December 2, 2022: Dr. Jekyll and Mr. Hyde

December 2, 2022: Dr. Jekyll and Mr. Hyde
Doug Noland Posted on December 2, 2022

Bloomberg’s Jonathan Ferro: “What is it that Chairman Powell did on Wednesday that you disagree with?”

Mohamed El-Erian: “I said it contributed to undue market volatility. It’s the undue part -excessive market volatility. I think, once again, the Fed did not understand the technicals. Once again, the Fed didn’t understand the behavioral aspect of markets. So, while Chair Powell went out of his way to be balanced, he did a few things that made the markets hear just what it wanted to hear. First, confirm that we are downshifting in December. Second, do this ahead of the labor report – suggesting that maybe he knew something that others did not know. Third, talk about risks being now balanced – two-sided – and bring in his colleagues on the Fed. And then what he didn’t mention, John, he did not push back in any way against what already was a significant rally in markets – and significant loosening of financial conditions. So, while he said other things – and he was right to say other things including warning about inflation staying [elevated] – warning about our job [tightening] not being done – he didn’t realize where the technicals of this marketplace were. And he didn’t realize the behavioral aspects. And that’s why you got this overreaction.”

Jonathan Ferro referred to “the brilliant Mohamed El-Erian.” Yes, Mr. El-Erian is unequaled in consistently providing adept analysis. Powell on Wednesday was not appropriately hawkish, especially compared to his November 2nd press conference. Recall the S&P500 sank about 5% between the start of his press conference and the following day’s market open. I have to assume Powell was uncomfortable that his comments had such a market impact.

I commented at the time that Powell likely planned on a balanced approach. But the more he spoke (replying to questions), the more his inner hawk took over. “I control those messages, and that’s my job,” stated Powell in November. My hunch: On his commute home on November 2nd, a restless Fed Chair thought to himself: “I’ve got to do a better job controlling my mouth.”

Powell was determined to hold a balanced line Wednesday. And, to be sure, balanced Powell conflicts with press conference forthright hawkish Powell. Dr. Jekyll and Mr. Hyde. And markets fancy balanced Powell. He’s a cautious team player. That hawkish Powell can be a little scary: On occasion, he gets that intrepid look in his eyes that he might go rogue Volcker. Balanced Powell, giving a nod to his dovish vice chair and her contingent, refers to “monetary policy works with long and variable lags.” “I don’t want to overtighten. My colleagues and I do not want to overtighten…” Hawkish Powell, from his November press conference, “if we over tighten, then we have the ability with our tools, which are powerful, to… support economic activity strongly.”

Jekyll Powell leans on “risk management” to avoid breaking things. “So, we have a risk management balance to strike, and we think that slowing down at this point is a good way to balance the risks of over tightening.” Hyde Powell, principled, bold and assertive, views the risk of things breaking as an inescapable facet of managing through a serious inflation threat. “And trying to make good decisions from a risk management standpoint, remembering of course that if we were to over-tighten, we could then use our tools strongly to support the economy.”

I guess Powell could check in with options and derivatives market positioning before he speaks. In preparing his speeches, he might consider “risk on” and “risk off” versions to choose from as he approaches the podium. The Fed these days must contend with wildly unstable markets of its own making, and surely Powell has no interest in trying to adapt messaging to the vagaries of today’s capricious marketplace. And, subconsciously or otherwise, there’s always this innate central banker soft spot for seeing those betting against system stability disincentivized (with losses).

To be sure, system stability would have been better served had hawkish Powell leaned against the market rally and attendant loosened financial conditions. I’ll assume he was more focused on tweaking his message to be more balanced and guarded. He seeks consistency and reduced market impact. Good luck.

Poor timing was a problem. “Risk on” markets – relishing cross-market short squeezes and the unwind of hedges, lower market yields, narrowed Credit spreads, reduced derivative premiums (cheaper risk protection) and the appearance of newfound liquidity abundance – looked straight through (invisible) balanced Powell and fixated on Jekyll. Jekyll is not going to cut it.

Friday’s November employment data provided a timely reminder that the Fed’s tightening cycle has yet to make significant headway. The economy created a stronger-than-expected 263,000 jobs last month (October revised up to 284k). For the year, non-farm payrolls are up 4.3 million. Importantly, Average Hourly Earnings jumped a strong 0.6% (estimate 0.3%), with one-year growth of 5.1%. Moving opposite of expectations, the Labor Force Participation Rate slipped a tenth to 62.1%. This followed Thursday’s stronger-than-expected 10.334 million October job vacancies (JOLTS). Despite mounting layoffs, unusually tight labor markets remain inconsistent with stable prices.

It has been long understood that failing to address accelerating inflation early – so-called “falling behind the curve” – ensures a more challenging and painful tightening cycle. The familiar “slamming on the brakes” terminology is apt. Throw Trillions of monetary inflation at a late-cycle boom, while holding rates at zero, and one should anticipate a uniquely challenging tightening cycle.

So far, the Fed has moved to normalize rates more rapidly than expected. Perhaps the more consequential surprise has been that financial conditions remain relatively loose. Securities markets conditions tightened, yet bank and “non-bank” lending booms and ongoing enormous deficit spending sustained elevated system Credit growth. And between robust Credit growth and residuals from the Fed’s $5 TN pandemic QE program (i.e. corporate and household cash balances), there has been more than ample monetary fuel to reinforce inflationary dynamics.

Responding to a question regarding the Fed’s efforts to shrink its balance sheet, Powell offered a telling perspective. “You know, having a lot of reserves in the system is really a good thing. It’s really a public benefit to have plenty of reserves, plenty of liquidity in the markets, in the banking system, in the financial system generally. So that’s how we would do it.”

Sounds like the antithesis of the degree of tight “money” necessary to get the inflation genie back in the bottle.

The Fed’s tightening cycle is somewhat of a mess right now. Officials feel compelled to get off the 75 bps per meeting train. Okay, but the Fed’s practice of clearly communicating its intentions muddies the waters.

“Risk on” markets interpret the FOMC’s downshifting as a prelude to a dovish pivot. Ten-year Treasury yields ended the week at 3.49%, down 73 bps from the November 7th high to the low since September 16th. Corporate Credit spreads (to Treasuries) traded Friday at their narrowest margins in months, with investment-grade spreads not narrower since April. The upshot is that financial conditions have loosened meaningfully. An effective inflation fight requires major tightening.

It may be too strong to assert that the Fed is losing its inflation battle. Fed officials and market pundits point to market indicators (i.e. yields and swap rates) as corroborating the Federal Reserve’s inflation-fighting credentials. They keep telling us that inflation expectations are well anchored. But I continue to believe that low market yields are more a reflection of bursting global Bubbles (i.e. China) and the inevitability of accidents.

The Fed’s inability to orchestrate a significant and timely tightening of system financial conditions is a major issue. It has allowed inflationary forces to become entrenched. Companies have grown comfortable raising prices, while workers are emboldened to demand higher compensation. Failure to quickly quash inflation resulted in an 8.7% 2023 Social Security COLA (cost of living allowance), the largest since 1981. And each month that loose financial conditions further accommodate these dynamics only ensures inflation becomes more deeply ingrained throughout the economy.

It’s as if markets are saying “no harm, no foul.” At least in the eyes of the Treasury market, Fed inflation ineffectiveness is virtually moot. No worries, all will be resolved by bursting global Bubbles. And as a last resort, a desperate “slamming on the brakes” would surely burst the inflation Bubble.

At least for now, the bond market vigilantes have retreated back into their caves. And without bond market discipline, it’s a challenge to envisage the type of tough decisions – at the FOMC and Washington – necessary to rein inflation in. This suggests stubborn upward pricing pressures. Moreover, the backdrop seems to ensure that, when crisis dynamics return to global markets, elevated inflation will have the Fed and global central bankers responding cautiously when markets come demanding massive additional liquidity (QE).

But for risk markets dominated by short-term options, derivatives trading and speculative dynamics, future inflation rates and policy risks are irrelevant. What mattered was Powell took a December hawkish surprise off the table. Greed and fear have been left to run their fateful courses into year-end, with the greedy bulls in command and the fearful bears – stocks, Treasuries, corporate Credit, the yen and renminbi – in full retreat.

And while on the subject of retreat:

November 30 – Associated Press: “China’s ruling Communist Party has vowed to ‘resolutely crack down on infiltration and sabotage activities by hostile forces,’ following the largest street demonstrations in decades by citizens fed up with strict anti-virus restrictions. A massive show of force by the security services Wednesday sought to deter further protests. The statement from the Central Political and Legal Affairs Commission… followed protests that broke out over the weekend in Beijing, Shanghai, Guangzhou and several other cities. While it did not directly address the protests, the statement was a reminder of the party’s determination to enforce its rule.”

Last weekend’s protests in a number of Chinese cities were extraordinary. It is inspiring to see the demonstration of such courage, especially from Chinese students and youth. The Chinese people have been through so much, an economic downturn coupled with draconian “zero Covid.” People are clearly at the ends of their ropes. Having had expectations so inflated during the protracted Bubble period, now the depressing downside.

The great Chinese surveillance apparatus and communist party iron fist could very well keep protestors off the streets for now. But I believe something important sprung to life last weekend. The Chinese people were willing to tolerate their heavy-handed government as incomes grew and living standards improved. With the future so bright, they would look away from increasingly oppressive government overreach.

The future has darkened. A bursting Bubble has revealed the fallibilities of the great Beijing meritocracy. A coercive autocratic central government is now viewed more as the problem than the solution. The Chinese people deserve much better – and they know it. Beijing wants them off the streets – and can force its will. Beijing wants them instead in stores, in showrooms and buying apartments. I’m skeptical that an oppressive Beijing is compatible with the type of consumer confidence necessary for economic recovery.

For years, I’ve pondered how the Chinese people, devoid of the ballot box, would respond to a collapsing Bubble. China’s Bubble inflated longer and much greater than I ever imagined. The pandemic and “zero Covid” were not part of the analysis. Nor was the invasion of Ukraine by China’s “partner without limits.” Trust has been broken. I think Beijing is going to have its hands full. We can only hope they don’t resort to using the Taiwan issue as a nationalism rallying cry.

For the Week:

The S&P500 increased 0.4% (down 14.6% y-t-d), while the Dow was little changed (down 5.3%). The Utilities were unchanged (down 2.6%). The Banks were about unchanged (down 19.5%), while the Broker/Dealers increased 0.4% (up 0.1%). The Transports slipped 0.3% (down 11.9%). The S&P 400 Midcaps were unchanged (down 9.4%), while the small cap Russell 2000 gained 0.4% (down 15.7%). The Nasdaq100 increased 0.2% (down 26.5%). The Semiconductors gained 0.4% (down 29.8%). The Biotechs rose 0.6% (down 1.5%). While bullion jumped $43, the HUI gold equities index was little changed (down 8.5%).

Three-month Treasury bill rates ended the week at 4.1475%. Two-year government yields dropped 18 bps to 4.27% (up 354bps y-t-d). Five-year T-note yields sank 21 bps to 3.65% (up 239bps). Ten-year Treasury yields fell 19 bps to 3.49% (up 198bps). Long bond yields dropped 19 bps to 3.55% (up 165bps). Benchmark Fannie Mae MBS yields sank 25 bps to 4.89% (up 282bps).

Greek 10-year yields sank 26 bps to 3.88% (up 256bps y-t-d). Italian yields fell nine bps to 3.77% (up 260bps). Spain’s 10-year yields fell eight bps to 2.87% (up 231bps). German bund yields dropped 12 bps to 1.86% (up 203bps). French yields fell 13 bps to 2.31% (up 211bps). The French to German 10-year bond spread narrowed one to 45 bps. U.K. 10-year gilt yields added three bps to 3.15% (up 218bps). U.K.’s FTSE equities index added 0.9% (up 2.3% y-t-d).

Japan’s Nikkei Equities Index lost 1.8% (down 3.5% y-t-d). Japanese 10-year “JGB” yields were little changed at 0.255% (up 18bps y-t-d). France’s CAC40 increased 0.4% (down 5.7%). The German DAX equities index was about unchanged (down 8.5%). Spain’s IBEX 35 equities index declined 0.4% (down 3.8%). Italy’s FTSE MIB index slipped 0.4% (down 10.0%). EM equities were mixed. Brazil’s Bovespa index rallied 2.7% (up 6.8%), while Mexico’s Bolsa index declined 0.8% (down 3.8%). South Korea’s Kospi index was little changed (down 18.2%). India’s Sensex equities index gained 0.9% (up 7.9%). China’s Shanghai Exchange Index rose 1.8% (down 13.3%). Turkey’s Borsa Istanbul National 100 index added 1.8% (up 167%). Russia’s MICEX equities index declined 0.7% (down 42.4%).

Investment-grade bond funds posted outflows of $6.919 billion, and junk bond funds reported negative flows of $1.712 billion (from Lipper).

Federal Reserve Credit declined $18.8bn last week to $8.569 TN. Fed Credit was down $332bn from the June 22nd peak. Over the past 168 weeks, Fed Credit expanded $4.428 TN, or 130%. Fed Credit inflated $5.758 Trillion, or 205%, over the past 525 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $1.8bn to $3.312 TN. “Custody holdings” were down $146bn, or 4.2%, y-o-y.

Total money market fund assets jumped $46bn to $4.671 TN. Total money funds were up $49bn, or 1.1%, y-o-y.

Total Commercial Paper dropped $15.4bn to $1.293 TN. CP was up $199bn, or 18.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates dropped 15 bps to 6.39% (up 328bps y-o-y). Fifteen-year rates fell nine bps to 5.79% (up 340bps). Five-year hybrid ARM rates slipped two bps to 5.49% (up 300bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 27 bps to 6.49% (up 327bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 1.3% to 104.55 (up 9.3% y-t-d). For the week on the upside, the Japanese yen increased 3.6%, the Brazilian real 3.4%, the New Zealand dollar 2.5%, the Singapore dollar 1.9%, the South Korean won 1.9%, the British pound 1.6%, the euro 1.4%, the Norwegian krone 1.1%, the Swedish krona 1.1%, the Swiss franc 0.9% and the Australian dollar 0.6%. On the downside, the South African rand declined 2.4%, the Canadian dollar 0.7% and the Mexican peso 0.4%. The Chinese (onshore) renminbi gained 1.58% versus the dollar (down 9.89% y-t-d).

Commodities Watch:

November 29 – Reuters (Alex Lawler, Ahmad Ghaddar and Olesya Astakhova): “OPEC+ is likely to keep oil output policy unchanged at a meeting on Sunday, five OPEC+ sources said, although two sources said an additional production cut was also likely to be considered to bolster prices… The Organization of the Petroleum Exporting Countries and allies including Russia, known as OPEC+, meets as demand faces headwinds from slowing economies and Chinese COVD-19 lockdowns, while a looming European Union ban on Russian crude imports and a G7 price cap on Russian oil places a question mark over supply.”

The Bloomberg Commodities Index slipped 0.4% (up 15.4% y-t-d). Spot Gold jumped 2.4% to $1,798 (down 1.7%). Silver surged 6.4% to $2 (down 0.7%). WTI crude rallied $3.70 to $79.98 (up 6%). Gasoline fell 2.1% (up 2.3%), and Natural Gas sank 10.6% to $6.26 (up 68%). Copper surged 6.1% (down 14%). Wheat dropped 4.5% (down 1%), and Corn fell 3.7% (up 9%). Bitcoin recovered $520 this week, or 6.2%, to $17,050 (down 63%).

Market Instability Watch:

December 1 – Bloomberg (Garfield Reynolds and Matthew Burgess): “Treasuries jumped by the most in almost three weeks on Wednesday following a speech from Federal Reserve Chair Jerome Powell, but the rally may have been more about month-end positioning, according to market participants. ‘The market reaction overnight was a touch surprising — it seemed aggressive,’ said Stephen Cooper, head of Australian and New Zealand fixed income in Sydney at First Sentier Investors… ‘We’ve seen over the last 12-to-18 months that, funnily enough, news that you don’t think is actually new sees market reactions which are out of size. It all just feels position based.’”

November 28 – Bloomberg (Josyana Joshua and Olivia Raimonde): “Credit investors are piling back into debt with long maturities hoping that the Federal Reserve will soon slow its pace of tightening. US corporate debt due in 10 years or more has surged 9.5% so far this month, on track for its biggest leap since December 2008. The bonds have plunged more than 24% in 2022 given their high duration, which causes prices to drop as rates rise.”

December 1 – Reuters (Oliver Hirt, Selena Li, Sumeet Chatterjee and Noele Illien): “Credit Suisse is looking for ways to accelerate cost cuts announced just weeks ago as client outflows and a slowdown in activity weigh on its revenue outlook, three people… said. The cost savings are likely to involve more job cuts than previously announced for the first wave of reductions, including in its mainstay wealth business…”

November 29 – Reuters (Danilo Masoni): “Credit Suisse shares slid below 3 Swiss francs on Tuesday as investors dumped rights to subscribe to new shares in a cash call aimed at raising $2.3 billion for the loss-making bank. The offering, part of a broader capital raise worth 4 billion francs which won shareholder approval last week, is intended to help fund Credit Suisse’s attempt to recover from the biggest crisis in its 166-year history. Shares in Credit Suisse fell 3.1% to 2.915 francs by 1451 GMT, their lowest level on record…, as the rights tumbled as much as 29.9%… That took losses for Credit Suisse shares in 2022 to more than 65%, further shrinking its market value to 12 billion francs… At its peak in 2007 the bank was worth around ten times more.”

November 26 – Financial Times (Harriet Clarfelt): “Investors have poured almost $16bn in to US corporate bond funds this month, underscoring how signs of easing inflation have helped brighten sentiment… Funds holding high-grade bonds have garnered $8.6bn of new client money in the month to November 23, while those focused on riskier junk-rated debt have posted net inflows of $7.1bn. The combined figure is set to be the highest monthly inflow since July 2020 if the trend holds in the final week of November, according to… EPFR.”

Crypto Bubble Collapse Watch:

December 2 – Financial Times (Joshua Oliver and Kadhim Shubber): “Hedge fund Alameda Research stepped in to shelter FTX from a loss of up to $1bn after a customer trade on the crypto platform blew up last year, highlighting the deep and longstanding links between Sam Bankman-Fried’s digital asset companies. Alameda in early 2021 shouldered FTX’s burden when a client’s leveraged bet on an obscure token tore through buffers designed to shield the exchange from sustaining losses when a trade goes bad, according to people with knowledge of the matter.”

November 30 – Reuters (Bharat Govind Gautam and Jaiveer Shekhawat): “U.S. cryptocurrency brokerage Genesis said it was seeking to avoid bankruptcy after Bloomberg news reported… that creditors to the firm are organizing with restructuring lawyers to prevent insolvency. Citing people with knowledge of the situation, the report said law firms Proskauer Rose and Kirkland & Ellis are being consulted by creditor groups, who are seeking to avoid a situation similar to crypto exchange FTX’s rapid descent into bankruptcy.”

November 30 – Reuters (Francesco Canepa): “Bitcoin is being artificially propped up and should not be legitimised by regulators or financial companies as it is more akin to gambling, the European Central Bank said… Bitcoin and other cryptocurrencies have been variously presented as an alternative form of money and a shield from the inflationary policies pursued by major central banks such as the ECB in recent years. But a 75% fall over the past year, just as inflation reared its head, and a string of scandals including the collapse of the FTX exchange this month have given critics among central bankers and regulators ammunition to fight back.”

November 28 – CNBC (Rohan Goswami): “There was supposedly one man who could save crypto — Sam Bankman-Fried. The former FTX CEO bailed out and took over crypto firms as cryptocurrency markets withered with Terra’s spring crash. In October, FTX won the bidding war for bankrupt crypto firm Voyager Digital in a highly advantageous deal. With the collapse of FTX, the firms which Bankman-Fried saved now find themselves in an uncertain state. Voyager put itself back up for auction last week. On Monday, BlockFi filed for bankruptcy in New Jersey, after weeks of speculation that the FTX collapse had fatally crippled it. The FTX ‘death spiral,’ as BlockFi advisor Mark Renzi put it, has now spread to another crypto entity.”

November 27 – Financial Times (Stephen Foley): “Cryptocurrency businesses that need their financial statements audited are probably going to have to pay more for it, and they have Sam Bankman-Fried to thank. The collapse of Bankman-Fried’s crypto empire, and the spotlight it put on the auditors that signed off on his books, have prompted small audit firms to re-examine their work for businesses in the nascent industry. Several US firms told the Financial Times that they had elevated some or all of their crypto-related clients to the status of ‘high risk’, triggering a more thorough audit that will take longer and lead to higher bills. Some clients could ultimately be dropped altogether.”

Bursting Bubble and Mania Watch:

December 1 – Reuters (Marc Jones): “Credit rating firm S&P Global has warned that speculative-grade U.S. and European corporate default rates are likely to double and might even treble next year as rising borrowing costs take their toll. The firm estimated that the ‘trailing-12-month default rates’ in the U.S. and Europe would reach 3.75% and 3.25% respectively by September, more than double the 1.6% and 1.4% in September 2022. With so much depending on the length, breadth and depth of a potential global economic downturn, however, S&P added that ‘pessimistic forecasts for default rates of 6.0% and 5.5% aren’t out of the question’.”

November 29 – Bloomberg (Jill R. Shah and Claire Ruckin): “Banks in the US and Europe with around $42 billion of buyout debt stuck on their balance sheets are making the most of their last chance to get rid of it this year. Stabilization in the leveraged loan and high yield bond markets has led to an opening for deals… as banks try to reduce debt on their balance sheets before the holidays.”

November 26 – Bloomberg (Julia Fioretti, Swetha Gopinath and Filipe Pacheco): “While initial public offerings have largely vanished, share sales have been surging. Since the start of November there have been $24 billion in additional stock sales globally, on track for the biggest monthly haul since August when almost $25 billion was raised…”

December 2 – Reuters (Julie Zhu, Engen Tham and Jing Xu): “Blackstone Inc limited withdrawals from its $69 billion unlisted real estate income trust (REIT)… after a surge in redemption requests, an unprecedented blow to a franchise that helped it turn into an asset management behemoth. The curbs came because redemptions hit pre-set limits, rather than Blackstone setting the limits on the day. Nonetheless, they fueled investor concerns about the future of the REIT… Many investors in the REIT are concerned that Blackstone has been slow to adjust the vehicle’s valuation to that of publicly traded REITs that have taken a hit amid rising interest rates…”

November 30 – Bloomberg (Sam Potter): “Investors who lavished billions betting on a comeback for Big Tech are nursing huge losses in Wall Street’s largest leveraged ETF. The ProShares UltraPro QQQ ETF, which aims to deliver three-times the performance of the Nasdaq 100 Index, has burned through about $20 billion so far this year as the most aggressive monetary tightening in decades slams pricey technology shares — with TQQQ down a whopping 75% in 2022.”

Ukraine War Watch:

November 30 – Bloomberg: “Six million consumers in Ukraine are without electricity after Russia’s intensive attacks on the country’s energy infrastructure, President Volodymyr Zelenskiy said in his nightly address. The nation needs high-voltage equipment that can be repaired quickly — transformers as well as generators — to get through the winter, Energy Minister Herman Halushchenko told Bloomberg TV…”

November 27 – Associated Press (John Leisester): “The play finishes. The actors take their bows. Then they let loose with wartime patriotic zeal. ‘Glory to Ukraine!’ they shout. ‘Glory to the heroes!’ the audience yells back, leaping to its feet. The actors aren’t done. More yells follow, X-rated ones, cursing all things Russian and vowing that Ukraine will survive. More cheers, more applause.’ Bundled up against the cold, everyone then troops out of the dark, unheated theater, barely lit with emergency generators. They head back to the hard realities of Ukraine’s capital — a once comfortably livable city of 3 million, now beginning a winter increasingly shorn of power and sometimes water, too, by Russian bombardments.”

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

December 2 – Bloomberg: “The European Union agreed to put a price cap on Russian oil at $60 a barrel — higher than current prices — paving the way for a wider Group of Seven deal… The Group of Seven is set to impose a price cap on Russian oil that’s well above where it now trades. If there was any doubt what the premise of the cap was, it’s now clear: the US and its allies want Russia’s crude to keep flowing.”

December 1 – Reuters (Jan Strupczewski and Kate Abnett): “Representatives of European Union governments were discussing… a price cap on Russian seaborne oil at $60 per barrel, with a review every two months, yielding to pressure from some countries to lower the cap, diplomats said. The Group of Seven nations (G7) proposed last week a price cap on Russian oil, meant to diminish Moscow’s revenues and its ability to finance its war in Ukraine, of $65-70 per barrel. The cap, if agreed, is to take effect from Dec 5th.”

November 30 – Reuters: “Russian and Chinese strategic warplanes, including Tupolev-95 long-range ‘Bear’ bombers, conducted joint patrols over the Sea of Japan and East China Sea, the Russian defence ministry said… South Korea’s military said earlier that it scrambled fighter jets as two Chinese and six Russian warplanes entered its air defence zone. Russia’s defence ministry said that ‘at certain stages of the route, strategic missile carriers were accompanied by fighters of foreign states.’”

November 27 – Reuters (Alasdair Pal): “Rapid advancements in China’s military capabilities pose increasing risks to American supremacy in outer space, the head of the United States military’s space wing said… Nina Armagno, director of staff of the U.S. Space Force, said Beijing had made significant progress in developing military space technology, including in areas such as satellite communications and re-useable spacecraft, which allow countries to rapidly scale up their space programs.”

De-globalization and Iron Curtain Watch:

November 29 – Associated Press: “China is ready to ‘forge closer partnership’ with Russia in energy, a state news agency quoted President Xi Jinping as saying…, potentially expanding ties that irk Washington by helping the Kremlin resist sanctions over its war on Ukraine. The announcement gave no details. It said Xi made the comment in a letter to the 4th China-Russia Energy Business Forum. China’s energy-hungry economy is one of the biggest customers for Russian oil and gas. Purchases more than doubled over a year ago in October to $10.2 billion as Chinese importers took advantage of discounts offered by Moscow.”

November 28 – Bloomberg (Vlad Savov): “Turmoil at Apple Inc.’s key manufacturing hub of Zhengzhou is likely to result in a production shortfall of close to 6 million iPhone Pro units this year, according to a person familiar… The Zhengzhou campus has been wracked by lockdowns and worker unrest for weeks after Covid infections left Foxconn and the local government struggling to contain the outbreak. Thousands of staff fled in October after chronic food shortages, only to be replaced by new employees who rebelled against pay and quarantine practices.”

December 1 – Financial Times (Nic Fildes): “Finland’s prime minister has warned democratic countries to ‘stop being naïve’ about China, saying it is essential that they reduce their technological and energy dependency on authoritarian regimes. Sanna Marin argued… that countries such as Australia and Finland had to forge ‘common lifelines’. Finland applied to join Nato in the wake of Russia’s invasion of Ukraine this year and Marin said she expected the Nordic country to become a full member and participate as a security provider.”

Inflation Watch:

November 30 – Wall Street Journal (Jinjoo Lee): “Heating bills are about to deliver an unpleasant jolt to American households. In a November report, the U.S. Energy Information Administration said it expects retail natural gas heating expenditures this winter (October to March) to increase by 25% on average and electricity bills to rise 11%. Households using heating oil will see an even bigger shock: EIA expects heating oil expenditures to rise 45% this winter compared with the last one.”

November 28 – Bloomberg (Naureen S. Malik): “New Yorkers face a sharp rise in electricity bills this winter as Russia’s war in Ukraine and a rebound in local demand boosts prices of natural gas, according to the state’s power grid operator. Wholesale electricity prices may be 20% to 30% higher than last winter, the top executive at the state grid operator said…”

Biden Administration Watch:

November 30 – CNBC (Chelsey Cox): “It’s now clear to U.S. officials that China, once considered a possible economic and political ally, has become an emerging threat to national security, U.S. companies and American workers, Commerce Secretary Gina Raimondo said… ‘Over the past decade, China’s leaders have made clear that they do not plan to pursue political and economic reform and are instead pursuing an alternative vision of their country’s future’ Raimondo said… ‘China’s reprioritization away from economic growth toward national security and its assertive military behavior means that we have to rethink how we protect our national security interests while also promoting our interests in trade and investment…’ Chinese leaders have made it apparent over the last decade that ‘increasing the role of the state society and economy,’ ‘constraining the free flow of capital’ and ‘decoupling in technology areas of the future’ is more important than political and economic reform. ‘Probably most disturbingly is they’re accelerating their efforts to fuse economic and technology policies with their military ambitions,’ Raimondo said.”

November 30 – Reuters (Diane Bartz and Alexandra Alper): “The Biden administration has banned approvals of new telecommunications equipment from China’s Huawei Technologies and ZTE because they pose ‘an unacceptable risk’ to U.S. national security. The U.S. Federal Communications Commission said… it had adopted the final rules, which also effectively bar the sale or import of new equipment made by Chinese surveillance equipment maker Dahua Technology Co, video surveillance firm Hangzhou Hikvision Digital Technology Co Ltd and telecoms firm Hytera Communications Corp Ltd.”

Federal Reserve Watch:

November 30 – Financial Times (Colby Smith): “Jay Powell has sent a strong signal that the Federal Reserve will slow the pace of interest rate rises next month in an otherwise hawkish speech warning that the US central bank has a long way to go in its fight against inflation. ‘The time for moderating the pace of rate increases may come as soon as the December meeting,’ the Fed chair said… The remarks from Powell suggest the Fed is preparing to ‘downshift’ to a 0.5 percentage point increase when it meets in two weeks after it raised rates by 0.75 percentage points at each of its past four meetings. ‘My colleagues and I do not want to overtighten,’ Powell said…”

November 30 – Reuters (Howard Schneider and Ann Saphir): “Federal Reserve Chair Jerome Powell… said it was time to slow the pace of coming interest rate hikes while also signaling a protracted economic adjustment to a world where borrowing costs will remain high, inflation comes down slowly and the United States remains chronically short of workers. In an hour-long session… at the Brookings Institution think tank… Powell gave a short-term message that sent markets soaring: The Fed was ‘slowing down’ from the breakneck pace of three-quarter percentage point rate hikes that have prevailed since June, and would feel the way towards the peak interest rate needed to slow inflation to the Fed’s 2% target.”

November 28 – Wall Street Journal (Nick Timiraos): “A senior Federal Reserve official said he expects inflation pressures to recede over the next year but cautioned the central bank will continue to have its work cut out because prices may decelerate to levels still above the Fed’s 2% target. New York Fed President John Williams also said the risks of a recession were elevated because the central bank has had to raise rates rapidly to combat high inflation. ‘I hope [a recession] is not the case, but that’s clearly a risk out there given all of the uncertainty in the global economic outlook,’ he told reporters…”

November 28 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of New York President John Williams said interest rates need to rise further and stay high through next year but could be lowered during 2024. ‘My baseline view is that we’re going to need to raise rates further from where we are today,’ he said… ‘I do think we’re going to need to keep restrictive policy in place for some time. I would expect that to continue through — at least through — next year.’”

November 28 – Bloomberg (Jonnelle Marte and Steve Matthews): “Federal Reserve policymakers stressed… that they will raise borrowing costs further to curb inflation, with one key official saying that he sees interest rates heading somewhat higher than he had forecast just a couple of months ago. ‘Stronger demand for labor, stronger demand in the economy than I previously thought, and then somewhat higher underlying inflation, suggest a modestly higher path for policy relative to September,’ New York Fed President John Williams told reporters… ‘Not a massive change, but somewhat higher.’”

November 28 – Reuters (Lindsay Dunsmuir): “The Federal Reserve needs to raise interest rates quite a bit further and then hold them there throughout next year and into 2024 to gain control of inflation and bring it back down toward the U.S. central bank’s 2% goal, St. Louis Fed President James Bullard said… ‘We’ve got a ways to go to get restrictive,’ Bullard said…, as he restated his conviction that the Fed’s target policy rate needs to rise to at least a range between 5.00% and 5.25%… to be ‘sufficiently restrictive’ to reduce inflation. Once at a high enough level, rates would then ‘have to stay there all during 2023 and into 2024’ given the historical behavior of inflation, Bullard said.”

November 28 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said financial markets are underestimating the chances that policymakers will need to be more aggressive next year in raising interest rates to curb inflation. ‘There is still a heavy degree’ of expectations that inflation will go away naturally, Bullard said…”

November 28 – Bloomberg (Craig Torres): “Federal Reserve Vice Chair Lael Brainard said US central bankers must lean against the risk of inflation expectations rising above the 2% target in a world where inflation may be less stable than in recent decades. ‘In the presence of a protracted series of supply shocks and high inflation, it is important for monetary policy to take a risk-management posture to avoid the risk of inflation expectations drifting above target,’ Brainard said… ‘A drawn-out sequence of adverse supply shocks that has the cumulative effect of constraining potential output for an extended period is likely to call for monetary policy tightening to restore balance between demand and supply.’”

November 30 – Reuters (Michael S. Derby): “Top Federal Reserve officials are showing no appetite for slowing the pace of the central bank’s balance sheet reduction, pushing back on outside observers’ assertions that money market conditions will bring an early end to the program. Fed Chair Jerome Powell and New York Fed President John Williams – whose bank manages the program – this week both said they saw no reason for them to throttle back from allowing about $95 billion a month of Treasuries and mortgage-backed securities to mature to shrink its $8.6 trillion asset portfolio.”

November 29 – Financial Times (Colby Smith): “A united front among Federal Reserve officials is in danger of splintering as sharper divisions emerge among policymakers over how forcefully to squeeze the economy to tackle inflation, economists have warned. As the US central bank prepares to slow the pace of interest rate rises next month after one of the most aggressive tightening campaigns of recent times, it is grappling with disagreements over how much more restraint will be needed and the extent to which the economy must suffer. ‘It’s a group that likes consensus if they can reach it, but they may not be able to,’ said Bill English, former director of the Fed’s division of monetary affairs. ‘The fundamental issue is that it’s going to be much less clear what they need and want to do with policy.’”

U.S. Bubble Watch:

December 2 – Bloomberg (Reade Pickert): “US employers added more jobs than forecast and wages surged by the most in nearly a year, pointing to enduring inflation pressures that boost chances of higher interest rates from the Federal Reserve. Nonfarm payrolls increased 263,000 in November after an upwardly revised 284,000 gain in October… The unemployment rate held at 3.7% as participation eased. Average hourly earnings rose twice as much as forecast… Average hourly earnings rose 0.6% in November in a broad-based gain that was the biggest since January, and were up 5.1% from a year earlier. Wages for production and nonsupervisory workers climbed 0.7% from the prior month, the most in almost a year.”

November 30 – CNBC (Jeff Cox): “Private hiring slowed sharply during November in a sign that the historically tight labor market could be losing some steam, according to… ADP. Companies added just 127,000 positions for the month, a steep reduction from the 239,000 the firm reported for October and well below the Dow Jones estimate for 190,000. It also was the lowest total since January 2021. The relatively weak total comes amid Federal Reserve efforts to loosen up a jobs picture in which there are still nearly two open positions for every available worker. The central bank has raised its benchmark borrowing rate six times this year, but the unemployment rate is still 3.7%, near the lowest since 1969.”

November 29 – Reuters (Ananya Mariam Rajesh and Deborah Mary Sophia): “Deal-hungry Americans snapped up everything from toys to electronics during the five-day long Thanksgiving through Cyber Monday shopping bonanza lured by steep discounts… A record 196.7 million people shopped during this period, the National Retail Federation said…, and total retail sales jumped about 11%, not adjusted for inflation, Mastercard SpendingPulse data showed. ‘Black Friday through Cyber Monday has proven to be a pretty solid weekend, which should give retailers some confidence that demand is there to purchase goods,’ said Joseph Feldman, analyst at Telsey Advisory Group.”

November 30 – Reuters (Lucia Mutikani): “U.S. job openings decreased in October, but remained significantly high, pointing to continued labor market resilience despite the Federal Reserve’s efforts to cool demand… The tight labor market keeps the Fed on course to continue tightening monetary policy, heightening the risks of a recession next year… Job openings, a measure of labor demand, decreased 353,000 to 10.3 million on the last day of October… It was the 16th straight month that job openings remained above 10 million.”

December 1 – Reuters (Lucia Mutikani): “U.S. consumer spending increased solidly in October, while inflation pressures moderated, giving the economy a powerful boost at the start of the fourth quarter as it faces rising headwinds from the Federal Reserve’s aggressive monetary policy tightening… Consumer spending… jumped 0.8% after an unrevised 0.6% increase in September… October’s gain was in line with economists’ expectations. Consumer bought motor vehicles, furniture and recreational goods. They also dined out and spent more on housing and utilities… Personal income increased 0.7%, the most in a year. With inflation subsiding, income at the disposal of households after accounting for inflation rose 0.4%. But consumers also tapped into their savings to fund their purchases. The saving rate dropped to 2.3%, the lowest since July 2005, from 2.4% in September.”

December 1 – Bloomberg (Jordan Yadoo): “US manufacturing contracted in November for the first time since May 2020 as output weakened in the face of a third-straight month of shrinking orders. The Institute for Supply Management’s gauge of factory activity slid to 49 from 50.2 in the prior month… The measure has fallen in five of the last six months… A measure of prices paid for materials… fell for an eighth straight month… Input prices shrank at the fastest pace since May 2020 in a welcome sign goods inflation is easing amid less stress on supply chains… The group’s measure of new orders has contracted for the fifth time in six months, while the production gauge retreated to 51.5 in November.”

November 29 – Wall Street Journal (Nicole Friedman): “Home prices fell in September from the prior month, marking the first time prices have declined for three straight months in nearly four years. The S&P CoreLogic Case-Shiller National Home Price Index, which measures home prices across the nation, fell 1% in September from August. Over the past three months, the index is down 2.6%. Home prices in many major cities had been booming for years before the pandemic-fueled home buying spree pushed prices even higher. That surge reversed abruptly this year due…”

November 29 – Reuters (Lucia Mutikani): “U.S. single-family home prices slowed further in September as higher mortgage rates eroded demand, closely watched surveys showed… The S&P CoreLogic Case Shiller national home price index dropped 0.8% month-over-month in September. Monthly house prices fell in July for the first time since late 2018. House prices rose 10.6% year-on-year in September, slowing from August’s increase of 12.9%.”

November 30 – CNBC (Diana Olick): “Mortgage rates soared over 7% just a month ago, but since then they have fallen more than half a percentage point… The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 6.49% from 6.67%… The weakness continues to be in refinance demand, which dropped 13% from the previous week and was 86% lower than the same week one year ago… Mortgage applications to purchase a home gained 4% from the previous week but demand was 41% lower than the same week one year ago.”

November 29 – Reuters (Lucia Mutikani): “U.S. consumer confidence slipped to a four-month low in November, with households less keen to spend on big-ticket items over the next six months amid high inflation and rising borrowing costs, heightening the risks of a recession next year. But the survey from the Conference Board… also showed that consumers remained upbeat about the labor market, which could limit some of the anticipated economic downturn.”

December 1 – Associated Press (Garfield Reynolds and Matthew Burgess): “A measure of inflation that is closely monitored by the Federal Reserve eased but remained at an elevated level in October… Thursday’s report… showed that prices rose 6% in October from a year earlier. That was the smallest increase since November 2021 and was down from a 6.3% year-over-year rise in September. Excluding volatile food and energy prices, so-called core inflation over the previous 12 months was 5%, less than the 5.2% in September.”

November 29 – Dow Jones (Andrew Ackerman): “The federal government is about to backstop mortgages of more than $1 million for the first time… The maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac will rise to $1,089,300 next year in high-cost markets, such as parts of California and New York, from $970,800 this year, the Federal Housing Finance Agency said… For most parts of the country, loan limits will rise to $726,200 from a 2022 maximum of $647,200…”

Fixed-Income Watch:

November 30 – Bloomberg (Finbarr Flynn, Garfield Reynolds, Caleb Mutua and Tasos Vossos): “Global bonds rebounded in November, adding a record $2.8 trillion in market value, as investors bet that central banks are getting a grip on inflation. But how long the party lasts is another matter. Government and investment-grade corporate debt securities have risen to a market value of $59.2 trillion from $56.4 trillion at the end of October, making for the biggest monthly increase in a Bloomberg index stretching back to 1990.”

China Watch:

November 27 – Reuters (Martin Quin Pollard and Brenda Goh): “Chinese protesters have turned to blank sheets of paper to express their anger over COVID-19 restrictions in a rare, widespread outpouring of public dissent that has gone beyond social media to some of China’s streets and top universities. Images and videos circulated online showed students at universities in cities including Nanjing and Beijing holding up blank sheets of paper in silent protest, a tactic used in part to evade censorship or arrest.”

November 29 – Financial Times (Thomas Hale and Arjun Neil Alim): “Students at Beijing’s Tsinghua University gathered last weekend to vent their fury at China’s zero-Covid policies. But discontent on the campus was also bound up in the country’s economic direction. ‘Because of the lockdown[s], the economy stagnated, and my family’s financial situation also deteriorated,’ said a student… ‘If the economic situation is poor, it may be difficult for my parents to pay for my study abroad,’ she added. ‘The Covid policy will affect my future choices.’ Young people in China, who were at the heart of a nationwide wave of demonstrations…, face a bleak economic outlook. Youth unemployment this year touched its highest level on record. One of the clearest impacts has been on youth unemployment, which hit 20% in July shortly after the lockdown of Shanghai. It has remained close to that level for months…”

November 29 – Reuters (Martin Quin Pollard and Eduardo Baptista): “Chinese authorities have begun inquiries into some of the people who gathered at weekend protests against COVID-19 curbs, people who were at the Beijing demonstrations told Reuters, as police remained out in numbers on the city’s streets. Two protesters told Reuters that callers identifying themselves as Beijing police officers asked them to report to a police station… with written accounts of their activities on Sunday night. A student also said they were asked by their college if they had been in an area where a protest happened and to provide a written account. ‘We are all desperately deleting our chat history,’ said another person… The person said police asked how they heard about the protest and what was their motive for going.”

November 28 – Financial Times (Gideon Rachman): “In his 2021 New Year’s address, Xi Jinping boasted of the success of China’s zero-Covid policy. While millions had died in the outside world, China had ‘put people and their lives first… ’With solidarity and resilience, we wrote the epic of our fight against the pandemic’. Almost two years later, Xi’s campaign to portray China’s handling of the pandemic as a personal and systemic triumph is collapsing. Mounting demonstrations against his zero-Covid policies represent a massive loss of face for the Chinese leader. They look like the most serious challenge to his leadership since he took power a decade ago. Some of the protests against China’s unending lockdowns have taken aim at Xi personally. In the city of Chengdu, demonstrators have chanted: ‘We don’t want a leader for life political system. We don’t want an emperor.’”

November 28 – Financial Times (Edward White, Thomas Hale and Ryan McMorrow): “Xi Jinping faces one of his greatest challenges as president of China after tens of thousands of people took to the streets over Beijing’s strict coronavirus controls and suppression of freedom of speech. At least 10 cities, including Shanghai, Beijing, Wuhan and Chengdu, were shaken by rare political protests over the weekend, triggering clashes with police and security officers that led to a spate of detentions… The sudden outbreak of civil disobedience was sparked by outrage after a deadly apartment fire in Urumqi, Xinjiang… While most of the protests appeared to have been stamped out by Monday, they followed months of frustration, especially among China’s young people, with relentless lockdowns, quarantines, mass testing and electronic surveillance under Xi’s zero-Covid policies.”

November 28 – Financial Times (Tom Mitchell and Edward White): “In 2011, Xi Jinping, China’s then vice-president, told his US counterpart, Joe Biden, that the ‘Arab spring’ roiling north Africa and the Middle East happened because leaders across the region lost touch with their people. A decade later, and less than six weeks after Xi coasted to a third term as head of the Chinese Communist party and military, the president is in a quandary after repeating their mistake. Does Xi crack down on the nationwide protests that erupted against his administration’s ‘zero-Covid’ policy over the weekend, risking an even bigger popular backlash? Or does he relent and soften coronavirus controls, potentially unleashing an ‘exit wave’ of cases that could kill hundreds of thousands — if not millions — of elderly citizens over the coming winter?”

November 27 – Financial Times (Yuan Yang): “Every day, somewhere in China, there is a local protest going on. The country sees hundreds of strikes a year, from staff protesting over unpaid wages to gig economy workers demanding higher rates. What prevents these protests from reaching popular consciousness is that they almost always stay local and single-issue-based. They can be resolved quickly, then forgotten. The past few days of protests in China over the zero-Covid lockdowns are the opposite. They have been nationwide, broad-based, and combine popular anger over multiple issues in a manner unheard of since Tiananmen Square in 1989.”

November 30 – Bloomberg (Jacob Gu): “China’s top official in charge of the fight against Covid-19 said the country’s efforts to combat the virus are entering a new phase with the omicron variant weakening and more Chinese getting vaccinated, a fresh sign that Beijing may be seeking to amend its strategy. ‘As the omicron variant becomes less pathogenic, more people get vaccinated and our experience in Covid prevention accumulates, our fight against the pandemic is at a new stage and it comes with new tasks,’ outgoing Vice Premier Sun Chunlan said…”

December 2 – Reuters (Julie Zhu, Engen Tham and Jing Xu): “China has ordered its top four state-owned banks to issue offshore loans to help developers repay overseas debt, three people with knowledge… told Reuters, in Beijing’s latest support measure for the cash-starved property sector. The regulators have given the banks ‘window guidance’, or verbal orders that leave no paper trail, setting a date of Dec. 10 by which to make loans secured against domestic assets…”

December 1 – Reuters (Ziyi Tang and Ryan Woo): “Risks to the stability of China’s financial system are rising on continued sluggishness in its property sector and an economic slowdown, making smaller banks more vulnerable, rating agency Moody’s said… China’s property sector has slowed sharply this year… The clampdown has triggered falls in property investment, sales and prices, and a growing number of bond defaults. ‘Some buffers protecting the financial system are eroding, which would pose risks if the property downturn becomes protracted… Risks to the stability of China’s financial system are rising amid a contraction in the property sector and the country’s economic slowdown.’”

November 29 – Bloomberg: “China’s economic activity contracted further in November amid a record Covid outbreak, with growth likely to remain weak and the central bank expected to add more stimulus to bolster the recovery. The official manufacturing purchasing managers index fell to 48 this month…, the lowest reading since April and worse than an estimate of 49 in a Bloomberg survey… The non-manufacturing index, which measures activity in the construction and services sectors, declined to 46.7 from 48.7 in October, also lower than the consensus estimate of 48.”

November 30 – Bloomberg: “China’s home sales slump persisted in November, underscoring the challenge for policy makers as they seek to revive the embattled industry. The 100 biggest real estate developers saw new-home sales drop 25.5% from a year earlier to 559 billion yuan ($78.9bn) in November… That narrowed from a 28% decline in October.”

November 27 – Bloomberg: “China’s economic activity slumped in November and could drop further in coming weeks as Covid outbreaks spread across the country and protests against tighter virus restrictions escalate. Bloomberg’s aggregate index of eight early indicators showed a likely contraction in activity in November from an already subdued pace in October. With Covid cases spreading rapidly in each of China’s provinces now and major cities like Guangzhou, Beijing and Zhengzhou imposing new restrictions to limit residents’ movements, the outlook remains grim.”

December 2 – Reuters (Zhang Yan and Julie Zhu): “China Evergrande Group’s electric vehicle unit has suspended mass production of its only model due to a lack of new orders, two people with knowledge… said, in the latest set of troubles facing the indebted property developer.”

Central Banker Watch:

November 28 – Reuters (Balazs Koranyi): “Euro zone inflation has not peaked and it risks turning out even higher than currently expected, European Central Bank President Christine Lagarde said…, hinting at a series of interest rate hikes ahead. Her comments, along with remarks by Dutch central bank chief Klaas Knot earlier, were likely to dampen speculation that the ECB was about to take a gentler path with future rate increases.”

November 28 – Bloomberg (William Horobin and Cagan Koc): “European Central Bank Governing Council member Klaas Knot signaled that the cycle of interest-rate increases targeting record inflation isn’t close to ending. The Dutch central bank chief said that while the ECB’s projections see price growth easing to near the 2% target in 2024 from more than five times that at present, risks to the outlook ‘are entirely tilted to the upside.’ ‘In Europe, we have to prepare ourselves for a protracted period in which policy makers and central bankers will have to be on it and focus on restoring price stability,’ he said… He called any talk of over-tightening at this point ‘a bit of a joke.’”

Global Bubble Watch:

December 1 – Bloomberg (Liza Tetley): “UK house prices are falling more sharply than expected after a jump in borrowing costs quelled demand, Nationwide Building Society said. The mortgage lender said home prices fell 1.4% in November, the fastest drop since June 2020. Excluding the pandemic, prices haven’t fallen this sharply since the global financial crisis more than a decade ago.”

November 30 – Bloomberg (Matthew Brockett and Swati Pandey): “House prices in Australia and New Zealand are now lower than a year ago and likely to fall further as their central banks keep raising interest rates to try to gain control over inflation. New Zealand home values suffered their biggest annual drop in more than 13 years in November, falling 2.9% from a year earlier, while Australia’s fell 3.2%, CoreLogic data showed Thursday. Annual house-price moves turned negative in both countries in October following monthly declines for most of this year.”

November 27 – Bloomberg (Sam Kim): “South Korean house prices recorded the biggest decline in nine years as the central bank’s 16-month tightening cycle weighs on the property market, adding to credit concerns for policy makers. Nationwide home prices dropped 0.32% in November from a year earlier, while Seoul slid 0.12%…”

Europe Watch:

November 27 – Bloomberg (Giulia Morpurgo): “While much of Europe Inc. is shrinking state-backed loans from the pandemic, Italian companies are still sitting on mountains of such borrowings, complicating government efforts to help them surmount the latest crisis: soaring energy costs. Italian companies had a record $127 billion of Covid-era state-backed credit lines outstanding as of June 30, up from €118 billion in the previous quarter… The country has the most government-guaranteed debt yet to be repaid in the euro zone, even though it’s not the region’s largest economy.”

November 30 – Bloomberg (Craig Stirling): “Euro-zone inflation slowed for the first time in 1 1/2 years, offering a glimmer of hope to the European Central Bank in its struggle to quell the worst consumer-price shock in a generation. The reading for November was 10%…, less than the 10.4% median estimate… The drop, from 10.6% in October, was the biggest since 2020 and was thanks to slower advances in energy and services costs, even as food prices grew more quickly. ECB officials have highlighted the data as crucial for their judgment over whether to raise interest rates by 75 bps for a third straight time — an outcome that may now be less probable.”

EM Crisis Watch:

November 26 – Financial Times (Michael Stott): “Weak investment, low productivity and inadequate education have condemned Latin America to a period of economic failure even worse than the ‘lost decade’ of the 1980s, according to the top UN economic official in the region. José Manuel Salazar-Xirinachs, new head of the UN Economic Commission on Latin America and the Caribbean (ECLAC), said the stagnation of the past decade contrasted not only with the 5.9% annual growth of the 1970s but also the 2% achieved in the 1980s, a turbulent decade for Latin America characterised by a wave of debt crises. ‘This is terrible, this really ought to be a huge red light,’ he said of the descent into stagnation, with average annual economic growth in the decade to 2023 set to be just 0.8%.”

December 1 – Reuters (David Lawder): “The world’s poorest countries now owe $62 billion in annual debt service to official bilateral creditors, an increase of 35% over the past year, World Bank President David Malpass said…, warning that the increased burden is increasing the risk of defaults. Malpass told the Reuters NEXT conference… that two thirds of this debt burden is now owed to China…”

November 28 – Reuters (Marcela Ayres): “A broad measure of Brazilian consumer and business credit default ratios rose in October to its highest level in almost four years…, amid high borrowing costs and aggressive monetary tightening. The default ratio in non-earmarked loans increased to 4.2% from 4.1% in September, the highest since August 2018’s 4.22%. At the same time, bank lending spreads were up to 30.3% from 28.6% the month before.”

November 27 – Bloomberg (Cindy Wang and Catherine Ngai): “Taiwan stocks dropped on Monday, weighed by ruling party DPP’s resounding defeat in local elections and amid a broader selloff across Asia. The benchmark Taiex slid 1.5%… after opposition Kuomintang’s victory at the polls. The party, which favors eventual unification with China, held onto 13 seats at Saturday’s elections.”

Japan Watch:

December 1 – Bloomberg (Toru Fujioka and Sumio Ito): “Even one of the strongest easing advocates on the Bank of Japan’s board said that a shift in Japan’s long-held deflationary price norms is beginning to materialize… ‘We need a shift in inflationary norms, and green shoots are finally beginning to emerge toward it,’ board member Asahi Noguchi told reporters… ‘I don’t expect any abrupt policy shift with the current data, but it could of course come earlier than expected depending on what additional data will show.’”

November 29 – Reuters (Kantaro Komiya and Kaori Kaneko): “Japan’s factory output fell for a second consecutive month in October… The feeble business activity highlights challenges for the world’s third-largest economy, which has been lagging behind peers in recovering from the pandemic even as the government readies another stimulus package to counter 40-year-high inflation.”

Social, Political, Environmental, Cybersecurity Instability Watch:

December 1 – Washington Post (Josh Partlow): “The first sign of serious trouble for the drought-stricken American Southwest could be a whirlpool. It could happen if the surface of Lake Powell, a man-made reservoir along the Colorado River that’s already a quarter of its former size, drops another 38 feet down the concrete face of the 710-foot Glen Canyon Dam here. At that point, the surface would be approaching the tops of eight underwater openings that allow river water to pass through the hydroelectric dam… If that happens, the massive turbines that generate electricity for 4.5 million people would have to shut down… or risk destruction from air bubbles. The only outlet for Colorado River water from the dam would then be a set of smaller, deeper and rarely used bypass tubes with a far more limited ability to pass water downstream…”

December 1 – Bloomberg (Mark Chediak): “Drought-stricken California cities will get limited water supplies from the state next year, state officials said… Water agencies that supply 27 million people in the most populous US state will receive 5% of what they requested in 2023, according to an initial estimate from the California Department of Water Resources… The announcement comes as California has suffered through its driest three-year stretch on record, parching farmland, driving water prices to an all-time high and leaving some cities at risk of running out altogether.”

November 27 – Associated Press (Josh Funk): “Nebraska agriculture officials say another 1.8 million chickens must be killed after bird flu was found on a farm in the latest sign that the outbreak that has already prompted the slaughter of more than 50 million birds nationwide continues to spread.”

December 1 – CNBC (Emma Newburger): “Hurricane Ian, a category 4 Atlantic hurricane that struck Florida and South Carolina earlier this year, was the costliest catastrophe and the second-largest insured loss on record after Hurricane Katrina in 2005, according to… Swiss Re. Ian caused between $50 billion and 65 billion in insured damages after it made landfall in western Florida in late September with extreme winds and torrential rain. The storm surges and downpour hit a densely populated coastline during an otherwise tame hurricane season. The analysis found that extreme weather disasters… caused an estimated total economic loss of $260 billion in 2022, well above the 10 year-average of $207 billion. Insurance losses from catastrophes were also high, with estimated damages of $115 billion, higher than the 10-year average of $81 billion…”

November 26 – Financial Times (Ian Smith): “Property catastrophe reinsurance premiums are about to soar as some companies have been forced to leave the market after another year of extreme weather, the industry has warned. The market, which pays out for hurricanes and storms, has been hit hard because of rising costs to provide cover, with some groups reducing their exposure. In recent days, notes from rating agency Fitch and equity broker Peel Hunt have highlighted a significant fall in supply of reinsurance across the wider market, with catastrophe deals under particular pressure.”

November 26 – Financial Times (Aime Williams): “Record floods and droughts fuelled by the El Niño and La Niña phenomena around the globe, from Australia to west Africa and the US to Argentina, are expected to become further intensified by climate change by 2030, according to the latest scientific reports. A new study published in Nature concluded that the influence of a warming planet in pushing up ocean temperatures in the eastern Pacific will be detectable in the weather patterns in eight years — almost 70 years earlier than previously thought. The La Niña phenomenon, which involves a large-scale cooling of the Pacific Ocean’s surface, drives changes in wind and rainfall patterns around the world. Typically, the pattern drives more rain in parts of Asia, including Australia, and drier conditions in parts of the US, South America and Africa.”

Leveraged Speculation Watch:

December 1 – Bloomberg (Katherine Burton): “Bridgewater Associates erased most of the returns it notched through this year’s first three quarters, ruining what was shaping up to be the hedge fund giant’s best annual performance in more than a decade. The Pure Alpha fund tumbled 13.2% in the fourth quarter through Nov. 25, cutting its year-to-date gain to 6%… It had surged 22% through September…”

Geopolitical Watch:

November 27 – Reuters (Josh Smith): “North Korean leader Kim Jong Un said his country’s intends to have the world’s most powerful nuclear force as he promoted dozens of military officers involved in the recent launch of a new ballistic missile, state media reported… The announcement comes after Kim inspected a Nov. 18 test of the Hwasong-17, North Korea’s largest intercontinental ballistic missile (ICBM) and pledged to counter what he called U.S. nuclear threats.”

November 29 – Reuters (Soyoung Kim, Jack Kim and Josh Smith): “South Korean President Yoon Suk-yeol warned of an unprecedented joint response with allies if North Korea goes ahead with a nuclear test, and urged China to help dissuade the North from pursuing banned development of nuclear weapons and missiles… Yoon called on China, North Korea’s closest ally, to fulfil its responsibilities as a permanent member of the U.N. Security Council. He said not doing so would lead to an influx of military assets to the region.”

November 28 – Reuters (Josh Smith): “Canada launched its long-awaited Indo-Pacific strategy on Sunday, outlining spending of C$2.3 billion ($1.7bn) to boost military and cyber security in the region and vowed to deal with a ‘disruptive’ China while working with it on climate change and trade. The plan, detailed in a 26-page document, said Canada would tighten foreign investment rules to protect intellectual property and prevent Chinese state-owned enterprises from snapping up critical mineral supplies.”

November 29 – Financial Times (Kana Inagaki): “The UK and Japan have wound up their first military exercise in three years as commanders warn of ‘sharp destabilisation’ in the security environment caused by Russia’s invasion of Ukraine and an increasingly assertive China. The nine-day training operation to strengthen island defence, dubbed ‘Vigilant Isles 22’, is the latest sign of deepening defence ties between the two US allies in the Indo-Pacific.”

December 2 – Reuters (Takaya Yamaguchi and Yoshifumi Takemoto): “Japan is set to earmark 40 trillion to 43 trillion yen ($295bn-$318bn) for defence spending over five years starting in the next fiscal year, which begins in April… That would be a jump from the current five-year defence plan for spending 27.5 trillion yen, stoking worry about worsening one of the industrial world’s worst debt burdens, which amounts to twice the size of Japan’s annual economic output.”

Stay Ahead of the Market
Receive posts right to your in box.
May 17, 2024: Zhang Zhan
May 10, 2024: Citadel Securities vs. Jane Street
May 3, 2024: Instability
April 26, 2026: Opposite Day
April 19, 2024: World-Wide De-Risking/Deleveraging
April 12, 2024: Trouble Brewing in Financial Asset Wonderland
April 5, 2024: Global Ring of Fire
March 29, 2024: On Currency Watch Following Melt-Up Q1
Double your ounces without investing another dollar!