January 20, 2023: Inflation Complacency

January 20, 2023: Inflation Complacency
Doug Noland Posted on January 21, 2023

Some headlines from the week: “Fed Officials Signal Slower Pace of Rate Hikes.” “Top Fed Officials Foreshadow Further Slowdown in Rate Increases.” “Fed’s Brainard Lends Support to Slowing Pace of Interest-Rate Rises.” “Fed’s Waller Backs Slowing the Next Rate Hike to 25 Basis Points.” “Fed’s George Says a Soft Landing Still Possible for US Economy.” “Fed’s Brainard: Taming Inflation May Not Cause Big Job Cuts.” “Fed Governor Waller Says Looking Forward, Rates Are Restrictive, Pretty Close to Sufficiently Restrictive.” “US Can Slow Inflation Without Unemployment Spike, Fed Study Says.” “Boston Fed’s Susan Collins Says Measured Approach to Rate Rises Makes Sense.”

Dow Jones quoted Boston Fed president Susan Collins: “Now that rates are in restrictive territory and we may, based on current indicators, be nearing the peak, I believe it is appropriate to have shifted from the initial expeditious pace of tightening to a slower pace.”

Are rates sufficiently “in restrictive territory” considering the past year’s inflationary surge? December’s 3.5% unemployment rate was the lowest since 1969. Clearly, the Fed’s tightening cycle has yet to make crucial headway in cooling hot labor markets. And as 2023 gets underway, markets are behaving as if monetary policy is invitingly unrestrictive.

January 19 – Bloomberg (Finbarr Flynn, Garfield Reynolds, Ronan Martin and Josyana Joshua): “The best start to a year for bond returns is helping fuel an unprecedented debt-sale bonanza by governments and companies around the world of more than half a trillion dollars. From European banks to Asian corporates and developing-nation sovereigns, virtually every corner of the new issue market is booming, thanks in part to a rally that’s seen global bonds of all stripes surge 4.1% to start the year, the best performance in data stretching back to 1999… Excess demand for offerings, falling new issue concessions and the largest inflows into high-grade US credit in more than 17 months has helped make this year’s January borrowing so far the busiest ever. Global issuance of investment- and speculative-grade government and corporate bonds across currencies reached $586 billion through Jan. 18, the biggest tally on record for the period…”

Despite all the talk, previous and ongoing, this Federal Reserve is soft on inflation. Not as eager as Wall Street to declare mission accomplished, Fed officials are nonetheless signaling that their work is near completion.

It’s worth recalling Fed thinking from one year ago this week (Barron’s Randall W. Forsyth): “An array of Fed speakers basically confirmed widespread market expectations of three one-quarter-percentage-point increases in the federal-funds target from the current 0% to 0.25% range this year. By week’s end, the fed-funds futures market was putting about a 60% probability of a fourth hike by December…”

The Fed began 2022 carelessly complacent. And after a flurry of second-half 75 bps rate hikes – and a 4.25% Fed funds rate – easygoing Fed officials believe it’s nearing time to relax. There’s a sense of satisfaction for executing an aggressive tightening cycle. It may have gotten off to a slow start, but there is now almost universal agreement that they adeptly and successfully played catch-up. No harm, no foul.

But there have been major and ongoing executional issues that can’t simply be swept under the rug. Fed funds were not taken above 2% until late July, a delay that ensured a year of exceptionally strong lending and Credit growth. This granted inflation dynamics crucial months to become more deeply rooted.

A year ago, the Fed’s published longer-run “neutral rate” was 2.5%. Neutral Rate: “The neutral rate is the theoretical federal funds rate at which the stance of Federal Reserve monetary policy is neither accommodative nor restrictive. It is the short-term real interest rate consistent with the economy maintaining full employment with associated price stability.”

What a distraction. How much brainpower did the Federal Reserve and economics community waste debating “r-star” – the theoretical “neutral rate”. Last year it was supposed to be 2.5%, and now this year it’s clearly much higher. Fed officials should today be especially humble and prudent. They whiffed on “transitory,” and the “r-star” neutral rate framework has proved worthless.

As a reminder, year-over-year CPI was 9.1% in June, and was still 8.2% not that long ago in September. CPI has been at least 5% for 20 straight months. Powell’s comments from November: “There’s no sense that inflation is coming down…” “Rates have to go higher and stay higher for longer.” “Here in the United States, we have a strong economy…”

It’s too soon to signal waning hawkish resolve. The FOMC during their February 1st meeting may decide a 25 bps rate hike is appropriate. But why would they want to signal a small rate increase in advance? The Fed might be approaching a level it believes is an appropriate “terminal rate.” Yet central banker prudence and inflation-fighting resolve should err on the side of not conveying a rapidly concluding tightening cycle. Especially with the markets demonstrating speculative impulses and loose conditions, Fed officials should be prepared to douse fires rather than fan them. At least “lean against the wind.”

The Philadelphia Semiconductor (SOX) index enjoys a y-t-d (14 sessions) gain of 10.37%, the NYSE TMT Index 8.76%, the Philadelphia Oil Services Index 8.60%, the Nasdaq Transports 8.50%, and the Nasdaq Computer Index 6.97%. The broader market is outperforming, with the small cap Russell 2000 up 6.02% and the S&P 400 Mid-Cap Index gaining 5.27%. The “average stock” Value Line Arithmetic Index has jumped 6.65% to begin the year. The Nasdaq100 has advanced 6.21%, while the S&P500 has gained 3.47%. Indicative of the speculative nature of trading to begin 2023, the Goldman Sachs Most Short Index has sprinted to a 13.9% three-week gain.

“Risk on” is not limited to U.S. equities. The iShares Investment-Grade Bond ETF (LQD) has already returned 4.86%, while the iShares High Yield Bond ETF (HYG) has returned 3.45%. The iShares Treasury Bond ETF (TLT) has returned 6.67%.

Major equities indexes have y-t-d gains of at least 8% in France, Germany, Spain, Italy, Sweden, Ireland, and Netherlands. Hong’s Kong’s Hang Seng index is up 11.44%, China’s CSI 300 8.00%, the South Korean KOSPI 7.10%, and Taiwan’s TAIEX 5.62%. Major indices are up 6.81% in New Zealand, 5.87% in Australia, 5.77% in Canada, and 11.3% in Mexico.

And with all the talk of peak inflation, it’s curious that gold has gained $102, or 5.6%, to begin the new year. Copper is up 11.6%, Aluminum 8.8%, Zinc 16.3%, and Tin 16.1%. Gasoline futures surged 4.4% this week to a two-month high.

January 19 – Bloomberg (Philip Aldrick): “Going soft on inflation will plunge economies back into the recessionary depths of the 1970s and have ‘adverse effect on working people everywhere,’ former US Treasury Secretary Larry Summers warned. The remark is a response to suggestions from economists including Olivier Blanchard, a former International Monetary Fund chief economist, who have suggested lifting inflation targets from 2% to 3% to avoid recessions. ‘To suppose that some kind of relenting on an inflation target will be a salvation would be a costly error, it would ultimately have adverse effect as it did in a spectacular way during the 1970s,’ Summers… told a panel at the World Economic Forum’s annual meeting…”

“Going soft on inflation” actually gained momentum with the Bank of England’s late-September emergency operations. I understand why the BOE believed they had to restart QE to thwart bond market meltdown. And I further appreciate that they made the program temporary, in hopes of guarding against moral hazard. But the whole world was watching – and they saw exactly what they were hoping to see. Following the bond scare and urgent BOE response, markets were assured that central bankers might talk tough on inflation, but they would not risk tightening to the point of sparking crisis.

Financial conditions almost immediately began to loosen globally, a loosening that has gathered important momentum early in 2023. Loose conditions created a lot of dry tinder for a powerful cross-asset short squeeze that has only engendered looser conditions.

It was important that central bankers pushed back against the view that QE liquidity backstops would be restarted as necessary to quash incipient market instability. Powell was hawkish during his November 1st post-meeting press conference. But Fed hawkish resolve soon dissipated. Now, messaging has become so frayed that markets don’t take hawkish resolve seriously. The paramount message that the Fed would push back against looser market conditions is MIA.

I cherry-picked headlines for the opening paragraph. There were some hawkish comments this week from key officials. Brainard: “Inflation remains high, and policy will need to be sufficiently restrictive for some time…” Williams: “With inflation still high and indications of continued supply-demand imbalances, it is clear that monetary policy still has more work to do…” And Bullard stated his desire to get rates above 5% “as quickly as we can.” But when conditions are loose and markets chipper, dovish comments resonate, while hawkish ones are easily dismissed.

Markets are pricing in a (near) “terminal rate” 4.89% for the FOMC’s May 3rd meeting. Rates are then expected to reverse lower to 4.42% at the December 13th meeting. Markets are not aligned with the Fed.

Early-2023 market policy rate expectations shouldn’t be as far off the mark as last year. But could they be off by over 100 bps – with a year-end Fed funds rate of 5.5% or higher? I see a number of developments that can work to push policy rates higher-than-expected. The Bank of England’s confirmation of central bank liquidity backstops and resulting loosening was surely good for at least 100 bps of additional tightening. That the Fed didn’t push back against loosening financial conditions during Q4 will require higher rates. And the big short squeeze and speculative start to 2023 throughout global markets is definitely positive for the type of ongoing Credit growth that underpins inflation.

If highly speculative markets go on a run here, the Fed may have significantly more work to do. And if Beijing is as desperate and determined as I suspect, there is potential for an astonishing year of Chinese stimulus and Credit growth. There are clearly reasonable odds for surprises in both inflation and Fed hikes. But market focus is elsewhere. I explained last week the thesis that rates markets are pricing in probabilities of an accident.

January 18 – Reuters (Naomi Rovnick, Yoruk Bahceli and Dhara Ranasinghe): “A seismic policy shift by Japan’s central bank is still a matter of when not if, say investors now hunkering down for fresh havoc in bond markets and wild swings in currencies. The Bank of Japan on Wednesday maintained ultra-low interest rates, including a bond yield cap it was struggling to defend, defying market expectations it would phase out its massive stimulus programme in the wake of rising inflationary pressure. Analysts say a policy change is inevitable at some point given that Japanese inflation is at 41-year highs and the cost of keeping borrowing costs down rises. ‘Although the timing is uncertain, we are not changing our view, this is something that has to happen at some point,’ said Cosimo Marasciulo, head of fixed income absolute return at Amundi, Europe’s largest fund manager.”

January 19 – Bloomberg (Ruth Carson): “Global funds will pressure the Bank of Japan until it capitulates and tightens policy, after the central bank disappointed bond bears by refusing to lift its ceiling on sovereign yields. UBS Asset Management and Schroders Plc are sticking with bets Japanese government bond yields will rise on the expectation the BOJ will eventually stop capping the 10-year benchmark at 0.5%… Torica Capital Pty also expects the central bank to fall in line and shift toward the global trend of raising rates. ‘We see no reason to square up shorts,’ said Tom Nash, a money manager at UBS… ‘The yield-curve-control policy is not consistent with the current economic and political landscape and will need to be dismantled.’”

It was fascinating to watch global market reaction to Wednesday’s (Tuesday night in the U.S.) Bank of Japan policy (non)announcement. To see such volatility in JGB yields, the yen, global currencies, Treasuries and global bonds was evidence of the major role loose Japanese finance has played in global markets. Kuroda needed to begin normalization – to release some steam – prior to his term concluding at the end of March. The odds of a major accident are rising.

While ahead of the BOJ, ECB policy normalization is in an early phase. Signals out of the ECB this week were alarmingly inconsistent. Tuesday (Bloomberg): “European Central Bank policymakers are starting to consider a slower pace of interest-rate hikes than President Christine Lagarde indicated in December, according to officials with knowledge…” Thursday (Bloomberg): “European Central Bank Governing Council member Klaas Knot said there’ll still be more than one half-point increase in interest rates…” And Friday (WSJ quoting Lagarde): “China’s abandonment of its zero-Covid policy is good news for global economic growth… ‘That is positive for the rest of the world, but there will be more inflationary pressure.’” European bonds were hit Friday.

And when contemplating Treasury market pricing for an accident, China is a major 2023 risk. Systemic risk is rising exponentially in China. Credit continues to expand swiftly, while the quality of loans and finance deteriorates. Massive stimulus raises the odds of currency instability. Something is going to break.

There is also the “Fed raises until something breaks” thesis that likely resonates within segments of the Treasury market. With conditions loose and markets strong, it’s only natural for louder Wall Street warnings of Fed “over-tightening”. These are highly speculative markets, and the more speculative they become, the more difficult it will be for the Fed to tighten conditions. I today equate such loose conditions with ongoing strong Credit growth and persistent inflation.

All the talk of Goldilocks and soft-landings is wishful thinking. It would be a huge mistake for the Fed to relax with conditions this loose. It’s reasonable to assume that inflation has peaked – for this short-term cycle. But inflationary forces have been unleashed. There are now powerful inflationary dynamics lurking throughout the system – at home and globally. Companies have grown comfortable raising prices. Labor has gained confidence to demand more compensation. Global commodities supplies are tight.

And, importantly, policymakers must anticipate ongoing supply shocks. Global fragmentation will gain further momentum, with negative ramifications for pricing pressures. We should assume climate change will create significant risks to foods supplies globally, while boosting myriad inflationary risks. And there has to be planning for inflationary consequences related to geopolitical developments. An increasingly hostile world increases the likelihood of supply disruptions, certainly including within energy markets. If the Fed and global central bankers relax with inflation in the five to six percent range, it will likely spike back toward double-digits during the next inflationary shock. This is no time for Inflation Complacency.

For the Week:

The S&P500 declined 0.7% (up 3.5% y-t-d), and the Dow dropped 2.7% (up 0.7%). The Utilities fell 3.0% (down 2.0%). The Banks slipped 0.5% (up 6.2%), and the Broker/Dealers declined 0.9% (up 6.2%). The Transports were little changed (up 7.2%). The S&P 400 Midcaps lost 0.9% (up 5.3%), and the small cap Russell 2000 fell 1.0% (up 6.0%). The Nasdaq100 added 0.7% (up 6.2%). The Semiconductors dipped 0.2% (up 10.4%). The Biotechs were about unchanged (up 4.7%). While bullion gained $6, the HUI gold equities index declined 0.5% (up 12.7%).

Three-month Treasury bill rates ended the week at 4.515%. Two-year government yields declined six bps this week to 4.17% (down 26bps y-t-d). Five-year T-note yields fell five bps to 3.56% (down 44bps). Ten-year Treasury yields dipped two bps to 3.48% (down 40bps). Long bond yields gained four bps to 3.66% (down 31bps). Benchmark Fannie Mae MBS yields increased three bps to 4.88% (down 51bps).

Greek 10-year yields increased four bps to 4.14% (down 42bps y-o-y). Italian yields dipped two bps to 3.99% (down 71bps). Spain’s 10-year yields declined three bps to 3.14% (down 38bps). German bund yields added a basis point to 2.18% (down 27bps). French yields slipped a basis point to 2.63% (down 36bps). The French to German 10-year bond spread narrowed about two to 45 bps. U.K. 10-year gilt yields were up one basis points to 3.38% (down 29bps). U.K.’s FTSE equities index declined 0.9% (up 4.3% y-t-d).

Japan’s Nikkei Equities Index gained 1.7% (up 1.8% y-t-d). Japanese 10-year “JGB” yields dropped 13 bps to 0.39% (down 4bps y-o-y). France’s CAC40 slipped 0.4% (up 8.1%). The German DAX equities index declined 0.4% (up 8.0%). Spain’s IBEX 35 equities index added 0.4% (up 8.4%). Italy’s FTSE MIB index was little changed (up 8.7%). EM equities were mostly higher. Brazil’s Bovespa index gained 1.0% (up 2.1%), and Mexico’s Bolsa index added 0.7% (up 11.3%). South Korea’s Kospi index increased 0.4% (up 7.1%). India’s Sensex equities index gained 0.6% (down 0.4%). China’s Shanghai Exchange Index jumped 2.2% (up 5.7%). Turkey’s Borsa Istanbul National 100 index surged 10.1% (down 0.3%). Russia’s MICEX equities index fell 1.5% (up 0.6%).

Investment-grade bond funds posted inflows of $3.036 billion, and junk bond funds reported positive flows of $230 million (from Lipper).

Federal Reserve Credit declined $4.3bn last week to $8.467 TN. Fed Credit was down $434bn from the June 22nd peak. Over the past 175 weeks, Fed Credit expanded $4.741 TN, or 127%. Fed Credit inflated $5.656 Trillion, or 201%, over the past 532 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $1.0bn last week at $3.331 TN. “Custody holdings” were down $116bn, or 3.4%, y-o-y.

Total money market fund assets dipped $2.1bn to $4.803 TN. Total money funds were up $129bn, or 2.8%, y-o-y.

Total Commercial Paper declined $3.5bn to $1.301 TN. CP was up $257bn, or 24.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates dropped 23 bps to a four-month low 5.95% (up 239bps y-o-y). Fifteen-year rates sank 36 bps to 5.18% (up 239bps). Five-year hybrid ARM rates declined eight bps to 5.41% (up 281bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up nine bps to 6.37% (up 278bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 0.2% to 102.01 (down 1.4% y-t-d). For the week on the upside, the British pound increased 1.4%, the New Zealand dollar 1.2%, the Swedish krona 1.0%, the Swiss franc 0.7%, the South Korean won 0.5%, the Norwegian krone 0.3%, the euro 0.2%, and the Canadian dollar 0.1%. On the downside, the Brazilian real declined 2.0%, the South African rand 1.8%, the Japanese yen 1.3%, the Mexican peso 0.6% and the Australian dollar 0.1%.The Chinese (onshore) renminbi declined 1.23% versus the dollar (up 1.68% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index increased 0.5% (down 0.6% y-t-d). Spot Gold added 0.3% to $1,926 (up 5.6%). Silver fell 1.4% to $23.93 (unchanged). WTI crude rose $1.78 to $81.64 (up 1.7%). Gasoline jumped 4.4% (up 8%), while Natural Gas dropped another 7.2% to $3.17 (down 29%). Copper gained 0.8% (up 12%). Wheat slipped 0.3% (down 6%), while Corn increased 0.2% (unchanged). Bitcoin rallied $2,800, or 14.2%, this week to $22,630 (up 36.6%).

Market Instability Watch:

January 16 – Bloomberg (Masaki Kondo): “An arbitrage trade that rattled Japan’s bond market last year looks to be back. The spread between the prices on Japanese 10-year debt and similar-maturity futures has swelled in recent weeks, providing room for so-called basis trades that try to take advantage of the difference. The gap widened as the Bank of Japan bought bonds to support prices in an effort stave off growing wagers that its yield-curve-control policy will end as soon as its meeting this week.”

January 19 – Financial Times (Kate Duguid and Adam Samson): “Trillions of dollars each day are gushing into a Federal Reserve facility designed to mop up excess cash in the financial system, showing how many ultra-safe investment funds are avoiding volatile US government debt markets even as interest rates rise. Investors this month are stashing an average $2.2tn a day in the Fed’s reverse repo facility… That is down from a record $2.6tn on the last trading day of 2022, but above last year’s average of $2tn. Before March 2021, usage was typically just a few billion dollars a day. The heavy use of the Fed’s reverse repo facility in recent months has confounded central bank officials and private analysts…”

Bursting Bubble and Mania Watch:

January 18 – CNBC (Ashley Capoot and Sofia Pitt): “The job cuts in tech land are piling up, as companies that led the 10-year bull market adapt to a new reality. Microsoft said Wednesday that it’s letting go of 10,000 employees, which will reduce the company’s headcount by less than 5%. Amazon also began a fresh round of job cuts that are expected to eliminate more than 18,000 employees and become the largest workforce reduction in the e-retailer’s 28-year history.”

January 19 – Bloomberg (Neil Callanan): “The slump in the world’s biggest asset class has spread from the housing market to commercial real estate, threatening to unleash waves of credit turmoil across the economy. Almost $175 billion of real estate credit is already distressed, according to data compiled by Bloomberg — about four times more than the next biggest industry. As the toll from higher interest rates and the end of easy money mounts, many real estate markets are almost frozen with some lenders telling borrowers to sell assets or risk foreclosure amid demands for additional capital from landlords. Distress levels in European real estate are at the highest in a decade…, according to… law firm Weil, Gotshal & Manges. UK commercial property values fell more than 20% in the second half of 2022, MSCI Inc. data show. In the US, the drop was about 9%, according to Green Street.”

January 17 – Bloomberg (John Gittelsohn): “Some of the biggest investors in US commercial real estate are looking to cash in before property values slide further. A group of property funds for institutional investors ended last year with $20 billion in withdrawal requests, the biggest waiting line since the Great Recession, according to IDR Investment Management… ‘It’s like the nightclub where everybody lines up to get in and then lines up to leave when it closes,’ John Murray, head of global private commercial real estate at Pacific Investment Management Co., said… Institutional investors sought to cut their exposure to some of the biggest funds at managers including JPMorgan…, Morgan Stanley and Prudential Financial Inc., according to people familiar…”

January 19 – Bloomberg (Allison McNeely): “KKR & Co. joined rivals including Blackstone Inc. in limiting withdrawals from a real estate investment trust after investors sought to pull out more money. KKR Real Estate Select Trust received requests in the first-quarter tender offer period to repurchase 8.1% of its net asset value, exceeding the 5% quarterly limit… The trust fulfilled 62% of each shareholder’s request… Real estate investment vehicles overseen by KKR and Blackstone have come under pressure in recent months as investors requested their money back beyond limits set by the funds. Blackstone Real Estate Income Trust and Starwood Real Estate Income Trust have said they would limit redemptions…”

January 17 – Wall Street Journal (Will Parker and Konrad Putzier): “The cost of insuring commercial real-estate loans against a rise in interest rates has exploded over the past year, raising the prospect of a market selloff since many property owners will no longer be able to afford these hedges. About one-third of all commercial property debt is floating rate, according to a 2019 report by the Mortgage Bankers Association. Lenders usually require that these borrowers hedge against an increase in borrowing costs… When rates were very low, the cost of this insurance was minimal. The cap on a multimillion-dollar mortgage could be had for as little as $10,000. These hedges saved real-estate owners millions of dollars by limiting their exposure to rising interest rates in 2022.”

January 17 – Reuters (Niket Nishant, Noor Zainab Hussain and Saeed Azhar): “Goldman Sachs… reported a bigger-than-expected 69% drop in fourth-quarter profit as it struggled with a slump in dealmaking, a drop in asset and wealth management revenue and booked losses at its consumer business. Wall Street banks are making deep cuts to their workforce and streamlining their operations as dealmaking activity, their major source of revenue, stalls on worries over a weakening global economy and rising interest rates. Goldman is also curbing its consumer banking ambitions as Chief Executive Officer David Solomon refocuses the bank’s resources on strengthening its core businesses such as investment banking and trading.”

January 15 – Financial Times (Stephen Foley): “Some of the world’s biggest companies are facing multibillion-dollar writedowns on recent acquisitions as a wave of dealmaking gives way to a new era of economic uncertainty and higher interest rates… US media and healthcare companies are among those to have slashed the value of business units in the past few months and accountants are warning that more cuts could be imminent as the annual reporting season gets under way.”

January 16 – Financial Times (Tabby Kinder, Richard Waters and Eric Platt): “The bill for Elon Musk’s purchase of Twitter is coming due, with the billionaire facing unpalatable options on the company’s enormous debt pile, ranging from bankruptcy proceedings to another costly sale of Tesla shares. Three people close to the entrepreneur’s buyout of Twitter said the first instalment of interest payments related to $13bn of debt he used to fund the takeover could be due as soon as the end of January. That debt means the company must pay about $1.5bn in annual interest payments. The Tesla and SpaceX chief financed his $44bn deal to take Twitter private in October by securing the huge debt from a syndicate of banks led by Morgan Stanley, Bank of America, Barclays and Mitsubishi. The $13bn debt is held by Twitter at a corporate level, with no personal guarantee by Musk.”

January 18 – Dow Jones (Erich Schwartzel): “Even by show-business standards, former Walt Disney Co. executive Geoff Morrell netted a massive payday from his brief time in Hollywood. Mr. Morrell started working at Disney on Jan. 24, 2022, as the company’s chief corporate-affairs officer. He left less than four months later following a public-relations implosion that led to employee protests and pitted the company and then-CEO Bob Chapek against Florida Gov. Ron DeSantis. For those 70 weekdays, Mr. Morrell made $8,365,403 in total compensation – or about $119,505 a day…”

Crypto Bubble Collapse Watch:

January 20 – Reuters (Tom Hals, Akanksha Khushi, and Elizabeth Howcroft): “The lending unit of crypto firm Genesis filed for U.S. bankruptcy protection on Thursday, owing creditors at least $3.4 billion… Genesis Global Capital, one of the largest crypto lenders, froze customer redemptions on Nov. 16 after the collapse of major exchange FTX sent shockwaves through the crypto asset industry, fuelling concern that other companies could implode. Genesis is owned by venture capital firm Digital Currency Group (DCG). Its bankruptcy filing is the latest in a string of crypto failures triggered by a market collapse that wiped about $1.3 trillion off the value of crypto tokens last year.”

Ukraine War Watch:

January 19 – Reuters (By Guy Faulconbridge and Felix Light): “An ally of President Vladimir Putin warned NATO… that a defeat of Russia in Ukraine could trigger a nuclear war, while the head of the Russian Orthodox Church said the world would end if the West tried to destroy Russia. Such apocalyptic rhetoric is intended to deter the U.S.-led NATO military alliance from getting even more involved in the war, on the eve of a meeting of Ukraine’s allies to discuss sending Kyiv more weapons. But the explicit recognition that Russia might lose on the battlefield marked a rare moment of public doubt from a prominent member of Putin’s inner circle. ‘The defeat of a nuclear power in a conventional war may trigger a nuclear war,’ former Russian President Dmitry Medvedev, who serves as deputy chairman of Putin’s powerful security council, said… ‘Nuclear powers have never lost major conflicts on which their fate depends,’ said Medvedev, who served as president from 2008 to 2012.”

January 18 – Bloomberg: “Russian authorities have deployed air-defense installations in and around Moscow after several drone attacks hit the country’s heartland. Local residents posted photos in social media of cranes lifting Pantsir systems to rooftops in downtown Moscow, as well as defenses installed in the western suburbs, near President Vladimir Putin’s official residence.”

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

January 18 – Reuters: “Russian Foreign Minister Sergei Lavrov drew a sharp rebuke from the White House… for saying the United States had assembled a coalition of European countries to solve ‘the Russian question’ in the same way that Adolf Hitler had sought a ‘final solution’ to eradicate Europe’s Jews. ‘How dare he compare anything to the Holocaust, anything. Let alone a war that they started,’ White House national security spokesman John Kirby said. Lavrov, who caused an international furore last year with remarks about Hitler, said Washington was using the same tactic as Napoleon and the Nazis in trying to subjugate Europe in order to destroy Russia. Using Ukraine as a proxy, he said, ‘they are waging war against our country with the same task: the ‘final solution’ of the Russian question.’ ‘Just as Hitler wanted a ‘final solution’ to the Jewish question, now, if you read Western politicians … they clearly say Russia must suffer a strategic defeat.’”

January 16 – Reuters (Darya Korsunskaya): “Russia’s attempts to plug its budget deficit by selling foreign currency reserves could lead to a vicious circle that pushes the rouble higher and further reduces the Kremlin’s crucial export revenues, analysts say. Russia’s finance ministry and central bank said last week they would restart interventions in foreign exchange markets for the first time in almost a year, selling 54.5 billion roubles worth of yuan ($793 million) from the National Welfare Fund.”

De-globalization and Iron Curtain Watch:

January 16 – Bloomberg (Michael Heath): “Geopolitical tensions that threaten to split the world into rival economic camps could complicate action needed to address global issues and leave everyone poorer, the head of the International Monetary Fund said. The longer-term cost of trade fragmentation alone could range from 0.2% of global output in a limited scenario to almost 7% in a severe one, IMF Managing Director Kristalina Georgieva said… If technological decoupling is added to the mix, some countries could see losses of up to 12% of GDP… ‘In addition to trade restrictions and barriers to the spread of technology, fragmentation could be felt through restrictions on cross-border migration, reduced capital flows, and a sharp decline in international cooperation,’ the IMF chief said… ‘That would leave us unable to address the challenges of a more shock-prone world.’”

January 16 – Reuters (Andrea Shalal): “A severe fragmentation of the global economy after decades of increasing economic integration could reduce global economic output by up to 7%, but the losses could reach 8-12% in some countries, if technology is also decoupled, the International Monetary Fund said in a new staff report… ‘The COVID-19 pandemic and Russia’s invasion of Ukraine have further tested international relations and increased skepticism about the benefits of globalization,’ the staff report said.”

January 17 – Reuters (Jake Cordell and Caleb Davis): “Russia’s current account surplus hit a record high in 2022…, as a fall in imports and robust oil and gas exports kept foreign money flowing in despite Western efforts to isolate the Russian economy. Russia’s current account – a measure of the difference between all money coming into a country through trade, investment and transfers, and what flows back out – came in at $227.4 billion, up 86% from 2021.”

Inflation Watch:

January 15 – Wall Street Journal (David Harrison): “Worker pay increases fell behind inflation in 2022 for the second year in a row, leaving households worse off despite historically strong pay gains. But recent data suggest a shift is under way, with paycheck totals gaining ground as inflation eases… A historically tight labor market pushed up average hourly earnings by 4.6% in December from a year earlier…, compared with a 6.5% annual inflation rate in the same period. Likewise, average hourly earnings rose 4.9% in December 2021 from a year earlier, compared with a 7% annual inflation rate.”

January 18 – CNBC (Jeff Cox): “Prices for wholesale goods and services fell sharply in December, providing another sign that inflation, while still high, is beginning to ease. The producer price index, which measures final demand prices across hundreds of categories, declined 0.5% for the month… The decline was the biggest on a monthly basis since April 2020. Excluding food and energy, the core PPI measure rose 0.1%… For the year, headline PPI rose 6.2%, the lowest annual level since March 2021 and down considerably from the 10% annual increase in 2021. A sharp drop in energy prices helped bring the headline inflation reading down for the month. The PPI’s final demand energy index plunged 7.9% on the month. Within that category, wholesale gasoline prices fell 13.4%.”

Biden Administration Watch:

January 19 – CNN (Tami Luhby): “In a letter to House Speaker Kevin McCarthy…, Treasury Secretary Janet Yellen announced that the agency will start taking ‘extraordinary measures’ now that the US has reached its $31.4 trillion debt limit. But the nation is not yet at the debt ceiling crisis point that could tank the financial markets, suspend Social Security payments to senior citizens, hurt the economy and cause other chaos. That’s what the so-called extraordinary measures are designed to temporarily avoid. And while they might sound dire, they are mainly behind-the-scenes accounting maneuvers that the Treasury Department can take to give Congress time to increase or suspend the limit before the US has to default on its debts. ‘We’re not in any immediate crisis right now economically,’ said Steven Pressman, economics professor at The New School. But these moves don’t last indefinitely. In the past, they’ve given lawmakers between a few weeks and several months to address the borrowing cap. How much revenue the government collects in tax revenue this spring will also be a factor in how long the country can go before default.”

January 20 – Reuters (Trevor Hunnicutt): “The White House is refusing to negotiate with hardline Republicans on raising the debt ceiling because it believes enough of them will eventually back off their demands, as a growing chorus of investors, business groups and moderate conservatives warn of the dangers of edging towards a default. The high-stakes deadlock is widely expected to last for months, and could come down to the last minute as each side tests the other ahead of June when the U.S. government might be forced to default on paying its debt… ‘Leading congressional Republicans have themselves admitted in the past that default would trigger an economic collapse, killing millions of jobs and decimating 401k plans,’ said White House spokesperson Andrew Bates… ‘But hardline MAGA Republicans are now advocating for this outcome.’”

January 19 – New York Times (Jim Tankersley and Alan Rappeport): “The United States hit its debt limit on Thursday, prompting the Treasury Department to begin using a series of accounting maneuvers to ensure the federal government can keep paying its bills ahead of what’s expected to be a protracted fight over whether to increase the borrowing cap… The milestone of reaching the $31.4 trillion debt cap is a product of decades of tax cuts and increased government spending by both Republicans and Democrats. But at a moment of heightened partisanship and divided government, it is also a warning of the entrenched battles that are set to dominate Washington, and that could end in economic shock.”

January 19 – Bloomberg (Chris Anstey): “The Treasury Department is beginning the use of special measures to avoid a US payments default, after the federal debt limit was reached Thursday. The department is altering investments in two government-run funds for retirees, in a move that will give the Treasury scope to keep making federal payments while it’s unable to boost the overall level of debt. Treasury Secretary Janet Yellen informed congressional leaders of both parties of the step in a letter on Thursday. She had already notified them of the plan last week, when she flagged that the debt limit would be hit Jan. 19.”

Federal Reserve Watch:

January 18 – Wall Street Journal (Nick Timiraos and David Harrison): “Two Federal Reserve officials said they would favor raising interest rates at the central bank’s next meeting by a quarter percentage point, further slowing the pace of increases… Dallas Fed President Lorie Logan said… she supported that decision ‘and the same considerations suggest slowing the pace further at the upcoming meeting’ on Jan. 31-Feb. 1… ‘If you’re on a road trip and you encounter foggy weather or a dangerous highway, it’s a good idea to slow down—likewise, if you’re a policy maker in today’s complex economic and financial environment,’ said Ms. Logan…”

January 19 – Wall Street Journal (Nick Timiraos): “Two senior Federal Reserve officials said the central bank was making progress in its inflation fight, but it would take time to bring inflation back to the Fed’s 2% target. Fed Vice Chair Lael Brainard indicated… she was supportive of slowing the pace of rate rises to a more traditional quarter percentage point at the central bank’s next policy meeting, which is Jan. 31 to Feb. 1, joining a number of colleagues. New York Fed President John Williams said at a separate event Thursday evening he was encouraged by signs interest-rate increases were having their desired effect in slowing growth and keeping consumers’ and businesses’ expectations of future inflation in check.”

January 19 – Bloomberg (Catarina Saraiva and Jonnelle Marte): “Two top Federal Reserve officials said high interest rates were needed to keep pressuring inflation that’s showing signs of slowing but is still too rapid. ‘Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis,’ Vice Chair Lael Brainard said… Later Thursday, New York Fed President John Williams said that officials have not completed their aggressive tightening campaign to reduce stubborn price pressures. ‘With inflation still high and indications of continued supply-demand imbalances, it is clear that monetary policy still has more work to do to bring inflation down to our 2% goal on a sustained basis,’ he told the Fixed Income Analysts Society…”

January 18 – Reuters (Howard Schneider): “St. Louis Fed President James Bullard said… U.S. Federal Reserve policymakers should get the policy rate of interest above 5% ‘as quickly as we can’ before pausing rate increases needed to battle an ongoing outbreak of inflation. Asked during a Wall Street Journal event if he was open to another half point rate increase at the Fed’s upcoming meeting, Bullard responded ‘why not go to where we’re supposed to go?… Why stall?”

January 18 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said US interest rates have to rise further to ensure that inflationary pressures recede. ‘We’re almost into a zone that we could call restrictive – we’re not quite there yet,’ Bullard said… Officials want to ensure inflation will come down on a steady path to the 2% target. ‘We don’t want to waiver on that,’ he said. ‘Policy has to stay on the tighter side during 2023’ as the disinflationary process unfolds, he added.”

January 18 – Reuters (Michael S. Derby): “Philadelphia Federal Reserve President Patrick Harker reiterated… he is ready for the U.S. central bank to move to a slower pace of interest rate rises amid some signs that hot inflation is cooling. ‘High inflation is a scourge, leading to economic inefficiencies and hurting Americans of limited means disproportionately,’ Harker said… To get inflation under control, the Fed’s ‘goal is to slow the economy modestly and to bring demand more in line with supply,’ he told a group…”

January 18 – Bloomberg (Craig Torres): “Recent US inflation reports have been encouraging, but the rate of increases in prices is still too high to ease off monetary restraint, Federal Reserve Bank of Richmond President Thomas Barkin said. ‘I would want to see inflation convincingly back to our target” before easing up on rate hikes, Barkin said… ‘You just can’t declare victory too soon…’ ‘I want to see inflation, and median and trimmed mean, compellingly headed back to our target… As long as inflation stays elevated, we need to continue to move the needle, to tighten if you will, ever more.’”

U.S. Bubble Watch:

January 19 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits unexpectedly fell last week, pointing to another month of solid job growth and continued labor market tightness… ‘It is a frustrating reminder for the Fed that the labor market remains tight as employers hold onto workers,’ said Matthew Martin, a U.S. economist at Oxford Economics… ‘We don’t expect a spike in initial jobless claims even as the economy slows.’ Initial claims for state unemployment benefits dropped 15,000 to a seasonally adjusted 190,000 for the week ended Jan. 14, the lowest level since September.”

January 18 – Associated Press (Anne D’Innocenzio): “Americans cut back on spending in December, the second consecutive month they’ve done so, underscoring how inflation and the rising cost of using credit cards slowed consumer activity over the crucial holiday shopping season. Retail sales fell a worse-than-expected 1.1% in December, following a revised 1% drop in November… In October, retail sales ticked up 1.3%, helped by early holiday shopping. Auto sales declined as rising interest rates for auto loans crimped demand. That, and falling gas prices, helped to pull overall retail sales lower. The December figure marked the biggest monthly decline in 2022.”

January 18 – CNBC (Diana Olick): “Builder sentiment in the single-family housing market posted an unexpected gain in January, rising for the first time in 12 straight months… Sentiment rose 4 points to 35 on the National Association of Home Builders/Wells Fargo Housing Market Index… The metric stood at 83 in January 2022.”

January 18 – Reuters (Lindsay Dunsmuir): “There were some encouraging signs U.S. inflation pressures and labor shortages were easing, a Federal Reserve report showed…, but economic activity was tepid as the central bank’s actions weigh on growth. Five of the Fed’s districts reported slight or modest increases in overall economic activity over the last several weeks, while six noted no change or slight declines…, and one cited a significant decline… The Fed released its latest survey on the health of the economy derived from business contacts nationwide after a slew of recent data raised hopes that too-high inflation is on a sustainable path downwards… ‘On balance, contacts generally expected little growth in the months ahead,’ the Fed said in its survey, known as the ‘Beige Book,’ which was conducted across its 12 districts through Jan. 9.”

January 18 – CNBC (Diana Olick): “Consumers returned from the holiday season to find mortgage rates at their lowest point since September, and they are responding in dramatic fashion. Mortgage application volume jumped nearly 28% last week compared with the previous week… Refinance demand made the biggest move, up 34% from the previous week, but it was still 81% lower than the same week one year ago. The refinance share of mortgage activity increased to 31.2% of total applications from 30.7% the previous week. Applications for a mortgage to purchase a home rose 25% week to week but were 35% lower than the same week one year ago.”

January 19 – CNBC (Nick Timiraos): “JPMorgan Chase CEO Jamie Dimon believes interest rates could go higher than what the Federal Reserve currently projects as inflation remains stubbornly elevated. ‘I actually think rates are probably going to go higher than 5% … because I think there’s a lot of underlying inflation, which won’t go away so quick,’ Dimon said…”

Fixed-Income Watch:

January 15 – Financial Times (Harriet Clarfelt): “Risky corporate bonds trading in the US have kicked off 2023 on an upbeat note, with investors tolerating a smaller premium to hold low-grade debt as evidence of cooling inflation mounts. Yields on speculative-grade US bonds have fallen by about 0.8 percentage points in the first two weeks of January to slightly more than 8%, according to an ICE Data Services index… Borrowing costs for groups with the lowest credit quality have dropped even more, according to an Ice gauge of distressed debt, sliding about 3 percentage points to 19.3% — a level last seen five months ago.”

China Watch:

January 16 – Reuters (Josh Arslan and Martin Quin Pollard): “Passengers laden with luggage flocked to rail stations in China’s megacities on Monday, heading to their hometowns for holidays that health experts fear could intensify a raging COVID-19 outbreak in areas less-equipped to handle it. ‘I haven’t been home for over three years,’ a 23-year old Beijing resident surnamed Chen told Reuters as he waited to board a train at the capital’s main rail station. ‘I am sure I will be very emotional once I reach the doorstep of my home.’”

January 18 – Reuters (Bernard Orr): “President Xi Jinping said… he was particularly concerned about China’s COVID-19 wave spreading to rural areas with poor medical facilities but he urged perseverance in stressful times, saying ‘light is ahead’… ‘China’s COVID prevention and control is still in a time of stress, but the light is ahead, persistence is victory,’ Xi said in his LNY greetings message carried by CCTV. ‘I am most worried about the rural areas and farmers. Medical facilities are relatively weak in rural areas, thus prevention is difficult and the task is arduous,’ Xi said, adding that the elderly were a top priority.”

January 16 – Bloomberg (Jinshan Hong): “China is likely to see 36,000 Covid deaths a day during the Lunar New Year holidays, making it one of the most deadly periods of the pandemic, according to an updated analysis of the largest outbreak the world has yet experienced. The revised figures from the independent forecasting firm Airfinity Ltd. added 11,000 deaths a day to its Dec. 29 estimate… The update is based on data from China’s regional provinces combined with rates seen in other Covid Zero countries after they first lifted restrictions, the… firm said.”

January 18 – New York Times (Keith Bradsher): “The Chinese economy had one of its worst performances in decades last year as growth was dragged down by numerous Covid lockdowns followed by a deadly outbreak in December that swept across the country with remarkable speed. China grew 3% for the year…, much less than in 2021 and short of Beijing’s target of 5.5%. Other than 2020, it was the most disappointing showing since 1976, the year Mao Zedong died, when the economy declined 1.6%.”

January 17 – Reuters (Kevin Yao and Ellen Zhang): “China’s economic growth in 2022 slumped to one of its worst levels in nearly half a century as the fourth quarter was hit hard by strict COVID curbs and a property market slump, raising pressure on policymakers to unveil more stimulus this year. The quarterly growth and some of the December indicators such as retail sales beat market expectations, but analysts noted the overall economic impulse across China remained weak… Gross domestic product (GDP) grew 2.9% in October-December from a year earlier…, slower than the third-quarter’s 3.9% pace. The rate still exceeded the second quarter’s 0.4% expansion and market expectations of a 1.8% gain.”

January 16 – Bloomberg: “China’s home prices fell for a 16th month in December, as widespread Covid outbreaks complicated efforts to rescue the slumping property market. New-home prices in 70 cities… declined 0.25% from a month earlier, the same pace as November… For the full year, prices dropped 2.3%… The latest decline came weeks after policy makers unveiled a sweeping plan to revive the housing industry, focusing mainly on the supply side by pledging financial support to cash-strapped developers.”

January 17 – Reuters (Liangping Gao and Kevin Yao): “China’s property investment fell 10.0% year-on-year in 2022, the first decline since records began in 1999, compared with a decline of 9.8% in the first 11 months of the year… Property sales by floor area dropped 24.3% in 2022 from the same period a year earlier, the most since the data became available in 1992,compared with a fall of 23.3% during January-November, according to… the National Bureau of Statistics (NBS). New construction starts measured by floor area declined 39.4% year-on-year in 2022, versus a 38.9% slump in the first 11 months of the year. Funds raised by China’s property developers slumped 25.9% on year, after tumbling 25.7% in January-November.”

January 18 – Reuters (Ellen Zhang and Kevin Yao): “China’s property sector fell 5.1% in 2022 from a year earlier, value-added data from the National Bureau of Statistics (NBS) showed…, heaping more pressure on policymakers to revive the sluggish sector in 2023. Value added in the once-mighty industry was 7.2% lower in the fourth quarter than a year before, following a 4.2% annual contraction seen in the third quarter… The figures indicated that the property sector was one of the biggest drags on the economy last year.”

January 19 – Wall Street Journal (Rebecca Feng and Cao Li): “China’s housing market flipped from being a growth driver to an economic drag in 2022, with sales slumping, prices falling and widespread job losses. The prognosis for this year isn’t much better, compounding Beijing’s efforts to get its economy back on firmer footing. Sales of new residential properties in the country tumbled 28% last year to the equivalent of $1.7 trillion in value terms, a five-year low. By floor area, they dropped to their lowest level in nearly a decade… Land sales by area declined 53% in 2022 to a level below that of 1999, the year China’s National Bureau of Statistics began releasing the data.”

January 19 – New York Times (Li Yuan): “They left after the government cracked down on the private sector. They ran away from a harsh ‘zero Covid’ policy. They searched for safe havens for their wealth and their families. They went to Singapore, Dubai, Malta, London, Tokyo and New York — anywhere but their home country of China, where they felt that their assets, and their personal safety, were increasingly at the mercy of the authoritarian government. In 2022… many Chinese businesspeople moved abroad, temporarily or for good. They were part of a wave of emigration that led to one of the year’s top online catchphrases, ‘runxue,’ understood to mean running away from China. A consequential, if privileged, piece of China’s economic puzzle, these people are pulling their wealth and businesses out when growth is at its lowest point in decades.”

January 16 – Bloomberg: “Chinese financial regulators and the nation’s biggest bad-debt management companies plan to offer as much as 160 billion yuan ($24bn) of refinancing support to high-quality developers in the first quarter, according to people familiar… Under the plan first announced on Friday with little details, the People’s Bank of China will channel 80 billion yuan of loans through China Huarong Asset Management Co. and its peers to selected developers at an annual rate of 1.75%…”

January 16 – Reuters (Roushni Nair and Clare Jim): “Embattled property developer China Evergrande said… its auditor, PricewaterhouseCoopers (PwC), had resigned amid disagreements over matters relating to the audit of its 2021 accounts. The issues included the timeline and scope of work involved in assessing the company’s going concern basis as well as additional audit work and procedures required for the assets impairment assessment, Evergrande said…”

January 18 – Bloomberg: “Foreign funds sold a record amount of Chinese bonds in 2022 mainly due to the nation’s wide yield gap with the US… Global funds sold 616 billion yuan ($91bn) of China bonds last last year, according to… data from China Central & Depository Clearing Co. and Shanghai Clearing House. That’s the first annual outflow from China’s onshore bond market since 2014 when the nation started reporting the holdings data.”

January 14 – Wall Street Journal (Chun Han Wong): “Chinese leader Xi Jinping went from cementing his supremacy last fall to battling a public-health and economic crisis into the new year—fallout from an abrupt pivot from ‘zero Covid’ that could cast a shadow over China for months to come. Mr. Xi secured a norm-breaking third term as Communist Party chief in October, and stacked the leadership with allies who sang their leader’s praises and trumpeted his vision of a thriving China. That rosiness dissolved amid intensifying economic pain and a wave of public protests against Mr. Xi’s zero-tolerance Covid strategy of lockdowns and border controls, followed by a haphazard dismantling of pandemic protocols that threatens to further batter the world’s second-largest economy.”

January 15 – Bloomberg: “In the weeks following the historic protests in China against Covid Zero lockdowns, President Xi Jinping appeared to show some empathy. Xi told European Council President Charles Michel in early December the demonstrators were ‘mainly students and teenagers’ frustrated with the pandemic. The Chinese leader followed that up with a New Year’s address saying it was ‘only natural’ for 1.4 billion people to have divergent views, adding: ‘What matters is that we build consensus through communication and consultation.’ But behind the scenes, China has been rounding up protesters that authorities view as instigators of social unrest. Weiquanwang, a website that tracks human rights cases in China, said more than 100 demonstrators may have been detained…”

January 18 – Bloomberg: “China’s censors have launched a campaign to ensure a ‘festive and peaceful’ mood prevails in the Asian nation as it nears its most important holiday while deaths from Covid-19 rise. The Cyberspace Administration of China said… it will ‘increase the rectification of epidemic-related online rumors’ over the next month to prevent content from ‘misleading the public and causing social panic.’ The internet watchdog said it would focus on ‘rumor-mongering behaviors in areas such as the economy and people’s livelihoods’ and deal with problems related to ‘fabricating patient experiences.’ It added that the goal was ‘to thoroughly rectify issues such as false information to prevent the exaggeration of gloomy emotions.’”

January 17 – Reuters (Albee Zhang and Farah Master): “China’s population fell last year for the first time in six decades, a historic turn that is expected to mark the start of a long period of decline in its citizen numbers with profound implications for its economy and the world. The country’s National Bureau of Statistics reported a drop of roughly 850,000 people for a population of 1.41175 billion in 2022, marking the first decline since 1961, the last year of China’s Great Famine. That possibly makes India the world’s most populous nation.”

Central Banker Watch:

January 19 – Financial Times (Colby Smith, Chris Giles, Valentina Romei and George Steer): “Investors have been put on notice that central bankers on both sides of the Atlantic will ‘stay the course’ on interest rate increases to cool down their economies and tame high inflation. European Central Bank president Christine Lagarde warned that further big rate rises lay ahead… ‘We shall stay the course until . . . we can return inflation to 2% in a timely manner,’ the ECB president said… Lael Brainard, the vice-chair of the Fed, signalled that the US central bank also had more to do to get inflation closer to its 2% target, despite signs that consumer spending is starting to ebb, the labour market is cooling and price pressures have eased. ‘Inflation is high, and it will take time and resolve to get it back down to 2%. We are determined to stay the course,’ Brainard said… John Williams, president of the New York Fed, said the central bank ‘must keep moving’ given it will ‘take time for supply and demand to come back into proper alignment and balance’, and further underscored the need for the Fed to ‘stay the course’.”

January 20 – Wall Street Journal (Paul Hannon): “China’s abandonment of its zero-Covid policy is good news for global economic growth but it could give a fresh boost to inflation in Europe, European Central Bank President Christine Lagarde said… ‘The change of this Covid policy will revive the economy,’ said Ms. Lagarde. ‘That is positive for the rest of the world, but there will be more inflationary pressure.’ The comments add to recent signals that the ECB will stay firm in its effort to combat inflation through higher interest rates despite recent signs that price pressure is moderating in the eurozone.”

January 17 – Bloomberg (Jana Randow and Alessandra Migliaccio): “European Central Bank policymakers are starting to consider a slower pace of interest-rate hikes than President Christine Lagarde indicated in December, according to officials with knowledge… While the 50 bps step in February she signaled remains likely, the prospect of a smaller 25-point increase at the following meeting in March is gaining support, the officials said, asking not to be identified because talks on the matter are confidential. Any slowdown in monetary tightening shouldn’t be viewed as the ECB going soft on its mandate, the officials said.”

January 16 – Bloomberg (Alexander Weber): “European Central Bank Governing Council member Olli Rehn said frontloading interest-rate increases to stem inflation may mean officials don’t have to take even more drastic action down the line. ‘By acting swiftly now, we should be able to avoid what is often called a ‘Volcker shock’,’ he said…, referring to the ‘rigorous disinflationary policies of the early 1980s’ by former Federal Reserve chief Paul Volcker. Policy rates will still have to rise significantly to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.’”

January 19 – Bloomberg (Jana Randow): “European Central Bank Governing Council member Klaas Knot said there’ll still be more than one half-point increase in interest rates, with the inflation situation remaining unsatisfactory. Investors… may be underestimating the ECB’s commitment to tame prices, Knot told CNBC… Policymakers are focused currently on the risk of doing too little, he said. ‘Our president has already announced that most of the ground that we have to cover we will cover at a constant pace of multiple 50 bps hikes,’ the hawkish Dutch central bank chief said…”

January 16 – Bloomberg (Loukia Gyftopoulou and Francine Lacqua): “Central banks will keep raising rates this year to ensure inflation sticks to its downward path, defying traders who expect policy makers to ease off, according to BlackRock Inc. Vice Chairman Philipp Hildebrand. ‘I don’t see any chance, frankly, of easing this year — I think the market has got that wrong,’ Hildebrand, the former head of the Swiss National Bank, told Bloomberg TV…”

January 18 – Reuters (Francesco Canepa): “European Central Bank staff are losing confidence in the institution’s leadership following the ECB’s failure to control inflation and a pay award that lagged the leap in prices, according to a survey by trade union IPSO. The responses underline that even central banks, whose primary responsibility is fighting inflation, are not immune to staff dissatisfaction with the sharply rising cost of living… Results of IPSO’s survey, which largely focused on pay and remote-working arrangements but also included questions about trust in the board, were sent to ECB staff on Tuesday… They showed two-thirds of roughly 1,600 respondents said their trust in Lagarde and the rest of the six-member ECB board had been damaged by recent developments such as high inflation and a pay increase that did not match the rise in prices.”

Global Bubble Watch:

January 18 – Financial Times (Tom Wilson): “Global oil demand is set to rise to an all-time high in 2023 as China relaxes its Covid-19 restrictions in a move that may push crude prices higher in the second half of the year, according to the International Energy Agency… ‘Two wild cards dominate the 2023 oil market outlook: Russia and China’ the report said, adding that robust demand growth would tighten ‘the balances as Russian supply slows under the full impact of sanctions’.”

January 16 – CNBC (Sophie Kiderlin): “Over the last two years, the richest 1% of people have accumulated close to two-thirds of all new wealth created around the world, a new report from Oxfam says. A total of $42 trillion in new wealth has been created since 2020, with $26 trillion, or 63%, of that being amassed by the top 1% of the ultra-rich… The remaining 99% of the global population collected just $16 trillion of new wealth, the global poverty charity says. ‘A billionaire gained roughly $1.7 million for every $1 of new global wealth earned by a person in the bottom 90%,’ the report…”

January 16 – Bloomberg (Ari Altstedter): “Canadian home prices fell by the most on record in 2022, as rapidly rising interest rates forced a market adjustment that may have further to go. The country’s benchmark home price fell 1.6% in December to C$730,600, bringing the total decrease since February’s peak to 13.2%, the Canadian Real Estate Association said… The decline was the biggest peak-to-trough falloff since the group started compiling the data in 2005.”

EM Crisis Watch:

January 20 – Reuters (Alun John): “Investors poured a record $12.7 billion into emerging-market debt and equity funds in the week to Wednesday, in response to China’s easing of its COVID-19 restrictions on activity, data on Friday from BofA Global Research showed. The sudden shift in Chinese policy has boosted many different asset classes, from commodities and mining stocks to currencies and equity markets in popular tourist destinations.”

January 18 – Bloomberg (Daniel Carvalho): “Brazil’s President Luiz Inácio Lula da Silva downplayed the importance of an independent central bank, addressed the country’s inflation target and vowed to see that the Jan. 8 rioters are brought to justice in a wide-ranging interview… ‘There was a lot of discussion in this country to have an independent central bank, believing that it would be better,’ Lula said. ‘It’s silly to think that an independent central bank governor is going to do more than when the president appointed him.’”

January 20 – CNN (Claudia Rebaza, Tara John, Jack Guy and Mia Alberti): “Peru’s President Dina Boluarte has called for dialogue after clashes between protesters and police during nationwide demonstrations left one person dead and 30 injured. ‘Once again, I call for dialogue, I call on those political leaders to calm down. Have a more honest and objective look at the country; let’s talk,’ Boluarte said… Her comments came after clashes on the streets of the capital Lima, where thousands of protesters from across the country faced a massive show of force by local police.”

Japan Watch:

January 19 – Reuters (Takahiko Wada and Leika Kihara): “Japan’s core consumer prices in December rose 4.0% from a year earlier, double the central bank’s 2% target, hitting a fresh 41-year high and keeping alive market expectations the central bank could phase out ultra-low interest rates… ‘Companies aren’t that cautious about raising prices any more. We might see inflation stay above the BOJ’s 2% target well into autumn this year,’ said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.”

January 18 – Financial Times (Kana Inagaki and Leo Lewis): “The Bank of Japan has defied market pressure and left its yield curve control measures unchanged, sending the yen diving and pushing stocks higher as it stuck to a core pillar of its ultra-loose monetary policy. Traders in Tokyo said the BoJ’s decision, which came after a two-day meeting, the penultimate under its longest-serving governor, Haruhiko Kuroda, was likely to heap more pressure on his successor to end Japan’s two-decade experiment in massive monetary easing. On Wednesday, Kuroda insisted his programme had been successful, saying the yield controls were sustainable… Benjamin Shatil, a currency strategist at JPMorgan…, said it was difficult to interpret the yen’s drop on Wednesday as an inflection… ‘In some ways the decision to make no changes today — neither to policy nor to forward guidance — sets the BoJ up for a protracted battle with the market,’ said Shatil.”

January 20 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Haruhiko Kuroda signaled the hottest inflation since 1981 has no impact on his determination to continue with monetary easing. The yen weakened. ‘Our hope is that wages start to rise and that could make the 2% inflation target to be met in a stable and sustainable manner,’ Kuroda told a panel discussion Friday in Davos… ‘But we have to wait for some time.’ Kuroda’s remarks reinforce this week’s central-bank pushback against the most intense market speculation for policy adjustments under his decade-long term.”

January 15 – Reuters (Kantaro Komiya): “Bank of Japan (BOJ) Deputy Governor Masayoshi Amamiya, a close aide of incumbent chief Haruhiko Kuroda, is most likely to succeed him this spring, according to two-thirds of economists in a Reuters poll. Investors have closely followed the race for the position of next BOJ governor, looking for clues of possible policy shifts after the retirement of Kuroda, who has overseen massive monetary stimulus with unorthodox methods since 2013… Nicknamed ‘Mr BOJ’ for masterminding many of the bank’s unconventional monetary easing steps, Amamiya has served as Kuroda’s right-hand man and has advocated keeping ultra-loose policy to get Japan out of deflation.”

Social, Political, Environmental, Cybersecurity Instability Watch:

January 16 – Reuters (Mark John): “Barely two in five people believe their families will be better off in the future, according to a regular global survey that also identified growing levels of distrust in institutions among low-income households. The Edelman Trust Barometer, which for over two decades has polled the attitudes of thousands of people, found that economic pessimism was at its highest in some of the world’s top economies such as the United States, Britain, Germany and Japan. It further confirmed how societies have been divided by the impacts of the pandemic and inflation. Higher-income households still broadly trust institutions such as government, business, media and NGOs. But alienation is rife among low-income groups.”

January 16 – The Guardian (Damian Carrington): “The return of the El Niño climate phenomenon later this year will cause global temperatures to rise ‘off the chart’ and deliver unprecedented heatwaves, scientists have warned. Early forecasts suggest El Niño will return later in 2023, exacerbating extreme weather around the globe and making it ‘very likely’ the world will exceed 1.5C of warming. The hottest year in recorded history, 2016, was driven by a major El Niño. It is part of a natural oscillation driven by ocean temperatures and winds in the Pacific, which switches between El Niño, its cooler counterpart La Niña, and neutral conditions. The last three years have seen an unusual run of consecutive La Niña events.”

January 17 – CNBC (Emma Newburger): “Developers planning to build homes in the desert west of Phoenix don’t have enough groundwater supplies to move forward with their plans, a state modeling report found. Plans to construct homes west of the White Tank Mountains will require alternative sources of water to proceed as the state grapples with a historic megadrought and water shortages… Water sources are dwindling across the Western United States and mounting restrictions on the Colorado River are affecting all sectors of the economy, including homebuilding…”

Leveraged Speculation Watch:

January 17 – Bloomberg (Nishant Kumar and Lisa Abramowicz): “Bob Prince, who helps manage the world’s largest hedge fund, said we’re seeing the return of the boom-bust cycle and more people need to lose their jobs before inflation will be brought under control. ‘It is hard to say whether we are done with the tightening or we will have another tightening,’ Prince, the co-chief investment officer of Bridgewater Associates, said… at the World Economic Forum in Davos… ‘What we can say is that the next shoe to drop has to be a decline in the economy, in particular, a contraction in the labor markets.’”

Geopolitical Watch:

January 15 – CNN (Brad Lendon): “It’s an arms race bigger than anything Asia has ever seen – three major nuclear powers and one fast-developing one, the world’s three biggest economies and decades-old alliances all vying for an edge in some of the world’s most contested land and sea areas. In one corner are the United States and its allies Japan and South Korea. In another corner, China and its partner Russia. And in a third, North Korea. With each wanting to be one step ahead of the others, all are caught in a vicious circle that is spinning out of control. After all, one man’s deterrence is another man’s escalation. ‘We’ll continue to see these dynamics spiral in East Asia, where we have no measures of restraint, we have no arms control,’ Ankit Panda, a nuclear policy expert at the Carnegie Endowment for International Peace, told CNN.”

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