December 29, 2023: 2023 Year in Review

December 29, 2023: 2023 Year in Review
Doug Noland Posted on December 30, 2023

I’ll be frank. This “Year in Review” piece just lacks the pizzazz of other publications. For example, the New York Times’ “A Look Back at the Top Business Stories of 2023” ran with a provocative photo shot of a rather venerated pop star – “Taylor Swift Conquers the World”. Their list also included “‘Barbenheimer’ Dominates the Box Office,” “Elon Musk Berates Advertisers Who Fled X,” and “Sam Bankman-Fried Is Convicted” – all newsworthy developments this recap won’t be examining.

Rather than the humdrum Taylor Swift craze, my review is focused on the riveting “Year of Treasury Debt, Money Market Fund Intermediation, Repos and the ‘Basis Trade’.” Instead of boring “Barbenheimer”, I’m coming with mesmerizing asset inflation and Bubble analysis. And if my advertisers don’t like it, they know what they can do with it. They know what they can do. TKWTCD.

The BBC’s “Ten Major Events that Shaped Business in 2023” was more chronological, with “November: WeWork Files for Bankruptcy Protection,” and “December: Purdue Pharma Settlement Reaches the US Supreme Court.” Just seems the spectacular year-end market melt-up should have made the cut.

Bloomberg: “AI Craze Driving Nasdaq 100’s Best Run Since 1999.” “Nvidia and AMD Power Chipmakers to Best Year since 2009.” “S&P 500 Bulls Drive Longest Weekly Win Since 2004.” “Emerging-Market Rebound Yields Best Annual FX Rally since 2017.”

Equilibrium: “A state of rest or balance due to the equal action of opposing forces.”

The notion of equilibrium has captivated economic thinkers for 250 years, with the general meaning of the term evolving – and often modified – over time. For our purposes, the Investopedia definition suffices: “Economic equilibrium is a condition or state in which economic forces are balanced. In effect, economic variables remain unchanged from their equilibrium values in the absence of external influences. Economic equilibrium is also referred to as market equilibrium.”

I certainly won’t be equating economic equilibrium to market equilibrium. In pioneering economic analysis, profits were viewed as a key stabilizing force working to balance supply and demand throughout the economic system. In the bond market, the supply of savings interacted with the demand for investment borrowings to determine market interest rates. And market rates were fundamental to balancing the supply and demand for financial assets more generally.

But by their nature, markets are prone to speculative excess and boom and bust dynamics. The concept of equilibrium is antithetical to market function – never more so than these days. Artificially low interest rates, underlying monetary excess, and government intervention exert profound impacts on speculative cycles, rendering notions of stability and equilibrium inapplicable.

Getting to the heart of 2023 analysis, there’s absolutely no force of equilibrium associated with Bubbles. They either inflate or deflate. Moreover, the more entrenched Bubble excess becomes, the greater their immunity to policy tightening. The Federal Reserve raised rates this year to the highest level since 2001. Speculative markets scoffed.

When I began working for a hedge fund in 1990, there was an office joke about those uninformed people believing they could make money in the stock market by simply buying a mutual fund: “Yeah, just buy a Dreyfus.” Today, tens of millions accept that simply buying mutual fund or ETF shares is guaranteed to make money. A record 58% of American household own stocks today, up from the low thirties back in 1990. Tens of millions trade stocks and funds online. Millions have fallen prey to the seduction of options trading.

“Our actions have moved our policy rate well into restrictive territory, meaning that tight policy is putting downward pressure on economic activity and inflation, and the full effects of our tightening likely have not yet been felt.” Fed Chair Powell, December 13, 2023

The effective Fed policy rate was increased 100 bps in 2023 to 5.33%, with the final increase at the July meeting. “Tightening” was paused despite growth accelerating to a 5% pace during Q3. There is powerful evidence that argues against the assertion that policy was “well into restrictive territory… putting downward pressure on economic activity and inflation.”

Evidence of loose conditions includes extraordinary asset inflation. Surging 14.3% during Q4, the Nasdaq100 returned (price and dividends) 55.1% for the year – the strongest performance since “terminal phase” Bubble year 1999. The Semiconductors (SOX) returned 67.0%. The S&P500 returned 11.7% during Q4 and 26.3% for the year.

The dovish Fed pivot stoked a powerful year-end rally, led by the broader market. The small cap Russell 2000’s 14.0% Q4 return boosted 2023 returns to 16.9%. The “average” stock Value Line Arithmetic Index returned 11.9% for the quarter and 17.5% for the year.

The Q4 rally was propelled by yet another powerful short squeeze – a market dynamic that held sway over markets throughout the year. The Goldman Sachs short index (GSSI) surged 15.9% during Q4, 2023’s third major squeeze rally. From January 3rd lows to trading highs on February 2nd, the GSSI surged 36%. Following a pullback, another squeeze saw the index jump 29% between June 6th lows and July 31st highs. After reversing 36% lower, the GSSI then surged 44% off October 30th lows in a backbreaker squeeze to finish the year. Jim Chanos, the surviving dean of short selling, whose career dates back to the 1980s, announced the closing of his hedge funds in November.

It was the year of the Everything Squeeze. Active shorting and hedging also provided fuel for sharp bond market rallies. After beginning the year at 3.88%, 10-year Treasury yields had dropped to 3.37% by January 18th. Having jumped to 4.06% by early (pre-banking crisis) March, 10-year yields were back down to 3.31% a month later. Yields then zigged and zagged higher, peaking at 4.99% on October 19th. A major squeeze helped push yields 119 bps lower to 3.80% on December 27th – before ending the year at 3.88%.

The MBS marketplace, a bastion of hedging and derivatives strategies, was even wilder. After beginning the year at 5.37%, benchmark Fannie Mae MBS yields were down to 4.66% on February 2nd, jumped to 5.73% by March 2nd, down to 4.85% on April 5th, up to 5.80% on May 26th, down to 5.43% and then up to 5.96% on July 6th, down to 5.43% on July 13th, up to 6.23% on August 22nd, down to 5.86%, then up to 6.66% on October 3rd, down to 6.38% then up to a 6.81% peak on October 19th. Yields then collapsed into year-end, sinking 165 bps to 5.16% on December 27th – before ending 2023 at 5.27%.

Years of artificially depressed interest rates came home to roost early in the year. A combination of reckless growth, dismal lending standards, and huge bond portfolios suddenly had the market’s attention. Silicon Valley Bank succumbed to a spectacular bank run, a contemporary variety with origins in social media and unleashed by computer keystrokes. Regulators took control of the bank on March 10th, after the stock traded at $271 on March 8th – down from a squeeze-induced 40% rally and $333 stock price on February 2nd.

Signature Bank and First Republic also succumbed, as a powerful bank-run dynamic imperiled the banking system. From February highs to May lows, the KBW Regional Bank Index sank 37%.

The banking crisis policy response was arguably the year’s most consequential market development. The Fed and FHLB combined to inject $700 billion of liquidity into the banking system. This liquidity ameliorated bank runs while spilling into increasingly speculative financial markets. Moreover, Washington essentially guaranteed all U.S. banking deposits in the process, while the Fed added to its menu of lending facilities (Bank Term Funding Program (BTFP)) that allayed market trepidation that runs would force the liquidation of bank bond portfolios (with huge unrecognized losses).

One cannot overstate the impact these extraordinary measures had on speculation and the global government finance Bubble, more generally. No longer would the market fear that Federal Reserve “tightening” might weaken the Fed’s market liquidity backstop (“Fed put”). Markets could stop fretting that necessary liquidity support might arrive too late and in inadequate scope. Indeed, the specter of bank runs and domino bank failures had Washington moving early and aggressively to thwart potential de-risking/deleveraging. In the end, three of the four largest bank failures in U.S. history only emboldened leveraged speculation and speculative excess more generally.

We witnessed in 2023 the unprecedented brute power of the global government finance Bubble, with forces that leave all previous Bubbles in the dust. We saw confirmation of the incredible might of money-like instruments empowered by insatiable demand characteristics. We witnessed the dynamics of a Bubble at the core of money and Credit, and how today’s Bubble Dynamics are distinct from previous more peripheral Bubbles (i.e., mortgage finance and corporate Credit).

From the Fed’s Q3 Z.1 report, Treasury Securities posted one-year growth of $2.180 TN to a record $28.649 TN. Treasurys surged $4.399 TN over two years and an incredible $10.835 TN, or 60.8%, during the past 17 quarters (beginning Q3 2019). Meanwhile, GSE Securities posted one-year growth of $460 billion to $11.902 TN, with two-year growth of $1.366 TN and 17-quarter ballooning of $2.638 TN (29%). Treasury and GSE “government finance” combined for growth of $2.640 TN over the past year, dominating system Credit growth and ensuring sufficient Bubble-sustaining system Credit expansion. Through 2023’s first three quarters, on an annualized basis, Non-Financial Debt expanded $3.624 TN, easily surpassing 2007’s ($2.529 TN) pre-pandemic annual record.

Importantly, the ongoing massive inflation of Washington “government finance” continues to underpin household incomes and savings, along with corporate earnings and cash flows. Q4’s 12% stock price inflation pushed Household equities holdings to all-time highs, with record Household Net Worth approaching $160 TN (vs. pre-pandemic $117 TN and pre-crisis 2007’s then record $71 TN). In the face of Fed “tightening,” Household Real Estate holdings inflated almost $2 TN over the past year to a record $50.064 TN.

December 26 – Bloomberg (Christine Maurus): “Home prices in the US rose for a ninth straight month, reaching a fresh record as buyers battled for a stubbornly tight supply of listings. A national gauge of prices rose 0.6% in October from September, according to… S&P CoreLogic Case-Shiller. A seasonally adjusted measure of prices in 20 of the largest cities also rose 0.6%. ‘US home prices accelerated at their fastest annual rate of the year in October,’ Brian Luke, head of commodities, real and digital assets at S&P Dow Jones Indices, said… ‘We are experiencing broad-based home-price appreciation across the country, with steady gains seen in 19 of 20 cities.’”

We witnessed in 2023 ongoing effects of hyper-inflationary pandemic-period policy measures. Despite the highest mortgage rates in two decades, home price inflation was underpinned by strong income gains and a lack of inventory. And spending and fund flows were certainly supported by the unprecedented $6.025 TN, 39.4%, 16-quarter gain in Household holdings of “money” – deposits, money market funds, Treasurys and Agency Securities – to a record $21.304 TN (doubling over the past decade).

The U.S. labor market, pushed to unprecedented tightness by inflationary policymaking, proved resilient. After ending 2022 at 3.5%, the Unemployment Rate had only inched up to 3.7% by November. Job openings (JOLTS) dropped about 3.3 million to a still highly elevated 8.73 million. And despite all the chatter of impending recession, Weekly Unemployment Claims remained at historically low levels into year-end. With the United Auto Workers and other labor unions enjoying hugely successful wage negotiations, “The Year of the Strike,” “The Year Labor Took the Lead” and “Why 2023 Was Such a Good Year for Labor” were apt year-end headlines.

Even with the Q4 rally, neither the markets nor the Fed would allow extraordinary asset inflation and robust labor conditions to deter the seductive “immaculate disinflation” narrative. CPI (y-o-y), after ending 2022 at 6.5%, was down to 3.0% by June and was reported in November at 3.1%. Sinking energy prices helped. “Core” CPI was stickier, declining from December ‘22’s 5.7% to November’s 4.0%. Ongoing home price inflation underpinned sticky housing cost inflation, while wage inflation helped explain sticky services cost pressures.

Inflation is always and everywhere a monetary phenomenon, a consequence of excessive money and Credit growth. This year presented myriad analytical challenges. Especially after the March crisis, the Fed and analysts focused on tighter standards and a major drop-off in bank lending. And while Bank Loan growth slackened from 2022’s off-the- charts $1.421 TN, lending will likely end 2023 in the ballpark of the pre-pandemic 2019 level ($460bn).

Some analysts also fixated on the contraction in the M2 monetary aggregate, largely explained by the drop in bank deposits. Meanwhile, historic monetary inflation ran wild throughout the money market fund complex.

Money Market Fund (MMF) Assets expanded $1.174 TN this year, or 24.9%, to a record $5.886 TN. This inflation crushed the annual record of $729 billion set in tumultuous 2007. Moreover, 2023 was an acceleration of already historic ballooning that started pre-pandemic. Over the past 15 quarters (12/31/19 to 9/30/23), money fund assets surged $2.141 TN, or 44.9%. It’s worth noting that the Fed Z.1 category “Government Money Market Funds” rose $1.979 TN, or 52.7%, over 15 quarters, to a record $4.761 TN.

Over-simplified analysis might conclude that extraordinary growth represents a shift in preference away from uncompetitive bank deposits to higher-yielding money market fund shares. And while bank disintermediation has been a factor in recent quarters, total bank deposits are still $4.611 TN, or 30%, higher over 15 quarters. I would instead argue that the money fund complex has become the epicenter of government finance Bubble intermediation and liquidity creation.

These days, the money funds are the pivotal “Wall Street alchemists”, transforming Treasury debt into perceived safe and liquid money-like instruments (MMF shares). And while so-called “government” money funds hold Treasury bills, floating-rate Treasury securities and short-term Agency debt, through their “repo” lending operations they have become major intermediators of longer-term Treasury and Agency bonds.

I wrote last week, “It’s the ultimate ‘Fed put,’ ‘too big to fail’ and ‘Fed secures Treasury and ‘repo’ liquidity’ all neatly wrapped up in a historic Trillion dollar ‘basis trade’ levered speculation.” Estimates have the so-called “basis trade” – where hedge funds lever Treasury cash bonds (commonly 50 to 1) while shorting Treasury futures – inflating rapidly this year to an unprecedented $1 TN.

Amazingly, the MMF complex has become the predominant financier to one of history’s greatest leveraged speculations – a speculative Bubble now at the heart of ongoing government finance Bubble “terminal phase” excess. Even more stunning is the lax regulatory environment for such a critical – with well-recognized vulnerability – financial system focal point. And this follows an inexcusable breakdown in banking system regulatory oversight, when unprecedented monetary stimulus should have had the Fed and regulator community laser focused. One word we didn’t hear much from the Fed in 2023: “macro-prudential”.

This year’s $1 TN contraction in Federal Reserve “reverse repo” liabilities (where MMFs park excess liquidity) complicates the analysis. But with MMF “repo” assets little changed through three quarters at $2.95 TN, we can assume a sharp increase in non-Fed “repo” lending. And over the past 15 quarters, money fund holdings of “security repurchase agreements” (“repo”) ballooned $1.706 TN, or 160%. As a percentage of fund assets, “repos” jumped from 31% to 48% over 15 quarters – to surpass holdings of debt securities (47%).

We can make industry inferences from an examination of the JPMorgan U.S. Government Money Market Fund. After beginning the year at $205 billion, assets expanded rapidly following the March bank runs. Assets had inflated to $280 billion by May. Fund assets dropped back to $246 billion by mid-October, before a big November led to year-end assets of $270 billion (‘23 growth of $65 billion, or 32%).

From end of November holdings data, we can see that “repos” held at the New York Fed accounted for 16.7% of (net) fund assets. Goldman Sachs “repos” totaled almost 11%, with 5.3% from the Fixed Income Clearing Corporation. Another 21 financial institutions – including Citigroup and Bank of America, along with several insurance companies and more than half foreign-based banks – accounted for “repos” of an additional 30% of fund assets. Overall, “repos” accounted for about 63% of fund assets.

I believe speculative leverage became only more integral to the government finance Bubble in 2023, with MMF financing of Treasury and Agency Securities “repo” holdings (including the hedge fund “basis trade”) providing the powerful marginal source of marketplace liquidity. This helps explain how markets displayed unmistakable effects of liquidity abundance in the face of an $804 billion contraction of the Fed’s balance sheet (QT) and weakened bank lending.

Yet it’s important to appreciate that liquidity abundance, asset inflation, and speculative Bubbles were global phenomena. Japan’s Nikkei 225 Index ended the year up 28.2%, Germany’s DAX 20.3%, Italy’s MIB 28.0%, France’s CAC 40 16.5%, and Spain’s IBEX 22.8%. Major equities indices were up 59.5% in Greece, 29.3% in Ireland, 18.6% in the Netherlands, 24.7% in Denmark, 18.5% in Sweden, and 12.8% in Norway. In Asia, major indices were up 29.8% in Taiwan, 18.7% in South Korea, 18.7% in India, and 12.2% in Vietnam.

Emerging equities generally posted strong gains. Major indices were up 22.2% in Brazil, 18.4% in Mexico, and 17.8% in Chile. In Eastern Europe, stocks in Poland jumped 36.5%, Russia 43.9%, Turkey 35.6%, Hungary 38.4%, Czech Republic 17.7%, Romania 31.8%, and Slovenia 19.8%.

I suspect similar dynamics were afoot throughout global markets: further expansion of speculative leverage providing key sources of liquidity. I often ponder the size of yen-based “carry trades” – borrow for free in a depreciating yen to finance speculative holdings of higher-yielding securities everywhere. Despite its 5.9% Q4 rally, the yen was still down 7.0% for the year versus the dollar. Many yen “carry trades” benefited from big currency appreciation. Versus the yen, the Colombian peso appreciated 35.4% this year, the Mexican peso 23.6%, Polish zloty 19.6%, Brazilian real 16.9%, Hungarian forint 15.7%, and the British pound 13.3%. The Euro gained 10.9% against the yen.

I wouldn’t be surprised to learn that “carry trade” (yen and other currencies) leverage has inflated into the Trillions, liquidity that continues to fuel historic asset inflation and speculative Bubbles. Japanese institutional and retail “investment” flows have also been enormous, with Japanese buying critical in markets from peripheral European bonds, EM debt, and U.S. corporate bonds and CDOs. I can only assume that Japanese-sourced finance has been embedded in derivatives leverage around the globe.

The Bank of Japan’s (BOJ) balance sheet inflated another 6.5% this year to $5.2 TN (up almost a third since the end of 2019). The BOJ timidly clung to negative rates and yield curve control (YCC), solidifying the yen as the go-to source of speculative finance in a world of rising policy rates and market yields. The ongoing BOJ inflationary policy train-wreck was a key 2023 Bubble development.

There’s a strong case to make that China’s deflating apartment Bubble actually supported global Bubble Dynamics. A New York Times article estimated Chinese 2023 outflows at $50 billion a month. Especially with most global central banks raising rates, cheap renminbi borrowings became an only more enticing source for financing leveraged speculation.

China’s deflating apartment Bubble took a turn for the worse in 2023. Scores of developer defaults sparked worries for local government debt, along with China’s $3 TN “trust” industry. Bloomberg estimates developer debt surpasses $12 TN, with another $12 TN of local government borrowings. There are all the makings for an acutely destabilizing crisis of confidence. Despite the long list of less than effective stimulus measures, confidence held that Beijing can hold major crises at bay.

Ominously, China apartment Bubble deflation and general economic stagnation unfolded in 2023 despite ongoing massive Credit growth. A solid December will see 2023 growth in Aggregate Financing slightly ahead of 2020’s record $4.9 TN, another year of compounding 10% growth. Chinese bank assets inflated $4.25 TN during the first nine months of the year to surpass $57 TN, posting 11% annualized growth. Under pressure through much of the year, Q4 dollar weakness reduced the renminbi’s 2023 loss to 2.84%.

Beijing’s superpower ambitions and, more specifically, its heated rivalry with the U.S. are viewed as ensuring that all mechanisms will be employed to sustain Chinese growth necessary to attain geopolitical objectives. People’s Bank of China (PBOC) assets rose 6% in 2023 to $6.175 TN, with late-year liquidity injections surely contributing to global market liquidity and speculative excess. Moreover, Chinese Bubble deflation likely placed some downward price pressures on key commodities and manufactured goods, playing a constructive role in this year’s weakened global inflation dynamics.

I’ll offer only brief comments on the deteriorating geopolitical backdrop. With China’s economy failing to respond satisfactorily to stimulus – while global companies moved swiftly to de-risk from Chinese investments – Beijing hit the panic button. I believe this explains China’s pivot to a somewhat less combative approach, including Xi Jinping’s November trip to San Francisco.

But beyond Beijing’s superficiality, the world became only more fractured in 2023. The Russia/Ukraine war turned only more horrendous, as U.S. public support for further Ukraine aid increasingly split on party lines.

Meanwhile, the present-day “axis of evil” coalesced around Russian and Chinese anti-U.S. ambitions. Top officials logged many a mile flying between Beijing, Moscow, Tehran, and Pyongyang. Putin and Xi further developed their partnership without limits. Putin and Kim Jong Un bonded as partners without morality.

If the geopolitical trajectory was not already frightful, the heinous October 7th terrorism attack against Israel unleashed malicious forces that will be difficult to contain. The world has become only more irreparably fractured. While it hasn’t yet become a full-fledged regional crisis, further escalation appears inevitable. The Houthis have become active combatants, Hezbollah has steadily escalated hostile actions, and the Iranians (and their other proxies) appear to be preparing for ongoing hostilities (including accelerated uranium enrichment). Meanwhile, Russia and China seek to take full advantage of rising anti-U.S. sentiment.

I’m not so convinced that global Bubble inflation and geopolitical deterioration are coincidental. To be sure, 2023 was a year of acute Monetary Disorder. From my analytical perspective, it was a fateful year of globalized “terminal phase Bubble excess.”

Here at home, our system was in desperate need of tighter conditions, slower Credit growth, and some speculative Bubble deflation. The bond market needed to begin disciplining spendthrift Washington. Powell and Fed comments notwithstanding, conditions instead loosened. Washington continued to borrow and spend recklessly, while Bubbles succumbed to speculative “melt-up” dynamics. It was the worst-case scenario clothed in brilliant bull (market) attire.

A few Bubble manifestations deserve special mention. The AI mania could not have been more Bubble perfect. Rather than tighter conditions and de-risking/deleveraging dynamics spurring a system cleansing of scores of uneconomic enterprises in the broader tech universe, the AI mania unleashed speculative dynamics and associated loose conditions that only exacerbated historic industry excess. The only thing more popular than Taylor Swift concert tickets were company conference calls with CEOs trumpeting plans for incorporating AI throughout their companies. It was the type of spending black hole that really stirs Wall Street imaginations – and speculative impulses.

What’s more, the Bubble in the likes of Nvidia (up 239%), Meta Platforms (194%), Microsoft (57%), Amazon (80%), Tesla (102%) and Alphabet/Google (58%) fueled melt-up dynamics in stocks and indices that are popular options trading and derivative targets. Nvidia ended the year with a market capitalization of $1.22 TN, priced at 27 times revenues. The Nasdaq100 Index’s market value inflated $7.5 TN to $19.75 TN – with much of the gain from “magnificent seven” stocks. How much market liquidity was created from related speculative leverage, especially from hedging in-the-money call options (buying underlying stocks to hedge against options written). Bloomberg: “Musk Leads World’s Richest to $1.5 Trillion Wealth Gain in 2023.”

On the subject of writing options, 2023 saw the proliferation of ETFs and other strategies that capture premium income by writing option contracts. The year experienced a further surge in options trading. 0DTE – “zero-days to expiration” – options continued to take the world by storm. The crypto Bubble came back to life with a vengeance, with Wall Street gearing up for crypto options trading and a plethora of new vehicles for speculation. Bloomberg: “Crypto Options Trading Volume Hits Record as ETF Deadline Nears.”

In the lending realm, the Bubble in private-Credit continued its formidable inflation to the point of providing a meaningful offset to tighter bank lending. The absence of marketplace de-risking/deleveraging in 2023 offered an extended lease on life for “decentralized finance” (De-Fi) and “shadow” lending more generally. What could have – should have – been a tightening of precariously loose consumer finance never came to fruition. The “buy now, pay later” craze became only more deeply embedded in consumer spending habits. The average car payment hit a record $736 during Q3 (Edmunds).

The year ended with financial conditions the loosest since pre-Fed rate increases.

After beginning the year at 130 bps, investment-grade spreads to Treasuries closed Friday at 99 bps – the low since January ‘22. High yield spreads collapsed from 469 bps to 323 bps, trading this week at the lows since March ‘22. Investment-grade CDS dropped from 82 bps to 57 bps – the low since January ‘22, with high yield CDS sinking from 484 bps to 356 bps – the low back to early-February ‘22. After beginning the year at 80 bps, JPMorgan CDS closed out ’23 at 44 bps – the low back to November ‘21. Indicative of the global nature of loose conditions, European Bank (subordinated) CDS dropped from 175 bps to 123 bps – the low since January ‘22. Emerging Market CDS sank from 239 bps to 167 bps – the low back to September ‘21.

It’s a challenge to comprehend why the Fed would abruptly pivot dovish with markets in the throes of historic speculative excess. Was the FOMC afflicted with “basis trade” worries, with year-end money market funding pressures on the horizon? And how significantly did the “Powell pivot” embolden the $1 TN “basis trade” (lever long Treasuries vs. short Treasury futures) and other leveraged speculation?

December 29 – Bloomberg (Elizabeth Stanton): “Speculators increased their net short position in 10-year Treasury note futures by an amount equal to $7.7m per basis point change in yield, according to CFTC data released Friday for the week up to Dec. 26… Their net short position increased by 117,412 to nearly 805,000 contracts, approaching the biggest on record over the past decade.”

For the Week:

The S&P500 added 0.3% (up 24.2% in 2023), and the Dow increased 0.8% (up 13.7%). The Utilities rallied 1.0% (down 12.3%). The Banks gained 0.7% (down 4.8%), and the Broker/Dealers rose 1.0% (up 24.1%). The Transports fell 1.0% (up 18.7%). The S&P 400 Midcaps slipped 0.2% (up 14.4%), and the small cap Russell 2000 dipped 0.3% (up 15.1%). The Nasdaq100 added 0.3% (up 53.8%). The Semiconductors rose 1.0% (up 64.9%). The Biotechs gained 0.9% (up 2.6%). While bullion increased $10, the HUI gold index fell 1.9% (up 5.9%).

Three-month Treasury bill rates ended the week at 5.18%. Two-year government yields fell seven bps this week to 4.25% (down 18bps in 2023). Five-year T-note yields slipped two bps to 3.85% (down 16bps). Ten-year Treasury yields declined two bps to 3.88% (unchanged). Long bond yields dipped two bps to 4.03% (up 6bps). Benchmark Fannie Mae MBS yields declined three bps to 5.27% (down 12bps).

Italian yields rose 14 bps to 3.70% (down 100bps). Greek 10-year yields gained five bps to 3.05% (down 151bps y-t-d). Spain’s 10-year yields rose nine bps to 2.99% (down 52bps). German bund yields increased four bps to 2.02% (down 42bps). French yields rose eight bps to 2.56% (down 42bps). The French to German 10-year bond spread widened four to 54 bps. U.K. 10-year gilt yields increased three bps to 3.54% (down 14bps). U.K.’s FTSE equities index added 0.5% (up 3.8% in 2023).

Japan’s Nikkei Equities Index gained 0.9% (up 28.2% in 2023). Japanese 10-year “JGB” yields slipped a basis point to 0.61% (up 19bps in 2023). France’s CAC40 dipped 0.3% (up 16.5%). The German DAX equities index added 0.3% (up 20.3%). Spain’s IBEX 35 equities index was little changed (up 22.8%). Italy’s FTSE MIB index was unchanged (up 28.0%). EM equities were mixed. Brazil’s Bovespa index rose 1.1% (up 22.3%), while Mexico’s Bolsa index was little changed (up 18.4%). South Korea’s Kospi index jumped 2.1% (up 18.7%). India’s Sensex equities index gained 1.6% (up 18.7%). China’s Shanghai Exchange Index rallied 2.1% (down 3.7%). Turkey’s Borsa Istanbul National 100 index declined 1.2% (up 35.6%). Russia’s MICEX equities index added 0.2% (up 43.9%).

Federal Reserve Credit dipped $6.1bn last week to $7.685 TN. Fed Credit was down $1.216 TN from the June 22nd, 2022, peak. Over the past 224 weeks, Fed Credit expanded $3.958 TN, or 106%. Fed Credit inflated $4.874 TN, or 173%, over the past 581 weeks.

Total money market fund assets gained $16.4bn to $5.886 TN, with a 42-week gain of $993bn (25% annualized). Money funds were up $1.174 TN, or 24.9%, y-o-y.

Total Commercial Paper rose $8.3bn to $1.271 TN. CP was up $10bn, or 0.8%, over the past year.

Freddie Mac 30-year fixed mortgage rates declined six bps to an almost eight-month low 6.42% (up 1bp y-o-y). Fifteen-year rates dropped 11 bps to a seven-month low 5.80% (unchanged). Five-year hybrid ARM rates fell six bps to a six-month low 6.36% (up 74bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 18 bps to a seven-month low 6.97% (up 38bps).

Currency Watch:

December 27 – Wall Street Journal (Anna Hirtenstein): “Some major emerging economies are dabbling in trading commodities without using the dollar, as they seek to reduce their reliance on the U.S. currency. Faced with U.S. sanctions and other restrictions, Russia and Iran in particular have stepped up oil sales in alternative currencies, and have found buyers in China, India and elsewhere that are happy to buy these exports, often at lower prices. The need is less pressing for other commodity heavyweights. But some of these countries, including Brazil, the United Arab Emirates and even Saudi Arabia, have recently taken steps laying the groundwork for trade that sidesteps the dollar. ‘The U.S. dollar is getting some competition in commodities markets,’ said Natasha Kaneva, head of global commodities strategy at JPMorgan… She estimated that the proportion of the world’s oil that is bought and sold in other currencies has risen to about 20%.”

For the week, the U.S. Dollar Index declined 0.4% to 101.33 (down 2.1% for 2023). For the week on the upside, the Swiss franc increased 1.7%, the South Korean won 1.6%, the Japanese yen 1.0%, the South African rand 0.4%, the New Zealand dollar 0.4%, the Norwegian krone 0.3%, the Singapore dollar 0.3%, the British pound 0.2%, the euro 0.2%, the Canadian dollar 0.2%, the Australian dollar 0.2%, and the Brazilian real 0.1%. On the downside, the Swedish krona declined 0.7%. The Chinese (onshore) renminbi increased 0.50% versus the dollar (down 2.84%).

Commodities Watch:

The Bloomberg Commodities Index declined 0.7% (down 12.6% for 2023). Spot Gold increased 0.5% to $2,063 (up 13.1%). Silver reversed 1.6% lower to $23.80 (down 0.7%). WTI crude fell $1.91, or 2.6%, to $71.65 (down 11%). Gasoline declined 1.1% (down 14%), and Natural Gas dropped 3.7% to $2.51 (down 44%). Copper slipped 0.4% (up 2%). Wheat rallied 1.9% (down 21%), while Corn declined 0.4% (down 31%). Bitcoin dropped $1,570, or 3.6%, to $42,000 (up 153%).

Middle East War Watch:

December 26 – Financial Times (Neri Zilber in Tel Aviv and Raya Jalabi): “Israel’s defence minister has warned of a growing risk of a regional conflict in the Middle East as tensions with Iran increase. Yoav Gallant on Tuesday told a parliamentary committee that Israel was being attacked in a ‘multi-arena war’ from seven areas, which he identified as Gaza, the West Bank, Lebanon, Syria, Iraq, Yemen and Iran. ‘We have already responded and acted in six of these arenas and I say here in the most explicit way — anyone who acts against us is a potential target, there is no immunity for anyone,’ he said… Israel has also exchanged daily fire with the Iran-backed Hizbollah militia in Lebanon across their shared frontier, with the episodes intensifying in recent weeks. A senior Iranian general based in Syria, Reza Mousavi, was killed in an airstrike on Monday that Iranian officials attributed to Israel. Tehran vowed that Israel would ‘pay’ for his death.”

December 27 – New York Times (Nadav Gavrielov and Thomas Fuller): “As Israel pounded targets in the Gaza Strip from the air and sea on Wednesday, a member of the country’s war cabinet threatened action on a second front, along the border with Lebanon, where the Iranian-backed militia Hezbollah has fired rocket barrages into Israel. ‘I say to our friends around the world: The situation in the northern border necessitates change,’ the war cabinet member, Benny Gantz, told reporters. ‘The time for a diplomatic solution is running out. If the world and the government of Lebanon don’t act to stop the fire toward northern communities and to push Hezbollah away from the border, the I.D.F. will do that.’”

December 26 – Reuters (Nidal Al-Mughrabi, Bassam Masoud and Maayan Lubell): “Israel’s war on Hamas will last for months, Israel’s military chief said… while the United Nations voiced alarm over an escalation of Israeli attacks that killed more than 100 Palestinians over two days in part of the Gaza Strip. Israel’s Chief of Staff Herzi Halevi told reporters… that the war would go on ‘for many months’. ‘There are no magic solutions, there are no shortcuts in dismantling a terrorist organization, only determined and persistent fighting,’ Halevi said. ‘We will reach Hamas’ leadership too, whether it takes a week or if it takes months.’”

December 25 – Reuters (Francois Murphy): “Iran has reversed a months-long slowdown in the rate at which it is enriching uranium to up to 60% purity, close to weapons grade, the U.N. nuclear watchdog said… Many diplomats believed the slowdown, which had begun by June, was the result of secret talks between the United States and Iran that led to the release of U.S. citizens held in Iran earlier this year. Iran already has enough uranium enriched to up to 60%, if enriched further, to make three nuclear bombs, according to the International Atomic Energy Agency’s theoretical definition…”

December 24 – Reuters (Elwely Elwelly): “The Iranian navy has taken delivery of cruise missiles with a range of 1,000 km (621 miles) as well as reconnaissance helicopters, state media reported on Sunday, as the U.S. accused Iran of a drone attack on a chemical tanker in the Indian ocean. ‘The Talaeiyeh cruise missile has a range of over 1,000 km and is a smart missile that can change targets mid-mission,’ state media cited the head of Iran’s navy, Shahram Irani, as saying.”

December 24 – Reuters (Christopher Bing): “A drone launched from Iran struck a chemical tanker in the Indian ocean early on Saturday, the U.S. Department of Defense said. ‘The motor vessel CHEM PLUTO, a Liberia-flagged, Japanese-owned, and Netherlands-operated chemical tanker was struck… today in the Indian Ocean, 200 nautical miles from the coast of India, by a one-way attack drone fired from Iran,’ a Pentagon spokesperson told Reuters.”

December 24 – Reuters: “An Iranian Revolutionary Guards commander said the Mediterranean Sea could be closed if the United States and its allies continued to commit ‘crimes’ in Gaza, Iranian media reported… ‘They shall soon await the closure of the Mediterranean Sea, (the Strait of) Gibraltar and other waterways,’ Tasnim quoted Brigadier General Mohammad Reza Naqdi, coordinating commander of the Guards, as saying.”

December 27 – CNN (Stephen Collinson): “Escalating attacks on US troops and commercial shipping and incidents often involving Iran and its proxies are causing new concerns that Israel’s war in Gaza could widen into a regional conflagration with grave political and economic consequences. With American service personnel increasingly in a dangerous firing line and with US and allied naval assets on high alert after multiple drone attacks, the deteriorating situation is leading to a tense holiday period for the White House. The rising possibility of US combat deaths and the worsening security situation from the Indian Ocean to the Red Sea and stretching through Iraq, Syria, Lebanon and Israel represents an unwelcome new foreign crisis as President Joe Biden’s reelection year dawns. And it is becoming a petri dish for a new geopolitical trend — endless tests of America’s will and credibility by its adversaries and their proxies.”

December 27 – Bloomberg (Iain Marlow): “US strikes on targets in Iraq and fresh attacks by Houthi militants on shipping in the Red Sea provided the latest warning signs that the war in Gaza risks expanding into a wider conflict destabilizing the Middle East. The Pentagon said late Monday that its forces launched strikes on three installations in Iraq linked to Kataib Hezbollah. Washington said the Iraqi insurgent group that’s backed by Iran was behind an attack that injured three US personnel, leaving one in critical condition. ‘While we do not seek to escalate conflict in the region, we are committed and fully prepared to take further necessary measures to protect our people and our facilities,’ Defense Secretary Lloyd Austin said… He called it a ‘necessary and proportionate’ response.”

December 26 – Reuters (Ahmed Rasheed): “Iraq’s government… condemned overnight U.S. air strikes on Iraqi military positions that it said killed one serviceman and wounded 18 people, calling them a ‘clear hostile act’. The United States carried out retaliatory air strikes on Monday in Iraq after a one-way drone attack earlier in the day by Iran-aligned militants that left one U.S. service member in critical condition and wounded two others. The government condemned the U.S. strikes as ‘an unacceptable violation of Iraqi sovereignty’…”

December 28 – Bloomberg (Brendan Murray and Alex Longley): “Half of the container-ship fleet that regularly transits the Red Sea and Suez Canal is avoiding the route now because of the threat of attacks, according to new industry data. The tally compiled by Flexport Inc. shows 299 vessels with a combined capacity to carry 4.3 million containers have either changed course or plan to. That’s about double the number from a week ago and equates to about 18% of global capacity.”

December 28 – Reuters (Lisa Baertlein): “Toymaker Basic Fun’s team that oversees ocean shipments of Tonka trucks and Care Bears for Walmart and other retailers is racing to reroute cargo away from the Suez Canal… Suppliers for the likes of IKEA, Home Depot, Amazon and retailers around the world are doing the same as businesses grapple with the biggest shipping upheaval since the COVID-19 pandemic threw global supply chains into disarray, sources in the logistics industry said… Basic Fun usually ships all Europe-bound toys from its China factories via the Suez Canal…, CEO Jay Foreman said… That trade route is used by roughly one-third of global container ship cargo, and re-directing ships around the southern tip of Africa is expected to cost up to $1 million extra in fuel for every round trip between Asia and Northern Europe.”

December 26 – Bloomberg (Wilfried Eckl-Dorna and Alex Longley): “Shipping giant Hapag-Lloyd AG said it will keep its vessels away from the Red Sea even after the launch of a US-led taskforce to protect the key trade route from militant attacks. The container liner said it will continue to reroute its vessels via the Cape of Good Hope, a detour of several thousand miles.”

December 26 – Bloomberg (Elizabeth Low): “A gas tanker’s long, circuitous journey is highlighting the toll that war and climate change are taking on the shipping industry. Pacific Weihai loaded in Houston on Dec. 14 with a cargo of liquefied petroleum gas intended for Ningbo, China, a route that should typically take 30 days. Instead, it faces an additional 15 days at sea, 8,000 kilometers in travel distance and potentially $1.8 million in shipping rates to avoid two key chokepoints that are upending global trade.”

Ukraine War Watch:

December 29 – Associated Press (Illia Novikov and Hanna Arhirova): “Russia launched 122 missiles and dozens of drones against Ukrainian targets, officials said Friday, killing at least 24 civilians across the country in what an air force official said was the biggest aerial barrage of the war. The Ukrainian air force intercepted most of the ballistic and cruise missiles and the Shahed-type drones overnight, said Ukraine’s military chief, Valerii Zaluzhnyi.”

December 22 – BBC (Oliver Slow): “Ukraine’s military says it shot down three Russian fighter jets on Friday in the south of the country. Three Su-34 fighter bombers were shot down over Kherson region… President Volodymr Zelensky thanked the servicemen who had downed the planes… In his nightly address on Friday, Mr Zelensky said the downing of the planes would make Russian pilots attacking targets in Ukraine aware that ‘none of them [would] go unpunished’.”

December 28 – Reuters (Yuliia Dysa): “A Panama-flagged bulk carrier that was headed to a River Danube port to load grain hit a Russian mine in the Black Sea on Wednesday, injuring two crew members, Ukrainian officials said… It was the latest incident of a civilian vessel hitting an explosive in the Black Sea in what Kyiv says is stepped-up Russian attacks on shipping and port infrastructure.”

Market Instability Watch:

December 22 – Bloomberg (Ruth Carson and Masaki Kondo): “The world’s debt market is on track to post its biggest two-month gain on record as traders ramp up expectations that central banks everywhere will slash interest rates next year. The Bloomberg Global Aggregate Total Return Index has risen nearly 10% over November and December, its best two-month run in data going back to 1990… ‘What we are seeing now is a bond carnival,’ said Hideo Shimomura, a senior portfolio manager at Fivestar Asset Management Co. in Tokyo. ‘Bond investors have been hibernating and now I feel that their explosive desire is to come out of their lair.’”

December 26 – Bloomberg (Lu Wang and Justina Lee): “This year’s hottest options trade is catching on with Wall Street’s nerd contingent. From Citigroup Inc. to JPMorgan… and UBS Group AG, banks that develop systematic equity products for clients have jumped on the bandwagon of derivative contracts that have zero days to expiration, or 0DTE. Desks responsible for so-called ‘quantitative investment strategies,’ or QIS, have either built new trades around these flashy options or used them as an alternative in existing strategies… The pitches speak to just how quickly Wall Street’s quant factory — which by one estimate runs $370 billion in assets — can churn out products in response to market changes. With QIS teams at every investment bank packaging these trades into swaps and structured notes, there’s growing pressure to keep up with the competition. At Citi, Cancelli and his colleague Guillaume Flamarion have led a charge into 0DTEs, bundling them up in a wide range of volatility-related products that hedge downside, harvest premium and juice up relative-value trades. In their view, there’s one big benefit from something with a shelf life shorter than 24 hours: minimal risk of being caught out by unfavorable overnight market moves.”

Bubble and Mania Watch:

December 26 – Wall Street Journal (Gunjan Banerji): “This was the year investors could hardly go wrong. After years of seemingly nowhere to go but the stock market, investors faced a bonanza of choices in 2023. The Federal Reserve’s aggressive interest-rate hiking campaign paved the way for the most tempting yields on ultrasafe assets in decades. Investors swiftly took advantage, sending torrents of cash to corners of the market that long seemed forgotten. In the final moments of the year, they are throwing money at virtually everything. Investors have piled into far-reaching corners of global markets, driving a rally spanning stocks, bonds, gold and even cryptocurrencies. Yields on risky corporate bonds have fallen to some of the lowest levels of the past year, while bond prices have rallied. And the beleaguered 60-40 portfolio of stocks and bonds is on track to return around 17% this year, a stunning bounceback and its best showing since 2019…”

December 26 – Financial Times (George Hammond): “Big tech companies have vastly outspent venture capital groups with investments in generative AI start ups this year, as established giants use their financial muscle to dominate the much-hyped sector. Microsoft, Google and Amazon last year struck a series of blockbuster deals, amounting to two-thirds of the $27bn raised by fledgling AI companies in 2023, according to… PitchBook. The huge outlay, which exploded after the launch of OpenAI’s ChatGPT in November 2022, highlights how the biggest Silicon Valley groups are crowding out traditional tech investors for the biggest deals in the industry. The rise of generative AI — systems capable of producing humanlike video, text, image and audio in seconds — have also attracted top Silicon Valley investors.”

December 21 – Bloomberg (Jeannine Amodeo and Josyana Joshua): “US leveraged loan issuance jumped 18% this year, and borrowers are expected to pursue opportunistic repricings in January as the market remains hot… Leveraged loan issuance excluding repricings increased to $296 billion this year, from $251 billion in 2023… December issuance was about $26 billion excluding repricings.”

December 27 – Bloomberg (Jonathan Randles and Amelia Pollard): “Wall Street’s affair with blank-check firms, the finance fad that pushed companies onto the stock market during the Covid-19 pandemic, ended this year with a string of big bankruptcies and even bigger losses for shareholders. At least 21 firms that went public by merging with special purpose acquisition companies, or SPACs, went bankrupt this year… Measured from their peak market capitalizations, the insolvencies bookend the loss of more than $46 billion of total equity value. The failures span money-losing electric vehicle startups and forward-thinking farming companies.”

December 26 – Bloomberg (Katherine Chiglinsky): “A Los Angeles office building located near Century City and Beverly Hills sold for about 52% less than its price five years ago. Harbor Associates and F&F Capital Group bought the five-story property at 1640 Sepulveda Blvd. for about $44.7 million… The building last sold in 2018 for $92.5 million.”

Banking Watch:

December 26 – Financial Times (Joshua Franklin): “JPMorgan… captured almost a fifth of all US bank profits in the first nine months of 2023, capitalising on a year of turmoil for the country’s financial sector to emerge even more dominant. Its US banking subsidiary earned $38.9bn in profits — about 18% of the industry’s total… If the pattern continues for the full year, the lender will not have commanded such a high share of industry profits since 2009…”

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

December 29 – Bloomberg: “China will escalate its challenge to the US-led world order, using a rare Communist Party conference this week to map out a strategy to raise its profile and power on the global stage. President Xi Jinping and other senior leaders pledged to raise China’s influence on world events ‘to a new level,’ according to a government statement issued late Thursday after the conference. ‘We must reject all acts of power politics and bullying, and vigorously defend our national interests and dignity,’ it said, an allusion to what it sees as the US’ anti-China lobbying… ‘We must take a clear and firm position, hold the international moral high ground, and unite and rally the overwhelming majority in our world,’ according to the statement.”

December 25 – Reuters: “President Xi Jinping vowed… to resolutely prevent anyone from ‘splitting Taiwan from China in any way’, the official Xinhua news agency reported, a little more than two weeks before Taiwan elects a new leader. China views democratically-governed Taiwan as its own territory, despite the strong objections of the government in Taipei, and has ramped up military and political pressure to assert its sovereignty claims… ‘The motherland must be reunified, and inevitably will be reunified,’ Xinhua cited Xi as telling senior officials from the Communist Party. China must deepen integration between the two sides, promote the peaceful development of relations across the Taiwan Strait, and ‘resolutely prevent anyone from splitting Taiwan from China in any way’, he said.”

December 27 – Reuters (Ryan Woo, Ethan Wang, Albee Zhang and Ben Blanchard): “The Chinese government… threatened to place further trade sanctions on Taiwan if the ruling party ‘stubbornly’ adheres to supporting independence, in a further escalation of the war of words as Taiwanese elections approach next month. Taiwan’s Jan. 13 presidential and parliamentary elections are taking place as China, which views the island as its own territory, has sought to force Taiwan to accept Chinese sovereignty claims.”

December 27 – Reuters (Vladimir Soldatkin and Olesya Astakhova): “Almost all of Russia’s oil exports this year have been shipped to China and India, Deputy Prime Minister Alexander Novak said…, after Moscow responded to Western economic sanctions by quickly rerouting supplies away from Europe. Russia has successfully circumvented sanctions on its oil and diverted flows from Europe to China and India, which together accounted for around 90% of its crude exports…”

De-globalization and Iron Curtain Watch:

December 29 – Reuters (Guy Faulconbridge and Dmitry Antonov): “The Kremlin on Friday warned the West that it had a list of U.S., European and other assets that would be seized if G7 leaders decided to go ahead and confiscate $300 billion in frozen Russian central bank reserves. Leaders of the Group of Seven major industralised nations will discuss a new legal theory that would enable the seizure of frozen Russian assets when they meet in February, two sources familiar with the plans and a British official said…”

December 26 – Bloomberg: “Chinese President Xi Jinping used a speech remembering Mao Zedong to push a framework the current leader rolled out recently to counter the West’s capitalist model. The ‘central task’ of the nation and its ruling Communist Party is ‘to build China into a stronger country and rejuvenate the Chinese nation on all fronts by pursuing Chinese modernization,’ Xi said… as he marked 130 years since Mao’s birth. Xi described ‘Chinese modernization’ — a vague concept he has been promoting since 2021 — as ‘a cause passed down from veteran revolutionaries including Mao Zedong’ that is now ‘the solemn historical responsibility of today’s Chinese Communists.’”

Inflation Watch:

December 26 – Bloomberg (Chris Marr): “Legislative and ballot fights over higher minimum wages will span a mix of red and blue states across the country in 2024, as worker advocates seek to emulate and expand on victories to boost pay for hourly workers. The push to mandate a $15 minimum continues in states that haven’t reached that level, including ballot proposals that could go before Ohio and Oklahoma voters next November…”

December 26 – Bloomberg (Anuradha Raghu): “Rice prices surged to a fresh 15-year high, fueled by strong demand and lingering supply concerns. Thai white rice 5% broken — an Asian benchmark — climbed for a third straight week to reach $659 a ton… That’s the highest since October 2008 and brings the increase in prices to about 38% this year…”

Biden Administration Watch:

December 25 – Wall Street Journal (Benoit Faucon and Gordon Lubold): “Escalating Iran-backed attacks against global commercial shipping in the Red Sea have heightened pressure on the Biden administration as officials scramble to protect trade while trying to avoid a direct confrontation with Tehran. The U.S. Navy said late Saturday that two more vessels had been attacked that day by Iranian-backed Houthi forces in Yemen, bringing the number of commercial ships attacked near a crucial passageway between the Horn of Africa and the Middle East to 15… The shipping attacks are part of a broader regional confrontation between Iran’s allies and the U.S. and Israel, and are increasing. A declassified document from the Defense Department shows Houthi attacks on ships escalated during the first half of December… The Houthi attacks have created a new front in the battle between Israel and Hamas and are just the latest test of Washington’s ability to support its closest Middle East ally while trying to contain the conflict from spilling over into a regional war.”

December 28 – Reuters (Phil Stewart, David Latona and Angelo Amante): “U.S. President Joe Biden hoped to present a firm international response to Yemen’s Houthi attacks on Red Sea shipping by launching a new maritime force, but a week after its launch many allies don’t want to be associated with it, publicly, or at all… But nearly half of those countries have so far not come forward to acknowledge their contributions or allowed the U.S. to do so. Those contributions can range from dispatching warships to merely sending a staff officer.”

December 27 – Reuters (Richard Valdmanis and Caitlin Webber): “The United States has finalized contracts to purchase three million barrels of oil to help replenish the Strategic Petroleum Reserve (SPR) after the largest sale in history last year… The administration of President Joe Biden had conducted sales last year, including a record one of 180 million barrels, to help control oil prices after Russia, a large crude exporter, invaded Ukraine. The U.S has now purchased about 14 million barrels for replenishment after last year’s sales.”

Federal Reserve Watch:

December 27 – Reuters (Michael S. Derby): “The traditional turbulence of money markets at year’s end could pose a first test for a new and so far largely unused central bank liquidity facility, but a shift to full scale activity likely still lies some time off into next year. Some market participants reckon that the Fed’s Standing Repo Facility, which it formally adopted in 2021, may see some noticeable usage over the turn of the year as traders and investors manage their money during a predictably volatile period. If that happens, it would not be a sign of distress, but of the financial plumbing system working as intended. The Standing Repo Facility, or SRF, takes in Treasury securities from eligible financial firms – they are mainly the mega banks that normally support the government securities market and serve as counterparties to Fed interventions – and converts them quickly into cash. Scarred by Treasury bond owners’ severe liquidity problems in the spring of 2020, the facility is designed to be a sort of automatic stabilizer for markets.”

U.S. Bubble Watch:

December 26 – Associated Press (Anne D’Innocenzio and Haleluya Hadero): “Holiday sales rose this year and spending remained resilient during the shopping season even with Americans wrestling with higher prices in some areas and other financial worries, according to the latest measure. Holiday sales from the beginning of November through Christmas Eve climbed 3.1%, a slower pace than the 7.6% increase from a year earlier, according to Mastercard SpendingPulse, which tracks all kinds of payments including cash and debit cards…”

December 24 – Wall Street Journal (Christopher Bing): “U.S. consumers continue to burn through their pandemic savings and are taking on more debt as they face high prices on everything from food and housing to entertainment… For many consumers, maintaining their lifestyles while grappling with inflation and rate increases means relying more on credit cards and other products. Some are loading up on installment loans offered by buy now, pay later players as grocery bills remain elevated and mortgage rates sit at around 7%. Credit-card spending was up in the third quarter at major banks, including 9% at JPMorgan Chase, the nation’s largest bank, and 15% at Wells Fargo.”

December 28 – Bloomberg (Augusta Saraiva): “Initial applications for US unemployment benefits increased in the week leading up to Christmas, while remaining at a level that is consistent with a resilient labor market. First-time claims rose by 12,000 to 218,000 in the week ended Dec. 23… Continuing applications, a proxy for the number of people collecting unemployment benefits, rose to 1.88 million the week prior.”

December 28 – Bloomberg (Dominic Carey): “Nov. advance trade deficit of goods widened to $90.3b from $89.6b in prior month… Imports fell 2.1% in Nov. to $255.380b from $260.880b in Oct. Exports fell 3.6% in Nov. to $165.107b from $171.317b in Oct.”

December 28 – Reuters (Dan Burns): “The interest rate on the most common type of U.S. home loan fell for a ninth straight week this week to close out the year at their lowest level since May, according to data released Thursday by Freddie Mac. The interest rate on a 30-year fixed-rate mortgage averaged 6.61% as of Dec. 28, down from 6.67% a week earlier. The rate has declined each week since hitting the highest level in 22 years in late October, tumbling 1.18 percentage points in that span.”

December 22 – Associated Press (David A. Lieb): “A new round of stadium construction is underway for professional sports teams across the U.S., and taxpayers will be helping to pay the multi-billion-dollar tab. The wave of construction has seen teams chasing both repairs and luxurious additions. Some teams have sought new public funding for the projects… even while debt from the last round of renovations a couple decades ago is still being paid off. This year alone, The Associated Press tallied about a dozen stadium projects that were unveiled or already underway for Major League Baseball and National Football League franchises. That doesn’t include additional projects for professional basketball, hockey and soccer teams.”

December 28 – Bloomberg (Danielle Muoio Dunn): “New York Gov. Kathy Hochul (D) is facing pressure from progressive groups and lawmakers to raise taxes on the wealthy and find new revenue streams, with the state facing multibillion budget gaps in the years ahead… Invest in Our New York, an advocacy group launched in 2021 to raise taxes on the rich and corporations, is backing bills that would impose an additional tax on investment income and an heir’s tax for inheritances over $250,000.”

China Watch:

December 28 – Wall Street Journal (Lingling Wei): “A song called ‘Tomorrow Will Be Better’ became a sensation in mainland China in the 1980s, when the nation was emerging from the poverty and turmoil of Mao Zedong’s rule. Its inspirational lyrics, which exhorted listeners to ‘look upward for the wings in the sky,’ came to represent a generation that was starting to believe in a brighter future. Now people in China are listening to the song again—but for a very different reason. Videos of the song are circulating on WeChat and other communications apps, often with taglines expressing sadness about the end of that era.”

December 26 – South China Morning Post (Sylvie Zhuang): “The Chinese president leads a ceremony honouring the former leader at Tiananmen Square… Xi tells event to mark Mao’s 130th birthday that ‘complete reunification of our motherland is a righteous cause’… Xi Jinping paid tribute to Mao Zedong and hailed his political teachings on Tuesday, the 130th anniversary of the late leader’s birth, saying mainland China will ‘surely’ be unified with Taiwan in the future. ‘The complete reunification of our motherland is an overall trend, a righteous cause, and the common aspiration of the people. Our motherland must be reunified, and it will surely be reunified,’ Xi said in his speech delivered at the Great Hall of the People… ‘[We] firmly oppose anyone using any means to separate Taiwan from China.’”

December 21 – Bloomberg: “Chinese President Xi Jinping used a speech remembering Mao Zedong to push a framework the current leader rolled out recently to counter the West’s capitalist model. The ‘central task’ of the nation and its ruling Communist Party is ‘to build China into a stronger country and rejuvenate the Chinese nation on all fronts by pursuing Chinese modernization,’ Xi said… Xi described ‘Chinese modernization’ — a vague concept he has been promoting since 2021 — as ‘a cause passed down from veteran revolutionaries including Mao Zedong’ that is now ‘the solemn historical responsibility of today’s Chinese Communists.’ The Chinese leader has trumped that idea at events including last year’s leadership congress, describing it as an alternative to systems used by the US and its allies.”

December 24 – Financial Times (Cheng Leng and Sun Yu): “The influence of China’s once-powerful central bank has diminished as Beijing steps up a drive to centralise Communist party control over financial regulation. Some of the powers formerly held by the People’s Bank of China have been taken over by a party oversight body and a revamped financial regulator… While the central bank retains a vital role in daily money markets, its governor is now ranked lower in the party hierarchy than the chiefs of some of the banks the PBoC used to regulate. Analysts said the changes, part of a shake-up under President Xi Jinping, would diminish the PBoC’s clout over domestic policymaking as well as its role as a communication channel with global regulators and markets. ‘One of the biggest casualties of the new financial architecture is the diminished status of the PBoC,’ said George Magnus, an associate at Oxford university’s China Centre.”

December 27 – Financial Times (Hudson Lockett and Cheng Leng): “Nearly nine-tenths of the foreign money that flowed into China’s stock market in 2023 has already left, spurred by mounting doubts about Beijing’s willingness to take serious action to boost flagging growth. Since peaking at Rmb235bn ($33bn) in August, net foreign investment in China-listed shares this year has dropped 87% to just Rmb30.7bn… International investors have been persistent net sellers since August, when missed bond payments by developer Country Garden revealed the severity of a liquidity crisis in the country’s property sector.”

December 22 – Bloomberg: “A fresh round of large banks’ deposit rate cuts turbocharged Chinese government bonds, driving some ultra-long yields to the lowest in nearly two decades, as the move may steer investment toward the debt market. In Friday morning trading, 30-year sovereign notes yields dropped to 2.84%, set for a fresh low since 2005, while 10-year yields continue to edge down to the lowest since September.”

December 28 – Bloomberg (Shawna Kwan): “Hong Kong’s home prices dropped to the lowest in almost seven years as high interest rates continue to weigh on buyers’ appetite, driving them to rent instead. Residential prices fell 2% in November from a month earlier, a seventh straight decline… The price index is now at its lowest since early 2017. In contrast, rents in the city rose for a 10th month to the highest in four years.”

Central Banker Watch:

December 28 – Bloomberg (Marton Eder): “One of the European Central Bank’s most hawkish Governing Council members said it’s too early to talk about lowering borrowing costs and such a move in 2024 is anything but certain. ‘Even if the ECB is past an unprecedented series of ten consecutive rate increases, there is also for the year 2024 no guarantee of rate reductions,” Robert Holzmann said… ‘Monetary policy normalization is already showing its impact on slowing inflation, but it would still be premature to think about rate cuts.’”

Global Bubble Watch:

December 29 – Bloomberg (Jordan Fitzgerald): “It was a comeback year for the world’s wealthiest. The combined net worth of the 500 richest people surged by $1.5 trillion in 2023, fully rebounding from the $1.4 trillion lost the year prior, according to the Bloomberg Billionaires Index. Once again, their fortunes were closely correlated to the performance of tech stocks, which rose to fresh records this year despite recession fears, lingering inflation, lofty interest rates and geopolitical turmoil. Tech billionaires saw their wealth grow by 48% or $658 billion, propelled by intense hype around artificial intelligence.”

Europe Watch:

December 27 – Bloomberg (Michael Nienaber and Patrick Donahue): “Wolfgang Schaeuble, who helped forge German reunification before being toppled from party leadership in 2000 by Angela Merkel, only to re-emerge almost a decade later as her fiscally hawkish finance minister to steer Europe’s largest economy through the euro crisis, has died. He was 81. Paralyzed from the chest down and confined to a wheelchair since a gunman shot him at a political rally in 1990, Schaeuble died late Tuesday. ‘His intellect, his joy in democratic debate, his conservative world view and his rhetorical sharpness particularly distinguished him,’ Chancellor Olaf Scholz, a Social Democrat who succeeded Schaeuble as finance minister in 2018, said…”

Japan Watch:

December 27 – Bloomberg (Erica Yokoyama and Yumi Teso): “Bank of Japan Governor Kazuo Ueda continued to prepare the ground for the nation’s first interest rate increase since 2007 with another round of comments that further build the case for a move in the spring while not ruling out the less probable option of a January hike. ‘It’s possible to make some decisions even if the bank doesn’t have the full results of spring wage negotiations from small- and middle-sized businesses,’ the governor said…”

December 26 – Reuters (Leika Kihara and Takahiko Wada): “Bank of Japan Governor Kazuo Ueda must change his communication style that is confusing markets into believing an exit from ultra-loose monetary policy is imminent, former BOJ board member Takako Masai told Reuters. Less than a year into the job, Ueda has already wrong-footed markets twice in comments about the policy outlook including on Dec. 7, when he elaborated on what the BOJ could do after ending its negative interest rate policy… ‘As chair of the policy meetings, the governor shouldn’t speak beyond what has been decided at the board,’ said Masai, who served at the BOJ’s nine-member board from 2016 to 2021. ‘The sequence of the BOJ’s recent communication is confusing and may narrow its options’ on the exit timing by prompting traders to price in the chance of imminent action, Masai said.”

December 25 – Reuters (Leika Kihara): “Bank of Japan Governor Kazuo Ueda said… the likelihood of achieving the central bank’s inflation target was ‘gradually rising’ and it would consider changing policy if prospects of sustainably achieving the 2% target increase ‘sufficiently’. While companies are becoming more open to raising wages and prices, the key is whether wages will continue rising next year and lead to further increases in service prices, Ueda said. ‘If the virtuous cycle between wages and prices intensifies and the likelihood of achieving our price target in a sustainable and stable manner rises sufficiently, we will likely considering changing policy,’ Ueda said, offering the clearest sign to date of the chance of ending ultra-easy monetary policy.”

December 24 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Kazuo Ueda pointed out some positive potential aspects of having higher interest rates under normal economic conditions while also reiterating his pledge to continue with monetary easing patiently in the pursuit of stable inflation. ‘The most obvious benefit of a slightly positive inflation rate is larger room for monetary policy responses to an economic downturn… I believe that greater economic stability as a result of securing room for monetary policy responses will have a significant positive effect on firms as they formulate their business plans,’ the governor said…”

December 26 – Reuters (Leika Kihara): “Some Bank of Japan policymakers called for deeper debate on a future exit from ultra-loose monetary policy as the economy makes progress toward achieving the bank’s price target, a summary of opinions at this month’s meeting showed… While the board agreed to maintain massive stimulus for the time being, the nine members were split between those who were cautious about raising interest rates, and others who saw the need to start preparing for a future exit. One member said the timing of normalising the BOJ’s ultra-easy policy was ‘getting closer’ given the increasing likelihood that the bank’s 2% inflation target for Japan would be reached in a sustainable manner. ‘To avoid the risk of high prices damaging consumption and undermining the chance of achieving our price target, we should not miss the opportunity to normalise monetary policy,’ the member said.”

December 26 – Bloomberg (Toru Fujioka): “Bank of Japan board members discussed the potential timing of the nation’s first interest rate hike since 2007 during their meeting last week, with several members indicating they see no rush to make the move. ‘It would not be too late even if the bank makes a decision after it sees developments in labor-management wage negotiations next spring,’ one of nine board members said… There is only a small risk of underlying inflation overshooting its 2% target by a significant degree, the same member said. Another voiced the opinion that there is now ‘sufficient leeway’ to determine whether a virtuous wage-inflation cycle has been achieved after the bank enhanced the flexibility of its yield curve control mechanism in October.”

December 25 – Bloomberg (Mia Glass): “The rise in Japan’s business service prices held steady at a three-decade high, in a development likely to fuel speculation that the Bank of Japan will inch its way toward normalizing policy in coming months. The country’s services producer price index… rose 2.3% in November from a year earlier… It was the second month of 2.3% gains, the fastest since April 1992 when excluding periods when there were sales tax increases.”

EM Watch:

December 26 – Bloomberg: “Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the seventh straight week of inflows. Inflows to U.S.-listed emerging market ETFs… totaled $4.05 billion in the week ended Dec. 22… This was the biggest weekly inflow since Jan. 13, 2023. So far this year, inflows have totalled $17.8 billion.”

December 22 – BBC (Nikunj Ohri): “The Indian government said.. a warning from the International Monetary Fund (IMF) that the country’s debt to GDP ratio could hit 100% was a worst-case scenario, and not a ‘fait accompli’. The IMF, in a so-called article IV review, said India’s general government debt, which includes federal and state government debt, could be 100% of GDP under adverse circumstances by fiscal 2028.”

December 25 – Reuters (Rachel Savage and Karin Strohecker): “Ethiopia became Africa’s third default in as many years… after it failed to make a $33 million ‘coupon’ payment on its only international government bond. Africa’s second most populous country announced earlier this month that it intended to formally go into default, having been under severe financial strain in the wake of the COVID-19 pandemic and a two-year civil war that ended in November 2022.”

Geopolitical Watch:

December 25 – Reuters (Ryan Woo, Neil Jerome Morales and Andrew Hayley): “Chinese state media accused the Philippines… of repeatedly infringing on China’s territory in the South China Sea, spreading false information and colluding with extraterritorial forces to cause trouble. The Philippines has relied on U.S. support to continually provoke China, with such ‘extremely dangerous’ behaviour seriously harming regional peace and stability, China’s Communist Party mouthpiece, the People’s Daily, wrote…”

December 25 – Reuters (Tuvan Gumrukcu and Ece Toksabay): “Turkey said… its air force ‘neutralised’ 26 Kurdish militants in strikes in Syria and northern Iraq in response to the killing of soldiers at the weekend… On Saturday, the defence ministry said 12 Turkish soldiers were killed during fighting with the outlawed Kurdistan Workers Party (PKK) in northern Iraq, prompting Ankara to conduct a barrage of air strikes and operations in the region.”

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