December 24, 2021: Just the Facts

MARKET NEWS / CREDIT BUBBLE WEEKLY
December 24, 2021: Just the Facts
Doug Noland Posted on December 24, 2021

For the Week:

The S&P500 rallied 2.3% (up 25.8% y-t-d), and the Dow rose 1.7% (up 17.5%). The Utilities were little changed (up 11.7%). The Banks gained 1.4% (up 34.1%), and the Broker/Dealers advanced 2.2% (up 29.5%). The Transports rose 2.3% (up 29.4%). The S&P 400 Midcaps jumped 2.5% (up 21.2%), and the small cap Russell 2000 surged 3.1% (up 13.5%). The Nasdaq100 advanced 3.2% (up 26.5%). The Semiconductors surged 4.6% (up 40.7%). The Biotechs increased 1.3% (down 1.6%). With bullion up $19, the HUI gold index jumped 2.5% (down 15.3%).

Three-month Treasury bill rates ended the week at 0.055%. Two-year government yields rose five bps to 0.69% (up 57bps y-t-d). Five-year T-note yields gained seven bps to 1.24% (up 88bps). Ten-year Treasury yields jumped nine bps to 1.49% (up 58bps). Long bond yields rose 10 bps to 1.91% (up 26bps). Benchmark Fannie Mae MBS yields gained six bps to 2.09% (up 74bps).

Greek 10-year yields jumped 13 bps to 1.32% (up 70bps y-t-d). Ten-year Portuguese yields gained 15 bps to 0.41% (up 38bps). Italian 10-year yields surged 22 bps to 1.11% (up 57bps). Spain’s 10-year yields jumped 17 bps to 0.51% (up 46bps). German bund yields gained 13 bps to negative 0.25% (up 32bps). French yields jumped 15 bps to 0.12% (up 46bps). The French to German 10-year bond spread widened two to 37 bps. U.K. 10-year gilt yields surged 17 bps to 0.93% (up 73bps). U.K.’s FTSE equities index gained 1.4% (up 14.1% y-t-d).

Japan’s Nikkei Equities Index increased 0.8% (up 4.9% y-t-d). Japanese 10-year “JGB” yields added two bps to 0.07% (up 5bps y-t-d). France’s CAC40 jumped 2.3% (up 27.7%). The German DAX equities index added 1.4% (up 14.9%). Spain’s IBEX 35 equities index rallied 3.0% (up 6.1%). Italy’s FTSE MIB index advanced 1.5% (up 21.5%). EM equities were mixed. Brazil’s Bovespa index fell 2.2% (down 11.9%), while Mexico’s Bolsa gained 0.9% (up 19.9%). South Korea’s Kospi index slipped 0.2% (up 4.8%). India’s Sensex equities index added 0.2% (up 19.6%). China’s Shanghai Exchange declined 0.4% (up 4.2%). Turkey’s Borsa Istanbul National 100 index sank 9.3% (up 28.1%). Russia’s MICEX equities index declined 0.6% (up 12.6%).

Investment-grade bond funds saw outflows of $2.778 billion, while junk bond funds posted inflows of $1.593 billion (from Lipper).

Federal Reserve Credit last week surged $66.7bn to a record $8.742 TN. Over the past 119 weeks, Fed Credit expanded $5.015 TN, or 135%. Fed Credit inflated $5.931 Trillion, or 211%, over the past 476 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.9bn to a one-year low $3.425 TN. “Custody holdings” were down $74.1bn, or 2.1%, y-o-y.

Total money market fund assets jumped $30.1bn to $4.666 TN. Total money funds increased $346bn y-o-y, or 8.0%.

Total Commercial Paper declined $3.7bn to $1.083 TN. CP was up $53bn, or 5.2%, year-over-year.

Freddie Mac 30-year fixed mortgage rates dropped seven bps to 3.05% (up 39bps y-o-y). Fifteen-year rates fell four bps to 2.30% (up 11bps). Five-year hybrid ARM rates dropped eight bps to 2.37% (down 42bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down six bps to 3.18% (up 25bps).

Currency Watch:

December 22 – Financial Times (Adam Samson, Laura Pitel and Ayla Jean Yackley): “Turkey’s foreign currency reserves have tumbled by billions of dollars since the start of the week, suggesting that aggressive interventions have aided the lira’s bounce back from record lows. The lira had fallen significantly following the latest series of interest rate cuts, but it turned sharply higher on Tuesday after President Recep Tayyip Erdogan unveiled a new savings scheme aimed at incentivising local residents to hold lira deposits. But at the same time, the country’s net foreign assets fell by $5.9bn in the first two days of this week to minus $5.1bn…”

December 20 – Bloomberg (Onur Ant and Firat Kozok): “The lira tumbled to another record low and stocks and bonds nosedived after Turkish President Recep Tayyip Erdogan pledged to continue cutting interest rates, referring to Islamic proscriptions on usury as a basis for his policy. ‘What is it? We are lowering interest rates. Don’t expect anything else from me,’ Erdogan said Sunday in televised comments… ‘As a Muslim, I’ll continue to do what is required by nas,’ he said, using an Arabic word used in Turkish to refer to Islamic teachings… Of course, we know the impact from price increases on people’s daily lives. We are of course aware of the instability caused by the lira’s fluctuations and its impact on prices… But we will put up resistance against these. I announce from here: there is no backing down.’”

December 21 – Bloomberg (Marcus Wong, Maria Elena Vizcaino and Tugce Ozsoy): “Turkey’s lira swung wildly after rallying nearly 50% this week, as investors weighed the sustainability of government measures to shore up the currency. The lira fell 7% after soaring as much as 20% against the U.S. dollar earlier on Tuesday. The whipsaw trading has made the currency the world’s most volatile, with a gauge of expected swings over the next year at a record high, showing traders are betting on more drama throughout 2022. The currency rocketed Monday in the biggest rally since 1983 after President Recep Tayyip Erdogan’s government said it planned measures including the introduction of a program to protect savings from the lira’s fluctuations.”

December 22 – Reuters (Tuvan Gumrukcu and Nevzat Devranoglu): “The Turkish currency was highly volatile again on Tuesday as traders digested measures proposed by President Tayyip Erdogan and the Turkish central bank to guard local currency savings against precisely such swings. The lira fell as much as 8.6% intraday on Tuesday and rose as much as 18.5% on its second-largest daily range, behind Monday’s record swings… One-month implied volatility on the lira, or expected price swings, jumped to the highest on record, reflecting uncertainty about the scheme.”

For the week, the U.S. Dollar Index declined 0.6% to 96.02 (up 6.8% y-t-d). For the week on the upside, the South African rand increased 2.2%, the Norwegian krone 2.0%, the Australian dollar 1.4%, the British pound 1.1%, the New Zealand dollar 1.0%, the Mexican peso 1.0%, the euro 0.7%, the Singapore dollar 0.7%, the Canadian dollar 0.6%, the Swiss franc 0.5%, and the Brazilian real 0.2%. For the week on the downside, the Japanese yen declined 0.7 and the South Korean won slipped 0.5%. The Chinese renminbi increased 0.12% versus the dollar (up 2.50% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index rallied 2.6% (up 26.7% y-t-d). Spot Gold gained 1.1% to $1,817 (down 4.3%). Silver recovered 2.9% to $23.02 (down 12.8%). WTI crude jumped $2.93 to $73.79 (up 52%). Gasoline rose 4.0% (up 56%), and Natural Gas recovered 1.1% (up 47%). Copper gained 2.3% (up 25%). Wheat surged 5.1% (up 27%), and Corn rose 2.1% (up 25%). Bitcoin rallied $4,659, or 10%, this week to $51,061 (up 76%).

Coronavirus Watch:

December 22 – Reuters (Paul Sandle): “The risk of needing to stay in hospital for patients with the Omicron variant of COVID-19 is 40% to 45% lower than for patients with the Delta variant, according to research by London’s Imperial College published… ‘Overall, we find evidence of a reduction in the risk of hospitalisation for Omicron relative to Delta infections, averaging over all cases in the study period,’ the researchers said of the study, which analysed data from PCR-test confirmed cases in England between Dec. 1 and Dec. 14.”

December 20 – Wall Street Journal (Sarah Toy): “The Omicron variant caused more than 70% of recent Covid-19 cases in the U.S., the Centers for Disease Control and Prevention said Monday, highlighting its substantial increase in infectiousness compared with earlier versions of the virus. The CDC said… Omicron had overtaken the Delta variant of the coronavirus in the U.S. and accounted for an estimated 73% of infections for the week ending Dec. 18. In many parts of the U.S., Omicron now makes up more than 90% of cases, the CDC said. Infectious-disease experts have said they believe the true share is likely even higher than that.”

December 21 – CNN (Michael Nedelman): “The US Centers for Disease Control and Prevention warns that the Omicron coronavirus variant could drive Covid-19 cases higher than ever before, according to modeling… ‘Current increases in Omicron cases are likely to lead to a national surge in the coming weeks with peak daily numbers of new infections that could exceed previous peaks,’ CDC says. Previously, cases peaked at their highest level in January 2021, with 7-day averages exceeding 250,000 new cases per day. Last week, the former director of the National Institutes of Health, Dr. Francis Collins, told CNN that ‘we might see hundreds of thousands of cases every day — maybe even a million cases in a day from Omicron.’”

December 19 – New York Times (Stephanie Nolen): “A growing body of preliminary research suggests the Covid vaccines used in most of the world offer almost no defense against becoming infected by the highly contagious Omicron variant. All vaccines still seem to provide a significant degree of protection against serious illness from Omicron… But only the Pfizer and Moderna shots, when reinforced by a booster, appear to have initial success at stopping infections… The other shots — including those from AstraZeneca, Johnson & Johnson and vaccines manufactured in China and Russia — do little to nothing to stop the spread of Omicron… And because most countries have built their inoculation programs around these vaccines, the gap could have a profound impact on the course of the pandemic.”

December 22 – Wall Street Journal (Chip Cutter, Douglas Belkin and Ruth Simon): “Businesses, schools, hospitals and governments are preparing for a new year with a sense of déjà vu, as the spread of Covid-19’s Omicron variant brings a familiar challenge: how best to navigate another surge. This time, they’re hopeful they can stay open and operating. In the short term, many big employers have delayed plans to reopen their offices in January. Some universities and schools in the U.S. have switched, temporarily, to remote instruction. Professional sports leagues have canceled games. Governments in Europe and Asia are imposing travel restrictions. And major events in January, such as the annual gathering of world leaders and chief executives in Davos, Switzerland, are being put off.”

December 23 – CNBC (Lauren Feiner): “Hospitals across the country are bracing for another wave of Covid-19 cases that promises to be just as bad, if not worse, than the early days of the pandemic. But this time, they are facing it with fewer nurses; and the staff that remains is exhausted after almost two years of fighting Covid. The health-care industry lost 450,000 workers from February 2020 through November, mostly nurses and residential-care employees… What’s more, the highly mutated and contagious omicron variant can more easily infect vaccinated employees than previous strains. That threatens to further exacerbate the staffing shortage by sending workers home to isolate, even if they have mild or no symptoms.”

December 19 – Wall Street Journal (Melanie Evans and Jon Kamp): “Many hospitals have few beds available to handle an influx of Omicron-driven cases, because their intensive-care units are flooded with patients needing urgent care for serious conditions such as heart disease and cancer as well as the Delta variant. The risk hospitals will be overrun is increased by widespread staffing shortages, hospital executives said. Dr. Anthony Fauci… warned on Sunday that the fast-moving Omicron variant will likely strain U.S. hospitals… Nationwide, 92 cities had hospitals with average intensive-care occupancy at 100% or more earlier this month, according to the most recent data from the University of Minnesota Covid-19 Hospitalization Tracking Project.”

December 21 – Bloomberg (Lauren Coleman-Lochner): “The U.S. health-care profession is suffering its own Great Resignation, pushing more hospitals into financial distress just as a winter surge of the coronavirus hits. Across the country, hospitals are buckling under the strain of nursing shortfalls and the spiraling cost of hiring replacements. For Watsonville Community Hospital on California’s Central Coast, those costs became too much to bear, and contributed to the facility’s bankruptcy this month…”

Market Mania Watch:

December 22 – Wall Street Journal (Mark Maurer): “Sitting atop a haul of strong earnings, companies are planning to spend even more in 2022 on share buybacks and dividends, a trend finance executives don’t expect to slow… Many companies have bounced back from the blow dealt by the coronavirus pandemic and are in a period of hale growth, giving them ample leeway to reward their shareholders, said Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices… ‘Most of the companies have significant cash-flow positions right now,’ he said. ‘There’s enough cash to do almost anything.’ Companies in the S&P 500 held $3.78 trillion in cash and cash equivalents at the end of the third quarter, up from $3.41 trillion a year before and $2.19 trillion from the 2019 period… For the year about to close, share repurchases at companies in the S&P 500 are expected to have hit an estimated record of $850 billion, up 63.6% from last year… and 16.6% from 2019. In the third quarter of this year, buybacks topped $234.6 billion, exceeding the previous $223 billion record, set in the fourth quarter of 2018.”

December 21 – Bloomberg (Jess Menton): “U.S. companies bought back their own shares at a blistering pace in the third quarter, dwarfing the amount spent on key investments to help generate growth. Share repurchases more than doubled from a year earlier for S&P 500 companies to an all-time high of $234.6 billion, according to… S&P Dow Jones Indices. Meanwhile, capital expenditures increased 21% to $189 billion, which is still down 3% from the final three months of 2019 before the pandemic shutdown the economy.”

December 21 – Yahoo Finance (Brian Cheung): “Since the pandemic began, the nation’s central bank has aggressively printed trillions of dollars to keep the U.S. economy afloat. Doing so has ballooned the Federal Reserve’s balance sheet to nearly $9 trillion. Fed officials, acknowledging the rising risks posed by inflationary pressures, are now starting to think about whether or not they can move to shrink the central bank’s holdings next year. ‘I have no idea what a normal balance sheet looks like anymore,’ said Federal Reserve Governor Christopher Waller…”

December 22 – Bloomberg (Crystal Tse and Katie Roof): “Initial public offerings have enjoyed legend status as the asset class that outperforms. Not in 2021. More than half of this year’s 481 U.S. IPOs are trading below their offer prices… These deals, excluding an even longer list of special purpose acquisition companies, collectively set a record of about $167 billion, easily beating 2020. Despite the historic volume, enthusiasm for IPOs has waned at the back end of the year because of volatility and lackluster performances. Though the first quarter of 2022 looks to be busy, expect a volatile year ahead, dealmakers say.”

December 22 – Bloomberg (Will Louch and Benjamin Robertson): “A record number of private equity firms went public this year as deal-savvy buyout executives took advantage of a booming market for initial public offerings — a trend that looks set to continue into 2022. Six private equity firms went public in 2021, Dealogic data show, equalling the combined total of the previous five years. Collectively, the firms raised nearly $3 billion, almost double the previous record set two years ago… Private capital firms have been among the biggest winners in the finance sector over the past decade as institutional investors like pension plans and sovereign wealth funds have plowed billions into the asset class in the search for yield.”

December 21 – Bloomberg (James Tarmy): “In 2021, at least 40 residential properties sold for more than $50 million in the U.S., according to… appraiser Miller Samuel. That’s about a 35% increase over 2020, which was also a record year. ‘The surge in this tier is unprecedented,’ says Jonathan Miller, the company’s president… ‘We’ve never seen this kind of growth.’ Fueled by a booming stock market, low interest rates, and a pandemic-era’s heightened emphasis on home life, prices for luxury houses have risen to stratospheric heights across the country. ‘It’s a national phenomenon,’ says Miller. ‘Not enough words have been written on the impact of low rates, even on the über-wealthy. And one big takeaway in housing is: The lower the rates, the higher the prices. And this is that phenomenon on steroids.’”

December 20 – CNBC (Robert Frank): “The Big Three auction houses hit a record $15 billion in sales this year, as a surge in global wealth and a wave of young, first-time collectors drove sales of everything from Basquiats to Birkin bags. Christie’s… reported total sales of $7.1 billion for 2021, the highest total in five years. Sotheby’s earlier reported total sales of $7.3 billion, its best showing in the company’s 277-year history… The auction records highlight the surge in global wealth during the pandemic, as government stimulus, central bank easing, soaring asset prices and a rebound in consumer demand created a massive wave of liquidity for wealthy buyers. The boom in crypto and online stock trading also spawned a new generation of young, wealthy collectors who started buying everything from art and classic cars to luxury goods, wine, watches and diamonds online.”

Market Instability Watch:

December 23 – Financial Times (Colby Smith and Eric Platt): “US financial conditions are near the most accommodative on record, even as the Federal Reserve has begun stepping up its exit from coronavirus crisis-era stimulus measures in a bid to battle elevated inflation. Measures of financial conditions have only marginally tightened since last week’s Fed meeting, according to economists at Goldman Sachs, who produce a closely followed index that takes into account the shifts in the US stock market, borrowing costs for companies, moves in the dollar and funding costs for the US government. Despite the hawkish pivot, US stocks have stayed buoyant around record-high levels, while yields on US Treasuries remain stubbornly low compared with their historic norms.”

Inflation Watch:

December 19 – Financial Times (Brooke Masters and Andrew Edgecliffe-Johnson): “All over the world, companies have encountered snags in their supply chains during the pandemic and the shipping bottlenecks that have followed as economies restarted. Car production lines have been halted by a lack of semiconductors, liquor distillers have run out of bottles and department stores are short of Christmas stock. Such troubles are forcing a rethink of corporate strategy. For decades, companies prioritised costs above all else when selecting suppliers, building factories and deciding how much stock to keep on hand. This philosophy was often dubbed ‘just in time’ because it emphasised keeping inventory to a minimum and using short-term, flexible contracts that could be adjusted quickly to changes in demand… ‘A lot of the operating models in the supply chains we see as broken today, were cemented 20 years ago on what at the time were universal truths, that going after low-cost suppliers . . . made a tonne of sense,’ says Brian Higgins, head of KPMG’s US supply chain and operations practice. ‘It lends itself to these very long supply chains because they are [focusing on] cost, not risk. We’ve seen that fracture many, many times.’”

December 21 – Wall Street Journal (David Harrison and Sarah Chaney Cambon): “The COLA is making a comeback. Higher prices, a worker shortage and a revitalized labor movement are bringing about the return of pay increases tied to inflation, known as cost-of-living adjustments, or COLAs. On Tuesday, striking workers at food maker Kellogg Co. ratified a contract that included a COLA, the second major labor agreement in recent weeks to feature such pay adjustments. Analysts say COLAs could spread in future negotiations between employers and unions. Under a COLA, a worker’s pay rises to compensate for the increase in consumer prices. The idea is to protect wages in times when consumer prices are rising rapidly and unpredictably.”

December 23 – Wall Street Journal (Jesse Newman and Jaewon Kang): “Schools are running low on food from soup to cereal after some manufacturers reduced offerings or limited orders after struggling to meet demand. Across the U.S., schools are hunting for staples for breakfast and lunch from soup to bacon to pizza, according to distributors, nonprofits and school districts. J.M. Smucker Co. ’s popular Uncrustables sandwiches have been in short supply for some schools. Others are tight on cereal following a monthslong strike at Kellogg Co. ’s cereal plants. The challenges come as some food manufacturers facing supply disruptions and labor shortages have curtailed shipments to schools and other institutions.”

December 19 – Wall Street Journal (Ryan Dezember): “Lumber prices have shot up again in a rise reminiscent of a year ago, when high-climbing wood prices warned of the hinky supply lines and broad inflation to come. Futures for January delivery ended Friday at $1,089.10 per thousand board feet, twice the price for a prompt delivery in mid-November… Pricing service Random Lengths said that its framing composite index, which tracks on-the-spot sales, has jumped 65% since October, to $915. A $129 gain this week was the biggest on record, eclipsing a $124 jump in May, when lumber prices crested at all-time highs.”

December 20 – Associated Press (Anne D’Innocenzio): “Emarilis Velazquez is paying higher prices on everything from food to clothing. Her monthly grocery bill has ballooned from $650 to almost $850 in recent months. To save money, she looks for less expensive cuts of meat and has switched to a cheaper detergent… For the holidays, she’s scaling back on gifts. She plans to spend $600 on her three young children instead of $1,000, and she won’t be buying any gifts for relatives… Retailers may be forecasting record-breaking sales for the holiday shopping season, but low-income customers are struggling as they bear the brunt of the highest inflation in 39 years.”

Biden Administration Watch:

December 22 – Reuters (Spencer Kimball): “The White House will deploy 1,000 military medical personnel to support hospitals facing a surge of patients infected with Covid this winter, and will purchase 500 million at-home tests that Americans can order online for free with delivery beginning in January, according to senior administration officials. President Joe Biden will announce the plan in a speech later Tuesday addressing how the administration is preparing for the highly contagious omicron variant of Covid-19. Biden warned last week that the unvaccinated face a winter of ‘severe illness and death,’ calling on them to get immunized and to receive a booster shot to protect their health.”

December 22 – Associated Press (Lisa Mascaro and Farnoush Amiri): “President Joe Biden appeared determined… to return to the negotiating table with Sen. Joe Manchin… Biden, responding to reporters’ questions at the White House, joked that he holds no grudges against the conservative West Virginia senator whose rejection of the social services and climate change bill stunned Washington just days ago. Instead, the president spoke passionately about the families that would benefit from the Democrats’ ambitious, if now highly uncertain, plan to pour billions of dollars into child care, health care and other services. ‘Sen. Manchin and I are going to get something done,’ Biden said… Manchin essentially crushed Biden’s sweeping policy measure in the 50-50 Senate, siding with all Republicans who oppose the bill.”

December 20 – Reuters (Susan Heavey and Moira Warburton): “The U.S. Senate will vote early next year on President Joe Biden’s sweeping $1.75 trillion policy bill as well as on voting rights, the chamber’s top Democrat said…, despite conservative Democratic Senator Joe Manchin’s opposition. Senate Majority Leader Chuck Schumer unveiled plans for both votes on Monday, the day after Manchin — who has stood as a roadblock to many Biden policies in the evenly divided chamber — said in a television interview that he would not vote for the “Build Back Better” bill, dealing it a potentially fatal blow.”

December 23 – Bloomberg: “When the trade deal between China and the U.S. was signed in January 2020, there was some hope it would lead to a reduction in bilateral tensions and restore some balance to trade, but those goals are proving elusive as 2021 comes to a close. In the 23 months since then-President Donald Trump signed the phase-one agreement, Chinese imports from the U.S. have indeed hit a new record. However, as of the end of last month Beijing was well behind on promises made — buying little more than 59% of the extra $200 billion in manufactured, agricultural and energy goods it said it would by the end of 2021.”

Federal Reserve Watch:

December 23 – New York Times (Jeanna Smialek): “The Fed’s preferred inflation gauge, the Personal Consumption Expenditures index, climbed 5.7% in November from a year earlier. Federal Reserve policymakers are finishing a year that has been colored by surprisingly high inflation with yet another piece of bad news: The price measure they follow most closely touched its highest level since 1982. The Personal Consumption Expenditures price index, which is the one the Fed officially targets when it aims for 2% annual inflation on average over time, climbed 5.7% in November from a year earlier… Part of the jump owed to gasoline prices… but a so-called core index that strips out food and fuel prices also increased sharply, to 4.7%. The sharp run-up in inflation this year, and the fact that it has lingered, leaves policymakers and economists trying to assess what will happen in 2022.”

U.S. Bubble Watch:

December 21 – Wall Street Journal (Tom Fairless): “A booming U.S. economy is rippling around the world, leaving global supply chains struggling to keep up and pushing up prices. The force of the American expansion is also inducing overseas companies to invest in the U.S., betting that the growth is still accelerating and will outpace other major economies. U.S. consumers, flush with trillions of dollars of fiscal stimulus, are snapping up manufactured goods and scarce materials. U.S. economic output is set to expand by more than 7% annualized in the final three months of the year, up from about 2% in the previous quarter, according to early output estimates published by the Federal Reserve Bank of Atlanta.”

December 20 – Bloomberg (Rich Miller and Mike Dorning): “The U.S. economy will spend 2022 learning to live with the coronavirus without much in the way of help from the Federal Reserve or the federal government — especially with the derailing of President Joe Biden’s $1.75 trillion spending plan. The Fed’s pivot last week toward tighter credit — ending its emergency bond-buying program in March to pave the way for higher interest rates — comes on top of a rollback in government spending programs put in place at the height of the pandemic. The fiscal squeeze will be even bigger if Democrats cannot salvage Biden’s social-spending package in the face of opposition from a key moderate senator.”

December 23 – Bloomberg (Reade Pickert): “U.S. consumer spending, adjusted for inflation, stagnated in November as the fastest price gains in nearly four decades eroded purchasing power. Purchases of goods and services, after adjusting for higher prices, were little changed following a 0.7% gain in October… The personal consumption expenditures price gauge, which the Federal Reserve uses for its 2% inflation target, increased 0.6% from a month earlier and 5.7% from November 2020, the highest reading since 1982.”

December 22 – Wall Street Journal (Nicole Friedman): “Existing-home sales, which rose in November to the highest seasonally adjusted annual rate since January, are on track for their strongest year since 2006 as low mortgage-interest rates and a robust job market drive up demand. Sales of previously owned homes rose 1.9% in November, climbing for the third straight month… The booming housing market comes against a backdrop of an economy that is growing but facing pressure from high inflation and worries about the Omicron variant of the coronavirus.”

December 20 – Reuters (Karen Pierog): “Home sales across the United States are expected to end 2021 up 7.1%, but are forecast to decline over the next two years as limited supply, along with higher mortgage rates and prices, cool the residential real estate market, Fannie Mae said… The government-sponsored enterprise’s Economic and Strategic Research Group raised its 2021 home sales growth projection from a prior 5.3%, citing an expected strong year-end surge in home buying. A 7.1% increase would be just under 2020’s 7.3% jump.”

December 22 – Bloomberg (Adriana Belmonte): “The dysfunction of the U.S. health care system is continuing to place a major burden on U.S. households, especially those from vulnerable communities… Data from July showed that 18% of Americans hold medical debt that has been sent to collection agencies. And according to a new West Health-Gallup 2021 Healthcare in America Report, 30% of Americans reported deferring medical care in the prior three months due to cost, a figure that has tripled since March 2021.”

December 23 – CNBC (Robert Exley Jr.): “Being a millionaire may not be as rare as you think. There are nearly 22 million people in the U.S. with enough assets to fit the definition, according to a 2021 study by Credit Suisse.”

December 22 – Bloomberg (Christine Maurus): “Manhattan’s luxury-home market is coming to the end of its best year on record. There were 1,877 contracts signed at $4 million and above this year, the most in data going back to 2006, brokerage Olshan Realty Inc. said… That was almost three times the number of deals in 2020 and twice as many as in 2019. The totals for both contracts and dollar value — $15.9 billion — were nearly 30% more than the highest years of 2013 to 2015…”

Fixed-Income Bubble Watch:

December 23 – Wall Street Journal (Heather Gillers): “Municipal bond investors are piling into exchange-traded funds, attracted by low costs and the ability to trade quickly. Muni ETFs held $80 billion as of the end of the third quarter, up from less than $50 billion two years ago, Federal Reserve data shows. Citigroup projects they will hold $125 billion by December 2022. Investors this year spent record amounts of cash buying shares in all types of ETFs, baskets of securities that trade as easily as stocks and typically track indexes.”

China Watch:

December 22 – Wall Street Journal (Louise Radnofsky, Rachel Bachman and Ben Cohen): “The Winter Olympics in China in six weeks have problems. They’re in the winter. They’re in China. And they’re in six weeks. The explosive spread of the highly contagious Omicron variant of the coronavirus is quickly presenting one of the most complicated possible Covid-19 scenarios for the 2022 Beijing Games. Thousands of athletes from dozens of countries are on course to head to the place where the pandemic began almost exactly two years ago but which has yet to experience this wave. Hundreds of those athletes could contract the variant by the Feb. 4 opening ceremony, in spite of being vaccinated, previously infected or both. Few will likely be seriously ill. But their positive test results stand to upend training and selection for the Games—and could prevent some of them leaving at all for a Games built around a ‘Covid zero’ approach to snuffing out all traces of the virus.”

December 22 – Reuters (Gabriel Crossley and Roxanne Liu): “China’s strict COVID-19 policy is weighing on consumption and rattling foreign firms, but its effectiveness and the imperative to maintain stability heading into a sensitive year mean Beijing will stick to its approach, experts say… Avoiding major outbreaks is especially critical in a year when Beijing hosts both the Winter Olympic Games and the once-every-five-years Communist Party Congress, where President Xi Jinping is expected to clinch a third term as party secretary. Beijing has been eager to burnish its record on tackling COVID-19, which a government white paper has described as among the “most important achievements” of its governance model – and often points out the high death tolls elsewhere, especially the United States.”

December 23 – Reuters (Roxanne Liu, Stella Qiu, Albee Zhang and Ryan Woo): “Rising COVID-19 infections in China’s city of Xian have spurred a lockdown of its 13 million residents, with stretches of highway eerily bare on Thursday, as many people queued in the cold to get their noses swabbed at testing sites… The daily count of domestically transmitted infections with confirmed symptoms in the northwestern city, famed for its terracotta warriors buried with China’s first emperor, has increased for six straight days since Dec. 17.”

December 23 – Bloomberg: “The finances of Chinese households are becoming increasingly stretched, with people increasingly turning to consumer loans to supplement incomes which are growing slower than spending. The repayment burdens of that debt are growing rapidly, according to new research from an influential Beijing-based think tank, and that is weighing on people’s ability to consume and buy homes. New loans are now the second-largest source of income, worth even more than social security payments, according to… China Finance 40 Forum that analyzed data between 2008 and 2019.”

December 20 – CNBC (Evelyn Cheng): “China’s central bank cut a benchmark lending rate on Monday for the first time since April 2020, during the height of the coronavirus pandemic in the country. The People’s Bank of China lowered the one-year loan prime rate to 3.8%, down from 3.85%… The last time the central bank cut the one-year and five-year LPR was in April 2020… The LPR affects lending rates for corporate and household loans.”

December 19 – Bloomberg: “December is poised to be a record month for Chinese offshore corporate defaults after missed payments by indebted companies including China Evergrande Group and Kaisa Group Holdings Ltd. Chinese firms have defaulted on a record $3.8 billion in offshore bonds so far this month, data compiled by Bloomberg show. The previous monthly high was in January when Chinese borrowers failed to repay $2.7 billion of such notes.”

December 22 – CNBC (Evelyn Cheng): “China’s struggling real estate developers face a growing number of repayment deadlines in the next few months. Real estate giant China Evergrande finally defaulted earlier this month without immediately sparking the widespread contagion that global investors had worried about. But the amount of debt and bills the industry faces will only grow in coming months. Chinese developers face $19.8 billion in maturing offshore, U.S.-dollar denominated bonds in the first quarter, and $18.5 billion in the second, estimates Nomura analysts Ting Lu and Jing Wang. That first-quarter amount is nearly double the $10.2 billion in maturities of the fourth quarter, the analysts said…”

December 20 – Financial Times (William Langley): “Evergrande’s slow-motion collapse reverberated through China’s property sector on Monday, as property stocks tumbled despite assurances from Beijing it would support ‘quality’ companies. Shares of Chinese Estates Holdings… dropped as much as 35.2% after a bid to take the company private and reduce its exposure to Evergrande failed. The group, controlled by the family of Hong Kong billionaire Joseph Lau, had been a significant investor in the world’s most indebted developer and its other ventures, including its electric vehicle unit.”

December 23 – Bloomberg (Sofia Horta e Costa): “After a difficult 2021, Chinese property firms have the toughest month yet ahead of them. On top of increasing offshore bond bills, developers and their contractors need to pay 1.1 trillion yuan ($173bn) in deferred wages to migrant construction workers by the end of the Lunar Year, according to Nomura… In 2022, that falls on Jan. 31. Beijing has made it clear that failing to pay workers on time is not an option given the risk of unrest just before the Beijing Winter Olympics. ‘Of all types of debt, developers and their construction partners are especially under pressure for repaying deferred wages, because failing to do so could trigger social instability,’ wrote Nomura economists Ting Lu and Jing Wang…”

December 22 – Financial Times (Andy Lin and Thomas Hale): “Chinese property developers have been hit by record numbers of downgrades from international credit rating agencies this year, as Evergrande’s collapse fuels concerns over the health of China’s economy… Moody’s, Fitch and S&P downgraded Chinese developers’ ratings 43, 54 and 30 times, respectively, in 2021, compared with six, 12 and 11 in 2020, adding further pressure on their ability to refinance offshore debt during a housing slowdown.”

December 20 – Reuters (Edmond Ng and Sara Cheng): “Pro-Beijing candidates swept to victory in an overhauled ‘patriots’-only legislative election in Hong Kong that critics described as undemocratic, with turnout hitting a record low amid a crackdown on the city’s freedoms by China. The 30.2% turnout, about half that of the previous poll in 2016, was seen by pro-democracy activists as a rebuke to China after it imposed a broad national security law and sweeping electoral changes to bring the city more firmly under its authoritarian grip. Almost all seats were taken by pro-Beijing and pro-establishment candidates…”

Central Banker Watch:

December 19 – Financial Times (Patrick Jenkins): “It is a year since Andy Haldane, then the Bank of England’s chief economist, delivered a lecture to the UCL Economist’s Society, extolling the virtues of independent central banks. But his words are sounding more resonant than ever. ‘Governments had a natural tendency to overinflate their economies, especially around election time,’ he said, explaining that the ‘inflation bias’ that helped cause runaway prices in the 1970s then spurred a fashion for central bank independence. Today, close to 90% of the world’s central banks are classed as independent. But, as finance ministers wrestle with record debt burdens, the Covid-19 crisis and fast-rising inflation, worries are growing that central banks will become increasingly instrumentalised by governments.”

December 20 – Bloomberg (Alexander Weber and Birgit Jennen): “Germany’s new coalition government picked Joachim Nagel, a former Bundesbank senior official, as the central bank’s next chief, touting his ability to help tackle soaring inflation. Nagel, 55, will succeed Jens Weidmann, who leaves at the end of the year. The choice of a veteran for the top job suggests there’ll be no major shift in stance at an institution hallowed within Germany for its role in reasserting price stability during the second half of the 20th century. ‘Considering the risk of inflation, stability-oriented monetary policy is of increasing significance,’ Finance Minister Christian Lindner said… ‘This is an experienced personality who will ensure continuity at the Bundesbank.’”

Global Bubble Watch:

December 20 – Reuters (Anirban Sen, Pamela Barbaglia, and Kane Wu): “Global merger and acquisition (M&A) activity shattered all-time records in 2021, comfortably erasing the high-water mark that was set nearly 15 years ago, as an abundance of capital and sky-high valuations fuelled frenetic levels of dealmaking. The value of M&A globally topped $5 trillion for the first time ever, with volumes rising 63% to $5.63 trillion by Dec. 16, according to Dealogic data, easily surpassing the pre-financial-crisis record of $4.42 trillion in 2007. ‘Corporate balance sheets are incredibly healthy, sitting on $2 trillion of cash in the U.S. alone — and access to capital remains widely-available at historically low costs,’ said Chris Roop who co-heads North America M&A at JPMorgan…”

EM Watch:

December 22 – Reuters (Orhan Coskun): “Turkey’s Treasury was working last week on an ambitious but risky plan to reverse a crash in the currency that would only be launched if it crossed the ‘absurd’ threshold of 18 to the dollar, according to four people with knowledge of discussions. The team of Treasury bureaucrats decided that lira depreciation beyond that level would damage the economy in ways that are ‘hard to repair’, one senior Turkish official told Reuters, so they needed a scheme to avoid that if needed. Two other officials said the idea – to provide a government guarantee against FX losses on lira deposits – was also floated in the midst of the last currency crisis in 2018, but it was shelved at the time due to risks. By Monday, President Tayyip Erdogan’s government pulled the trigger on the latest plan – just hours after the lira spiralled beyond 18 for the first time to a record low of 18.4 versus the U.S. currency.”

December 23 – Financial Times (Laura Pitel and Funja Guler): “Within hours of President Recep Tayyip Erdogan announcing a new scheme that promised to guard savers from volatility in the value of the Turkish lira, the state-owned Halkbank began urging its customers to put their faith in the national currency. In a slickly produced advert, set to rousing Ottoman-inspired music, a well-known television actor walks a young friend through a museum exhibition and tells him that, just as the Turkish flag, the Turkish language and the parliament represent the country’s pride, ‘the Turkish lira is our power’… On the streets of Ankara, the nation’s capital, Turks were unsure about the two new state-backed financial products, the government’s latest plan to bolster their battered currency.”

December 22 – Bloomberg (Tugce Ozsoy): “This week’s historic rally in the Turkish lira has done little to comfort investors in the country’s stock and bond markets. Five-year credit-default swaps, a measure of Turkey’s debt risk, remain near a 16-month high… Investors are paying more to insure themselves against a default by Turkey than for Iraq, whose debt is rated two steps lower by both Moody’s… and S&P Global… The nation’s benchmark equity index, which closed in a bear market and completed its steepest four-day decline in more than two decades, is sending equally worrying signals. President Recep Tayyip Erdogan’s measures, which promised investors protection from the currency’s gyrations, are raising concern over the impact on the nation’s fiscal position.”

December 23 – Bloomberg: “Turkish net foreign assets fell by nearly $6 billion early this week as President Recep Tayyip Erdogan unveiled plans to bolster the lira, suggesting Turkey made unannounced interventions in foreign-exchange markets. While the government has said it didn’t intervene, the fall of $5.9 billion probably signals a backdoor intervention similar to operations carried out over two years from October 2018, when state lenders sold dollars to support the local currency.”

December 20 – Bloomberg (Eduardo Thomson): “Now that he’s won the election, Chile President-elect Gabriel Boric will turn his attention to forming a cabinet that tries to satisfy allies and voters while not further alienating nervous investors who’ve been dumping assets. The economic scenario faced by the most left-wing president in Chile since Salvador Allende in the early 70s is far from simple. The country’s central bank forecasts that growth next year will come to a halt, plunging from near 12% this year to as low as 1.5%, as the pandemic stimulus is withdrawn. The next government needs to address a fiscal deficit that has swelled to almost 12% of gross domestic product.”

December 20 – Reuters (Lisandra Paraguassu and Stephen Eisenhammer): “Brazil’s former President Luiz Inacio Lula da Silva, who is currently leading in the polls ahead of next year’s election, said if reelected he would seek to build a broad range of alliances in a bid to unite a deeply polarized country… The 76-year-old former union leader promised to more fairly distribute wealth under a Workers Party government, and stressed the need to get rich Brazilians to pay more tax. He also vowed to regain Brazil’s international credibility, damaged by President Jair Bolsonaro. A South American trade deal with the European Union would be a priority, he said, as would strengthening ties with the United States and China.”

Europe Watch:

December 20 – Reuters (William James and Kylie Maclellan): “British Prime Minister Boris Johnson said on Monday he would tighten coronavirus curbs to slow the spread of the Omicron variant if needed, after the Netherlands began a fourth lockdown and as other European nations consider Christmas restrictions. Speaking after UK media reported Britain might impose new curbs after Christmas, Johnson said the situation was ‘extremely difficult’ and hospitalisations were rising steeply in London.”

December 21 – New York Times (Patricia Cohen and Melissa Eddy): “‘You could feel Christmas was coming,’ Amanda Whiteside, a manager at Gordon’s Wine Bar in London, said of the crowds and buzz. ‘And then it was gone.’ Throughout Britain and in other parts of Europe, new government restrictions combined with heightened anxiety over the highly contagious Omicron variant of the coronavirus have drastically reduced business at restaurants, pubs, event venues and stores, prompting urgent calls for additional government assistance.”

December 21 – Bloomberg (Isis Almeida, Anna Shiryaevskaya and Todd Gillespie): “This year’s energy crunch is threatening to derail Europe’s economic recovery as gas and electricity costs soar to fresh records. Prices surged more than 20% on Tuesday after Russia curbed gas flows to Europe and France, usually a power exporter, was forced to boost electricity imports and burn oil to keep the lights on. Higher costs have forced some companies to shut down or curb output… The energy crunch is deepening just as the coronavirus omicron variety spreads across Europe, darkening the region’s economic outlook. Costs are also adding to supply-chain snarls… ‘It’s not only the cost of energy that’s a problem right now, we have all these supply-chain issues,’ said Anne-Sophie Corbeau, a research scholar at the Center on Global Energy Policy at Columbia University. ‘Eating and heating are very important things. Right now, a lot of people might have problems with heating, but you might have problems with eating because fruit and vegetables are expensive. Everything is becoming quite expensive.’”

December 22 – Bloomberg (Todd Gillespie, Jesper Starn, and Isis Almeida): “European power climbed to a fresh record as France faces a winter supply crunch, with heavy industries forced to curb production across the region. Electricity for delivery next year jumped to an all-time-high in both Germany and France… France, facing outages at nuclear plants, will need to suck up supplies instead of exporting power to neighboring countries. The situation is so severe that it is forcing factories to cut output or shut down altogether. Aluminium Dunkerque Industries France has curbed production in the past two weeks due to high power prices, while Trafigura Group’s Nyrstar will pause its zinc smelter in France in the first week of January. Romanian fertilizer producer Azomures SA temporarily halted output.”

Japan Watch:

December 23 – Bloomberg (Yuko Takeo, Grace Huang and Takashi Hirokawa): “Japan is set to unveil another record annual budget this week as Prime Minister Fumio Kishida adds to the world’s heaviest debt load with more spending ahead of an election next summer. The budget for the year starting in April will increase to around 107.6 trillion yen ($943bn)…”

Social, Political, Environmental, Cybersecurity Instability Watch:

December 21 – Reuters (Kanishka Singh): “The United States’ population grew at a slower rate in 2021 than in any other year on record as the COVID-19 pandemic exacerbated the more subdued growth the country has experienced in recent years, the U.S. Census Bureau said. ‘The slow rate of growth can be attributed to decreased net international migration, decreased fertility, and increased mortality due in part to the COVID-19 pandemic,’ the Census Bureau said… The year 2021 is the first time since 1937 that the U.S. population grew by fewer than 1 million people, reflecting the lowest numeric growth since at least 1900, when the Census Bureau began… estimates. The population of the United States increased in the past year by 392,665, or 0.1%…”

December 20 – USA Today (Doyle Rice): “Glaciers in the Himalayas are melting at an ‘exceptional’ rate because of global warming, threatening the water supply of millions of people in Asia, a study… said. The study revealed that Himalayan glaciers are shrinking far more rapidly than glaciers in other parts of the world. ‘Our findings clearly show that ice is now being lost from Himalayan glaciers at a rate that is at least 10 times higher than the average rate over past centuries,’ the study’s lead author, Jonathan Carrivick of the University of Leeds, said…”

Leveraged Speculation Watch:

December 22 – Bloomberg (Denise Wee): “Wealthy Asians are pouring money at a record pace into alternative assets through private banks and high-end investment firms to escape low interest rates and volatile listed markets. The haul at JPMorgan’s… private banking arm from Asian clients more than doubled this year to an all-time high. HSBC Holdings Plc hit a record, with more than half of its inflows coming from Asia.”

Geopolitical Watch:

December 22 – Reuters (Mark Trevelyan): “President Vladimir Putin said… Russia had no room to retreat in a standoff with the United States over Ukraine and would be forced into a tough response unless the West dropped its ‘aggressive line’. Putin addressed his remarks to military officials as Russia pressed for an urgent U.S. and NATO reply to proposals it made last week for a binding set of security guarantees from the West. ‘What the U.S. is doing in Ukraine is at our doorstep… And they should understand that we have nowhere further to retreat to. Do they think we’ll just watch idly?’ Putin said. ‘If the aggressive line of our Western colleagues continues, we will take adequate military-technical response measures and react harshly to unfriendly steps.’”

December 23 – Reuters (Kiyoshi Takenaka): “Japanese and U.S. armed forces have drawn up a draft plan for a joint operation for a possible Taiwan emergency, Japan’s Kyodo news agency said…, citing unnamed Japanese government sources, amid increased tensions between the island and China. China claims democratically governed Taiwan as its own ‘sacred’ territory and in the past two years has stepped up military and diplomatic pressure to assert its sovereignty claims, fuelling anger in Taipei and deep concern in Washington.”

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