MARKET NEWS / CREDIT BUBBLE WEEKLY

January 19, 2024: Cold and Hot

MARKET NEWS / CREDIT BUBBLE WEEKLY
January 19, 2024: Cold and Hot
Doug Noland Posted on January 20, 2024

Please join Doug Noland and David McAlvany this coming Thursday, January 25th, at 3:00 pm Eastern/ 1:00 pm Mountain Time (one hour earlier than normal) for the Tactical Short Q4 recap conference call, “Prospects After a Market Melt-Up.” Click here to register.

Too much ice, not enough electricity. For others, brutal cold. Weather extremes were only one facet of such an “interesting” week. Much to Beijing’s chagrin, Taiwan’s DPP party won a third term, with a gutsy, independent-minded new President taking charge. Story to continue… The Houthi’s scoff at U.S. strikes and threats, vowing to ratchet up Red Sea attacks. Iran lobs missiles into Pakistan (and Iraq and Syria), and the Pakistanis respond in kind. The IDF intensifies airstrikes in Southern Lebanon, as three months of tit-for-tat risk Hezbollah war eruption on Israel’s northern border. The S&P500 and Nasdaq100 trade to new all-time highs.

Here at home, frigid conditions were in stark contrast to hot economic data. And there’s no magic here. Contain those happy thoughts of a soundly resilient U.S. economy. Work diligently to manage complacency. After all, we’re only witnessing the consequences of last year’s major loosening of financial conditions – and confirmation that the “dovish pivot” is a worthy addition to the long list of Fed policy blunders. More importantly, it’s all part of one incredibly prolonged and erratic “terminal” Bubble phase, which seduces only to punish later.

December Retail Sales rose a stronger-than-expected 0.6%, confirming the strength of holiday spending. Sales were up 5.6% y-o-y, with Retail Sales Ex-Gas rising 6.7%. “Control Group” sales (used in GDP calculations) were up 0.8% versus estimates of 0.2%.

Housing Starts (1.46 million) and Building Permits (1.495 million) both beat forecasts. While Existing Home Sales were somewhat below expectations, the lack of supply continues to be a pressing issue. Inventory dropped an additional 130,000 to a historically depressed one million, the low back to last March (20-year average 2.28 million). Little wonder the National Association of Home Builders Market Index jumped a much stronger-than-expected seven points to a five-month high 44 (expectations 39). Weekly Mortgage Purchase Applications rose 9.2% to the highest level since July, while Refinancing Applications surged 10.8% to the high back to May.

Squinting is required to observe (trumpeted) labor market loosening. Weekly Initial Jobless Claims dropped 13,000 to 187,000, the low since September 2022. Declining for a third straight week, Continuing Claims fell to 1.806 million, the lowest number back to the week of October 13th. For perspective, the 20-year average is 3.175 million.

At 78.8, preliminary January University of Michigan Consumer Confidence absolutely blew away expectations. Consumer Sentiment surged nine points to the high since July 2021, a report also preceded by a big stock market rally. The Current Conditions component jumped 10 points, while Expectations rose 8.5 points (both highs since July ’21).

From Bloomberg (Vince Golle): “The consumer sentiment survey showed the pickup in optimism was broad, with improvements across age, income and political affiliation. More than half of households expect their incomes to grow at least as fast as inflation, the highest share since mid-2021… Meanwhile, stock market expectations were the strongest in more than two years… Consumers’ perception of their current financial situation rose to a two-year high, while expectations for future finances climbed to the highest since 2021. Buying conditions for durable goods rose to a nearly three-year high…”

It’s increasingly challenging for the bond market – and Fed officials – to downplay the odds of a meaningful upside surprise in U.S. economic activity. And tight labor market conditions increase the likelihood of already elevated inflation refusing to follow the nice glide path to 2%. It’s worth noting that the UK and Canada both reported stronger-than-expected inflation. UK headline inflation at 0.4% for the month (4.0% y-o-y) – and Core CPI up 5.1% y-o-y – made for an unpleasant Bloomberg headline: “UK Inflation Shock Sets Gilts Up for Worst Ever Start to a Year.” Canada’s core inflation jumped to 3.65%, 0.30% above expectations. Bloomberg: “Core Inflation Spurs Traders to Pare Bets on Canada Rate Cuts.”

Bond market gyrations are a cause for concern for a bullish marketplace confident the storm has passed. Two-year Treasury yields surged 24 bps this week to 4.38%, fully reversing the previous week’s 24 bps drop. Ten-year yields rose 18 bps to 4.12%, with yields up 24 bps during the first three weeks of 2024. MBS has returned to its hyper-volatile 2023 ways. Yields jumped 28 bps this week to 5.55%. This follows the 24 bps drop during the second week of the year and week one’s 24 bps surge.

The rates market ended the week pricing a 49% probability of a rate cut by the March 20th FOMC meeting, down from the previous Friday’s 83% – and half of the 100% to end 2023. The market closed the week expecting a 3.98% Fed funds rate for the December 18th meeting, up from last Friday’s 3.65% and the year-end 3.75%. Markets are now pricing 135 bps of 2024 cuts, down from last week’s 168 bps.

January 18 – Bloomberg: “Trading has surged to a nine-year high in China’s onshore swaps market, an increasingly popular one-stop-currency-shop for everyone from foreign to local to state banks and corporates, all happy to bypass traditional FX venues. Attractive rates for those with dollars to lend, strong demand for the US currency in China’s banking system and even shadow intervention from officials keeping the yuan in check are some of the suggested reasons that have driven one measure of client activity to the highest since 2015. Swaps are becoming more common tools to manage currency positions, with a market share now of 10%, according to Bloomberg calculations, compared to about 75% for old school buying and selling via so-called spot trading.”

Reading this week of the boom in Chinese derivative swaps trading, my thoughts returned to early 1998. It was a February (as I recall) Financial Times article that detailed surging trading volumes in Russian currency and bond derivatives. The derivatives boom was understandable. Russia was acutely vulnerable to similar dynamics that took down the Asian Tigers the previous year. Significant speculative leverage created fragility, along with intense demand for bond and currency hedges. After reading the FT article, I was even more convinced that market dislocation was inevitable. A de-risking/deleveraging episode would find players on the wrong side of a mountain of downside derivative exposures, facing panicked selling in an illiquid marketplace.

Obviously, China to begin 2024 is in a much stronger position than Russia in early 1998. But there is today an elevated risk of disorderly currency trading. I suspect Beijing has leaned on currency derivatives to conserve international reserve holdings. China’s major banks have been directed to support the renminbi, leading to a surge in currency futures contracts and derivative swaps trading. Such activities do reduce the amount of renminbi selling and the need for central bank support (dollar sales to buy renminbi). But they come at a potentially steep cost. As a mountain of derivative exposures accumulates, risks rise for a bout of derivative-related panic selling, illiquidity and dislocation.

The market mantra in 1998 was “the West will never allow a Russian market collapse.” Markets have pretty much remained 100% confident that Beijing would never tolerate a currency crisis. Acute underlying fragility, confidence in a powerful market backstop, and mountains of derivatives are the recipe for market trouble.

The Shanghai Composite’s 1.7% decline this week pushed y-t-d losses to 4.8%. The Hang Seng China Financials Index sank 4.3% this week (down 7.5% y-t-d), with the index sinking to lows back to November 2022. Renminbi losses were held to a minimum (-0.36%), which is more than can be said for the vulnerable Japanese yen (-2.19%).

I can’t help but think that the dollar-denominated EM debt market is sending an important message. Ten-year yields were up 35 bps this week in Colombia (7.33%), 26 bps in Panama (7.12%), 26 bps in Peru (5.40%), 25 bps in Turkey (7.67%), 19 bps in Mexico (5.71%), 17 bps in Indonesia (5.15%), and 14 bps in Brazil (6.15%). This puts the three-week yield surge at 69 bps in Columbia, 66 bps in Turkey, 49 bps in Panama, 48 bps in Peru, 42 bps in Indonesia, 34 bps in the Philippines, 30 bps in Mexico, 29 bps in Chile, and 23 bps in Brazil. Could the message be, “Get prepared for global de-risking/deleveraging and associated liquidity issues”?

European peripheral bonds are faring only somewhat better. This week’s 40 bps jump pushed the y-t-d Portuguese yield surge to 52 bps. Yields are up 30 bps y-t-d in Greece, 26 bps in Spain, and 18 bps in Italy. Yields were up 16 bps this week (up 32 bps y-t-d) in Germany and 15 bps in France (up 27bps). This week’s 14 bps jump pushed the UK 2024 surge to 39 bps. Australian 10-year yields jumped 22 bps this week (up 34 bps y-t-d). Closer to home, Canadian 10-year yields surged 27 bps to 3.49% (up 38 bps y-t-d).

Was Q4’s spectacular squeeze rally merely a head fake in an ongoing global bond bear market? It was just a few months back, in October, when global markets were fretting myriad casualties from spiking global yields. A 2024 global yield spike would catch everyone by surprise – and poorly positioned. The fraught geopolitical backdrop – with increasingly clear inflation ramifications – is not helpful.

January 16 – Associated Press (Jon Gambrell and Lolita C. Baldor): “A barrage of U.S., coalition and militant attacks in the Middle East over the last five days are compounding U.S. fears that Israel’s war on Hamas in Gaza could expand, as massive military strikes failed to stall the assault on Red Sea shipping by Yemen-based Houthis. Even as the U.S. and allies pummeled more than two dozen Iran-backed Houthi locations on Friday in retaliation for attacks on ships, the Houthis have continued their maritime assaults. And Tehran struck sites in Iraq and Syria, claiming to target an Israeli ‘spy headquarters,’ then followed that Tuesday with reported missile and drone attacks in Pakistan. The chaotic wave of attacks and reprisals involving the United States, its allies and foes suggested not only that last week’s assault had failed to deter the Houthis, but that the broader regional war that the U.S. has spent months trying to avoid was becoming closer to reality.”

January 15 – Bloomberg (Alex Longley): “The cost of war-risk insurance for vessels sailing through the Red Sea is spiraling, adding a further potential impediment to trade passing through a waterway already labeled too dangerous for merchant shipping by the US Navy. Underwriters are now charging between 0.75% and 1% of the value of the ship to sail through the region, according to people familiar with the matter, jumping significantly since US and UK airstrikes targeted the Houthi rebels in Yemen at the end of last week. Just a few weeks ago, quotes for cover were about one tenth of that amount.”

January 14 – Wall Street Journal (Rory Jones): “After 100 days, Israel’s war with Hamas is turning into a protracted conflict with no clear end, threatening to spread across the Middle East, disrupt global trade and bog down the U.S. One of the biggest geopolitical events this century, the war has swung from a Hamas attack on Oct. 7 that Israel says killed 1,200 people to the Israeli military’s ferocious retaliation against the militant group in Gaza. More than 23,000 Palestinians have been killed, mostly women and children, Palestinian authorities say, a number that doesn’t distinguish combatants from civilians, and nearly 70% of Gaza’s 439,000 homes and about half of its buildings have been damaged or destroyed.”

January 14 – Wall Street Journal (Chun Han Wong): “For eight years, China has raged against Taiwan’s ruling party, accusing it of pursuing a separatist agenda that must be confronted with economic muscle and shows of military might. On Saturday, Taiwanese voters handed the Democratic Progressive Party another ringing victory, all but ensuring that those tensions will persist—or even intensify—over the next four years, and cementing the island’s status as a flashpoint between Washington and Beijing. Lai Ching-te’s win is likely to stoke anxiety in Beijing, while also fueling concern in Washington that China may lean toward the use of force to bring Taiwan’s democratic government to heel.”

January 16 – Reuters: “Russian President Vladimir Putin said… that Ukraine’s statehood could suffer an ‘irreparable blow’ if the pattern of the war continued, and Russia would never be forced to abandon the gains it had made. Putin made his televised comments a day after Switzerland agreed to host a global summit at the request of Ukrainian President Volodymyr Zelenskiy. Putin dismissed ‘so-called peace formulas’ being discussed in the West and Ukraine and what he called the ‘prohibitive demands’ they entailed. ‘Well, if they don’t want (to negotiate), then don’t!… Now it is quite obvious, not only (Ukraine’s) counter-offensive failed, but the initiative is completely in the hands of the Russian armed forces. If this continues, Ukrainian statehood may suffer an irreparable, very serious blow’.”

January 19 – Bloomberg (Jonathan Tirone): “Iran is frustrating international efforts to examine its nuclear program as it speeds up its production of uranium enriched close to the level needed for weapons. International Atomic Energy Agency inspectors figure Iran now has sufficient quantities of highly-enriched uranium to build several atomic warheads, Director General Rafael Mariano Grossi told Bloomberg… ‘It is a very frustrating cycle,’ Grossi said. ‘We don’t understand why they don’t provide the necessary transparency.’”

For the Week:

The S&P500 gained 1.2% (up 1.5% y-t-d), and the Dow increased 0.7% (up 0.5%). The Utilities dropped 3.8% (down 3.8%). The Banks were little changed (down 2.0%), and the Broker/Dealers were about unchanged (down 3.2%). The Transports rallied 0.8% (down 1.9%). The S&P 400 Midcaps increased 0.5% (down 1.5%), and the small cap Russell 2000 slipped 0.3% (down 4.1%). The Nasdaq100 jumped 2.9% (up 2.9%). The Semiconductors surged 8.0% (up 4.8%). The Biotechs fell 1.9% (down 4.0%). With bullion down $20, the HUI gold index dropped 6.3% (down 10.2%).

Three-month Treasury bill rates ended the week at 5.1825%. Two-year government yields surged 24 bps this week to 4.138% (up 13bps y-t-d). Five-year T-note yields jumped 22 bps to 4.05% (up 20bps). Ten-year Treasury yields rose 18 bps to 4.12% (up 24bps). Long bond yields gained 15 bps to 4.33% (up 30bps). Benchmark Fannie Mae MBS yields surged 28 bps to 5.55% (up 28bps).

Italian yields rose 15 bps to 3.88% (up 18bps y-t-d). Greek 10-year yields gained 12 bps to 3.35% (up 30bps). Spain’s 10-year yields rose 16 bps to 3.25% (up 26bps). German bund yields increased 16 bps to 2.34% (up 32bps). French yields gained 15 bps to 2.83% (up 27bps). The French to German 10-year bond spread narrowed one to 49 bps. U.K. 10-year gilt yields rose 14 bps to 3.93% (up 39bps). U.K.’s FTSE equities index fell 2.1% (down 3.5% y-t-d).

Japan’s Nikkei Equities Index gained 1.1% (up 7.5% y-t-d). Japanese 10-year “JGB” yields jumped six bps to 0.67% (up 5bps y-o-y). France’s CAC40 fell 1.3% (down 2.3%). The German DAX equities index dipped 0.9% (down 1.2%). Spain’s IBEX 35 equities index dropped 2.3% (down 2.4%). Italy’s FTSE MIB index slipped 0.6% (down 0.2%). EM equities were mostly lower. Brazil’s Bovespa index fell 2.6% (down 4.9%), and Mexico’s Bolsa index dipped 0.2% (down 3.4%). South Korea’s Kospi index lost 2.1% (down 6.9%). India’s Sensex equities index declined 1.2% (down 0.8%). China’s Shanghai Exchange Index dropped 1.7% (down 4.8%). Turkey’s Borsa Istanbul National 100 index was little changed (up 7.0%). Russia’s MICEX equities index declined 0.6% (up 2.2%).

Federal Reserve Credit increased $2.5bn last week to $7.650 TN. Fed Credit was down $1.251 TN from the June 22nd, 2022, peak. Over the past 227 weeks, Fed Credit expanded $3.923 TN, or 105%. Fed Credit inflated $4.839 TN, or 172%, over the past 584 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $4.6bn last week to $3.379 TN. “Custody holdings” were up $48.5bn, or 1.5%, y-o-y.

Total money market fund assets declined $14.1bn to $5.961 TN. Money funds were up $1.156 TN, or 24%, y-o-y.

Total Commercial Paper surged $24.4bn to $1.255 TN. CP was down $45.6bn, or 3.5%, over the past year.

Freddie Mac 30-year fixed mortgage rates declined six bps to 6.60% (up 65bps y-o-y). Fifteen-year rates dropped 11 bps to 5.76% (up 58bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates unchanged at 7.06% (up 69bps).

Currency Watch:

For the week, the U.S. Dollar Index gained 0.9% 103.29 (up 1.9% y-t-d). For the week on the downside, the Japanese yen declined 2.2%, the New Zealand dollar 2.1%, the South African rand 2.0%, the Norwegian krone 2.0%, the South Korean won 1.9%, the Swiss franc 1.9%, the Swedish krona 1.8%, the Brazilian real 1.5%, the Australian dollar 1.3%, the Mexican peso 1.3%, the Singapore dollar 0.7%, the euro 0.5%, the British pound 0.4%, and the Canadian dollar 0.1%. The Chinese (onshore) renminbi declined 0.36% versus the dollar (down 1.30%).

Commodities Watch:

The Bloomberg Commodities Index declined 1.2% (down 1.9% y-t-d). Spot Gold fell 1.0% to $2,029 (down 1.6%). Silver dropped 2.5% to $22.62 (down 4.9%). WTI crude recovered 73 cents, or 1.0%, to $73.41 (up 2.5%). Gasoline jumped 2.0% (up 3%), while Natural Gas sank 24% to $2.52 (unchanged). Copper rallied 1.2% (down 3%). Wheat slipped 0.5% (down 6%), and Corn declined 0.3% (down 6%). Bitcoin lost $1.320, or 3.1%, to $41,640 (down 3.1%).

Middle East War Watch:

January 19 – Bloomberg (Alberto Nardelli, Peter Martin and Jennifer Jacobs): “The US and the UK are exploring ways to step up their campaign against Houthi militants in Yemen without provoking a broader war, with a focus on targeting Iranian resupplies and launching more aggressive pre-emptive strikes… The proposals could mark an escalation in the allied effort to end the chaos in the Red Sea, which handled about 12% of global trade before the Houthis began targeting commercial ships in response to Israel’s bombardment of the Gaza Strip. The Houthi attacks has led to higher insurance costs and provoked fears of fresh inflationary pressure as ships take a longer and costlier route around the southern tip of Africa.”

January 17 – Reuters (Idrees Ali and Phil Stewart): “The U.S. military said… its forces conducted strikes on 14 Houthi missiles that were loaded to be fired from Yemen, in the fourth day of U.S. strikes in less than a week. In a statement on social media platform X, U.S. Central Command said the Houthi missiles presented an imminent threat to merchant vessels and U.S. Navy ships in the region. ‘These missiles on launch rails … could have been fired at any time, prompting U.S. forces to exercise their inherent right and obligation to defend themselves,’ it added.”

January 18 – Bloomberg (Dana Khraiche and Mohammed Hatem): “Yemen’s Houthis vowed they would keep attacking ships in the Red Sea, even after the US launched a fourth round of missiles strikes against them. ‘It is an honor for our people to be in such a confrontation with these evil forces,’ Abdul Malik al-Houthi, the head of the Iran-backed militant group, said…, citing the US, the UK and Israel. The Houthis are now in ‘direct confrontation’ with all three and are taking steps to bolster their military capabilities, he said.”

January 16 – Reuters (Muhammad Al Gebaly and Hatem Maher): “The Yemeni Houthi movement will expand its targets to include U.S. ships, an official from the Iran-allied group said… ‘The ship doesn’t necessarily have to be heading to Israel for us to target it; it is enough for it to be American,” Nasruldeen Amer, a spokesperson for the Houthis, told Al Jazeera. ‘The United States is on the verge of losing its maritime security.’ Amer also said British and American ships had become ‘legitimate targets’ due to the strikes launched by the two countries on Yemen last week.”

January 16 – Reuters (Ari Rabinovitch and Maya Gebeily): “Israel unleashed an intense barrage of air strikes on a valley in south Lebanon, Lebanese security sources and the Israeli military said, after a rare Israeli acknowledgment of a special forces operation on the border. Lebanese security sources told Reuters there were at least 16 airstrikes in quick succession on the Suluki Valley, describing them as the ‘densest bombardment of a single location’ since border-area hostilities began three months ago.”

January 14 – Reuters (Nidal Al-Mughrabi and Fadi Shana): “Israeli tanks and aircraft hit targets in southern and central Gaza on Sunday and there were fierce gun battles in some areas as the war reached 100 days since the Oct. 7 attack led by gunmen from the Islamist Hamas movement. Communications and internet services were down for the third day running, complicating the work of emergency and ambulance crews trying to help people in areas hit by fighting.”

January 17 – CNBC (Natasha Turak): “Within 24 hours, Iran launched missile and drone strikes on targets in three countries — Iraq, Syria and Pakistan — and took the extraordinary step of announcing its responsibility for the attacks, triggering anger from its neighbors. The developments have heightened concerns over the possibility of a wider Middle East conflict, as the Israel-Hamas war and daily Israeli bombardment of the Gaza enclave passes the 100-day mark. Baghdad recalled its ambassador to Iran after the Monday night attack on its northern semi-autonomous Kurdistan region killed four civilians and injured at least six. Tehran said the strike targeted an Israeli spy hub near the U.S. consulate in Erbil…”

January 15 – Associated Press (Qassim Abdul-Zahra and Salar Salim): “Iran fired missiles late Monday at what it claimed were Israeli ‘spy headquarters’ near the U.S. Consulate in the northern Iraqi city of Irbil, and at targets linked to the extremist group Islamic State in northern Syria. Four civilians were killed and six injured after missiles hit an upscale area near the consulate in Irbil, the seat of Iraq’s semi-autonomous Kurdish region… Iran’s Revolutionary Guards said in a statement that it had hit a headquarters of Mossad, the Israeli intelligence agency, in the Kurdish region of Iraq.”

January 16 – Financial Times (Jim Pickard): “Ministers have warned business leaders there are limits to what the UK government can do to protect critical global supply chains as attacks on ships using the key Suez Canal route continued this week. ‘It is first and foremost for businesses to manage their supply chains, with government intervention reserved for those areas where it is necessary, such as in cases of market failure,’ Nusrat Ghani, business minister, said…”

Taiwan Watch:

January 13 – Reuters (Yimou Lee, Sarah Wu and James Pomfret): “Taiwan’s president-elect Lai Ching-te could face a tough four years in office with no parliamentary majority, an opposition which wanted to re-start a vexed service trade deal with China and the ever present threat of military action from Beijing. Lai, from the ruling Democratic Progressive Party (DPP), won on Saturday by a comfortable margin though with less than half the vote but his party lost control of parliament on which Lai will have to rely to pass legislation and spending. China wasted little time in pointing out most electors voted against Lai, with its Taiwan Affairs Office saying that the DPP ‘cannot represent the mainstream public opinion’ on Taiwan… Lin Fei-fan, a former DPP deputy secretary general who is now a senior member of a party think tank, told Reuters he’s ‘fairly worried’ that the new government will have a ‘very tough’ four years especially on China-related issues.”

January 17 – Wall Street Journal (Joyu Wang): “More than a decade ago, some residents of this southern Taiwanese city got a lesson in the character of the man who is now set to be Taiwan’s next president. Lai Ching-te, then Tainan’s mayor, wanted to move a section of railway underground. Residents whose homes would have to be demolished blocked bulldozers with their bodies and accused him of selling them out to property developers. Political opponents called him a dictator. Lai was undeterred, telling city officials the project was crucial for the city’s future. ‘If he believes something is right, he’s all in,’ said Hsiao Po-jen, one of Lai’s cabinet officials at the time. Even that means he has to ‘bear heavy responsibility and endure humiliation.’ Lai’s resolve—or stubbornness, as his critics call it—has taken on outsize significance since the 64-year-old emerged victorious from Taiwan’s unpredictable three-way presidential election…”

January 13 – Bloomberg (Cindy Wang): “Taiwan blasted China’s claims that the island’s election was an internal affair for President Xi Jinping’s government as ridiculous, after Beijing criticized the democratic vote. ‘China issued one erroneous comment after another last night,’ Taiwan’s Ministry of Foreign Affairs said… ‘The Taiwanese people are determined to uphold democratic values.’ Beijing’s comments undermining Taiwan’s sovereignty were ‘wild fallacies’ not in line with the international understanding of the current situation across the strait, Taiwan’s ministry added.”

January 14 – Financial Times (Kathrin Hille): “A high-level US delegation of former top officials will arrive in Taipei later on Sunday, putting to the test China’s restraint in its response to its democratic neighbour’s presidential election. Taiwan on Saturday elected Lai Ching-te president, giving his Democratic Progressive party an unprecedented third term in office. China has denounced Lai as a dangerous separatist because he has a record of association with the wing of the DPP which favours formalising Taiwan’s de facto independence.”

January 13 – Reuters (Eduardo Baptista): “The Chinese embassy in Japan said… that it ‘resolutely opposed’ Japanese Foreign Minister Yoko Kamikawa’s statement congratulating Taiwan’s new president-elect Lai Ching-te. In a statement published on the Japanese foreign ministry’s website…, after the results of the Taiwan presidential election were announced, Kamikawa congratulated Lai on his victory, calling the self-ruled island claimed by Beijing ‘an extremely crucial partner and an important friend.’”

January 16 – Reuters (Mikhail Flores, Andrew Hayley and Ben Blanchard): “China summoned the ambassador from the Philippines… and warned the country ‘not to play with fire’ after President Ferdinand Marcos Jr congratulated Taiwan’s president-elect Lai Ching-te on his election victory. China was ‘strongly dissatisfied with and resolutely opposes these remarks,’ its foreign ministry spokesperson said, referring to Marcos congratulating Lai on Monday for winning Taiwan’s election and referring to him as its next president.”

Ukraine War Watch:

January 18 – Reuters (Tom Balmforth and Yuliia Dysa): “Ukraine hit targets in Russia’s St Petersburg overnight using a domestic-produced drone that flew 775 miles, a Ukrainian government minister was quoted as saying by Interfax-Ukraine news agency… A Ukrainian military source told Reuters earlier that an oil terminal in Russia’s second city, located some 530 miles from the nearest section of the Ukrainian border, was targeted as part of a ‘new stage of work in this region’.”

Market Instability Watch:

January 15 – Reuters (Davide Barbuscia): “Cracks are forming in the market’s bullish consensus for bonds, as resurfacing fiscal concerns duel with expectations that cooling inflation will push the Federal Reserve to cut interest rates in coming months. Bullish investors believe the explosive rally bonds experienced in late 2023 is likely to continue into this year, if the Fed loosens monetary policy as expected. Futures tied to the Fed’s main policy rate on Friday showed investors pricing in more than 150 bps of cuts – twice the amount policymakers projected last month… Not so fast, say the bears. While expectations for Fed easing may be driving bond prices now, some believe U.S. Treasury issuance, expected to nearly double to $2 trillion in 2024, could be a counterweight. Yields – which move inversely to bond prices – would have to rise from current levels to entice demand for the flood of new debt, they say.”

January 17 – Reuters (Urvi Dugar): “The International Monetary Fund is watching for potential market liquidity risks as countries refinance debt issued during the pandemic, its first Deputy Managing Director Gita Gopinath told Bloomberg… ‘Debt is at extremely high levels,’ she said. ‘What worries me on top of that is that we have projected fiscal deficits that are going to be higher than they were pre-pandemic.’ ‘Many countries borrowed a lot during the pandemic. That was short term in nature, and that’s coming due, so I think liquidity risks are something we should pay attention to’, Gopinath said.”

January 16 – Bloomberg (Farah Elbahrawy): “Optimism over Federal Reserve interest rate cuts has spurred investors to up their exposure to US stocks to the highest level in more than two years, according to Bank of America Corp.’s latest fund manager survey. There is ‘record optimism on rate cuts’ and 79% of survey respondents expect the global economy to experience either a soft or no landing in 2024, BofA’s team led by Michael Hartnett wrote in a note. Most respondents see stocks as the best way to play the Fed rate cutting cycle, the analysts said.”

January 19 – Reuters (Gaurav Dogra): “Global equity funds witnessed hefty outflows in the week up to Jan. 17 as investors trimmed positions after central bankers in the U.S. and Europe pushed back against market expectations of an early interest rate cut. Investors pulled a net $8.68 billion out of global equity funds during the week, logging the third straight week of outflows, data from LSEG showed.”

January 19 – Wall Street Journal (Sam Goldfarb): “Companies with low credit ratings are rushing to slash their borrowing costs even before the Federal Reserve makes a single interest-rate cut. As of Thursday morning, companies such as SeaWorld Entertainment and Dave & Buster’s had asked investors to cut the interest rates on some $62 billion of sub-investment grade loans in January—already the largest monthly total in three years, according to PitchBook LCD… Prices of so-called leveraged loans, which are often used to fund private-equity buyouts, have climbed especially high, in part because a slowdown in those deals has led to lack of new loans entering the market.”

Global Bond Watch:

January 19 – Bloomberg (Constantine Courcoulas and James Hirai): “UK bonds extended the biggest slide across major markets this year after an unexpected surge in inflation prompted investors to rethink of how much the Bank of England can cut interest rates. The Bloomberg Sterling Aggregate Bond Index is down over 3% this month, more than any other sovereign market and the worst start to the year on record for the gauge. The rout comes as swap traders abandoned bets on a full quarter-point of cuts earlier this week after the report on UK consumer prices.”

Bubble and Mania Watch:

January 18 – Reuters (Suzanne McGee): “A new batch of U.S. bitcoin exchange-traded funds (ETFs) has attracted strong investor interest, though it is unclear if they will be able to maintain the pace of inflows in coming weeks. Investors have poured $1.9 billion into nine new exchange-traded funds tracking the spot price of bitcoin in their first three days of trading, data from issuers and analysts showed, with fund giants BlackRock, opens new tab and Fidelity pulling in the lion’s share of the flows.”

January 18 – Financial Times (Will Schmitt): “Passively managed US mutual funds and exchange traded funds have for the first time amassed more money than their actively managed counterparts, thanks in large part to years of strong inflows into the increasingly popular ETF wrapper. At the end of December, passive US mutual funds and ETFs held about $13.3tn in assets while active ETFs and mutual funds had just over $13.2tn… On net, active funds shed about $450bn last year. Passive funds took in about $529bn.”

January 14 – Wall Street Journal (AnnaMaria Andriotis): “Goldman Sachs has given up on lending to Main Street consumers. Now it’s doubling down on wealthy clients. The Wall Street giant is increasing lending to its private-wealth clients, individuals and families who on average have $60 million with the bank. In its trading department, loans to institutional clients, including hedge funds seeking to borrow for stock purchases, are on track to produce the highest revenue in at least three years. In all, Goldman’s loans and lending commitments outstanding, excluding consumer, totaled $327.5 billion at the end of the third quarter, up about a third from the same time in 2020.”

January 16 – CNBC (Jeff Cox): “Corporate debt defaults soared last year and could be a problem again in 2024 as cash-strapped companies deal with the burden of high interest rates, S&P Global Ratings reported… The number of companies that failed to make required payments on their debt totaled 153 for 2023, up from 85 the year before, an increase of 80%. It was the highest default rate outside of the Covid-related spike in 2020 in seven years. Much of the total came from low-rated companies that had negative cash flows, high debt burdens and weak liquidity, S&P said. From a sector standpoint, consumer-facing companies — media and entertainment in particular — led the defaults.”

January 17 – Wall Street Journal (Peter Grant): “The troubled commercial real estate market is bracing for a record amount of maturing loans, boosting the prospect of a surge in defaults as property owners are forced to refinance at higher rates. In 2023, $541 billion in debt backed by office buildings, hotels, apartments and other types of commercial real estate came due, the highest amount ever for a single year, according to… Trepp. Commercial-debt maturities are expected to continue rising, with more than $2.2 trillion coming due between now and the end of 2027, Trepp said. Most of these loans have so far been repaid or extended. In 2022 and 2023, many owners were able to exercise one- or two-year extensions built into their original loans.”

January 18 – Bloomberg (John Sage): “Palmer Square Capital BDC Inc., a type of private lender known as a business development company, went public on Wednesday, and three other BDCs have filed in January to do the same. Firms are streaming into the market after valuations for BDCs have surged in recent months, bringing the first notable public offerings in the space in about two years. In the queue to go public are funds managed by Blue Owl Capital Inc., Churchill Asset Management and Morgan Stanley. Three of the four are first-time public issuers for BDCs, while Blue Owl has listed them before.”

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

January 17 – Politico (Joshua Posaner): “NATO countries need to be on red alert for war and ‘expect the unexpected,’ the chair of the alliance’s military committee of national chiefs Rob Bauer said… ‘In order to be fully effective, also in the future, we need a warfighting transformation of NATO,’ said Bauer during a meeting of military chiefs in Brussels. ‘For this too, public-private cooperation will be the key.’ Bauer, a Dutch admiral, said allies need to ‘focus on effectiveness’ and ramp up defense readiness with more exercises, industry partnerships and troops on high alert. ‘We need public and private actors to change their mindset from an era in which everything was plannable, foreseeable, controllable, focused on efficiency … to an era in which anything can happen at any time. An era in which we need to expect the unexpected,’ Bauer added.”

January 18 – Reuters (Sabine Siebold and Andrew Gray): “NATO is launching its largest exercise since the Cold War, rehearsing how U.S. troops could reinforce European allies in countries bordering Russia and on the alliance’s eastern flank if a conflict were to flare up with a ‘near-peer’ adversary. Some 90,000 troops are due to join the Steadfast Defender 2024 drills that will run through May, the alliance’s top commander Chris Cavoli said…”

January 17 – Reuters: “Russia is developing its relations with North Korea in all areas, including ‘sensitive’ ones, Kremlin spokesman Dmitry Peskov said… North Korea’s foreign minister lauded comradely ties with Russia on Tuesday and then held rare talks in the Kremlin with President Vladimir Putin, who has been invited by Kim Jong Un to visit the reclusive nuclear-armed country… ‘The Democratic People’s Republic of Korea is our very important partner, and we are focused on the further development of our relations in all areas, including in sensitive areas,’ Peskov told reporters.”

De-globalization and Iron Curtain Watch:

January 15 – New York Times (Ana Swanson and Jim Tankersley): “The Biden administration has begun pumping more than $2 trillion into U.S. factories and infrastructure, investing huge sums to try to strengthen American industry and fight climate change. But the effort is facing a familiar threat: a surge of low-priced products from China. That is drawing the attention of President Biden and his aides, who are considering new protectionist measures to make sure American industry can compete against Beijing. As U.S. factories spin up to produce electric vehicles, semiconductors and solar panels, China is flooding the market with similar goods, often at significantly lower prices than American competitors. A similar influx is also hitting the European market. American executives and officials argue that China’s actions violate global trade rules.”

Inflation Watch:

January 16 – Reuters (Promit Mukherjee and Steve Scherer): “Canada’s annual inflation rate rose as expected in December…, and underlying prices pressures remained, dashing hopes that the central bank would shift into rate-cut mode early this year. Annual inflation rose to 3.4% in December from 3.1% in November…, matching estimates by economists… On a monthly basis, consumer prices matched expectations as well and fell 0.3% from November.”

January 17 – Financial Times (Valentina Romei and Mary McDougall): “UK inflation increased unexpectedly in December for the first time in 10 months, causing a heavy sell-off in gilts and traders to scale back expectations of how soon the Bank of England will start cutting interest rates. Consumer prices rose at an annual rate of 4% in December, up from 3.9% in November… The reading — double the BoE’s inflation target — was driven by increases in alcohol and tobacco prices and exceeded the 3.8% forecast by economists…”

January 18 – Bloomberg: “Chaos in the Red Sea is starting to disrupt shipments of produce from coffee to fruit — and threatening to halt a slowdown in food inflation that brought some relief to strained consumers. Vessels loaded with foodstuffs are among those avoiding Houthi attacks in the key waterway by sailing around Africa, a longer and costlier route. But unlike gas, oil and consumer goods cargoes that have also been affected, lengthier shipping times risk making perishable foods unsellable. That’s spooking the industry. Italian exporters fear kiwi and citrus fruits will spoil on the way, Chinese ginger is getting pricier and some African coffee cargoes were briefly delayed. Grain is being diverted from the Suez Canal and a livestock carrier bound for the Middle East has changed course.”

Biden Administration Watch:

January 18 – Bloomberg (Iain Marlow): “US officials acknowledge that airstrikes against Houthi militants in Yemen won’t deter the group from attacks that have roiled commercial shipping in the Red Sea. Yet that doesn’t mean the military campaign will stop anytime soon. President Joe Biden candidly described the dilemma Thursday when he was asked about the efforts to weaken Houthi capabilities after the Iran-backed group’s series of drone and missile strikes disrupted shipping in in the Bab el-Mandeb Strait, a vital trade waterway. ‘Are they stopping the Houthis? No. Are they going to continue? Yes,’ Biden told reporters…”

January 15 – Wall Street Journal (Chun Han Wong and Charles Hutzler): “Taiwan’s election of the presidential candidate China most distrusts puts at risk a fragile detente between Washington and Beijing, threatening another flare-up between the world’s biggest economic and military powers. Voters on Saturday gave the Democratic Progressive Party four more years in power, this time by choosing as president-elect the current vice president, Lai Ching-te, whom China condemns as an inveterate agitator for Taiwan’s independence—an outcome that Beijing has vowed to prevent, by force if necessary. Though expected, Lai’s win sharpens global attention on this democratically self-ruled island and its outsize significance in the strategic rivalry between the U.S. and China, which has described Taiwan as the most sensitive issue in its relationship with Washington. President Biden showed he is mindful of Beijing’s red lines, answering a reporter’s question… by saying: ‘We do not support independence.’”

Federal Reserve Watch:

January 19 – Bloomberg (Laura Curtis, Catarina Saraiva and Steve Matthews): “Three Federal Reserve officials on Friday emphasized that incoming data will guide their decision on when to cut interest rates, and made clear they haven’t seen enough evidence yet to begin easing. ‘While I think it’s appropriate for us to look forward and ask when would policy adjustments be necessary so we don’t put a stranglehold on the economy, it’s really premature to think that that’s around the corner,’ San Francisco Fed President Mary Daly said… ‘Do I get consistent evidence that inflation is coming down, or do I get any early signs with the labor market starting to falter?’ said Daly… ‘Neither one of those right now is pushing me to think that an adjustment is necessary.’”

January 16 – Bloomberg (Craig Torres): “Federal Reserve Governor Christopher Waller said the US central bank should take a cautious and systematic approach when it begins cutting interest rates, a process that can start this year absent a rebound in inflation. ‘As long as inflation doesn’t rebound and stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year,’ Waller said… ‘When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,’ he added.”

January 14 – Financial Times (Claire Jones): “A top Federal Reserve official has said inflation could ‘see-saw’ if policymakers cut rates too soon, warning that the descent towards the central bank’s 2% goal was likely to slow in the months ahead. After surging to its highest level in decades during the summer of 2022, US inflation fell sharply over the second half of last year, paving the way for rate-setters to consider lowering borrowing costs from their current 23-year high of 5.25 to 5.5%. However, Raphael Bostic, the Atlanta Fed president who will vote on the Federal Open Market Committee’s decisions this year, said he was ‘expecting to see much slower progression of inflation moving forward’.”

January 16 – Reuters (Howard Schneider and Ann Saphir): “The U.S. is ‘within striking distance’ of the Federal Reserve’s 2% inflation goal, but the central bank should not rush to cut its benchmark interest rate until it is clear lower inflation will be sustained, Fed Governor Christopher Waller said… And regardless of when rate cuts begin, Waller said the central bank should proceed ‘methodically and carefully,’ not make the sort of large, fast reductions used when the Fed is trying to bail out the economy from a shock or a pending downturn.”

January 15 – Wall Street Journal (Nick Timiraos): “Though the Federal Reserve stopped raising interest rates last summer, it is quietly tightening monetary policy through another channel: shrinking its $7.7 trillion holdings of bonds and other assets by around $80 billion a month. Now that, too, may change. Fed officials are to start deliberations on slowing, though not ending, that so-called quantitative tightening as soon as their policy meeting this month. It could have important implications for financial markets.”

January 18 – Bloomberg (Carter Johnson and Alexandra Harris): “Banks borrowed a record sum from the Federal Reserve’s Bank Term Funding Program, with demand climbing the most in nine months as they piled into a reliable arbitrage trade just weeks ahead of its scheduled closure. Data from the Fed showed a fresh high of $161.5 billion in borrowing from the BTFP in the week through Wednesday, Jan. 17. That’s a jump of $14.3 billion compared to the previous all-time high of $147 billion reached the week prior, and the biggest weekly increase since April 5. Launched amid last year’s banking crisis, the BTFP allows banks and credit unions to borrow funds for up to one year, pledging US Treasuries and agency debt as collateral valued at par.”

U.S. Bubble Watch:

January 19 – Reuters (Lucia Mutikani): “U.S. consumer sentiment improved in January, hitting the highest level in 2-1/2 years amid growing optimism over the outlook for inflation and household incomes, which bodes well for the economy’s prospects this year. The better-than-expected reading in sentiment reported by the University of Michigan… reflected a brightening of moods across all age and income groups, education and geographical locations as well as political affiliation… ‘The economy is not going backwards, it is going forwards at the start of 2024,’ said Christopher Rupkey, chief economist at FWDBONDS… ‘For the first time, massive interest rate hikes have not put a damper on economic growth.’”

January 18 – CNBC (Jeff Cox): “The labor market continued to show surprising resiliency in the early days of 2024, with initial jobless claims posting an unexpected drop last week. Initial filings for unemployment insurance totaled 187,000 for the week ended Jan. 13, the lowest level since Sept. 24, 2022… The total marked a 16,000 decline from the previous week and came in below the Dow Jones estimate of 208,000. Labor strength has persisted despite attempts by the Federal Reserve to slow the economy, and the jobs market in particular, through a series of interest rate hikes.”

January 17 – CNBC (Jeff Cox): “Holiday shopping turned out even better than expected in December as shoppers picked up the pace to close out a strong 2023… Retail sales increased 0.6% for the month, buoyed by a pickup in clothing and accessory stores as well as online nonstore businesses. The results were better than the 0.4% Dow Jones estimate. Excluding autos, sales rose 0.4%, which also topped the 0.2% estimate… On a year-over-year basis, retail sales ended 2023 up 5.6%… On a yearly basis, food services and drinking places saw the biggest gains, rising 11.1% though sales were flat in December. Both health and personal care and electronics and appliances saw 10.7% increases. Gas stations dropped 6.6%.”

January 17 – Bloomberg (Michael Sasso): “A gauge of US mortgage applications for home purchases rose to an almost six-month high as lower borrowing costs prompted more buyers to step off the sidelines. The index of mortgage applications to buy a home increased 9.2% in the week ended Jan. 12 to 162.2, the highest since July 14, according to the Mortgage Bankers Association. The measure of overall applications, which also includes refinancings, jumped 10.4%.”

January 18 – Reuters (Amina Niasse): “U.S. mortgage rates fell this week to the lowest since May 2023, Freddie Mac reported on Thursday, providing a possible boost to buyer traffic in the housing market. The average fixed-rate 30-year mortgage fell to 6.60% as of Thursday from 6.66% the week prior… ‘This is an encouraging development for the housing market and in particular first-time homebuyers who are sensitive to changes in housing affordability,’ Sam Khater, Freddie Mac’s chief economist, said. ‘However, as purchase demand continues to thaw, it will put more pressure on already depleted inventory for sale.’”

January 19 – CNBC (Diana Olick): “Sales of previously owned homes fell 1% in December compared with November to 3.78 million units on a seasonally adjusted annualized basis, according to the National Association of Realtors. Sales were 6.2% lower than in December 2022, marking the lowest level since August 2010. Full-year sales for 2023 came in at 4.09 million units, the lowest tally since 1995. Regionally, on a month-to-month basis, sales were unchanged in the Northeast and fell 4.3% in the Midwest. Sales were down 2.8% in the South but rebounded 7.8% in the West. On a year-over-year basis, sales were lower in all regions. The count of home closings is based on contracts likely signed in late October and November, when mortgage rates were considerably higher…”

January 16 – Bloomberg (Maxwell Adler): “California is on the verge of a potential borrowing boom as Democratic state lawmakers draft more than $100 billion of municipal-bond proposals to fill funding gaps for several key legislative priorities. The proposals include $15 billion of debt to make the state more resilient to climate change, $14 billion to modernize schools and $10 billion for affordable housing.”

January 16 – Bloomberg (Zach Williams): “New York Gov. Kathy Hochul… unveiled a proposed $233 billion state budget that aims to close a projected $4.3 billion gap without raising taxes on personal income or businesses, according to a draft spending plan…”

January 18 – Reuters (Michael S. Derby): “Lower-income Americans are starting to face nascent signs of financial turbulence now that government support programs tied to the coronavirus pandemic have wound down, but any problems are relatively contained so far. The Federal Reserve Bank of New York said in a report… ‘Financial stress appears to have risen’ for lower-income households, the report said, while noting any rise in trouble compares to very low levels of financial trouble seen before the pandemic. The report noted that even higher-income Americans are facing challenges on mortgages, auto loans and credit cards since 2021, with all measures at or just above where they were before the pandemic.”

January 18 – Reuters (Mike Stone): “The replacement for the ground-based U.S. nuclear arsenal anchored by the Minuteman III has officially busted through its $95.8 billion budget due to the COVID-19 pandemic and inflation, the Air Force said… The Air Force is notifying Congress that the program, being designed and managed by Northrop Grumman Corp, opens new tab, is now at least 37% over a pre-pandemic cost estimate finalized in September 2020, Andrew Hunter, assistant secretary of the Air Force for Acquisition, Technology and Logistics, told Reuters…”

Fixed Income Watch:

January 18 – Reuters (Matt Tracy): “Defaults by U.S. companies with low junk credit ratings are likely to rise further in the first quarter of 2024, according to a Thursday report by credit rating agency Moody’s… Defaults among the lowest-rated U.S. companies will peak at 5.8% this quarter from 5.3% in November before leveling out to 4.1% by the end of 2024, Moody’s analysts said. Moody’s counts 238 corporate borrowers on its ‘B3 Negative and Lower’ list in the fourth quarter of 2023, compared to 218 a year ago. Moody’s believes these companies have a higher probability of defaulting on debt.”

January 18 – Bloomberg (Allison Nicole Smith): “Bank of America Corp., U.S. Bancorp and Citizens Financial Group Inc. are the latest to barrel into the US investment-grade debt market, selling nearly $10 billion of bonds Thursday. The trio of banks added to a roughly $50 billion stampede of debt issuance this week as regional firms join money-center banks in the race to tap the market after reporting earnings. With nearly two weeks left to go, this month is already the second-busiest January on record.”

January 16 – Bloomberg (Emily Graffeo): “The banks that sell US corporate bonds often stick index funds with worse-priced securities, according to a recent academic study. When exchange-traded index funds account for a higher percentage of the buyers of a new corporate bond issue, the debt tends to perform worse in the initial days and weeks of trading, according to the study by Caitlin Dannhauser, an associate professor of finance at Villanova University, and Michele Dathan, an economist at the Federal Reserve Board of Governors.”

China Watch:

January 17 – Bloomberg (Liangping Gao and Ryan Woo): “Chinese Premier Li Qiang gave his clearest signal yet that Beijing won’t resort to huge stimulus to revive growth amid the worst bout of deflation in decades. Another batch of troubling data is testing the patience of investors who worry Beijing is behind the curve. Speaking to leaders at the World Economic Forum this week, Li trumpeted his nation’s ability to hit its roughly 5% growth target last year without flooding the economy with ‘massive stimulus.’”

January 19 – Reuters (Samuel Shen, Casey Hall and Ellen Zhang): “For Chinese businessman Han Changming, disruptions to Red Sea freight are threatening the survival of his trading company in the eastern province of Fujian. Han, who exports Chinese-made cars to Africa and imports off-road vehicles from Europe, told Reuters the cost of shipping a container to Europe had surged to roughly $7,000 from $3,000 in December… ‘The disruptions have wiped out our already thin profits,’ said Han, adding that higher shipping-insurance premiums are also taking a toll on Fuzhou Han Changming International Trade Co Ltd, the company he founded in 2016.”

January 19 – Reuters: “China has instructed heavily indebted local governments to delay or halt some state-funded infrastructure projects, three people with knowledge of the situation said, as Beijing struggles to contain debt risks even as it tries to stimulate the economy. Increasing its efforts to manage $13 trillion in municipal debt, the State Council in recent weeks issued a directive to local governments and state banks to delay or halt construction on projects with less than half the planned investment completed in 12 regions across the country, the sources said.”

January 17 – Reuters (Kevin Yao and Ellen Zhang): “China’s economy grew 5.2% in 2023, slightly more than the official target, but the recovery was far shakier than many analysts and investors expected, with a deepening property crisis, mounting deflationary risks and tepid demand casting a pall over the outlook for this year. Expectations that the world’s second-largest economy would stage a strong post-COVID bounce quickly fizzled as the year progressed, with weak consumer and business confidence, mounting local government debts and slowing global growth sharply weighing on jobs, activity and investment.”

January 19 – Bloomberg (Dorothy Ma and Alice Huang): “China’s largest bad-debt managers suffered Moody’… rating downgrades that cut China Huarong Asset Management Co. to junk status, over concerns about the property crisis. Huarong AMC’s long-term rating was reduced one notch to Ba1. Three other peers – China Great Wall Asset Management Co., China Orient Asset Management Co., China Cinda Asset Management Co. – also had their ratings cut Friday by one to two notches. Moody’s action is the latest alarm sounded over the property sector ills’ spillover across the economy, despite Beijing’s pledges for support policies.”

January 17 – Reuters (Liangping Gao and Ryan Woo): “China’s troubled property market ended last year with the worst declines in new home prices in nearly nine years, despite government efforts to prop up the sector that was once a key driver of the world’s second largest economy. New home prices in December logged their steepest drop since February 2015, while property sales measured by floor area fell 23% in December from a year earlier, data from the National Bureau of Statistics (NBS) showed… At the same time, property investment by developers in December fell year-on-year at the fastest clip since at least 2000… Overall for 2023, property investment dropped 9.6%, roughly the same as the slide in 2022.”

January 17 – Bloomberg: “China home prices fell the most in almost nine years in December, underscoring why officials are extending support to the biggest cities to end the property crisis. New-home prices in 70 cities… dropped 0.45% last month from November, when they declined 0.37%, National Bureau of Statistics figures showed… The decrease was the steepest since February 2015. The second-hand market didn’t fare any better, with prices sliding 0.79%, the same pace as the previous month.”

January 18 – Bloomberg (Jinshan Hong): “Country Garden’s project Allegro in Kowloon City is pushing out new homes with as much as 30% discount, Hong Kong Economic Times reports.”

January 18 – Bloomberg (Tom Hancock): “China’s deflation was driven by falling prices in its manufacturing sector last year, fresh data showed on Thursday, adding to the risk of trade tensions with the US and Europe amid a major ramp-up in Chinese industrial capacity. China’s GDP deflator, the widest measure of prices across the economy, was negative 0.6% in 2023, the steepest annual decline since the late 1990s…”

January 18 – Bloomberg: “A meltdown in Chinese shares is wreaking havoc on the country’s asset management sector, pushing mutual fund closures to a five-year high in another sign of waning investor confidence. About 240 local mutual funds were liquidated last year, according to Bloomberg-compiled data dating back to 2014. That’s the most since 2018, when stricter asset management rules triggered a major industry shakeup.”

January 15 – Financial Times (Hudson Lockett and Joe Leahy): “Chinese authorities have in recent days told some institutional investors not to sell stocks, as regulators face renewed pressure to stabilise share prices following the steep decline in the first weeks of the new year. Since October, market regulators have been providing private instructions — known as ‘window guidance’ — to some investors, which prevent them from being net sellers of equities on certain days.”

Central Banker Watch:

January 17 – Financial Times (Sam Fleming and Martin Arnold): “A top IMF official has warned central banks need to move cautiously on cutting interest rates this year, as market expectations of looser monetary policy could fuel another flare-up of inflation. Gita Gopinath, the first deputy managing director of the IMF, said inflation is set to decline less sharply than it did last year because of tight labour markets and high services inflation in the US, euro area and elsewhere. This points to a ‘bumpy’ path towards lower inflation, she said, suggesting official rates should not be lowered until the second half of the year. ‘The job is not done,’ Gopinath told the Financial Times… ‘[Central banks] must move cautiously. Once you cut rates, it solidifies expectations of further rate cuts and you could end up with much larger loosening — which can be counter-productive.’”

January 19 – Wall Street Journal (Martin Arnold): “European Central Bank policymakers were concerned that investor bets on rate cuts as early as March had loosened financial conditions so much that they ‘could derail the disinflationary process’, minutes from their last meeting show. Members of the ECB’s governing council decided to push back against market expectations of early interest rate cuts and agreed that June was likely to be the earliest they could know if inflation had been tamed… ‘Against this background, it was widely regarded as important not to accommodate market expectations in the post-meeting communication,’ the ECB said. ‘It was stressed that there was no room for complacency.’”

January 15 – Bloomberg (Alessandro Speciale and Jana Randow): “Threats stemming from lingering inflation will prevent the European Central Bank from lowering interest rates this year — even as a recession can no longer be ruled out, according to Governing Council member Robert Holzmann… ‘The geopolitical threat has increased because what we saw until now by the Houthis — I think it’s not the end, it might be the overture to something much more broad based, which will impact the Suez Canal and increase the prices there,’ Holzmann said… ‘We should not bank on the rate cut at all for 2024.’”

Global Bubble Watch:

January 15 – Financial Times (Sandrine Dixson-Decleve): “This year’s World Economic Forum at Davos is focused on the theme of ‘rebuilding trust’. The topic could not be more timely, with public trust in governments still low in many countries. Yet if those gathered in Switzerland are serious about tackling declining trust, they must also raise tough questions about growing inequality. We are living in a time of phenomenal extremes. Between 2019 and 2020, global inequality grew more rapidly than at any time since the second world war. When it comes to income inequality, the most compelling example is the exorbitant pay divide between chief executives and workers. In 2022, CEOs in the US were paid 344 times as much as a typical worker, compared with 21 times back in 1965. Equally concerning is the so-called wealth gap, with the fortunes of billionaires having grown by 109% over the past decade. According to Oxfam, during the pandemic, a new billionaire was created every 30 hours.”

January 17 – Bloomberg (Wei Zhou): “China is leading a broader slump in Asia in dollar bond issuance, hit by a combination of elevated US interest rates, weaker economic conditions and cheaper local funding. Chinese companies have sold a combined $2.47 billion of US-currency notes so far in 2024, a record low for the same period… It’s a similar picture in ex-Japan Asia, where year-to-date dollar bond offerings total $12.1 billion, the least since 2017.”

January 19 – Bloomberg (Hannah Benjamin-Cook and Sri Taylor): “Global leveraged loan sales are booming as issuers take advantage of strong buyer demand ahead of any cuts to interest rates and election-fueled volatility later this year. Bankers on both sides of the Atlantic are bringing a burst of repricings and a stream of all-new deals to market… Repricings in particular are helping drive overall global leveraged loan supply beyond $54 billion in the fastest start to a year on record, according to data compiled by Bloomberg.”

Europe Watch:

January 18 – Reuters (Francesco Canepa): “Workers in Europe are hoping this year’s pay round will help restore incomes eroded by higher prices, but the expected boost to their purchasing power could hamper the European Central Bank’s efforts to bring inflation back to target. The ECB has singled out wages as the single biggest risk to its 1-1/2 year crusade against inflation. It expects salary growth across the euro zone of 4.6% this year, far more than the 3% pace it considers consistent with inflation at its 2% target. Higher wage settlements would be a risk to interest-rate cuts that financial markets are betting will start in April.”

Japan Watch:

January 18 – Reuters (Leika Kihara): “The Bank of Japan is likely to maintain its ultra-loose monetary settings next week, putting the focus on any hints Governor Kazuo Ueda drops about when the central bank will boost short-term interest rates out of negative territory. As many policymakers want to spend a few more months determining whether wage increases will broaden enough to keep inflation sustainably at the BOJ’s 2% target, markets now expect a rate hike in March or April at the earliest. While the BOJ likely has its eyes set on ending negative rates, four people familiar with the central bank’s thinking said there were plenty of benefits to holding fire at least until its April 25-26 meeting.”

January 15 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan is likely to be encouraged by stronger annual wage negotiation results that will pave the way for the end of its negative interest rate by this spring, according to a former BOJ executive director in charge of monetary policy. ‘There’s a good chance the outcome of spring wage talks will be higher than last year by reaching 4%,’ Eiji Maeda, the former director, said… That’s because the positive price mechanism the central bank has been seeking to confirm is already in operation, he added. ‘A virtuous cycle between wages and inflation is already in place.’”

January 19 – Bloomberg (Mia Glass and Toru Fujioka): “Japan’s latest inflation report gives the Bank of Japan another reason to wait beyond next week’s meeting before ending the negative rate policy, while also adding to the case for a hike in coming months. Growth in consumer prices excluding fresh food slowed to 2.3% in December from a year earlier, matching consensus…”

EM Watch:

January 16 – Bloomberg (Martha Beck): “Emerging-markets assets fell on Tuesday, adding to the worst start to a year since 2016, amid doubts about whether the Federal Reserve will cut interest rates as deeply as markets have been expecting… MSCI Inc.’s index for developing-nation stocks dropped 1.7%, the most since Aug. 2, bringing its fall this year to 4.4%. Its counterpart for currencies slid 0.6%.”

Social, Political, Environmental, Cybersecurity Instability Watch:

January 16 – Reuters (Rod Nickel and Tom Polansek): “Crop-killing weeds such as kochia are advancing across the U.S. northern plains and Midwest, in the latest sign that weeds are developing resistance to chemicals faster than companies… can develop new ones to fight them. In many cases weeds are developing resistance against multiple herbicides, scientists said. Reuters interviewed two dozen farmers, scientists, weed specialists and company executives and reviewed eight academic papers published since 2021 which described how kochia, waterhemp, giant ragweed and other weeds are squeezing out crops in North Dakota, Iowa, Wisconsin and Minnesota as chemicals lose their effectiveness.”

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