MARKET NEWS / CREDIT BUBBLE WEEKLY

December 1, 2023: Rule of Thumb

MARKET NEWS / CREDIT BUBBLE WEEKLY
December 1, 2023: Rule of Thumb
Doug Noland Posted on December 2, 2023

Let’s get November documented, starting with notable headlines: “Biggest Blowout in Bonds Since the 1980s Sparks Everything Rally.” “S&P 500 Has One of Best November Gains in Century.” “Munis Haven’t Rallied So Much in a Month Since Volcker Ran Fed.” “Munis Make It a November to Remember While Smashing Records.” “November Was Once-in-a-Generation Month for Assets.” “Short Sellers See $80 Billion Hit as November Rally Upends Bets.” “Treasuries November Gain Biggest Since 2008.” “Global Stocks Soar in November as Appetite for Risk Returns.” “Investors Swarm Junk-Bond Funds, Spurring Record Monthly Inflow.” “Emerging-Market Assets Have Best Monthly Rally Since January ’23.”

The S&P500 returned 9.13% during November, with the Nasdaq100 returning 10.82%. The KBW Bank Index returned 15.45%, the Semiconductors 15.95%, the NYSE Financial Index 11.37%, the small cap Russell 2000 9.03%, the “average stock” Value Line Arithmetic Index 8.88%, the S&P400 Midcaps 8.50%, and the Dow Transports 8.36%. The Goldman Sachs Short Index jumped 11.4%.

The NYSE Arca Gold Bugs Index (HUI) surged 11.20% in November. Gold jumped $52.53, or 2.6%, to $2,036.41. Silver surged $2.43, or 10.6%, to $25.27.

Ten-year Treasury yields sank 60 bps, the largest monthly drop since December 2008 (71bps). Benchmark MBS yields collapsed 81 bps, also the biggest fall back to December 2008 (94bps). Two-year yields fell 41 bps. Since the great financial crisis, only pandemic March 2000 (67bps) and banking crisis March 2023 (79bps) posted larger monthly declines in two-year yields.

Investment-grade CDS prices dropped 17 bps (largest monthly drop since Oct. 2022) to the low since January 2022. High yield CDS sank 122 to 402 bps, trading to lows since April 2022. JPMorgan CDS closed the month down 18 bps to the lowest price (52bps) since January 2022. Investment-grade spreads to Treasuries narrowed 25 bps to a 22-month low 1.04 percentage points. High yield spreads narrowed 67 bps to 3.70. For the most part, CDS prices are lower and spreads narrower now than when the Fed began its “tightening” cycle.

And the trend continued into the first trading day of December. Midday headline: “US Two-Year Yield Falls 10 Basis Points on Powell.” The Goldman Sachs Short Index surged 6.2% Friday, with the small cap Russell 2000 jumping 3.0%.

Market expectations for the Fed funds rate at the January 2025 meeting collapsed 52 bps this week to 3.84% (down 95 bps from the October 18th peak). It’s worth noting that the week’s largest decline in two-year yields (15bps) came Tuesday, largely in response to comments by hawkish-leaning Fed Governor Christopher Waller.

November 28 – Associated Press (Christopher Rugaber): “A key Federal Reserve official raised the possibility Tuesday that the Fed could decide to cut its benchmark interest rate as early as spring if inflation keeps declining steadily. If inflation continues to cool ‘for several more months — I don’t know how long that might be — three months, four months, five months — that we feel confident that inflation is really down and on its way, you could then start lowering the policy rate just because inflation is lower,’ Waller said…”

To have a prominent FOMC “hawk” openly discussing rate cuts, perhaps as soon as in three months, was everything giddy markets could have hoped for. Never mind that his rate cutting talk was inconsistent with Waller’s prepared remarks (i.e., “inflation is still too high, and it is too early to say whether the slowing we are seeing will be sustained”). Waller’s off-the-cuff comment came during Q&A, in response to a question from the Wall Street Journal’s Nick Timiraos.

“If you think about central banking, we talk about a “Taylor rule” – or various types of Taylor rules – that kind of give us a rule of thumb about how we think we should set policy. And every one of those things would say if inflation is coming down – once you get inflation down low enough – you don’t necessarily have to keep rates up at those levels. So, there’s certainly good economic arguments from any kind of standard Taylor rule that would tell you – if we see disinflation continuing for several more months – I don’t know how long that might be – three months, four months, five months – that we feel confident that inflation is really down and on its way [to target], then you could then start to lower the policy rate just because inflation is lower. It has nothing to do with trying to save the economy or recession. It’s just consistent with every policy rule I know from my academic life as a policymaker. If inflation goes down, we’d lower the policy rate. There’s just no reason to say you would keep it really high if inflation is back at target.” Fed Governor Christopher J. Waller, November 28, 2023, American Enterprise Institute

There’s nothing unreasonable about Waller’s comments. But he made a mistake as a member of the FOMC, which has too often demonstrated a lack of discipline. Fed officials have specifically avoided signaling looming rate cuts, knowing that doing so would spark a major market speculative response and resulting easing of financial conditions. The Fed Governor let his guard down. Moreover, he did so with markets in the throes of a major squeeze rally and upside market dislocation.

Comments from a bevy of Fed officials this week make it clear the Fed is not ready to signal impending cuts. Markets were having none of it. Richmond Fed President Thomas Barkin: “I think you want to have the option of doing more on rates.” New York Fed President John Williams: “I expect it will be appropriate to maintain a restrictive stance for quite some time…” San Francisco Fed President Mary Daly: “I’m not thinking about rate cuts at all right now.” Governor Michelle Bowman: “My baseline economic outlook continues to expect that we will need to increase the federal funds rate further…”

It was left to Powell’s Friday morning “fireside chat” to get the markets more aligned with Fed thinking – and to “lean against the wind” of speculative excess. Bloomberg Live Blog’s “Question of the Day: How Much Should Powell Push Back?” Well, Balanced Powell’s “premature to speculate on when policy may ease” and “Fed prepared to tighten more if it becomes appropriate” fell on the deafest of ears – token boilerplate that exuberant markets were delighted to completely brush off. Bloomberg: “Powell Gave His Clearest Signal Yet the Fed has Finished Raising Interest Rates.” “Bonds Up as Powell Pushback Lasts ‘A Few Seconds’”

Two-year yields dropped 14 bps in Friday trading, to an almost six-month low of 4.54% (down 68bps from 10/18 peak). The rates market ended the week with a 15% probability of a rate CUT at the Fed’s January 31 FOMC meeting – and 76% for a rate reduction by the March 20th meeting.

All along, markets have been skeptical of this tightening cycle. There is simply too much debt and speculative leverage for the Fed to ratchet rates up to the point of spurring significant tightening of financial conditions. Markets have remained confident that the Fed will pull back to avoid a recession and financial accident. And the rapid response to March bank runs was further emboldening.

In my parlance, financial markets have maintained a strong “inflationary bias”. This remains an extraordinarily speculative market backdrop. There’s a $4 TN hedge fund industry. There are millions of online traders looking to jump on the latest hot momentum stock or index. Options trading has mushroomed, with millions trading in and out of positions – often 0DTE – zero-day to expiration options. Moreover, derivative hedging strategies proliferate across asset markets, ensuring ample short positions and hedges to spark “rip your face off” squeeze rallies.

Contemporary Market Structure incentivizes speculative leverage – both on the upside and downside. With all the options and derivatives, a downside market break could easily unleash cascading sell orders and market dislocation. Meanwhile, the proliferation of shorting and hedging creates the firepower for upside dislocation and melt-up dynamics. There’s too much “money” sloshing about the markets; too much FOMO (fear of missing out); and too many Crowded Trades.

These “melt-down” and “melt-up” dynamics are notably asymmetrical. Markets have grown quite confident that the Fed (and central bank community) will intervene to thwart illiquidity and downside dislocation. The crash scenario can be disregarded, a market peculiarity that grossly distorts the risk vs. reward calculus, market incentives, and speculative dynamics. This ensures acute market focus on short squeezes, the unwind of hedges, upside dislocations, and melt-up dynamics. Squeezing shorts and front-running the unwind of hedges – in stocks, Treasuries, MBS, corporate bonds, global sovereign debt, EM, and the currencies – has become a go-to strategy for generating quick speculative returns.

Let’s delve a little into Waller’s a “Taylor rule… that kind of gives us a rule of thumb about how we think we should set policy.” Rule of thumb: “A general or approximate principle, procedure, or rule based on experience or practice…”

Okay, what might be the rate policy “rule of thumb” appropriate for an extraordinarily speculative marketplace – one characterized by a 46% y-t-d gain in the Nasdaq100, 21.5% return for the S&P500, and 134% spike in bitcoin? Where the Semiconductor Index has gained 46.7% and is only 6% from all-time highs? Where home prices continue to inflate despite the highest mortgage rates in years?

What is the rate policy “rule of thumb” when $2 TN federal deficits are running at 7% of GDP – when outstanding Treasury securities have increased 360% since the end of 2007 to $28 TN? When combined Treasury and Agency Securities inflated $12.6 TN, or 47%, over just the past four years?

What is the “rule of thumb” following an unprecedented $5 TN QE program, where despite 17 months of QT, the Fed’s balance sheet is still at $7.8 TN – 87% larger than where it began 2020? Where Money Fund Assets have inflated $1.2 TN, or 25.8%, over the past year to a record $5.836 TN? Where Household Net Worth inflated an unmatched $41 TN in 15 quarters to a record $154.3 TN, or 576% of GDP (previous cycle peaks 444% in Q1 2000 and 488% during Q1 2007)? Where combined Household holdings of liquid deposits, money funds, and Treasury and Agency Securities inflated $6.0 TN, or 39%, in 15 quarters to a record $21.3 TN?

The “rule of thumb” for an unemployment rate of 3.9% and 9.55 million job openings – and labor and labor unions the most emboldened in decades? Where CPI (y-o-y) peaked at 9.1% 17 months ago – and was still 4.9% as recently as April?

I know the “soft landing” and “immaculate disinflation” narrative has become conventional wisdom. It’s widely believed these days that there is no price to pay for years of monetary and speculative excess, for deeply flawed monetary management, and for fiscal recklessness. That structural maladjustment is a nonissue.

I don’t buy any of it. The day of reckoning is only on hold. By now, the system should be well into what will be painful financial and economic adjustment. Instead, Bubble inflation runs unabated.

Truth be told, we are witnessing wild end-of-cycle Monetary Disorder. Evidence includes extraordinary price instability – from CPI to securities markets to quarterly GDP. Importantly, market structure at this point precludes stability. Speculative excess ensures sporadic upside market dislocations, where squeeze rallies create Trillions of perceived wealth, dramatic financial conditions loosening, and economic instability. It all appears prelude to serious trouble.

Bloomberg: “Powell Pushes Back on Rate-Cut Bets But Markets Push Back Harder.” A historic speculative Bubble has taken control – perhaps decisive, fateful control. Gold jumped $35.81 during Powell Fireside Friday, trading to an all-time high $2,072. For the week, gold rose $71.40, or 3.6%, with silver surging $1.16, or 4.8% to $25.49. The precious metals signal central bankers and their “rule of thumb” are playing with fire.

For the Week:

The S&P500 increased 0.8% (up 19.7% y-t-d), and the Dow jumped 2.4% (up 9.3%). The Utilities rose 1.5% (down 12.4%). The Banks surged 5.5% (down 13.5%), and the Broker/Dealers rose 1.7% (up 12.2%). The Transports jumped 2.4% (up 15.5%). The S&P 400 Midcaps rose 2.5% (up 8.0%), and the small cap Russell 2000 surged 3.1% (up 5.8%). The Nasdaq100 was little changed (up 46.2%). The Semiconductors slipped 0.3% (up 47.6%). The Biotechs gained 1.7% (down 6.8%). With bullion jumping $71, the HUI gold equities index surged 8.1% (up 6.7%).

Three-month Treasury bill rates ended the week at 5.1975%. Two-year government yields sank 41 bps this week to 4.54% (up 11bps y-t-d). Five-year T-note yields dropped 36 bps to 4.12% (up 12bps). Ten-year Treasury yields fell 27 bps to 4.20% (up 32bps). Long bond yields dropped 21 bps to 4.39% (up 42bps). Benchmark Fannie Mae MBS yields sank 38 bps to 5.69% (up 30bps).

Italian yields sank 30 bps to 4.10% (down 60bps). Greek 10-year yields dropped 25 bps to 3.57% (down 100bps y-t-d). Spain’s 10-year yields fell 27 bps to 3.36% (down 15bps). German bund yields sank 28 bps to 2.36% (down 8bps). French yields sank 27 bps to 2.93% (down 5bps). The French to German 10-year bond spread widened one to 57 bps. U.K. 10-year gilt yields declined 14 bps to 4.14% (up 47bps). U.K.’s FTSE equities index increased 0.5% (up 1.0% y-t-d).

Japan’s Nikkei Equities Index slipped 0.6% (up 28.1% y-t-d). Japanese 10-year “JGB” yields dropped eight bps to 0.70% (up 28bps y-t-d). France’s CAC40 increased 0.7% (up 13.5%). The German DAX equities index jumped 2.3% (up 17.8%). Spain’s IBEX 35 equities index rose 2.0% (up 23.2%). Italy’s FTSE MIB index gained 1.7% (up 26.2%). EM equities were mostly higher. Brazil’s Bovespa index rose 2.2% (up 16.8%), and Mexico’s Bolsa index gained 1.7% (up 11.2%). South Korea’s Kospi index increased 0.3% (up 12.0%). India’s Sensex equities index jumped 2.3% (up 10.9%). China’s Shanghai Exchange Index declined 0.3% (down 1.9%). Turkey’s Borsa Istanbul National 100 index increased 0.8% (up 45.7%). Russia’s MICEX equities index dropped 2.3% (up 45.9%).

Federal Reserve Credit declined $6.9bn last week to $7.769 TN. Fed Credit was down $1.132 TN from the June 22nd, 2022, peak. Over the past 220 weeks, Fed Credit expanded $4.042 TN, or 108%. Fed Credit inflated $4.958 TN, or 176%, over the past 577 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.7bn last week to a six-month low of $3.397 TN. “Custody holdings” were up $84.8bn, or 2.6%, y-o-y.

Total money market fund assets surged $102bn over the past two weeks to a record $5.836 TN, with a 38-week gain of $942bn (26% annualized). Total money funds were up $1.195 TN, or 25.8%, y-o-y.

Total Commercial Paper jumped $21.9bn to a 10-month high $1.275 TN. CP was down $18bn, or 1.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell six bps to a 16-week low 7.07% (up 68bps y-o-y). Fifteen-year rates declined five bps to 6.53% (up 74bps). Five-year hybrid ARM rates dropped seven bps to 6.75% (up 126bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 19 bps to 7.63% (up 114bps).

Currency Watch:

November 28 – New York Times (Keith Bradsher and Joy Dong): “Affluent Chinese have moved hundreds of billions of dollars out of the country this year, seizing on the end of Covid precautions that had almost completely sealed China’s borders for nearly three years. They are using their savings to buy overseas apartments, stocks and insurance policies. Able to fly again to Tokyo, London and New York, Chinese travelers have bought apartments in Japan and poured money into accounts in the United States or Europe that pay higher interest than in China, where rates are low and falling. The outbound shift of money in part indicates unease inside China about the sputtering recovery after the pandemic as well as deeper problems, like an alarming slowdown in real estate, the main storehouse of wealth for families. For some people, it is also a reaction to fears about the direction of the economy under China’s leader, Xi Jinping, who has cracked down on business and strengthened the government’s hand in many aspects of society.”

For the week, the U.S. Dollar Index was little changed at 103.27 (down 0.2% y-t-d). For the week on the upside, the New Zealand dollar increased 2.2%, the Japanese yen 1.8%, the Swiss franc 1.6%, the Australian dollar 1.4%, the Canadian dollar 1.0%, the British pound 0.9%, the Swedish krona 0.8%, the South African rand 0.7%, the Norwegian krone 0.6%, the Singapore dollar 0.5%, and the Brazilian real 0.4%. On the downside, the euro declined 0.5% and the Mexican peso lost 0.4%. The Chinese (onshore) renminbi increased 0.29% versus the dollar (down 3.23%).

Commodities Watch:

November 30 – Reuters (Alex Lawler, Olesya Astakhova, Maha El Dahan and Ahmad Ghaddar): “OPEC+ oil producers… agreed to voluntary output cuts totalling about 2.2 million barrels per day (bpd) for early next year led by Saudi Arabia rolling over its current voluntary cut… Saudi Arabia, Russia and other members of OPEC+, who pump more than 40% of the world’s oil, met online on Thursday to discuss supply policy.”

The Bloomberg Commodities Index was little changed (down 10.0% y-t-d). Spot Gold jumped 3.6% to $2,072 (up 13.6%). Silver surged 4.8% to $25.49 (up 6.4%). WTI crude fell $1.47, or 1.9%, to $74.07 (down 8%). Gasoline dropped 2.0% (down 14%), and Natural Gas declined 1.4% to $2.81 (down 37%). Copper jumped 2.6% (up 3%). Wheat rallied 5.1% (down 27%), and Corn increased 0.3% (down 32%). Bitcoin rose $800, or 2.1%, to $38,720 (up 134%).

Middle East War Watch:

December 1 – Reuters (Suhaib Salem and Nidal Al-Mughrabi): “Renewed fighting in Gaza stretched into a second day on Saturday after talks to extend a week-old truce with Hamas collapsed and mediators said Israeli bombardments were complicating attempts to again pause hostilities. Eastern areas of Khan Younis in southern Gaza came under intense bombardment as the truce deadline lapsed shortly after dawn on Friday, with columns of smoke rising into the sky, Reuters journalists in the city said.”

November 28 – Bloomberg (Alex Longley and Áine Quinn): “A spate of attacks on merchant shipping near Yemen and Somalia, likely triggered by the war in Gaza, have prompted the US to warn vessel operators to be extra careful when navigating the region. On Nov. 19, Houthis seized of the Galaxy Leader car carrier while a Liberia-flagged chemicals tanker was targeted over the weekend. Both have an Israeli connection.”

Ukraine War Watch:

November 25 – Wall Street Journal (James Marson): “Russia sent waves of explosive drones to strike cities across Ukraine in the largest attack since last winter that likely marks the start of a fresh campaign aimed at demoralizing and dislocating Ukrainians. Ukraine’s military said it intercepted all but one of 75 Shahed drones overnight, most of which were targeted at Kyiv… Russia has spent much of the year rebuilding its stocks of explosive drones and missiles with the aim, Ukrainian officials say, of trying to knock out power and heat in cities over winter.”

November 27 – Wall Street Journal (Marcus Walker): “As Russia’s war against Ukraine approaches its third year, Moscow holds the advantage on the military, political and economic fronts. Russia has far more men to replenish its battered army than the Ukrainians, who are running short of well-trained infantry. President Vladimir Putin is militarizing the Russian economy, using strong oil revenues to pay for rising weapons production. Meanwhile, political paralysis in the U.S. and Europe is threatening the supply of arms and money that Ukrainian survival depends on.”

November 29 – Financial Times (Henry Foy, Christopher Miller, and Max Seddon): “Russia has built up a large stockpile of missiles and intends to use them in a bid to destroy Ukraine’s power and heating infrastructure in the coming months, Nato’s secretary-general has warned. With the front line largely frozen after Ukraine’s autumn counteroffensive failed to make significant gains, Kyiv has stepped up calls for more air defence supplies from its western allies as it girds for another winter bombardment. ‘Russia has amassed a large missile stockpile ahead of winter, and we see new attempts to strike Ukraine’s power grid and energy infrastructure, trying to leave Ukraine in the dark and cold,’ Nato secretary-general Jens Stoltenberg told reporters…”

Market Instability Watch:

November 28 – Bloomberg (Katherine Burton, Hema Parmar, Madeline Campbell and Nishant Kumar): “Even Ken Griffin is a little worried. Multimanager funds like Griffin’s Citadel have come to dominate the hedge fund industry, riding a steady run of outperformance to oversee more than $1 trillion, including a healthy dose of leverage. But the explosive growth has led the industry giants to pile into many of the same trades. That has built unease among regulators, investors and traders over these so-called pod shops. And while Citadel’s billionaire founder has vocally opposed any notion that his firm and rivals pose systemic risks and need more regulation, even he acknowledges that crowded trades could lead to widespread losses if all of them head for the exits at once. ‘Could you see the multimanager hedge funds take a joint 10, 15, 20% hit to their equity? It’s possible,’ Griffin said…, calling such a drop ‘painful, but not systemic.’”

November 29 – Financial Times (Jennifer Hughes, Kate Duguid and Harriet Clarfelt): “US bonds are on track to record their best monthly performance in nearly four decades, as growing optimism about interest rate cuts by the Federal Reserve next year fuels a dramatic rebound from an early autumn sell-off. The Bloomberg US Aggregate bond index, a widely tracked measure of total returns on US fixed income, has risen 4.3% so far in November, putting it on course for its best monthly showing since 1985. The rally has nudged the benchmark’s total returns this year into positive territory, raising hopes it can avoid notching up a three-year string of losses — an unprecedented event in its 47 years.”

November 30 – Bloomberg (Michael Mackenzie and Liz Capo McCormick): “In a year in which little has gone right in the US bond market, November turned out to be a month for the record books. Investors frantically bid up the price of Treasuries, agency and mortgage debt, sparking the best month since the 1980s and igniting a powerful pan-markets rally in everything from stocks to credit to emerging markets. Even obscure cryptocurrencies, the sort of speculative, uber-risky assets that struggled when yields were soaring, posted big gains.”

November 30 – Bloomberg (Rita Nazareth): “Wall Street saw a late-day rebound, with stocks notching one of their biggest November rallies on record, fueled by speculation the Federal Reserve will put an end to its aggressive hiking campaign. After this month’s $3 trillion surge, the S&P 500 is now just 5% away from its all-time high. The US equity benchmark climbed over 8% in November — a feat achieved fewer than 10 times during that same month since 1928, according to data compiled by Bloomberg. It was also the gauge’s biggest monthly gain since July 2022.”

November 25 – Financial Times (Nicholas Megaw): “Trading in a controversial type of derivative known as ‘zero-day’ options is spreading to Treasury and commodity markets, as Nasdaq and other exchange groups try to replicate a boom that has transformed trading in US stock indices. Nasdaq this week listed a series of new options contracts tracking some of the most popular exchange traded funds investing in gold, silver, natural gas, oil and long-term Treasuries… Trading a contract on the day it expires is known as zero-day trading and can be used to bet on or hedge against extremely short-term market moves.”

November 29 – Bloomberg (Shruti Date Singh): “The last time the municipal bond market rallied so much, it was Paul Volcker — and not Jerome Powell — who was winning a war on inflation. Fueled by growing speculation that the Federal Reserve has tamed inflation enough to start cutting interest rates next year, everything from Bitcoin to tech stocks to Treasuries have rallied sharply this month. For state and local government debt, it has been a particularly heady run: They’ve delivered a return of more than 5% in November, the best month since January 1986.”

November 26 – Wall Street Journal (Justin Baer): “Industrial & Commercial Bank of China, the world’s largest bank, paid $1 for its place on Wall Street. It got more than it bargained for. The Chinese lender acquired a small New York broker-dealer in 2010, a move that extended its presence into the U.S. securities industry. It is now dealing with the fallout from a cyberattack this month that crippled that business and briefly triggered widespread concerns about the fragility of the largest cash market in the world. The episode also delivered a grim reminder that hacks and other operational failures can wreak havoc…”

November 30 – Bloomberg (Carter Johnson and Robert Fullem): “With less than a year to go, currency traders are beginning to bet on greater volatility around the Nov. 5 US presidential election. Year-ahead pricing in foreign-exchange volatility markets has begun to pick up relative to shorter-dated tenors now that next year’s election has swung into view, currency strategists at Wells Fargo… and JPMorgan… cautioned clients in recent notes.”

Bubble and Mania Watch:

November 28 – Yahoo Finance (Hamza Shaban): “The market cheerleading around AI may be new, but investors pouring into high-flying tech names has run its course before. So, in other words, buyer beware. The staggering rise of the ‘Magnificent Seven’ resembles bubbles of the past… Parallels to the dot-com boom in the late nineties and the eventual bust that followed — who could forget Pets.com and Webvan? — have gained renewed attention… The divergence between the biggest tech stocks on Wall Street and the rest of the S&P 500 continues to grow, drawing comparisons to the inflated valuations of tech companies in the dot-com era.”

November 29 – Bloomberg (Edward Bolingbroke): “Positioning for an economic hard landing and aggressive Federal Reserve easing next year is spreading across the US interest-rate markets. In the cash bond market, JPMorgan Chase & Co.’s Treasury client survey, conducted weekly since 1991, found that the most active investors in the market are as bullish as they’ve ever been. In short-term interest-rate options… structures that would benefit from several Fed rate cuts by the middle of next year have been in favor. A notable one Monday targeted rate cuts totaling as much as 250 bps by September, about 200 bps more than what’s currently priced into the swaps market.”

November 28 – Bloomberg (Myriam Balezou and Laura Benitez): “UBS Chairman Colm Kelleher warned against growing risks in private credit as the market continues to boom. ‘There is clearly an asset bubble going on in private credit,’ Kelleher said at the FT Global Banking Summit… ‘There are many other asset bubbles building. What it needs is just one thing to trigger a fiduciary crisis.’ Private credit has become an increasingly sought-after funding tool for buyout firms as banks have pulled back amid a spike in interest rates and a drop in investor risk appetite… The private credit market has roughly tripled in size since 2015, growing to a $1.6 trillion industry that includes traditional direct lending to smaller companies, buyout financing as well as real estate and infrastructure debt.”

November 29 – Bloomberg (Ellen Schneider): “The rapid rise of private credit may pose unforeseen threats to the US banking system, according to two senior Democratic senators. Sherrod Brown, who chairs the Banking Committee, and Jack Reed, who also sits on the panel, on Wednesday asked US regulators to do more to assess the potential dangers. The lawmakers also requested details on what the Federal Reserve, Federal Deposit Insurance Corp. and the Office of Comptroller of the Currency were doing to address the issue. ‘Unlike the traditional banking industry, the private credit market is subject to minimal, indirect regulatory oversight,’ the senators wrote in a letter to the Fed’s Michael Barr, FDIC Chairman Martin Gruenberg and Acting Comptroller Michael Hsu. ‘The lack of transparency in this market obscures its true size and risk.’”

November 29 – Bloomberg (Ethan M Steinberg and Emily Graffeo): “Investors are embracing high-yield funds like never before, broadening their risk appetite across markets amid swelling optimism for a soft landing. In November, they’ve dumped $11.9 billion into exchange-traded funds tracking junk bonds, the biggest monthly inflow for the sector on record, according to data compiled by Bloomberg Intelligence’s James Seyffart. Yields on speculative-grade debt have fallen to a more than 10-week low and month-to-date returns are at their highest levels since July 2022. And the extra yield investors demand to hold junk bonds, on an option-adjusted basis, has slid by 12% this month. The surge in demand has led to a flurry of debt sales. Junk-rated borrowers have issued more than $16.5 billion since the beginning of the month. That outstrips the totals for all but four other months this year despite the pre-Thanksgiving slowdown.”

November 30 – Bloomberg (Katie Greifeld): “A bond exchange-traded fund crossed $100 billion for the first time since such products launched over two decades ago. A $14 million inflow Wednesday pushed assets in the Vanguard Total Bond Market ETF (ticker BND) above $100 billion for the first time ever… BND has absorbed $15.6 billion so far this year.”

November 28 – Bloomberg (Austin Weinstein): “The federal government will back mortgages of more than $1 million in additional areas, including San Diego and Breckenridge, Colorado, as US home prices reach records. The ceiling for government backing on mortgages on single-family homes in the highest-cost areas will increase to nearly $1.15 million in 2024… That limit, the maximum for a loan to be bought by Fannie Mae and Freddie Mac, is up from about $1.09 million this year. For the rest of the country, the limit for loans to be purchased by the mortgage giants will climb to $766,550 from $726,200 this year.”

November 29 – Reuters (Alexandra Schwarz-goerlich, John O’Donnell and Emma-Victoria Farr): “Property and retail giant Signa declared insolvency on Wednesday after last-ditch attempts to secure fresh funding failed, making it the biggest casualty so far of Europe’s property crash. Controlled by Austrian magnate Rene Benko, the group is an owner of New York’s Chrysler Building as well as several high-profile projects and department stores across Germany, Austria and Switzerland.”

November 27 – Wall Street Journal (E.B. Solomont): “A few months ago, Jorge Luis Garcia was sipping an Odette Estate Winery Cabernet with Juan Miguel Almeida and Adria Adrian Almeida, his neighbors on Palm Island in Miami Beach, Fla. Having observed a string of mega-real estate deals, Garcia had a proposition for the Almeidas, whose home is adjacent to his two waterfront properties. ‘We were talking about how we are sitting here on a tremendous opportunity,’ said Garcia, the former owner of a medical business in Orlando. ‘If these houses were sold together, can you imagine that?’ The Almeidas agreed with his logic. Now, the neighbors are putting the three waterfront houses on the market as a package deal for $150 million. The Mediterranean-style houses each have about 100 feet of water frontage, for a total of 300 linear feet facing downtown Miami, Garcia said. Together, they sit on roughly 2 acres.”

Banking Crisis Watch:

November 29 – Reuters (Pete Schroeder): “U.S. banks reported… a slowdown in profits in the third quarter of the year, as lower noninterest income and higher realized losses on bank investments took a toll. The U.S. Federal Deposit Insurance Corporation reported bank profits at $68.4 billion in the most recent quarter, down 3.4% from the prior quarter. Year over year, bank profits were down 4.6%, due in large part to banks setting aside more funds in provision expenses for potential loan losses, which were up 33.2% in the last four quarters. Noninterest income was down $4.1 billion, or 5.2%, in the third quarter… The agency also reported that banks saw their unrealized losses on securities climb to $683.9 billion in the third quarter, a 22.5% jump driven primarily by rising mortgages rates that have reduced the value of mortgage-backed securities held by banks.”

November 28 – Financial Times (David Keohane and Kana Inagaki): “Japan’s regulators are raising pressure on regional banks to pre-empt the kind of risks that took down Silicon Valley Bank as the country prepares for its first interest rate rise in more than a decade. Even as Japan’s biggest banks churn out record profits and anticipate further gains from domestic rate increases, the country’s central bank warned in its recent Financial Stability Report that regional banks and shinkin financial co-operatives were exposed to interest rate risk after piling into long-term loans and securities.”

November 28 – Bloomberg (Tasos Vossos, Abhinav Ramnarayan, and Cecile Gutscher): “A day that started with a blunt call to investors ended with incredulous fund managers at Algebris Investments facing double-digit losses. It was March 20, and the Swiss government had just taken the unprecedented decision to wipe out $17.3 billion of junior debt as part of a forced merger between Credit Suisse Group AG and UBS Group AG. The move set off a global slump in the price of additional tier 1 bonds, as the riskiest banking debt is known… Fast forward eight months and the picture couldn’t look more different. Algebris’s biggest fund is on track for its best annual return since 2020, while many of the investors who warned the AT1 sector wouldn’t survive are now rushing to get their hands on the bonds.”

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

November 28 – Associated Press: “Russian President Vladimir Putin…, in a ranting speech before a presidential election campaign, cast Moscow’s military action in Ukraine as an existential battle against purported attempts by the West to destroy Russia. Putin… is expected to soon declare his intention to seek another six-year term in a presidential election next March. ‘We are defending the security and well-being of our people, the highest, historical right to be Russia — a strong, independent power, a country-civilization,’ Putin said, accusing the U.S. and its allies of trying to ‘dismember and plunder’ Russia.”

November 25 – Bloomberg (Casey Hall, Laurie Chen and Ben Blanchard): “China and the United States exchanged accusations at the weekend over the disputed South China Sea, after China’s military said it had driven away a U.S. warship that the U.S. Navy said was on a routine freedom of navigation operation. According to a post…, the Chinese military deployed its naval and air forces to ‘track, monitor and warn away’ the U.S. destroyer.”

De-globalization and Iron Curtain Watch:

November 27 – Reuters (Joe Cash, Ellen Zhang and Kane Wu): “U.S. furniture company head Jordan England thinks his firm’s Chinese suppliers are among the best in the game, but geopolitics and a slowing economy have pushed him to source more products from Southeast Asia, Eastern Europe and Mexico. ‘I’m looking to move away from it (China),’ said England, CEO and co-founder of Florida-based Industry West… Foreign investors have been sour on China for most of this year, but data released over the past month has provided clear evidence of the negative impact de-risking strategies are having on the world’s second-largest economy.”

November 27 – Reuters (Elena Fabrichnaya, Nidhi Verma and Dmitry Zhdannikov): “One of Russia’s most lucrative oil trade routes since the imposition of Western sanctions over the Ukraine conflict faces a major challenge because of the drawbacks of payment in currency other than dollars…For decades, the U.S. dollar has been the currency of international oil trade and efforts to find alternatives have been thwarted by the difficulties of conversion, as well as political obstacles. The problems flared when India – which has become Russia’s biggest buyer of seaborne oil since European customers retreated – insisted in July on paying in rupees and the trading activity nearly fell apart…”

November 28 – Reuters (Eduardo Baptista and Joe Cash): “China opposes protectionism and wants to strengthen supply chains with all countries, Premier Li Qiang said…, as a growing number of nations voice concern at how much their supply chains depend on the world’s second largest economy. Li’s comments come amid calls over the past year from the United States and the European Union to reduce their dependence on China in certain sectors and ‘de-risk’ their supply chains, as well as efforts to cut off Chinese enterprises from some advanced semiconductors.”

Inflation Watch:

November 27 – Bloomberg (Reade Pickert and Jennah Haque): “After years of inflation, US consumers are shouldering a burden unlike anything seen in decades — even as the pace of price increases has slowed. It now requires $119.27 to buy the same goods and services a family could afford with $100 before the pandemic. Since early 2020, prices have risen about as much as they had in the full 10 years preceding the health emergency. It’s hard to find an area of a household budget that’s been spared: Groceries are up 25% since January 2020. Same with electricity. Used-car prices have climbed 35%, auto insurance 33% and rents roughly 20%. Those figures help explain why Americans continue to register strong dissatisfaction with the economy…”

November 28 – Wall Street Journal (Nicole Friedman and Andrew Ackerman): “Home prices rose to a new record in September due to a shortage of homes for sale… The S&P CoreLogic Case-Shiller National Home Price Index… rose 3.9% from a year earlier in September, compared with a 2.5% annual increase the prior month. The September level was the highest since the index began in 1987. On a month-over-month basis, the index rose a seasonally adjusted 0.7% in September… ‘Speeding up of annual home-price growth reflects much of the pent-up demand that exists in the housing market amid very low inventories,’ said Selma Hepp, chief economist at CoreLogic. ‘Nevertheless, home prices are feeling the weight of high mortgage rates, which will slow the rate of price growth in the coming months.’”

November 28 – CNBC (Diana Olick): “Higher mortgage rates appear to be doing very little to cool home prices. Nationally, prices were 3.9% higher in September compared with the same month a year earlier, up from a 2.5% annual gain in August, according to S&P CoreLogic Case-Shiller… Of the 20 metropolitan markets highlighted in the report, Detroit saw the biggest annual increase at 6.7%, followed by San Diego at 6.5% and New York at 6.3%. Three of the 20 cities, Las Vegas, Phoenix and Portland, Oregon, reported lower prices compared with a year ago. Those cities were some of the biggest gainers in the first few years of the Covid-19 pandemic.”

November 30 – CNBC (Jeff Cox): “Inflation as measured by personal spending increased in line with expectations in October… The personal consumption expenditures price index, excluding food and energy prices, rose 0.2% for the month and 3.5% on a year-over-year basis… Both numbers aligned with the Dow Jones consensus and were down from respective readings of 0.3% and 3.7% in September.”

November 29 – Wall Street Journal (Nora Eckert): “The United Auto Workers formally launched one of the largest organizing drives in its history with campaigns at 13 automakers, in an effort to leverage record gains from its recent labor deals in Detroit. The UAW plans to target nearly 150,000 workers at U.S. factories owned by large foreign automakers including Toyota Motor and Volkswagen, as well as newer electric-vehicle manufacturers such as Tesla and Rivian Automotive, the union said…”

Biden Administration Watch:

December 1 – Reuters (Humeyra Pamuk): “The U.S. insisted to Israel this week that it come up with clear plans to minimize civilian harm in any military operation in southern Gaza, a senior U.S. official said on Friday, as the Israeli military resumed bombardment of the enclave after a week-long truce collapsed. Friday’s bombing was most intense in the southern areas of Khan Younis and Rafah, however, medics and witnesses said.”

Federal Reserve Watch:

November 30 – Financial Times (Colby Smith): “Federal Reserve officials are preparing to leave their historic interest-rate raising campaign on hold next month for the third meeting in a row — but that does not mean they are ready to discuss cuts yet. Since July the federal funds rate has held steady at a 22-year high of 5.25% to 5.5%, a level that policymakers have described as ‘restrictive’ for households and businesses… But officials have danced around two crucial questions: whether rates are now high enough to bring inflation down to the Fed’s 2% target, and how long they must stay at a ‘sufficiently restrictive” level… Thomas Barkin, president of the Richmond Fed…, warned that if inflation looks set to ‘flare back up, I think you want to have the option of doing more on rates’. Jay Powell… also seemed wary earlier this month of again being ‘misled’ by positive news on the inflation front as he kept the door open to more tightening.”

November 28 – New York Times (Jeanna Smialek and Joe Rennison): “Federal Reserve officials appear to be dialing back the chances of future interest rate increases, after months in which they have carefully kept the possibility of further policy changes alive for fear that inflation would prove stubborn. Several Fed officials… hinted… that the central bank is making progress on inflation and may be done or close to done raising borrowing costs… Christopher Waller, a Fed governor and one of the central bank’s more inflation-focused members, gave a speech on Tuesday titled ‘Something Appears to Be Giving’… ‘I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy,’ Mr. Waller said. ‘I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%.”

November 30 – Bloomberg (Alexandra Harris): “Federal Reserve Bank of New York President John Williams reiterated the Fed’s benchmark lending rate is at or near its peak level and said monetary policy is ‘quite restrictive.’ Rates are ‘estimated to be the most restrictive in 25 years,’ Williams said… at the Bretton Woods Committee conference at the New York Fed. ‘I expect it will be appropriate to maintain a restrictive stance for quite some time to fully restore balance and to bring inflation back to our 2% longer-run goal on a sustained basis… We’ve gotten to a restrictive stance and things are moving in the right direction… Now we can assess whether we need to do more.’”

November 30 – Bloomberg (Alister Bull): “Federal Reserve Bank of San Francisco President Mary Daly said interest rates are in a ‘very good place’ to control inflation though she’s not thinking about cuts and that it was too soon to say if hikes are finished… ‘Policy is in a very good place. We have raised the key interest rate significantly,’ she said… ‘We don’t need an insurance mentality now, where we hedge against rising inflation. We should simply be patient and remain vigilant.’”

November 28 – Bloomberg (Steve Matthews and Mark Niquette): “Federal Reserve Governor Michelle Bowman said she expects to support additional tightening of monetary policy to return inflation to the central bank’s goal. ‘My baseline economic outlook continues to expect that we will need to increase the federal funds rate further to keep policy sufficiently restrictive to bring inflation down to our 2% target in a timely way,” Bowman said… ‘However, monetary policy is not on a preset course, and I will continue to closely watch the incoming data as I assess the implications for the economic outlook and the appropriate path of monetary policy.’”

November 29 – Reuters (Michael S. Derby): “Cleveland Federal Reserve President Loretta Mester said… an easing of inflation pressures has given the U.S. central bank time to decide the next move in its monetary policy path. ‘While it is still above our 2% goal, there has been discernible progress on inflation even while the overall economy has remained relatively strong,’ Mester said… It will likely take time to hit the Fed’s inflation target, Mester said, but in the meantime, ‘monetary policy is in a good place for policymakers to assess incoming information on the economy and financial conditions.’ The central bank’s rate policy will need to be ‘nimble’ and ‘I believe the current level of the (federal) funds rate positions us well to do that.’”

November 28 – Bloomberg (Catarina Saraiva and Steve Matthews): “Two Federal Reserve officials who led the push for higher interest rates to curb inflation last year signaled they could be comfortable holding rates steady for now… Governor Michelle Bowman said she remains willing to support rate hikes if inflation progress stalls, but stopped short of endorsing an increase next month… Bowman… said she continues to believe more policy tightening will be needed, though her support for higher rates was more conditional than it had been… ‘I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation down to 2% in a timely way,’ she said.”

U.S. Bubble Watch:

November 27 – Reuters (Arriana McLymore and Deborah Mary Sophia): “A record amount of price-pinched holiday shoppers are expected to use buy now, pay later services for Cyber Monday to relieve stress on their wallets, according to Adobe Analytics. Shoppers are slated to spend between $12 billion and $12.4 billion online on Monday, with $782 million of purchases made with BNPL services, including Klarna and Affirm, representing a surge of nearly 19% from last year… ‘The scale of the adoption (of BNPL) has just gotten so big. It’s become really, really, really popular,’ said Dan Dolev, an analyst at Mizuho Securities.”

November 28 – Reuters (Deborah Mary Sophia): “Deep discounts on everything from beauty products and toys to electronics during the Thanksgiving weekend enticed U.S. shoppers to splurge about $38 billion online, signaling a strong holiday shopping season even as economic uncertainty swirled. Online consumer spending jumped 7.8% during Cyber Week, or the five days from Thanksgiving through Cyber Monday, according to… Adobe Analytics, outstripping initial expectations for a 5.4% rise.”

November 28 – Axios (Hope King): “U.S. shoppers pounced on deep online discounts during Cyber Monday to set a new spending record, according to data from Adobe Analytics. Driving the news: Americans rang up $12.4 billion worth of online purchases, up 9.6% from last year. Online spending during the five days from Thanksgiving to Cyber Monday was up 7.8% year-over-year, totaling $38 billion. The new Cyber Monday record comes days after Americans set a new Black Friday online spending record, shelling out $9.8 billion — a 7.5% jump from last year, Adobe Analytics data shows.”

November 29 – Associated Press (Paul Wiseman): “Shrugging off higher interest rates, America’s consumers spent enough to help drive the economy to a brisk 5.2% annual pace from July through September, the government reported… in an upgrade from its previous estimate. The government had previously estimated that the economy grew at a 4.9% annual rate last quarter… Consumer spending, the lifeblood of the economy, rose at a 3.6% annual rate from July through September — still healthy but a downgrade from the previous estimate of 4%. Private investment surged at a 10.5% annual pace, including a 6.2% increase in housing investment, which defied higher mortgage rates.”

November 28 – Axios (Emily Peck): “Your boss would probably rather you didn’t know this, but workers have a lot of leverage right now… From highly paid AI engineers to teachers, delivery drivers and autoworkers, employees are getting what they want — thanks in part to a very tight labor market… The U.S. unemployment rate has been below 4% for 21 straight months — the longest stretch since the late-1960s… The share of prime-age workers (those 25-54) who are employed is hovering at a 22-year high. Meaning: There aren’t many folks left out there who businesses can hire. And demographics may keep things tight for the long haul… With fewer workers available, companies have less leverage over employees — they can’t necessarily rely on an unlimited pool of labor to keep things running. That’s why you’re seeing growth in real wages this year. Workers in many fields can demand raises.”

November 26 – Wall Street Journal (Gwynn Guilford and Gabriel T. Rubin): “A healthcare hiring boom is helping offset weaker job growth in other areas of the softening U.S. economy, boosting its chances of skirting a recession… Healthcare providers—including hospitals, clinics, pharmacies and doctors’ offices—accounted for 30% of U.S. job gains in the six months through October, though less than 11% of the country’s total employment…”

November 29 – Reuters (David Shepardson): “General Motors said… its new labor deals after a lengthy U.S. strike will cost it $9.3 billion even as it outlined $10 billion in share buybacks, a 33% dividend increase and ‘substantially lower’ spending at its robotaxi unit Cruise. The buyback is the equivalent at Tuesday’s closing price to nearly a quarter of GM’s common stock. Its shares were down about 14% this year before rising 9.8% to $31.71 on Wednesday.”

November 29 – CNBC (Diana Olick): “Mortgage rates fell last week for the fourth time in five weeks, and homebuyers appear to be responding. Demand from current homeowners to refinance, however, fell sharply… Mortgage applications to purchase a home rose 5% for the week but were still 19% lower than the same week one year ago.”

November 27 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes fell more than expected in October as higher mortgage rates squeezed out buyers even as builders cut prices, but the setback is likely temporary amid a persistent shortage of previously owned houses on the market… ‘The market for new homes remains very solid by any historical standard and continues to be boosted by extremely low existing home inventory,’ said Daniel Vielhaber, an economist at Nationwide… New home sales dropped 5.6% to a seasonally adjusted annual rate of 679,000 units last month… The supply of previously owned houses on the market is nearly 50% below its pre-pandemic level…”

November 30 – Yahoo Finance (Dani Romero): “Contract signings for existing homes logged their slowest pace in more than two decades in October. Home sales under contract dropped 1.5% from the month before, according to the National Association of Realtors… The 71.4 index reading is the lowest since the index’s founding in 2001. An index level of 100 is equal to the pace of contract activity in 2001.”

November 28 – Axios (Kate Marino): “Evidence is stacking up showing Americans are saving less and drawing down their existing savings cushions. The latest: The share of adults who say they can cover six months of expenses using their savings is considerably lower than it was last year, according to polling from Morning Consult. And the share that simply doesn’t know how long their savings will carry them has grown, to about 21%, from 15.5% in July 2022… The savings drawdown shows how consumption patterns are sticky — people want to maintain their lifestyles, even if it costs more and they have to dip into their savings, says Jesse Wheeler, senior economist at Morning Consult.”

November 26 – Bloomberg (Emily Graffeo): “Reeling from a bear market last year, beaten-up investors decided to send more than $60 billion to exchange-traded funds focusing on dividends. Eleven months later, the trade is misfiring. Rather than give shelter in a stormy season, the largest dividend ETFs have been left behind by a tech-obsessed market whose biggest proxies have surged 15% or more. At the bottom of the leader board is the $18 billion iShares Select Dividend ETF (ticker DVY), down 5.4% on a total return basis after all-in bets on utilities and financial stocks fizzled.”

China Watch:

November 28 – Bloomberg: “China’s central bank foreshadowed a slowdown in credit extension while pledging it would press banks to lower their real lending rates, amid concerns that sluggish borrowing demand has weakened the effect of monetary easing… ‘Credit growth may slow from its previous expansion pace,” Zheshang Securities economists, including Li Chao, said… ‘China has kept the pace of credit expansion at above 10% in the past few years, and there’s now a possibility it will fall below 10% going forward.’”

November 26 – Reuters: “Cash conditions in China’s money market showed signs of tightness on Monday, as market participants grew cautious about month-end demand and a recent liquidity squeeze remained fresh in memory. Despite fresh liquidity injections by the central bank to calm the market, traders and analysts said borrowing costs for the funds that could help financial institutions, especially non-banks, to tide over the critical month-end period remained high… The People’s Bank of China (PBOC) injected a net 296 billion yuan ($41.05bn) through reverse repos in open market operations on Monday, the third straight session of net cash offerings into the financial system.”

November 28 – Bloomberg: “China’s deepening property rout is pushing the nation’s central bank toward a style of policy it has long criticized: Quantitative easing. Bloomberg… has reported that the People’s Bank of China may provide at least 1 trillion yuan ($140bn) in low-cost funding to construction projects via so-called Pledged Supplemental Lending. Under that program, the central bank has provided cheap long-term cash to policy banks (by accepting their loans as collateral) to fund lending to the housing and infrastructure sectors… The PSL was used between 2014 and 2019 to help fund a home building spree, leading some economists to describe it as Chinese-style QE because of the resulting creation of money and expansion of the central bank’s balance sheet. ‘After so much policy relaxation, stimulus and relief, the property sector still hasn’t shown any obvious improvement. All traditional tools have been used, so what’s left are only unconventional tools,’ said Lu Ting, chief China economist at Nomura… ‘The possibility of using central bank funds to rescue unfinished housing projects is increasing.’”

November 27 – Bloomberg: “China will likely unleash 2.28 trillion yuan ($319bn) of next year’s special local bond quota by the end of December…, a sign Beijing is moving early to boost growth in 2024. Authorities are expected to distribute 60% of next year’s special local government bond quota to provinces ahead of time… That implies the overall size of the next year’s special local bond quota — primarily meant for infrastructure investment — could total 3.8 trillion yuan…”

November 28 – Bloomberg: “China’s escalating push to have its banking behemoths backstop struggling property firms is adding to a maelstrom of woes for the $57 trillion sector. Already stung by soaring bad loans and record low net interest margins, lenders such as Industrial and Commercial Bank of China Ltd. may soon be asked for the first time to provide unsecured loans to developers, many of whom are in default or teetering on the brink of collapsing. The risky lifeline threatens to exacerbate an already bleak outlook. ICBC and 10 other major banks may next year need to set aside an additional $89 billion for bad real estate debt, or 21% of estimated pre-provisions profits in 2024, according to Bloomberg Intelligence. Lenders are now weighing lowering growth targets and cutting jobs among possible options, according to at least a dozen bankers who asked not to be named discussing internal matters. ‘The government can’t just ask banks to step up without providing a solution to their issues,’ said Shen Meng, a director at Beijing-based investment bank Chanson & Co. ‘Their profits may still look good on the surface, but if you take a deeper dive into their assets and bad loans, things won’t look good for long.’”

November 28 – Reuters (Ziyi Tang and Ryan Woo): “Local governments in China have sold record amounts of so-called special bonds this year to inject capital into struggling smaller banks… Special-purpose bonds are a form of off-budget debt financing used by local governments in China… Local governments plan to use the proceeds of the latest bond sales to purchase equity or convertible bonds from smaller banks, most of them state-owned, effectively recapitalising them… The governments have raised 152.3 billion yuan ($21.05bn) via such bonds so far in 2023 to replenish the capital of small and medium-sized banks… China’s small, regional banks would need to address a capital shortfall of an estimated 2.2 trillion yuan based on a scenario where up to 20% of regional lenders face capital inadequacy, according to a… report by S&P Global Ratings.”

November 27 – Wall Street Journal (Rebecca Feng and Weilun Soon): “Chinese authorities are taking more forceful action to contain the growing financial troubles of one of the country’s biggest shadow lenders. Police in Beijing said over the weekend that they had taken ‘criminal coercive measures’… against multiple employees of Zhongzhi Enterprise. The privately held conglomerate operates several businesses that sold investment products to many wealthy individuals and companies in China… Zhongzhi is on the brink of becoming one of China’s biggest corporate failures in years. The firm’s collapse could deal a major blow to investor confidence… Investors who bought Zhongzhi products have gathered in social-media groups and in person over the past few weeks and tried to figure out ways to pressure the conglomerate to repay them…”

November 26 – Bloomberg: “As China’s embattled shadow banking giant Zhongzhi Enterprise Group Co. faces a criminal probe, lawyers and analysts are assessing the damage to investors. One estimate puts that at about $56 billion. More than three quarters of investor cash would be lost, with just 100 billion yuan ($14bn) being recovered from debt of as much as 460 billion yuan, according to one scenario outlined by Ying Yue, a lawyer at Leaqual Law Firm in Shanghai. He expects a slow and drawn out court process…”

November 26 – Reuters (Joe Cash): “Profits at China’s industrial firms extended gains for a third month in October… The 2.7% year-on-year rise sees profit growth narrow back to single-digits, following an 11.9% increase in September and a 17.2% gain in August, putting pressure on authorities to extend further assistance to manufacturers as soft global demand continues to dog policymakers heading into 2024.”

November 30 – Reuters (Clare Jim, Scott Murdoch and Xie Yu): “China Evergrande Group, the world’s most indebted property developer, is seeking to avert a potentially imminent liquidation with a last-minute debt restructuring proposal, three people with direct knowledge… said. The defaulted company has until a Hong Kong court hearing on Monday to present a ‘concrete’ revised debt restructuring proposal for offshore creditors, a judge said last month after its original plan had lapsed.”

November 30 – Bloomberg (Phila Siu): “China’s top 100 developers saw their combined contract sales down 29.6% on year to 390b yuan in Nov., according to data released by China Real Estate Information Corp. It was an decline of 4.1% from a month earlier. The top 100 developers’ 2023 sales expected -15% from 2022.”

November 27 – Financial Times (Robin Wigglesworth): “Pretty much everyone agrees that foreign direct investment has collapsed in China. But pretty much no one seems to agree on exactly how far it’s collapsed… China has a… unique approach to economic statistics, which means people often try to reverse-engineer more accurate data from other series. But no amount of lipstick could make the provisional third-quarter FDI data look better. The preliminary balance of payments data from China’s State Administration of Foreign Exchange released earlier this month indicated that inward FDI fell into negative territory for the first time since the series began in 1998.”

November 27 – Reuters: “The Beijing Stock Exchange has de facto implemented a new policy that prevents major shareholders of companies listed on the bourse from selling stock, worried that such sales could douse a long-desired rally, three people familiar… said… The bourse said in a statement… that talk of such a policy was ‘not factual’, and there was ‘no change to the spirit of relevant published guidelines’.”

November 29 – Bloomberg: “One of China’s largest investment banks has warned its analysts against making any bearish calls and to avoid showing off their lavish lifestyle, as Beijing continues to clamp down on well-paid bankers. Analysts at China International Capital Corp. are barred from sharing negative comments about the economy or markets in both public and private discussions… Employees should also avoid wearing luxury brands or revealing their compensation to third parties, the memo said. The directive underscores the increasing level of self-scrutiny at Chinese financial institutions after authorities lashed out this year at bankers’ ‘hedonistic’ lifestyles, and ordered them to comply with President Xi Jinping’s ‘common prosperity’ drive.”

November 26 – Bloomberg (Iris Ouyang): “A gauge of bank funding costs in Hong Kong jumped to the highest in 16 years, as year-end demand for cash exacerbates an already-tight liquidity environment. The one-month Hong Kong interbank offered rate, or Hibor, rose 15 bps to 5.53%, the highest since October 2007. Demand for the local currency is on the rise as lenders stockpile cash for regulatory purposes, sucking capital from the interbank system.”

November 29 – Bloomberg (Shawna Kwan): “Hong Kong saw a record number of failed land tenders this year with plot-sales revenue headed toward the lowest ever due to the sector downturn. The city only sold one-third of land plots in public tenders in the first 11 months, a record for failed bids in Hong Kong… Increased costs for funding and construction are deterring property companies from acquiring land, said Hannah Jeong, head of valuation & advisory services in Hong Kong. ‘At the same time they don’t know whether residential prices will go up to cover the margin five years later… That’s why developers are losing confidence at the moment.’”

Central Banker Watch:

November 29 – Bloomberg (William Horobin, Lisa Abramowicz and Jonathan Ferro): “The Federal Reserve and the European Central Bank will need to keep interest rates high for longer than investors expect to ensure inflation is weeded out of their economies, OECD Chief Economist Clare Lombardelli told Bloomberg… The… organization said in its economic outlook that rate cuts will only begin in the US in the second half of 2024, and not until the spring of 2025 in the euro area. That contrasts starkly with the expectations of markets… ‘There’s a lot of strength in American consumers in particular so what we are expecting is for it to take a bit more time for inflation to come back to show a persistent downward trend and come back to target,” Lombardelli said… ‘Monetary policy is going to need to remain restrictive for a period.’”

November 27 – Financial Times (Martin Arnold): “Christine Lagarde has said the European Central Bank is likely to discuss speeding up the shrinkage of its balance sheet by ending the last of its bond purchases earlier than planned. The ECB president’s comments… are the clearest sign to date that the bank is preparing to further tighten monetary policy — beyond its earlier interest rate rises — by reducing the amount of bonds it plans to buy next year. Several of the more hawkish members of the ECB have been calling for these reinvestments to end…”

November 26 – Bloomberg (Emily Cadman and Ben Westcott): “Australia’s government will introduce legislation this week to facilitate the largest overhaul of the central bank in a generation, including setting up a separate governance board and scrapping the treasurer’s power to reverse policy decisions. The bill is the result of an independent review of the Reserve Bank that made 51 recommendations… It follows criticism in recent years ranging from the bank’s pre-Covid reluctance to cut interest rates to a pledge that they wouldn’t rise before 2024 and a messy yield-target exit — that damaged the institution’s credibility.”

November 27 – Reuters (William Schomberg): “Bank of England Governor Andrew Bailey said getting inflation down to the central bank’s 2% target will be ‘hard work’ as most of its recent fall was due to the unwinding of the jump in energy costs last year. ‘The rest of it has to be done by policy and monetary policy… And policy is operating in what I call a restrictive way at the moment – it is restricting the economy. The second half, from there to two, is hard work and obviously we don’t want to see any more damage.’”

November 29 – Financial Times (Sam Fleming): “The OECD has warned that inflation could force central banks in western Europe to keep interest rates higher next year than financial markets expect, despite some of the weakest global growth rates since the financial crisis. In its latest economic outlook, the Paris-based organisation said it expected the European Central Bank and the Bank of England to hold benchmark rates at their current peaks until 2025 — much longer than the markets are expecting — because of persistent inflationary pressures. That contrasts with the US Federal Reserve, which it expects to start cutting rates in the second half of next year.”

November 27 – Bloomberg: “Central bankers from Australia, the UK and Thailand warned that the monetary policy outlook remains uncertain, despite growing global expectations that interest rates are at or close to their peak. The Reserve Bank of Australia is grappling with ‘a wide range of uncertainties and experiences,’ Governor Michele Bullock said at a monetary conference in Hong Kong. Economic activity has held up more than expected and services inflation is proving ‘a bit sticky,’ she added.

Global Bubble Watch:

November 30 – The Canadian Press: “The Canadian economy shrank in the third quarter as higher rates weighed on consumer and business spending, but has so far managed to skirt a recession after a significant upward revision to second quarter GDP figures. Statistics Canada released its gross domestic product report Thursday, which shows the economy contracted 1.1% on an annualized basis.”

November 28 – Bloomberg (Chien-Hua Wan and Betty Hou): “Taiwan cut its growth forecast for this year to the slowest pace since the global financial crisis in a setback to the ruling Democratic Progressive Party ahead of January elections. The economy will likely expand 1.42% in 2023… That would be the weakest annual growth since 2009, and compared with an August projection of 1.6%.”

Europe Watch:

November 27 – Bloomberg (Alice Atkins): “A remarkable role reversal is underway across the euro area just over a decade since a series of fiscal crises almost broke the single currency. Back then it was the so-called periphery countries of Portugal, Italy, Ireland, Greece and Spain drawing the ire of investors after running up massive debts. Now it’s the core nations of Germany and France which are having to increasingly explain themselves amid budget crises and fiscal plans that are running up against European Union limits.”

November 30 – Bloomberg (Craig Stirling): “Euro-zone countries haven’t broken the link between public finances and banks that dominated the region’s sovereign debt crisis, and investors could refocus on that vulnerability next year, S&P Global Ratings said. Despite the establishment of common supervision and resolution mechanisms aimed to eradicate such dangers, the entangled relationship that bred turmoil in several members of the single currency is ‘here to stay,’ the company said… Problems in the banking sector can have devastating ripple effects on sovereigns, and vice versa — the so-called sovereign doom loop,’ S&P analysts Nicolas Charnay, Cihan Duran and Karim Kroll wrote.”

November 28 – Bloomberg (Jana Randow and James Hirai): “Lending to euro-area businesses fell for the first time in eight years — adding to evidence that steep European Central Bank interest-rate hikes are weighing on the economy. Credit to non-financial corporations shrank by an annual 0.3% in October… That’s the first contraction since 2015…”

November 30 – Reuters (Balazs Koranyi): “Euro zone inflation tumbled more than expected for a third straight month in November… Consumer price growth in the 20 nations sharing the euro currency dropped to 2.4% in November from 2.9% in October, well below expectations for 2.7%, dragged lower by nearly all items, with the notable exception of unprocessed food prices.”

November 29 – Bloomberg (Jana Randow): “German inflation eased more than forecast in November on retreating energy and travel costs, putting the European Central Bank’s 2% target within reach. Consumer prices rose 2.3% from a year ago — down from 3% in October and less than the 2.5% estimated… They fell 0.7% on the month, with package tours alone responsible for 0.15 percentage point of the decline.”

November 26 – Reuters (Andreas Rinke and Sarah Marsh): “Germany’s budget crisis has given new momentum to reforming self-imposed borrowing limits even among the opposition conservatives, as hunger for sorely needed investment trumps an earlier political obsession with fiscal rectitude. A constitutional court ruling on Nov. 15 against a budget manoeuvre to get around Germany’s ‘debt brake’ threw the financial plans of Chancellor Olaf Scholz’s coalition into disarray. It also indicated that his and future governments would have to stick more closely to the spirit of the brake, which limits a government structural budget deficit to 0.35% of gross domestic product…”

Japan Watch:

November 27 – Reuters (Satoshi Sugiyama): “Japanese firms this year have raised or will raise monthly average regular wages by a record amount, an annual government survey showed… Monthly regular pay rose 3.2%, or 9,437 yen ($63.59), on average this year, both record highs since comparative figures began in 1999… Last year, regular pay, which includes allowances but excludes overtime, holiday and special payments, rose 1.9%, or 5,534 yen. The percentage of firms that raised or will raise average regular wages this year reached 89.1% versus 85.7% in last year’s poll, the highest since 2019.”

November 26 – Reuters (Leika Kihara): “Japan’s business-to-business service inflation accelerated in October as a tight job market lifted labour costs, underscoring a broadening of price pressures that could heighten the chance of a near-term end to ultra-loose monetary policy. The services producer price index, which measures the price companies charge each other for services, rose 2.3% in October from a year earlier, up from a revised 2.0% gain in September…”

November 28 – Bloomberg (Toru Fujioka): “The Bank of Japan racked up the most unrealized losses on its bond holdings on record in the latest six-month period, illustrating the challenge facing Governor Kazuo Ueda if he moves toward normalizing policy. The paper loss on those assets was ¥10.5 trillion ($70.7bn) at the end of September, the largest loss in data going back to fiscal 2004…”

November 27 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japan’s top business lobby Keidanren will discuss at next month’s executive meeting the potential negative impact of the yen’s weakness on the economy. Keidanren, which is comprised of major companies including big automakers and electronics firms, traditionally favoured a weak yen and have called on the government to stave off sharp yen rises… Any discussion on the demerits of a weak yen by Keidanren would highlight a shift in how Japan’s business sector views the currency’s movement and its impact on the economy.”

November 28 – Reuters (Leika Kihara and Takahiko Wada): “Bank of Japan board member Seiji Adachi said it was premature to debate an exit from negative interest rates, suggesting it might take until well into next year to determine whether wages would rise enough to pull out of ultra-loose monetary policy settings. The remarks… by Adachi… came amid growing market expectations the BOJ could pull short-term interest rates out of negative territory as early as January. Adachi said the BOJ must wait for clear signs that prices and wages would rise in tandem and keep inflation sustainably at its 2% target before ending negative interest rates. ‘I personally feel we’re not there yet,’ he told a news conference…”

EM Watch:

November 30 – Bloomberg (Anup Roy): “India’s economy grew at a much faster pace than analysts predicted, as manufacturing surged and the government boosted spending before elections. Gross domestic product rose 7.6% in the three months to September from a year ago…, higher than any of the estimates in a Bloomberg survey of economists.”

Levered Speculation Watch:

November 29 – Reuters (Nell Mackenzie): “Investors pulled a net $7.6 billion from the hedge fund industry in October, particularly from low performing stock pickers as many of these funds failed to improve their performance from last year…, eVestment said… This was after investors pulled a net $19.2 billion from hedge funds in September. Hedge funds primarily focused on trading equities reported an average negative 2.7% performance in October and a negative 3% performance so far this year, eVestment said.”

Social, Political, Environmental, Cybersecurity Instability Watch:

November 30 – Bloomberg (Alexander Isakov, Gerard DiPippo, and Ziad Daoud): “The cost of conflict to the global economy this year is likely to be the highest since the end of World War II. Wars in Ukraine, the Middle East, and Africa have killed more than 100,000 people, and disrupted the lives of many more. The post-Cold War peace dividend appears to be fading. The most important cost of war is the innate value of human lives lost and damaged — a tragedy whether those are lives lived in countries rich or poor.”

November 30 – Financial Times (Attracta Mooney): “This year has ‘shattered’ climate records and is set to be the hottest since measurements began, with greenhouse gas and sea levels reaching all-time highs and Antarctic sea ice at record lows, a pattern set to continue in 2024, said the World Meteorological Organization. The El Niño weather phenomenon… is likely to result in further high temperatures in 2024 because it ‘has the greatest impact on global temperatures after it peaks’, said the WMO, adding that the past nine years, 2015 to 2023, were the warmest on record. The world had experienced a ‘deafening cacophony of broken records’ in 2023, the WMO said.”

November 21 – Axios (Stef W. Kight, Hans Nichols, and Andrew Solender): “Lawmakers are fleeing Congress at a record clip, with 13 senators and representatives announcing this month they won’t seek re-election — the highest number in more than a decade… Rancor and recriminations from the House speaker’s battle, a surge in partisan censures and impeachments and yet another government shutdown threat have created a perfect storm for retirements. State of play: The routine infighting and childish behavior — insults like ‘p***y’ and ‘smurf’ were exchanged on Capitol Hill this month — has exhausted some lawmakers. But the exits are also driven by ambition.”

Geopolitical Watch:

November 29 – Reuters (Ben Blanchard and Yew Lun Tian): “China’s leadership is too ‘overwhelmed’ with its internal problems to consider an invasion of Taiwan, President Tsai Ing-wen said… ‘Well, I think the Chinese leadership at this juncture is overwhelmed by its internal challenges. And my thought is that perhaps this is not a time for them to consider a major invasion of Taiwan… Largely because the internal economic and financial as well as political challenges, but also, the international community has made it loud and clear that war is not an option, and peace and stability serves everybody’s interests.’”

November 26 – Reuters (Hyunsu Yim): “North Korea warned… it would continue to exercise its sovereign rights, including through satellite launches, while its troops were reported to be restoring some demolished guard posts on the border with South Korea. North Korea’s foreign ministry said the launch of a reconnaissance satellite last week was prompted by the need to monitor the United States and its allies, state media KCNA reported.”

November 25 – Financial Times (Demetri Sevastopulo): “In the 1920s, the Canadian politician Raoul Dandurand described the country as a ‘fireproof house’ — surrounded on three sides by the Pacific, Arctic and Atlantic oceans, and with a friendly neighbour in the US to the south. It is a comforting view of the world that has helped define Canada’s identity… But that sense of detachment from the harsh realities of geopolitics is rapidly disappearing. Canada has found itself sucked into a series of perilous foreign policy dilemmas that have left it struggling to balance its values, interests and identity. In particular, Canada now finds itself at loggerheads with both India and China — the two most populous nations and the rising powers of this century.”

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