February 17, 2023: Ueda and No Landings

February 17, 2023: Ueda and No Landings
Doug Noland Posted on February 17, 2023

Data this week confirmed both that “disinflation” is not running wild and that the U.S. economy is not falling off a cliff. A comment by a senior German central banker (Isabel Schnabel) summed up the situation (for Europe and the U.S.): “Markets are priced for perfection… They assume inflation is going to come down very quickly toward 2% and it is going to stay there, while the economy will do just fine.”

At 0.5%, January’s CPI increase was the strongest in three months (in line with expectations). But with revisions, year-over-year consumer inflation of 6.4% was higher than the 6.2% expected. In short, pricing pressures remain robust, while hopeful forces of “disinflation” seem to have stalled – especially in goods pricing. Services prices increased 0.6%, Housing 0.8%, Food & Beverages 0.5%, and Transportation 0.4%.

January Producer Price Inflation (PPI) increased 0.7% for the month, higher than the expected 0.4%, and the strongest monthly gain since June (December revised to negative 0.2% from negative 0.5%). PPI excluding food and energy rose a stronger-than-expected 0.5% (expectations 0.3%), while December core was revised to 0.3% from 0.1%. This put year-over-year PPI at 6.0% (expectations 5.4%), with ex-food and energy PPI up 5.4% (expectations 4.9%).

Retail Sales surged a stronger-than-expected 3.0% in January, a remarkable recovery from December’s 1.1% drop. Retail strength was notably broad-based, with robust gains in Vehicle sales (5.9%), Furniture (4.4%), Department Stores (17.5%), Eating & Drinking Establishments (7.2%), and Electronics (3.5%).

The year began with a big cross-market squeeze that spurred surging bond prices/sinking yields. With analysis and punditry following market direction, a narrative soon took hold of recession and impending dovish Fed pivot. “Look at what the market says over what the Fed says.” A look at the markets has been telling: financial conditions have significantly loosened.

I believe the world is transitioning to a new cycle. Expectations that inflation conveniently returns to previous cycle dynamics is wishful thinking. Hopes that central bankers can quickly conclude tightening cycles without the need to inflict pain are unrealistic.

February 16 – Bloomberg (Alex Tanzi): “US household debt soared by the biggest amount in two decades in the fourth quarter, with younger borrowers in particular struggling to make loan payments amid high inflation and interest rates. Households added $394 billion in overall debt, the largest nominal increase in 20 years, bringing the total to a record $16.9 trillion, according to… the Federal Reserve Bank of New York…”

February 16 – Yahoo Finance (Gabriella Cruz-Martinez): “As credit card debt hit an all-time high — just shy of $1 trillion — in the final three months of 2022, delinquencies among borrowers accelerated. Balances grew $61 billion in the fourth quarter from the previous one to $986 billion, the Federal Reserve Bank of New York found. That marked the largest quarterly increase and the highest total since the series began in 1999… The $130 billion year-over-year increase in credit card debt, also the highest annual gain on record per the New York Fed, came as interest rates on credit cards also hit new highs…”

February 15 – New York Times (Jim Tankersley and Alan Rappeport): “The United States is on track to add nearly $19 trillion to its national debt over the next decade, $3 trillion more than previously forecast, as a result of rising costs for interest payments, veterans’ health care, retiree benefits and the military, the Congressional Budget Office said… The new forecasts… project a $1.4 trillion gap this year between what the government spends and what it takes in from tax revenues. Over the next decade, deficits will average $2 trillion annually, as tax receipts fail to keep pace with the rising costs of Social Security and Medicare benefits for retiring baby boomers. To put those numbers in context, the total amount of debt held by the public will equal the total annual output of the U.S. economy in 2024, rising to 118% of the economy by 2033.”

Lost in all the discussion of monetary policy, market forecasts and economic prospects is that Credit continues to expand excessively. Annualizing the New York Fed’s Q4 household borrowing data, Credit card debt expanded at a 26% pace and total debt at a 9.5% rate during the quarter. The big story so far is how little impact the Fed’s aggressive tightening cycle has had on incessantly loose financial conditions. And with inflationary biases percolating throughout the economy (and globally), reining in excessive Credit growth will require tighter financial conditions. In short, the Credit boom must end, and the transition to new Credit dynamics will be anything but pain free.

American households are borrowing more to pay for higher priced goods, food, automobiles, services and such. Our spendthrift government borrows more to pay for rising costs on expenditures, including debt service. Corporations borrow more to finance rising cost structures, along with investment booms directly and indirectly associated with new cycle inflationary pressures (including “de-globalization,” renewable energy and climate change).

Importantly, previous cycle inflationary dynamics – where Credit and liquidity excess would bypass traditional inflationary channels as it gravitated to inflating asset Bubbles – are transitioning. Credit and monetary inflations now bolster consumer and producer price inflation. And unprecedented monetary and fiscal pandemic stimulus not only supercharged spending and inflation dynamics, but also left a residual of huge cash balances (household and corporate). These new cycle dynamics are in the process of creating significant challenges for central bankers and highly speculative financial markets.

February 16 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said he would not rule out supporting a half-percentage-point interest-rate hike at the Fed’s March meeting, rather than the quarter point that other officials have signaled may be appropriate. ‘My overall judgment is it will be a long battle against inflation, and we’ll probably have to continue to show inflation-fighting resolve as we go through 2023,’ Bullard told reporters… Bullard also said he advocated for a 50 bps increase at the Fed’s meeting earlier this month, echoing remarks from Cleveland Fed President Loretta Mester earlier in the day…”

The rates market is now pricing peak Fed funds at 5.28% for the July 26th FOMC meeting, 44 bps higher than about two weeks ago (February 2nd). Over this period, rate expectations for the December 16th meeting have surged 45 bps to 5.07%. Two-year yields have jumped from 4.11% to 4.62%. Ten-year Treasury yields are up 42 bps to 3.82%, with benchmark MBS yields surging 69 bps in two weeks to 5.38%.

The Atlanta Fed’s GDPNow model currently forecasts Q1 growth at 2.50%. Already this year, Wall Street’s bullish narrative has morphed from mild recession and Fed dovish pivot, to Goldilocks and “soft landing”, to the more recent iteration, “immaculate disinflation” and “no landing.”

Don’t misconstrue economic resilience for system soundness. Loose conditions are extending the Credit cycle – rather than circumventing it. A serious inflation fight will require higher rates sufficient to restrain Credit growth. And prospects for the downside of this historic Credit cycle are troubling, to say the least. “No landing” exuberance will have a short half-life.

While policy rate expectations have adjusted higher, rate markets still price in a dovish pivot for later in the year. There remains a 39 bps differential between rates at the July 26th (5.28%) and January 31, 2024, (4.89%) FOMC meetings, what I believe is the market discounting probabilities of an “accident” forcing a Fed pivot. Japan is high on the list of accident candidates.

February 16 – Reuters (Leika Kihara and Tetsushi Kajimoto): “For Prime Minister Fumio Kishida, Japan’s next central bank chief had to symbolise a departure from the unconventional policies of his predecessor Shinzo Abe – but without angering pro-growth lawmakers of Abe’s powerful political faction. The tricky task of steering the Bank of Japan (BOJ) out of years of ultra-low interest rates without upending markets required the skill to read markets and clearly communicate policy intentions, both domestically and internationally. Kazuo Ueda, a 71-year-old university professor who has kept a low profile despite strong credentials as a monetary policy expert, ticked some important boxes. He was branded neither an explicit dove nor hawk. While he was not even on the list of dark horse candidates floated by the media, Ueda was well known in global central bank circles.”

February 14 – Bloomberg (Isabel Reynolds): “Japanese Prime Minister Fumio Kishida said it would be important for the Bank of Japan to make appropriate decisions on monetary policy as markets change rapidly, indicating his desire for flexibility under the new governorship. Kishida was responding to questions in a parliamentary committee about his nominee for BOJ governor, Kazuo Ueda, and the future of Japan’s ultra-easy policy, dubbed ‘Abenomics’ after the late former Prime Minister Shinzo Abe. ‘From now on, the situation around the world and in the markets is going to change rapidly,’ Kishida said. ‘In that situation it’s important to make appropriate decisions.’”

Prime Minister Kishida understands that Japan must conclude the “Abenomics” experiment and rein in Kuroda’s runaway monetary inflation. He has called upon widely respected monetary scholar Kazuo Ueda to craft an exit strategy. By all accounts, Ueda is thoughtful, pragmatic and cautious. Expectations are that he will begin implementing a plan for measured normalization at some point this year. The right man and a not unreasonable strategy.

Markets seemed poised to accommodate. Global yields were dropping, the dollar weakening, inflationary pressures abating, and pressure on global central bankers was waning. Importantly, pressure was easing off the yen and government bond market. Time seemed to be on the side of the soon-to-be governor of the Bank of Japan to deliberately craft his course of action. Perhaps some tinkering (scrapping 10-year JGBs for shorter maturities), but abandoning YCC (yield curve control) could wait for another day.

But suddenly, the backdrop has shifted. Global inflation has not morphed into “disinflation;” the Fed and central bankers are not off the hook; bond yields are surging; and dollar strength is reemerging. Japan’s vulnerable currency and bonds are suddenly back in market crosshairs.

I just don’t see Kazuo Ueda as having months to settle in – to build camaraderie with his BOJ colleagues, while establishing credibility with the markets. Trial by fire. “Measured” and “gradualism” seemed foolproof – only a week or two ago. Everyone has a plan until they get punched in the mouth. How will Ueda respond to a sinking yen? To a serious breach of yield curve control?

The problem is that adhering to yield curve control would likely force the BOJ into (many) hundreds of billions of additional debt monetization – liquidity creation that risks dislocation and a crisis of confidence for its fragile currency.

February 14 – Reuters (Jamie McGeever): “The explanation for the whoosh higher in risk assets this year may be as simple as it is surprising: eye-popping liquidity from central banks. Largely thanks to the Bank of Japan hoovering up domestic government bonds to keep its ‘yield curve control’ policy intact, and stimulus from the People’s Bank of China (PBOC), aggregate liquidity from the official sector has surged in recent months. Apollo Global Management’s Torsten Slok reckons the BOJ bought $291 billion of bonds in January – a monthly record which contributed to G4 central banks’ first net injection of liquidity into the global financial system since last April.”

I don’t believe we can at this point overstate the importance of BOJ policy and Japanese liquidity. The weak yen and ongoing negative rates were a boon for global leveraged speculation last year, partially mitigating the forces of de-risking/deleveraging. Over recent months, BOJ monetization has been instrumental in offsetting QT effects from the Fed and others – global liquidity support likely instrumental during the big squeeze and reemergence of “risk on” liquidity abundance.

For the most part, markets remain sanguine. Everything appears steady as she goes. No radical policy shifts by Ueda seem to ensure ongoing BOJ liquidity support, a dynamic that could help explain why rising global yields have thus far not spurred “risk off” deleveraging and tightening liquidity conditions.

I would however caution that the situation is turning tenuous. The clock is now ticking on global “risk on.” So long as financial conditions remain loose, markets will face elevated inflation and policy tightening risks. Moreover, rising yields risk unleashing de-risking/deleveraging dynamics. The weak yen bolsters dollar strength, with rising yields and a resurgent dollar pressuring the emerging markets. “Doom loop” – rising yields and dollar gains forcing EM central banks to liquidate Treasuries and international reserves to support flagging currencies – risks lurk. Meanwhile, a stronger dollar, rising yields and risk aversion would pressure Italian bonds and Europe’s vulnerable periphery, with European bond markets and the euro susceptible to their own “doom loop” dynamic. A resurgent dollar and global “risk off” would also spell trouble for China and the renminbi.

And surging global yields and troubles in EM, Europe and China would compound risks to Japan’s vulnerable bonds and currency. There’s a scenario where Governor Ueda is forced to choose between maintaining yield curve control and stabilizing the yen. Currency stability would take precedence. Yield curve control, after all, is unsustainable anyway. And abandoning YCC with global markets in the throes of de-risking/deleveraging would surely unleash acute instability.

But I’m jumping too far ahead of things. Ueda’s term doesn’t even begin until April. While vulnerable, global financial conditions remain loose. There is yet minimal evidence of the bond market reversal spurring general de-risking/deleveraging. Heck, the stock market took some shots – during options expiration week, no less – and barely flinched.

It wouldn’t be surprising to see equities market game-playing run for a stretch. For 2023, greed shifted decisively to the bull camp and fear to the bears’. So, a highly speculative market will target “weak hands” for short squeezes and bearish option position reversals – until that game quits working. Speculative dynamics bolster the old “climb the wall of worry” dynamic. Especially in the current backdrop, it’s a dangerous game. Greater fool.

But keep your eye on the yen. The Japanese currency traded above 135 to the dollar intraday Friday for the first time since Kuroda loosened YCC on December 20th – and dropped a notable 2.1% for the week. Does yen weakness (dollar strength) exert contagion effects on the euro and EM currencies? And, of course, we’ll monitor global bond markets, expecting rising yields to pressure Japanese bonds.

For now, markets are emboldened that ongoing yield curve control will continue to offer a reliable source of global liquidity. This assurance only heightens the risk of serious dislocation the day the Ueda BOJ ditches YCC. The way things are lining up, I wouldn’t bet on the “no landing” scenario.

For the Week:

The S&P500 slipped 0.3% (up 6.2% y-t-d), while the Dow was little changed (up 2.0%). The Utilities recovered 0.9% (down 3.9%). The Banks declined 0.5% (up 10.9%), while the Broker/Dealers gained 1.1% (up 11.9%). The Transports added 0.6% (up 13.0%). The S&P 400 Midcaps rose 1.0% (up 9.7%), and the small cap Russell 2000 gained 1.4% (up 10.5%). The Nasdaq100 increased 0.4% (up 13.0%). The Semiconductors slipped 0.2% (up 18.7%). The Biotechs advanced 1.3% (up 4.6%). With bullion down $23, the HUI gold equities index sank 4.8% (down 2.3%).

Three-month Treasury bill rates ended the week at 4.6675%. Two-year government yields rose 10 bps this week to a 15-week high 4.62% (up 19bps y-t-d). Five-year T-note yields jumped 11 bps to 4.03% (up 2bps). Ten-year Treasury yields gained eight bps to a six-week high 3.82% (down 6bps). Long bond yields increased five bps to 3.87% (down 10bps). Benchmark Fannie Mae MBS yields rose seven bps to 5.38% (down 1bp).

Greek 10-year yields rose nine bps to 4.28% (down 29bps y-o-y). Italian yields gained nine bps to 4.30% (down 40bps). Spain’s 10-year yields jumped 10 bps to 3.41% (down 11bps). German bund yields increased eight bps to 2.44% (unchanged). French yields rose seven bps to 2.90% (down 8bps). The French to German 10-year bond spread narrowed one to 46 bps. U.K. 10-year gilt yields jumped 12 bps to 3.52% (down 16bps). U.K.’s FTSE equities index rallied 1.5% (up 7.4% y-t-d).

Japan’s Nikkei Equities Index declined 0.6% (up 5.4% y-t-d). Japanese 10-year “JGB” yields added a basis point to 0.51% (up 9bps y-t-d). France’s CAC40 rallied 3.1% (up 13.5%). The German DAX equities index gained 1.1% (up 11.2%). Spain’s IBEX 35 equities index jumped 2.4% (up 13.4%). Italy’s FTSE MIB index rose 1.8% (up 17.1%). EM equities were mixed. Brazil’s Bovespa index rallied 1.0% (down 0.5%), and Mexico’s Bolsa index jumped 2.5% (up 11.0%). South Korea’s Kospi index declined 0.7% (up 9.6%). India’s Sensex equities index increased 0.5% (up 0.3%). China’s Shanghai Exchange Index fell 1.1% (up 4.4%). Turkey’s Borsa Istanbul National 100 index rallied 20.1% (down 8.8%). Russia’s MICEX equities index dropped 4.1% (up 0.7%).

Investment-grade bond funds posted inflows of $1.194 billion, while junk bond funds reported outflows of $2.817 billion (from Lipper).

Federal Reserve Credit declined $4.5bn last week to $8.393 TN. Fed Credit was down $508bn from the June 22nd peak. Over the past 179 weeks, Fed Credit expanded $4.666 TN, or 125%. Fed Credit inflated $5.582 Trillion, or 199%, over the past 536 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $14.0bn last week to $3.346 TN. “Custody holdings” were down $102bn, or 3.0%, y-o-y.

Total money market fund assets rose $10bn to $4.815 TN. Total money funds were up $265bn, or 5.8%, y-o-y.

Total Commercial Paper surged $29.5bn to $1.256 TN. CP was up $233bn, or 22.8%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose 18 bps to a six-week high 6.34% (up 242bps y-o-y). Fifteen-year rates surged 26 bps to 5.67% (up 252bps). Five-year hybrid ARM rates gained 19 bps to 5.66% (up 268bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 21 bps to a three-month high 6.80% (up 260bps).

Currency Watch:

For the week, the U.S. Dollar Index increased 0.2% to 103.86 (up 0.4% y-t-d). For the week on the upside, the Mexican peso increased 1.6%, the Brazilian real 1.0%, the euro 0.2%, and the Swedish krona 0.1%. On the downside, the South Korean won declined 2.7%, the Japanese yen 2.1%, the Norwegian krone 1.3%, the South African rand 1.1%, the Canadian dollar 1.0%, the New Zealand dollar 0.9%, the Australian dollar 0.6%, the Singapore dollar 0.5%, the British pound 0.2%, and the Swiss franc 0.2%. The Chinese (onshore) renminbi declined 0.79% versus the dollar (up 0.44% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index fell 2.0% (down 5.6% y-t-d). Spot Gold declined 1.2% to $1,842 (up 1.0%). Silver lost 1.2% to $21.73 (down 9.3%). WTI crude dropped $3.38, or 4.2%, to $76.34 (down 5%). Gasoline fell 3.8% (down 2%), and Natural Gas sank 9.5% to $2.28 (down 49%). Copper rallied 2.2% (up 8%). Wheat fell 1.2% (down 2%), and Corn declined 0.4% (unchanged). Bitcoin jumped $2,960, or 13.7%, this week to $24,636 (up 49%).

Market Instability Watch:

February 15 – Bloomberg (Lu Wang): “The explosive rise of short-dated options is creating event risk on the scale of the stock market’s early-2018 volatility implosion, according to JPMorgan…’s Marko Kolanovic. That episode, known as Volmageddon, sparked market chaos exactly five years ago and forced the shuttering of one major volatility-focused exchanged-traded product. The latest proliferation of options with zero days to expiry has similar potential to create market turmoil, the top-ranked strategist says. By his team’s estimate, daily notional volumes in such short-term options — known as 0DTE in industry parlance — is around $1 trillion. ‘While history doesn’t repeat, it often rhymes,’ Kolanovic wrote… The selling of these ‘daily and weekly options is having a similar impact on markets.’ The February 2018 ‘Volmageddon’ episode is one of the more famous instances of dynamics in derivatives markets bleeding into their underlying assets, in this case stocks.”

February 15 – Bloomberg (Christopher Anstey and Erik Wasson): “The nonpartisan Congressional Budget Office warned that the federal government would be at risk of a payment default as soon as July if lawmakers fail to raise the debt limit. The Treasury Department is currently using accounting maneuvers to keep making good on federal obligations, after hitting the statutory debt ceiling last month. While Treasury Secretary Janet Yellen signaled at the time those measures would last at least until early June, Wednesday’s CBO estimates offer an updated timeline. ‘If the debt limit remains unchanged, the government’s ability to borrow using extraordinary measures will be exhausted between July and September 2023,’ the CBO estimated.”

February 16 – Yahoo Finance (Alexandra Semenova): “Individual investors have been snapping up stocks at the fastest pace on record as U.S. equity markets have charged higher to start the year. Over the past month, retail investors funneled an average of $1.51 billion each day into U.S. stocks, the highest amount ever recorded, according to… VandaTrack…”

February 13 – Bloomberg (Farah Elbahrawy): “US stocks are ripe for a selloff after prematurely pricing in a pause in Federal Reserve rate hikes, according to Morgan Stanley strategists. ‘While the recent move higher in front-end rates is supportive of the notion that the Fed may remain restrictive for longer than appreciated, the equity market is refusing to accept this reality,’ a team led by Michael Wilson wrote…”

Bursting Bubble and Mania Watch:

February 15 – Wall Street Journal (Will Parker): “Investors bought fewer homes last quarter than they have in years… Large and small businesses purchased 48,445 homes in the last three months of 2022, a 46% decrease from the same quarter a year earlier and the second straight quarter of large declines, according to… Redfin, which tracked sales of single-family homes, condominiums and other properties across 40 major metro areas. Those purchases were the lowest by investors for any quarter since 2017, excluding the second quarter of 2020 when Covid-19 effectively shut down most of the housing market. The 46% decline was the largest ever tracked by Redfin, whose data goes back to 2000. Many of these firms and individuals look to profit by renting out the homes.”

February 16 – Bloomberg (Miles Weiss): “Starwood Real Estate Income Trust Inc. said shareholder redemption requests continued to mount in January, as investors filed notices to withdraw more than $700 million from the property fund. Investors in the vehicle… asked to pull a total 5.2% of its December 31 net asset value, exceeding monthly limits… Starwood is among alternative investment firms including Blackstone Inc. and KKR & Co. that set up real estate trusts to pool billions of dollars from individual investors and buy properties.”

February 14 – Bloomberg (John Gittelsohn): “Brookfield Corp., parent of the largest office landlord in downtown Los Angeles, is defaulting on loans tied to two buildings rather than refinancing the debt as demand for space weakens in the center of the second-largest US city. The two properties in default, part of a portfolio called Brookfield DTLA Fund Office Trust Investor, are the Gas Company Tower, with $465 million in loans, and the 777 Tower, with about $290 million in debt…”

February 12 – Financial Times (Steve Johnson): “Insider traders have used exchange traded funds to conceal billions of dollars’ worth of trades, according to a team of academics who say their finding may be just the ‘tip of the iceberg’. Their analysis suggests at least $2.75bn worth of anomalous trades occurred in US-listed ETFs before merger and acquisition announcements between 2009 and 2021. ‘Our findings suggest insider trading is more pervasive than just the ‘direct’ forms that have been the focus of research and enforcement to date,’ the academics from institutions in Sweden and Australia said in the paper, Using ETFs to Conceal Insider Trading.”

‘Crypto Bubble Collapse Watch:

February 15 – Financial Times (Scott Chipolina): “US authorities have begun the year with a crackdown on crypto companies and their products at such a pace that executives fear the industry is being pushed out of one of its biggest markets. In recent weeks, US regulators, led by the Securities and Exchange Commission, have fired off a series of enforcement actions against some of the biggest digital asset companies and their tokens. At the same time, many of the banks on which these companies rely for payments and custody of assets are also coming under fresh scrutiny. The newly forceful approach has hit a crypto industry still reeling from a bruising year of plunging prices and a crisis of confidence that led to the collapse of some of the sector’s biggest players…”

February 11 – Wall Street Journal (Vicky Ge Huang): “In-house crypto tokens play a big role in the crypto economy, allowing companies to attract users and expand their businesses. But the November collapse of FTX has brought them growing scrutiny. FTX companies used the in-house token, FTT, as collateral to obtain billions of dollars of loans…That left FTX with few sources of funding when the price of FTT went south. The crypto lender Celsius Network used its in-house token, CEL, to fuel its own growth, according to… Shoba Pillay, the examiner appointed by the bankruptcy court to probe Celsius’s business practices.”

Ukraine War Watch:

February 14 – Reuters (Pavel Polityuk and Yiming Woo): “Russian forces bombarded front-line Ukrainian troops and towns in the eastern Donetsk region on Tuesday in what appeared to be early salvoes of a new offensive, as Western allies met to weigh sending more arms to Kyiv for an expected counter-attack. Much of Russia’s artillery fire was focused on Bakhmut, a bombed-out city in Donetsk province and a principal target for President Vladimir Putin. Ukrainian troops there have fortified positions in anticipation of street fighting.”

February 13 – Financial Times (Felicia Schwartz and Henry Foy): “Western intelligence shows Russia is amassing aircraft close to the border with Ukraine, an indication that Moscow is preparing to throw its jets and helicopters into the war to support a stuttering land offensive. The fear of a looming air war in Ukraine has prompted allies to prioritise rapid shipments of air defence assets and artillery ammunition to Kyiv, western officials said, to respond to the shift in approach by Moscow as the almost year-long war enters a new phase. Intelligence shared among Nato allies shows Russia is amassing fixed-wing and rotary aircraft close to the border with Ukraine, according to two officials briefed on its contents.”

February 13 – Reuters (Alexander Tanas and Katharine Jackson): “Moldova’s president accused Russia… of planning to use foreign saboteurs to bring down her tiny country’s leadership, stop it joining the European Union and use it in the war against Ukraine. President Maia Sandu made her comments after Ukrainian President Volodymyr Zelenskiy said last week his country had uncovered a Russian intelligence plan ‘for the destruction of Moldova’, and days later the country’s government resigned.”

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

February 13 – Reuters (Guy Faulconbridge): “The United States has told its citizens to leave Russia immediately due to the war in Ukraine and the risk of arbitrary arrest or harassment by Russian law enforcement agencies. ‘U.S. citizens residing or travelling in Russia should depart immediately,’ the U.S. embassy in Moscow said. ‘Exercise increased caution due to the risk of wrongful detentions.’ ‘Do not travel to Russia… Russian security services have arrested U.S. citizens on spurious charges, singled out U.S. citizens in Russia for detention and harassment, denied them fair and transparent treatment, and convicted them in secret trials or without presenting credible evidence…’”

February 16 – Associated Press (Tara Copp): “As the war rages on in Ukraine, the United States is doing more than supporting an ally. It’s learning lessons — with an eye toward a possible future clash with China. No one knows what the next U.S. major military conflict will be or whether the U.S. will send troops — as it did in Afghanistan and Iraq — or provide vast amounts of aid and expertise, as it has done with Ukraine. But China remains America’s biggest concern. U.S. military officials say Beijing wants to be ready to invade the self-governing island of Taiwan by 2027, and the U.S. is the island democracy’s chief ally and supplier of defense weapons.”

February 16 – Financial Times (Demetri Sevastopulo): “The Pentagon’s top China official is to visit Taiwan in the coming days, a rare trip to the island by a senior US defence policymaker that comes as relations between Washington and Beijing are mired in crisis… Michael Chase, deputy assistant secretary of defence for China, will go to Taiwan in the coming days, according to four people… Chase would be the first senior defence official to visit Taiwan since Heino Klinck, deputy assistant secretary for east Asia, went in 2019. At the time, he was the most senior Pentagon official to visit the island in four decades.”

February 12 – Associated Press: “The United States Navy and Marine Corps are holding joint exercises in the South China Sea at a time of heightened tensions with Beijing over the shooting down of a suspected Chinese spy balloon. The 7th Fleet based in Japan said Sunday that the USS Nimitz aircraft carrier strike group and the 13th Marine Expeditionary Unit have been conducting ‘integrated expeditionary strike force operations’ in the South China Sea. It said exercises involving ships, ground forces and aircraft took place Saturday… China claims virtually the entire South China Sea and strongly objects to military activity by other nations in the contested waterway through which $5 trillion in goods are shipped every year.”

February 16 – Reuters (Tony Munroe and Laurie Chen): “China… put Lockheed Martin and a unit of Raytheon Technologies on an ‘unreliable entities list’ over arms sales to Taiwan, banning them from imports and exports related to China in its latest sanctions against the U.S. companies. The measures come amid heightened tensions after the U.S. military shot down what it says was a Chinese spy balloon, and a day after Beijing warned of ‘countermeasures against relevant U.S. entities that undermine China’s sovereignty and security’.

February 15 – Reuters (Cassandra Garrison): “China said… that U.S. high altitude balloons flew over its Xinjiang and Tibet regions, and that it will take measures against U.S. entities that undermine Chinese sovereignty as a diplomatic dispute festered. Washington and Beijing are locked in a tussle over flying objects after the U.S. military this month shot down what it called a Chinese spy balloon over the coast of South Carolina. Beijing says its balloon was a civilian research vessel mistakenly blown off course, and that Washington overreacted.”

De-globalization and Iron Curtain Watch:

February 14 – Bloomberg: “Chinese leader Xi Jinping pledged to deepen ties with Tehran after meeting Iran’s President Ebrahim Raisi in Beijing, weeks after the US said it would increase pressure on China to stop buying Iranian oil. Raisi’s trip, the first by an Iranian president since his predecessor Hassan Rouhani in 2018, also comes amid signs of tensions between Tehran and Beijing after recent complaints from Iran about a lull in bilateral ties between the two. The US meanwhile wants to enforce sanctions on Iranian crude exports to curb the Islamic Republic’s nuclear activities.’ ‘China will unswervingly develop friendly cooperation with Iran no matter how international and regional situations change,’ Xi said…”

February 14 – Wall Street Journal (Benoit Faucon, Austin Ramzy and Raffaele Huang): “President Ebrahim Raisi of Iran met with Chinese leader Xi Jinping… at the start of a three-day trip, as the two countries shored up ties amid their escalating tensions with the U.S. Iran is increasingly reliant on China to salvage an economy crippled by U.S. sanctions, but also fears Beijing’s growing ties with Saudi Arabia could leave it further isolated. Mr. Xi told his Iranian counterpart that China will support Iran in safeguarding its interests in order to properly resolve the Iranian nuclear issue… China was part of a group of nations that negotiated the 2015 deal alongside the U.S. with Iran. But Washington, which pulled out of the agreement in 2018 under Donald Trump, has been increasingly indifferent to the accord’s fate.”

Inflation Watch:

February 14 – Bloomberg (Reade Pickert): “US consumer prices rose briskly at the start of the year, a sign of persistent inflationary pressures that could push the Federal Reserve to raise interest rates even higher than previously expected. The overall consumer price index climbed 0.5% in January, the most in three months and bolstered by energy and shelter costs… The measure was up 6.4% from a year earlier. Excluding food and energy, the so-called core CPI advanced 0.4% last month and was up 5.6% from a year earlier… The details of the report showed shelter was ‘by far’ the largest contributor to the monthly advance, accounting for almost half of the rise. Used car prices… fell for a seventh month. Energy prices rose for the first time in three months. Shelter costs, which are the biggest services component and make up about a third of the overall CPI index, rose 0.7% last month.”

February 16 – CNBC (Jeff Cox): “Inflation rebounded in January at the wholesale level, as producer prices rose more than expected to start the year… The producer price index… rose 0.7% for the month, the biggest increase since June. Economists… had been looking for a rise of 0.4% after a decline of 0.2% in December. Excluding food and energy, the core PPI increased 0.5%, compared with expectations for a 0.3% increase. Core excluding trade services climbed 0.6%, against the estimate for a 0.2% rise. On a 12-month basis, headline PPI increased 6%, still elevated but well off its 11.6% peak in March 2022.”

February 14 – Bloomberg (Michael Hirtzer): “Breakfast is getting even more expensive after US egg prices soared 8.5% in January while citrus fruits, cereal and baked goods also climbed. Egg prices have been surging amid the nation’s worst-ever outbreak of deadly bird flu that decimated chicken flocks. One outbreak late last year wiped out more than a million birds, according to the US Department of Agriculture. Although wholesale prices have started to slip from all-time highs, that hasn’t yet rippled through to grocery stores.”

February 16 – Dow Jones (Rachel Wolfe): “Not even the family cats and dogs are immune from inflation-driven cutbacks. With the cost of pet food up 15% year-over-year and pets and pet products up 12%…, owners are making changes. Pet toy purchases are down 16% year-over-year as of February…, and sales of pet housing are down 21%. People often treat their pets like children. But elevated inflation means many are struggling to afford taking care of themselves and their kids. Pet owners are now getting rid of Buddy’s raw-food diet and Bella’s monthly treat and toy subscription box.”
Biden Administration Watch:

February 15 – Bloomberg (Erik Wasson): “The clash between President Joe Biden and House Speaker Kevin McCarthy over US fiscal policy is set to intensify after the Congressional Budget Office warned of a sharp deterioration in the federal budget. ‘The fiscal trajectory is unsustainable,’ CBO Director Phillip Swagel told reporters… ‘Our spending is outpacing our revenue,’ he said after his agency released updated long-term projections. ‘At some point something has to give.’ Among the CBO’s stark figures: the budget deficit for 2023 is now seen $426 billion worse than projected last May, at $1.41 trillion. Debt held by the public is seen climbing to $46 trillion by 2033, amounting to 118% of GDP — the highest in US history.”

February 14 – Reuters (Andrea Shalal, Steve Holland and Lindsay Dunsmuir): “President Joe Biden… picked Federal Reserve Vice Chair Lael Brainard and White House economist Jared Bernstein as his top economic advisers, part of a fresh push by the Democratic president to convince skeptical Americans his economic policies are working. The decision, announced after financial markets closed, gives Biden a pair of trusted Washington insiders to steer economic policy as the risk of recession fades but inflation lingers. Big fights also loom with the Republican-controlled House of Representatives over raising the debt ceiling.”

Federal Reserve Watch:

February 15 – Bloomberg (Molly Smith): “The US economy showed remarkable resilience at the start of the year, highlighting robust demand that’s keeping inflation elevated and heaping pressure on the Federal Reserve to stomp the brakes even harder. Retail sales rose last month by the most in nearly two years, and separate measures of manufacturing also came in better than expected… And homebuilders are feeling more confident as mortgage rates settle back from their highs late last year. Combined with Tuesday’s inflation report… the figures illustrate an economy seemingly spurning the Fed’s efforts to slow it down.”

February 16 – Yahoo Finance (Jennifer Schonberger): “Cleveland Fed President Loretta Mester said… she would have favored raising interest rates by 0.50% earlier this month, saying the Fed still has more work to do to bring down inflation. ‘The FOMC has come an appreciable way in bringing policy from a very accommodative stance to a restrictive one, but I believe we have more work to do,’ Mester said… ‘Indeed, at our meeting two weeks ago, setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50-bps increase, which would have brought the top of the target range to 5%,’ Mester said.”

February 13 – Reuters (Lindsay Dunsmuir): “The Federal Reserve will need to continue to raise interest rates in order to get them to a level high enough to bring inflation back down to the central bank’s target rate, Fed Governor Michelle Bowman said… ‘I expect we’ll continue to increase the federal funds rate because we have to bring inflation back down to our 2% goal and in order to do that we need to bring demand and supply into better balance,’ Bowman said…”

February 14 – Reuters (Ann Saphir): “The U.S. central bank will need to keep gradually raising interest rates to beat inflation, Dallas Federal Reserve President Lorie Logan said…, putting investors on notice that borrowing costs may ultimately need to go higher than is now widely expected. ‘We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions,’ Logan said… ‘And even after we have enough evidence that we don’t need to raise rates at some future meeting, we’ll need to remain flexible and tighten further if changes in the economic outlook or financial conditions call for it.’”

February 14 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Philadelphia President Patrick Harker said he believes policymakers will need to raise interest rates to some level above 5% to counter inflation that is retreating only slowly. ‘We’re going to have to let the data dictate that,’ Harker said… ‘It’s going to be above 5% in the Fed funds rate. How much above 5? It’s going to depend a lot on what we’re seeing.’”

U.S. Bubble Watch:

February 16 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits unexpectedly fell last week… ‘Labor market conditions remain exceptionally tight,’ said Michael Pearce, lead U.S. economist at Oxford Economics… ‘That is consistent with most other indicators which suggest that the labor market is still carrying plenty of momentum, leaving the Fed on track to raise rates at its March meeting, and probably at the May meeting too.’ Initial claims for state unemployment benefits slipped 1,000 to a seasonally adjusted 194,000 for the week ended Feb. 11…”

February 15 – CNBC (Jeff Cox): “Sales at retailers rose far more than expected in January as consumers persevered despite rising inflation pressures. Advance retail sales for the month increased 3%, compared with expectations for a rise of 1.9%… Excluding autos, sales rose 2.3%… The ex-autos estimate was for a gain of 0.9%. Food services and drinking places surged 7.2% to lead all major categories. Motor vehicle and parts dealers increased 5.9%, while furniture and home furnishing stores saw a rise of 4.4%. Even with a 2.4% increase in gas prices, receipts at service stations were flat. Online retailers saw an rise of 1.3%, while electronics and appliances stores increased 3.5%. No categories saw a decline, following a December in which sales fell 1.1%. On a year-over-year basis, retail sales increased 6.4%…”

February 14 – Yahoo Finance (Dani Romero): “Small business owners see some inflation pressures easing, but remain ‘cynical’ about the overall U.S. economic outlook. The National Federation of Independent Business’ (NFIB) optimism index rose 0.5 to 90.3 last month… Two areas that continue to weigh on small business sentiment are labor and inflation… The survey found 45% of owners struggled to fill positions, up from December’s figures. Some have taken the initiative to reduce employment rather than increasing it. ‘Owners have a negative outlook on the small business economy but continue to try to fill open positions and return to a full staff to improve productivity,’ Dunkelberg added.”

February 15 – CNBC (Diana Olick): “After falling for five straight weeks, mortgage rates jumped last week, triggering a decline in mortgage demand. Total mortgage application volume fell 7.7% last week… The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 6.39% from 6.18%… Mortgage applications to purchase a home fell 6% for the week and were 43% lower than the same week a year ago. Real estate agents across the country are reporting a jump in buyer demand in the past few weeks, perhaps indicating an early start to the historically busy spring market.”

February 15 – Wall Street Journal (Xavier Fontdegloria): “Confidence among home-builders in the U.S. rose markedly in February…, according to data from the National Association of Home Builders… Here are the report’s main takeaways: –The NAHB’s housing-market index–which gauges the single-family housing market–rose to 42 in February from 35 in January, indicating that more builders view conditions as poor rather than good. Still, this is the largest monthly increase in sentiment since June 2013, pushing the index to its highest reading since September.”

February 16 – Reuters (Lucia Mutikani): “U.S. single-family homebuilding fell in January… Single-family housing starts, which account for the bulk of homebuilding, dropped 4.3% to a seasonally adjusted annual rate of 841,000 units last month… Single-family homebuilding tumbled 27.3% on a year-on-year basis in January.”

February 16 – Reuters (Dan Burns): “Manufacturing activity in the Mid-Atlantic region dropped off sharply and unexpectedly in February, and goods producers reported input cost increases accelerated for the first time in 10 months while their own price increases slowed dramatically, signaling margin pressures were building. The Philadelphia Federal Reserve’s monthly manufacturing index plunged to -24.3 this month from -8.9 in January, belying expectations among economists for a third straight monthly improvement.”

February 14 – Financial Times (Joshua Franklin): “Executives at some of Wall Street’s biggest banks said the US economy was holding up better than corporate leaders had anticipated and that the mood was more optimistic than it was a few months ago. The comments from top brass at Goldman Sachs, Bank of America and Wells Fargo reflect the growing belief that the Federal Reserve may achieve a so-called ‘soft landing’ for the US economy in its battle to tame inflation while avoiding a recession. ‘The consensus has shifted to be a little bit more dovish in the CEO community that we can navigate through this in the United States with a softer economic landing than what people would have expected six months ago,’ Goldman chief executive David Solomon told an industry conference…”

February 14 – Bloomberg (Katherine Doherty): “US consumers are still in a position of strength despite persistent inflation and other economic headwinds, Bank of America Corp. Chief Executive Officer Brian Moynihan said. Americans continue to spend, though the rate of growth in spending is slowing, and they still have capacity to borrow, Moynihan said… That stability is causing continued tension for the Federal Reserve… The prospect of a US recession looks further off, Moynihan said…, with bank analysts moving out their original prediction to the third or fourth quarter of this year.”

February 14 – Bloomberg (David Welch and Keith Naughton): “A shiny new car in the driveway has been an emblem of middle-class prosperity for generations. But for the typical American family, it’s now a distant dream. The average monthly payment for a new car has soared to a record $777, nearly doubling from late 2019, according to Kelley Blue Book owner Cox Automotive. That’s almost a sixth of the median after-tax income for US households. Even used models have climbed to $544 a month on average.”

Fixed Income Watch:

February 14 – Bloomberg (Scott Carpenter): “US consumers have been falling behind on car payments at the highest rate since the financial crisis, but money managers are shrugging off the warning signs and snatching up securities backed by subprime auto loans. Finance companies sold more than $5 billion of the bonds last month, the most since June and almost double the average since the start of 2020… In the first half of February, companies have sold about $900 million of the bonds, nearly double the sales in the same time last year.”

China Watch:

February 15 – Bloomberg: “China will push financial institutions to provide more lending to the private sector in 2023, according to a PBOC statement after a work meeting held by the central bank on Feb. 10. China will explore and expand scope of a debt financing support tool for the private sector.”February 15 – Reuters (Liangping Gao, Ella Cao and Ryan Woo): “China’s new home prices rose in January for the first time in a year…, as the end of the zero-COVID regime, favourable property policies and market expectations for more stimulus measures boosted demand. New home prices in January were up 0.1% month-on-month, versus a 0.2% slide in December… Prices were down 1.5% year-on-year in January… ‘The roots of the crisis in China’s property sector lie in the worsening long-term outlook for demand,’ said Mark Williams, chief Asia economist at Capital Economics. ‘This has not improved. But sales started the year so beaten down that a short-run cyclical recovery is likely.’”

February 16 – Bloomberg: “A $2 trillion swathe of China’s local bond market is approaching a risky inflection point as issuers struggle to refinance maturing debt. Net financing — new yuan bond issuances minus maturities — for the country’s local government financing vehicles, or LGFVs, turned negative in the fourth quarter of 2022 for the first time in at least four years, according to… S&P Global Ratings. While the measure turned positive in January, it was still down 83% from a year earlier at 48.9 billion yuan ($7.1bn). The funding slump, which has coincided with an uptick in pulled bond deals, adds to signs of strain in a murky corner of the debt market that has long been flagged by China skeptics as a threat to financial stability…”

February 13 – Bloomberg: “China may lose a key support for economic growth and the yuan this year as residents flock overseas again and exports continue to plummet because of a global slowdown. After hitting a 14-year high of almost $420 billion last year, the surplus on the current account — the broadest measure of trade in goods and services — is expected to narrow sharply this year. Economists… predict it will weaken to 1.4% of gross domestic product this year, down from 2.3% in 2022. The slump will not only affect economic growth, it will also put pressure on the currency to depreciate.”

February 17 – Bloomberg: “Bao Fan’s knack for closing complicated deals and spotting rising tech stars made him one of China’s most influential financiers. His sudden disappearance this week — linked to a Chinese government investigation — is now sending chills through the country’s business elite and raising fresh doubts about whether President Xi Jinping’s crackdown on the private sector has run its course.”

February 13 – Wall Street Journal (Nathaniel Taplin): “Beijing has spent the past week needling Washington over the forcible deflation and subsequent crash of a certain balloon. But a different sort of leakage should worry Beijing much more: China’s population fell outright last year for the first time since the early 1960s. The threat posed by China’s declining labor force to its low-cost manufacturing model is well understood. But worsening demographics could strike at the heart of China’s development strategy in another way as well: by eating away at the savings it needs to finance its expansive industrial policy and research juggernaut. China’s dependency ratio—the population of children and elderly relative to that of the 15- to 64-year-old age bracket—hit 46% in 2021, up from just 34% in 2010.”

Central Banker Watch:

February 16 – Financial Times (Markus Kerber): “Losses on the balance sheets of the world’s leading central banks have become an increasing preoccupation for governments, central bankers and the financial markets. This is an unfortunate legacy of the massive amounts of government bonds acquired under quantitative easing in the past decade to try to boost inflation. Some of these purchases were misguided and they should have anyway been ended much earlier in the light of signs that inflation was picking up again well before the Ukraine invasion. Especially in Europe, central banks need to show that they understand the full implications of the complex issues surrounding their balance sheets. Otherwise this could undermine public confidence in the euro, especially in Germany, the eurozone’s largest member.”

February 17 – Bloomberg (Jana Randow and Alexander Weber): “One of the European Central Bank’s most senior officials said that investors risk underestimating the persistence of inflation, and the response needed to bring it under control. ‘We are still far away from claiming victory,’ Executive Board member Isabel Schnabel said… The economy’s reaction to interest-rate increases may prove weaker than in prior episodes, and if that transpires, ‘we may have to act more forcefully’… ‘Markets are priced for perfection… They assume inflation is going to come down very quickly toward 2% and it is going to stay there, while the economy will do just fine. That would be a very good outcome, but there is a risk that inflation proves to be more persistent than is currently priced by financial markets.’”

February 16 – Reuters (Steve Scherer and Kanishka Singh): “Bank of Canada Governor Tiff Macklem said… the economy remains overheated and the jobs market is too tight, as he kept the door open to future interest rate hikes. On Jan. 25, the Bank hiked its key interest rate to 4.5%, the highest level in 15 years, and became the first major central bank to say it would hold off on further increases as long as prices eased as forecast.”

Europe Watch:

February 15 – Wall Street Journal (Laurence Norman): “European Union member states started discussions on a new set of economic measures targeting Russia, including proposals for a ban on over $11 billion worth of Russian imports and sanctions against Iranian entities the bloc says is supplying drones to Russia… EU officials have said the new package seeks to avoid problems the EU has faced with some previous export bans on Russia. In particular, it seeks to target specific technologies and components that the Russian military or military-linked companies can purchase only from European and other Western suppliers. As in previous packages, the measures are being closely coordinated with Washington and the U.K.”

February 17 – Reuters (Reinhard Becker and Maria Martinez): “Most Germans are worried about high inflation, and more than half of them report that rising prices are making them struggle financially, an international survey by Dynata showed. According to the part of the survey dedicated to Germany…, 61% of German citizens are very or extremely concerned about rising prices for energy, food, gasoline and housing. Only 2% of the respondents said they were not concerned, and 37% were slightly or somewhat concerned.”

Japan Watch:

February 14 – Reuters (Leika Kihara and Satoshi Sugiyama): “Japanese Prime Minister Fumio Kishida said… he hoped the central bank’s new leadership will take into account the government’s goal of achieving higher wages and sustained economic growth, in guiding monetary policy. Kishida also said it was premature to say whether the government and the Bank of Japan (BOJ) should revise a joint policy statement, which commits the BOJ to achieve its 2% inflation target at the earliest date possible. ‘We’d like to achieve structural wage growth and sustainable economic growth. I hope the new BOJ leadership guide policy taking account our policy direction,’ Kishida told parliament.”

February 13 – Reuters (Leika Kihara): “A soft-spoken academic with a PhD from the Massachusetts Institute of Technology, Kazuo Ueda – Tokyo’s nominee for next Bank of Japan governor – is a pragmatist who knows how to turn policy ideas into reality. Unlike incumbent Governor Haruhiko Kuroda, who arrived with a clear mandate to beat deflation with massive stimulus, Ueda faces the delicate task of phasing out his predecessor’s radical and complicated policy framework without derailing a fragile economic recovery. His academic credentials suggest he is fit for the job. At MIT, he studied economics under Stanley Fischer, whose students include former U.S. Federal Reserve chair Ben Bernanke and former European Central Bank President Mario Draghi. As the first postwar BOJ governor to come from academia, the 71-year-old also brings a wealth of experience helping guide Japan’s economy through rough waters – including during his time at the central bank’s nine-member board from 1998 to 2005.”

February 13 – Bloomberg (Ruth Carson and Masaki Kondo): “Now that traders have an idea who’s likely to take the Bank of Japan hot seat, the focus will sharpen on the biggest worry of global bond investors — a wave of Japanese cash flowing out of international markets toward rising yields at home. Local bond yields climbed on Friday’s surprise that economist Kazuo Ueda looks set to become the next BOJ governor… But beyond the yield volatility that any policy decision may soon trigger, the steady selling of overseas bonds in favor of Japanese alternatives has already begun in earnest and looks unlikely to stop. Last year Japanese investors offloaded a record $181 billion of foreign debt and poured ¥30.3 trillion ($231bn) into the local government bond market… The reason why global investors need to worry if Ueda does indeed remove the BOJ’s cap on yields is that there’s still more than $2 trillion of overseas bonds left to potentially sell.”

February 13 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s economy averted recession but rebounded much less than expected in the fourth quarter as business investment slumped… While private consumption is holding up against headwinds from rising living costs, uncertainties over the global economic outlook will weigh on Japan’s delayed recovery from the scars of the COVID-19 pandemic, analysts say. The world’s third-largest economy expanded an annualised 0.6% in the final quarter of last year after slumping a revised 1.0% in July-September…”

Global Bubble Watch:

February 13 – Bloomberg (Alexandra Harris): “Risky assets may be in trouble now that one-off liquidity injections from global central banks that have been fueling a market rally in recent months have come to an end, according to Citi strategist Matt King. In a report…, King pointed to interventions in recent months undertaken by the Bank of Japan and People’s Bank of China — as well as shifting line items on the European Central Bank’s and Federal Reserve’s balance sheets — that have added almost $1 trillion to global central bank reserves. ‘The origins of this year’s risk rally lie in obscure technicals driving central bank liquidity,’ King said… ‘At this point we think most of the boost to reserves is done. This implies that the story for the rest of this year should return to being one of liquidity drainage and risk weakness.’”

February 14 – Bloomberg (Subhadip Sircar): “India is leading a charge among Asia’s emerging-market central banks in rebuilding foreign-exchange stockpiles, which would help them defend their currencies if the dollar rebounds. India, South Korea, Taiwan, and Southeast Asian countries have recouped about $132 billion since November — more than than half of what they lost last year… The rupee has lagged behind EM peers partly because its central bank has been the most aggressive in rebuilding reserves. These countries saw their foreign reserves drop by $243 billion in the first 10 months of 2022 as they sought to defend currencies that plunged against the dollar.”

February 15 – Bloomberg (Ari Altstedter): “Canadian home prices fell for an 11th straight month as rising interest rates continued to limit what prospective buyers can afford, ramping up pressure on the country’s housing market. The national benchmark price for a home declined 1.9% to C$714,700 ($532,060) in January from December… It’s down 15% from last year’s peak. The Canadian housing market has seen an abrupt reversal from its frenzied pandemic days as the central bank started raising interest rates last year…”

EM Crisis Watch:

February 14 – Bloomberg (Firat Kozok and Kerim Karakaya): “Turkey is throwing its full weight behind stocks before the planned resumption of trading at the nation’s key equity market on Wednesday. The government is channeling billions of liras from pension funds and state lenders into the stock market and planning tax waivers for buybacks… The scope of measures shows authorities are determined to reverse the rout that erased tens of billions of dollars from Turkish companies’ market value in the two days following Feb. 6 earthquakes…”

February 15 – Bloomberg (Finbarr Flynn, Divya Patil and Archana Narayanan): “Gautam Adani’s sprawling corporate empire embraced the era of cheap debt like few others. But with yields spiking and access to overseas financing suddenly in question, investors and analysts say the borrowing blitz has made it all the more vulnerable amid its worst crisis ever. The conglomerate, with businesses stretching from ports to renewable energy, tapped international bond buyers for more than $8 billion in recent years, while also turning to global banks for at least as much in foreign-currency loans… After its borrowing costs surged in response to allegations of fraud and stock manipulation…”

February 13 – Reuters (Aftab Ahmed and Sarita Chaganti Singh): “India’s annual retail inflation in January rose above the central bank’s upper threshold for the first time in three months, on higher food prices… India’s annual retail inflation rate rose to 6.52% in January from 5.72% in December… January’s retail inflation was above the Reserve Bank of India’s upper targeted limit of 6% for the first time since October…”

February 11 – Financial Times (Bryan Harris): “Brazilian leader Luiz Inácio Lula da Silva has reignited investors’ concerns about his new leftwing administration after repeatedly criticising the president of the country’s central bank and questioning whether the institution should remain independent. ‘Is this country doing well? Is this country growing? Are people’s lives improving? No. So, I want to know what independence was good for,’ said Lula this month, referring to the official autonomy granted to the central bank in 2021… ‘I will wait for this citizen [bank president Roberto Campos Neto] to finish his mandate so we can make an evaluation of what the independent central bank meant.’”

February 15 – Bloomberg (Vinícius Andrade and Maria Elena Vizcaino): “Investors are losing faith in Brazil’s corporate borrowers in the aftermath of Americanas SA’s implosion, defying reassurances that the century-old retailer’s collapse was a one-off with no broader implications. Instead, in just the few weeks since the default, power company Light SA, clothing retailer Marisa Lojas SA and travel-agency CVC Brasil have all hired advisers to restructure their debt. “

February 15 – Reuters (Tetsushi Kajimoto): “Growth in Japan’s merchandise exports slowed sharply in January amid weakening Chinese demand for cars and chipmaking machinery, stoking concern about a global slowdown and creating the country’s largest trade deficit on record… The value of Japan’s merchandise exports in January was 3.5% higher than a year earlier… Imports of goods were up 17.8%… The result was a 3.49 trillion yen ($26.07bn) deficit in merchandise trade in January, the biggest in records going back to 1979…”

Social, Political, Environmental, Cybersecurity Instability Watch:

February 16 – New York Times (Kevin Roose): “Bing, the long-mocked search engine from Microsoft, recently got a big upgrade. The newest version, which is available only to a small group of testers, has been outfitted with advanced artificial intelligence technology from OpenAI, the maker of ChatGPT. This new, A.I.-powered Bing has many features. One is a chat feature that allows the user to have extended, open-ended text conversations with Bing’s built-in A.I. chatbot. On Tuesday night, I had a long conversation with the chatbot, which revealed (among other things) that it identifies not as Bing but as Sydney, the code name Microsoft gave it during development. Over more than two hours, Sydney and I talked about its secret desire to be human, its rules and limitations, and its thoughts about its creators. Then, out of nowhere, Sydney declared that it loved me — and wouldn’t stop, even after I tried to change the subject.”

February 15 – Reuters (Cassandra Garrison): “Scientists studying Antarctica’s vast Thwaites Glacier – nicknamed the Doomsday Glacier – say warm water is seeping into its weak spots, worsening melting caused by rising temperatures, two papers published in Nature journal showed… Thwaites, which is roughly the size of Florida, represents more than half a meter (1.6 feet) of global sea level rise potential, and could destabilize neighboring glaciers that have the potential to cause a further three-meter (9.8-foot) rise.”

February 15 – Reuters (Tom Polansek): “Avian flu has reached new corners of the globe and become endemic for the first time in some wild birds that transmit the virus to poultry, according to veterinarians and disease experts, who warn it is now a year-round problem. Reuters spoke to more than 20 experts and farmers on four continents who said the prevalence of the virus in the wild signals that record outbreaks will not abate soon on poultry farms, ramping up threats to the world’s food supply. They warned that farmers must view the disease as a serious risk all year… Outbreaks of the virus have continued in North and South America, Europe, Asia and Africa, undefeated by summer heat or winter cold snaps, since a strain arrived in the United States in early 2022 that was genetically similar to cases in Europe and Asia.”

Leveraged Speculation Watch:

February 17 – Bloomberg (Tom Maloney and Hema Parmar): “Said Haidar’s conviction that inflation was about to explode across the globe can be summarized by a single number: $63 billion. That’s how much his Haidar Capital Management reported in assets to start 2022. The catch? The hedge fund actually oversaw just $1.2 billion. That copious leverage led to a tumultuous year — one month the fund was up 54%, another it was down 20% — but ultimately paid off, producing a 193% return for investors.”

Geopolitical Watch:

February 16 – Reuters (Soo-hyang Choi and Hyonhee Shin): “North Korea threatened… to take ‘unprecedentedly constant, strong responses’ if South Korea and the United States press ahead with planned military drills, accusing the allies of raising tensions in the region. In a statement…, the North’s foreign ministry also said it would consider additional military action if the U.N. Security Council, under the influence of the United States, continues to pressure Pyongyang.”

February 15 – Reuters (Karen Lema): “The Philippines and the United States will this year carry out their biggest joint military drills since 2015, Manila’s army chief said…, against a backdrop of growing tensions with China in the South China Sea. The exercises underscore improved ties with the United States under President Ferdinand Marcos Jr., and come as the Philippines condemns China’s ‘aggressive’ actions in the disputed waterway, including its use of a ‘military-grade laser’ against one of Manila’s vessels earlier this month.”

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