MARKET NEWS / CREDIT BUBBLE WEEKLY

February 9, 2024: Deflation & Inflation

MARKET NEWS / CREDIT BUBBLE WEEKLY
February 9, 2024: Deflation & Inflation
Doug Noland Posted on February 10, 2024

A few headlines: WSJ: “Deflation Tightens Grip on China’s Economy.” FT: “China’s Prices Fall at Fastest Rate in 15 years as Economy Battles Deflation.” NYT: “China Deflation Alarms Raised by Falling Prices for Food and Cars.”

February 7 – Bloomberg: “China’s consumer prices fell last month at the fastest pace since the global financial crisis, piling pressure on the government to step-up support for a stumbling economic rebound that’s roiling markets. The consumer price index dropped 0.8% in January from a year ago…, the weakest since September 2009. The drop was worse than economists’ expectations for a 0.5% decline. ‘The CPI data today shows China faces persistent deflationary pressure,’ said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management Ltd. ‘China needs to take actions quickly and aggressively to avoid the risk of deflationary expectation to be entrenched among consumers.’”

Chinese Credit data belie all the deflation chatter. The first month of the year is always a big Credit month, with January 2024 especially big. Aggregate Financing (China’s metric for system Credit growth) expanded a monthly record $904 billion, 8% ahead of January 2023 – and 16% above estimates. This puts three-month growth at $1.515 TN, 17% ahead of comparable 2023. And for the first time, 12-month growth in Aggregate Financing surpassed $5 TN ($5.017 TN), expanding 13.4%. It’s worth noting that 12-month growth exceeded pre-pandemic comparable January 2020 by 39%.

Total New Loans of a record $684 billion were slightly ahead of January 2023 – and 9% ahead of estimates. Bank Loans expanded $3.163 TN, or 10.4%, over twelve months. Loans expanded 23.3% over two years, 37.5% over three and 73.8% over five years – in one of history’s great Credit inflations.

Consumer (chiefly mortgage) Loan growth jumped to $136 billion, the strongest since last March, but below January 2023’s $152 billion. Consumer Loans expanded $702 billion, or 6.6%, over the past year. One-year growth was almost 24% higher compared to January 2023, but a third lower than comparable January 2022.

Slowing somewhat, Corporate Loans continue to expand at a brisk pace. At $537 billion, January growth lagged the year ago expansion by 17%. Yet Corporate Loans expanded $2.376 TN, or 12.0%, over the past year. Loans jumped 28.7% over two years, 43.5% over three and 78.2% over five years.

With banks lending like crazy during the month, Beijing pulled back on debt issuance. Government bonds expanded $42 billion in January, down from December’s $129 billion and January 2023’s $57 billion. Still, three-month growth of $330 billion was almost 60% ahead of the comparable year ago increase. One-year growth of $1.319 TN was 37% ahead of comparable January 2023. Government Bonds expanded 15.7% over one year, 30.6% over two, 51.4% over three, and 82.1% over five years.

We’ll focus on a Bloomberg headline: “What China’s Persistent Deflation Means for the World.”

Bloomberg’s “QuickTake” offered a simple deflation definition: “The term describes a situation in which prices for goods and services fall across the economy.”

The root cause of aggregate price declines can vary. They are typically associated with a marked drop in aggregate demand within a backdrop of overcapacity. Both tend to be inevitable consequences of boom-time excess. And, typically, deflation is associated with a contraction (or at least rapid slowing) of Credit.

The underlying root causes of the demand shortfall and price declines will profoundly impact policy prescriptions and their efficacy. For example, interruptions to Credit growth and the flow of finance in an economy are amenable to government intervention. On the other hand, deflationary forces emanating from bursting Bubbles pose a serious policy dilemma. Inflationary measures adopted to boost demand and prices risk reigniting Bubble excess, ensuring only greater “deflationary” pressures later.

When we contemplate what China’s deflation might mean for the U.S. and the world, it’s important to appreciate that Beijing over the years repeatedly reflated its historic Bubble. Consequences include what could be history’s greatest speculative Bubble in Chinese apartments, along with epic overcapacity and unrivaled structural maladjustment. Moreover, there is the issue of China’s $60 TN banking system with now long tentacles across global financial and economic systems.

“American exceptionalism” is topical these days. It is no coincidence that U.S. equities are in the throes of a major speculative melt-up as Chinese stocks meltdown. We’re now 15 years into a historic global government finance Bubble. “GFC” reflationary measures quickly stoked China’s Bubble into a powerful “locomotive” pulling the global economy out of the post-mortgage finance Bubble muck. But China’s Bubble was allowed to run wild, in a process that emboldened ambitions of global economic might and superpower status.

Today, intractable problems at the global “periphery” (i.e., China) bolster late-cycle Terminal Phase Bubble Excess at the “Core.” Where would U.S. and global goods inflation be today, if not for downward price pressures from China’s massive global export machine? How great is the flow of finance exiting China and Chinese markets in favor of U.S. and global asset markets? How much is being borrowed at low-cost Chinese interest rates – for global speculation, including “carry trades” and such?

And there’s an argument to be made that Chinese “deflation” has acted as a pivotal countervailing factor diluting Bank of Japan (BOJ) reflationary measures in Japan. Ongoing negative BOJ rates and yield curve control (YCC) have been instrumental in boosting late-cycle blow-off excess at the U.S. “core” and global “periphery.”

February 8 – Bloomberg (Yumi Teso and Daisuke Sakai): “Japanese investors purchased the largest amount of US sovereign debt on record in 2023 — attracted by high yields and expectations for the end of the Federal Reserve’s tightening cycle. The net ¥18 trillion ($121bn) of purchases runs counter to concern of the Japanese dumping Treasuries to repatriate funds back home as the central bank in Tokyo lays the ground work to raise interest rates.”

How colossal has the yen “carry trade” inflated during eight years of negative rates (15 years of near zero rates!)? Flows out of Japan – traditional and for levered speculation – during this cycle have surely been in the Trillions.

As we approach the two-year mark for the Fed’s “tightening” cycle, we can ponder how massive flows out of Japan and China have countered rising domestic policy rates. Importantly, the loose global liquidity backdrop has been instrumental in perpetuating leveraged speculation in the U.S. and globally. Without exorbitant Japanese and Chinese finance, prospects for Fed QT and attendant liquidity pressures would have instilled some caution in the leveraged speculating community. Instead, loose global finance and last year’s Fed/FHLB liquidity injections emboldened leveraged speculation (including the “basis trade”) despite higher policy rates.

Loose conditions at this late-cycle phase both promote and validate financial innovation. So-called “private Credit” reached critical mass, with aggressive sector growth dynamics offsetting a pullback in boom-time bank lending.

February 8 – Bloomberg (Allison McNeely): “Apollo Global Management Inc. Chief Executive Officer Marc Rowan took a ‘victory lap’ on the firm’s record year, laying out goals to double its private credit origination business and put that asset class into retirement accounts. The firm posted record annual earnings, beating Wall Street estimates as higher interest rates powered growth at the credit-focused alternative asset manager. Originating private credit assets to sell to its Athene annuities business, other insurance companies and individual investors is crucial for the firm’s growth, Rowan said. Apollo aims to raise its annual origination of private credit to $200 billion-$250 billion in five years, up from around $100 billion, he said…”

Abundant marketplace liquidity and easy Credit Availability have compressed corporate risk premiums to two-year lows. Collapsing Credit default swap (CDS) “insurance” prices only intensify the speculative fervor, with strong demand for debt securities ensuring record corporate issuance.

February 5 – Reuters (Mark Niquette): “The U.S. corporate bond market is set to break new issuance records as borrowers take advantage of lower financing costs than last year and investors, emboldened by the prospect of an economic ‘soft landing,’ pile into the asset class… Issuance of bonds by companies rated investment-grade surged above $196 billion last month, making it the busiest January on record. This record issuance may be repeated this month, with BofA Global estimating nearly $160 billion to $170 billion in just investment-grade rated bond supply, which would make it the busiest February ever. Such back-to-back record months at the start of the year are unusual even for the prolific investment grade market, which is expected to see nearly $1.3 trillion of bond issuance this year.”

Again, it’s no coincidence that China’s Bubble deflates while the U.S. Bubble wildly inflates. An apt Friday evening Bloomberg headline: “Stock Mania Rages On as S&P500 Closes Above 5,000.” To go along with record corporate debt issuance, there was a flurry of new all-time highs to end the equities trading week – S&P500, S&P1500, Nasdaq100, Nasdaq Composite, Nasdaq Transportation, Nasdaq Insurance, Philadelphia Semiconductor (SOX), NYSE Healthcare, Russell 1000, Russell 3000, NYSE Arca Computer Technology, NYSE Arca Institutional, and other indices.

There will be no backing down on my part. I’m convinced that extending “Terminal Phase Excess” – in history’s greatest Bubble – is so fraught with peril. While central to the bullish market narrative, waning consumer price inflation is today detrimental to system stability. At this point, it’s a full-fledged mania. Speculation and speculative leverage are running wild.

It is critical that financial conditions tighten. The Powell Fed’s December “dovish pivot” only stoked financial excess. Not only will the eventual Bubble deflation be more destabilizing for the markets and economy. But today’s raging Bubble will disregard more hawkish Fed pushback. Markets today have no fear whatsoever that the Fed might interrupt the party with tighter conditions.

The Fed can celebrate mission accomplished in their dual mandate of full employment and price stability. Meanwhile, I see nothing but acute price instability, especially in the asset markets. Our central bank has over recent decades repeatedly ignored William McChesney Martin’s sage teachings: It’s the Fed’s job to take away the punch bowl just as the party gets going. Having spiked the punch a number of times to ensure the good times keep rolling, our central bank is content today to sheepishly walk away and disavow responsibility for the drunken mess.

Chair Powell used Sunday’s “60 Minutes” interview to somewhat clean up what I referred to last week as his “immaculate disinflation” press conference comments.

CBS’s Scott Pelley: “You’ve avoided a recession. Why not cut the rates now?”

Powell: “Well, we have a strong economy. Growth is going on at a solid pace. The labor market is strong: 3.7% unemployment. And inflation is coming down. With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully.”

It’s a relief to see that a strong economy and strong labor market are factors these days in determining rate policy. This, along with a bevy of Fed officials pushing back against market rate cut expectations (i.e., Barkin, Kashkari, Logan, Collins, Mester, Kuglar), had the bond market on edge. Ten-year yields jumped 16 bps this week to an eight-week high 4.18%. This week’s 16 bps increase in MBS yields (5.65%) pushed the y-t-d yield gain to 38 bps.

Market expectations for the May 1st FOMC meeting increased five bps to 5.14%, implying 19 bps of rate reduction. The rates market is pricing a 4.20% policy rate at the December 18th meeting, up 13 bps this week – and implying 123 bps of cuts.

Curiously, the market still sees an almost one in five probability of a cut at the Fed’s March 20th meeting. And the market is pricing almost five cuts by December, down from the start of the year – but still about double what the Fed has signaled.

A Bloomberg headline from earlier in the week: “Banking Worries Put Five Cuts Back on Table for Traders.” There’s something lurking out there that has the market pricing odds of the Fed forced into action this year. While it could be looming banking problems, I tend to be skeptical. While European bank CDS prices increased a tad this week, U.S. CDS prices continue to signal “all’s clear.” At 43 bps, JPMorgan CDS prices are near lows back to September 2021. Bank of America CDS declined three this week to 65 bps, Wells Fargo was little changed at 62 bps, and Citigroup was about unchanged at 63 bps – all near lows since (pre-rate hikes) February 2022.

It seems more reasonable that the rates market is pricing probabilities for a global de-risking/deleveraging event. And this gets back to China and trouble at the “periphery.” I’ll continue to use the mortgage finance Bubble example: The subprime eruption marked the beginning of the Bubble’s end, but it also sparked a rally in AAA rated agency bonds and MBS that extended “Terminal Phase” excess.

In a replay of 2007 dynamics, markets today don’t appreciate the major ramifications of what is unfolding in China. It didn’t come easily, but Beijing ignited a rally into the Chinese New Year holiday. But that won’t clear the deep gloom that is settling over China’s asset markets and economy. The “Beijing has everything under control” adhesive holding everything together is eroding.

Another month of huge Credit growth is not supportive of renminbi stability. Sure, formidable international reserves and trade surpluses provide currency support. I just believe the scope of unfolding Credit and banking problems will dwarf China’s liquid international reserves. Meanwhile, China’s export model shows vulnerability. Manufacturing capacity is shifting to competing countries. And just as Beijing has achieved massive EV and battery export capacity, demand trends have weakened.

A disorderly Chinese currency adjustment is on my short list of possible catalysts for a bout of global de-risking/deleveraging. Geopolitical developments also make the list, though something could come out of the blue. Or might it be something as simple as regulators coming down hard?

February 6 – Bloomberg (Lydia Beyoud): “Hedge funds and proprietary trading firms that regularly trade US Treasuries are set to be labeled as dealers by the Securities and Exchange Commission — a tag that brings greater compliance costs and scrutiny. The SEC… boosted oversight of trading by the firms, which are increasingly responsible for liquidity in the world’s biggest government bond market. The new regulations also apply to market participants in other government bonds, equities and additional securities. Wall Street’s main regulator under Chair Gary Gensler has homed in on the Treasuries market and the private-funds industry as needing more guardrails.”

February 9 – Bloomberg (Chris Dolmetsch): “A new Securities and Exchange Commission market-tracking database is a ‘massive, unprecedented government surveillance system’ that could cost the financial services industry billions of dollars and compromise investors’ privacy, Citadel Securities told a US appeals court… In a brief…, the trade group and the market-making firm founded by billionaire Ken Griffin said the… appeals court should declare the funding plan unlawful. They argued that the Consolidated Audit Trail, or CAT, as the database is known, exceeds the statutory authority granted to the SEC and was implemented without congressional consent… ‘Not surprisingly, this program’s threats to privacy and civil liberties have set off alarm bells across the political spectrum, which have only grown louder as the public learns of the SEC’s repeated failures to safeguard its own systems against foreign hackers… Incredibly, however, the Commission created this Big Brother regime without any approval, direction or appropriation from Congress.’”

He doth protest too much. A Big Brother threat to privacy and civil liberties perhaps, but transparency would certainly pose a direct threat to highly levered “basis trades” (and other speculative bets). I doubt many players would be willing to enter such highly levered trades, knowing their positioning will be evident to all. That’ll take the fun out of one of history’s great easy money trades.

For the Week:

The S&P500 gained 1.4% (up 5.4% y-t-d), while the Dow was little changed (up 2.6%). The Utilities fell 2.0% (down 4.8%). The Banks lost 1.2% (down 2.5%), while the Broker/Dealers increased 0.4% (down 1.0%). The Transports rallied 2.6% (up 2.0%). The S&P 400 Midcaps rose 1.5% (up 1.0%), and the small cap Russell 2000 recovered 2.4% (down 0.8%). The Nasdaq100 advanced 1.8% (up 6.8%). The Semiconductors surged 5.3% (up 9.4%). The Biotechs slipped 0.3% (down 6.2%). With bullion down $16, the HUI gold index dropped 3.7% (down 13.3%).

Three-month Treasury bill rates ended the week at 5.22%. Two-year government yields rose 12 bps this week to 4.48% (up 23bps y-t-d). Five-year T-note yields jumped 15 bps to 4.14% (up 29bps). Ten-year Treasury yields gained 16 bps to 4.18% (up 30bps). Long bond yields rose 15 bps to 4.37% (up 34bps). Benchmark Fannie Mae MBS yields jumped 16 bps to 5.65% (up 38bps).

Italian yields gained 15 bps to 3.97% (up 27bps y-t-d). Greek 10-year yields surged 21 bps 3.51% (up 46bps). Spain’s 10-year yields rose 20 bps to 3.37% (up 38bps). German bund yields gained 14 bps to 2.38% (up 36bps). French yields rose 15 bps to 2.90% (up 34bps). The French to German 10-year bond spread widened about one to 52 bps. U.K. 10-year gilt yields jumped 17 bps to 4.09% (up 55bps). U.K.’s FTSE equities index dipped 0.6% (down 2.1% y-t-d).

Japan’s Nikkei Equities Index jumped 2.0% (up 10.3% y-t-d). Japanese 10-year “JGB” yields gained five bps to 0.73% (up 11bps y-t-d). France’s CAC40 increased 0.7% (up 1.4%). The German DAX equities index was little changed (up 1.0%). Spain’s IBEX 35 equities index fell 1.6% (down 2.0%). Italy’s FTSE MIB index rose 1.4% (up 2.7%). EM equities were mixed. Brazil’s Bovespa index increased 0.7% (down 4.6%), while Mexico’s Bolsa index fell 1.4% (unchanged). South Korea’s Kospi index increased 0.2% (down 1.3%). India’s Sensex equities index declined 0.7% (down 0.9%). China’s Shanghai Exchange Index rallied 5.0% (down 3.8%). Turkey’s Borsa Istanbul National 100 index jumped 4.4% (up 21.1%). Russia’s MICEX equities index added 0.5% (up 4.6%).

Federal Reserve Credit declined $24.9bn last week to $7.594 TN. Fed Credit was down $1.296 TN from the June 22nd, 2022, peak. Over the past 230 weeks, Fed Credit expanded $3.867 TN, or 104%. Fed Credit inflated $4.783 TN, or 170%, over the past 587 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $15.4bn last week to $3.360 TN. “Custody holdings” were up $28bn, or 0.8%, y-o-y.

Total money market fund assets rose $16.7bn to a record $6.018 TN. Money funds were up $1.197 TN, or 24.8%, y-o-y.

Total Commercial Paper declined $13.0bn to $1.253 TN. CP was down $8bn, or 0.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates added a basis point to 6.64% (up 48bps y-o-y). Fifteen-year rates declined four bps to 5.90% (up 49bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 21 bps to an eight-week high 7.16% (up 57bps).

Currency Watch:

For the week, the U.S. Dollar Index added 0.2% to 104.11 (up 2.7% y-t-d). For the week on the upside, the New Zealand dollar increased 1.4%, the Norwegian krone 0.6%, the Swedish krona 0.4%, the Mexican peso 0.3%, the Brazilian real 0.3%, and the Australian dollar 0.2%. On the downside, the Swiss franc declined 0.9%, the South African rand 0.7%, the Japanese yen 0.6%, the South Korean won 0.4%, and the Singapore dollar 0.2%. The Chinese (onshore) renminbi was unchanged versus the dollar (down 1.30%).

Commodities Watch:

February 7 – Bloomberg (Sybilla Gross): “China added to its gold reserves for a 15th consecutive month in January, the government said… People’s Bank of China holdings rose by 320,000 troy ounces in January…”

The Bloomberg Commodities Index recovered 0.3% (down 1.7% y-t-d). Spot Gold slipped 0.8% to $2,024 (down 1.9%). Silver dipped 0.3% to $22.61 (down 5.0%). WTI crude surged $4.56, or 6.3%, to $76.84 (up 7%). Gasoline jumped 8.9% (up 11%), while Natural Gas sank 11.2% to $1.85 (down 27%). Copper dropped 3.7% (down 5%). Wheat declined 0.5% (down 5%), and Corn lost 3.1% (down 9%). Bitcoin surged $3,929, or 9.1%, to $47,225 (up 11%).

Middle East War Watch:

February 8 – Bloomberg (Alex Longley and Sanne Wass): “Major shipping companies are warning that the security situation in the Red Sea is continuing to deteriorate, despite efforts by the west to limit attacks by Yemen’s Houthi rebels. The bosses of A.P. Moller-Maersk A/S and D/S Norden A/S said… they felt the threat level was continuing to escalate in the region. It comes after Japanese shipping giant Mitsui OSK Lines Ltd. said the disruption on the route could last for a year. Swaths of the merchant fleet have been avoiding the waterway since attacks by the Houthis began in mid-November. The area grew even more volatile after the US and UK launched airstrikes in the middle of last month, prompting major owners in all sectors to avoid the region.”

February 3 – Financial Times (Andrew England, Felicia Schwartz and Najmeh Bozorgmehr): “Iran and Iraq have warned that a wave of US strikes against militants backed by Tehran could trigger greater instability across the region. The US military said it hit 85 targets at seven facilities in Iraq and Syria on Friday that were associated with Iran’s elite Revolutionary Guards and Iranian-backed militias. It was the first of what President Joe Biden said would be a series of retaliatory strikes for the drone attack on a base on the Jordan-Syrian border that killed three US servicemen last month.”

February 6 – Reuters (Yomna Ehab, Nayera Abdallah, Jana Choukeir, Tala Ramadan and Renee Maltezou): “Yemen’s Iran-aligned Houthis said… they had fired missiles at two vessels in the Red Sea, causing damage to the ships. The Houthis have been targeting commercial vessels with drones and missiles in the Red Sea since mid-November, in what they describe as acts of solidarity with Palestinians against Israel in the Gaza war. The group’s military spokesman said it had fired naval missiles at the Star Nasia and Morning Tide, identifying the Marshall Islands and Barbados-flagged ships, respectively, as American and British.”

February 5 – Bloomberg (Alisa Odenheimer): “Israel’s foreign minister warned time’s running short to find a diplomatic solution to the presence of Hezbollah fighters along the country’s northern border… Hezbollah, a Shiite militant group backed by Iran, and Israeli forces have exchanged fire almost daily since the Israel-Hamas war erupted on Oct. 7. While those skirmishes have killed scores of people and forced almost 100,000 Israelis and thousands of Lebanese to evacuate their homes, neither side has escalated its operations. Israel has said, though, that it’s prepared to open another front with a military attack on southern Lebanon if Hezbollah doesn’t move back to about 20 miles from the border… ‘Israel will act militarily to return the evacuated citizens to their homes’ if Hamas doesn’t comply with the resolution, known as 1701, Foreign Minister Israel Katz told his French counterpart…”

February 5 – The Dispatch (Charlotte Lawson): “The Israeli troops stationed along the country’s northern border with Lebanon say they don’t want a war with Hezbollah, but they’re ready for one. That worst-case scenario is beginning to look inevitable as diplomatic attempts to get the Iranian-backed terrorist group to withdraw its forces north founder. If such a war does erupt, so too will widespread devastation in Israel and Lebanon alike. ‘We hope that political and diplomatic efforts will permit a change in the situation… but we don’t see any change right now,’ Olivier Rafowicz, a military spokesman, told The Dispatch… ‘That’s why we are ready for any possibility and development. As you see here, there are many tanks, many forces, and the Israeli army is fully prepared to deal with any threat.’”

February 2 – Bloomberg (Alex Longley): “With western navies focused on trying to quell Houthi militants’ attacks on merchant shipping in the Red Sea, Somali pirates are quietly showing signs of making a comeback. In December, they hijacked their first ship in six years when the commodity carrier Ruen was boarded and taken to a port in the east African country… Figures from the European Union Naval Force show there have been further attempts since then, and this week the UK Navy issued an advisory to shipping cautioning that pirates are operating in the Indian Ocean.”

Taiwan Watch:

February 8 – Reuters (Ben Blanchard): “President Tsai Ing-wen thanked the international community for supporting Taiwan in her Lunar New Year message…, a day after China’s military released a song urging the island to ‘come home’ amid images of simulated missile attacks… China’s People’s Liberation Army Eastern Theatre Command… put out a new year’s music video called ‘You Only Win by Coming Home’ and sung partially in Hokkien, widely spoken in Taiwan… The video showed footage of Chinese warships and warplanes, including J-20 stealth fighters, as well as images of simulated missile strikes on Taiwan that the command first released during war games around the island in April 2023.”

February 7 – Reuters (Michael Martina and David Brunnstrom): “China has sought to ‘cheat’ and ‘steal’ its way to matching Taiwan in chip technology, but has yet to succeed despite investing huge sums, Taiwan’s de facto ambassador to Washington said…, while holding out the prospect of more Taiwanese semiconductor investment in the U.S. In a wide-ranging interview with Reuters, Taiwan’s representative Alexander Yui cast doubt on reports that China’s chipmakers are on the cusp of making next-generation smartphone processors, and refuted charges by Donald Trump, the leading Republican candidate for the 2024 U.S. presidential election, that Taiwan was taking American semiconductor jobs.”

February 8 – Bloomberg: “The Taiwan issue is a line that must not be crossed and officials in the Philippines need to be aware of that, Chinese Foreign Ministry spokesman Wang Wenbin said… Wang was responding to a question about the Philippines planning to boost its military presence and infrastructure in a province near Taiwan…”

February 7 – Bloomberg (Cindy Wang): “The government asks travel agencies to stop arranging new group tours to China from Wednesday as Beijing so far hasn’t made similar arrangements for group tours to Taiwan, according to a statement from Tourism Administration in Taipei.”

Ukraine War Watch:

February 3 – Reuters (Tom Balmforth): “Two Ukrainian attack drones struck the largest oil refinery in southern Russia on Saturday, a source in Kyiv told Reuters, detailing the latest in a series of long-range attacks on Russian oil facilities. Local authorities in Russia said earlier that a fire had been extinguished at the Volgograd refinery following a drone attack. Oil producer Lukoil, which owns the refinery, later said the plant was working as normal.”

February 6 – Reuters (Michelle Nichols): “The United States accused Russia… of firing at least nine North Korean-supplied missiles at Ukraine, while Moscow labeled Washington a ‘direct accomplice’ in the downing of a Russian military transport plane last month. Russia’s U.N. Ambassador Vassily Nebenzia and deputy U.S. Ambassador to the U.N. Robert Wood traded the accusations at a U.N. Security Council meeting on Ukraine, requested by Moscow. Russia invaded neighboring Ukraine nearly two years ago. ‘To date, Russia has launched DPRK-supplied ballistic missiles against Ukraine on at least nine occasions,’ Wood told the 15-member Security Council…”

Market Instability Watch:

February 7 – Financial Times (Claire Jones): “The US’s budget deficit is set to soar by almost two-thirds over the next 10 years, from $1.6tn to $2.6tn, Congress’s independent fiscal watchdog has warned, as higher interest rates weigh on the government’s finances. The Congressional Budget Office said… interest payments on US government debt would account for about three-quarters of the rise in the deficit between now and 2034. The deficit’s share as a proportion of gross domestic product would increase from 5.6% in 2024 to 6.1% in 10 years’ time, due to the debt-servicing costs, remaining well above the average of 3.7% over the past 50 years, the CBO said.”

February 7 – Bloomberg (Christopher Condon): “The cost to service the US government’s burgeoning debt load will hit a record high next year and then keep on climbing, the Congressional Budget Office warned… Net interest payments will climb to 3.1% of gross domestic product next year, the highest level in records going back to 1940, and then go on to hit 3.9% in 2034… ‘Net interest costs are a major contributor to the deficit, and their growth is equal to about three-quarters of the increase in the deficit from 2024 to 2034,’ CBO Director Phillip Swagel said…”

February 7 – Reuters (David Lawder): “The U.S. Congressional Budget Office on… projected a slightly smaller $1.507 trillion federal deficit for fiscal 2024 as increased revenues from stronger growth and employment offset higher costs for clean energy tax credits and public debt interest. The CBO said the deficit would dip this year from $1.695 trillion in fiscal 2023, but resume its march upward to $1.772 trillion in fiscal 2025, hitting $2.579 trillion in fiscal 2034. The CBO also projected a slightly smaller cumulative 10-year deficit, to $20.016 trillion for the fiscal 2025-2034 period, compared with last year’s estimate of a $20.314 trillion deficit for 2024-2033.”

February 7 – Bloomberg (Lydia Beyoud): “US regulators will begin making available key details on completed Treasuries transactions on a trade-by-trade basis in the latest push by Washington to increase transparency in the world’s biggest government bond market. The Securities and Exchange Commission said… that specific trades’ time, price, direction, venue, and volume would all be made public under a new rule.”

February 8 – Wall Street Journal (Eric Wallerstein): “Investors are more convinced than ever that interest rates are coming down later this year. Their record on these things, however, isn’t great. Wall Street has been caught offside in both directions while betting on the path of interest rates over the past few years. Few thought the Federal Reserve would get anywhere near 5% in the first place. Now traders keep ramping up bets that rate cuts are just months away, only to see that day recede with each batch of strong economic data. ‘Every day you don’t see softer growth data is another day that cuts are pushed back,’ said Mike Best, a high-yield-bond portfolio manager at… Barings. ‘At the start of the year, if you said there won’t be any rate cuts this year, people would’ve looked at you as if you had three heads. Now, it’s a real possibility.’”

February 6 – Bloomberg (Greg Ritchie): “Reliable sources of liquidity are at the top of traders’ minds as they brace for another year of turbulence, according to a JPMorgan… electronic trading survey. Volatile markets are predicted to be the greatest daily challenge for a second year in a row, the annual poll of institutional traders found. Access to liquidity is the biggest concern about market structure, ahead of regulatory change and data costs. While volatility across asset classes remains relatively contained compared to recent gyrations, the worry is that it could spike if the global economy faces another shock.”

Bank Watch:

February 6 – New York Times (Rob Copeland): “As the one-year anniversary of a crisis that brought down several midsize banks approaches, trouble at another lender is putting unwelcome attention on the industry again. Concerns now center on New York Community Bancorp, which operates roughly 400 branches nationwide under brands such as Flagstar Bank and Ohio Savings Bank. The bank ballooned in size over the past year, to more than $100 billion in assets, after taking over the fallen Signature Bank last spring in an auction organized by federal regulators. New York Community Bancorp’s stock nose-dived after it released an ugly earnings report that included unexpected losses on real estate loans tied to both office and apartment buildings.”

February 6 – Bloomberg (Bruce Grant): “New York Community Bancorp, which saw its share price almost halved over the past week on concern about exposure to commercial real estate, may not be the only casualty of a US troubled regional banking sector. Members of the KBW Regional Banking Index held a combined $1.07t of total loans reported in the latest filing period, of which about $331.2b or 30% was tied to commercial real estate.”

February 7 – Financial Times (Joshua Franklin and Stephen Gandel): “US regional lender New York Community Bancorp has sought to reassure inventors that it is still taking in new deposits, after a week in which its share price has more than halved and it was downgraded to ‘junk’ status by Moody’s. The bank also announced that Alessandro DiNello, the former chief executive of Flagstar Bank, which NYCB bought in 2022, would take on an executive role. DiNello had been serving as non-executive chair, but the lender said he would now become executive chair and work with chief executive Thomas Cangemi ‘to improve all aspects of the bank’s operations’.”

February 7 – Bloomberg (Giulia Morpurgo, Tasos Vossos and Neil Callanan): “Losses in the commercial property market, which have already sent some banks in New York and Japan into a tailspin, moved to Europe’s biggest economy this week. Bonds issued by real estate-focused German lenders slumped after Morgan Stanley analysts recommended clients sell senior bonds issued by Deutsche Pfandbriefbank AG because of its exposure to the CRE market in the US, according to people with knowledge of the matter…”

February 5 – Bloomberg (Reade Pickert): “The Federal Reserve said US banks reported stricter credit standards in the fourth quarter, although the proportion of those tightening standards shrank from the prior period. The net share of US banks that tightened standards on commercial and industrial loans for medium and large businesses compared to the prior period dropped to 14.5%, from 33.9% in the third quarter, according to a Fed survey of lending officers… That was the smallest such share since 2022. About 53% of banks kept lending conditions basically unchanged. While demand for credit remains weak, the net share of banks reporting weaker demand for C&I loans among large and mid-sized firms declined to 25%, an improvement from the third quarter.”

Global Bond Watch:

February 8 – Bloomberg (Gowri Gurumurthy): “High-yield borrowers are taking advantage of macroeconomic strength to get this year’s issuance done early. The supply surge probably won’t move spreads much, given that demand for yield just keeps growing. High-yield US corporate bond issuance has jumped 55% year-on-year to almost $40 billion. Borrowers are moving fast to capitalize on spreads under 350 basis points and yields below 8% — less than the two-year average.”

February 5 – Financial Times (Harriet Clarfelt and Antoine Gara): “US private equity firms are rushing to take advantage of lower borrowing costs by loading debt on to their portfolio companies and using the cash to pay dividends to themselves and their investors. Corporate borrowers sold $8.1bn worth of junk-rated US loans to fund payments to shareholders in January, more than six times December’s total and the highest monthly figure in more than two years. Most were issued by companies backed by private equity firms… With weak deal volumes and sluggish demand for initial public offerings making it harder to offload existing investments, private equity firms are turning to such so-called dividend recapitalisations to pacify investors eager for a return on their capital. ‘Credit markets are hot right now,’ said a senior private equity executive. ‘It is a great opportunity to issue or refinance debt at a lower cost of capital.’”

February 3 – Financial Times (Mary McDougall): “Eurozone governments have rushed to raise debt early this year in an effort to take advantage of bumper investor demand. The bloc’s members have sold €200bn of bonds since the start of 2024. Issuance in January was the highest monthly total on record and about 20% above the same period last year, according to… Barclays. Investors have been piling in to government bonds, attracted by yields that are still well above levels of a few years ago… Meanwhile, governments with record amounts of bonds to sell are getting deals away while investor appetite lasts.”

February 5 – Reuters (Karin Strohecker and Jorgelina Do Rosario): “Sovereign debt sales from developing nations scaled an all-time record for January at $47 billion led by major and less risky emerging markets but a lack of investor flows into dedicated funds could curtail a nascent recovery for riskier issuers… At the same time, flows into dedicated emerging market debt funds remained in the doldrums. Year-to-date, investors pulled about $1.6 billion out of dedicated emerging market hard-currency funds… That follows outflows of around $80 billion in 2022 and around half of that again last year.”

Bubble and Mania Watch:

February 4 – Financial Times (Tabby Kinder, Camilla Hodgson and Cristina Criddle): “Microsoft, Google, Meta and Amazon added almost $10bn to their profits in the past two years by extending the estimated working life of their servers, an accounting change that will help soften the blow of future costs such as developing generative artificial intelligence. The Big Tech companies… have in recent years been reviewing how they accounted for the predicted working life of their technical equipment, at the same time as they came under pressure to cut costs and began to reallocate resources towards AI products. It resulted in a $6bn boost to income at Google and Microsoft alone last year. Other groups, such as Amazon, have extended the estimated lifespan of their assets even further this month, which will mean more profits this year.”

February 6 – Bloomberg (Sagarika Jaisinghani): “Investor positioning in US technology stocks is so bullish that any selloff could trigger a wider rout, according to Citigroup Inc. strategists. Wagers on declines in tech-heavy Nasdaq 100 futures have been completely erased, leaving investors overwhelmingly expecting further gains. ‘The large consensus positioning is a risk that could amplify a turn in the market,’ strategists led by Chris Montagu wrote…”

February 8 – Reuters (Matthew Griffin): “Greenlight Capital was forced to shift its strategy as the growth of passive investing and algorithmic trading transformed markets, founder David Einhorn said. ‘I view the markets as fundamentally broken,’ Einhorn, 55, said… ‘Passive investors have no opinion about value. They’re going to assume everybody else has done the work’… At the same time, Einhorn said that quants base their trades on short-term price moves rather than a company’s actual worth. Algorithmic investing ‘has an opinion about price,’ he said. ‘Like, what is the price going to be in 15 minutes?’… Einhorn also took aim at the Securities and Exchange Commission, contending it has stopped policing corporate behavior unless a company has filed for bankruptcy. ‘The regulatory infrastructure is essentially gone,’ he said.”

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

February 6 – New York Times (Farnaz Fassihi): “Russia and China used an emergency meeting of the United Nations Security Council… to sharply criticize recent U.S. retaliatory strikes on Iraq and Syria, calling the military action a violation of the territorial integrity of those countries that would further destabilize the Middle East. U.S. tensions with Russia have been high since that country’s leader, Vladimir V. Putin, ordered his forces to invade Ukraine almost two years ago. The Security Council has frequently been a platform for U.S. and Russia’s spats over Ukraine, Syria and, most recently, the war in Gaza. China has sided with Russia on those issues and maintained a consistent policy of denouncing actions that undermine a country’s sovereignty, even as its own territorial aspirations have drawn increasing U.S. opposition. In the conflicts in the Middle East, China has close ties to many of the key actors, including Russia and Iran.”

February 8 – Reuters (Dmitry Antonov): “Russian President Vladimir Putin and Chinese President Xi Jinping spoke by phone… and both rejected what they called U.S. interference in the affairs of other countries… Kremlin aide Yury Ushakov gave details of the call in a briefing to journalists, saying the two leaders had spoken of creating a ‘multipolar, fairer world order’ in the face of U.S.-led efforts to contain both of Washington’s biggest adversaries. Putin and Xi also discussed the situation in Ukraine and conflict resolution in the Middle East and see eye to eye on those conflicts, he said, without elaborating. Russia supported China’s policy on Taiwan, he said.”

February 8 – Reuters: “China’s President Xi Jinping told Russian President Vladimir Putin that the two countries should pursue close strategic coordination and defend the sovereignty, security and development interests of their respective countries, state media said. During a phone call with Putin on Thursday, Xi said both sides should resolutely oppose interference in internal affairs by external forces, state broadcaster CCTV said.”

De-globalization and Iron Curtain Watch:

February 7 – Wall Street Journal (Tracy Qu): “China is encouraging its electric vehicle makers to expand their overseas presence, including forging tie-ups with foreign research institutions and countries to build industrial clusters. Companies are being encouraged to establish research and development centers overseas and collaborate with shipping companies to integrate warehousing and logistics resources in foreign markets, the Ministry of Commerce said… The ministry said it would optimize credit support by encouraging banks to support EV supply chain companies domestically and overseas financially… The moves are part of Beijing’s efforts to strengthen its EV and automobile industry market share…”

Inflation Watch:

February 3 – Yahoo Finance (Irina Ivanova and Sydney Lake): “There’s a problem with inflation. It just refuses to go that ‘last mile’ down to 2%, the magic percentage targeted by the Federal Reserve. Economists have widely agreed on one culprit: high housing costs. Not to fear, they’ve been assuring the public for roughly a year, ‘shelter inflation’ has a lag and it will come down soon. So why are we still waiting for that to happen? Over the past year, two-thirds of the core CPI increase has come from shelter, Greg McBride, chief financial analyst at Bankrate, wrote recently. ‘Shelter remains the largest contributor, responsible for more than half of [December’s] increase in the headline CPI and more than two-thirds of the increase in core CPI over the past year.’”

February 4 – Wall Street Journal (Allysia Finley): “In case you missed the White House memo, the U.S. economy is fantastic. It’s never been better. Stock prices and jobs are booming. Inflation and mortgage rates are falling. Happy days are here again. Yet many Americans remain unhappy. What gives? One explanation could be that government measures of inflation don’t fully reflect rising prices. Sure, headline inflation is nearing the Federal Reserve’s 2% target, but these statistics can be deceiving. Shrinkflation, paying the same price for noticeably smaller quantities of the same thing, isn’t appearing only in the grocery aisle. It’s everywhere. Americans may be paying around the same prices as they did a year ago, but they are often getting less. Take airline fares, which… fell 9.4% during 2023. That sounds nice, until you consider that the calculation heavily weighs the ‘lowest available fare’ for a trip—typically offered by budget airlines, which require customers to pay more to bring a carry-on and select a seat in basic economy.”

February 4 – Wall Street Journal (Heather Haddon): “California restaurants are some of the most expensive places to eat out in the country—and they are about to get pricier. Minimum wage for California fast-food workers is set to rise to $20 an hour in April, a 25% increase from the state’s broader $16 minimum wage. Restaurants including McDonald’s, Chipotle, Jack in the Box and others say they will raise menu prices in California in response, with some McDonald’s franchisees estimating hundreds of thousands of dollars per restaurant in added labor costs. ‘Everyone is going to have to pay more,’ said Jack Hartung, chief financial officer of Chipotle… Chipotle has raised its menu prices four times in the past two years and expects to increase them a further 5% to 9% in its California restaurants to cover the higher pay required for workers.”

February 8 – Bloomberg (Leslie Patton): “Disposable diapers came to be in the US around the same time that large numbers of women joined the workforce during World War II and no longer had time to wash the cloth versions. These tiny work savers soon became a staple and for decades were a reliable source of growth for some of the biggest consumer products companies. No longer. The US birthrate has stagnated in recent years… To make matters worse, outsize inflation for baby-care items since the pandemic—data from consumer researcher Circana say the retail price of a pack of diapers rose 35% from 2019 to 2023…”

February 6 – Bloomberg (Jake Lloyd-Smith): “The great cocoa squeeze shows no signs of abating, with prices now on the cusp of topping a peak set when Jimmy Carter was in the White House. A shortage of beans, especially from African growers, has driven US futures upward every week this year. In Monday’s session, they hit $5,249/ton, just shy of the $5,379 intraday high seen in July 1977.”

Biden Administration Watch:

February 6 – Bloomberg (Christopher Condon and Viktoria Dendrinou): “Treasury Secretary Janet Yellen said that while losses in commercial real estate are a worry, US regulators are working to ensure that loan-loss reserves and liquidity levels in the financial system are adequate to cope. A combination of factors ‘is going to put a lot of stress on the owners of these properties,’ Yellen told lawmakers… She cited the increase in interest rates, higher vacancy rates thanks to shifting work patterns triggered by the pandemic and a wave of commercial real estate loans coming due this year. ‘I’m concerned,’ she said… ‘I believe it’s manageable, although there may be some institutions that are quite stressed by this problem.’”

February 8 – Bloomberg (Katanga Johnson): “Treasury Secretary Janet Yellen said US regulators are monitoring risks stemming from nonbank mortgage lenders, and cautioned that a failure of one of them is possible in the case of market strains. ‘FSOC is very focused on that because nonbank mortgage companies lack access to deposits, which banks have,’ Yellen said at the Senate Banking Committee… FSOC groups the main US financial regulators.”

Federal Reserve Watch:

February 4 – Financial Times (Claire Jones): “The Federal Reserve’s rate-setters still expect to make about three quarter-point rate cuts this year, its chair Jay Powell said… Powell told CBS’s 60 Minutes show that ‘almost all’ of the members of the Federal Open Market Committee think the US central bank will cut rates from their current 23-year high of 5.25 to 5.5% at some point over the course of 2024. Rate-setters, on average, expected to make 75 bps of cuts back in December. Powell said… that, while new projections were not due out until March 20, ‘nothing has happened in the meantime that would lead me to think that people would dramatically change their forecasts’.”

February 7 – Bloomberg (Craig Torres, Christopher Anstey and Catarina Saraiva): “Four Fed officials suggested… they don’t see an urgent case for lowering interest rates, adding to a roster of policymakers in recent days who made clear a cut isn’t likely until May at the earliest. Governor Adriana Kugler, Boston Fed President Susan Collins, Minneapolis Fed chief Neel Kashkari and Richmond’s Thomas Barkin were all noncommittal on when the US central bank can start reducing the Fed’s benchmark lending rate from a two-decade high, despite a marked improvement in inflation last year.”

February 8 – Yahoo Finance (Jennifer Schonberger): “Richmond Fed President Tom Barkin said it would be smart for the central bank to ‘take our time’ on rate cuts despite ‘remarkable’ data showing that inflation is dropping. Barkin made these comments during a speech before the Economic Club of New York, arguing that while it’s possible for the US to return to a pre-pandemic economy ‘seamlessly,’ it’s also possible that the landing could be ‘bumpier.’ ‘That’s why I think it is smart for us to take our time,’ he said. ‘No one wants inflation to reemerge. And given robust demand and a historically strong labor market, we have time to build that confidence before we begin the process of toggling rates down.’”

February 7 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Minneapolis President Neel Kashkari said officials would like to see ‘a few more months’ of inflation data before cutting interest rates, adding that he thinks two to three cuts will likely be appropriate for 2024. ‘We’re not looking for better inflation data, we’re just looking for additional inflation data that is also at around this 2% level,’ Kashkari said… ‘If we get to see a few more months of that data, I think that will give us a lot of confidence.’ He also said the labor market will dictate the speed at which the Fed lowers interest rates, noting if the jobs market remains strong, it will give the central bank the flexibility to move slowly.”

February 6 – Bloomberg (Catarina Saraiva and Mark Niquette): “Federal Reserve Bank of Cleveland President Loretta Mester said policymakers will probably gain confidence to cut interest rates ‘later this year’ if the economy evolves as expected, but said she doesn’t see a need to rush. Meantime, she said Fed officials want to see more evidence that inflation is cooling toward their 2% target, and cautioned against lowering borrowing costs too soon. ‘It would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to 2%,’ Mester said… ‘If the economy evolves as expected, I think we will gain that confidence later this year, and then we can begin moving rates down.’”

U.S. Bubble Watch:

February 5 – Bloomberg (Mark Niquette): “The US service sector expanded in January at the fastest pace in four months…, helped by a pickup in orders and employment. The Institute for Supply Management’s overall gauge of services increased 2.9 points, the biggest gain in a year, to 53.4 last month… The group’s metric of prices paid for materials jumped 7.3 points, the most since 2012, to 64 in January. The index is the highest since February of last year and shows that costs are rising at a faster pace… The surge in prices is being driven by higher shipping costs and across-the-board increases in commodities and services prices, the ISM’s Anthony Nieves told reporters… US companies are contending with soaring ocean shipping costs amid militant attacks in the Red Sea that are prompting carriers to reroute.”

February 7 – Wall Street Journal (Aaron Zitner, Amara Omeokwe, Rachel Wolfe and Rachel Louise Ensign): “Clayton Wiles, a truck driver in North Carolina, earns about 20% more than three years ago. Kristine Funck, a nurse in Ohio, has won steady pay raises, built retirement savings and owns her home. Alfredo Arguello, who opened a restaurant outside Nashville when the pandemic hit, now owns a second one and employs close to 50 people. But ask any of them about the state of the American economy, and the same gloominess surfaces. ‘Unstable’ is how Arguello describes it. Said Funck: ‘Even though I’m OK right now, there’s a sense it could all go away in a second’… The disconnect has puzzled economists, investors and business owners. But press Americans harder, and the immediate economy emerges as only one factor in the gloomy outlook. Americans feel sour about the economy, many say, because their long-term financial security feels fragile and vulnerable to wide-ranging social and political threats.”

February 8 – Bloomberg (Nazmul Ahasan): “An index of sentiment among chief executive officers of US companies has turned positive for the first time in two years, according to the Conference Board. The group’s Measure of CEO Confidence rose to 53 in the first quarter, up from 46 in the final three months of 2023… Readings above 50 indicate more optimistic than pessimistic responses. ‘CEOs are feeling better about the economy, but remain cautious about risks ahead,’ Roger W. Ferguson, Jr., a trustee of The Conference Board, said…”

February 8 – Bloomberg (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits fell slightly more than expected last week, pointing to underlying labor market strength despite a recent surge in announced layoffs… Initial claims for state unemployment benefits dropped 9,000 to a seasonally adjusted 218,000 for the week ended Feb. 3.”

February 5 – Wall Street Journal (Nicole Friedman): “Falling mortgage rates boosted home-shopping activity in January, luring the first wave of opportunistic buyers back to the market after last year’s epic collapse in home sales. A number of home seekers who paused when borrowing rates marched higher last year have resumed their search, real-estate agents say. Real-estate showings in the week ended Jan. 31 were up 9.9% from the first week of the year, according to… Zillow Group. Buyers are seizing on the recent reversal in mortgage rates, which hit a 23-year high of 7.79% in October.”

February 5 – CNBC (Diana Olick): “The average rate on the popular 30-year fixed mortgage crossed over 7% on Monday for the first time since December, hitting 7.04%, according to Mortgage News Daily. It comes after the rate took the sharpest jump in more than a year Friday, after the January employment report came in much higher than expected… Mortgage rates have been on a wild ride since the summer, briefly crossing to a 20-year high of 8% in October.”

February 7 – CNBC (Diana Olick): “Mortgage demand is struggling to contend with what appears to be another upswing in interest rates. Homebuyers in particular are pulling back… Even with rates lower for the bulk of last week, applications for a mortgage to purchase a home fell 1% compared with the previous week and were 19% lower than the same week one year ago. ‘Purchase activity has been strong to start 2024 compared to the final quarter of 2023. However, activity is still weaker than a year ago because of low housing supply,’ said Joel Kan, an MBA economist…”

February 7 – Reuters (Lucia Mutikani): “The U.S. trade deficit widened slightly in December, but contracted by the most in 14 years in 2023 as imports declined and exports jumped to a record high… The trade deficit increased 0.5% to $62.2 billion… The trade gap narrowed 18.7% in 2023, the largest drop since 2009, to $773.4 billion. It represented 2.8% of GDP, down from 3.7% in 2022… Exports increased 1.2% to a record $3 trillion last year, propelled by capital goods, automotive vehicles, parts and engines as well as consumer and other goods. Imports slumped 3.6% to $3.8 trillion amid decreases in industrial supplies… Exports ended the year on a strong note, rising 1.5% to $258.2 billion in December.”

February 7 – Associated Press (Paul Wiseman): “For the first time in more than two decades, Mexico last year surpassed China as the leading source of goods imported to the United States. The shift reflects the growing tensions between Washington and Beijing as well as U.S. efforts to import from countries that are friendlier and closer to home. Figures… show that the value of goods imported to the United States from Mexico rose nearly 5% from 2022 to 2023, to more than $475 billion. At the same time, the value of Chinese imports imports tumbled 20% to $427 billion.”

February 6 – CNBC (Jeff Cox): “Credit card delinquencies surged more than 50% in 2023 as total consumer debt swelled to $17.5 trillion, the New York Federal Reserve reported… Debt that has transitioned into ‘serious delinquency,’ or 90 days or more past due, increased across multiple categories during the year, but none more so than credit cards. With a total of $1.13 trillion in debt, credit card debt that moved into serious delinquency amounted to 6.4% in the fourth quarter, a 59% jump from just over 4% at the end of 2022… The quarterly increase at an annualized pace was around 8.5%… Delinquencies also rose in mortgages, auto loans and the ‘other’ category. Student loan delinquencies moved lower as did home equity lines of credit. Overall, 1.42% of debt was 90 days or more past due, up from just over 1% at the end of 2022.”

February 6 – Bloomberg (Alex Tanzi and Claire Ballentine): “American households took on more debt at the end of last year, and some of those loans are increasingly going bad, according to… the Federal Reserve Bank of New York. Although overall US delinquency rates remain below pre-Covid levels, those for credit cards and auto loans are now higher. About 8.5% of credit card balances and 7.7% of auto loans moved into delinquency in the fourth quarter… ‘Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,’ said Wilbert van der Klaauw, economic research advisor at the New York Fed. ‘This signals increased financial stress, especially among younger and lower-income households.’”

February 6 – Yahoo Finance (Gabriella Cruz-Martinez): “Millennials in their 30s sank deeper into credit card debt toward year-end, a new report found, as US credit card debt continued to climb to new heights. Outstanding credit card balances hit a record high $1.13 trillion in the fourth quarter of 2023, according… the Federal Reserve Bank of New York, up roughly 5% from $1.08 billion the previous quarter. At the same time, the 90-day delinquency rate measure for credit cardholders also jumped to 6.36%, up from 4.01% a year earlier. While delinquencies have been climbing across age groups, the flow into serious delinquency was particularly acute among younger millennials between the ages of 30 and 39 and lower-income households…”

February 7 – Bloomberg (Alex Tanzi): “Young Americans far outpaced older generations in wealth growth since the pandemic, thanks in part to the boom in stocks, according to Federal Reserve Bank of New York research. For adults under 40, aggregated wealth jumped by 80% since 2019, compared with 10% for those who are 40 to 54 and 30% for those over 55, New York Fed economists wrote… The youngest generations, by far the poorest, received much of the Covid-era fiscal stimulus, giving them extra savings to invest in equities, the researchers found.”

February 7 – Bloomberg (Ilena Peng): “US farmers are poised to see the biggest hit to their income since 2006 this year as a slump in agriculture markets takes its toll. Net farm income is forecast to fall about 26% in 2024 to $116.1 billion, according to US Department of Agriculture data… If the estimate holds, that would mark the biggest year-over-year drop since 2006… Prices for major crops have slumped amid plentiful supplies. And at the same time, American farmers have started to lose their dominance in global grain shipping as Brazil strengthens its position.”

China Watch:

February 7 – Bloomberg: “Staffers at China’s main securities regulator had been working around the clock for weeks on ways to prop up the nation’s tumbling stock market when the bombshell dropped. Late Wednesday, the official Xinhua News Agency reported that their boss Yi Huiman had been ousted, becoming the biggest Communist Party casualty of a $5 trillion selloff… The announcement sent shockwaves across the industry and within the China Securities Regulatory Commission, according to people familiar… Prior to the Xinhua news, there had been no internal announcement from the Communist Party’s organization department… The departure of Yi… underscores the growing sense of alarm within President Xi Jinping’s government over the speed and scope of the market meltdown that’s now entering its fourth year.”

February 5 – Bloomberg (Ishika Mookerjee and Charlotte Yang): “China’s smallest stocks are flashing a warning about the potential downside for the world’s second-largest equity market if Beijing fails to follow through on a highly anticipated rescue campaign. While the country’s large-cap CSI 300 Index eked out a 0.7% gain on Monday after a renewed pledge from regulators to support the market, a gauge of small-cap shares sank more than 6% to the lowest level since 2018. That took the CSI 1000 Index’s losses to 27% this year… The stark underperformance suggests investors are throwing in the towel on small-cap shares out of belief that policy support will be focused on rescuing blue-chip stocks.”

February 6 – Bloomberg: “A top Chinese macro hedge fund said it slashed stock positions last month as the nation’s market rout deepened, taking losses after acknowledging mistakes betting on a rapid economic recovery. Shanghai Banxia Investment Management Center ‘significantly reduced’ its equity assets in the middle of January to cut losses, only keeping exposure to safer high-dividend stocks and bigger companies in the CSI 300 Index… Banxia recognized its mistakes two weeks into the year, realizing it ‘must lose an arm for survival’…, said in the Feb. 4 letter…”

February 5 – Bloomberg: “China’s margin debt for stock trades fell by the most since early 2016 as a deepening slump triggered a rush to unwind leveraged positions. The outstanding balance of margin debt fell by 2.7% on Monday, the most since January 2016, when the stock market was reeling from a historic crash from a mid-2015 peak.”

February 4 – Bloomberg (Felix Tam): “China pledged to stabilize markets after shares sank to a five-year low in chaotic trading on Friday, but policymakers offered no specifics on how they plan to end a selloff that’s erased more than $6 trillion of value and dented confidence in the world’s second-largest economy. The China Securities Regulatory Commission vowed on Sunday to prevent abnormal fluctuations, saying it would guide more medium- and long-term funds into the market and crack down on illegal activities including malicious short selling and insider trading. The brief statement followed a sudden plunge of as much as 3.4% in the benchmark CSI 300 Index on Friday…”

February 5 – Bloomberg: “China is tightening trading restrictions on domestic institutional investors as well as some offshore units as authorities fight to stem a deepening stock rout, according to people familiar… Officials this week imposed caps on some brokerages’ cross-border total return swaps with clients, limiting a channel that can be used by China-based investors to short Hong Kong stocks… At the same time, some Chinese brokers that use the channel to buy mainland shares for their offshore units were told not to reduce their positions…”

February 5 – Reuters (Summer Zhen): “Chinese brokerages, including state-owned behemoth China International Capital Corp (CICC), have restricted the amount of cross-border swap transactions domestic investors can undertake, as authorities seek to defend the weak stock market, according to six sources… Since Monday, domestic CICC clients cannot add new positions via total return swaps, to make overseas investments, as the broker seeks to limit its derivatives book…”

February 5 – Reuters (Liangping Gao and Ryan Woo): “China’s services activity expanded at a slightly slower pace in January as new orders fell, a private-sector survey showed…, suggesting a soft start for the world’s No.2 economy amid tepid demand and a property slump. The Caixin/S&P Global services purchasing managers’ index (PMI) edged down to 52.7 from 52.9 in December, but remained above the 50-mark that separates expansion from contraction for the 13th consecutive month. The figure comes after official data last week showed factory activity contracted again, offering a snapshot of the state of the economy at the start of the year.”

February 5 – Bloomberg: “An uptick of missed payments on private debt by Chinese local government financing vehicles is spilling over into their bonds, potentially leading to a downward spiral. As the LGFVs fail to pay on debt such as loans or commercial papers, bond holders can invoke a so-called cross-protection clause, allowing them to demand extra collateral or ask for faster or higher payments. In January, three LGFVs bonds have been subject to the cross-protection clause trigger — after only three other similar cases were seen from 2017 to 2023, Yu Liu, senior analyst at Guangfa Securities Co., wrote…”

February 4 – Financial Times (Yanmei Xie): “A senior official in charge of China’s industrial policy recently vowed to get serious about slashing excess capacity in the country’s electric-vehicle industry, seemingly taking to heart a key trade complaint from the EU. The bloc last October initiated an anti-subsidy investigation on imported EVs from China. European Commission president Ursula von der Leyen pledged to defend Europe’s auto industry against cheap Chinese exports driven by subsidy-fed overcapacity. But now Beijing is setting about making things right, trade tensions with Brussels will dissipate, surely? Not a chance.”

February 7 – Reuters (Helen Reid, Emma Rumney and Ananya Mariam Rajesh): “Some of the world’s top food, drinks and tech companies have struck a sour tone about Chinese demand, deepening investor worries about damage to firms exposed to the country and Beijing’s ability to revive the world’s second-biggest economy. The downbeat comments from companies including Starbucks, Pandora and Carlsberg, as they report fourth-quarter results come ahead of China’s Lunar New Year holiday… They highlight the scale of the challenge for companies selling everything from phones to cars and necklaces as Chinese consumers tighten their belts amid uncertain employment prospects, especially for younger people, a plunging stock market and declining property values.”

Central Banker Watch:

February 7 – Reuters (Promit Mukherjee): “Members of the Bank of Canada’s (BoC) governing council were concerned about cutting borrowing costs too soon amid persistent inflation when they decided to keep the key overnight rate on hold on Jan. 24, minutes… showed. The policy-setting governing council was ‘particularly concerned about the persistence of inflation and did not want to lower interest rates prematurely,’ the minutes said… Shelter price inflation… remained the biggest contributor to above-target inflation, the minutes said. ‘Members expressed concern that, going forward, shelter price inflation would continue to keep overall inflation elevated,’ the so-called summary of deliberations said.”

February 6 – Reuters (Promit Mukherjee and Steve Scherer): “Bank of Canada (BoC) Governor Tiff Macklem… said more time was needed for monetary policy to ease price pressures, while he warned that the biggest driver of prices – shelter costs – cannot be tamed by borrowing costs. ‘We can see monetary policy is working to bring down inflation … and we need to give monetary policy more time to ease the remaining price pressures,’ he said… Canada’s central bank has increased its key overnight rate 10 times in 17 months to a 22-year high of 5%… While this has helped ease inflation from a high of 8.1% in June 2022 to 3.4% in December, the path to its 2% target has been slow.”

February 7 – Bloomberg (Mark Schroers): “Recent economic figures and aggressive market bets on rapid interest-rate cuts mean the European Central Bank should be patient before loosening borrowing costs, according to Executive Board member Isabel Schnabel. Citing sticky services inflation, a resilient labor market, a notable loosening of financial conditions and tensions in the Red Sea, ‘this cautions against adjusting the policy stance soon,’ she said… ‘It means we must be patient and cautious because we know also from historical experience that inflation can flare up again,’ Schnabel said.”

February 4 – Bloomberg (Zoe Schneeweiss): “European Central Bank officials need to ensure there aren’t any second-round effects on inflation from wages before cutting interest rates, according to Governing Council member Boris Vujcic… ‘If you look at what we define as domestic inflation, it is at the moment still resilient, so this is a part that you want to see easing before you decide to get into the easing cycle,’ Vujcic said.”

February 6 – Reuters (Stella Qiu): “Australia’s central bank… trimmed its forecasts for inflation and economic growth but signaled demand was still running ahead of supply, suggesting it would be in no rush to cut interest rates. In its quarterly Statement on Monetary Policy, the Reserve Bank of Australia (RBA) said inflation was now expected to be back in the central bank’s 2-3% target range in late 2025 and reach the midpoint of 2.5% in 2026. ‘Inflation is expected to decline a little quicker than previously thought,’ said the RBA. ‘But, services inflation remains high and is expected to decline only gradually as domestic inflationary pressures moderate.’ The central bank noted that while the growth in demand has slowed, the level of demand is still robust and is assessed to be above the economy’s capacity to supply goods and services, thereby creating inflationary pressures.”

Europe Watch:

February 7 – Reuters (John O’Donnell, Tom Sims and Matthias Inverardi): “German home prices could fall as much as 30% below their 2022 peak, one of the country’s largest landlords told Reuters, in a more pessimistic assessment than rivals highlighting the continued threat posed to Europe’s biggest economy. TAG Immobilen co-CEO Martin Thiel painted a bleak picture for Europe’s biggest residential property market, which has already seen prices tumble by around 10% in Germany’s worst property crash in a generation.”

Japan Watch:

February 7 – Reuters (Leika Kihara): “The Bank of Japan will likely end its risky asset purchases but avoid raising interest rates rapidly when scaling back monetary support, Deputy Governor Shinichi Uchida said in the strongest hint to date that an end to its massive stimulus was nearing. Service-sector prices are rising as more companies hike wages and pass on rising labour costs, Uchida said… ‘If sustainable and stable achievement of our 2% inflation target comes in sight, the large-scale monetary easing will have fulfilled its role and we’ll explore whether it should be revised,’ Uchida said… Ending negative interest rates, a move markets expect to happen either in March or April, would be equivalent to hiking short-term interest rates by 0.1% percentage point, he said.”

February 7 – Bloomberg (Toru Fujioka): “A top Bank of Japan official said it’s hard to see the bank raising its policy rate continuously and rapidly even after the negative interest rate is ended. ‘Even if the bank were to terminate the negative interest rate policy, it is hard to imagine a path in which it would then keep raising the interest rate rapidly,’ BOJ Deputy Governor Shinichi Uchida said… He said that after the bank ends the negative rate policy, financial conditions will remain easy, and he foresees any policy moves thereafter as occurring at a gradual pace.”

February 4 – Reuters (Satoshi Sugiyama): “Japan’s January service activity expanded at the strongest pace since September…, supported by robust demand and the weak yen, while international demand jumped for the first time in five months. The service sector, which accounts for around 70% of the country’s gross-domestic product (GDP), has been a bright spot for the world’s third-largest economy… The final au Jibun Bank Service purchasing managers’ index (PMI) rose to 53.1 in January from 51.5 in December, marking the 17th consecutive month of growth…”

February 6 – Bloomberg (Ruth Carson): “The Bank of Japan may scrap its negative interest-rate policy as soon as March and make multiple hikes this year, adding to the bearish outlook for the nation’s government bonds, according to Pacific Investment Management Co.”

Emerging Market Watch:

February 5 – Bloomberg (Baris Balci and Beril Akman): “Turkish monthly inflation jumped the most since August, an upswing that could test the central bank’s resolve to quell inflation quickly after halting interest-rate increases last month. While policymakers called an end to their tightening cycle, Hafize Gaye Erkan’s surprise removal from the top job last week has left the path forward uncertain. Fatih Karahan, a deputy governor chosen to replace her, said… the central bank would be ‘ready to act’ if the inflation outlook deteriorates… In annual terms, inflation unexpectedly accelerated slightly to 64.9% from 64.8% in December.”

Social, Political, Environmental, Cybersecurity Instability Watch:

February 8 – Bloomberg (Laura Millan): “Last month was the hottest January on record, with global temperatures 1.66C above the average during pre-industrial times, according to… Europe’s Earth observation agency Copernicus. It was the eighth consecutive month with record-high monthly temperatures, according to the report. Global temperatures over the past 12 months were the highest ever recorded — 1.52C above the average between 1850 and 1900. ‘Rapid reductions in greenhouse gas emissions are the only way to stop global temperatures increasing,’ Samantha Burgess, deputy director of the Copernicus Climate Change Service, said…”

February 6 – Financial Times (Lauly Li and Cheng Ting-Fang): “The market for artificial intelligence is not the only thing heating up. So, too, are the chips and servers that power the cutting-edge technology, driving demand for more efficient cooling solutions. Taiwan’s Liteon Technology is one of several component makers stepping up efforts to develop liquid cooling solutions for AI data centres as energy consumption emerges as one of the most pressing bottlenecks to boosting computing performance. ‘There is a lot of heat to be solved [with AI data centres]’ and traditional air-cooling solutions are not capable enough, Simon Ong, Liteon associate vice-president of cloud infrastructure platform and solutions, told Nikkei Asia. ‘[The need for] a more sophisticated cooling technology to solve the heat generated from the systems is unstoppable.’”

February 5 – New York Times (Ivan Penn): “For decades, managers of electric grids feared that surging energy demand on hot summer days would force blackouts. Increasingly, they now have similar concerns about the coldest days of winter. Largely because of growing demand from homes and businesses, and supply constraints thanks to aging utility equipment, many grids are under greater strain in winter. By 2033, the growth in electricity demand during winter… is expected to exceed the growth in demand in summer, according to the North American Electric Reliability Corporation…”

Leveraged Speculation Watch:

February 7 – Bloomberg: “China’s deepening stock-market slump is even taking its toll on quantitative hedge funds, whose computer models have helped them outperform human traders at rival funds for the past three years. Private quant funds suffered a 7.2% average loss in January, according to Shenzhen PaiPaiWang Investment & Management… While traditional hedge funds fared even worse, it’s a far cry from quants’ stellar 4.9% gain in 2023, when China’s main equity gauge tumbled… A recent slump in small-cap stocks and newly imposed curbs on short trading are posing fresh challenges for quants, which rely on algorithms to trade stocks, bonds and commodities.”

February 8 – Bloomberg (Alice Huang, Dorothy Ma and Pearl Liu): “From afar, China Evergrande Group had all the makings of a killer distressed-debt trade: $19 billion in defaulted offshore bonds; $242 billion in assets; and a government that appeared determined to prop up the country’s faltering property market. So US and European hedge funds piled into the debt… What they got instead over the course of the next two years is a harsh lesson in the dangers of trying to bargain with the Communist Party. The talks are now dead — a Hong Kong court has ordered Evergrande’s liquidation, and the bonds are nearly worthless, trading in secondary markets at just 1 cent on the dollar.”

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