MARKET NEWS / CREDIT BUBBLE WEEKLY

August 4, 2023: Shot Across the Bow

MARKET NEWS / CREDIT BUBBLE WEEKLY
August 4, 2023: Shot Across the Bow
Doug Noland Posted on August 5, 2023

The two-year versus 10-year Treasury spread narrowed 20 bps this week, the largest narrowing since the banking crisis week of March 17th.

Ten-year Treasury yields rose eight bps for the week to 4.03% – after trading up to 4.20% early-Friday following the release of July payroll data. This was within two bps of the October 21st high – which was the peak yield back to June 2008. Benchmark MBS yields traded above 6% in early-Friday trading for the first time since the (UK bond dislocation) October yield spike. MBS yields reversed a notable 26 bps in volatile Friday trading, ending the week up six bps to 5.74%. Long-bond yields surged a notable 19 bps this week to 4.20% (high since November).

Meanwhile, two-year yields dropped 11 bps to a near three-week low 4.77%. The market’s probability for a 25 bps rate increase at the Fed’s September 20th meeting dropped from 19% to 13%. It’s an interesting market dynamic when bond yields are at the cusp of breaking higher, yet shorter-term yields decline along with expectations for higher policy rates.

A “risk off” tenor took some pressure off short rates. Investment-grade corporate CDS gained 5.6 bps this week – the largest increase since March (to a still relatively low 68 bps). High-yield CDS jumped 27.3 bps, second only to the week of June 23rd (27.6 bps) for the largest weekly gain since March.

Curiously, “risk off” extended to the hot emerging markets. It’s always interesting to see the familiar list of EM currencies quickly under pressure when global risk aversion makes an appearance. Even after Friday’s rally, the week’s losses were meaningful. The South African rand declined 4.5%, the Russian ruble 3.9%, the Colombian peso 3.7%, the Brazilian real 2.9%, the Chilean peso 2.7%, the South Korean won 2.5%, and the Peruvian sol 2.4%. The Mexican peso’s 1.4% Friday advance cut losses for the week to 2.3%.

The emerging market equities ETF (EEM) dropped 3.3%, while EM bonds (EMB) declined 1.1%. EM CDS rose 11 bps this week, the largest weekly increase since April. EM dollar bonds were under notable selling pressure. Yields were up 23 bps in Panama (to 6.02%), 22 bps in Turkey (8.13%), 20 bps in the Philippines (4.95%), 19 bps in Indonesia (5.01%), and 18 bps in Peru (5.33%). Surging to highs since March, yields rose 20 bps in Brazil (6.07%) and 16 bps in Mexico (5.62%).

Local currency EM yields surged 29 bps in Colombia (10.41%), 25 bps in Romania (6.70%), 21 bps in Hungary (7.42%), 19 bps in Mexico (8.99%), and 17 bps in Peru (6.89%).

Germany’s DAX equities index dropped 3.1%, with major indices down 2.2% in France, 3.1% in Italy, 3.3% in Spain, and 1.7% in the UK.

Down 2.2%, it was the largest weekly loss for the S&P500 since March. Curiously, the Utilities were slammed 4.7%, the biggest drop since last September. The Nasdaq100 fell 3.0%, the largest decline since the week of the SVB failure (March 10th).

Apple’s 4.8% Friday slump boosted losses for the week to 7.1% (largest since November). It’s worth noting that Apple closed Monday trading at an all-time high, at that point with a y-t-d return of 51.6%. The company Thursday reported fiscal Q3 Net Income of $19.881 billion, up 2% vs. Q3 2022. Revenues were down slightly y-o-y. The stock closed the week with a price-to-earnings ratio of 30.59.

It seems like the market this week was infected with a touch of reality. ISM and PMI surveys pointed to ongoing U.S. service sector strength. The ISM Services Price Paid Index rose 2.7 points to 56.8, the high since April. Employment data (non-farm payrolls, ADP, Challenger, weekly claims) all pointed to ongoing labor market strength.

August 2 – Bloomberg (Jeff Cox): “Private sector companies added far more jobs than expected in July, pushed higher by a boom in leisure and hospitality jobs, payroll processing firm ADP reported… Job gains for the month came to 324,000, driven by a 201,000 jump in hotels, restaurants, bars and affiliated businesses. That total was well above the… estimate for 175,000… Services-related industries dominated job creation during the month as the economy continues its transition back from being goods-oriented in the early days of the Covid pandemic. The sector was responsible for 303,000 jobs on the month.”

The July Unemployment Rate declined a tick to 3.5%, near the lowest level since 1969. Notably, Average Hourly Earnings gained a stronger-than-expected 0.4% during July, with y-o-y growth of 4.4%. June and July’s back-to-back months of 0.4% increases were the first of the year, as data point to a re-acceleration of wage gains. It’s worth noting that y-o-y Average Hourly Earnings growth peaked in 2007 at 3.5% – and in 2008 at 3.6%. Gains averaged 2.6% during the decade 2009 through 2018. Average Hourly Earnings had accelerated to 3.2% during 2018 and 2019, momentum that pandemic stimulus supercharged.

Bonds have every reason to be nervous. It didn’t help that Fitch dropped their AAA rating on U.S. debt.

August 2 – Reuters (Davide Barbuscia): “Fitch downgraded the U.S. credit rating due to fiscal concerns, a deterioration in U.S governance, as well as political polarization reflected partly by the Jan. 6 insurrection, Richard Francis, a senior director at Fitch Ratings, told Reuters… In a move that took investors by surprise, Fitch downgraded the United States to AA+ from AAA on Tuesday, citing fiscal deterioration over the next three years and repeated down-to-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills.”

August 2 – Bloomberg (Christopher Condon): “Treasury Secretary Janet Yellen… slammed the move by Fitch Ratings to strip the US of its top-tier credit rating, calling it ‘flawed’ and ‘entirely unwarranted.’ ‘Fitch’s decision is puzzling in light of the economic strength we see in the United States,’ Yellen said… ‘In the longer term, the US ‘remains the world’s largest, most dynamic, and most innovative economy – with the strongest financial system in the world.’”

Former Treasury Secretary Larry Summers: “The idea that this is creating the risk of a default on US Treasury securities is absurd, and I don’t think that Fitch has any new and useful insights into the situation.”

Mohamed El-Erian: “We don’t have a debt problem as long as growth continues to pick up, and one of the upside surprises has been not only that actual growth has picked up, but that potential growth is starting to be positively impacted by policy.” “Why now? You scratch your head as to the timing of this.”

A few of my favorite headlines: “Here’s Why Top Economists Are Calling Fitch’s Decision to Downgrade America’s Credit Rating ‘Bizarre and Inept’.” “Massive Backlash Over U.S. Credit Rating Downgrade Forces Fitch into Defense Mode.” “Credit Downgrade Shocks Biden Aides, as More Debt Fights Loom.”

Thou doth protest too much. And despite all the Wall Street and Washington pushback against Fitch’s decision, Treasury debt has inflated from $6 TN to $27 TN since the end of 2007 – growing from about 40% of GDP to over 100%. And why downgrade now? At $1.4 TN, the federal deficit for the first nine months of the fiscal year was up 170% from comparable 2022.

July 31 – Bloomberg (Liz Capo McCormick): “The US Treasury boosted its estimate for federal borrowing for the current quarter, as it addresses a deteriorating fiscal deficit and keeps replenishing its cash buffer. The Treasury Department increased its net borrowing estimate for the July through September quarter to $1 trillion, well up from the $733 billion amount it had predicted in early May. The new amount… is a record for the September quarter and in excess of what some close watchers of the figure had expected.”

The deterioration in our nation’s fiscal position is shocking, especially during a period of economic expansion. The CBO is projecting a 2023 deficit of about 6% of GDP. A reasonable scenario that includes persistent inflation forcing “higher for longer” and surging debt service, recession and sinking revenues, rising defense spending and such could easily see deficits approach 10% of GDP. Major bank failures and GSE recapitalization would push deficits even higher. And who has any confidence that Congress could come to bipartisan agreement on how to manage through a fiscal crisis?

August 2 – Reuters (Urvi Dugar and Megan Davies): “Ratings agency Fitch… downgraded U.S. mortgage finance giants Fannie Mae and Freddie Mac Long-Term Issuer Default Ratings (IDR) and senior unsecured debt ratings to ‘AA+’ from ‘AAA’ after the U.S. rating downgrade… ‘The downgrade to the ratings of Fannie and Freddie was a certainty after Fitch’s downgrade of the US rating since the two ratings are linked,’ said Gennadiy Goldberg, Head of US Rates Strategy at TD Securities.”

I tend to see Fitch’s timely downgrade as a Shot Across the Bow. It might take a while – even a very long while – but, at the end of the day, fundamentals matter. Fundamentals should be troubling to the bond market these days. Inflation appears more persistent than it has been in a long time, supporting the New Cycle thesis. Massive deficits ensure a massive supply of Treasuries as far as the eye can see. And “higher for longer” ensures heightened risk for both higher rates and QT. There is also the risk of problematic deleveraging and derivatives-related selling overwhelming the marketplace. And we cannot today disregard risks unfolding in Japan.

July 31 – Financial Times (Kana Inagaki, Leo Lewis, Mary McDougall and Katie Martin): “Japanese government bond yields jumped on Monday as global debt, currency and equity markets began to absorb a landmark shift by the Bank of Japan to allow yields to rise more freely. Analysts said BoJ governor Kazuo Ueda’s decision to loosen the central bank’s grip on long-term bond yields marked a significant step towards unwinding decades of ultra-accommodative monetary policy. The benchmark yield on 10-year JGBs rose to a nine-year high…”

August 1 – Bloomberg (Garfield Reynolds): “The Bank of Japan is seeding uncertainty across global markets with a radical shift to its policy settings. The likely outcome is higher volatility and bond yields both in the Asian nation and around the world. The potential impact is set to be extensive given Japanese portfolio investors hold some ¥308.4 trillion ($2.2 trillion) of overseas debt…”

My analytical interests are piqued by big “bear steepeners” – when long-term yields jump and shorter rates decline. It has me contemplating a New Paradigm. The old paradigm goes back a while – sowed in the days of Greenspan and fully embraced with Bernanke. It unfolded gradually – then quickly. Bond pricing evolved to be dictated more by prospects for Fed policy stimulus than by underlying fundamentals (i.e., inflation and supply). Market became highly distorted and dysfunctional.

There’s a strong argument that this dysfunction turned even more pronounced during the Fed’s current “tightening cycle” – that has failed to tighten financial conditions. It’s worth noting that 10-year bond yields reached 8% during the last true tightening cycle in 1994 – despite inflation lower than today. The bond market has largely disregarded the risk of entrenched inflation and has been quick to price in prospective Fed rate cuts. After the restart of QE in 2019, $5 TN of Covid QE, and the recent bank crisis response, it’s understandable that bond pricing has reflected the near certainty of ongoing aggressive monetary stimulus.

Bond market dysfunction has perpetuated loose conditions and accommodated massive fiscal deficits. A distorted marketplace has incentivized both leveraged speculation and dangerous derivative structures. In short, the bond market has been sowing the seeds of its own crisis for a long time.

It has been inevitable. It’s so long overdue. Bond focus appears to be pivoting to the risk of sticky inflation, supply and a more prolonged Fed tightening cycle. This week’s shift to “risk off” saw two-year note yields drop. Such a backdrop would have typically also spurred buying of longer maturities and resulting lower yields. But bond market focus has shifted to other concerns – the type of concerns that in the past would have been a source of bond and market grief.

Bond and MBS yields rose Friday morning to key levels – and then recoiled. Unless “risk off” gains momentum, bonds are vulnerable here. We could be witnessing the start of an important paradigm shift.

August 4 – Bloomberg (Matthew Boesler, Craig Stirling and Paul Abelsky): “No amount of power and prosperity can stop the irritation of getting judged for your borrowing habits, as the world’s biggest economy just experienced. The US downgrade from AAA by Fitch Ratings this week is just the most high profile episode in a new era of scrutiny over global public finances that deteriorated in the wake of the Covid pandemic. Rich-world peers from Italy to France and the UK are in the spotlight as higher interest rates impact debt levels exceeding 100% of annual output. Stakes are even higher for capital-hungry developing nations, where potentially ill-timed, negative revisions can push up borrowing costs for years.”

August 2 – Bloomberg (Liz Capo McCormick): “It’s taken more than a decade, but David Beers is feeling something like vindication after Fitch Ratings downgraded US government debt this week. The former head of S&P Global Ratings’ sovereign debt scoring committee was one of the analysts behind the controversial decision to cut the US credit grade back in 2011. He warned… that issues dogging the world’s top economy now are reminiscent of those that drove S&P’s downgrade 12 years ago — and some have escalated. That includes political brinkmanship surrounding the US debt ceiling. ‘The underlying fiscal position and underlying debt trajectory has picked up pace,’ Beers… said… ‘AAA is the top rating any rating agency can assign, but of course, the US and any other sovereign that’s being rated has no god-given or automatic right to that.’”

August 2 – Bloomberg (Christopher Anstey): “Two former US Treasury secretaries urged Washington policymakers to address the country’s long-term fiscal challenges before they become insurmountable… ‘Our fiscal trajectory is concerning,’ Hank Paulson said… ‘We’re a rich country, and we’ve got time to deal with it. But we need to do some things in the next few years to change that trajectory.’ Paulson’s successor as Treasury chief, Timothy Geithner, said ‘you want to move the system to act before it’s late and hard.’ Asked whether it would take a crisis before Washington did address its borrowing needs, he answered, ‘I hope not.’”

For the Week:

The S&P500 fell 2.3% (up 16.6% y-t-d), and the Dow declined 1.1% (up 5.8%). The Utilities sank 4.7% (down 10.6%). The Banks lost 1.2% (down 12.8%), and the Broker/Dealers fell 1.4% (up 12.7%). The Transports slumped 2.2% (up 21.9%). The S&P 400 Midcaps declined 1.3% (up 10.3%), and the small cap Russell 2000 dipped 1.2% (up 11.1%). The Nasdaq100 dropped 3.0% (up 39.6%). The Semiconductors sank 4.0% (up 46.1%). The Biotechs fell 3.0% (down 1.9%). With bullion down $16, the HUI gold equities index lost 3.5% (down 0.3%).

Three-month Treasury bill rates ended the week at 5.255%. Two-year government yields dropped 11 bps this week to 4.46% (up 34bps y-t-d). Five-year T-note yields declined five bps to 4.13% (up 13bps). Ten-year Treasury yields rose eight bps to 4.03% (up 16bps). Long bond yields surged 19 bps to 4.20% (up 24bps). Benchmark Fannie Mae MBS yields gained six bps to 5.74% (up 36bps).

Greek 10-year yields declined four bps to 3.77% (down 79bps y-t-d). Italian yields jumped 11 bps to 4.21% (down 49bps). Spain’s 10-year yields rose eight bps to 3.59% (up 8bps). German bund yields gained seven bps to 2.56% (up 12bps). French yields increased six bps to 3.09% (up 11bps). The French to German 10-year bond spread narrowed a basis points to 53 bps. U.K. 10-year gilt yields rose five bps to 4.38% (up 71bps). U.K.’s FTSE equities index fell 1.7% (up 1.5% y-t-d).

Japan’s Nikkei Equities Index lost 1.7% (up 23.4% y-t-d). Japanese 10-year “JGB” yields jumped eight bps to a nine-year high 0.65% (up 23bps y-t-d). France’s CAC40 fell 2.2% (up 13.0%). The German DAX equities index dropped 3.1% (up 14.6%). Spain’s IBEX 35 equities index sank 3.3% (up 13.8%). Italy’s FTSE MIB index dropped 3.1% (up 20.6%). EM equities were mostly lower. Brazil’s Bovespa index slipped 0.6% (up 8.9%), and Mexico’s Bolsa index lost 1.7% (up 11.4%). South Korea’s Kospi index dipped 0.2% (up 16.4%). India’s Sensex equities index declined 0.7% (up 8.0%). China’s Shanghai Exchange Index increased 0.4% (up 6.4%). Turkey’s Borsa Istanbul National 100 index jumped 4.7% (up 34.3%). Russia’s MICEX equities index rose 2.8% (up 43.6%).

Investment-grade bond funds posted outflows of $1.765 billion, and junk bond funds reported negative flows of $1.013 billion (from Lipper).

Federal Reserve Credit dropped $31.1bn last week to $8.190 TN. Fed Credit was down $711bn from the June 22nd, 2022, peak. Over the past 203 weeks, Fed Credit expanded $4.464 TN, or 120%. Fed Credit inflated $5.379 TN, or 191%, over the past 560 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $15.3bn last week to $3.446 TN. “Custody holdings” were up $78.7bn, or 2.3%, y-o-y.

Total money market fund assets jumped $29bn to a record $5.516 TN, with a 21-week gain of $622bn (31% annualized). Total money funds were up $940bn, or 20.6%, y-o-y.

Total Commercial Paper fell $8.9bn to $1.166 TN. CP was down $2.9bn, or 0.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 12 bps to an eight-month high 6.92% (up 193bps y-o-y). Fifteen-year rates rose 11 bps to 6.31% (up 205bps). Five-year hybrid ARM rates gained eight bps to 6.51% (up 226bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates added three bps to 7.41% (up 203bps).

Currency Watch:

August 1 – Reuters: “China’s currency regulators have in recent weeks asked some commercial banks to reduce or delay their dollar purchases… The informal instruction, or the so-called window guidance, was meant to slow the pace of yuan depreciation, the sources said. One source said the regulators were emphatic banks should hold off dollar purchases under their proprietary trading accounts.”

For the week, the U.S. Dollar Index increased 0.3% to 102.017 (down 1.4% y-t-d). On the upside, the Norwegian krone increased 0.6%. On the downside, the South African rand declined 4.5%, the Brazilian real 2.9%, the South Korean won 2.5%, the Mexican peso 2.3%, the Australian dollar 1.2%, the New Zealand dollar 1.1%, the Canadian dollar 1.1%, the British pound 0.8%, the Singapore dollar 0.6%, the Japanese yen 0.4%, the Swiss franc 0.3%, the Swedish krona 0.3%, and the euro 0.1%. The Chinese (onshore) renminbi declined 0.34% versus the dollar (down 3.82%).

Commodities Watch:

August 4 – Bloomberg (Julia Fanzeres and Anthony Di Paola): “Oil headed for the sixth straight weekly gain, the longest streak in more than a year, after OPEC+ heavyweights Saudi Arabia and Russia extended supply curbs into next month and US stockpiles sank by a record. West Texas Intermediate traded around $82 a barrel, taking gains during the six-week span to about 19%. Saudi Arabia said… it would extend its unilateral 1 million barrel-a-day output cut into September…”

August 4 – Bloomberg (Megan Durisin, Áine Quinn and Tarso Veloso): “Wheat futures rose more than 4%, paring a weekly loss, after an attack forced a major Russian grain-shipping hub to temporarily close. Traffic at the Novorossiysk port was halted for several hours on Friday after a Ukrainian drone attack on a naval vessel.”

July 31 – Financial Times (Edward White): “China’s metals and mining investments overseas are on track to hit a record this year…, as the country races to secure resources to defend its position as the world’s biggest producer of electric vehicles, batteries, solar panels and wind turbines. In the first half of this year, Chinese investments and new contracts in the mining and metals sector topped $10bn, according to… the Green Finance & Development Center at Fudan University… That figure is more than the 2022 full-year total, and puts this year’s investments on track to exceed the previous record of $17bn in 2018.”

The Bloomberg Commodities Index declined 1.2% (down 6.1% y-t-d). Spot Gold dipped 0.8% to $1,943 (up 6.5%). Silver dropped 2.9% to $23.635 (down 1.3%). WTI crude gained $2.22, or 2.8%, to $82.82 (up 3%). Gasoline dropped 5.6% (up 13%), and Natural Gas fell 2.6% to $2.577 (down 42%). Copper declined 1.6% (up 2%). Wheat sank 10.1% (down 20%), and Corn fell 7.2% (down 29%). Bitcoin lost $310, or 1.1%, to $29,030 (up 78%).

Global Bank Crisis Watch:

July 31 – Reuters (Ann Saphir): “U.S. banks reported tighter credit standards and weaker loan demand from both businesses and consumers during the second quarter, Federal Reserve survey data… showed… The Fed’s quarterly Senior Loan Officer Opinion Survey, or SLOOS, also showed that banks expect to further tighten standards over the rest of 2023. ‘The most cited reasons for expecting to tighten lending standards were a less favorable or more uncertain economic outlook, an expected deterioration in collateral values, and an expected deterioration in credit quality of CRE (commercial real estate) and other loans,’ the Fed said.”

August 3 – Bloomberg (Lydia Beyoud and Tom Schoenberg): “The Federal Home Loan Bank of San Francisco, which had propped up several banks with multibillion-dollar loans before their collapses this year, will part ways with its chief executive officer. A search committee has been formed to replace 64-year-old Teresa Bryce Bazemore when her term ends in March 2024… The San Francisco FHLB said it decided not to renew the employment agreement on July 28. Bazemore received compensation worth $2.4 million in 2022, much of it in bonuses.”

July 29 – Yahoo Finance (David Hollerith): “The banks that showed some of the biggest deposit declines during the second quarter weren’t midsize regional lenders. They were the industry’s giants. JPMorgan…, Bank of America, Citigroup and Wells Fargo — the four biggest banks by assets — gave up a net $262 billion in deposits when compared with the year-earlier period. From the first quarter to the second quarter, customers pulled $62 billion from three of those banks. Many regional banks, meanwhile, gained deposits back.”

July 31 – Wall Street Journal (Gina Heeb and Ben Eisen): “Midsize and small banks in the second quarter largely stabilized or even reversed the deposit exodus they suffered earlier this year. To do so, many had to rely on deposits that flowed through third-party brokers. Brokered deposits are a quick and easy way banks can bolster their balance sheets in a pinch. A bank can go to a firm such as Morgan Stanley or Fidelity to find people to invest in its certificates of deposit, often for large amounts. But brokered deposits are typically much more expensive for banks. They can come with interest rates of 5% or more, putting pressure on profit margins.”

UK Crisis Watch:

August 1 – Reuters (Andy Bruce): “British house prices fell by the most since 2009 in the 12 months to July, mortgage lender Nationwide said…, as the drag from rising interest rates on the housing market intensified. Compared with July last year, the average house price was down 3.8% after a 3.5% annual fall in June, Nationwide said.”

Market Instability Watch:

August 2 – Bloomberg (Benjamin Purvis and Simon Kennedy): “Fitch Ratings’ downgrade of US government debt sparked criticism from Washington and Wall Street even amid unease that swollen fiscal deficits risk eventual turbulence in markets, the economy and next year’s presidential election. Fitch cut the US’s sovereign credit grade one level from AAA to AA+. The move comes just two months after it warned the rating was under threat as lawmakers flirted with default by battling over raising the nation’s debt limit. The credit grader justified the shift by arguing the country’s finances will likely deteriorate over the next three years given tax cuts, new spending initiatives, economic shocks and repeated political gridlock.”

August 2 – Bloomberg (Kate Duguid and James Politi): “The reaction to Fitch Ratings’ downgrade of the US’s pristine debt rating played out on a split screen on Wednesday: outrage from the White House and relative calm among investors in the market for Treasury bonds assessed by the agency. Fitch… lowered the US long-term rating one rung from triple A to double A plus, citing the country’s growing debt burden and an ‘erosion of governance’, including on fiscal matters. The action came two months after the country narrowly averted default amid political wrangling over the federal borrowing limit. The Biden administration reacted with anger, sending out a release citing pundits calling the decision ‘off-base’, ‘absurd’ and ‘widely & correctly ridiculed’.”

August 1 – Bloomberg (Alexandra Harris): “Mounting Treasury-bill supply is creating a ‘narrow and difficult’ path for the Federal Reserve to keep unwinding its massive balance sheet and avoid roiling funding markets, according to Barclays Plc. The key question is where the money will come from to absorb the hundreds of billions of dollars of bills the Treasury is selling in the wake of the debt-ceiling resolution in June. Along with Fed interest-rate hikes, that burst of issuance is driving up bill yields and luring cash from across the financial system.”

August 1 – Bloomberg (Michael Mackenzie and Katie Greifeld): “Seven years since Japan embarked on a highly unorthodox monetary experiment that helped pin down borrowing costs on Wall Street and beyond, the nation’s central bank is loosening its vice-like grip on domestic bond yields — with potentially profound consequences for high finance and households across the US. Think higher interest rates for Corporate America, more expensive mortgages for home buyers and lower demand for risky assets including stocks, in the event that Japanese buyers bring their huge pools of overseas investments back home for higher returns.”

August 2 – Bloomberg (Yumi Teso): “The Bank of Japan came into the market for the second time this week to slow gains in benchmark sovereign bond yields, underscoring its determination to curb sharp moves in rates even as it makes room for them to rise. The buying operation Thursday also highlighted the challenge investors face interpreting a rates regime that is built on gray lines to let the BOJ be flexible rather than provide clarity for markets. The impact was also felt immediately in the currency market, with the yen weakening.”

July 29 – Financial Times (Mary McDougall and Daria Mosolova): “The Bank of Japan’s latest relaxation of its cap on bond yields will enhance the returns on offer on the country’s debt, leading some investors to forecast that a ‘great repatriation’ of Japanese investment flows is set to accelerate. The policy shift comes at a time when overseas debt has become an increasingly unappealing prospect for many Japanese investors because of the soaring cost of hedging… Many big Japanese investors, such as insurers, routinely hedge their currency exposure when they buy foreign bonds. Rising interest rates in the rest of the developed world have sharply driven up the cost of doing so, more than cancelling out the growing yield gap between Japan and other economies…”

August 2 – Bloomberg (Ye Xie): “Treasuries haven’t been this ineffective as a stock hedge since the 1990s. Historically, Treasuries tend to rally when stocks are tumbling, meaning they are negatively correlated. The idea is a cornerstone of the popular 60/40 strategy that uses an allocation to bonds as well as stocks to reduce the volatility of the overall portfolio. But the one-month correlation between the Bloomberg US Treasury Total Return Index and the S&P 500 strengthened this week to 0.82. A reading of 1 means bonds and stocks always move in tandem, while -1 means the opposite. Between 2000 and 2021, it averaged -0.3.”

August 4 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Global money market funds attracted massive inflows in the week to Aug. 2 as investors sought safer assets amid a U.S. credit downgrade and weak economic data from the euro zone and China. Investors poured in a net $67.52 billion into global money market funds during the week, marking the biggest weekly net purchase since March 22…”

Bubble and Mania Watch:

July 31 – Bloomberg (Garfield Reynolds): “The world’s stockpile of negative-yielding debt looks to be grinding toward extinction as the Bank of Japan eases back on its rigid bond market control. The global stock of bonds where investors receive sub-zero yields dropped to $1.3 trillion on Monday when two-year Japanese bond yields topped 0%… The market value of negative-yield bonds in Bloomberg’s Global Aggregate Index of debt peaked at $18.4 trillion in late 2020…”

July 30 – Reuters (Sinead Cruise, Lucy Raitano and Lewis Jackson): “Commercial real estate investors and lenders are slowly confronting an ugly question – if people never again shop in malls or work in offices the way they did before the pandemic, how safe are the fortunes they piled into bricks and mortar? Rising interest rates, stubborn inflation and squally economic conditions are familiar foes to seasoned commercial property buyers, who typically ride out storms waiting for rental demand to rally and the cost of borrowing to fall… This time though, analysts, academics and investors… warn things could be different. With remote working now routine for many office-based firms and consumers habitually shopping online, cities like London, Los Angeles and New York are bloated with buildings local populations no longer want or need.”

July 31 – Wall Street Journal (Kate King): “Crystal Mall’s parking lots used to be so crowded that parents would line up to drop off their teenagers near one of the entrances rather than search for a spot. Now, the vast stretches of cracked pavement surrounding this 1980s-era regional mall on Connecticut’s coast have more weeds than cars. Valued by an appraiser at $153 million as recently as 2012, Crystal Mall sold in June for just over $9.5 million in a foreclosure auction.”

August 3 – Bloomberg (Lu Wang): “Of all the signs out there that the US will manage to dodge a recession once deemed inevitable, perhaps none is more convincing than this: CEOs across the country are opting to reinvest more of their profits in expansion projects rather than handing the money back to shareholders… The median company pushed up capital expenditures by 15% in the period… By contrast, buybacks among corporate clients have been tracking below seasonal trends since May. More broadly, net repurchases plunged 36% from a year ago among S&P 500 firms that announced financial results.”

August 3 – Financial Times (Thomas Hale): “Chinese deal activity in the US has fallen to its lowest level in almost two decades, in a sign of geopolitical tensions between the two countries weighing on cross-border financial activity. US merger and acquisition investment from China has totalled just $221mn so far this year, representing the slowest pace of investment since 2006, according to data from Dealogic. The total at this point last year was $3.4bn.”

Ukraine War Watch:

August 2 – Financial Times (Darron Dodd): This morning’s Russian attacks on port facilities and a grain silo in Ukraine have heightened concerns about food security, particularly in the global south, and threaten to halt the recent easing in food prices in Europe. The strikes caused wheat, maize and soyabean oil prices to jump… Russia has been increasing bomb and missile attacks on Ukraine’s ports since withdrawing from the accord. It has warned that it would attack civilian merchant ships in what western officials say is an attempt to cripple the country’s agricultural industry and disrupt global food markets.”

July 31 – Reuters (Alexander Marrow): “Economic sanctions have been the biggest headache for Russia’s business elite since the start of the war in Ukraine, but two drone strikes in the heart of Moscow’s financial district are forcing companies to think about their employees’ safety. An explosion early on Sunday rocked the Moskva-Citi business district, a few miles west of the Kremlin and home to several skyscrapers, in what Russia’s defence ministry said was a thwarted Ukrainian drone attack, the second in a week.”

July 30 – Politico (Varg Folkman): “If Ukraine’s ongoing counteroffensive against Moscow’s invasion captures Russian territory, there would be no alternative to using strategic nuclear weapons, Russia’s Dmitry Medvedev warned… ‘There would simply be no other way out’ of using nuclear weapons if the Ukrainian offensive succeeded in taking Russian territory, Medvedev, former Russian president and current National Security Council deputy chairman, said… ‘Just imagine that the NATO-supported ukrobanderovtsy’s offensive turned out successful, and they took away a part of our land: Then we would have to, following the president’s degree of 02.06.2020, use the nuclear weapon,’ Medvedev wrote…”

July 29 – Financial Times (Alexander Gabuev): “‘These amendments are written for a big war and general mobilisation. And the smell of this big war can already be scented,’ Andrei Kartapolov, the head of the Duma’s defence committee, said this week as the Russian parliament rushed to adopt a new law. The legislation enabling the Kremlin to send hundreds of thousands more men into combat reveals a sad truth: that far from seeking an off-ramp from his disastrous war in Ukraine, Vladimir Putin is preparing for an even bigger war.”

August 4 – Reuters: “Russia has doubled its 2023 defence spending target to more than $100 billion – a third of all public expenditure…, as the costs of the war in Ukraine spiral and place growing strain on Moscow’s finances. The figures shed light on Russia’s spending on the conflict at a time when sector-specific budget expenditure data is no longer published.”

August 2 – Financial Times (Anastasia Stognei and Courtney Weaver): “Russian local authorities have begun distributing anti-drone guns and other weaponry to civilian forces in the south-west of the country for the first time since the Ukraine war began. Tass… reported territorial self-defence forces in the Belgorod region that borders Ukraine had received the equipment, which also included machine guns and off-road vehicles. ‘These are necessary measures against the attacks from the Ukrainian territory,’ Kremlin spokesperson Dmitry Peskov told reporters. He said the Kremlin did not fear that the weapons could fall ‘into the wrong hands’.”

August 1 – Reuters (Agnieszka Pikulicka-Wilczewska): “Poland said… it was rushing troops to its eastern border after accusing Belarus, Russia’s closest ally, of violating its airspace with military helicopters. The Belarusian military denied any such violation and accused NATO member Poland, one of Ukraine’s most fervent backers in its conflict with Russia, of making up the accusation to justify a buildup of its troops. Belarus leader Alexander Lukashenko had earlier taunted Poland over the presence of Russian Wagner mercenaries near their joint border.”

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

July 29 – Associated Press (Huizhong Wu): “China accused the United States of turning Taiwan into an ‘ammunition depot’ after the White House announced a $345 million military aid package for Taipei… China’s Taiwan Affairs Office issued a statement… ‘No matter how much of the ordinary people’s taxpayer money the … Taiwanese separatist forces spend, no matter how many U.S. weapons, it will not shake our resolve to solve the Taiwan problem. Or shake our firm will to realize the reunification of our motherland,’ said Chen Binhua, a spokesperson for the Taiwan Affairs Office.”

De-globalization and Iron Curtain Watch:

July 31 – Reuters: “China… announced export controls on some drones and drone-related equipment, saying it wanted to safeguard ‘national security and interests’ amid escalating tension with the United States over access to technology. The restrictions on equipment, including some drone engines, lasers, communication equipment and anti-drone systems, will take effect on Sept. 1… The controls also affect some consumer drones, and no civilian drones can be exported for military purposes…”

Inflation Watch:

July 30 – Wall Street Journal (Jean Eaglesham): “Double-digit premium hikes. Higher deductibles. New coverage limits. Drones to check the state of roofs and yards. Home insurers are insuring less and charging more as they try to claw their way back to profitability after losing money in five of the past six years, analysts and insurance agents say. ‘We’re seeing moves to put more of the risk back onto the homeowner, tougher underwriting restrictions and big rate increases,’ said Lauren Menuey, a managing director at independent agency Goosehead Insurance. The higher-cost, lower-coverage trend extends well beyond Florida, California and other states prone to hurricanes, floods or wildfires, Menuey added. ‘I don’t think anywhere is safe from this right now,’ she said.”

August 2 – Wall Street Journal (Telis Demos): “Inflation comes in many forms, and pretty much all of them are affecting insurers right now. Auto and home insurer Progressive this week reported a big jump in its combined ratio, which measures underwriting losses and expenses as a percentage of premiums, to 100.4% in the second quarter. That is up from 95.6% a year earlier. This happened despite 18% growth in net written premiums in the quarter, reflecting the efforts that Progressive and other insurers have been making to push through higher rates to customers… This has been an inflated year for natural disasters in the U.S. The number of U.S. potential billion-dollar weather and climate disasters in 2023 through June has exceeded every year tracked by that point besides 2017, with 12 such events so far…”

July 30 – Associated Press (Alex Veiga): “When viewed through a wide lens, renters across the U.S. finally appear to be getting some relief, thanks in part to the biggest apartment construction boom in decades. Median rent rose just 0.5% in June, year over year… A closer look, however, shows the trend will likely be little comfort for many U.S. renters who’ve had to put an increasing share of their income toward their monthly payment… Median U.S. rent has risen to $2,029 this June from $1,629 in June 2019, according to… Rent, which tracks rents in 50 of the largest U.S. metropolitan areas.”

July 31 – Bloomberg (Lucia Kassai and Rachel Graham): “Record-breaking summer heat is forcing fuelmakers to cut back operations, just as dwindling supplies are causing gasoline prices to surge around the world. The hottest-ever June and July prompted refiners to curtail oil processing by at least 2% globally as long stretches of triple-digit heat posed a threat to operations, according to Vikas Dwivedi, a global oil and gas strategist for Macquarie Group. Excessive heat, associated with deferred maintenance in the past, has spurred an unusual number of refinery breakdowns this year…”

August 1 – CNBC (Lee Ying Shan): “India’s rice export ban could ripple across global rice markets — and millions are expected to be impacted, with Asian and African consumers set to bear the biggest brunt. India, the world’s largest rice exporter, banned the exports of non-basmati white rice on Jul. 20, as the government sought to tame surging domestic food prices and ‘ensure adequate domestic availability at reasonable prices.’ The country accounts for more than 40% of the global rice trade. ‘Malaysia appears to be the most vulnerable according to our analysis,” Barclays said in a recent report, highlighting the country’s sizable reliance on Indian rice.’”

August 2 – Bloomberg (Anuchit Nguyen and Mai Ngoc Chau): “Thailand has urged farmers to reduce their rice planting to save water following poor rainfall, a move that poses a fresh threat to global supply after India banned some shipments of the grain… Thailand, the world’s second-biggest rice exporter, is seeing less rain as the nation braces for a potential drought next year with the onset of the El Niño weather pattern. Cumulative rainfall so far in the central region is about 40% below normal…”

August 4 – Wall Street Journal (Paul Hannon): “Inflation has cooled in many countries, but in most of them, food inflation remains rampant and there are reasons to fear it may accelerate. A combination of disrupted exports, unusually hot weather and Russia’s continuing pounding of Ukraine… is likely to add fresh momentum to the main source of global inflation. U.K. food prices rose 17.4% in the year through June, while Japanese prices were up 8.9% and French prices were up 14.3%… In each country, food prices are rising much more quickly than prices of other goods and services. The U.S. has fared better, with food prices up 4.6% from a year earlier in June…”

July 29 – Bloomberg (Mumbi Gitau, Ekow Dontoh and Baudelaire Mieu): “Bad news has emerged this week for chocolate lovers: it’s going to get more expensive to satisfy your cravings. The cost of wholesale cocoa beans soared to the highest level in more than a decade, and manufacturers are betting prices of the key chocolate ingredient will stay elevated through 2024. That’s mainly because production in West Africa, a region that accounts for two-thirds of the world’s bean harvest, is faltering. Heavy rains and a rot-causing disease have ravaged crops…”

Biden Administration Watch:

August 2 – Reuters (Timothy Gardner): “The Biden administration has pulled an offer to buy 6 million barrels of oil for the Strategic Petroleum Reserve…, as oil prices are expected to keep rising after a output cut from Saudi Arabia. The U.S. made the latest solicitation to buy the sour crude oil for the SPR on July 7. After the administration released a record 180 million barrels from the reserve last year to control prices after Russia’s invasion of Ukraine, the Energy Department has bought back 6.3 million barrels in recent months. The move was not a rejection of oil companies’ offers to sell oil to the SPR but a decision made on ‘market conditions,’ the spokesperson said.”

Federal Reserve Watch:

August 1 – Bloomberg (Steve Matthews): “Federal Reserve Chair Jerome Powell has left the door open to another interest-rate hike, but Wall Street economists see the signs pointing in one direction ahead of the central bank’s September meeting: pause. Policymakers in recent days have said they’re waiting on incoming data to guide their decision on whether to raise rates at the Fed’s next gathering. The latest surprisingly mild inflation reports, signs of moderating consumer spending and evidence of diminishing wage pressures have suggested there’s little urgency to raise rates next month.”

August 1 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic urged the US central bank to be cautious not to overtighten monetary policy with inflation poised to continue receding. ‘There has been significant progress in the battle,’ Bostic said… ‘Inflation is well off of its highs that we saw in the last year. And recent numbers have come in promising in ways that suggest that we might be seeing continued declines.’”

U.S. Bubble Watch:

August 4 – CNBC (Jeff Cox): “Job growth in July was less than expected… Nonfarm payrolls expanded by 187,000 for the month, slightly below the… estimate for 200,000. Though the headline number was a miss, it actually represented a modest gain from the downwardly revised 185,000 for June. The unemployment rate was 3.5%, against a consensus estimate that the jobless level would hold steady at 3.6%. The rate is just above the lowest level since late 1969. Average hourly earnings… rose 0.4% for the month, good for a 4.4% annual pace. Both numbers were higher than the respective estimates for 0.3% and 4.2%. Hours worked nudged down to 34.3.”

August 1 – Reuters (Lucia Mutikani): “U.S. job openings fell to the lowest level in more than two years in June, but remained at levels consistent with tight labor market conditions… Labor market resilience was underscored by the third straight monthly decline in layoffs as employers hoard workers after difficulties finding labor during the COVID-19 pandemic. There were 1.61 job openings for every unemployed person in June, up from 1.58 in May… Job openings, a measure of labor demand, dropped 34,000 to 9.582 million as of the last day of June, the lowest level since April 2021, the Job Openings and Labor Turnover Survey, or JOLTS report, showed.”

August 3 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits rose slightly last week, while layoffs dropped to an 11-month low in July as labor market conditions remain tight… Initial claims for state unemployment benefits increased 6,000 to a seasonally adjusted 227,000 for the week ended July 29…”

August 4 – Reuters (Timothy Aeppel): “When storms hammered California’s farms last winter, Kevin Kelly knew his small factory outside San Francisco would soon see demand wilt for the plastic bags it churns out for pre-cut salads and other produce. In the past, he would have swiftly chopped 10% of the workers… But after struggling to fill jobs during the boom triggered by the COVID-19 pandemic, he didn’t this time. ‘I knew it would be hard to find people when business came back, let alone train them,’ said Kelly, the CEO of Emerald Packaging. So he held on to his employees… Employers across the U.S. are making a similar calculation.”

August 3 – Reuters (Lucia Mutikani): “The U.S. services sector slowed in July, but businesses faced higher prices for inputs as demand continued to hold up, suggesting a long and slow road to low inflation. The Institute for Supply Management (ISM) said… its non-manufacturing PMI fell to 52.7 last month from 53.9 in June… A measure of new orders received by services businesses dipped to 55.0 last month from 55.5 in June. With orders still solid, services inflation picked up last month… A gauge of prices paid by services businesses for inputs increased to 56.8 last month from 54.1 in June.”

August 1 – Reuters (Lucia Mutikani): “U.S. manufacturing appeared to stabilize at weaker levels in July amid a gradual improvement in new orders, but factory employment dropped to a three-year low… The Institute for Supply Management (ISM) said… that its manufacturing PMI edged up to 46.4 last month from 46.0 in June, which was the lowest reading since May 2020… The ISM survey’s forward-looking new orders sub-index increased to 47.3 in July. That was the highest reading since October 2022 and was up from 45.6 in June.”

August 2 – CNBC (Diana Olick): “Mortgage rates have been holding at high levels for several weeks now, and that is taking its toll on homebuyers… Mortgage applications to purchase a home fell 3% last week compared with the previous week, according to the MBA’s seasonally adjusted index. Applications were 26% lower than the same week one year ago.”

July 30 – Bloomberg (Paulina Cachero): “It’s never been more challenging to find an affordable home to buy in the US. High prices, a critical shortage of listings and mortgage rates that have more than doubled from the record lows of just a couple years ago are forcing countless Americans to put their next moves and other major life decisions on hold. Gridlock is gripping the housing market in part because buyers and homeowners took advantage of historically low rates to purchase homes or refinance mortgages and lock in lower borrowing costs. More than nine of every 10 US homeowners with mortgages — or 46.1 million people — have a rate below 6%…”

August 3 – CNBC (Diana Olick): “International buyers are pulling back from the U.S. housing market, as high mortgage rates, soaring home prices, a meager supply of homes for sale and a strong dollar all make the purchases much less financially attractive. From April of last year to this March, international buyers bought roughly 84,600 homes; that’s the lowest number since the National Association of Realtors began tracking such purchases in 2009 and a 14% drop from the year before.”

July 31 – Reuters (Lisa Baertlein): “The operational shutdown of Yellow Corp, a major U.S. trucking firm, should help prop up industry rates that tumbled after the cargo bubble of the early coronavirus pandemic deflated last year, transportation analysts said. The company, formerly known as YRC, is one of the nation’s largest so-called ‘less-than-truck load’ carriers with customers that include Walmart and Home Depot. It notified customers that it stopped operations… and warned the Teamsters union, which represents 22,000 of its 30,000 employees, that it plans to file for bankruptcy.”

China Watch:

July 30 – Reuters (Liangping Gao and Ryan Woo): “China’s State Council… issued measures to restore and expand consumption in the automobile, real estate and services sector, aiming to give full play to the ‘fundamental role’ of consumption in economic development. The State Council said… the government will improve the infrastructure for charging to promote more purchases of new energy vehicles, support housing demand by expanding the supply of affordable rental housing and encourage tourism by asking local governments to cut admission fees at scenic areas or even make them free during low periods.”

August 3 – Bloomberg: “China is expected to speed up roll-out of a plan to resolve its local government debt risks, with measures including debt swap, extension and restructuring, China Securities Journal says in a front-page report… Select local governments are likely to get approval to issue bonds to swap out part of their hidden debts so as to extend their debt payment, lower interest expenses and reduce risks…”

August 1 – Bloomberg (Foster Wong): “China’s central bank will guide the country’s commercial banks to adjust interest rates of existing personal housing loans as it pledges its continued support to the healthy and stable development of the country’s real estate market. Will also continue to guide the mortgage loan interest rates and down payment ratios downwards to better meet the demand…”

August 3 – Bloomberg: “China’s central bank said it would increase funding support for the private sector after meeting with executives from the property industry, identifying several companies by name in a statement that underscores growing urgency among regulators to boost market confidence. Newly appointed People’s Bank of China Governor Pan Gongsheng met with representatives from eight private firms…”

July 30 – Reuters (Liangping Gao and Ryan Woo): “China’s biggest cities including Beijing and Shenzhen said over the weekend they would implement measures to better meet the needs of homebuyers, without giving details, aiming to prop up a property sector that is seeing few signs of recovery. This comes after top leaders at a Politburo meeting pledged this month to adjust and optimise property policies in a timely manner, and the housing minister promised more effective implementation measures.”

July 31 – Bloomberg: “China has pledged to boost credit to private companies and extend other funding measures to small firms as policymakers seek ways to shore up confidence and support the recovery. The nation will expand a bond credit enhancement tool that is backed by financial institutions to all qualified private companies… In the past the policy has mainly been used to help cash—strapped property developers raise funds from the bond market. The notice included 28 points aimed at broadening market access, enhancing financial support and promising to meet demand among firms for land, strengthening legal protections, and cracking down on negative commentary about the private sector.”

August 2 – Bloomberg: “China is stepping up its policy support for the economy, pressuring local governments to speed up the sale of bonds to fund infrastructure spending. Regulators have told local authorities to use up this year’s quota of special purpose bonds by the end of next month…, and for the proceeds to be put to use by the end of October… The latest push ‘suggests a re-acceleration in infrastructure investments in the near term, as the third quarter will likely continue to see a big drag from property investments,’ said Michelle Lam, greater China economist at Societe Generale SA.”

August 1 – Bloomberg: “One of China’s last major developers to have so far avoided defaults amid the nation’s property debt crisis slid in equity and credit markets Tuesday, after canceling a share placement. Shares of Country Garden Holdings Co., one of China’s largest private-sector developers, fell as much as 11% in their biggest drop this year…”

August 1 – Bloomberg: “China’s home sales tumbled the most in a year in July, underscoring why policy makers are seeking to address a property slowdown that’s weighing on the economic recovery. The value of new home sales by the 100 biggest real estate developers fell 33.1% from a year earlier to 350.4 billion yuan ($49bn)… The drop was the second in a row, after four months of gains. Sales slid 33.5% month-on-month.”

August 3 – Reuters (Ellen Zhang and Ryan Woo): “China’s services activity expanded at a slightly faster pace in July…, a private-sector business survey showed…, partly offsetting the drag from the weak manufacturing sector. The Caixin/S&P Global services purchasing managers’ index (PMI) rose to 54.1 in July from 53.9 in June…”

July 31 – Financial Times (William Langley and Joe Leahy): “Manufacturing activity in China contracted for a fourth straight month in July while growth in services and other sectors slipped, adding to calls for Beijing to unveil concrete measures to boost the flagging recovery of the world’s second-biggest economy. China’s official manufacturing sector purchasing managers’ index for July came in at 49.3, slightly higher than analysts’ forecasts of 49.2 and above June’s reading of 49… The non-manufacturing PMI, which includes sectors such as construction and agriculture, fell to 51.5 from 53.2 the previous month. It was short of the 53 forecast…”

August 1 – Bloomberg: “China’s manufacturing and housing market continued to slump in July, with Beijing making fresh pledges to shore up the economy’s recovery. The Caixin index of manufacturing activity declined to a six-month low of 49.2 last month, pointing to a contraction in the sector as export demand slumped. A separate report showed home sales tumbled 33.1% in July, the most in a year.”

August 2 – Bloomberg: “Almost a third of Chinese provinces recorded shrinking investment in the first half of the year, the most widespread decline for the same period since 2020, as financially-strained local governments and companies cut back on spending. Some of the most debt-laden provinces, like Guangxi and Tianjin, had the biggest contraction in fixed-asset investment in the period…”

August 4 – Reuters (Winni Zhou and Rae Wee): “China’s consumers and companies are tying up trillions of yuan in longer-dated deposits with banks, effectively taking a vast pool of money out of circulation and risking the kind of liquidity trap that hobbled Japan’s economy in the 1990s. Latest official data shows financial institutions issued 5.5 trillion yuan ($766.12bn) worth of long-term deposits known as certificates of deposit (CD) in the first quarter of this year – the largest such quarterly issuance since the product was introduced in 2015.”

August 3 – Wall Street Journal (Rebecca Feng): “Private-equity funds focused on China once boasted big returns. Now they have big problems. U.S. dollar fundraising by private-equity firms that invest mainly in China has all but dried up. The days of large and easy profits are also over, as the country’s internet gold rush has ended. Chinese companies are finding it increasingly hard to go public in Hong Kong and the U.S., limiting many private-equity funds’ exit strategies. Chinese funds’ returns for the last two years have also disappointed investors.”

August 3 – Reuters (Liz Lee, Ryan Woo and Ethan Wang): “From coping with dangerously swollen rivers to helping residents trapped in waterlogged cities, China’s disaster-response systems are being put to the test after one of the strongest storms in years brought record rainfall that could take weeks to recede. Typhoon Doksuri battered northern China this week with extreme rain, breaking Beijing’s 140-year rainfall record and dumping volumes of rain that normally fall in a whole year in the populous province of Hebei.”

August 4 – Bloomberg: “Chinese flood victims in hard hit areas of northern China have taken aim at a key Communist Party official, saying he sacrificed their safety to protect President Xi Jinping’s flagship projects. A hashtag playing off a comment by Ni Yuefeng, the Communist Party boss of Hebei province, had more than 80 million views on China’s Twitter-like Weibo on Thursday. Many people expressed anger at Ni because he called for cities in the province bordering Beijing to ‘resolutely play a good role of moat for the capital.’ He said the Xiong’an area — a new city China started building in 2017 that Xi has described as a project of ‘millennial significance’ – represented ‘the top priority of flood control in our province.’”

Central Banker Watch:

August 3 – Reuters (David Milliken and Andy Bruce): “The Bank of England raised its key interest rate by a quarter of a percentage point to a 15-year peak of 5.25%…, and gave a new warning that borrowing costs were likely to stay high for some time. Unlike the U.S. Federal Reserve or the European Central Bank…, the BoE’s Monetary Policy Committee gave little suggestion that rate hikes were about to end as it battles high inflation. ‘The MPC will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target,’ the BoE said… ‘Some of the risks of more persistent inflationary pressures may have begun to crystallise,’ it added.”

July 31 – Bloomberg (Toru Fujioka and Cynthia Li): “Bank of Japan watchers don’t expect any further change from the central bank this year, after the BOJ surprised investors around the world by tweaking its yield curve control program last week, according to a Bloomberg survey… More than 90% of 41 economists don’t anticipate any further moves this year, following Friday’s decision that effectively raised the tolerated ceiling for 10-year yields. Economists now see April as the most likely month for the next policy shift…”

Global Bubble Watch:

August 4 – Bloomberg (Randy Thanthong-Knight): “The Canadian economy unexpectedly shed jobs last month even as wages grew faster, signaling a softening labor market that will likely pave the way for the Bank of Canada to hold rates steady. The country lost 6,400 jobs in July, while the unemployment rate rose to 5.5%, the third straight monthly increase…”

August 3 – Reuters (Lewis Jackson): “Australia’s office vacancy rates crept higher in the first half to levels not seen since the 1990s… Vacancies in downtown Sydney, Melbourne and Perth, where most large companies are headquartered, were already above 10% and rose between 0.2% and 0.9% in the first half of the year, with those in the Melbourne central business district (CBD) rising the most, according to biannual data published by the Property Council of Australia.”

Europe Watch:

July 31 – Reuters (Philip Blenkinsop): “The euro zone returned to growth in the second quarter of 2023, with a greater than expected expansion after narrowly avoiding a technical recession around the turn of the year, preliminary data showed… Gross domestic product in the euro zone expanded by 0.3% in the second quarter, above expectations of 0.2%… Compared to a year earlier, growth was 0.6% against expectations of 0.5%.”

July 30 – Reuters (Alvise Armellini): “Italy made an ‘improvised and atrocious’ decision when it joined China’s Belt and Road Initiative (BRI) four years ago as it did little to boost exports, Italian Defence Minister Guido Crosetto said… Italy signed up to the BRI under a previous government, becoming the only major Western country to have taken such a step… ‘The decision to join the (new) Silk Road was an improvised and atrocious act’ that multiplied China’s exports to Italy but did not have the same effect on Italian exports to China, Crosetto told the Corriere della Sera newspaper.”

Japan Watch:

August 1 – Bloomberg (Toru Fujioka): “Deputy Governor Shinichi Uchida said the Bank of Japan is far from reaching an exit from its current policy framework — and from raising its negative interest rate — after the bank jolted global financial markets last week by adjusting its yield curve control program. ‘Needless to say, we do not have an exit from monetary easing in mind,’ Uchida said in a speech to local business leaders… ‘In sum, the bank’s decision to conduct yield curve control with greater flexibility aims at patiently continuing with monetary easing.’”

August 3 – Bloomberg (Toru Fujioka and Erica Yokoyama): “The Bank of Japan’s tweak to its yield curve control mechanism created another reason to take a look at the nation’s fiscal conditions, as Tokyo seeks to expand spending on defense and childcare while shouldering a massive public debt. BOJ Governor Kazuo Ueda’s loosening of restraints on 10-year bond yields prompted speculation among some that the end of the YCC program was somewhere on the horizon, and with it the quantitative easing program that allowed the government to grow the national debt to almost 260% of gross domestic product, the most in the developed world.”

July 31 – Bloomberg (Erica Yokoyama): “Japan’s unemployment rate fell in June, feeding into optimism that upward pressure on wages may persist and help Bank of Japan Governor Kazuo Ueda achieve his goal of sustainable inflation. The jobless rate fell to 2.5%…, the lowest since January.”

July 31 – Reuters: “Japan’s factory activity contracted at a faster pace in July, a business survey showed…, taking a hit from soft orders amid weakening global economic conditions. The final au Jibun Bank Japan manufacturing purchasing managers’ index (PMI) fell to 49.6 in July, slightly higher than flash 49.4 but down from 49.8 in June. The decline was largely due to a deterioration in new orders…”

July 30 – Reuters (Leika Kihara): “Some Bank of Japan (BOJ) policymakers baulked at former chief Haruhiko Kuroda’s idea of deploying a ‘bazooka’ massive stimulus a decade ago, unconvinced central banks had the power to jolt public perceptions, accounts of the meeting… showed… ‘My belief is that we need to deploy unprecedented monetary easing steps … and communicate it in a simple way to overhaul market and public expectations,’ Kuroda said at the policy meeting on April 3-4, 2013…”

EM Bubble Watch:

July 30 – Bloomberg (Michael Mackenzie): “One of the year’s top fixed-income trades is facing a critical juncture in Latin America as bond investors attempt to time pivots in US and local interest rates. Central banks in the region have wooed money managers with their early and aggressive monetary tightening cycles — establishing a level of inflation-fighting credibility that’s fueled a 25% rally in domestic bonds. Now, as local policymakers start to pivot ahead of the Federal Reserve, the bet comes with a new undertone of risk. ‘EM local markets have been the trade of the year,’ said Mauro Favini, a senior portfolio manager at Vanguard… ‘But the road ahead is likely to be uneven and full of bumps.’”

Leveraged Speculation Watch:

July 31 – Bloomberg (Lu Wang): “For stock-picking hedge funds coping with 2023’s loopy markets, risks are starting to outweigh the rewards. Pro managers who make both bullish and bearish equity wagers last week slashed positions on both sides of their book, also known as de-grossing, according to… JPMorgan… The rush to tweak positions was frantic enough to push total client stock flows to the highest level since the retail-fomented short squeeze in 2021. ‘While the equity rally might be good for those who are long the market, it’s been quite challenging for HF shorts and the rally seems to be inducing broad capitulation in the form of de-grossing,’ JPMorgan’s team including John Schlegel wrote in a note titled ‘Throwing in the Towel … De-grossing Accelerates Amidst Busy Earnings Week.’”

August 2 – Wall Street Journal (Paul Kiernan): “Private-equity and hedge funds are bracing for what could be the biggest regulatory challenge in years to their business of managing money for deep-pocketed investors. The Securities and Exchange Commission is preparing to adopt a rule package as soon as this month aiming to bring greater transparency and competition to the multitrillion- dollar private-funds industry… SEC Chair Gary Gensler has said he hopes to bring down fees and expenses that cost hundreds of billions of dollars a year.”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 31 – Associated Press (Seth Borenstein): “At about summer’s halfway point, the record-breaking heat and weather extremes are both unprecedented and unsurprising, hellish yet boring in some ways, scientists say. Killer heat. Deadly floods. Smoke from wildfires that chokes. And there’s no relief in sight. Expect a hotter than normal August and September, American and European forecast centers predict. ‘We are seeing unprecedented changes all over the world,’ said NASA climate scientist Gavin Schmidt. ‘The heat waves that we’re seeing in the U.S. and in Europe, in China are demolishing records left, right and center. This is not a surprise.’”

August 1 – Reuters (Safiyah Riddle): “Record-breaking heat waves across the U.S. forced small businesses to close early in July, according to a report…, and reduced paid working hours for employees as dangerous temperatures reshape consumer behavior. Hundreds of millions Americans dealt with extreme heat advisories in the past two weeks, as temperatures across the South and Southwest hit historic highs. These hazardous conditions have kept consumers inside and forced small businesses to close early – cutting into paid hours for employees – according to… Homebase.”

August 2 – CNBC (Sam Meredith): “Iran… began a two-day nationwide shutdown because of soaring temperatures, shortly after the Islamic Republic’s health ministry warned of a possible increase in cases of heat exhaustion. Government spokesman Ali Bahadori Jahromi… said that ‘unprecedented heat’ had forced the closures of governmental offices, banks and schools…The shutdown will cover the working weekdays of Wednesday and Thursday.”

Geopolitical Watch:

July 29 – Reuters (Soo-hyang Choi): “North Korean leader Kim Jong Un met the Chinese delegation which visited Pyongyang to celebrate the 70th anniversary of the end of the Korean War and vowed to develop the two countries’ relations to a ‘new high’… ‘Reaffirmed at the talk was the stand of the parties and governments of the two countries to cope with the complicated international situation on their own initiative and steadily develop the friendship and comradely cooperation onto a new high stage,’ KCNA said.”

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