February 24, 2023: Perils of Unsound Money

February 24, 2023: Perils of Unsound Money
Doug Noland Posted on February 25, 2023

Archaic perhaps, but I am an impassioned proponent of sound money – and have been for a long time. It’s vital – fundamental. The Austrian School of Economics heavily influences my analytical framework. I focus first on Credit inflation – the expansion of new financial claims. This new purchasing power has varied inflationary effects – including consumer and producer price inflation, asset price inflation and Bubbles, over/mal-investment, trade and current account deficits…

Prolonged periods of excessive Credit growth ensure Bubbles (i.e. Credit, asset, speculative and investment) and progressively destabilizing Monetary Disorder. Inflation is insidious, pernicious and poorly understood. Policy and economic circles will continue to debate “r-star” (the so-called “natural rate”). Others will waste time debating the appropriate inflation target rate. Two or 3% doesn’t matter at this point. Decades of damage have been wrought to financial, market and economic structures.

We’re now three decades into history’s greatest Credit Bubble, which, not by accident, coincided with radical monetary management experimentation. I often refer to the “Terminal Phase” of Bubble excess, with systemic risks rising exponentially as the cycle comes to its fateful conclusion. That these dynamics have unfolded on an unprecedented global scale only makes the backdrop more perilous.

The consequences of decades of unsound money are coming home to roost. Our nation is hopelessly divided in an increasingly decoupled world. Predictably, inflation and Bubbles are sowing inequality, insecurity, hostility and conflict – at home and abroad. Trust in critical institutions continues to wane.

The costs associated with this epic policy failure will be enormous – possibly catastrophic. There are no quick fixes. Markets are dreaming if they actually believe inflation will soothingly return to the previous cycle’s relative quiescence. The ongoing toll on society will be tragic – the triple trouble of destabilizing inflation, bursting Bubbles and disorienting monetary disorder. And since this historic Credit Bubble and inflations have been global phenomena, geopolitical hardship could prove even more consequential.

I contemplate how the world would be these days had not trillions of monetary inflation (i.e. U.S. current account deficits, central bank QE, fiscal deficits) created massive international reserve holdings for both China and Russia. I ponder the scope and duration of China’s Bubble inflation without the endless fuel of loose U.S. finance and Trillions of trade deficits. It may seem crazy to many, but I see a direct link between Trillions of QE, years of zero rates – runaway inflationist monetary policies – and China’s perilous Bubble and the rise of the aspiring heroic autocrat, Xi Jinping. And I don’t see Putin invading Ukraine without his $500 billion international reserve stockpile, inflated global energy prices, and a powerful (enemy of my enemy) “partner without limits” with global superpower and new world order ambitions.

It was an eventful week. The brutal Ukraine War reached its one-year mark. President Biden made a surprise visit to Kiev to signal unwavering support. In Moscow, Putin threatened nuclear escalation, while backing away from the START nuclear non-proliferation treaty. And as U.S. concerns mount over more direct Chinese war support for Russia, Xi Jinping presents himself as a peacemaker. Prospective BOJ governor Kazuo Ueda testified before a lower-house Diet committee. In the U.S., there was additional corroboration that inflation and the economy maintain significant momentum in the face of higher policy rates and market yields.

A much stronger-than-expected Services PMI (8-month high); a revised higher Q4 Core PCE (4.3% from 3.9%); lower-than-expected weekly initial and continuing jobless claims; stronger-than-expected January Personal Spending (1.8%); and higher-than-expected monthly January PCE (0.6%) and Core PCE (0.6%). Wow.

Blockbuster January jobs data were no aberration, leaving markets increasingly dazed and confused. Wednesday’s release of the minutes from the FOMC’s February 1st meeting provided no relief. Seemingly at odds with Powell’s press conference focus, the minutes passed on “disinflation” while noting concerns for easing financial conditions.

Ten-year yields jumped another 13 bps this week to 3.94%, the high since November. Two-year yields surged 20 bps to 4.81%, surpassing the November peak to the highest yield since pre-crisis June 2007. The market is now pricing peak Fed funds at 5.40% for the June 24th FOMC meeting, up 12 bps this week and 56 bps since February 2nd. Expectations for the December meeting policy rate jumped 22 bps this week (up 88bps in three weeks) to 5.28%. Market pricing now has consecutive rate increases at the March, May and June FOMC meetings, with about a 20% probability for a 50 bps hike next month.

Rising yields is a global phenomenon. Italian yields rose another 14 bps this week to 4.44%, with Italian two-year yields surging 28 bps to 3.58% – the high since the summer of 2012 crisis period. UK two-year yields jumped 23 bps to 4.00% – trading this week above 4% for the first time since post-BOE emergency operations in October. Two-year German yields rose 15 bps, surpassing 3% (3.02%) for the first time since just before the wheels came off in October 2008. Outside of the euro zone, Swedish two-year yields gained 34 bps to 3.18%, also the high back to October 2008. Two-year yields rose 12 bps this week in Canada to 4.27%, matching the peak since 2007.

February 24 – Reuters (Takaya Yamaguchi and Leika Kihara): “Japan’s core consumer inflation hit a fresh 41-year high in January as companies passed on higher costs to households… The data underscores the dilemma policymakers face as soaring prices of fuel and daily necessities hit households… The nationwide core consumer price index (CPI), which excludes volatile fresh food but includes energy costs, was 4.2% higher in January than a year earlier, matching a median market forecast and accelerating from a 4.0% annual gain in December. January’s rise was the fastest since September 1981…”

February 24 – Bloomberg (Toru Fujioka): “Bank of Japan Governor nominee Kazuo Ueda warned against any magical solution to produce stable inflation and normalize policy as he largely stuck to the existing central bank script in the first parliamentary hearing to approve his appointment… Ueda said the BOJ should continue with stimulus for now, while flagging the need to consider returning to a normal policy approach if the outlook for prices clearly improved. He said it would still take some time to reach stable and sustainable inflation in Japan… ‘If I’m appointed BOJ governor, my mission isn’t to come up with some kind of magical, special monetary policy,’ Ueda said. ‘As I’ve mentioned before, if you look at the trend in prices, there are improvements we’re seeing, but the situation remains that it’ll still take some time until we’ve securely achieved 2% inflation.’”

Observers were left pondering the meaning of “securely achieved 2% inflation.” A Friday Reuters headline: “Japan’s Consumer Inflation Hits 41-year High, Keeps BOJ Under Pressure,” following data showing 4.3% y-o-y Nationwide CPI (10th straight month above 2%). Ueda, understandably, didn’t want to rattle markets with any hawkish talk. Currency traders were ready, salivating.

The yen dropped 1.3% in Friday trading, boosting the loss for the week to 1.7%. The dollar versus yen ended the week at 136.48, the high since Kuroda’s December 20th yield curve control (YCC) adjustment.

Once inflation dynamics become firmly embedded, a return to stability becomes extremely difficult. This is the case for inflationary monetary policy, such as the Bank of Japan’s years of reckless QE and YCC. It’s also true for asset inflation and speculative Bubbles, and certainly with consumer and producer price inflation.

Suddenly, it’s as if global markets have awoken to the risk that central bankers might be battling stubborn inflation for several years. What a difference a few weeks make.

I certainly have my doubts that consumer inflation will conveniently return to previous dynamics. New cycle dynamics are at play. Indeed, there is today every reason to expect ongoing deterioration in the geopolitical backdrop. The forces of “de-globalization” and, more specifically, decoupling from Russia and China gain momentum by the week. In the U.S. and elsewhere, there are powerful investment booms associated with domestic manufacturing, renewable energy, infrastructure, defense spending and climate change. And there aren’t enough workers. These are patently not elements of previous cycle dynamics.

And on the subject of nascent new cycle dynamics.

February 19 – Wall Street Journal (Editorial Board): “California Gov. Gavin Newsom’s budget last month projected a $22.5 billion deficit, but apparently his forecast was too sunny. The Legislative Analyst’s Office (LAO) warned last week that the state’s budget hole may be a lot bigger owing to plunging revenue. Look out below. The state’s monthly tax revenue in January was about $14 billion lower than during the same month last year. Tax revenue in the current fiscal year that started last July is running about $23 billion lower than in the previous year… The top 0.5% of California taxpayers pay 40% of state income taxes. Volatile equity prices and layoffs at Silicon Valley companies are hitting capital gains. Companies are also cutting bonuses. Corporate tax revenue came in about 20% lower in January than during the previous year… As a result, LAO estimates tax revenue during this fiscal year and the next will likely be $10 billion lower, and the budget gap will likely be about $7 billion larger than the Governor forecasted last month…”

California was on the right side of previous cycle inflationary dynamics. Asset inflation and the technology Bubble inundated the Golden State with “money.” With coffers overflowing (capital gains and Silicon Valley pay packages as big contributors), the state spent lavishly. Years of heady inflation ensured California became a very expensive place to live and operate a business. High costs and extreme inequality created deep-rooted problems. Now there’s a persistent exodus of workers and companies. Tech and real estate Bubbles are faltering, leaving a legacy of high costs and declining tax revenues.

I expect California to illuminate a fundamental Bubble maxim: inflation may appear the great wealth creator during booms, but when Bubbles burst the true scope of wealth destruction is revealed. California has plenty of company. Bursting Japanese and Chinese Bubbles, in particular, will expose epic inflated perceived wealth, mal-investment and wealth destruction.

It was interesting to see China’s renminbi drop Friday concurrently with the Japanese yen. The dollar index gained 1.3% for the week (largest weekly gain since September), as contagion gathers momentum. The combination of a rising dollar and surging global yields risks restarting problematic de-risking/deleveraging dynamics. It was interesting to see Chinese sovereign and big bank CDS prices jump to highs since the first week of the year. For the most part, however, my mosaic of financial conditions indicators signaled only a moderate “risk off” dynamic. But the risk of a highly destabilizing de-risking/deleveraging dynamic materializing is high.

It’s been an interesting few months. There was a big squeeze. Folks got all bulled up again. Buy the dip; stocks always recover. A few months of “risk on” ensured that short exposures and derivative hedges were reduced. I’ll assume the leveraged speculating community leaned in on the long side. The Fed has had months to withdraw liquidity (QT) during a period of risk and speculative leverage embracement. QT will become a liquidity issue during the next period of “risk off” deleveraging.

I certainly don’t sense that markets are prepared for a return of the 2022 dynamic – only worse. But when deleveraging takes hold, the questions from last year will reemerge: Where is the Fed put? How quickly would the Fed shift to QE – and at what size? And the more inflationary pressures persist, the more difficult these questions will be for the Fed. At this point, any serious de-risking/deleveraging episode comes with major risks. The day markets begin to question the Fed and global central bank liquidity backstop, there is a serious problem.

A scenario doesn’t seem that far-fetched to me. Confidence in China’s recovery wanes. The new BOJ governor faces a disorderly yen devaluation and fragile bond market. Already destabilized global markets – especially the vulnerable European periphery and EM – get hit by geopolitical developments. Escalation in the Ukraine war – nuclear blackmail. The U.S. responds to Chinese war support with sanctions – China reciprocates. Things become heated. Global markets turn dicey, with pressure on the Fed to intervene with bond market-stabilizing QE. With one eye on shaky markets and the other on sticky inflation, how will the Powell Fed respond? Will it suffice? Years of unsound “money” coming home to roost.

For the Week:

The S&P500 dropped 2.7% (up 3.4% y-t-d), and the Dow fell 3.0% (down 1.0%). The Utilities sank 3.1% (down 6.9%). The Banks lost 2.5% (up 8.2%), and the Broker/Dealers slumped 2.6% (up 9.0%). The Transports dropped 3.3% (up 9.2%). The S&P 400 Midcaps fell 2.5% (up 7.0%), and the small cap Russell 2000 lost 2.9% (up 7.9%). The Nasdaq100 stumbled 3.1% (up 9.4%). The Semiconductors fell 2.4% (up 15.9%). The Biotechs sank 5.5% (down 1.1%). With bullion dropping $31, the HUI gold equities index slumped 4.7% (down 6.9%).

Three-month Treasury bill rates ended the week at 4.6625%. Two-year government yields surged 20 bps this week to a 15-year high 4.81% (up 38bps y-t-d). Five-year T-note yields jumped 19 bps to 4.22% (up 21bps). Ten-year Treasury yields gained 13 bps to a three-month high 3.94% (up 7bps). Long bond yields rose eight bps to 3.95% (down 2bps). Benchmark Fannie Mae MBS yields surged 20 bps to a three-month high 5.58% (up 19bps).

Greek 10-year yields rose nine bps to 4.37% (down 19bps y-o-y). Italian yields jumped 14 bps to 4.44% (down 26bps). Spain’s 10-year yields gained 10 bps to 3.51% (down 1bp). German bund yields rose 10 bps to 2.54% (up 9bps). French yields gained 11 bps to 3.02% (up 4bps). The French to German 10-year bond spread widened about one to 48 bps. U.K. 10-year gilt yields surged 14 bps to 3.66% (down 1bp). U.K.’s FTSE equities index declined 1.6% (up 5.7% y-t-d).

Japan’s Nikkei Equities Index slipped 0.2% (up 5.2% y-t-d). Japanese 10-year “JGB” yields were little changed at 0.50% (up 8bps y-t-d). France’s CAC40 fell 2.2% (up 11.0%). The German DAX equities index lost 1.8% (up 9.2%). Spain’s IBEX 35 equities index declined 1.4% (up 11.8%). Italy’s FTSE MIB index dropped 2.8% (up 13.8%). EM equities were mixed. Brazil’s Bovespa index sank 3.1% (down 3.6%), and Mexico’s Bolsa index fell 2.1% (up 8.7%). South Korea’s Kospi index declined 1.1% (up 8.4%). India’s Sensex equities index dropped 2.5% (down 2.3%). China’s Shanghai Exchange Index gained 1.3% (up 5.8%). Turkey’s Borsa Istanbul National 100 index increased 0.6% (down 8.2%). Russia’s MICEX equities index rallied 1.8% (up 2.5%).

Investment-grade bond funds posted inflows of $184 million, while junk bond funds reported outflows of $6.125 billion (from Lipper).

Federal Reserve Credit dropped $44.3bn last week to $8.349 TN. Fed Credit was down $552bn from the June 22nd peak. Over the past 180 weeks, Fed Credit expanded $4.622 TN, or 124%. Fed Credit inflated $5.538 Trillion, or 197%, over the past 537 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $6.6bn last week to $3.353 TN. “Custody holdings” were down $105bn, or 2.8%, y-o-y.

Total money market fund assets increased $5.4bn to $4.820 TN. Total money funds were up $266bn, or 5.8%, y-o-y.

Total Commercial Paper dropped $17.5bn to $1.238 TN. CP was up $218bn, or 21.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 32 bps to a three-month high 6.66% (up 277bps y-o-y). Fifteen-year rates jumped 23 bps to 5.90% (up 276bps). Five-year hybrid ARM rates gained 17 bps to 5.83% (up 285bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 17 bps to a 16-week high 6.97% (up 272bps).

Currency Watch:

For the week, the U.S. Dollar Index gained 1.3% to 105.21 (up 1.7% y-t-d). For the week on the downside, the Australian dollar declined 2.2%, the South African rand 2.0%, the Japanese yen 1.7%, the euro 1.4%, the New Zealand dollar 1.3%, the Singapore dollar 1.1%, the Canadian dollar 1.0%, the Norwegian krone 1.0%, the British pound 0.8%, the Brazilian real 0.7%, the Swedish krona 0.5%, the South Korean won 0.4%, and the Mexican peso 0.3%. The Chinese (onshore) renminbi declined 1.31% versus the dollar (down 0.88% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 0.9% (down 6.4% y-t-d). Spot Gold fell 1.7% to $1,811 (down 0.7%). Silver dropped 4.4% to $20.76 (down 13.3%). WTI crude was little changed at $76.32 (down 4.9%). Gasoline fell 2.1% (down 4.1%), while Natural Gas rallied 12.0% to $2.55 (down 43%). Copper dropped 3.7% (up 4%). Wheat sank 7.0% (down 9%), and Corn fell 4.2% (down 4%). Bitcoin dropped $1,450, or 5.9%, this week to $23,180 (up 40%).

Market Instability Watch:

February 23 – Financial Times (Kana Inagaki): “The Bank of Japan should be ‘creative’ with its monetary policy and pursue interest rate normalisation if it appears able to sustain its 2% inflation target, the central bank’s expected next governor Kazuo Ueda has said… In comments that appeared to be intended to avoid disruption to financial markets, Ueda acknowledged that it would take time for Japan’s price growth to be maintained at the BoJ’s target level. He warned that tightening monetary policy under current conditions could slow the economy, as current inflation was not driven by underlying strong demand. ‘There have been various side effects, but in light of the economic and price conditions, the methods have been necessary as well as appropriate to sustainably achieve the 2% inflation target,’ Ueda said, referring to the BoJ’s adoption of negative rates and yield curve control under incumbent governor Haruhiko Kuroda. ‘I believe it is appropriate to continue monetary easing measures while being creative in line with the situation,’ Ueda added.”

February 21 – Reuters (Davide Barbuscia and Saeed Azhar): “Bond investors are starting to trim holdings of U.S. debt to brace for a possible government default that they see as highly unlikely but potentially seismic for financial markets around the world. The U.S. Treasury hit its $31.4 trillion borrowing limit last month. Unless congress raises or suspends that cap, the government could begin to default on bonds that underpin the global financial system and are considered some of the safest investments.”

February 22 – Bloomberg (Alexandra Harris): “Investors this week are piling into auctions of US Treasury bills most exposed to the looming debt ceiling, in part because a recent selloff driven by the Federal Reserve has made yields more attractive. The Treasury Department on Wednesday sold $36 billion of four-month bills at 4.83%, the highest yield since the issue was introduced as a benchmark in October.”

February 20 – Bloomberg (Netty Ismail): “The dollar’s renewed vigor is upending the popular strategy of borrowing cheap in low interest-rate currencies and investing in higher-yielding emerging markets. Goldman Sachs… is advising so-called carry trades in currencies other than the dollar… ‘The macro environment is still a friendly one for EM carry trades,’ strategists including Kamakshya Trivedi said… ‘A ‘basket trade’ with non-US dollar funding can help absorb the different sensitivities of each currency to growth and rates shocks.’”

Bursting Bubble and Mania Watch:

February 23 – Bloomberg (Suzanne Woolley): “The average 401(k) account at Fidelity Investments lost about a fifth of its value in 2022, tumbling to $103,900 from $130,700… After a year when the S&P 500 plunged 19% and bonds provided little refuge, double-digit drops are about what you’d expect for investors who didn’t retreat into money market funds. Average account balances at Vanguard were down 20%, and losses on some of the largest actively managed equity funds in 401(k) plans were far greater.”

February 22 – Bloomberg (Paulina Cachero): “The value of the US housing market shrunk by the most since the 2008 as the pandemic boom fizzled out. After peaking at $47.7 trillion in June, the total value of US homes declined by $2.3 trillion, or 4.9%, in the second half of 2022, according to… Redfin. That’s the largest drop in percentage terms since the 2008 housing crisis, when home values slumped by 5.8% from June to December.”’

February 21 – Bloomberg (Vildana Hajric and Lu Wang): “Passively managed equity funds are on the cusp of marking a milestone that’s been more than a decade in the making: Globally, net assets in such products are about to exceed those of their actively managed counterparts, according to Societe Generale… At least 19% of the shares of the average publicly listed US stock is owned by passive mutual funds or passive ETFs, tripling since 2013, according to an analysis by James Seyffart at Bloomberg Intelligence… ETFs and mutual funds own some $16 trillion of the roughly $44 trillion of publicly held US equities, with the rest in the hands of individuals, corporations, insurance companies, pensions and other entities…”

February 20 – Wall Street Journal (Berber Jin): “Fundraising by venture-capital firms hit a nine-year low in the fourth quarter… Venture firms raised $20.6 billion in new funds in the fourth quarter. That was a 65% drop from the year-earlier quarter and the lowest fourth-quarter amount since 2013, according to… Preqin Ltd… The amount was also less than half the level raised in the preceding three months, the first time fundraising volumes decreased from the third to fourth quarter since 2009… Fund backers, known as limited partners, invested in 226 venture-capital funds in the fourth quarter, the fewest for that time period since 2012… By contrast, they backed 620 funds in the last three months of 2021…”

February 21 – Wall Street Journal (Peter Grant): “The number of big office landlords defaulting on their loans is on the rise, fresh evidence that more developers believe that remote and hybrid work habits have permanently impaired the office market. The giant investment manager Brookfield Asset Management recently defaulted on a total of over $750 million in debt for a pair of 52-story towers in Los Angeles… Real-estate firm RXR is in talks with creditors to restructure debt on 61 Broadway, a 34-story tower in Manhattan’s financial district…”

Crypto Bubble Collapse Watch:

February 18 – New York Times (David Yaffe-Bellany): “Cryptocurrency executives hoped that 2023 would herald a new beginning after a year of disastrous setbacks. Instead, the industry has found itself on the receiving end of an aggressive government crackdown. Last month, the Securities and Exchange Commission levied fines and other penalties against crypto lending firms, while federal banking officials issued policy statements that appeared calculated to make it harder for crypto companies to participate in the mainstream finance system. In the last few days, the pace has accelerated. Two high-profile crypto firms… came under intense pressure from state and federal regulators. After announcing a settlement with the exchange, the S.E.C. also fined a crypto promoter and sued a start-up that issued digital coins, for a total of three enforcements in just over a week.”

Ukraine War Watch:

February 24 – Reuters (Olena Harmash and Max Hunder): “Ukrainians honoured fallen loved ones on Friday and vowed to fight on to victory, while Russia said its forces were making battlefield gains in the east as its invasion entered a second year with no end in sight. At a ceremony on Kyiv’s St Sophia Square, President Volodymyr Zelenskiy bestowed medals on soldiers and the mother of one killed. He fought back tears at the national anthem. ‘We have become one family … Ukrainians have sheltered Ukrainians, opened their homes and hearts to those who were forced to flee the war,’ he said in a televised address.”

February 21 – Reuters (Guy Faulconbridge): “President Vladimir Putin… delivered a warning to the West over Ukraine by suspending a landmark nuclear arms control treaty, announcing that new strategic systems had been put on combat duty, and threatening to resume nuclear tests. Nearly a year after ordering an invasion that has triggered the biggest confrontation with the West in six decades, Putin said Russia would achieve its aims and accused the West of trying to destroy it. ‘The elites of the West do not hide their purpose. But they also cannot fail to realise that it is impossible to defeat Russia on the battlefield,’ he told his country’s political and military elite. Alleging that the United States was turning the war into a global conflict, Putin said Russia was suspending participation in the New START treaty, its last major arms control treaty with Washington.”

February 21 – Reuters (Mark Trevelyan): “The last remaining treaty that limits Russian and U.S. nuclear weapons was already in grave peril before President Vladimir Putin announced… that Moscow was suspending its participation. Now it may be beyond repair, raising the risk of a new arms race – in parallel with the war in Ukraine – in which neither side can rely on the stable, predictable framework that successive nuclear accords have provided for more than 50 years. Security analysts said that could hugely complicate the delicate calculus that underpins mutual deterrence between the two countries, while also spurring other powers such as China, India and Pakistan to build up their nuclear arsenals.”

February 24 – Bloomberg: “China called for a cease-fire between Russia and Ukraine in a position paper on ending the war that offered some reprieve to Moscow but was quickly dismissed by Kyiv’s allies… Several of the 12 points outlined by China in the document issued Friday would, if carried out, offer clear benefits to Russian President Vladimir Putin. That includes a cease-fire, which would freeze Russian troops in place on Ukrainian territory, as well as a call to immediately end all sanctions not endorsed by the UN Security Council, where Russia holds veto power. US National Security Advisor Jake Sullivan… brushed off the Chinese proposal, saying it should have ended after the first bullet point, which calls for ‘respecting the sovereignty of all countries.’”

February 21 – Reuters: “Outspoken Russian mercenary chief Yevgeny Prigozhin launched two verbal attacks against top brass…, accusing them of depriving his Wagner fighters of munitions in what he called a treasonous attempt to destroy his private military company. The Russian defence ministry rejected his initial accusations about blocking ammunition as ‘absolutely untrue’. Prigozhin then released a voice message saying this was ‘tantamount to nothing more than simply spitting at Wagner’, reiterating that his men were very short of supplies.”

February 20 – Wall Street Journal (Lingling Wei): “China’s leadership is growing worried that increased Western military support for Ukraine will severely weaken Russia, a key partner for Beijing in its heightened competition with the U.S. and its allies. Ukraine’s robust battlefield resistance has prompted a rethink in Beijing, making it more inclined to push for a cease-fire to prevent further Russian setbacks—or even a larger-scale defeat, according to people close to Chinese decision-making. The reconsideration has led to Beijing further expanding its economic ties with Moscow.”

February 20 – Financial Times (Alice Hancock and David Sheppard): “Dutch intelligence authorities have warned of Russian attempts to sabotage its North Sea energy infrastructure and told operators to be on their guard. Russia had instigated ‘activities that indicate espionage as well as preparing operations for disturbance and sabotage’ of underwater cables, wind farms and gas pipelines in the North Sea, said a report published by the Dutch military intelligence unit MIVD… General Jan Swillens, head of MIVD, said at a news conference that a ship had been detected attempting to map energy infrastructure in the North Sea in recent months…”

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

February 21 – Reuters (Martin Pollard, Laurie Chen): “China is ‘deeply worried’ that the Ukraine conflict could spiral out of control, foreign minister Qin Gang said…, and called on certain countries to stop ‘fuelling the fire’ in an apparent dig at the United States. Beijing, which last year struck a ‘no limits’ partnership with Moscow, has refrained from condemning Russia’s invasion of Ukraine. The United States has warned of consequences if China provides military support to Russia, which Beijing says it is not doing. ‘China is deeply worried that the Ukraine conflict will continue to escalate or even spiral out of control’ Qin said… ‘We urge certain countries to immediately stop fuelling the fire,’ he said in comments that appeared to be directed at the United States, adding that they must ‘stop hyping up ‘today Ukraine, tomorrow Taiwan’’.”

February 20 – Associated Press: “Nearly one year after Russia invaded Ukraine, new questions are rising over China’s potential willingness to offer military aid to Moscow in the increasingly drawn-out conflict… U.S. Secretary of State Antony Blinken said American intelligence suggests China is considering providing arms and ammunition to Russia, an involvement in the Kremlin’s war effort that he said would be a ‘serious problem.’ China has refused to criticize Russia for its actions or even to call it an invasion in deference to Moscow. At the same time, it insists that the sovereignty and territorial integrity of all nations must be upheld. The question now is whether China is willing to convert that rhetorical backing into material support.”

February 22 – Washington Post (Christian Shepherd and Vic Chiang): “Ahead of the first anniversary of Russia’s invasion of Ukraine, China has launched a public diplomacy offensive to wrest control of the narrative about its role in the conflict, trying to clear itself of accusations that it has sided with Russia while accusing the United States of turning the conflict into a ‘proxy’ war. Few of the positions staked out by Chinese officials in a flurry of speeches and documents this week are new, but they have underscored why Beijing continues to stand by Moscow even as it professes ‘deep concern’ about the conflict: It considers the United States — not Russia — the progenitor of global insecurity, including in Ukraine.”

February 20 – Bloomberg (Courtney McBride): “The US and China came to Germany last weekend looking to patch up a new rift opened by the uproar over a Chinese balloon. But a meeting between their top diplomats showed how difficult it will be to compromise. Secretary of State Antony Blinken and China’s State Councilor Wang Yi traded barbs on everything from the balloon and Taiwan to North Korea and Russia in their first meeting since the high-altitude craft traversed the US and provoked an acrimonious round of finger pointing… It all underscored how, for all the claims from President Joe Biden and President Xi Jinping about their desire to steady ties, neither side seems capable of doing so. What was meant to pave the way for a Blinken trip to Beijing — he canceled a visit once the balloon was spotted — only seemed to make prospects more remote.”

February 23 – U.S. News & World Report (Paul D. Shinkman): “The Pentagon… pledged ‘consequences’ for Beijing if it heeds Moscow’s desperate pleas for arms and ammunition but yet again stopped short of detailing how it would follow through on the stern but vague threat. Spokeswoman Sabrina Singh delivered the cagey response during a press conference in which she demurred despite repeated requests for specifics. It wasn’t the first such shadowy warning… Sunday on CBS News, Secretary of State Antony Blinken referred to a ‘serious problem’ if China looked to strengthen its alliance with Russia at this time.”

February 23 – Reuters (Idrees Ali and Ben Blanchard): “The United States is set to expand the number of troops helping train Taiwanese forces, two U.S. officials said… Reuters reported in 2021 that a small number of U.S. special operations forces have been rotating into Taiwan on a temporary basis to train their forces. The officials… said that the Pentagon was expected to increase that number in the coming months.”

February 20 – Bloomberg: “China laid out a fresh laundry list of problems it has with how the US uses its power, underscoring how tensions between the two nations have worsened over issues from the alleged spy balloon dispute to Russia’s war in Ukraine. The official Xinhua News Agency published a 4,000-word article… titled ‘U.S. Hegemony and Its Perils’ that lays out Beijing’s sweeping view of how the US misbehaves on the world stage in the political, military, economic, technological and cultural spheres. The article said the US ‘embeds American values in its products such as movies,’ to dominate public opinion. ‘When Hollywood movies descend on the world, they scream the American values tied to them,’ it added.”

February 22 – Financial Times (Max Seddon and James Kynge): “Vladimir Putin and Wang Yi, China’s top diplomat, vowed to strengthen ties between their two countries despite ‘pressure from the international community’ ahead of the first anniversary of Russia’s invasion of Ukraine. Wang’s visit to Moscow, the first by a senior Chinese official since Putin ordered the full-scale invasion last year, highlights the deepening relationship between Russia’s president and his Chinese counterpart Xi Jinping as the war drags into its second year. ‘We are prepared to maintain our strategic focus and determination alongside Russia,’ Wang said as he met Putin… He added that the two sides would deepen ‘political mutual trust and strategic co-operation’… Beijing has provided an economic lifeline to Moscow as western sanctions bite, stepping up its purchase of Russian energy exports. It has also increased its supply of technical components that Russia can no longer import from western countries because of sanctions. ‘China-Russia relations have withstood pressure from the international community and are developing in a very stable manner against the backdrop of a very complex, changing international situation,’ Wang told Putin.”

February 21 – Wall Street Journal (Austin Ramzy, Keith Zhai and Laurence Norman): “Chinese leader Xi Jinping is preparing to visit Moscow for a summit with Russia’s president in the coming months, according to people familiar with the plan, as Vladimir Putin wages war in Ukraine and portrays himself as a standard-bearer against a U.S.-led global order. Beijing says it wants to play a more active role aimed at ending the conflict, and the people familiar with Mr. Xi’s trip plans said a meeting with Mr. Putin would be part of a push for multiparty peace talks and allow China to reiterate its calls that nuclear weapons not be used. Western capitals have expressed skepticism about China’s diplomatic initiative…”

De-globalization and Iron Curtain Watch:

February 21 – Bloomberg (Daniel Flatley and Christopher Condon): “A top Treasury Department official warned companies in China and around the world that they will be punished if they keep doing business with Russia in violation of US sanctions, as the Biden administration looks to sever President Vladimir Putin’s financial lifeline with the conflict heading into its second year. ‘The cost of doing business with Russia in violation of our policies is a steep one, and companies and financial institutions should not wait for their governments to make the decision for them,’ Deputy Treasury Secretary Wally Adeyemo told an audience at the Council on Foreign Relations.”

February 22 – Financial Times (Sam Fleming and Daria Mosolova): “The EU and its allies are investigating a surge in exports to economies in Russia’s vicinity as they seek to prevent companies from evading western sanctions imposed on Moscow. David O’Sullivan, the EU’s newly appointed sanctions envoy, told the Financial Times that big increases in trade with countries in Russia’s neighbourhood raised questions as to whether products hit by sanctions were entering the country via the back door. ‘We see a massive fall-off in trade flows from the EU to Russia and unusual spikes in trade with other third countries, particularly with those in close vicinity to Russia,’ he said.”

February 20 – Financial Times (Eri Sugiura): “US curbs on China’s access to advanced technology are killing its viability as a manufacturing base for exports, according to the head of Japan’s Kyocera, as one of the world’s largest makers of chip components shifts its production elsewhere and invests heavily in facilities at home. Hideo Tanimoto, president of a company that is an important part of the chip supply chain, makes his stark assessment as he leads an aggressive investment strategy for Kyocera that includes construction of its first factory in Japan in nearly two decades. ‘It works as long as [products are] made in China and sold in China, but the business model of producing in China and exporting abroad is no longer viable,’ Tanimoto told the Financial Times. ‘Not only have wages gone up, but obviously with all that’s happening between the US and China, it’s difficult to export from China to some regions.’”

February 18 – Financial Times (Arjun Neil Alim and Oliver Telling): “A combination of supply chain chaos, higher costs and concerns about working conditions is forcing some western fashion brands to rethink their decades-old dependence on factories in China. Dieter Holzer, the former chief executive and a board member of Marc O’Polo, said the Swedish-German fashion brand started to swap some suppliers in the country in favour of factories in Turkey and Portugal in 2021. The decision was meant to ‘balance and take out risk from your supply chain and make it more sustainable’, he said. ‘I think many companies across the industry are reviewing their exposure [to China].’”

February 22 – Reuters (Nayera Abdallah and Ahmed Rasheed): “Iraq’s central bank said… it planned to allow trade from China to be settled directly in yuan for the first time, in an attempt to improve access to foreign currency. The central bank has been taking urgent steps to compensate for a dollar shortage in local markets, which prompted the cabinet to approve a currency revaluation earlier this month. ‘It is the first time imports would be financed from China in yuan, as Iraqi imports from China have been financed in (U.S.) dollars only,’ the government’s economic adviser… told Reuters…”

February 22 – Bloomberg: “Chinese authorities have urged state-owned firms to phase out using the four biggest international accounting firms, signaling continued concerns about data security… China’s Ministry of Finance is among government entities that gave the so-called window guidance to some state-owned enterprises as recently as last month, urging them to let contracts with the Big Four auditing firms expire…”

Inflation Watch:

February 24 – Associated Press (Paul Wiseman): “The Federal Reserve’s preferred inflation gauge rose last month at its fastest pace since June, an alarming sign that price pressures remain entrenched… Friday’s… showed that consumer prices rose 0.6% from December to January, up sharply from a 0.2% increase from November to December. On a year-over-year basis, prices rose 5.4%, up from a 5.3% annual increase in December. Excluding volatile food and energy prices, so-called core inflation rose 0.6% from December, up from a 0.4% rise the previous month. And compared with a year earlier, core inflation was up 4.7% in January, versus a 4.6% year-over-year uptick in December.”

February 23 – Reuters (Siddharth Cavale): “As American shoppers stomach soaring food prices, they are cutting back on purchases of other goods, such as toys, clothing and housewares, in a challenging trend for retailers. Commentary this week from executives at Walmart and other retailers shows how Americans are shifting their shopping habits… in the face of the highest inflation in a generation. At Walmart… Americans are still spending but are more ‘choiceful, discerning, thoughtful’ about what they buy, its global Chief Executive Officer Doug McMillon told analysts. Higher prices on food led to soft sales of electronics, toys, home and apparel in the most recent quarter at Walmart. McMillon said he believed inflation on dry groceries and items made for immediate consumption would remain high ‘for a while’. The average cost for food consumed at home climbed 11.3% in January from a year earlier, Labor Department data showed.”

February 23 – Bloomberg (Catarina Saraiva and Steve Matthews): “In downtown Nashville, chef Matt Farley is serving up trouble for Federal Reserve Chair Jerome Powell. Acme Feed and Seed, the restaurant and honky tonk he manages on the main live-music drag, has been jacking up prices for everything from fried chicken to a rack of ribs. There are two big reasons. Food supplies are way more expensive – pork costs two-and-a-half times what it used to, for example. More worrying for the Fed, so are workers. Farley is having to pay $17 an hour, up from about $12 before the pandemic hit, to hire dishwashers in a city where unemployment was just 2.3% in December. A line cook now makes more than $20, compared with $14 back in 2019.”

February 22 – Wall Street Journal (Yusuf Khan): “Grain exports from Ukraine have slowed markedly in recent weeks, pushing up global prices, amid shipping delays and concerns about the looming expiration of a United Nations-backed deal to give food cargoes safe passage. Russia’s invasion of Ukraine last year had initially trapped shipments of wheat, sunflower oil and other agricultural products, sparking concerns of a global food crisis. Shipments then recovered later in the year to near prewar levels after Moscow and Kyiv agreed to a U.N.-backed pact to resume food exports… Now, with tensions high ahead of the first anniversary of the invasion, some traders are worried Russia won’t extend the grain deal, which is due to expire on March 19.”

Biden Administration Watch:

February 19 – Financial Times (Amanda Chu): “A shortage of construction workers is putting at risk the Biden administration’s ambitious plan to fuel a historic building boom in the US, according to industry executives. The construction sector could be short of as many as half a million workers this year, according to the Associated Builders and Contractors, an industry group, increasing project costs and delaying a building campaign that executives say is comparable to that of the second world war. ‘It would be difficult to identify a period during which the construction labour market was more constrained than it is now,’ said Anirban Basu, chief economist at the ABC. ‘Demand for construction workers is sky high…This is the era of the mega project.’”

February 18 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “The White House will next week hold secret talks with Taiwan’s foreign minister Joseph Wu and national security adviser Wellington Koo as part of a special diplomatic dialogue intended to remain private to avoid sparking an angry reaction from China. Five people familiar with the secret talks — known as the ‘special channel’ — said Wu and Koo would lead the delegation. After arriving at the weekend, the Taiwanese team will next week meet Jon Finer, the US deputy national security adviser. One person said Wendy Sherman, deputy secretary of state, would also take part in the meetings.”

Federal Reserve Watch:

February 22 – Reuters (Howard Schneider and Michael S. Derby): “Nearly all Federal Reserve policymakers rallied behind a decision to further slow the pace of interest rate hikes at the U.S. central bank’s last policy meeting, but also indicated that curbing unacceptably high inflation would be the ‘key factor’ in how much further rates need to rise. In language that suggested a compromise between officials worried about a slowing economy and those convinced inflation would prove persistent, minutes from the Jan. 31-Feb. 1 meeting said policymakers agreed rates would need to move higher, but that the shift to smaller-sized hikes would let them calibrate more closely with incoming data.”

February 22 – CNBC (Jeff Cox): “St. Louis Federal Reserve President James Bullard expressed confidence that the central bank can beat inflation and advocated Wednesday for stepping up the pace in the battle. Bullard told CNBC that a more aggressive interest rate hike now would give the rate-setting Federal Open Market Committee a better chance to bring down inflation… ‘It has become popular to say, ‘Let’s slow down and feel our way to where we need to be.’ We still haven’t gotten to the point where the committee put the so-called terminal rate,’ he said… ‘Get to that level and then feel your way around and see what you need to do. You’ll know when you’re there when the next move could be up or down.’”

U.S. Bubble Watch:

February 24 – Reuters (Lucia Mutikani): “U.S. consumer spending increased by the most in nearly two years in January amid a surge in wage gains… The report… was the latest indication that the economy was nowhere near a much- dreaded recession. It joined data earlier this month showing robust job growth in January and the lowest unemployment rate in more than 53 years… Consumer spending, which accounts for more than two-thirds of U.S. economic activity, shot up 1.8% last month. That was the largest increase since March 2021.”

February 23 – Associated Press (Christopher Rugaber): “The U.S. economy expanded at a 2.7% annual rate from October through December, a solid showing despite rising interest rates and elevated inflation, the government said… in a downgrade from its initial estimate. The government had previously estimated that the economy grew at a 2.9% annual rate… The… revised estimate of the fourth quarter’s gross domestic product… marked a deceleration from the 3.2% growth rate from July through September. Thursday’s report revised down the government’s estimate of consumer spending growth… from a 2.1% rate to 1.4%.”

February 23 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, pointing to a persistently tight labor market… Those worries were amplified by other data on Thursday showing inflation was much stronger than initially thought in the fourth quarter… A measure of inflation in the economy, the price index for gross domestic purchases, rose at a 3.6% rate, revised up 0.4 percentage point from the advance estimate.”

February 22 – Reuters (Nayera Abdallah and Ahmed Rasheed): “U.S. existing home sales dropped to the lowest level in more than 12 years in January… The report from the National Association of Realtors… also showed the smallest increase in annual house prices since 2012… Existing home sales fell 0.7% to a seasonally adjusted annual rate of 4.00 million units last month, the lowest level since October 2010…That marked the 12th straight monthly decline in sales, the longest such stretch since 1999… There were 980,000 previously owned homes on the market, up 2.1% from December and 15.3% from a year ago… At January’s sales pace, it would take 2.9 months to exhaust the current inventory of existing homes up from 1.6 months a year ago. A four-to-seven-month supply is viewed as a healthy balance between supply and demand.”

February 24 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes jumped to a 10-month high in January as prices declined, but a resurgence in mortgage rates could slow a much anticipated housing market turnaround. New home sales increased 7.2% to a seasonally adjusted annual rate of 670,000 units last month, the highest level since March 2022… On a regional basis, sales surged in the South but slumped in the Midwest, Northeast and West… Sales declined 19.4% on a year-on-year basis in January.”

February 22 – Bloomberg (Vince Golle): “A gauge of US home-purchase applications tumbled last week to the lowest level since 1995 as the highest mortgage rates in three months hammered a housing market struggling to stabilize. The Mortgage Bankers Association’s index of mortgage applications to buy a home slumped more than 18% — the biggest drop since 2015 — to 147.1 in the week ended Feb. 17…”

February 22 – Reuters (Lindsay Dunsmuir): “The average interest rate on the most popular U.S. home loan rose last week to its highest since November…, data from the Mortgage Bankers Association (MBA) showed… The average contract rate on a 30-year fixed-rate mortgage jumped by 23 bps to 6.62% for the week…”

February 18 – Wall Street Journal (Ben Eisen and Gina Heeb): “The U.S. economy is on a steady footing and the unemployment rate is superlow. Yet a rising number of Americans are falling behind on their car payments. Some 9.3% of auto loans extended to people with low credit scores were 30 or more days behind on payments at the end of last year, the highest share since 2010, according to… Moody’s Analytics. The past few years have been unusually good for consumers, who stowed away extra money during the pandemic, but sky-high inflation is eating away at those gains. Car prices, in particular, jumped because of a shortage of vehicles. Many borrowers took out large loans to buy them, leaving little breathing room…”

February 23 – Bloomberg (Hannah Levitt): “The US economy has obstacles to overcome though there’s still a chance for a so-called soft landing, Jamie Dimon said. ‘The US economy right now is doing quite well — consumers have a lot of money, they’re spending it, jobs are plentiful,’ the JPMorgan… chief executive officer said… ‘Out in front of us there’s some scary stuff.’”

Fixed Income Watch:

February 19 – Financial Times (Steve Johnson): “Fixed-income exchange traded funds can suck the liquidity out of corporate bonds during times of market stress, potentially worsening price dislocations during crises, academics have claimed. Bond ETFs are generally perceived as innovations that have enhanced liquidity and aided price discovery during market ruptures, offering a superior option than attempting to trade in the underlying bonds… The potential problem stems from the creation and redemption baskets that ETF issuers trade with market makers known as authorised participants (APs) in order to handle inflows to, or outflows from, their ETFs.”

China Watch:

February 24 – Bloomberg: “Chinese President Xi Jinping is set to bring decision-making of the financial system further under his control with the likely revival of a powerful committee to coordinate financial policy and the possible appointment of a key ally in a top position at the central bank. Authorities are considering reviving the long-disbanded Central Financial Work Commission to allow the ruling Communist Party to assert more control over financial policy, according to people familiar… Ding Xuexiang, Xi’s chief of staff, is set to become the head of the entity…”

February 23 – Wall Street Journal (Keith Zhai and Lingling Wei): “Chinese leader Xi Jinping is preparing to shake up the leadership of the country’s financial system, installing key associates to run the central bank and reviving a Communist Party body to tighten political control over financial affairs… The moves are a continuation of efforts by Mr. Xi to reshape the world’s second-largest economy. In recent years, the central bank and other financial regulators have continued to lose their already fading independent status amid Mr. Xi’s broader effort to strengthen the party’s rule.”

February 23 – Financial Times (Cheng Leng and Joe Leahy): “Zhu Hexin, one of China’s most senior commercial bankers, is among the frontrunners to take over as the governor of the country’s central bank as Beijing prepares to overhaul the leadership of its most important financial regulatory institutions next month. If his nomination is confirmed, Zhu, the chair of state-owned conglomerate Citic Group, would succeed Yi Gang as governor of the People’s Bank of China… Apart from appointing new leaders at the financial regulators, the party is also expected to undertake a wider government reshuffle, including appointing new ministers.”

February 21 – Bloomberg: “China’s local governments are feeding into a money-market cash squeeze as they are on course to boost debt issuance to the highest since June to raise funds for stimulus programs. Regional governments have already sold 391 billion yuan ($56.9bn) of debt this month…, and have planned issuance in the pipeline that will boost that total to 512.7 billion yuan… Gauges of money-market liquidity are all showing stress.”

February 20 – Bloomberg: “Overseas funds returned to selling China’s bonds in January after a one-month pause, underscoring the relatively unattractive yields on yuan-denominated debt as Beijing keeps monetary policy loose to support growth. Foreign holdings of Chinese onshore bonds in the interbank market including sovereigns, policy bank debt and other fixed-income securities slid by 106.5 billion yuan ($15.5bn) to 3.28 trillion yuan, the lowest since 2020… That’s also the biggest outflow since May.”

February 18 – Bloomberg: “China plans to adopt more differentiated risk weighting measures to limit banks’ lending to toxic investments that are exposed to higher default threats, including those to problematic house developers. The China Banking and Insurance Regulatory Commission proposed to align its banking prudential regulations to global standards in a draft amendment released on Saturday, and said it would classify all its commercial lenders into three groups to direct loans into the real economy. The new rule, due to take effect from Jan. 1 next year, is aimed at providing ‘ample and stable’ liquidity to the Chinese banking system…”

February 23 – Bloomberg: “A Chinese city with a population of 7.7 million drew public attention… for almost losing its bus services because of a lack of funds, highlighting the financial strain local governments are under after years of spending on Covid controls. The only bus company in Shangqiu… said Thursday it would halt services from March 1, citing heavy losses that made it difficult to pay salaries or even vehicle insurance. It blamed the situation partly on the insufficient payment of fiscal subsidies from the city’s government.”

February 20 – Bloomberg (Low De Wei): “A Chinese professor has been suspended by his university after a talk he gave at a school prompted an outburst from a student who accused him of worshiping the West. The incident happened Saturday… in Anhui province, some 250 miles west of Shanghai. A video clip posted on social media shows a student walking onto the stage, taking a microphone from a professor and shouting, ‘He only has money in his eyes, thinks learning is just for money, worships the West and panders to overseas powers.’”

Central Banker Watch:

February 21 – Financial Times (Martin Arnold): “Investors are betting the European Central Bank will raise interest rates to all-time highs, spurred on by the eurozone economy’s resilience and signs that inflation could prove tougher to rein in than expected. The… central bank, widely seen as one of the world’s most dovish during its eight-year experiment with negative borrowing costs, is now expected to raise rates substantially this year. Swap markets are pricing in a jump in the ECB’s deposit rate to 3.75 per cent by September, up from the current 2.5%. That would match the benchmark’s 2001 peak…”

February 20 – Reuters (Stella Qiu): “Australia’s central bank, startled by the risk that inflation could prove stickier than previously thought, abandoned all thought of pausing at its February policy meeting and signalled more rate hikes would be needed in the months ahead. Minutes of the Feb. 7 policy meeting… showed the Reserve Bank of Australia’s (RBA) Board only discussed two options – hiking by 50 bps or 25 bps. That was a marked change from December when it had considered staying pat.”

February 21 – Reuters (Lucy Craymer): “New Zealand’s central bank raised interest rates by 50 bps to a more than 14-year high of 4.75%…, and said it expects to keep tightening further as inflation remains too high, a hawkish signal that sent the local dollar surging. The Reserve Bank of New Zealand (RBNZ) said it was too early to assess the policy implications of the recent devastating cyclone and floods in the country’s North Island…”

February 20 – Bloomberg (Love Liman): “Sweden’s central bank may need billions of kronor worth of new capital as rising interest rates erode the market value of notes it bought under its quantitative easing program. Analysts at Swedbank AB estimate the Riksbank will miss its equity target for the year, of 60 billion kronor ($5.8bn), due to a slump in the value of its holdings. That will force the central bank to request a capital injection in the range of 20 to 40 billion kronor… ‘This recapitalization of the Riksbank is likely to lead to an increased borrowing requirement for the government,’ Swedbank’s analysts Glenn Nielsen and Knut Hallberg wrote…”

February 19 – Bloomberg (Philip Aldrick and Jana Randow): “The euro area’s central banks will disclose their first significant losses from a decade of money printing in the coming weeks, heralding a new era of scrutiny and the prospect of taxpayer bailouts… ‘Results will turn negative for many banks already in 2022, because of the mismatch of interest rates on assets and liabilities,’ Bank of Portugal Governor Mario Centeno said… ‘We finance ourselves now at higher interest rates, which do not match the return of bonds and all sorts of debt in the central bank’s balance sheet.’”

Europe Watch:

February 23 – Bloomberg (Andrew Langley): “Underlying inflation in the euro area hit a record in January, revised data showed, likely cementing the European Central Bank’s plan to raise interest rates by another half-point next month. Core price gains reached 5.3%… Headline inflation, which includes food and power, also ticked up by 0.1 percentage point to 8.6% after Germany’s figure turned out to be higher than the agency’s preliminary estimate.”

February 21 – Bloomberg (Alexander Weber): “Euro-area business activity rose at the fastest rate in nine months in February — raising the likelihood that the bloc can avoid a downturn this quarter. The better-than-expected performance was driven by services, which saw the strongest growth since June in surveys of purchasing managers by S&P Global. Manufacturing output also improved as supply-chain bottlenecks eased further. Activity rose across the region, with both France and Germany returning to expansion after likely pullbacks in January.”

February 22 – Reuters (Gavin Jones, Giuseppe Fonte and Valentina Consiglio): “Italy’s budget deficit over the last three years will be higher than previously stated when new public finance figures are released next week… The reason is a ruling this month by the European Union’s statistics agency Eurostat regarding the way tax credits are classified in state accounts… The 2021 deficit, originally reported at 7.2% of gross domestic product, is now seen closer to 8%.”

February 20 – Bloomberg (Niclas Rolander): “Sweden’s underlying inflation continued its ascent in January, adding pressure on the country’s central bank to raise borrowing costs despite the gloomiest economic outlook of all European Union nations. A measure of prices that strips out energy costs and the effect of interest-rate changes rose 8.7% from a year ago… The data… suggest a more difficult balancing act for the Riksbank’s new governor, Erik Thedeen, as he tries to calm stubbornly high inflation — worsened by a weakening krona — at a time price growth is slowing in the US and the euro area.”

Japan Watch:

February 19 – Financial Times (Benjamin Shatil): “It is little wonder that markets were scouring decade-old comments by Kazuo Ueda, the newly announced Bank of Japan governor. A relatively unknown academic outside of Japan who served on the central bank’s board between 1998 and 2005, Ueda’s nomination has prompted a rush to understand both the person and his profile. But this risks missing the forest for the trees. The question to ask is not who, but rather why. Why has the administration of Prime Minister Fumio Kishida nominated a comparative outsider to lead the BoJ, breaking with a long-held tradition of rotating between appointments from the Ministry of Finance and from within the ranks of the bank itself? Perhaps others did not want the job. Or perhaps Ueda offers a shot at a relatively clean break for monetary policy. If the legacy of ultra-easy Abenomics looms large in Japan, dismantling an increasingly convoluted patchwork of policies will require someone who, at the very least, was not their architect.”

February 20 – Bloomberg (Toru Fujioka): “Bank of Japan Deputy Governor Masayoshi Amamiya says that among difficult and important challenges for any exit strategy is deciding when it should start and how to communicate that with financial markets. BOJ has ways to address challenges for market operations when it exits, Amamiya says… Discussions over an exit will take place when a virtuous economic cycle emerges between inflation and wage growth. BOJ has adapted sustainable easing framework over years after first trying to hit its inflation target in short term. It’s appropriate to continue with monetary easing considering Japan’s inflation outlook…”

February 19 – Bloomberg (Toru Fujioka): “Bank of Japan watchers are flagging the outside risk that Governor Haruhiko Kuroda may surprise international markets one last time next month with adjustments to smooth the transition process for his nominated successor Kazuo Ueda. The central bank’s yield curve control program already presents a complicated challenge for Ueda. As soon as he takes the BOJ’s helm, the nominee will likely face intense market pressure for change, even if he may prefer to take time to carefully assess the past decade’s extraordinary stimulus measures as an economist. That’s why some BOJ watchers warn there’s a risk of a surprise at Kuroda’s final meeting ending March 10.”

February 20 – Reuters (Kantaro Komiya): “Japan’s manufacturing activity contracted at the fastest pace in 30 months in February, a business survey showed…, in a worrying sign for the world’s third-largest economy, which is facing weakening demand and struggling to tame cost pressures.”

February 21 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan will likely adopt a gradual approach to raising interest rates, and won’t be too focused on reducing the side effects of monetary easing, according to a former board member. ‘A March move is unlikely,’ Makoto Sakurai said… ‘They will be raising rates only gradually, by carefully assessing the underlying economy and inflation.’”

Global Bubble Watch:

February 21 – Reuters (Ismail Shakil and Steve Scherer): “Canada’s annual inflation rate eased more than expected in January to 5.9%…, which should allow the Bank of Canada to keep interest rates steady at its next meeting while it lets previous rate hikes sink in… Month over month, the consumer price index rose 0.5%, Statistics Canada said, again lower than analysts’ forecast of a 0.7% gain, after a 0.6% decline in December.”

EM Crisis Watch:

February 22 – Financial Times (Jonathan Wheatley): “Developing countries’ stockpile of debt hit a fresh record high last year, the Institute of International Finance said…, adding to concerns of a wave of sovereign defaults this year. The combined government, household, corporate and financial sector debts of 30 large low and middle-income countries rose to $98tn at the end of December… The debt burden for the 30 countries was up from $96tn a year earlier and from $75tn in 2019…, the IIF… said in the latest edition of its quarterly Global Debt Monitor. Government debts alone hit almost 65% of gross domestic product by the end of 2022 — an increase of 10 percentage points over pre-pandemic levels and the highest-ever year-end total.”

February 21 – Bloomberg (Abhishek Vishnoi): “The combined equity market value of Adani Group’s 10 companies slipped below $100 billion…, as the embattled conglomerate struggles to reassure investors following a scathing report by a US short seller. The ports-to-power group has now lost about $138 billion in market capitalization since Jan. 24…”

February 23 – Bloomberg (Mai Ngoc Chau and Nguyen Dieu Tu Uyen): “Vietnam’s property debt crisis is intensifying as the country’s second-largest developer joined the ranks of peers seeking debt extensions after failing to repay a bond on time. No Va Land Investment Group said earlier this week it will delay repayment of a 1 trillion dong ($42 million) note originally due on Feb. 12… Better known as Novaland, the company is a prominent addition to an expanding group of Vietnamese companies tardy with their bond payments. Fifty-four companies — many of them in the real estate sector — were late as of Jan. 31, up from six the month before…”

Social, Political, Environmental, Cybersecurity Instability Watch:

February 18 – Financial Times: “At least 67 journalists and media support workers were killed around the world last year, the highest number since 2018 according to the Committee to Protect Journalists. The war in Ukraine was a big factor: 15 journalists were killed in the country, the highest number among the nations tracked by the committee. Mexico recorded almost as many killings as Ukraine: 13, the highest number for a single year in the Latin American nation, highlighting the dangers involved in reporting on topics such as corruption and gang violence.”

February 19 – Associated Press (Josh Funk): “The ongoing bird flu outbreak has cost the government roughly $661 million and added to consumers’ pain at the grocery store after more than 58 million birds were slaughtered to limit the spread of the virus. In addition to the cost of the government response that the USDA tallied up and rising prices for eggs, chicken and turkey, farmers who raise those animals have easily lost more than $1 billion, said an agricultural economist… The bad news is that with the outbreak entering its second year and the spring migratory season looming, there is no end in sight.”

February 24 – Reuters (Jennifer Rigby): “The World Health Organization is working with Cambodian authorities after two confirmed human cases of H5N1 bird flu were found among one family in the country. Describing the situation as ‘worrying’ due to the recent rise in cases in birds and mammals, Dr Sylvie Briand, the director of epidemic and pandemic preparedness and prevention, told reporters… that WHO was reviewing its global risk assessment in light of the recent developments.”

Leveraged Speculation Watch:

February 24 – Bloomberg (Dawn Lim): “Blackstone Inc. Chief Executive Officer Steve Schwarzman took home a record $1.27 billion for 2022, as the investing titan continued building his fortune into one of the world’s largest. Schwarzman, who owns some 20% of Blackstone shares, reaped roughly $1 billion in dividends alone. He also earned $253.1 million in compensation, most of it through incentive fees and his cut of fund profits known as carried interest. The annual haul, up from about $1.1 billion a year earlier, underscores Schwarzman’s status as one of Wall Street’s highest earners — with a net worth of $30.6 billion…”

Geopolitical Watch:

February 20 – Reuters (By Soo-Hyang Choi and Hyonhee Shin): “North Korea launched two more ballistic missiles off its east coast on Monday, with the powerful sister of leader Kim Jong Un saying North Korea’s use of the Pacific as a ‘firing range’ would depend on the behaviour of U.S. forces. The launches come just two days after North Korea fired an intercontinental ballistic missile (ICBM) into the sea off Japan’s west coast, prompting the United States to hold joint air exercises with South Korea and separately with Japan…”

February 20 – Bloomberg (Jonathan Tirone): “International atomic monitors in Iran have detected uranium enriched to levels just below nuclear weapons-grade, risking an escalation over Tehran’s expanding program. The International Atomic Energy Agency is trying to clarify how Iran accumulated uranium enriched to 84% purity — the highest level found by inspectors in the country to date, and a concentration just 6% below what’s needed for a weapon. Iran says its decades-long atomic program is for peaceful purposes but Western powers and Israel have accused it of working toward a nuclear bomb.”

February 19 – Reuters (Ari Rabinovitch): “Israeli Prime Minister Benjamin Netanyahu… said that Iran was responsible for a reported attack on an oil tanker last week. An attack on the Liberian-flagged Campo Square was confirmed on Saturday by the ship’s captain, who said it was lightly damaged by an airborne object on Feb. 10 while sailing through the Arabian Sea. Shipping databases linked the tanker to Zodiac Maritime, which is controlled by Israeli shipping magnate Eyal Ofer.”

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