January 12, 2024: Pricing Six Cuts (and Counting)

January 12, 2024: Pricing Six Cuts (and Counting)
Doug Noland Posted on January 13, 2024

Monetary disorder played prominently throughout 2023, though most acutely with the fourth quarter upside market dislocation. Speculative leverage went to extremes, exemplified by a $1 TN hedge fund “basis trade.” Derivatives-related leverage was also pivotal in exacerbating liquidity excesses. Options trading boomed, while hedging in-the-money call options provided a key source of marketplace liquidity generation. The proliferation of derivatives strategies coupled with the “magnificent seven” phenomenon evolved into a powerful source of speculative leverage and self-reinforcing market liquidity excess.

I believe odds favor an evolving de-risking/deleveraging dynamic taking hold in 2024. Inherently problematic, unsustainable market melt-ups hasten their own demise. And I would expect the leveraged speculator community, which profited greatly from last year’s parabolic gains in the big tech stocks and indices, to turn more defensive. That said, players can be expected to stick with squeezing both shorts and derivatives traders until that highly rewarding game stops working. And the FOMO and “buy every dip” crowds are now well-conditioned to ignore risk while seeking buying opportunities.

Today’s late-speculative cycle backdrop ensures a highly uncertain and unstable market environment. We should anticipate erratic interplay between mounting caution and deeply ingrained risk embracement. We likely haven’t seen the last of late-cycle crazy, with enterprising Wall Street primed for all kinds of nutty stuff (i.e., spot bitcoin ETFs).

And, sure enough, the “risk off” tenor of 2024’s first week of trading was quickly reversed during week two. The Nasdaq100 rallied 3.2%, fully reversing the previous week’s decline. This allayed fears of impending de-risking/deleveraging in a key (highly levered and vulnerable) segment of the marketplace. With January options expiration next Friday, this week’s Nasdaq recovery spurred reversals in derivative hedges and bearish option bets. And the unwind of hedges again was instrumental in a general loosening of market conditions.

Global markets remain closely correlated. The first week of trading pointed to fledgling risk aversion and liquidity concerns. Yields jumped, CDS prices rose, spreads widened, and risk premiums generally increased. This week provided the opposite.

Investment-grade CDS declined five bps, more than reversing the previous week’s three bps increase. High-yield CDS dropped 18 bps, after jumping 15 bps. U.S. bank CDS reversed much of the previous week’s rise. Reversals were notably weaker in Europe and the emerging markets. Pounded the first week of the new year, this week’s EM bond rally was only a partial reversal.

Treasuries rallied this week, with some curious curve gyrations. Ten-year yields reversed 11 of the previous week’s 17 bps jump, while MBS yields reversed all the 24 bps surge. Meanwhile, two-year Treasury yields sank 24 basis points this week, with yields 11 bps lower over two weeks. Market expectations for the policy rate at the December FOMC dropped a notable 30 bps this week to 3.65%, implying 168 bps (six plus) of rate cuts between now and December 18th.

The reasons behind the market’s pricing of an additional rate cut this week are worthy of contemplation. It certainly wasn’t weak data. December CPI was reported stronger-than-expected. Headline CPI increased 0.3% (0.2% expected) and 3.4% y-o-y (3.2%), with “core” up 0.3% (0.3%) and 3.9% y-o-y (3.8%). Last month’s Small Business Optimism survey hasn’t been stronger since September 2022. November Consumer Credit blew away estimates ($23.8bn vs. $8.6bn). Weekly jobless claims (202k) were the lowest since October. Mortgage applications jumped, while the December federal deficit was a much-stronger-than-expected $129 billion.

Fed officials didn’t offer the market justification for pricing an additional cut. Dallas Fed President Lorie Logan doesn’t want to take another rate hike off the table. New York Fed President John Williams reiterated “higher for longer.” Cleveland Fed President Loretta Mester pushed back against market expectations of a cut by March. And even dovish Chicago Fed President Austan Goolsbee strongly pushed back against the market’s aggressive rate cut outlook.

I view market rate cut expectations as corroborating the acute fragility thesis. There’s something(s) out there that has the market betting the Fed will be forced into aggressive cuts. It could certainly be a market structure issue. A market reversal, unwind of “basis trade” and other speculative leverage, and a surge in hedging/derivatives-related selling could swiftly erupt into illiquidity, market dislocation and panic.

Perhaps the market is pricing odds of a geopolitical crisis forcing aggressive policy easing. The strike on Houthi military assets in Yemen raises the stakes. A scenario where a surge in Hezbollah and Iranian aggression pulls the U.S. further into the conflict cannot be discounted. And I can’t shake the notion that global bond markets are fixated on Chinese developments – financial and geopolitical.

New Credit data this week. China’s Aggregate Financing (system Credit growth) expanded $271 billion during December, about 50% ahead of December ’22, but 10% below estimates – to $52.74 TN. This pushed 2023 growth to a record $4.964 TN, or 9.8%. This was 11.2% above 2022 and narrowly (2.3%) ahead of prior record 2020 growth. Q4 growth of $870 billion was 48% above ‘22’s fourth quarter.

At $163 billion, Bank Loans were 13% below forecasts and down 16% from December ’22 – to a record $33.14 TN. Q4 Loans of $418 billion compare to the year ago $450 billion. Bank Loans expanded $3.293 TN, or 11.0%, over the past year – 10.8% ahead of ’22’s growth of $2.971 TN. Bank Loans grew 23.3% over two, 37.5% over three, and 74.3% over five years.

Consumer (chiefly mortgage) Loans increased only $30 billion, with one-year growth of 6.9%. Q4 Consumer Loans expanded $67 billion, up from Q4 ‘22’s $58 billion – but down 70% from Q4 ’21. Corporate Loans increased $125 billion during December, down from the year ago $177 billion. Q4 growth of $311 billion was 15% below Q4 ’22. Yet Corporate Loans still expanded $2.497 TN, or 13.0%, in 2023 (5% ahead of ’22 growth).

The Beijing boom gathered pace. Government Bonds increased $130 billion to a record $9.736 TN. Record one-year growth of $1.282 TN, or 15.9%, was 41% ahead of ’22 growth – and a third higher than 2020’s previous record expansion. The $509 billion Q4 increase in Government Bonds compares with Q4 ‘22’s $188 billion.

Indicative of mounting stress in the non-bank sector, the “Shadow Banking” category contracted $22 billion during December and $57 billion for Q4.

How does record annual Credit growth of almost $5 TN square with the headlines, “China’s Loan Growth Falls to Record Low as Demand Struggles,” “Deflation Worries Deepen in China,” and “China’s Worst Deflation Streak in 14 Years Puts Pressure on PBOC”?

China’s Bubble is engulfed in a most perilous phase. A deflating apartment Bubble has led to a collapse of developer Credit and a major slowing in consumer mortgage borrowings. Meanwhile, Beijing is aggressively pushing lending and growth in non-real estate sectors to meet its 5% growth target (i.e., EV and auto manufacturing, renewable energy, semiconductors and technology…). Corporate lending continues at a breakneck pace, while government borrowing and spending ramp up dramatically.

China’s economic imbalances are turning only more precarious. For example, there are an estimated 300 EV manufacturers in China. Talk of “deflation” misses the point. The maladjusted Chinese system now requires upwards of $5 TN annually to hold systemic Bubble collapse at bay. At Beijing’s direction, “Terminal Phase” Credit excesses continue to promote rapid expansion of increasingly suspect loans. Enormous amounts of new Credit are being allocated to uneconomic enterprises, either funding the investment spending necessary to meet growth goals or extending additional Credit to loss-making enterprises to keep them afloat. Importantly, this is prolonging the parabolic rise in system risk, the type of late-cycle dynamics that risks a crisis of confidence in a system’s banking system and currency.

January 12 – AFP: “China’s military on Friday vowed to ‘crush’ any efforts to promote Taiwan’s independence, a day before a crucial election on the self-ruled island which Beijing claims is part of its territory. ‘The Chinese People’s Liberation Army maintains high vigilance at all times and will take all necessary measures to firmly crush ‘Taiwan independence’ attempts of all forms,’ defence ministry spokesperson Zhang Xiaogang said… Zhang accused Taiwan’s ruling Democratic Progressive Party of pushing the island ‘toward the dangerous conditions of war’ by purchasing arms from the United States.”

January 9 – Financial Times (Kathrin Hille): “Lai Ching-te’s voice cracked as he hailed a crowd of tens of thousands in southern Taiwan on Sunday night. In the home stretch ahead of the presidential elections, Lai, the candidate for the ruling Democratic Progressive party, was hoarse from weeks of campaigning, but he implored supporters to keep his party in power. ‘We must embrace the world instead of relying on China,’ he said. ‘Your sacred ballot will decide not only the future of Taiwan but the fate of the world!’ The race has unfolded under unprecedented pressure from China, which… threatens to annex it by force if Taipei refuses to submit to its control indefinitely. Beijing has described the vote on Saturday as a choice between war and peace, between prosperity and decline — an indication that China could step up its campaign of military intimidation and economic pressure if Lai, the current vice-president, wins.”

The Thursday night strike on the Houthis likely marks a significant escalation of Middle East tensions. Saturday’s election in Taiwan is potentially a major geopolitical development. Victory by the Democratic Progressive Party (DPP) would mark a third straight term for a party Beijing detests.

When it comes to Taiwan, talk always seems to be of the critical importance of maintaining the status quo. It is becoming increasingly clear that Beijing is tiring of the status quo. And just as Xi Jinping tired of Hong Kong developments, he’s likely about had his fill of Taiwan’s increasingly fraternal relationship with the U.S. The People’s Liberation Army’s pre-election threat was ominously direct.

Assuming a DPP win, I expect Beijing to begin tightening the noose. The Biden administration and Congress stepped up military support last year. Ongoing support appears likely. A November BBC headline: “The US is Quietly Arming Taiwan to the Teeth.” I’ll assume Beijing’s intense efforts to thwart DPP at the polls were merely its first line of defense. Things get tougher now.

China’s deflating Bubble and its more belligerent approach with Taiwan are surely no coincidence. I’ll assume Beijing has crafted a plan that includes a threatening response to a DPP victory. I would expect much more aggressive push back against Taiwan’s relationship with Washington, with a focus on military assistance and transfers. Beijing will significantly ratchet up financial and economic pressure, with more intimidating military operations around the island. And, over time, I would not be surprised by threats to blockade the Island to halt the import of military supplies and other strategic resources.

With no end in sight for the Ukraine war and the Middle East at the brink, it wouldn’t be an inopportune time for China to begin executing its Taiwan plans. Such a development would pose a major challenge to the U.S., with risks even today’s markets couldn’t ignore. Perhaps the rates market is pricing probabilities of a detonation of one of these geopolitical catalysts bursting vulnerable global market Bubbles.

January 12 – Bloomberg (Sam Dagher and Mohammed Hatem): “The airstrikes meant to cow Yemen’s Houthi militants are pitting the US and its allies against an Iran-backed movement that senses its moment has arrived after seizing on the Israel-Hamas war three months ago. It’s also a confrontation that Iran has been scripting in the decades spent assembling what’s been called its ‘axis of resistance’ to Israel and the US. But never before did members of Tehran’s arc of influence — stretching from the Houthis to Hamas and Islamic Jihad in Gaza, Hezbollah in Lebanon to militias in Iraq and Syria — coordinate so well and on such scale. What happens next rests not just on Iran but also in large part with Houthi leader Abdul Malik Al-Houthi, whose relish for staring down the US leaves little hope the escalation will end here. Taking on the world’s superpower is a step toward fulfilling what the 44-year-old and his followers believe is his fate to become a pan-Islamic ruler…”

January 12 – Telegraph (Benedict Smith): “Abandoning Ukraine to Vladimir Putin will embolden Iran, Rishi Sunak has warned as he met Volodymyr Zelensky in Kyiv. The prime minister’s comments come after Britain and the US launched airstrikes against Iranian-backed Houthis who have brought chaos to the Red Sea by attacking merchant ships. ‘For the free nations of the world, aid to Ukraine is also an investment in our own collective security,’ Mr Sunak said. ‘Because if Putin wins in Ukraine he will not stop there and our opponents around the world believe we have neither the patience nor resources for long wars. ‘So waver now and we embolden not just Putin but his allies in North Korea, Iran and elsewhere.’”

For the Week:

The S&P500 rallied 1.8% (up 0.3% y-t-d), and the Dow increased 0.3% (down 0.3%). The Utilities dropped 1.9% (unchanged). The Banks fell 3.1% (down 2.0%), and the Broker/Dealers lost 1.9% (down 3.2%). The Transports slipped 0.2% (down 2.7%). The S&P 400 Midcaps recovered 0.6% (down 1.9%), while the small cap Russell 2000 was little changed (down 3.8%). The Nasdaq100 rallied 3.2% (unchanged). The Semiconductors recovered 3.0% (down 2.9%). The Biotechs slumped 1.9% (down 2.1%). Though bullion recovered $4, the HUI gold index was little changed (down 4.1%).

Three-month Treasury bill rates ended the week at 5.20%. Two-year government yields sank 24 bps this week to 4.14% (down 11bps y-t-d). Five-year T-note yields dropped 18 bps to 4.01% (down 2bps). Ten-year Treasury yields fell 11 bps to 3.94% (up 6bps). Long bond yields declined three bps to 4.18% (up 15bps). Benchmark Fannie Mae MBS yields sank 24 bps to 5.27% (unchanged).

Italian yields fell 12 bps to 3.73% (up 3bps y-t-d). Greek 10-year yields declined eight bps to 3.23% (up 18 bps). Spain’s 10-year yields fell six bps to 3.09% (up 10bps). German bund yields increased three bps to 2.18% (up 16bps). French yields declined two bps to 2.68% (up 12bps). The French to German 10-year bond spread narrowed about five to 50 bps. U.K. 10-year gilt yields added a basis point to 3.79% (up 26bps). U.K.’s FTSE equities index declined 0.8% (down 1.4% y-t-d).

Japan’s Nikkei Equities Index surged 6.6% (up 6.3% y-t-d). Japanese 10-year “JGB” yields were unchanged at 0.61% (down 1bp y-o-y). France’s CAC40 increased 0.6% (down 1.0%). The German DAX equities index gained 0.7% (down 0.3%). Spain’s IBEX 35 equities index dipped 0.7% (down 0.1%). Italy’s FTSE MIB index was little changed (up 0.4%). EM equities were mixed. Brazil’s Bovespa index declined 0.8% (down 2.4%), and Mexico’s Bolsa index fell 1.1% (down 3.1%). South Korea’s Kospi index dropped 2.1% (down 4.9%). India’s Sensex equities index increased 0.8% (up 0.5%). China’s Shanghai Exchange Index fell 1.6% (down 3.1%). Turkey’s Borsa Istanbul National 100 index surged 4.7% (up 6.9%). Russia’s MICEX equities index gained 1.6% (up 2.8%).

Federal Reserve Credit declined $12.5bn last week to $7.647 TN. Fed Credit was down $1.254 TN from the June 22nd, 2022, peak. Over the past 226 weeks, Fed Credit expanded $3.920 TN, or 105%. Fed Credit inflated $4.836 TN, or 172%, over the past 583 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $5.0bn last week to $3.384 TN. “Custody holdings” were up $52bn, or 1.6%, y-o-y.

Total money market fund assets expanded $10bn to a record $5.975 TN, with a 44-week gain of $1.081 TN (26% annualized). Money funds were up $1.230 TN, or 26.0%, y-o-y.

Total Commercial Paper gained $15.5bn to $1.231 TN. CP was down $74bn, or 5.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates increased four bps to 6.66% (up 48bps y-o-y). Fifteen-year rates slipped two bps to 5.87% (up 33bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down seven bps to 7.06% (up 78bps).

Currency Watch:

For the week, the U.S. Dollar Index was unchanged at 102.40 (up 1.1% y-t-d). For the week on the upside, the Brazilian real increased 0.4%, the British pound 0.3%, the Norwegian krone 0.2%, the South African rand 0.2%, the South Korean won 0.1%, the euro 0.1%, and the Mexican peso 0.1%. On the downside, the Australian dollar declined 0.4%, the Canadian dollar 0.4%, the Swiss franc 0.3%, the Swedish krona 0.3%, the Japanese yen 0.2%, the Singapore dollar 0.1%, and the New Zealand dollar 0.1%. The Chinese (onshore) renminbi declined 0.28% versus the dollar (down 0.94%).

Commodities Watch:

January 18 – Bloomberg (Jake Lloyd-Smith): “Gold’s not done much of note so far in the early days of 2024, but underlying signs continue to be reasonably positive, including sustained accumulation by the People’s Bank of China. If that theme carries on, it will help to support prices just as the Federal Reserve leans into its pivot. The PBOC chimed in at the weekend to say its bullion reserves expanded yet again in December. That’s the 14th monthly rise in a row. Within that span, holdings increased by a hefty 225 tons over calendar 2023.”

January 9 – Financial Times (Myles McCormick and Jamie Smyth): “US crude oil and natural gas output is set to notch fresh records in 2024 and 2025, the government has forecast, despite mounting fears that the shale revolution that fuelled the nation’s energy boom has run its course. Average US oil production will amount to 13.2mn barrels per day this year, rising to 13.4mn b/d next year, according to an energy outlook… by the Energy Information Administration. The figures top the 12.9mn b/d estimated in 2023 — itself a record, surpassing levels reached before the Covid-19 pandemic.”

The Bloomberg Commodities Index declined 0.7% (down 0.7% y-t-d). Spot Gold added 0.2% to $2,049 (down 0.7%). Silver was unchanged at $23.19 (down 2.5%). WTI crude fell $1.13, or 1.5%, to $72.68 (up 1%). Gasoline gained 0.7% (up 1%), and Natural Gas surged 14.5% to $3.31 (up 32%). Copper fell 1.7% (down 4%). Wheat dropped 3.2% (down 5%), and Corn slumped 3.0% (down 5%). Bitcoin lost $1,270, or 2.9%, to $42,960 (up 1.1%).

Middle East War Watch:

January 7 – Reuters (Simon Lewis, Nidal Al-Mughrabi and Emily Rose): “The top U.S. diplomat swept through the Middle East on Sunday, warning that the Gaza conflict could spread across the region without concerted peace efforts, although Israel’s leader vowed to continue the war until Hamas was eliminated. U.S. Secretary of State Antony Blinken… also sought to assure Arab leaders that Washington opposes the forcible displacement of Palestinians from Gaza or the occupied West Bank. ‘This is a moment of profound tension for the region. This is a conflict that could easily metastasize, causing even more insecurity and suffering,’ Blinken said…”

January 10 – Reuters (Jasper Ward, Eric Beech, Muvija M, Alistair Smout and Andrew Mills): “U.S. and British naval forces shot down 21 drones and missiles fired by Yemen-based Houthis on Tuesday towards the southern Red Sea, the United States said, with Britain hinting at further measures to protect international shipping lanes. British Defence Secretary Grant Shapps said it was the largest attack in the area by the militants to date as the three-month-long war between Israel and Hamas in Gaza spills over into other parts of the Middle East.”

January 7 – Wall Street Journal (Gordon Fairclough): “Israel’s defense minister, Yoav Gallant, said the scale and severity of the Oct. 7 assault on Israel by Palestinian Islamist militant group Hamas deeply shook Israelis’ sense of security and profoundly altered the way they view the world around them. ‘October 7 was the bloodiest day for Jewish people since 1945,’ Gallant, a general-turned-politician, told The Wall Street Journal. ‘The world needs to understand. This is different’… ‘My basic view: We are fighting an axis, not a single enemy,” Gallant said. “Iran is building up military power around Israel in order to use it.’”

January 9 – Financial Times (Raya Jalabi, James Shotter and Neri Zilber): “Senior figures in the Hizbollah and Hamas militant groups were killed on Monday in separate incidents, the latest in a spate of deaths attributed to Israel that have fuelled fears of a wider conflagration in the Middle East. Wissam Tawil, a senior commander in Lebanon’s powerful Hizbollah paramilitary force, was killed in a strike in the south of the country… Israel Katz, Israel’s foreign minister, appeared to confirm the claim…, saying: ‘The attack in south Lebanon… we took responsibility… this is part of our war.’ Katz described Tawil as the ‘de facto commander’ of Hizbollah’s elite Radwan forces.”

January 8 – Reuters (Laila Bassam and Maya Gebeily): “Israel killed a top Hezbollah commander in a strike in south Lebanon on Monday…, inflicting a heavy blow after three months of hostilities at the Lebanese-Israeli frontier. Wissam Tawil was a commander of Hezbollah’s elite Radwan forces and the most senior Hezbollah officer killed so far in the conflict, a senior source in Lebanon said, adding he played a leading role in directing its operations in the south.”

January 8 – Reuters (Laila Bassam, Suleiman Al-Khalidi and Maya Gebeily): “Israel is carrying out an unprecedented wave of deadly strikes in Syria targeting cargo trucks, infrastructure and people involved in Iran’s weapons lifeline to its proxies in the region… The sources… said Israel had shifted strategies following the Oct. 7 rampage by Hamas fighters into Israeli territory and the ensuing Israeli bombing campaigns in Gaza and Lebanon.”

January 9 – Reuters (Laila Bassam and Dan Williams): “Hezbollah attacked an Israeli army base with explosive drones deployed from Lebanon on Tuesday, hitting the position for the first time in what the Iran-backed group declared part of its response to recent Israeli assassinations in Lebanon. Also on Tuesday, an Israeli attack killed three Hezbollah fighters in south Lebanon… Hezbollah deputy leader Naim Qassem, in a televised speech, said his group did not want to expand the war from Lebanon, ‘but if Israel expands (it), the response is inevitable to the maximum extent required to deter Israel’.”

January 11 – Bloomberg (Sam Dagher and Mohammed Hatem): “The leader of Yemen’s Houthis threatened a ‘big’ response to the US and its allies if they proceed with military action against his group, which has been attacking ships in the Red Sea for almost two months. ‘We’ll confront the American aggression,’ Abdul Malik Al-Houthi said… ‘Any American attack won’t go unpunished.’ Al-Houthi said the scale of the response would surpass an attack carried out by the Iran-backed group on shipping lanes Tuesday, which involved two dozen drones and a barrage of ballistic and cruise missiles. The assault was described by the US military as the largest to date.”

January 5 – Reuters: “The commander of Iran’s Revolutionary Guards vowed… to reach ‘the enemy’ far and near as tensions soar on key shipping routes where Tehran’s allies have been attacking vessels. ‘Today, we are facing an all-out battle with the enemy,’ said Guards commander Hossein Salami… in the southern Gulf port city of Bandar Abbas, where the Guards’ navy unveiled a new ship named ‘Abu Mahdi’ and 100 missile launchers… ‘We need to defend our national interests to wherever they extend,’ Salami said… ‘It will be harmful for the enemy to be found near and at a half distant. They should stay away from this area.’”

January 9 – Financial Times (Robert Wright): “The number of container ships at the mouth of the Red Sea on their way to or from the Suez Canal was 90% down in the first week of January compared with the start of 2023, according to research showing the disruption to world trade by attacks on ships by Yemen’s Houthi rebels. The research, by the London-based shipping services company Clarksons, also showed that the number of container ships diverting from the Red Sea to travel round the Cape of Good Hope on January 9 was more than double the total as recently as December 21.”

January 7 – Bloomberg (Alex Longley and Anna Shiryaevskaya): “Container shipping is set to face a crunch ahead of the Lunar New Year holiday as Houthi attacks in the Red Sea restrict capacity, a major industry consultant said. The coming weeks are likely to be very difficult as trade volumes ramp up before Lunar New Year, which begins Feb. 10, according to Philip Damas, Managing Director and Head of Supply Chain Advisors at Drewry Shipping. Diversions as a result of the attacks are forcing ships to sail thousands of miles further than normal and are therefore restricting the amount of vessels able to carry goods. Over the weekend, the number of transits through the Suez Canal fell to the lowest since the waterway was blocked by the Ever Given container ship in 2021…”

January 11 – Associated Press (Jon Gambrell): “Iran’s navy captured an oil tanker Thursday in the Gulf of Oman that only months earlier had seen its cargo of Iranian oil seized by the United States over sanctions linked to Tehran’s nuclear program, further escalating the tensions gripping the Mideast’s waterways. The vessel was previously known as the Suez Rajan when it was involved in a yearlong dispute beginning in 2021 that ultimately saw the U.S. Justice Department take the 1 million barrels of Iranian crude oil on it.”

Taiwan Election Watch:

January 10 – Politico (Phelim Kine): “Taiwan goes to the polls on Saturday for a presidential election that will determine how it navigates its increasingly volatile relationship with Beijing. And Washington is caught in the middle — with already fraught U.S.-China ties on the line. The two main parties offer starkly different approaches to managing the longrunning threat from China to the self-governing island. The ruling Democratic Progressive Party — whose candidate Lai Ching-te is widely favored to win — has long called for independence from China and has pledged to increase the island’s military capabilities to fend off any potential attack from Beijing. The opposition Kuomintang, or KMT, party opposes any moves toward independence and says friendlier relations with China will lower the chance of war. Polls show Lai is ahead of KMT candidate Hou You-ih by between 3 and 11 percentage points. But the polls are more than a week old, and there’s still the possibility of an upset…”

January 10 – Reuters (Michael Martina and Patricia Zengerle): “Dozens of U.S. lawmakers co-sponsored legislation… praising democracy in Taiwan ahead of its presidential and parliamentary elections, prompting China to call for the U.S. to stop official contact with the island. ‘Resolved, That the Senate … is committed to supporting Taiwan’s self-defense and the liberty of its people through effective deterrence using all elements of United States power,’ read the resolution, which has at least 28 Republican and Democratic sponsors in the Senate. The resolution praises Taiwan’s ‘rule of law and vibrant civil society, diverse economy, and stable political system,’ and contrasts that with the situation in China.”

January 10 – Reuters (Ben Blanchard): “Taiwan’s de facto ambassador to the United States met on Tuesday with U.S. House of Representatives Speaker Mike Johnson, Taiwan’s foreign ministry said on Wednesday, drawing a stern rebuke from Beijing. The United States is Taiwan’s most important international backer and arms supplier despite the lack of formal diplomatic ties with the island, which China views as its own territory. Alexander Yui took up his new post last month, replacing Hsiao Bi-khim, who is now running to be vice president in Taiwan’s elections on Saturday.”

Ukraine War Watch:

January 12 – Washington Post (David L. Stern): “On a visit to Kyiv, British Prime Minister Rishi Sunak announced Friday that the United Kingdom would provide Ukraine with more than $3 billion in additional military aid and signed bilateral security guarantees between London and Kyiv — the first such agreement on concrete security pledges… Sunak said that ‘in the event of a future Russian attack,’ London will provide ‘swift and sustained security assistance, military equipment across land, sea and air domains, economic assistance,’ as well as ‘economic and other costs on Russia.’ ‘It’s important that Russia sees that we are not moving away, that we will be with Ukraine, not just today, not just tomorrow, but for the long term,’ Sunak said.”

Market Instability Watch:

January 10 – Reuters (Hannah Lang and Suzanne McGee): “The U.S. securities regulator on Wednesday approved the first U.S.-listed exchange traded funds (ETFs) to track bitcoin, its Chair Gary Gensler said, in a watershed for the world’s largest cryptocurrency and the broader crypto industry. The U.S. Securities and Exchange Commission approved 11 applications, including from BlackRock, Ark Investments/21Shares, Fidelity, Invesco and VanEck, among others… The products – a decade in the making – are a game-changer for bitcoin, offering institutional and retail investors exposure to the world’s largest cryptocurrency without directly holding it, and a major boost for a crypto industry beset by a string of scandals. Standard Chartered analysts this week said the ETFs could draw $50 billion to $100 billion this year alone, potentially driving the price of bitcoin as high as $100,000.”

January 10 – Bloomberg (Kurt Wagner): “The US Securities and Exchange Commission said its account on social network X was ‘compromised,’ leading to a spike in the price of Bitcoin and raising fresh questions about X’s reliability as a source of information and the security options for its users. The incident, one of the most consequential breaches in years on the platform formerly known as Twitter, began with a post on the SEC’s official verified account, which inaccurately shared that the regulator had approved spot-Bitcoin exchange-traded funds — a decision that had been anticipated for later this week.”

January 9 – Wall Street Journal (Siobhan Hughes and Katy Stech Ferek): “Congress may need to pass another short-term bill to avoid a partial government shutdown in less than two weeks, potentially forcing House Speaker Mike Johnson (R., La.) to break a vow he made to GOP colleagues swearing off such measures. Senate Minority Leader Mitch McConnell (R., Ky.) said the dwindling days left before the deadline meant Congress would have to take up a stopgap bill… to keep the government open as work continues on full-year fiscal 2024 legislation. The current interim spending law funds some parts of the government through Jan. 19 and the rest through Feb. 2. Johnson and Senate Majority Leader Chuck Schumer (D., N.Y.) struck a deal Sunday to set overall discretionary spending at $1.66 trillion for fiscal 2024.”

January 9 – Axios (Andrew Solender): “Leading conservatives in the House are publicly projecting pessimism about their prospects of securing policy wins or spending cuts in upcoming fights over annual government spending bills. Why it matters: It’s a rare and telling bit of expectation-setting as House Speaker Mike Johnson (R-La.) prepares to try to ram through another compromise with Senate Democrats. Hardliners feel particularly burned after the bipartisan passage of a major defense bill that excluded many of their efforts to scale back military diversity programs and affirmative action, restrict access to abortion and gender-affirming care and rein in government surveillance. What they’re saying: ‘Past history would not indicate that we are willing to fight for good policy or reduced spending,’ Rep. Bob Good (R-Va.), chair of the right-wing Freedom Caucus, told Axios…”

January 8 – Financial Times (Mary McDougall): “Investors are warning governments around the world over ‘unmoored’ levels of public debt, saying excessive pre-election borrowing promises risk sparking a bond market backlash. Government debt issuance in the US and the UK is expected to soar to the highest level on record in the coming year, with the exception of the early stages of the Covid pandemic. Emerging markets are set to add to the deluge of bond sales, after government debt climbed to an all-time high of 68.2% of GDP last year… Deficits are ‘out of control and the real story is that there’s no mechanism for bringing them under control’, said Jim Cielinski, global head of fixed income at Janus Henderson.”

January 9 – Yahoo Finance (Jeff Lagerquist): “A trio of Canadian economic heavyweights is sounding alarm bells over America’s record-breaking US$34 trillion national debt. Former Bank of Canada governor David Dodge, John Manley, a former deputy prime minister and finance minister, and economist David Rosenberg, say the situation recalls this country’s brush with soaring deficits in the 1990s. ‘The U.S. is getting very close to running into a situation where they are up against the wall, just as we were at the beginning of the 90s,’ Dodge said… ‘The U.S. has to now work to preserve confidence in the U.S. dollar that they didn’t before. And I think this changes the game.’”

January 10 – Bloomberg (Anchalee Worrachate, Liz Capo McCormick and Garfield Reynolds): “Right around the start of November, two words suddenly disappeared from the chatter in the bond market: debt supply. As bond prices surged across the developed world day after day, sending yields tumbling and handing investors some much-needed profits, the angst about soaring budget deficits melted away. But for how long? Over the next several weeks, governments from the US, UK and the eurozone will start flooding the market with bonds at a clip rarely seen before. Saddled with the kind of bloated deficits that were once unthinkable, these countries — along with Japan — will sell a net $2.1 trillion of new bonds to finance their 2024 spending plans, a 7% increase from last year, according to estimates from Bloomberg Intelligence.”

Bubble and Mania Watch:

January 11 – Axios (Matt Phillips): “About 93% of U.S. households’ stock market wealth is held by the top 10%… While it’s true that a record high 58% of American households do own stocks via mutual funds or as individual shares, in the aggregate the amount of stock most of these folks own is tiny. The big picture: Despite the trauma of the last few years — the collapse of stocks in the early days of the pandemic, and the brutal bear market brought on by the Fed’s rate hikes over the last couple of years — the stock market has soared over the long term. In the last 10 years, the S&P 500 gained 155%, and the tech-heavy Nasdaq rose a whopping 250%.”

January 9 – Bloomberg (Paula Seligson, Katherine Doherty and Jill R. Shah): “Jane Street Group LLC reeled in $7.3 billion of net trading revenue in the first nine months of last year, as the proprietary trading giant benefited from market swings and an expansion of its products. The figures… also showed the company expected to generate $3 billion to $3.5 billion of net trading revenue in the fourth quarter, according to people familiar… That would bring it close to the $10.7 billion it made in the full year of 2022, the people said…”

January 11 – Bloomberg (Natalie Wong): “Soaring borrowing costs and plunging prices walloped the global commercial-property market last year. Now, more clarity around values and an urgent need to address looming debt maturities are expected to spark more deals. Sellers and buyers are finally seeing more opportunities to transact after uncertainty nearly froze the market for much of last year… And the opportunity may be vast: The brokerage estimates that property owners with loans maturing through the end of 2025 will need as much as $570 billion in new equity given how sharply values have fallen.”

January 8 – Bloomberg (Allison McNeely, Dawn Lim, and Layan Odeh): “For private equity, 2023 turned out to be a terrible, horrible, no good, very bad year, and the pain won’t likely end until it’s clear that central banks have truly decided to stop hiking rates. US private equity firms bought or sold $871 billion in assets last year, the lowest level since 2016, according to… PitchBook. And the projected rate of distributions to private equity investors was the second-smallest in a quarter century, investment bank Raymond James says.”

January 11 – Reuters (Krystal Hu): “U.S. investors injected $170.6 billion into startups in 2023, a decrease of nearly 30% from the $242.2 billion recorded in 2022, as the venture capital funding market continues to grapple with valuation resets amid rising interest rates, according to PitchBook… The latest data, from a year in which megadeals in artificial intelligence captured the imagination of investors, shows a persistent decline from the peak of U.S. venture funding in 2021 when startups raised $348 billion.”

January 9 – Wall Street Journal (Peter Grant): “One of the world’s largest data-center developers is getting a $6.4 billion equity infusion, the latest sign that this property sector is booming alongside the rise in artificial intelligence. Vantage Data Centers plans to use the capital from digital infrastructure investor DigitalBridge Group and Silver Lake… to add more than 3 gigawatts of capacity globally. That is enough to power more than 2.5 million homes. Vantage already has 32 data-center campuses on five continents. Its expansion is in response to growing AI demand from tech companies such as Microsoft, Google, Oracle and Amazon Web Services. The new capacity will cost about $30 billion, including debt, company officials said.”

January 9 – Financial Times (Peter Campbell): “The resale value of best-selling electric vehicles fell almost a third in the US last year, amid a wider slowdown in the growth of EVs across the developed world. The second-hand value of the top-10 selling battery cars in the US, including models from Tesla, General Motors and Ford, fell an average of 28% in 2023, data from CarGurus… show.”

January 11 – Reuters (Nathan Gomes and Joseph White): “Rental firm Hertz Global Holdings is selling about 20,000 electric vehicles, including Teslas, from its U.S. fleet about two years after a deal with the automaker to offer its vehicles for rent, in another sign that EV demand has cooled. Hertz will instead opt for gas-powered vehicles…, citing higher expenses related to collision and damage for EVs even though it had aimed to convert 25% of its fleet to electric by 2024 end.”

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

January 9 – Reuters (Kanishka Singh): “A joint statement by the United States and its partners… condemned arms transfers between North Korea and Russia, including what it termed as Russia’s procurement of North Korean ballistic missiles and Moscow’s use of those against Ukraine on Dec. 30 and Jan. 2. Both Moscow and Pyongyang have drawn closer since the beginning of the Ukraine conflict… North Korean leader Kim Jong Un met President Vladimir Putin in Russia’s Far East region last September and senior Russian officials have made several visits to Pyongyang.”

De-globalization and Iron Curtain Watch:

January 9 – Reuters (Ben Blanchard and Liz Lee): “China… threatened new trade measures against Taiwan, which accused Beijing of ‘economic coercion’ ahead of pivotal weekend elections on the island and also voiced anger at a surprise Chinese satellite launch over its air space… The DPP’s presidential candidate Lai Ching-te said… he would maintain the status quo and pursue peace through strength if elected, remaining open to engagement with Beijing under the preconditions of equality and dignity… ‘Peace is priceless and war has no winners,’ Lai told reporters… ‘Peace without sovereignty is just like Hong Kong. It is fake peace.’”

Inflation Watch:

January 11 – Reuters (Lucia Mutikani): “U.S. consumer prices increased more than expected in December, with Americans paying more for shelter and healthcare… ‘The final stretch of the path back to the 2% inflation target could be harder than the market is anticipating,’ said Ryan Brandham, head of global capital markets, North America, at Validus Risk Management. The consumer price index (CPI) rose 0.3% last month after nudging up 0.1% in November… The cost of shelter, which includes rents, hotel and motel stays as well as school housing, accounted for more than half of the increase in the CPI.”

January 12 – CNBC (Jeff Cox): “Wholesale prices unexpectedly declined in December, providing a positive signal for inflation… The producer price index fell 0.1% for the month and ended 2023 up 1% from a year ago… The index had surged 6.4% in 2022. Excluding food and energy, core PPI was flat against the estimate for a 0.2% increase. Excluding food, energy and trade services, PPI also was up 0.2%, in line with the estimate. For the full year, the final demand measure less food, energy and trade services rose 2.5% for all of 2023 after being up 4.7% in 2022.”

January 8 – Wall Street Journal (Jean Eaglesham): “After Allstate suffered billions of dollars in losses and failed to get the rate increases it wanted, it resorted to the nuclear option. The insurance giant threatened last fall to stop renewing auto insurance for customers in three states that hadn’t given in to its demands… The states blinked. In December, New Jersey approved auto rate increases for Allstate averaging 17%, and New York, a 15% hike. Regulators in California are allowing Allstate to boost auto rates by 30%, but still haven’t decided on its request for a 40% increase in home-insurance rates… For many Americans, getting insurance for both their cars and homes has gone from a routine, generally manageable expense to a do-or-die ordeal that can strain household budgets. Insurers are coming off some of their worst years in history.”

January 9 – Bloomberg (Anuradha Raghu): “The rice market is set to remain tight at the start of the year on India’s ongoing export restrictions and an expected boost from festival demand, providing impetus for elevated prices to climb even higher. The grain is vital to the diets of billions and further price gains would stretch household budgets. Thai white rice 5% broken — an Asian benchmark — eased to $646 a ton on Wednesday, slipping for the first time since early December, but still remains near a 15-year high.”

Biden Administration Watch:

January 12 – Guardian (Julian Borger): “When Joe Biden gave the order for airstrikes on Houthi targets in Yemen, he was taking a step that now imperils one of the primary aims of his own Middle East policy – to prevent a regional war. US and allied officials argue he had little choice. Diplomacy, back-door channels, signalling and threats had failed to halt relentless Houthi attacks on shipping in the Red Sea and Gulf of Aden, which the Iranian-backed group has claimed are being carried out in solidarity with Gaza… Rather than pulling back, Houthi attacks became bolder. On New Year’s Eve, Houthi fighters launched a daring assault on a container ship, the Maersk Hangzhou, racing towards it in four small boats. US ship-launched helicopters came to the ship’s protection, sinking three of the boats and killing the crews…”

Federal Reserve Watch:

January 6 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Dallas President Lorie Logan said the US central bank may need to slow down the pace at which it shrinks its portfolio of assets amid scarcer liquidity in financial markets. While there’s still more than enough liquidity in the financial system, she said, individual banks could start to see constraints… Logan said it’s now ‘appropriate’ to begin discussing the parameters around a Fed decision to slow the pace of its balance-sheet runoff. ‘In my view, we should slow the pace of runoff as ON RRP balances approach a low level,’ Logan said, referencing the Fed’s overnight reverse repurchase facility…”

January 8 – Bloomberg (Alexandra Harris): “With the Federal Reserve telegraphing plans to begin slowing the pace of its balance-sheet unwind, market participants are rushing to determine just how soon the end of quantitative tightening could start. Strategists at Bank of America Corp. and Barclays Plc predict that the central bank is likely to begin tapering the program in April, with the runoff wrapping up by mid-summer. Deutsche Bank AG expects the unwind start in June, while Morgan Stanley is telling clients that policymakers want to give markets plenty of time to prepare, and won’t act until September.”

January 6 – Reuters (Ann Saphir): “Federal Reserve Bank of Dallas President Lorie Logan… warned that the U.S. central bank may need to resume raising its short-term policy rate to keep a recent decline in long-term bond yields from rekindling inflation. ‘If we don’t maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we’ve made,’ Logan said… ‘In light of the easing in financial conditions in recent months, we shouldn’t take the possibility of another rate increase off the table just yet.’”

January 10 – Bloomberg (Alexandra Harris): “Federal Reserve Bank of New York President John Williams said monetary policy is now tight enough to guide inflation back to the Fed’s target, but suggested policymakers need more evidence of cooling inflation before cutting interest rates. ‘My base case is that the current restrictive stance of monetary policy will continue to restore balance and bring inflation back to our 2% longer-run goal,’ Williams said… ‘I expect that we will need to maintain a restrictive stance of policy for some time to fully achieve our goals, and it will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2% on a sustained basis,’ he said.”

January 11 – Reuters (Lindsay Dunsmuir): “The rocky path of getting inflation back to the U.S. Federal Reserve’s 2% target rate reflected in the latest Consumer Price Index (CPI) figures means that it would likely be too soon for the central bank to cut its policy rate in March, Cleveland Fed President Loretta Mester said… ‘I think March is probably too early in my estimation for a rate decline because I think we need to see some more evidence,’ Mester said… ‘I think the December CPI report just shows there is more work to do and that work is going to take restrictive monetary policy.’”

January 9 – Bloomberg (Katanga Johnson): “The Federal Reserve’s top bank watchdog signaled that the central bank is unlikely to extend an emergency loan program that it started last year during the regional banking crisis. Michael Barr, the Fed’s vice chair for supervision, said… the Fed’s Bank Term Funding Program had functioned as intended to ease stress in the financial system. The temporary program is set to expire on March 11. The program allows banks and credit unions to borrow funds for as long as one year. Banks have tapped the backstop for a record amount of funds in recent weeks as expectations that the Fed will cut interest rates as soon as March have made it a more attractive choice.”

January 8 – Reuters (Ann Saphir): “Federal Reserve Governor Michelle Bowman… retreated from her persistently hawkish view, saying she now sees U.S. monetary policy as ‘sufficiently restrictive’ and signaled her willingness to support eventual interest-rate cuts as inflation eases. ‘My view has evolved to consider the possibility that the rate of inflation could decline further with the policy rate held at the current level for some time,’ Bowman said…”

January 8 – Bloomberg (Michael Sasso and Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic said inflation has come down more than he expected and is on a path today to reaching the Fed’s 2% goal, though it’s too early to declare victory. “We are on a path to 2% today,” Bostic said… ‘The goal is to make sure we stay on the path’… ‘We are in a very strong position right now,’ he said…”

U.S. Bubble Watch:

January 11 – Reuters (David Lawder): “The U.S. federal government posted a December deficit of $129 billion, up $44 billion or 52% from a year earlier as outlays rose while receipts fell from December 2022 levels that were swelled by pandemic-deferred tax payments… The Treasury said that outlays for December rose 3% to $559 billion, a December record, partly as a result of higher Social Security outlays and interest on the public debt. Receipts for the month fell 6% to $429 billion. For the first three months of the 2024 fiscal year that started Oct. 1, the federal deficit reached $510 billion, up $89 billion, or 21% from the year ago period… Outlays rose 12% to $1.618 trillion, while receipts rose 8% to $1.108 trillion. Public debt interest costs for December rose to $119 billion, up 11% or $12 billion from December 2022…”

January 11 – Dow Jones (Greg Robb): “Initial jobless benefit claims inched down by 1,000 to 202,000 in the week ended Jan. 6… This is the lowest level since mid-October… The number of people already collecting jobless benefits in the week ended Dec. 30 fell by 34,000 to 1.83 million. This is the lowest level since October. Continuing claims have fallen by 90,000 since the end of November.”

January 8 – Reuters (Howard Schneider): “The U.S. economy ended last year with the labor scars from the COVID-19 pandemic effectively healed and a quandary for Federal Reserve policymakers so far waiting in vain for wage and job growth to cool to a sustainable level… ‘Workers still have the upper hand in the current environment, with strong wage growth and plenty of job opportunities,’ wrote Nationwide Senior Economist Ben Ayers. Wage growth remaining above 4% adds to concern that inflation in labor-intensive services industries may be hard to quell and represents “another blow to the odds that Fed will cut rates early this spring.’”

January 8 – Bloomberg (Vince Golle): “US consumer borrowing surged in November by the most in a year on a jump in credit-card balances… Total credit rose $23.8 billion after rising a revised $5.8 billion in October, according to Federal Reserve data… The figure well exceeded the highest estimate…, which had a median forecast of $8.6 billion. Revolving credit outstanding, which includes credit cards, increased $19.1 billion in November, the most since March 2022. Non-revolving credit, such as loans for vehicle purchases and school tuition, climbed $4.6 billion.”

January 9 – Reuters (Amina Niasse): “U.S. small business sentiment rose for the first time in five months in December…, but hiring costs and ongoing concerns around inflation continue to sour business owners’ confidence. The National Federation of Independent Business (NFIB) index rose to 91.9 in December from November’s 90.6. It was the first increase since July and matched that month’s reading… A net negative 25% of businesses reported improved profits in December, a 7 point increase from the month prior, with labor costs continuing to weigh on earnings, the report said. Inflation was the top problem for owners, and the share of owners reporting inflation as their main concern rose to a seasonally adjusted 23%.”

January 9 – CNBC (Diana Olick): “Home prices are rising faster and faster each month… On a national level, home prices jumped 5.2% in November compared to the same month a year earlier, according to… CoreLogic. That’s up from a 4.7% annual gain in October. States in the Northeast led the gains, with Rhode Island (11.6%), Connecticut (10.6%) and New Jersey (10.5%) seeing the strongest growth… ‘This continued strength remains remarkable amid the nation’s affordability crunch but speaks to the pent-up demand that is driving home prices higher,’ Selma Hepp, chief economist for CoreLogic, said… ‘Markets where the prolonged inventory shortage has been exacerbated by the lack of new homes for sale recorded notable price gains over the course of 2023,’ she added.”

January 8 – Reuters (Amina Niasse): “U.S. homebuyer confidence improved in December, with more homeowners anticipating that mortgage rates would fall further this year, but it could take sometime for housing supply to recover as many remain hesitant to sell their homes. Mortgage finance agency Fannie Mae said on Monday its Home Purchase Sentiment Index rose 2.9 points to 67.2 in December. It was up 6.2 points year-over-year. ‘Notably, homeowners and higher-income groups reported greater rate optimism than renters; in fact, for the first time in our National Housing Survey’s history, more homeowners, on net, believe mortgage rates will go down than go up,’ said Mark Palim, deputy chief economist at Fannie Mae.”

January 11 – Bloomberg (Alex Tanzi): “Credit-card delinquency rates have exceeded pre-pandemic levels, while the share of borrowers making only the minimum payment climbed above 10% for the first time since 2019, according to a Federal Reserve Bank of Philadelphia report. Almost 3.2% of card balances were at least 30 days past due as of the end of September… That’s the highest figure in more than a decade, and up by over 40 bps from the previous quarter. The share of debts that are 60 and 90 days late also jumped. Responding to the signs of ‘greater consumer fragility,’ banks are granting fewer credit-line increases and reducing limits more frequently, the Philadelphia Fed said.”

January 8 – Wall Street Journal (Konrad Putzier): “America’s offices are emptier than at any point in at least four decades… A staggering 19.6% of office space in major U.S. cities wasn’t leased as of the fourth quarter, according to Moody’s Analytics, up from 18.8% a year earlier. That is slightly above the previous records of 19.3% set in 1986 and 1991 and the highest number since at least 1979, which is as far back as Moody’s data go.”

January 8 – Bloomberg (Ellen Schneider): “Private US companies are seeing their earnings and profit margins collapse after the Federal Reserve’s rate hikes have lifted financing costs, and are increasingly going broke, according to a new report. Larger companies have been mostly insulated from the pain so far. But these corporations often use mid-sized private firms as suppliers, and the failure of smaller businesses could disrupt supply chains and boost costs for bigger enterprises, according to the report from Marblegate Asset Management and Rapid Ratings… ‘The water looks fine from the shore but what’s happening underneath the surface is a very very troubled environment that is very dangerous,’ said Andrew Milgram, managing partner and chief investment officer at Marblegate.”

China Watch:

January 8 – Bloomberg: “China’s central bank signaled that it’s prepared to keep policy loose by lowering the amount of money banks must keep in reserve, reinforcing expectations among investors of more easing to come. The People’s Bank of China will use a variety of tools to provide ‘strong support’ for a reasonable growth in credit, said Zou Lan, head of the central bank’s monetary policy department… He highlighted ‘reserve requirements’ as one option…”

January 8 – Bloomberg: “President Xi Jinping vowed to deepen an anti-corruption campaign spanning several critical sectors, a move that risks freezing spooked decision makers and hampering China’s fragile economic recovery. The Chinese leader singled out the finance, energy, pharmaceutical and infrastructure sectors, as well as state-owned enterprises, as targets of fresh scrutiny at a meeting of the Communist Party’s anti-graft agency on Monday… China will clean up ‘hidden risks’ in sectors where ‘power is concentrated, capital is intensive and resources are rich,’ Xi told the conclave… ‘There’s no turning back, no relaxing and no mercy in fighting corruption,’ he said.”

January 10 – Bloomberg (Tom Hancock): “China’s efforts to lower risks from local government debt are likely to weigh on economic growth again this year as a national deleveraging campaign is expected to curb spending on investment projects. The concern stems from a catch in the plan Beijing has put forth to lower the risk of disorderly defaults. China is helping local governments to refinance the off-balance sheet — or so-called ‘hidden’ — debt accrued by state-owned financing vehicles. That seems to be mitigating the chance of a financial crisis this year, but those local authorities are also under unprecedented pressure to stop issuing additional debt. Less borrowing by local government financing vehicles is ‘likely to be a drag on infrastructure investment and GDP growth this year,’ said Adam Wolfe, emerging markets economist at Absolute Strategy Research.”

January 12 – Bloomberg: “China’s exports posted the first full-year decline since 2016 as global demand faltered and prices fell, hurting a major pillar of growth for the world’s second-biggest economy. The country sold $3.38 trillion worth of goods to the rest of the world last year, a 4.6% drop from the record a year earlier… Full-year imports fell 5.5%, leaving a surplus of $823 billion for the year.”

January 7 – Reuters (Clare Jim and Donny Kwok): “China Evergrande New Energy Vehicle Group said… its Vice Chairman Liu Yongzhuo has been detained and is under criminal investigation, sending its stock tumbling and marking another setback after a share sale plan was scrapped. The detainment could also hurt its parent company, China Evergrande Group – the world’s most indebted property developer… It has some $23 billion in offshore debt and more than $300 billion in total liabilities.”

January 8 – Reuters: “China’s securities regulator is allowing mutual fund managers to sell more shares than they buy each day, three sources said, removing a ban introduced late last year aimed at propping up a flagging stock market. The China Securities Regulatory Commission (CSRC) late last year barred major mutual fund companies from selling shares on a net basis on any day, answering top leadership calls to stabilise a market that was among the world’s worst performers.”

January 11 – Bloomberg (Linda Lew): “China’s auto production and exports climbed to record highs in 2023 as its domestic market recovered and manufacturers filled the void left by Western companies that pulled out of Russia. Carmakers churned out 30.16 million vehicles last year, and wholesale deliveries… rose to 30 million, according to China Association of Automobile Manufacturers data…. Both surpassed previous records set in 2017. Exports surged 58% to 4.91 million units.”

January 8 – Bloomberg (Jackie Cai and Dong Cao): “One of China’s biggest auto dealers is working with bankers to explore repayment options as its dollar bond comes due soon, highlighting how cash woes are spreading beyond the ailing real estate sector. China Grand Automotive Services Limited is mulling various strategies for its 9.125% note maturing Jan. 30… The move underscores efforts by China’s high-yield issuers to preserve cash as they struggle to refinance debt.”

January 8 – Bloomberg: “A corrupt Chinese official loaded more than 150 billion yuan ($21bn) onto his city’s debt books in one of the country’s most over-leveraged provinces, according to a state media documentary highlighting Beijing’s anti-graft efforts. Li Zaiyong let his city ‘borrow blindly’ during his tenure running Liupanshui city in Guizhou province between 2013 and 2017, with scant regard for the area’s “actual fiscal affordability,” state-run broadcaster China Central Television said… Li green-lit 23 tourism-related construction projects, of which 16 have now been listed by the province as either inefficient or idle, according to the program.”

January 10 – Reuters (Samuel Shen and Vidya Ranganathan): “China’s real estate investment products are tumbling, extending last year’s slump as investors lose hope for a recovery in the economy and property assets such as industrial parks and logistics hubs… After tumbling 28% in 2023, the CSI REITs Index has dropped another 6.4% this year through a rare, seven-day losing streak driven by one REITs manager’s disclosure of cuts in warehouse rental prices and broader fears of falling yields.”

Central Banker Watch:

January 7 – Bloomberg (Jasmina Kuzmanovic): “The European Central Bank is unlikely to lower borrowing costs before the summer, according to Governing Council member Boris Vujcic. While inflation will continue to gradually ease, officials want to be convinced of the slowdown and will await data on the euro zone’s labor market, the Croatian central bank chief… ‘We’re not talking about cutting interest rates now, and probably won’t before summer,’ Vujcic told Croatia’s N1 TV.”

Global Bubble Watch:

January 6 – Bloomberg (Selcuk Gokoluk): “Developing-nation borrowers are rushing to sell debt, taking advantage of increased appetite for new bonds to lock in costs as traders continue to flip-flop over when the Federal Reserve will begin lowering interest rates. Mexico was first off the block, kicking off the year with its largest ever bond sale. Hungary, Slovenia, Indonesia and Poland quickly followed. In just four days, emerging-market governments and companies closed 20 deals worth $24.4 billion, the busiest start to a year on record for dollar- and euro-denominated debt issuance out of developing nations…”

January 11 – Reuters (René Wagner): “Global trade declined by 1.3% from November to December 2023 as militant attacks on merchant vessels in the Red Sea led to a plunge in the volumes of cargo transported in that key region, a German economic institute said… Currently around 200,000 containers are being transported via the Red Sea daily, down from some 500,000 per day in November… Diversions in response to the attacks have led to journeys between Asian production centres and European consumers taking up to 20 days longer…”

January 9 – New York Times (Alan Rappeport): “The global economy is at risk of a ‘wasted’ decade and the weakest stretch of growth in 30 years, the World Bank warned…, saying a sluggish recovery from the pandemic and crippling wars in Ukraine and the Middle East are expected to weigh heavily on output. In its semiannual Global Economic Prospects report, the World Bank projected that the growth in world output will slow further in 2024, declining to 2.4% from 2.6%… The converging crises in recent years have put the world economy on track for the weakest half-decade in 30 years.”

Europe Watch:

January 9 – Bloomberg (James Hirai and Ronan Martin): “Europe is having its busiest day ever for primary bond market issuance, with demand for government bond sales breaking new highs. A record of more than €45.7 billion ($50bn) of new publicly syndicated debt from financials, corporates and public- sector borrowers is set to price on Tuesday… At the same time it has been the busiest day for government bond auctions so far this year.”

January 9 – Bloomberg (Andrew Langley): “Unemployment in the euro area matched its lowest level on record in November… The jobless rate dropped to 6.4% from 6.5% in October…, equivalent to almost 11 million people out of work in the region of more than 300 million. The data underscore why the European Central Bank has no plans to start cutting interest rates any time soon.”

Japan Watch:

January 11 – Reuters (Brigid Riley): “Japan’s Nikkei share average scaled its highest levels since February 1990 on Thursday, as a weaker yen buoyed exporters and caution over an impending hike by the Bank of Japan continued to fade on the back of weak wage data. The Nikkei rose 1.77% on its third straight day of gains this week, closing at its highest in nearly 34 years at 35,049.86. The index was also on its way to the largest weekly gain since late March 2020.”

January 11 – Bloomberg (Toru Fujioka and Sumio Ito): “Bank of Japan officials are likely to discuss cutting their forecasts for economic growth and a gauge of inflation that includes energy when they gather to set policy later this month, even as their overall assessment of price trends remains intact, according to people familiar with the matter… The prospect of a downgrade to inflation estimates is likely to firm up market speculation that authorities will stand pat this month.”

January 10 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan is fully prepared to put an end to the world’s last negative interest rate, and April is the most likely timing for when it might do so, a former BOJ board member said. ‘The BOJ is completely ready,’ Makoto Sakurai, the former board member, said… ‘They are just waiting for one last push from one or two economic data.’ April is the most likely timing for a rate hike after authorities peruse initial results of spring wage talks due in March, Sakurai said…”

January 9 – Bloomberg (Erica Yokoyama and Mia Glass): “Headline wage growth for Japanese workers slowed sharply in November, an unwelcome development for the Bank of Japan as it seeks evidence of a virtuous cycle linking pay hikes to price increases as a prerequisite for normalizing monetary policy. Nominal cash earnings for workers rose 0.2% from the previous year, decelerating sharply from a 1.5% increase in October… Real wages declined 3%, much deeper than the consensus call for a 2% drop.”

EM Watch:

January 10 – Reuters (Ben Blanchard): “Ecuador President Daniel Noboa said… his country was ‘at war’ with drug gangs who are holding prison guards hostage, amid a dramatic surge in violence that saw gunmen briefly take over a TV live broadcast and explosions in multiple cities. Noboa on Tuesday named 22 gangs as terrorist organizations, making them official military targets. The president took power in November pledging to tackle a growing security problem caused by a rise in drug-trafficking gangs transporting cocaine through Ecuador. ‘We are at war and we cannot cede in the face of these terrorist groups,’ Noboa told radio station Canela Radio…”

January 11 – Reuters (Horacio Soria and Hernan Nessi): “Argentina’s annual inflation rate sped past 211% in December…, hitting the highest level since the early 1990s as new libertarian President Javier Milei seeks to head off hyperinflation with tough austerity measures. Argentina’s monthly inflation rate also hit 25.5% in the month…, after a sharp devaluation of the peso currency last month after Milei’s government took office on Dec. 10, pledging to get inflation under control.”

January 9 – Bloomberg (Max de Haldevang): “Mexico’s consumer prices rose more than expected in December with increased spending during the holiday season keeping pressure on the central bank as it starts considering an interest rate cut in coming months. Consumer prices rose 4.66% compared to the same period a year earlier, up from 4.32% in November…”

Social, Political, Environmental, Cybersecurity Instability Watch:

January 9 – New York Times (Tiffany Hsu, Stuart A. Thompson and Steven Lee Myers): “Billions of people will vote in major elections this year — around half of the global population, by some estimates — in one of the largest and most consequential democratic exercises in living memory. The results will affect how the world is run for decades to come. At the same time, false narratives and conspiracy theories have evolved into an increasingly global menace. Baseless claims of election fraud have battered trust in democracy. Foreign influence campaigns regularly target polarizing domestic challenges. Artificial intelligence has supercharged disinformation efforts and distorted perceptions of reality… ‘Almost every democracy is under stress, independent of technology,’ said Darrell M. West, a senior fellow at the Brookings Institution think tank. ‘When you add disinformation on top of that, it just creates many opportunities for mischief.’”

January 9 – Associated Press (Seth Borenstein): “Earth last year shattered global annual heat records, flirted with the world’s agreed-upon warming threshold and showed more signs of a feverish planet, the European climate agency said… The European climate agency Copernicus said the year was 1.48 degrees Celsius (2.66 degrees Fahrenheit) above pre-industrial times… And January 2024 is on track to be so warm that for the first time a 12-month period will exceed the 1.5-degree threshold…”

January 9 – Financial Times (Attracta Mooney, Steven Bernard and Kenza Bryan): “The world experienced its hottest year in 2023, with ‘climate records tumbling like dominoes’ as the global average temperature reached almost 1.5C above pre-industrial levels, the European earth observation agency has said. Scientists from the Copernicus climate change service said that last year marked the first since records began in which every day was at least 1C warmer than pre-industrial levels… Almost half of the days of 2023 were 1.5C warmer, while two days in November were more than 2C hotter.”

January 10 – Bloomberg (Mark Chediak): “Texas is warning residents to brace for a deep freeze early next week that’s likely to send electricity demand soaring, raising the specter of a deadly cold blast that struck the state three years ago and caused blackouts. The Electric Reliability Council of Texas, the state grid operator, issued a weather watch from January 15 to 17 due to a forecast of extreme cold weather that will descend on the second-largest US state. Temperatures in the Dallas-Fort Worth metropolitan area could plunge to 10 degrees or lower Monday and Tuesday…”

January 9 – Bloomberg (Brian K Sullivan): “The US endured a record number of 28 weather and climate disasters in 2023, each causing $1 billion or more in damage and collectively killing at least 492 people. The disasters, which included major floods in California, the Northeast and Florida and wildfire in Hawaii, broke the old mark of 22 such disasters set in 2020, the National Centers for Environmental Information reported… The disasters caused a total of $92.9 billion in damages and losses, but that figure could rise after a final analysis is done to storms and flooding that hit the East Coast in mid-December.”

January 10 – CNBC (Lee Ying Shan): “China and India’s growing economies will continue to fuel demand for coal even as they set ambitious renewable energy targets, according to experts. While China is the world’s largest energy consumer, India is ranked third globally, and both countries are the top consumers of coal as they strive to fuel economic growth. China’s share of global electricity consumption, 60% of which is generated by coal, is set to jump to one-third by 2025… India’s rapidly growing economy also means the country’s demand for energy including oil and natural gas will be significant…”

Geopolitical Watch:

January 8 – Reuters (Daria Sito-Sucic): “Two F-16 fighter jets will fly over Bosnia… to underline U.S. support for its territorial integrity against ‘secessionist activity’ by Serbs at odds with the country’s 1990s Dayton peace accords, the U.S. embassy in Sarajevo said. The overflight will be part of bilateral air-to-ground training conducted along with Bosnia´s national armed forces in areas of the Balkan country’s north not controlled by Serbs, the U.S. Embassy in Sarajevo said…”

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July 19, 2024: Election on the Brink
July 12, 2024: Houston, We Have a Bubble Problem
July 5, 2024: Nothing Matters
June 30, 2024: Just the Facts
June 21, 2024: Greatest Threat
June 14, 2024: Potential Catalyst and Q1 2024 Z.1
June 7, 2024: Summer of Discontent and Instability
May 31, 2024: Thesis Corroboration
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