August 25, 2023: The Speculative Cycle

August 25, 2023: The Speculative Cycle
Doug Noland Posted on August 26, 2023

While economists won’t ratchet Q3 growth estimates up to match the Atlanta Fed GDPNow’s 5.9%, forecasts will be moving higher. The Unemployment Rate is expected to remain unchanged for August, near a multi-decade low 3.5%. August Services PMI data point to some cooling, while stronger-than-expected (17-month high) New Home Sales data (July) suggest construction will for now support economic expansion. Who would have thought the homebuilders would have it so good (Homebuilder ETF up 32% y-t-d!) after more than 500 bps of Fed rate hikes?

Thirty-year mortgage rates rose eight bps this week to 7.30%, the high back to December 2000. MBS yields traded up to 6.27% in Tuesday trading, the peak since July 2007, before ending the week down seven bps at 6.08%. Ten-year Treasury yields rose to 4.36% intraday Tuesday, the high since November 2007. Two-year Treasury yields traded as high as 5.09% in Friday trading, surpassing the March 8th (pre-SVB) peak to the high back to June 2007.

August 25 – Barron’s (Megan Cassella): “One of the buzziest topics heading into the Jackson Hole symposium this year was a fairly wonky one: At what level would the real interest rate be considered neutral? The economy’s surprising strength had sparked a debate over whether the neutral rate, which economists call R-star, or r*, was actually higher than previously thought. That could signal in turn that monetary policy would have to get more restrictive than anticipated, too. The trick with r* is that it is impossible to measure in the moment, so economists were on high alert for whether Federal Reserve Chairman Jerome Powell, in his Friday speech, would tip his hat about where he believed neutral rates were and what that might indicate about how much work the Fed has left to do.”

August 25 – Bloomberg (Ruth Carson): “An abstract interest-rate metric is dominating discussions across trading desks ahead of the Jackson Hole symposium, with investors wondering if Federal Reserve Chair Jerome Powell will weigh in, and bracing for further declines in US Treasuries if he does. Fidelity International, Jupiter Asset Management and hedge fund Blue Edge Advisors are among those pondering the implications of whether there has been an increase in the neutral rate, also known as R*. That’s the theoretical level at which rates neither stimulate nor restrict an economy. If the Fed wants to contain a price surge – as it does now – it raises its benchmark above that level.”

It was more “Balanced Powell” Friday at Jackson Hole. By no stretch an economic theory wonk, Powell did address the neutral rate:

Powell: “There are some challenges that are common to all tightening cycles. For example, real interest rates are now positive and well above mainstream estimates of the neutral policy rate. We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation. But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.”

I’ve been no fan of contemporary “neutral rate” (“neither restrictive nor expansionary”/“neither stimulates nor restricts the economy”) theorizing. I understand why the neutral/natural rate was such a focal point of great economic thinkers, from Henry Thornton and Knut Wicksell, to Dennis Robertson, J.M. Keynes and the great Austrian economists Ludwig von Mises and Friedrich Hayek.

Simplistically, think in terms of a banking system lending for capital investment as the prevailing source of money and Credit entering the system. If the rate charged by banks was below the return on capital investment, businesses would boost borrowings to build additional plant and equipment. If the bank rate was too high, they would borrow and spend less. Excess investment would increase capacity/supply, driving down returns on investments. Vice versa for under-investment. In such an environment, there is a theoretical bank rate – a “neutral” or “natural” rate – that over time converged with real economic returns to promote relative stability – a so-called “equilibrium.”

For a number of reasons, this “neutral rate” theoretical framework is hopelessly antiquated. Economic systems today are extremely complex, with services and finance dominating factors like never before. Bank lending for capital investment is certainly not a primary source of system monetary expansion. And, when it comes to a policy rate working to regulate monetary expansion and profits, there are today two distinct spheres of profits that operate with disparate dynamics: real economy earnings and financial returns.

Simplifying and cutting to the chase, neutral rate discussion and debate ignore what has become a dominant force in contemporary finance and economics: the Speculative Cycle. Speculative leverage and flows have evolved into a prevailing source of market and system liquidity. “Risk on” leveraging and flows will loosen financial conditions, while “risk off” can lead to abrupt and highly destabilizing tightening. And as we’ve witnessed over the past 18 months, the Speculative Cycle can take on a life of its own, irrespective of Fed monetary policy tightening.

Powell: “Restrictive monetary policy has tightened financial conditions, supporting the expectation of below-trend growth. Since last year’s symposium, the two-year real yield is up about 250 bps, and longer-term real yields are higher as well—by nearly 150 bps. Beyond changes in interest rates, bank lending standards have tightened, and loan growth has slowed sharply. Such a tightening of broad financial conditions typically contributes to a slowing in the growth of economic activity, and there is evidence of that in this cycle as well.”

“Such a broad tightening of financial conditions”? The S&P500 has returned 10.5% since Powell spoke almost a year ago to the day. The Nasdaq100 has returned 19.6%, with the Semiconductors returning 26.8%. A.I. golden child Nvidia has skyrocketed 182%.

To gauge financial conditions, we can look to corporate debt risk premiums. Investment-grade spreads to Treasuries have declined from 137 to 119 basis points over the past year. High yield spreads narrowed to 380 from 452 bps.

Credit default swap (CDS) prices provide valuable financial conditions indicators. Investment-grade CDS over the past year fell from 86 to 65 bps. High yield CDS dropped from 499 to 438 bps. Bank CDS are interesting. JPMorgan CDS closed the week at 56, down from the year ago 80 bps. Citigroup CDS declined from 93 to 69 bps, and Bank of America CDS was down three to 80 bps.

Keep in mind that bank CDS prices have declined despite the March banking crisis. Indeed, we can point directly to the crisis response for an explanation of why CDS – and market financial conditions generally – loosened in the face of Fed tightening measures. Importantly, massive Fed and FHLB liquidity injections unleashed a powerful Speculative Cycle – triggering a short squeeze, unwind of hedges, FOMO flows and derivative-related (i.e., hedging of call options written) melt-up dynamics.

This latest chapter of a most protracted Speculative Cycle bolstered system conditions through typical channels – speculative leverage, wealth effects, powerful financial flows, and debt issuance – working in concert to offset the bank lending slowdown.

August 25 – Bloomberg (Michael Gambale): “Investment-grade bond sellers are poised to swarm the market with new debt offerings in September, with much of it expected to come in the four days following the US Labor Day holiday. Banks that underwrite the bonds expect about $120 billion to be issued next month, much more than the $78 billion sold in September 2022…”

According to S&P Global Market Intelligence, first-half corporate debt issuance jumped 36% from comparable 2022, to $398 billion.

The financial system over the past three decades went through a historic transformation. Market-based finance – led by the GSEs, Wall Street securitizations and derivatives, and the money fund complex – evolved to become a commanding force in Credit creation. The rise of non-bank lending fundamentally loosened system Credit. Meanwhile, the GSEs joined with the Federal Reserve to provide a fullproof market liquidity backstop. And when the Federal Reserve responded to new financial structure instability by aggressively slashing rates, the backdrop became only more conducive to speculation and speculative leveraging.

What policy rate would be “neutral” for a major Bubble? There is no neutral – no equilibrium or even stability – for Bubbles. Bubbles know no middle ground; they either inflate or deflate. And for three decades, the Fed (and global central bank community) has responded to Bubble deflation and collapse with ever more powerful reflationary stimulus measures, feeding the greatest Speculative Cycle in human history.

So why is there so little discussion of the momentous role speculation now plays in determining system financial conditions? How could this subject matter not be central to discussions of the inability so far of Fed hikes to tighten broad financial conditions?

Well, Wall Street economists clearly would rather not go there. And for the economics community, there’s no place in econometric models for a Speculative Cycle. Greed and Fear are rather unruly factors for modeling. And if you can’t model it, you disregard it.

Yet these Speculative Cycles are about the most fascinating dynamics around. The old bank lending model could assume rational actors and reasonable behavior. Speculative markets are a different animal. Fun and games; mania and panics. It is often stated that manic speculative markets are creatures of irrationality. I tend to emphasize that if markets inflate long enough, with reassuring liquidity backstops and bailouts along the way, it becomes perfectly rational to aggressively speculate and leverage. Irrationality seems to apply to the chumps on the sidelines.

Especially late in the cycle, there’s a thin line between a bursting Bubble and speculative melt-up. If the Fed and FHLB hadn’t come hastily in March with $700 billion of additional liquidity, we’d be today in a different Speculative Cycle phase. And if A.I. wasn’t a fledgling Bubble back in March, this liquidity-induced Speculative Cycle would have much different dynamics. If “private Credit” and “De-Fi” weren’t enveloped in Bubble Dynamics, it would have been challenging for market-based finance to take up the slack from tighter bank Credit.

But Fed rate hikes, along with the likelihood that tighter conditions would puncture the “tech” Bubble, ensured large short positions, hedging and downside derivative bets. The Big Squeeze and loosened conditions then played out perfectly for the bullish A.I. narrative, unleashing powerful speculative dynamics – including for the market-leading “magnificent seven.”

As an aside, Ben Bernanke is fond of eviscerating the 1929 “Bubble poppers,” while blaming tight Fed policies for the market crash that precipitated the Great Depression. The key issue, however, was not tight policy. Instead, ultra-loose market conditions fueled a culminating, run amok speculative blow-off to conclude a historic Speculative Cycle. Speculative leverage had evolved to become the dominant source of system liquidity, and the situation spun out of the Federal Reserve’s control. The only cure for a Bubble is not to let it inflate. A crash was inevitable.

Our era will be studied and debated for generations. There will be those who argue that the Fed’s aggressive tightening measures were responsible for financial and economic crises. A year of higher rates is not the problem. It’s loose financial conditions for the better part of three decades. It’s repeated market bailouts. It’s runaway Credit growth and a historic Speculative Cycle.

There are eerie parallels between 1929 and today. Powerful speculative excess continues in the face of acute fragilities and faltering Bubbles (i.e., startups and commercial real estate) here at home, while Bubble deflation gathers momentum globally (i.e., China). And so long as the Speculative Cycle runs unabated, loose conditions will bolster spending and inflation. Meanwhile, system underpinnings turn only more fragile. Powell and Fed officials continue to talk “higher for longer.” The market is now pricing a 63% probability of one additional rate increase (by the November 1st meeting). But then the market prices in about 100 bps of cuts for 2024.

What Fed policy rate would today be “neutral”? Neutral for what? To neutralize inflation back to the Fed’s 2% target? Neutral for the real economy? Neutral for financial conditions? Or neutral for highly speculative financial markets and asset prices? Well, at this point, the Speculative Cycle will dictate so much. And after the big March liquidity bailout, this imposing Speculative Bubble scoffs at Fed “tightening.”

Powell: “Two percent is and will remain our inflation target.”

Those advocating raising the inflation target completely miss a critical point: even a 2% inflation target was grossly deficient in promoting a sound monetary environment. Money and Credit growth were excessive, asset price inflation was excessive, and speculation and speculative leverage were precariously excessive. The inflationists would like to believe that raising the target today will protect the economy from aggressive tightening measures. More likely, a higher inflation target would only guarantee a more precarious Speculative Cycle.

For the Week:

The S&P500 added 0.8% (up 14.7% y-t-d), while the Dow slipped 0.4% (up 3.6%). The Utilities increased 0.2% (down 11.4%). The Banks fell 2.1% (down 20.6%), while the Broker/Dealers gained 1.1% (up 11.1%). The Transports dipped 0.5% (up 16.6%). The S&P 400 Midcaps were unchanged (up 6.1%), while the small cap Russell 2000 declined 0.3% (up 5.2%). The Nasdaq100 advanced 1.7% (up 36.6%). The Semiconductors rose 1.0% (up 38.1%). The Biotechs gained 1.7% (down 0.6%). With bullion rallying $26, the HUI gold equities index recovered 3.1% (down 3.8%).

Three-month Treasury bill rates ended the week at 5.2975%. Two-year government yields surged 14 bps this week to 5.08% (up 65bps y-t-d). Five-year T-note yields gained five bps to 4.39% (up 43bps). Ten-year Treasury yields slipped two bps to 4.24% (up 36bps). Long bond yields fell nine bps to 4.29% (up 32bps). Benchmark Fannie Mae MBS yields declined seven bps to 6.08% (up 69bps).

Greek 10-year yields declined five bps to 3.87% (down 69bps y-t-d). Italian yields dropped nine bps to 4.24% (down 46bps). Spain’s 10-year yields dropped nine bps to 3.59% (up 8bps). German bund yields fell six bps to 2.56% (up 12bps). French yields declined eight bps to 3.09% (up 11bps). The French to German 10-year bond spread narrowed about two to 53 bps. U.K. 10-year gilt yields sank 23 bps to 4.44% (up 77bps). U.K.’s FTSE equities index rallied 1.0% (down 1.5% y-t-d).

Japan’s Nikkei Equities Index increased 0.6% (up 21.2% y-t-d). Japanese 10-year “JGB” yields gained three bps to 0.66% (up 24bps y-t-d). France’s CAC40 recovered 0.9% (up 11.7%). The German DAX equities index added 0.4% (up 12.3%). Spain’s IBEX 35 equities index gained 0.8% (up 13.5%). Italy’s FTSE MIB index rallied 1.6% (up 19.0%). EM equities were mixed. Brazil’s Bovespa index increased 0.4% (up 5.6%), while Mexico’s Bolsa index was unchanged (up 9.8%). South Korea’s Kospi index added 0.6% (up 12.6%). India’s Sensex equities index was little changed (up 6.6%). China’s Shanghai Exchange Index dropped 2.2% (down 0.8%). Turkey’s Borsa Istanbul National 100 index rallied 2.7% (up 40.1%). Russia’s MICEX equities index gained 1.5% (up 46.6%).

Investment-grade bond funds posted outflows of $984 million, and junk bond funds reported negative flows of $1.170 billion (from Lipper).

Federal Reserve Credit dropped $46.4bn last week to $8.107 TN. Fed Credit was down $794bn from the June 22nd, 2022, peak. Over the past 206 weeks, Fed Credit expanded $4.381 TN, or 118%. Fed Credit inflated $5.296 TN, or 188%, over the past 563 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $9.1bn last week to $3.440 TN. “Custody holdings” were up $54bn, or 1.6%, y-o-y.

Total money market fund assets were little changed at a near-record $5.569 TN, with a 24-week gain of $675bn (30% annualized). Total money funds were up $999bn, or 21.9%, y-o-y.

Total Commercial Paper dipped $3.5bn to $1.163 TN. CP was down $34bn, or 2.8%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose eight bps to 7.30% (up 175bps y-o-y) – the high back to 2002. Fifteen-year rates gained eight bps to 6.73% (up 188bps). Five-year hybrid ARM rates surged 40 bps to 7.11% (up 275bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates unchanged at 7.58% (up 171bps).

Currency Watch:

August 22 – Bloomberg: “China is escalating its defense of the yuan, pushing up funding costs in the offshore market to squeeze short positions and setting a new record with its stronger-than-expected reference rate for the currency… The offshore yuan reversed earlier gains to weaken Tuesday, dropping back toward its 2023 low set last week. The People’s Bank of China set its daily fixing for the currency at 7.1992 per dollar Tuesday, compared with an average estimate of 7.3103 in a Bloomberg survey. That was the largest gap since the polls began in 2018.”

August 21 – Bloomberg (Yumi Teso): “Funding costs in China’s offshore market rose by the most in six years amid speculation that authorities in Beijing are making it more expensive to bet against the currency. One-month offshore yuan swap points — a measure of the costs to borrow the yuan — jumped 1.73 bps, the most since 2017 as the yuan gained Monday. As a result, the one-month implied yield surged to 5.5% from 2.7% on Friday…”

August 21 – Reuters: “China’s major state-owned banks were seen actively mopping up the offshore yuan on Monday…, as the currency comes under growing pressure from a darkening economic outlook and strain in the property sector. State banks often act as agents for China’s central bank in the offshore foreign exchange market, but they could also trade on their own behalf or execute their clients’ orders. Tightening up offshore yuan liquidity could also act to stabilise the yuan… The move effectively raised the cost of shorting the Chinese yuan , at a time the local unit is facing mounting depreciation pressure.”

August 24 – Reuters (Winni Zhou and Tom Westbrook): “Increased yuan bill sales by China’s central bank in Hong Kong this week helped tighten liquidity in the offshore market to help stabilise the yuan by making it expensive for speculators to short the currency, according to a former central banker. The comments by Sheng Songcheng, a former director of the People’s Bank of China’s (PBOC) statistics and analysis department, were reported by the state-owned Shanghai Securities News…”

August 25 – Reuters: “China’s central bank has asked domestic lenders to scale back outward bond investments according to two sources with direct knowledge of the matter, the latest in series of increasingly strong steps to support the yuan. The directive… is for banks to restrict southbound purchases under the Bond Connect scheme, and is aimed at limiting the supply of yuan offshore, the sources said.”

For the week, the U.S. Dollar Index gained 0.8% to 104.19 (up 0.7% y-t-d). On the upside, the South African rand increased 2.0%, the Brazilian real 2.0%, the Mexican peso 1.8%, the South Korean won 1.0%, and the Singapore dollar 0.1%. On the downside, the British pound declined 1.2%, the Japanese yen 0.7%, the euro 0.7%, the Swedish krona 0.7%, the Norwegian krone 0.5%, the Canadian dollar 0.4%, the Swiss franc 0.3%, and the New Zealand dollar 0.3%. The Chinese (onshore) renminbi declined 0.04% versus the dollar (down 5.33%).

Commodities Watch:

The Bloomberg Commodities Index rallied 1.2% (down 6.5% y-t-d). Spot Gold rose 1.4% to $1,915 (up 5.0%). Silver surged 6.5% to $24.23 (up 1.1%). WTI crude declined $1.42, or 1.7%, to $79.83 (down 1%). Gasoline recovered 1.9% (up 17%), while Natural Gas slipped 0.4% to $2.54 (down 43%). Copper gained 1.2% (down 1%). Wheat dropped 3.3% (down 25%), and Corn fell 1.8% (down 31%). Bitcoin was little changed at $26,100 (up 57%).

Global Bank Crisis Watch:

August 21 – Bloomberg (David Scheer): “Two weeks after Moody’s… rattled financial stocks by cutting the ratings for a slew of US banks, S&P Global Ratings is downgrading and dimming its outlook for several more — citing a similar mix of pressures making life ‘tough’ for lenders… Many depositors have ‘shifted their funds into higher-interest-bearing accounts, increasing banks’ funding costs,’ S&P wrote in a note summarizing the moves. ‘The decline in deposits has squeezed liquidity for many banks while the value of their securities — which make up a large part of their liquidity — has fallen.’”

August 22 – Bloomberg (Carter Johnson): “While higher interest rates can juice profits for a slew of lenders, a senior TD Securities strategist warns that the relentless jump in borrowing costs threatens to create fresh problems for the banking sector. The yield on two-year Treasuries rising to 5% this week represents the ‘pain trade for a lot of the banks’ heading into the fall, said Gennadiy Goldberg, TD’s head of US rates strategy… ‘If you just track unrealized held-to-maturity and available-for-sale losses at banks, the pressure is on,’ he said…”

UK Crisis Watch:

August 23 – Reuters (David Milliken): “Britain’s economy looks on course to shrink during the current quarter and risks falling into a recession, as a survey… showed a slump in factory output and broader weakness in the face of higher interest rates. The S&P Global/CIPS composite Purchasing Managers’ Index (PMI) tumbled to 47.9 in August from 50.8 in July… The reading was the lowest since January 2021, when Britain was in a COVID-19 lockdown, and the first fall below the 50 level which divides growth from contraction since January this year.”

August 22 – Financial Times (Valentina Romei and Michael O’Dwyer): “British companies face a higher risk of corporate defaults, posing a threat to investment and employment, as a result of rising interest rates, the Bank of England warned… The share of non-financial UK companies experiencing debt-servicing stress — those with a low ratio of earnings to interest expenses — will rise to 50% by the end of the year, from 45% in 2022… The proportion rose to 70% for medium-sized companies, those with an annual turnover between £10mn and £500mn. Under this scenario, corporate debt stress would hit its highest level since the 2008-09 financial crisis.”

August 21 – Reuters (William Schomberg): “Asking prices for homes in Britain fell sharply this month as rising mortgage costs caused sellers to lower their expectations of what they can get for their properties, an industry survey showed… Website Rightmove said average asking prices for homes dropped by 1.9%, the biggest monthly fall for August since 2018… Britain’s housing market, which boomed during the COVID-19 pandemic, has weakened as the Bank of England fights high inflation with a run of interest rate hikes, although two-year mortgage rates recently dipped from July’s 15-year highs.”

Market Instability Watch:

August 22 – Wall Street Journal (Eric Wallerstein): “Investors looking for a safe way to beat inflation don’t have to look very far anymore. Real yields—a measure of the stated return on Treasury bonds, minus inflation—have climbed to heights not seen since 2009. Based on 10-year Treasury inflation-protected security yields, real rates (as they are also known) are around 2% in the U.S. Higher real yields are good news for savers, but the picture gets more complicated as they ripple through the markets and the economy. They reflect the fact that borrowing is getting more expensive… And higher real yields tend to drive investors into cash-like products…, from stocks to cryptocurrencies to gold, which can have an economic impact, too, if that movement goes on long enough.”

August 22 – Bloomberg (Alexandra Harris): “Foreign investors are ditching short-dated Treasuries, keeping the pressure on bill yields to climb higher. The very short part of the US curve — securities that mature in less than a year — is seeing renewed selling, particularly by cross-border investors, John Velis, a foreign-exchange and macro strategist at Bank of New York Mellon Corp., wrote… By contrast, yields on longer dated securities are sufficiently high that they’re starting to woo overseas money, he wrote. ‘This means that the front end will cheapen further, as waning demand pressures prices,’ he said.”

August 19 – Financial Times (George Steer): “The market for extremely short-dated options on US stock market moves has boomed in recent weeks, sparking fears among analysts that the daily bursts of activity could be causing sharp sell-offs in equities. So-called zero-day options, which allow traders to take targeted positions in stock markets around events such as economic data releases or monetary policy meetings, have surged in popularity since the start of the coronavirus pandemic. Zero-day options on Wall Street’s S&P 500 index now account for 43% of overall S&P 500 options volume, compared with just 6% in 2017… Analysts say demand for zero-day contracts has further surged in the past three weeks as financial markets have become more volatile.”

August 21 – Bloomberg (Ye Xie and Robert Fullem): “Japan’s 10-year government bond yield reached a new nine-year high Tuesday amid upward pressure in global interest rates. The yield increased to 0.66%, the highest since 2014, raising the prospect that the Bank of Japan may come into the market with an unscheduled bond-buying operation to slow gains. Investors are trying to gauge the central bank’s tolerance for yield spikes after it waded into the market twice since adjusting policy on July 28.”

August 20 – Bloomberg (Yumi Teso and Masaki Kondo): “The Bank of Japan is purchasing government bonds at a record pace this year, a factor that likely prompted its recent move to allow larger yield movements to reduce the strain on its control of longer-term interest rates… Calculations by Bloomberg indicate that total buying will reach $857bn unless market pressure relents and the BOJ is able to scale back its operations. The projected figure is up 12% from 2022, and 4.5% from the previous high in 2016 when the central bank launched yield-curve control to make its stimulus more sustainable by reducing the need to buy JGBs.”
August 21 – Reuters (David Morgan): “A feud over spending cuts between hardline and centrist Republicans in the U.S. House of Representatives raises the risk that the federal government will suffer its fourth shutdown in a decade this fall. Members of the hardline House Freedom Caucus are pushing to cut spending to a fiscal 2022 level of $1.47 trillion, $120 billion less than President Joe Biden and House Speaker Kevin McCarthy agreed to in their May debt ceiling compromise. The group… announced its opposition to any stopgap measure to keep the government afloat that fails to meet its demands. With Republicans also seeking higher spending on defense, veterans benefits and border security, analysts say the hardline target would mean cuts of up to 25% in areas such as agriculture, infrastructure, science, commerce, water and energy and healthcare.”

August 21 – Bloomberg (Katie Greifeld and Vildana Hajric): “The $7.4 trillion ETF world is wrestling with a unique strain of concentration risk: some of the biggest issuers are reliant on a single product for the bulk of their success. At least 28 firms — that run eight funds or more — have a minimum of 40% of their entire asset base in a single product… Heavyweights including Invesco Ltd., ARK Investment Management and Pacific Investment Management Co. are among the managers with the most concentrated lineups.”

Bubble and Mania Watch:

August 23 – Bloomberg (John Gittelsohn): “About $1.2 trillion of debt on US commercial real estate is ‘potentially troubled’ because it’s highly leveraged and property values are falling, according to Newmark Group Inc. Offices are the biggest near-term problem, accounting for more than half of the $626 billion of at-risk debt that’s set to mature by the end of 2025, the brokerage estimates. Office values have tumbled 31% from a peak in March 2022, when the Federal Reserve started raising interest rates, according to… Green Street. Concerns are mounting that defaults will increase as property values fall and costs rise for landlords who need to refinance at higher interest rates. Overleveraged owners are often more motivated to stop payments than sink money into buildings with diminished prospects for returns.”

August 24 – Bloomberg (Lisa Lee): “As corporate failures surge this year, debt investors are in a fight to salvage as much money as they can from the wreckage. The early skirmishes are going very badly. The bankruptcy of GenesisCare, a cancer treatment specialist backed by private equity powerhouse KKR & Co. and China Resources Pharmaceutical Group Ltd., is the latest cautionary tale of how much value is being destroyed when companies go bust now. In previous default cycles, leveraged-loan providers would expect to get 70% to 80% of their cash back from failing companies. Those days are over. Some GenesisCare investors are bracing for a mid-teen percentage… — a new blow to a lending market headed for record low recoveries.”

August 22 – Bloomberg (Bill Dudley): “Who knew that the subject of US Treasury bond yields could inspire such passion? When, in late June, I argued that they were likely to move considerably higher than the then-prevailing 3.75%, I attracted some vehement pushback. In a publication titled ‘Don’t Be a Dud,’ analysts at Morgan Stanley insisted that the 10-year bond would experience a summer price rally, and that the yield would ultimately settle into a longer-term range of 2% to 3%. I’m sticking with my prediction. What’s more, I strongly suspect that the bond bull market that began in the early 1980s is over.”

Ukraine War Watch:

August 20 – Reuters: “Russia said Ukrainian drones had attacked four separate regions in a flurry of attempted strikes on Sunday, injuring five people and forcing two of Moscow’s airports to briefly divert flights. Russia’s Kursk, Rostov and Belgorod regions, all of which border Ukraine, reported attempted drone strikes, while Russia’s defence ministry said it had jammed a Ukrainian drone in the Moscow region…”

August 20 – Bloomberg (Áine Quinn and Olesia Safronova): “The Kremlin’s efforts to paralyze Ukrainian food shipments are succeeding, with a third of the country’s crop exports wiped out since its Black Sea ports were effectively blocked last month. The drop marks a significant setback for Ukraine’s economy and global food security, even with a €1-billion push by the European Union to build out alternative routes since the start of Russia’s invasion.”

U.S./Russia/China/Europe Geo Watch:

August 21 – Wall Street Journal (Katie Greifeld and Vildana Hajric): “China is playing an increasingly important role in propping up Russia’s economy and helping boost its war effort, with recent trade data showing Beijing providing a range of goods, including some with potential military applications… China has become the principal source of many of the goods and components Russia’s sanctions-hit economy needs, while also giving Moscow a buyer for its oil and gas. The growing economic relationship is a central piece of the efforts by the two countries to unite against what their leaders describe as Western efforts to contain them. China’s total trade with Russia in the first seven months of this year jumped 36% from the same period a year earlier, to $134 billion, putting Moscow just behind Australia and Taiwan on the list of China’s biggest trading partners…”

August 19 – Financial Times (Kathrin Hille): “China has launched military exercises around Taiwan, lashing out against the country’s vice-president and election frontrunner Lai Ching-te for visiting the US this week. The drills, which the People’s Liberation Army called a ‘serious warning against the provocation of ‘Taiwan independence’ forces colluding with external forces’, came after Lai returned… from one of the most low-profile US visits by a top Taiwanese politician in recent years. Lai made brief transit stops in New York and San Francisco on his way to and from the inauguration of the new president of Paraguay…”

De-globalization and Iron Curtain Watch:

August 22 – Reuters (Bhargav Acharya and Gabriel Araujo): “BRICS leaders met… to plot the future course of the bloc of developing nations but divisions re-emerged ahead of a critical debate over a potential expansion of the group intended to boost its global clout. Heightened tensions in the wake of the Ukraine war and Beijing’s growing rivalry with the United States have pushed China and Russia – whose President Vladimir Putin will attend the meeting virtually – to seek to strengthen BRICS… ‘Right now, changes in the world, in our times, and in history are unfolding in ways like never before, bringing human society to a critical juncture,’ China’s President Xi Jinping said in remarks delivered at a BRICS business forum.”

August 24 – Reuters (Carien du Plessis, Anait Miridzhanian and Bhargav Acharya): “The BRICS bloc of developing nations agreed on Thursday to admit Saudi Arabia, Iran, Ethiopia, Egypt, Argentina and the United Arab Emirates in a move aimed at accelerating its push to reshuffle a world order it sees as outdated. The group’s leaders left the door open to future enlargement, potentially paving the way for the admission of dozens more countries motivated by a desire to level a global playing field they consider rigged against them. The expansion adds economic heft to BRICS… It could also amplify its declared ambition to become a champion of the Global South. But long-standing tensions could linger between members who want to forge the grouping into a counterweight to the West – notably China and Russia – and those that continue to nurture close ties to the United States and Europe.”

August 24 – Bloomberg (Sam Dagher and Fiona MacDonald): “Some of the US’s top Middle Eastern allies — including the world’s biggest oil exporter — are moving closer into the orbit of China and Russia, further complicating geopolitics upended by Russia’s invasion of Ukraine. Saudi Arabia, the United Arab Emirates and Egypt are set to join the BRICS grouping of major emerging markets, after being invited Thursday during a summit in South Africa. They’re likely to join at the start of next year, along with Iran, Argentina and Ethiopia.”

Inflation Watch:

August 21 – Reuters (Michael S. Derby): “American workers’ expectations for pay surged in July…, said a survey… by the Federal Reserve Bank of New York. Respondents told the bank that they’d expect an annual salary offer of $67,416 upon being offered a job, a record reading in a survey that started in 2014, up from the $60,310 reported a year ago. ‘The increase was broad-based across age, education, and income groups, but was most pronounced for respondents above age 45 and for college graduates,’ the report said.”

August 22 – CNBC (Leslie Josephs): “UPS workers ratified a massive five-year labor deal that includes big wage increases and other improvements to work rules and schedules, the International Brotherhood of Teamsters said… ‘Teamsters have set a new standard and raised the bar for pay, benefits and working conditions in the package delivery industry. This is the template for how workers should be paid and protected nationwide, and nonunion companies like Amazon better pay attention,’ Teamsters General President Sean O’Brien said…”

August 25 – Bloomberg (Augusta Saraiva): “US consumers’ year-ahead inflation expectations picked up in August to a three-month high as gasoline prices increased, weighing on sentiment. Consumers expect prices will climb at an annual rate of 3.5% over the next year, up from the 3.4% expected in July, according to the final August reading from the University of Michigan. They see costs rising 3% over the next five to 10 years…”

August 21 – Yahoo Finance (Ines Ferré): “Californians are seeing gas prices reach 2023 highs as Tropical Storm Hilary makes its way out of Southern California, leaving a trail of flooding, power outages, and other damage in its wake. The average price of gasoline rose $0.11 last week in the Golden State to $5.26 per gallon, the highest level of the year for the nation’s most expensive state, according to AAA.”

August 25 – Wall Street Journal (Jean Eaglesham): “Cape Coral, Fla., was devastated by Hurricane Ian last year, but real-estate agents still pitch waterfront homes as ‘Gulf access haven.’ Insurers take a different view. Home-insurance premiums are soaring in the Southwest Florida city, and there is evidence that the higher costs are starting to affect the real-estate market. Buyers’ concerns about insurance costs are slowing sales and causing some canceled deals in areas with particularly high flood or wildfire risks… The average annual home-insurance premium for Floridians has tripled in five years, from $1,988 in 2019 to $6,000…”

August 21 – CNBC (Clement Tan and Lee Ying Shan): “A perfect storm may be brewing in Asia. Rice prices surged to their highest in almost 12 years, after India’s rice export ban and adverse weather conditions dented production and supplies of Asia’s primary staple food, according to the UN’s food agency. ‘The price of global rice prices is particularly worrying,’ Qingfeng Zhang, a senior director from the Asian Development Bank, told CNBC. ‘What seems to be clear is that food price volatility will continue in coming months.’”

August 23 – Reuters (Rajendra Jadhav and Mayank Bhardwaj): “India is expected to ban mills from exporting sugar in the next season beginning October, halting shipments for the first time in seven years, as a lack of rain has cut cane yields… India’s absence from the world market would be likely to increase benchmark prices in New York and London that are already trading around multi-year highs, triggering fears of further inflation on global food markets. ‘Our primary focus is to fulfil local sugar requirements and produce ethanol from surplus sugarcane,’ said a government source… ‘For the upcoming season, we will not have enough sugar to allocate for export quotas.’”

August 22 – CNBC (Lee Ying Shan): “Bacon is about to get even more expensive as wholesale pork belly prices approach record highs on the back of an animal welfare law in California, as well as peak summer demand. Pork belly prices rose over 100% year-to-date from 131.59 cents per pound in January, to 270.89 cents at the end of July — just shy of the all-time high of 279.97 cents per pound in August 2021…”

Biden Administration Watch:

August 21 – The Hill (Laura Kelly): “The Biden administration is urging U.S. citizens in Belarus to depart the country immediately and warned against travel there… The security alert comes after bordering countries Lithuania, Latvia and Poland have stepped up security along the border over concerns about Russian Wagner mercenary forces exiled in the country. The State Department, in its warning, encouraged Americans still in Belarus to depart the country immediately and categorized the country as a Level 4 risk, the highest security warning.”

Federal Reserve Watch:

August 20 – Wall Street Journal (Nick Timiraos): “Despite the Federal Reserve raising interest rates to a 22-year high, the economy remains surprisingly resilient, with estimates putting third-quarter growth on pace to easily exceed its 2% trend. It is one of the factors leading some economists to question whether rates will ever return to the lower levels that prevailed before 2020 even if inflation returns to the Fed’s 2% target over the next few years. At issue is what is known as the neutral rate of interest. It is the rate at which the demand and supply of savings is in equilibrium, leading to stable economic growth and inflation. First described by Swedish economist Knut Wicksell a century ago, neutral can’t be directly observed. Instead, economists and policy makers infer it from the behavior of the economy. If borrowing and spending are strong and inflation pressure rising, neutral must be above the current interest rate. If they are weak and inflation is receding, neutral must be lower. The debate over where neutral sits hasn’t been important until now. Since early 2022, soaring inflation sent the Federal Reserve racing to get interest rates well above neutral.”

August 22 – Reuters (Howard Schneider): “The Federal Reserve must be open to the possibility that the economy will begin to reaccelerate rather than slow, with potential implications for the U.S. central bank’s inflation fight, Richmond Fed President Thomas Barkin said… U.S. retail sales were stronger than expected in July, and with consumer confidence also rising ‘the reacceleration scenario has come onto the table in a way that it really wasn’t three or four months ago,’ Barkin said…”

August 24 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of Philadelphia President Patrick Harker says the Fed has ‘probably done enough’ and should keep interest rates at restrictive levels while it assesses the impact on the economy. ‘Right now, I think that we’ve probably done enough,’ Harker says… ‘We are in a restrictive stance,’ he says. ‘I’m in the camp of, let the restrictive stance work for a while, let’s just let this play out for a while, and that should bring inflation down’.”

U.S. Bubble Watch:

August 23 – Dow Jones (Ed Frankl): “Business activity in the U.S. rose at a weaker pace in August, as activity teetered near stagnation across the private sector, according to a purchasing managers’ survey… The S&P Global Flash Composite Output Index–which gauges activity in the manufacturing and services sectors–fell to 50.4 in August from 52.0 in July, the lowest rate in six months… Manufacturing slipped further into contraction territory…, coming in at 47.0, compared with 49.0 in July. It also missed expectations of 49.0 in a consensus forecast… Meanwhile, the flash services PMI slowed further to 51.0 in August from 52.3 last month, its lowest level since February and missing expectations that it would rise slightly to 52.5. Rising wages, alongside increased energy prices, also are pushing input-cost inflation up, which will raise concerns prices will stay higher for longer…”

August 22 – CNBC (Diana Olick): “Sales of previously owned homes dropped 2.2% in July from June to a seasonally adjusted, annualized rate of 4.07 million units… Sales were 16.6% lower compared with July of last year. Homes sold at the slowest July pace since 2010… Sales fell month to month in all regions except the West, where they rose 2.7%. Sales dropped the most in the Northeast, down 5.9%… There were 1.11 million homes for sale at the end of July, 14.6% fewer than July 2022 and the lowest level since 1999. There are now half as many homes for sale as there were pre-Covid. At the current sales pace, that represents a 3.3-month supply. A six-month supply is considered balanced… The median price of a home sold in July was $406,700, an increase of 1.9% from July of last year.”

August 23 – Bloomberg (Augusta Saraiva): “US mortgage applications for home purchases dropped last week to an almost three-decade low, indicating residential real estate is reeling from the recent spike in borrowing costs. The Mortgage Bankers Association index of home-purchase applications fell 5% to 142, the lowest level since 1995.”

August 24 – Associated Press (Damian J. Toise): “Americans didn’t let persistent inflation and lingering worries about a recession cut into summer spending on eating and drinking out. Retails sales at restaurants and bars surged from May through July compared with a year ago, despite prices remaining relatively elevated for restaurants and bars. Sales in the sector jumped 11.8% in July and 9.5% in June from a year ago, according to the Commerce Department.”

August 19 – Bloomberg (Rich Miller): “US consumers are approaching a reckoning as the excess cash they built up during the pandemic dwindles. How they respond will help determine whether the world’s largest economy can dodge a recession. Over the past two years, consumers have drawn down the more than $2 trillion in extra savings they accumulated during the pandemic in order to keep spending in the face of sky-high inflation. That’s enabled the economy to push ahead even as the Federal Reserve jacked up interest rates at the fastest pace in four decades.”

August 23 – Yahoo Finance (Brian Sozzi): “A warning on the health of US consumers by America’s department store is likely sending quakes through the C-suites of similar retailers. And investors in retail stocks need to pay attention because there could be aftershocks. On Tuesday, Macy’s (M) said its second quarter credit card sales tanked 36% from the prior year to $150 million. The culprit: Bloated balances on Macy’s Citibank-powered credit card have been met with a rising interest rate environment. In turn, cash-strapped consumers — enduring an almost 32% annual percentage interest rate on the Macy’s card — haven’t been able to pay off their bills. Macy’s has opted to write off those balances.”

August 23 – Reuters (Ananya Mariam Rajesh and Aishwarya Venugopal): “Latest results and forecasts from retailers ranging from Macy’s to Foot Locker are fresh signs that U.S. consumer spending is under stress heading into the second half of the year. Middle-income Americans are spending less as many struggle to pay off existing card debts amid a surge in cost of living, raising worries for retail sector investors betting on more business during the back-to-school and holiday seasons. ‘It is going to be a challenging back half,’ said Telsey Advisory Group analyst Cristina Fernandez…”

August 24 – Bloomberg (Hari Govind): “Zillow Group Inc. is offering mortgages with just a 1% down payment as it tries to attract house hunters facing the most-unaffordable market in almost four decades. The 1% down payment program is even lower than Freddie Mac’s best of 3%, with Zillow offering to pay 2% of the down payment at closing… It comes after mortgage rates in the US hit a 22-year high Thursday, further squeezing would-be homebuyers.”

Fixed-Income Watch:

August 23 – Reuters (Davide Barbuscia): “A recent spike in U.S. bond yields has come alongside muted expectations for inflation, a sign to some bond fund managers that economic resilience and high bond supply are now playing a larger role than second-guessing the Federal Reserve. Benchmark 10-year nominal yields on Tuesday hit near 16-year peaks… ‘The narrative has very much changed over the last few months,’ said Calvin Norris, Portfolio Manager & US Rates Strategist at Aegon Asset Management. Investors see evidence that a fresh set of drivers has taken hold, including the Bank of Japan letting yields go higher, which may reduce foreign investors’ appetite for Treasuries, and an increase in supply of U.S. government bonds, with investors demanding more for holding more debt.”

China Watch:

August 22 – Reuters (Michael Martina): “China’s leader Xi Jinping told the BRICS group on Tuesday that China’s economy was resilient and that the fundamentals for its long-term growth remained unchanged. Xi, who is in South Africa for a summit of Brazil, Russia, India, China and South Africa (BRICS), made the remarks… read by Chinese Commerce Minister Wang Wentao at a business forum. ‘The Chinese economy has strong resilience, tremendous potential and great vitality,’ Xi said…”

August 21 – Financial Times (Cheng Leng and Thomas Hale): “The vow by China’s leaders last month to address the ‘new difficulties and challenges’ besetting the world’s second-largest economy appeared to open the way for bolder government measures to stimulate activity. But a subsequent call by the People’s Bank of China for lenders to be allowed to make a ‘reasonable profit’ helps explain why smaller than expected reductions to core interest rates were unveiled on Monday. Experts said the limited cuts highlighted a dilemma for Beijing: how to balance any desire to stimulate the stuttering economy — by reducing borrowing costs — with the need to preserve the stability of China’s $56tn banking system and support its weakening currency. As China’s central bank said in a monetary policy report: ‘It will take some time for banks’ lending risk to be exposed and they should have a certain amount of financial reserves and risk buffers.’”

August 22 – Reuters (Ellen Zhang and Ryan Woo): “China should adhere to the principle that ‘houses are for living in, not for speculation’ for the time being, the state-run Economic Daily said in an editorial… China’s top leaders started using the phrase in late 2016, when they began introducing tighter rules for the property market and its removal from the Politburo statement in July was seen as a signal that some of those curbs could be unwound. ‘The positioning of ‘houses are for living in, not for speculation’ should be insisted on and it is not out of date,’ the Economic Daily said… ‘In some popular cities, housing demand still exceeds supply. Once speculation on house prices resumes, China may go back to the old path of the over-reliance on the real estate sector, which will have adverse impacts on economic and social development.’”

August 21 – Reuters (Winni Zhou, Tom Westbrook and Kevin Buckland): “China cut its one-year benchmark lending rate… as authorities seek to ramp up efforts to stimulate credit demand, but surprised markets by keeping the five-year rate unchanged amid broader concerns about a rapidly weakening currency. The recovery in the world’s second-largest economy has lost steam due to a worsening property slump, weak consumer spending and tumbling credit growth… However, downward pressure on the yuan means Beijing has limited room for deeper monetary easing, analysts say, as a further widening of China’s yield differentials with other major economies could trigger yuan selloffs and capital flight. The one-year loan prime rate (LPR) was lowered by 10 bps to 3.45% from 3.55% previously, while the five-year LPR was left at 4.20%.”

August 23 – Bloomberg: “China is attempting to defuse risks from its $9 trillion pile of off balance-sheet local government debt, without resorting to major bailouts. That path forward is a treacherous one for President Xi Jinping’s government. To thread the needle, the provinces and cities whose borrowing drove the world’s largest infrastructure boom will need to roll back their spending and restructure debt — all without drastically dragging down economic growth. If they fail, it could thrust the world’s second-biggest economy into a prolonged malaise. At the center of this dilemma are local government financing vehicles, companies set up across China to borrow on behalf of provinces and cities but not explicitly in their name.”

August 22 – New York Times (Keith Bradsher): “China’s stock market was plunging and its currency was teetering. The head of the central bank, fielding questions at a rare news conference, said China would make it easier to get home mortgages. It was February 2016, and Zhou Xiaochuan, the central bank’s longtime governor at the time, announced what proved to be the start of an extraordinary blitz of lending by China’s immense banking system. Minimum down payments for buying apartments were reduced, triggering a surge in construction. Vast sums were also lent to local governments, allowing them to splurge on new roads and rail lines. For China, it was a familiar response to economic trouble. Within months, growth started to pick up and financial markets stabilized. Today, as China faces another period of deep economic uncertainty, policymakers are drawing on elements of its crisis playbook, but with little sign of the same results.”

August 21 – Bloomberg: “Chinese banks kept a key interest rate that guides mortgages on hold and made a smaller-than-expected cut to another rate, surprise moves that reflect Beijing’s difficult choice between boosting confidence and safeguarding the banking system’s stability… ‘Protecting banks’ net interest margins is the main motivation behind the smaller-than-expected cuts to LPR in our view,’ Goldman Sachs… economists including Maggie Wei wrote… ‘Having said that, confidence remains key to an economic recovery, and the disappointing cut to LPR would not help with building confidence.’”

August 25 – Bloomberg: “China unveiled a further easing of its mortgage policies to halt a slump in its residential property market and revive growth in the world’s second-largest economy. The country is proposing that local governments can scrap a rule that disqualifies people who’ve ever had a mortgage – even if fully repaid – from being considered a first-time homebuyer in major cities…”

August 21 – Bloomberg: “China is considering stronger action to address risks from local government financing vehicles, with Caixin reporting on a plan to give the businesses cheap funding as debt concerns mount. The central bank may set up an emergency liquidity tool with banks to provide low-cost funds with longer maturities to LGFVs… The move, if approved, would give cash-strapped LGFVs access to funds to improve their cashflow and avoid short-term liquidity stress.”

August 20 – Bloomberg (Li Liu): “China’s central bank and financial regulators met with bank executives and told lenders again to boost loans to support a recovery, adding to signs of heightened concern from policymakers about the deteriorating economic outlook. Authorities also urged for adjustments and an optimization of policies for home mortgages at the meeting on Friday… Executives from China Life Insurance Co. and stock exchanges were at the same meeting, where officials also discussed measures with the financial sector to prevent and reduce local government debt risks.”

August 20 – Wall Street Journal (Lingling Wei and Stella Yifan Xie): “For decades, China powered its economy by investing in factories, skyscrapers and roads. The model sparked an extraordinary period of growth that lifted China out of poverty and turned it into a global giant… Now the model is broken. What worked when China was playing catch-up makes less sense now that the country is drowning in debt and running out of things to build. Parts of China are saddled with under-used bridges and airports. Millions of apartments are unoccupied. Returns on investment have sharply declined. Signs of trouble extend beyond China’s dismal economic data to distant provinces, including Yunnan in the southwest, which recently said it would spend millions of dollars to build a new Covid-19 quarantine facility, nearly the size of three football fields… Other localities are doing the same. With private investment weak and exports flagging, officials say they have little choice but to keep borrowing and building to stimulate their economies.”

August 23 – Bloomberg: “Three years ago, China cracked down on a booming real estate sector to reduce risk and make homes more affordable—part of President Xi Jinping’s ‘common prosperity’ drive. Beijing may have gone too far, it now seems. Country Garden Holdings Co., a developer that was once a pillar of the industry, is on the verge of default… There are signs the situation is spiraling, too. More developers are on the brink, home prices are collapsing in smaller cities, and fears of contagion have spread to the nation’s $60 trillion financial system… ‘Property booms and busts are typically extreme but especially in China’s case,’ says George Magnus, author of Red Flags: Why Xi’s China Is in Jeopardy. ‘The sector is so big in relation to the economy and so significant in terms of household savings and confidence.’”

August 24 – Bloomberg (Evelyn Yu): “Chinese authorities ramped up efforts to bolster the nation’s fragile financial markets, urging the country’s pension fund and some large-scale banks and insurers to increase stock investments. The China Securities Regulatory Commission held a seminar on Thursday with executives of the financial institutions, who vowed to help stabilize the stock market and boost economic development, according to a CSRC statement.”

August 23 – Reuters (Laurie Chen): “At an unfinished Country Garden residential complex on the outskirts of the northern Chinese metropolis of Tianjin, construction has slowed to a dull whirr and a few idle workers roam a near-empty site. ‘They haven’t paid us since Chinese New Year (in January). We are all worried,’ said a labourer surnamed Wang… The sprawling complex is one of two projects Reuters visited on Friday in Tianjin, a port city of 14 million people about 84 miles southeast of Beijing. Both sites are run by Country Garden, China’s largest developer by sales volume before this year… Construction had partially or fully stopped at both sites…”

August 22 – Bloomberg (Pearl Liu): “Country Garden Holdings Co., the distressed Chinese developer that earlier this month missed interest payments on some dollar bonds, is leaving investors in the dark about the exact date the grace period ends. That’s adding to signs of opaqueness in the nation’s offshore junk debt market, which has lost $87 billion in the past two years. One of China’s biggest developers, Country Garden must repay a combined $22.5 million in two coupons within the grace period, otherwise creditors could call a default that would be the developer’s first on such debt. That would threaten even worse impact than defaulted peer China Evergrande Group given Country Garden has four times as many projects.”

August 24 – Financial Times (Cheng Leng): “China Construction Bank, the country’s second largest by assets, has warned that its profit margin will stay under pressure this year as concerns mount about the health of the country’s $56tn banking system. The lender is the first state bank in China to report its second-quarter results… Beijing has tried to balance its desire to stimulate the economy — by reducing borrowing costs — with the need to preserve the stability of China’s banking system.”

August 24 – Bloomberg (Dorothy Ma): “Bonds from at least 83 Chinese companies totaling $79.5 billion face repayment pressure, according to company and ratings firm statements… That involves 347.19 billion yuan worth of notes and $31.76 billion of offshore bonds. At least 23 companies are local government funding vehicles, entailing 183 billion yuan worth of local notes and $1.37 billion of offshore bonds.”

August 23 – Financial Times (Cheng Leng and Andy Lin): “Once known as one of China’s most impoverished provinces, the mountainous region of Guizhou has over the past decade become famous for a different reason: it is home to some of the world’s tallest bridges. From the 565-metre-high Duge Beipan river bridge that links Guizhou and neighbouring province Yunnan to the 332-metre-high Pingtang bridge that spans the Caodu river canyon, Guizhou’s investment in infrastructure has helped lift the province out of poverty… But the high ground has come with a high cost. Guizhou’s debt totalled $165.7bn at the end of 2022. With a debt-to-gross domestic product ratio of 62%, it is one of the most indebted provinces… Including off-balance-sheet debt, the figure could be as high as 137%, according to one estimate. The enormous amount of borrowing accumulated by China’s provinces, much of it through opaque local government financing vehicles… — has become a huge problem for the world’s second-largest economy. Increased tension between local and central governments over the debt comes as Beijing searches for new models of regional economic growth.”

August 23 – Bloomberg: “Global investors have been shedding China’s blue-chip stocks during the longest stretch of outflows on record, showing even the nation’s industry leaders are falling out of favor as a rout deepens… Overseas funds have been fleeing the mainland market, offloading the equivalent of $10.7 billion in a thirteen-day run of withdrawals through Wednesday, the longest since Bloomberg began tracking the data in 2016. Their departure comes as a prolonged housing slump raises the risk of broader financial contagion…”

August 21 – Reuters (Joe Cash and Liangping Gao): “China’s fiscal revenue rose 11.5% in the first seven months of 2023 from the same period a year earlier, but was slower than the 13.3% rise posted for the first six months…, amid signs the economy is losing momentum. Fiscal revenue totalled 13.9 trillion yuan ($1.92 trillion) from January-July, while fiscal expenditure grew 3.3% to 15.2 trillion yuan ($2.10 trillion)…”

August 24 – Reuters (Bernard Orr): “China’s abrupt move to dismantle its strict COVID-19 regime, which unleashed the virus onto its 1.4 billion residents, could have led to nearly 2 million excess deaths in the following two months, a new U.S. study shows. The study by the federally funded Fred Hutchinson Cancer Center… was taken from a sample of mortality data published by some universities in China and internet searches.”

Central Banker Watch:

August 25 – Bloomberg (Alexander Weber and Michael McKee): “European Central Bank Governing Council member Joachim Nagel said that he’s not convinced inflation is under control enough for a halt in interest rate hikes, with his decision hinging on additional data… ‘It’s for me much too early to think about a pause,’ the Bundesbank chief told Bloomberg TV at Jackson Hole… ‘We shouldn’t forget inflation is still around 5%. So this is much too high. Our target is 2%. So there’s some way to go.’”August 24 – Dow Jones (Ed Frankl): “Turkey’s central bank… raised its key interest rate for the third consecutive meeting, as it attempts to wrest back control of climbing inflation in the troubled economy. The bank raised the country’s benchmark interest rate, the one-week repo rate, to 25% from 17.5%. After a series of cuts, the bank increased rates in June for the first time since 2021. The hike compares with expectations of a key rate of 20%…”

Global Bubble Watch:

August 23 – Reuters (Nivedita Balu and Fergal Smith): “Highly indebted Canadians hoping for relief from a rapid rise in mortgage rates are in for some disappointment, as recent moves in the bond market point to interest rates staying at elevated levels for longer than previously expected due to stubborn inflation. The yield on Canada’s 5-year bond climbed on Tuesday to a 16-year high of 4.17%, up from 2.66% in March… Nearly all Canadian mortgages have a term of five years or less, compared with the 30-year term that is common in the United States.”

Europe Watch:

August 23 – Bloomberg (Alexander Weber and Naomi Tajitsu): “The contraction of private-sector activity in the euro area intensified, leading investors to bet that the European Central Bank will pause its campaign of interest-rate hikes next month. Services in August ceased being a bright spot and followed the industrial sector into a downturn in the region’s top two economies… The flash Purchasing Managers’ Index for the region fell to 47… Services activity shrank for the first time since end-2022… ‘The PMIs were very weak and highlight the dire outlook for Europe’s largest economy and the risks ahead of the September ECB policy meeting,’ said Valentin Marinov, head of G10 FX strategy at Credit Agricole. The figures were particularly dire in Germany, where overall activity declined at the fastest pace since the first wave of the pandemic… France reported a third monthly drop in output, while the rest of the region contracted more moderately.”

August 23 – Reuters (Maria Martinez): “German business activity contracted at the fastest pace for more than three years in August, a preliminary survey showed… The HCOB German Flash Composite Purchasing Managers’ Index (PMI), compiled by S&P Global, fell to 44.7 from July’s 48.5, hitting its lowest since May 2020 and confounding analysts’ expectations for a reading of 48.3.”

August 22 – Financial Times (Ludovic Subran): “Are eurozone governments getting too close for comfort to a new danger zone? The signs are there, with sovereign exposure to the corporate sector crossing 20% of gross domestic product. This comes from both the European Central Bank’s asset purchases and the generous policy support to shield companies from the effects of back-to-back crises. Government credit guarantees and liquidity support certainly hit the mark… But they mask considerable economic scarring. Some sectors and firms have yet to fully recover, and some may never recover… At the same time, delayed insolvency proceedings and the (so far) shallow recession have helped keep corporate defaults low. But these suppressed bankruptcies are hiding sizeable losses, which could emerge quickly as the effects of strong policy support fade, given the build-up of corporate leverage and still weak fundamentals.”

Japan Watch:

August 22 – Reuters (Leika Kihara): “Japan may be seeing early signs of sticky inflation with several measures of broad price trends hitting record highs in July…, heightening the case for a retreat from decades of ultra-loose monetary policy. Based on the government’s consumer price data, the Bank of Japan (BOJ) releases several measurements of underlying inflation that look at the distribution of price changes… The ‘trimmed mean’ index, which strips away the upper and lower tails of the distribution, rose a record 3.3% in July from a year earlier…, accelerating from a 3.0% gain in June.”

August 21 – Bloomberg (Emi Urabe and Brian Fowler): “Prime Minister Fumio Kishida and Bank of Japan Governor Kazuo Ueda met Tuesday to discuss financial conditions amid continued yen weakness and a rise in bond yields ahead of a key gathering of central bankers in Jackson Hole later this week. ‘Prime Minister Kishida asked various questions about the economic and financial situation,’ Ueda told reporters… The two didn’t particularly discuss currency moves, the governor added.”

EM Watch:

August 21 – Bloomberg (Beril Akman and Kerim Karakaya): “As the lira was approaching a decade of continuous losses, Turkish policymakers hit on an idea that promised a quick fix, and it helped stave off another currency crisis. But nearly two years on, a government-backed savings program — which protects lira deposits from depreciation against hard currencies — has become too big to unwind and too dangerous to live without… At $124 billion, foreign exchange-linked savings now account for more than a quarter of total deposits, dwarfing the central bank’s gross reserves. The program… is increasingly a drain on state coffers and a constraint on policymakers…”

August 24 – Financial Times (Michael Stott and James Kynge): “Argentina faced a familiar problem at the end of last month. The South American nation was struggling to repay the IMF $2.7bn from its latest $44bn bailout. The solution, however, was unconventional. With its net dollar reserves in the red, Buenos Aires settled the payment partly in renminbi. ‘Argentina will not use a single dollar from its reserves to make the payment,’ economy minister Sergio Massa crowed. The transfer in the Chinese currency was only Argentina’s second to the IMF. ‘These are indications of broader changes happening in the international financial system, which will become permanent,’ a senior official at the Argentine economy ministry said. ‘These shifts will take time, but they will not be reversed.’ On the other side of the globe, Bangladesh also alighted on the renminbi as the answer to a problem it had in April: how to make stalled payments to Russia for a nuclear power plant”

August 23 – Reuters (Jorgelina Do Rosario): “Argentina plans to tap a $7.5 billion disbursement from the International Monetary Fund to repay China part of the money it borrowed through a currency swap line… Latin America’s third-largest economy recently used $2.8 billion equivalent of yuan to cover just over half of two repayments from a 2018 IMF loan, in order to avoid a default to the multilateral lender.”

August 23 – Reuters (Nivedita Bhattacharjee): “An Indian spacecraft became the first to land on the rugged, unexplored south pole of the moon on Wednesday in a mission seen as crucial to lunar exploration and India’s standing as a space power, just days after a similar Russian lander crashed. ‘This moment is unforgettable. It is phenomenal. This is a victory cry of a new India,’ said Prime Minister Narendra Modi, who waved the Indian flag as he watched the landing from South Africa where he is attending a BRICS summit, a group that joins Brazil, Russia, India, China and South Africa.”

Leveraged Speculation Watch:

August 25 – Bloomberg (Claire Ruckin and Silas Brown): “Private equity firms are turning to a new weapon to help them get their buyouts over the line: less-than-conventional funding. M&A activity has slumped this year in part because spiraling interest rates have made traditional PE investors nervous about leveraged acquisitions. Buyout firms are increasingly using expensive subordinated debt — also known as junior financing — to help fill funding gaps and get deals done.”

Social, Political, Environmental, Cybersecurity Instability Watch:

August 24 – Reuters (Sakura Murakami): “Japan started releasing treated radioactive water from the wrecked Fukushima nuclear power plant into the Pacific Ocean on Thursday, a polarising move that prompted China to announce an immediate blanket ban on all aquatic products from Japan. China is ‘highly concerned about the risk of radioactive contamination brought by… Japan’s food and agricultural products,’ the customs bureau said…”

August 22 – Bloomberg (Brian K. Sullivan): “About 145 million people across the central US are facing wilting temperatures this week from another massive heat wave that will tax energy grids and raise health risks from Minnesota to the Gulf Coast. The heat is already smashing records dating back more than a century, and temperatures are forecast to reach 100F degrees (38C) or more from Minneapolis in the north to Dallas in the south Tuesday. Triple-digit readings will spread even further on Wednesday and Thursday…”

August 23 – Wall Street Journal (Joseph Pisani and Jennifer Calfas): “Climate scientists have a message about this summer’s wild weather: Get used to it. The wildfires, flooding and heat waves will get worse and happen more often—and affect more people, they say. ‘There isn’t really a new normal yet,’ said Rachel White, an atmospheric scientist and assistant professor at the University of British Columbia. ‘What we’re experiencing right now is probably just a stopover on our way to the new normal.’ Decades of pumping greenhouse gasses into the air is heating the planet, climate scientists say, making wildfires burn farther, storms grow stronger and heat waves last longer.”

August 21 – CNBC (Sam Meredith): “An increasing number of climate-driven extreme weather events is taking its toll on the world’s major shipping routes — and El Niño could make matters worse. El Niño… marks the unusual warming of the surface waters in the tropical central and eastern Pacific Ocean. It is a naturally occurring climate pattern which takes place on average every two to seven years. The effects of El Niño tend to peak during December, but its full impact typically takes time to spread across the globe. This lag is why forecasters believe 2024 could be the first year when humanity surpasses the key climate threshold of 1.5 degrees Celsius.”

Geopolitical Watch:

August 20 – Wall Street Journal (Peter Landers and Dasl Yoon): “If this isn’t another Cold War, it certainly resembles one. On the one side, leaders of the U.S., Japan and South Korea, touting their shared democratic values, pledged cooperation in confronting China’s ‘dangerous and aggressive behavior.’ On the other, Chinese leader Xi Jinping was traveling to South Africa for a summit with developing nations open to Beijing’s wooing. China’s state news agency denounced America as ‘driven by a desperate bid to salvage its hegemonic power.’ Cold War I, for the U.S., was about assembling allies and friends to counteract the Soviet Union. Two of the most important were Japan, facing Soviet power on its northern edge, and South Korea in its standoff with communist North Korea. Now those two countries, putting aside longstanding feuds with each other, are teaming up with the U.S. to present a united front against Beijing.”

August 23 – Wall Street Journal (Thomas Grove and Austin Ramzy): “Russia and China used a summit of countries known as the Brics this week to air their grievances against Western powers, present themselves as defenders of developing economies and set out the case for an alternative international order. Russian President Vladimir Putin, addressing the… summit by video, accused the West of provoking everything from the war in Ukraine and global inflation to hunger in the world’s most vulnerable countries by hampering Russian grain and fertilizer sales through sanctions. Leaders of Brics nations Brazil, India, China and South Africa, gathered in Johannesburg with Putin—who faces an international arrest warrant for alleged war crimes in Ukraine—joining by video. ‘Our actions in Ukraine are dictated by only one thing, to bring an end to the war that was unleashed by the West,’ he said…”

August 21 – Bloomberg (Simone Preissler Iglesias, S’thembile Cele, and Sudhi Ranjan Sen): “The world’s leading emerging market powers have complained for years about being sidelined by wealthy nations. Now they are mounting their most ambitious challenge yet to the status quo. The BRICS bloc — Brazil, Russia, India, China and South Africa — will use an annual leaders’ summit in Johannesburg this week to begin the process of enlisting more members to bolster its global heft, a push driven mainly by Chinese President Xi Jinping but also backed by Russia and South Africa. There will also be talks on how to accelerate a shift away from the dollar, in part by increasing the use of local currencies in trade between members, which is surging…”

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