July 14, 2023: Battle Lines are Drawn

July 14, 2023: Battle Lines are Drawn
Doug Noland Posted on July 15, 2023

I might have titled this week’s CBB “Wednesday.” But even I will (on occasion) draw a line on quirkiness. Wednesday was another extraordinary market session – and a dramatic antithesis to the previous Thursday. Battle Lines Are Drawn.

The gains in headline and “core” CPI came in a tick below estimates at 0.2%. CPI (y-o-y) was reported at 3.1% (estimate 3.0%), with “core” at 4.8% (vs. 5.0%). It was like Déjà vu all over again. Two-year Treasury yields sank as much as 16 bps to 4.71%, a full 40 bps below the intraday highs from the previous Thursday. Ten-year Treasury yields fell 11 bps Wednesday and were down 31 bps for the week at Friday morning lows.

Yet Treasury volatility has been child’s play compared to the wild and woolly MBS marketplace. MBS yields collapsed as much as 44 bps in Wednesday trading, and were as much as 67 bps lower than the previous Thursday’s intraday high. MBS yields ended Wednesday’s session down 25 bps, the largest decline since the 33 bps collapse on the FOMC’s March 22nd meeting date (with the Fed focused on the banking crisis and markets interpreting Powell’s comments as suggesting a likely pause). Friday’s 12 bps jump reduced the week’s yield decline to 38 bps, the largest drop since the banking crisis week March 17th.

Chalk one up for the “immaculate disinflation” crowd.

July 14 – Bloomberg (Anchalee Worrachate): “The bond rally that erupted after this week’s US inflation report was the moment Wall Street veteran Bob Michele has been waiting for. The J.P. Morgan Asset Management chief investment officer for fixed income has been gearing up for a bond rally since late last year… He has long believed the US economy will enter a recession as the Federal Reserve went too far in raising interest rates. So when he saw inflation in the world’s biggest economy cooled more than economists had forecast, he was convinced this was the start of a prolonged rally. Michele… says the deeply inverted US yield curve spells trouble and the Fed will be forced to cut rates by the end of this year. ‘More and more indicators are at levels you only see in recession. We are buying every backup in yields… The considerable central bank tightening is starting to bite hard in the real economy.’”

I’m challenged to find significant evidence Fed policy is “starting to bite hard.” My analytical framework prioritizes financial conditions. Generally, tighter market liquidity conditions presage tighter lending, slower Credit growth and weakened demand. Markets lead economic performance – not vice versa. Booming markets generate self-reinforcing liquidity, loose conditions and asset inflation, which work to bolster confidence and boost spending.

Investment-grade corporate spreads traded Thursday at the narrowest level versus Treasuries since March. High-yield spreads traded to the lows since April 2022. Investment-grade CDS dropped to 63 bps, the low since February 2022. High-yield CDS sank to 410 bps Thursday, the low since pre-bank crisis February 3rd. JPMorgan CDS traded Friday at lows since February 2022, with BofA CDS at lows since March. Leveraged Loan prices (Morningstar Index) surged this week to highs since August 2022. The VIX (equities volatility) traded Thursday (13.12) near the lows since pre-pandemic January 2020 (closed Friday at 13.34).

Market financial conditions have become extraordinarily loose. The unwind of short positions continues to bolster liquidity. Friday’s reversal halted a major run in the Goldman Sachs Short Index, with a blistering 19% gain over 13 sessions (index up 31% y-t-d). And I’ll assume the reversal of short positions and hedges provided powerful liquidity support this week throughout Treasury and fixed-income markets (MBS!).

So, back to “Battle Lines.” The “immaculate disinflation” crowd sees inflation on a solid trajectory to the Fed’s 2% target. It’s back to normal after persevering through the aberrational Covid spike. Fed policy is working its magic, as it always does. At this point, the softest of landings is virtually assured. And lower bond yields will underpin another leg higher for the perpetual equities bull market.

I see inflation ebbing and flowing – with much more flow than ebb over time. But what conventional analysis sees as the previous inflation normal, I view as aberrational. Inflation risk remains highly elevated in New Cycle Dynamics. This exceptionally hot weekend will remind us of newfound climate hostilities. And there is deglobalization, with heightened China tensions adding to trade, supply-chain and pricing uncertainties.

The bottom line is I don’t see inflation risks subsiding until financial conditions tighten. Labor markets remain extraordinarily tight, which implies ongoing upward compensation pressures. Meanwhile, American households are enjoying a windfall on returns from Trillions of cash holdings that ballooned during the pandemic. Moreover, a decent percentage of the population is benefiting (directly or indirectly) from this year’s booming stock market.

July 14 – MarketWatch (Greg Robb): “The University of Michigan’s gauge of consumer sentiment rose to a preliminary July reading of 72.6 from a June reading of 64.4. It is the largest gain since December 2005. Sentiment is at its highest level since September 2021.”

Inflation data notwithstanding, recent data support the view of loose conditions and bubbling markets bolstering confidence and economic activity. There was last week’s strong employment and services data. Tuesday’s report on NFIB Small Business Confidence was stronger-than-expected, rising to the highest level (91) since November.

The Current Economic Conditions component of the Univ. of Michigan survey posted a June/July surge of 12.6 points (to a 21-month high 77.5), the largest two-month gain since the 12.8 May/June 2020 recovery from the Covid panic (which was the largest two-month gain since 2005). Moreover, consumer inflation expectations surprised to the upside, with one-year expectations up a tick to 3.4% and five-to-10-year expectations up a tick to 3.0%.

The rates market still prices peak fed funds for the November meeting, with the expected yield down three bps to 5.40%. The market is pricing a 92% probability of a hike on the 26th, while the odds of an increase on September 20th dropped to 17% from last week’s 28%. The expected policy rate at the March 2024 meeting fell 15 bps to 5.08%.

Fed officials’ (Waller, Barr, Mester, and Daly) tough talk on inflation was drowned out this week by the sound of an equities breakout. Markets basically have the tightening cycle wrapping up this month, an assumption that finds the Fed again in a tough spot.

The Nasdaq100 enjoys a y-t-d gain of 42.3%. The S&P500 has returned 18.4% and is only about 6% below all-time highs. The “average stock” Value Line Arithmetic Index is up 12.2% – and less than 6% from record highs. The iShares High Yield Corporate ETF (HYG) has returned 5.1% this year, with the iShares Investment-grade ETF (LQD) returning 3.9%. Treasuries (TLT) have returned 3.3%.

I get it. Stocks and bonds rally near the end of tightening cycles. Markets would, however, traditionally commence recovery out of recession angst and debilitating bear market losses, as the system responds to nascent loosening. The current cycle has little in common with the past. Five hundred basis points of rate increases have neither tightened conditions nor inflicted significant pain in the markets or real economy. Arguably, “animal spirits” are today as spirited as ever.

Inflation is a risk, though I believe it is overshadowed by myriad risks associated with ongoing Bubble excess. The way I see it, there is way too much debt, liquidity, “money,” derivatives, hedging and speculative excess. In short, global financial markets have become one big “Crowded Trade.” This ensures that dysfunctional markets are incapable of orderly adjustment. In particular, short positions (in stocks, Treasuries, MBS, ETFs, futures, etc.) are established in anticipation of weaker markets, only to be run over by an over-liquefied and highly speculative marketplace.

MBS yields spiked last week as derivatives-related selling pressured the market. A big reversal of hedges and derivative-related short positions this week sparked a yield collapse. There was nothing in the data suggestive of economic weakening (quite the contrary). But a tick better-than-expected CPI and vulnerable market positioning were enough to trigger a tumultuous market reversal.

I have my doubt bonds are out of the woods. Equities have dislocated to the upside, with panic short covering, the unwind of hedges, and a flurry of FOMO speculation (stocks, ETFs and options) working to inundate the marketplace with excess liquidity. Until proven otherwise, this should lend a vulnerable economy meaningful support. It will extend labor market tightness, providing additional time for expectations of higher compensation to become more deeply rooted. Ironically, market expectations for slower growth and waning inflation exacerbate the loose conditions underpinning inflationary pressures.

Contemporary market structure is at the root of the problem. This is not Paul Volcker’s financial system. For one, Washington can run ongoing massive deficits ($1.39 TN over nine months!) with little impact on Treasury yields. There are hundreds of Trillions of derivatives, along with a multi-trillion “leveraged speculative community.” There is the $130 TN U.S. “Financial Sector” (from the Fed’s Z.1) – including an $8.3 TN Fed balance sheet, $9.5 TN of GSE Assets, $6.1 TN of “Fed Funds and Securities Repo,” $5.5 TN of Money Market Fund Assets, $2.7 TN of GSE MBS, and $4.8 TN of Security Broker/Dealer Assets.

Back in the nineties, as this new financial structure took hold, the Federal Reserve was blind to ramifications. They were caught by complete surprise by the 1994 bond/derivative rout, the 1995 Mexican crisis, the 1997 SE Asia debacle, and the 1998 Russia/LTCM collapse. The Fed’s complacency shocked me throughout the 2002-2007 mortgage finance Bubble period.

At this point, the Fed and global central banking community are well-versed in the risks associated with market-based finance. The Bank of England this week released their semi-annual Financial Stability Report. It’s a comprehensive and analytically robust document. And while the report focuses on UK issues, it also touches on key international risks to financial stability.

July 12 – Bloomberg (Greg Ritchie): “A leveraged trade in US Treasury futures that has regained popularity with hedge funds poses a risk to global financial stability, according to the Bank of England. Known as the basis trade, the strategy typically involves exploiting small price differences between cash bonds and futures, and is attracting scrutiny from US regulators… The BOE added its voice, saying the risks associated with these trades have mostly not been tackled by regulators. The trade is particularly risky because returns are bolstered by borrowing money in the repo market. That tends to work well in a low volatility environment but can backfire if the market moves fast, and can even disrupt the smooth functioning of the financial system. At the onset of the coronavirus pandemic in early 2020, as fund rushed to unwind their basis trades, liquidity dried up in Treasuries and other money markets.”

Other key risks noted in the BOE report include:

“Vulnerabilities in certain parts of market-based finance (MBF) remain. These could crystallise in the context of the current interest rate volatility, amplifying any tightening in financial conditions.”

“Although the business models of some non-bank financial institutions (NBFIs), such as pension funds and insurance companies, mean that they can benefit from the impact of higher interest rates, the use of derivatives to hedge their interest rate exposures can create material liquidity risk. Liquidity risks also arise when NBFIs use derivatives and repo to create leverage. These liquidity risks must be managed, as evidenced by the LDI stress seen in September 2022.”

“The risks from higher interest rates can also be amplified by NBFIs deleveraging and rebalancing their portfolios.”

“There continues to be an urgent need to increase resilience in MBF globally.”

“The underlying vulnerabilities in the system of MBF, identified by the FPC and financial stability authorities globally, remain largely unaddressed and, absent actions to mitigate them, could rapidly resurface.”

“The FSB published Policy Proposals to Enhance Money Market Fund Resilience to address the structural vulnerabilities and ‘run risks’ associated with MMFs. As sterling and dollar denominated MMFs are also domiciled in Luxembourg and Ireland, there is a need to ensure that MMFs globally are resilient.”

Bubbling markets readily disregard myriad stability risks. Inflation is seen in full retreat, with policy tightening having about run its course. Recession risks have dissipated.

It’s difficult for me to imagine a backdrop of greater stability risk. Inflation risk remains highly elevated. The risk of bursting financial Bubbles is extreme. Fed rate increases have failed to tighten market conditions, with speculation and speculative leverage becoming only more acute. And fearless markets are more confident than ever that underlying fragilities ensure central bankers won’t risk bursting Bubbles.

The Swedish krona and Norwegian krone were up 5.7% this week, the Hungarian forint 5.3%, the South African rand 4.2%, the Swiss franc 3.1%, the Malaysian ringgit 3.1%, the South Korean won 3.1%, the New Zealand dollar 2.6%, and the Japanese yen 2.5%. It’s worth repeating that U.S. MBS yields sank 38 bps this week, after surging 31 bps the previous week. UK 10-year yields dropped 21 bps after surging 26 bps. Italian yields dropped 19 bps following the previous week’s 28 bps spike. Two-year Treasury yields experienced a 50 bps swing in six sessions. With the Dollar Index sinking 2.3%, the Bloomberg Commodities Index rallied 2.6%. Silver surged 8.1%, and Copper rose 4.0%.

Indications of heightened instability are being masked by the upside equities market dislocation. A monumental head fake. Despite all the bullish enthusiasm, it appears to be an increasingly challenging environment for leveraged speculation. Battle Lines are Drawn.

For the Week:

The S&P500 rose 2.4% (up 17.3% y-t-d), and the Dow gained 2.3% (up 4.1%). The Utilities rallied 2.3% (down 6.3%). The Banks rose 1.9% (down 18.4%), and the Broker/Dealers jumped 3.1% (up 8.5%). The Transports advanced 1.7% (up 18.2%). The S&P 400 Midcaps jumped 2.7% (up 10.0%), and the small cap Russell 2000 surged 3.6% (up 9.6%). The Nasdaq100 advanced 3.5% (up 42.3%). The Semiconductors surged 4.8% (up 48.1%). The Biotechs rallied 4.0% (up 0.8%). With bullion rallying $30, the HUI gold equities index surged 8.0% (up 7.3%).

Three-month Treasury bill rates ended the week at 5.39%. Two-year government yields dropped 18 bps this week to 4.77% (up 34bps y-t-d). Five-year T-note yields sank 31 bps to 4.05% (up 4bps). Ten-year Treasury yields dropped 23 bps to 3.83% (down 4bps). Long bond yields declined 12 bps to 3.93% (down 4bps). Benchmark Fannie Mae MBS yields sank 38 bps to 5.57% (up 18bps).

Greek 10-year yields dipped one basis point to 3.94% (down 62bps y-t-d). Italian yields dropped 19 bps to 4.17% (down 53bps). Spain’s 10-year yields fell 15 bps to 3.53% (up 2bps). German bund yields dropped 13 bps to 2.51% (up 7bps). French yields fell 15 bps to 3.04% (up 6bps). The French to German 10-year bond spread narrowed two to 53 bps. U.K. 10-year gilt yields sank 21 bps to 4.44% (up 77bps). U.K.’s FTSE equities index rallied 2.4% (down 0.2% y-t-d).

Japan’s Nikkei Equities Index was unchanged (up 24.1% y-t-d). Japanese 10-year “JGB” yields jumped five bps to a three-month high 0.48% (up 6bp y-t-d). France’s CAC40 rallied 3.7% (up 13.9%). The German DAX equities index jumped 3.2% (up 15.7%). Spain’s IBEX 35 equities index rose 2.0% (up 14.7%). Italy’s FTSE MIB index rallied 3.2% (up 20.9%). EM equities were mixed. Brazil’s Bovespa index declined 1.0% (up 7.3%), and Mexico’s Bolsa index slipped 0.2% (up 11.0%). South Korea’s Kospi index surged 4.0% (up 17.5%). India’s Sensex equities index added 1.2% (up 8.6%). China’s Shanghai Exchange Index recovered 1.3% (up 4.8%). Turkey’s Borsa Istanbul National 100 index jumped 4.1% (up 16.9%). Russia’s MICEX equities index rose 2.5% (up 34.8%).

Investment-grade bond funds posted inflows of $691 million, while junk bond funds reported outflows of $379 million (from Lipper).

Federal Reserve Credit declined $8.3bn last week to $8.260 TN. Fed Credit was down $640bn from the June 22nd, 2022, peak. Over the past 200 weeks, Fed Credit expanded $4.534 TN, or 122%. Fed Credit inflated $5.450 TN, or 197%, over the past 557 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $5.2bn last week to $3.437 TN. “Custody holdings” were up $71.1bn, or 2.1%, y-o-y.

Total money market fund assets declined $20.4bn to $5.454 TN, with a 18-week gain of $561bn (33% annualized). Total money funds were up $881bn, or 19.3%, y-o-y.

Total Commercial Paper jumped $15.9bn to $1.166 TN. CP was down $4bn, or 0.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose 15 bps to an eight-month high 7.02% (up 151bps y-o-y). Fifteen-year rates jumped 17 bps to 6.44% (up 177bps) – matching the high since July 2006. Five-year hybrid ARM rates surged 16 bps to 6.60% (up 225bps) – the high in data back to 2005. Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 20 bps to 7.14% (up 137bps).

Currency Watch:

July 12 – Reuters (Christopher Bing and James Pearson): “The dollar’s grip as the dominant global currency is loosening, credit rating agency S&P Global’s top economist said… Aggressive U.S. sanctions such as last year’s freezing of hundreds of billions of dollar’s worth of Russia’s reserves has seen a flurry of countries start to do some trade in currencies other than dollar as well as repatriate gold reserves. The dollar ‘doesn’t have quite the pull it used to,’ Paul Gruenwald, S&P’s chief economist, said at a conference… ‘There’s a fragmentation around the edges’. Gruenwald pointed to a number of examples where countries were now circumventing the dollar: ‘We’ve got other things happening outside of the dollar world’.”

For the week, the U.S. Dollar Index sank 2.3% to a 15-month low 99.96 (down 3.4% y-t-d). On the upside, the Swedish krona increased 5.7%, the Norwegian krone 5.7%, the South African rand 4.2%, the Swiss franc 3.1%, the South Korean won 3.1%, the New Zealand dollar 2.6%, the Japanese yen 2.5%, the euro 2.4%, the Mexican peso 2.4%, the Australian dollar 2.2%, the British pound 2.0%, the Singapore dollar 1.9%, the Brazilian real 1.7%, and the Canadian dollar 0.4%. The Chinese (onshore) renminbi increased 1.17% versus the dollar (down 3.41%).

Commodities Watch:

The Bloomberg Commodities Index rallied 2.6% (down 7.3% y-t-d). Spot Gold advanced 1.6% to $1,955 (up 7.2%). Silver surged 8.1% to $24.95 (up 4.2%). WTI crude rallied $1.56, or 2.1%, to $75.42 (down 6.0%). Gasoline recovered 2.1% (up 8%), while Natural Gas fell 1.7% to $2.54 (down 43%). Copper surged 4.0% (up 3%). Wheat increased 0.3% (down 19%), while Corn rallied 7.0% (down 12%). Bitcoin slipped $125, or 0.4%, to $30,220 (up 82%).

Global Bank Crisis Watch:

July 11 – New York Times (Jeanna Smialek, Emily Flitter and Rob Copeland): “Michael S. Barr, the Federal Reserve’s vice chair for supervision, announced… that he would be pushing for significant changes to how America’s largest banks were overseen in a bid to make them more resilient in times of trouble — partly by ratcheting up how much capital they have to get them through a rough patch. The overhaul would require the largest banks to increase their holdings of capital — cash and other readily available assets that could be used to absorb losses in times of trouble. Mr. Barr predicted that his tweaks, if put into effect, would be ‘equivalent to requiring the largest banks hold an additional two percentage points of capital.’”

July 14 – Reuters (Niket Nishant and Nupur Anand): “JPMorgan… reported a bigger-than-expected jump in second-quarter profit as it earned more from borrowers’ interest payments and benefited from the purchase of First Republic Bank. Shares of the largest U.S. lender rose… as it kicked off second-quarter results… and CEO Jamie Dimon reassured investors that the economy remained resilient. ‘Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly. That being said, there are still salient risks in the immediate view,’ he said… Dimon flagged high inflation, consumers using up their cash buffers, quantitative tightening and the war in Ukraine as some of the risks.”

July 13 – Wall Street Journal (Jon Sindreu): “Right now, the only way to escape high interest rates is by opening a deposit account to try to benefit from them. But investors shouldn’t assume banks can just keep on snubbing depositors. Though the Federal Reserve has pegged market rates of interest above 5%, getting more than 4% on a savings account is tough. A handful of banks are there, such as… PNC and Goldman Sachs’ online arm Marcus, but the average rate paid in May was 0.73%, data from… Center for Financial Stability suggests.”

July 9 – Financial Times (George Steer and Jane Croft): “Banks sold a record amount of ultra-safe mortgage-backed debt in the first half of the year, rushing to lock in a cheap source of funding during a turbulent period for the sector… More than €175bn of so-called covered bonds were sold to investors in the six months to June, surpassing the previous high in 2011… Covered bonds — a largely European phenomenon but increasingly popular with lenders in Australia and Canada — are a form of usually triple A-rated debt not only backed by the bank that issues them but also an underlying pool of assets, typically mortgages on the bank’s balance sheet.”

July 9 – Financial Times (Joshua Franklin and Stephen Gandel): “The largest US banks are this week set to report the biggest jump in loan losses since the onset of the coronavirus pandemic, as rising interest rates pile mounting pressure on borrowers across the economy… The nation’s six largest banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — are predicted to have written off a collective $5bn tied to defaulted loans in the second quarter of this year, according to the average estimates of bank analysts…”

UK Crisis Watch:

July 10 – Reuters (David Milliken and Andy Bruce): “Bank of England Governor Andrew Bailey said… the British central bank had to ‘see the job through’ on bringing down an inflation rate that is running higher than in any other major rich economy. Bailey, under pressure from politicians and some economists over the surge in inflation, said price growth had proved to be stickier than the BoE had expected. ‘It is crucial that we see the job through, meet our mandate to return inflation to its 2% target and provide the environment of price stability in which the UK economy can thrive,’ Bailey said…”

July 10 – Financial Times (Gill Plimmer): “Thames Water has fallen short of its goal of raising £1bn of urgent funding, instead securing conditional agreement from its shareholders to inject £750mn of new equity. The troubled UK utility said… its investors had agreed to provide the £750mn by April 2025 if certain conditions were met. These include a business plan ‘that underpins a more focused turnround’ with targeted performance improvements and ‘appropriate regulatory arrangements”…”

July 11 – Bloomberg (Tom Rees, Philip Aldrick, Lucy White and Aline Oyamada): “UK wages rose more than expected to a level that Bank of England Governor Andrew Bailey said is fueling inflation, maintaining pressure for higher interest rates. Average weekly earnings excluding bonuses held at 7.3% in the three months through May after figures for the period through April were revised up… It equaled the highest readings on record last month and in mid-2021, when the figures were distorted by the pandemic.”

July 11 – CNBC (Sam Meredith): “A key U.K. mortgage rate… climbed to its highest level for 15 years, surpassing levels reached in the aftermath of September’s ‘mini-budget’ crisis and deepening fears of a catastrophe for struggling homeowners. The average rate of a two-year fixed deal now stands at 6.66%… It means mortgage costs are now at their highest level since August 2008 during the global financial crisis.”

July 10 – Bloomberg (Kit Rees): “UK real estate firms face a ‘precarious’ situation in the near to-medium term as net asset values fall and refinancing risks loom, according to…HSBC, who downgraded 11 firms in the sector. Analysts led by Stephen Bramley-Jackson cut all UK real estate stocks they cover to either hold or reduce, leaving no buy ratings in the sector… ‘The near to medium-term looks particularly precarious,’ Bramley-Jackson wrote… ‘Real estate equity is factoring in a further 20%+ fall in asset prices and looming refinancing risk is a major concern.’”

July 12 – Bloomberg (Tom Rees): “The Bank of England warned that some 4 million households will face a sharp increase in mortgage costs, with the average borrower paying almost £3,000 a year more. Governor Andrew Bailey said… that the surge in mortgage rates will have an ‘impact clearly’ on finances as the central bank’s Financial Stability Report predicted that 1 million households face a £500-plus hike in monthly repayments.”

July 11 – Damian Shepherd (Reade Pickert): “UK mortgage holders have a fresh financial worry to deal with after a key lending rate surged to its highest in almost 15 years. The average rate for fixed two-year home loans rose to 6.66% on Tuesday, the highest since August 2008…”
July 12 – Wall Street Journal (Humza Jilani): “Three decades ago, London remade a derelict shipping yard at Canary Wharf into a forest of glass-and-concrete skyscrapers in a bid to mimic U.S. financial hubs. Now the 128-acre banking district east of central London is suffering a problem also plaguing U.S. cities: emptying office buildings. Last month, HSBC Holdings, the U.K.’s largest financial firm, said it was leaving its 1.1-million-square-foot headquarters… The move followed a decision by law firm Clifford Chance to relocate… and major office-space downsizings by Barclays and Société Générale, among others. Already, Canary Wharf and its surrounding area have an availability rate of 17.1%, roughly the size of an empty Empire State Building…”

Market Instability Watch:

July 12 – Financial Times (Jennifer Hughes): “US money market funds escaped the threat of ‘swing pricing’ …after regulators opted instead to impose mandatory fees and larger liquidity buffers as they sought to improve the $5.4tn market’s ability to withstand extreme stress. A divided Securities and Exchange Commission adopted new rules aimed at preventing investor stampedes more than three years after the wild market swings of March 2020. Back then, so many investors joined a ‘dash for cash’ and withdrew funds from the $800bn prime money funds… that the Federal Reserve was forced to intervene. After strong pushback from the funds industry, the SEC stopped short of imposing swing pricing, which requires funds to adjust the net asset value of withdrawals to reflect the costs of exit so that the remaining investors do not bear that burden.”

July 12 – Bloomberg (Lydia Beyoud and Alexandra Harris): “Money-market funds are getting their biggest rules overhaul in years after Wall Street’s top regulator finalized a plan to stem rapid outflows during times of financial stress. The US Securities and Exchange Commission decided… to require fees that could significantly affect a key corner the $5.5 trillion industry. Although the regulations will make it more expensive to yank money during tumult, the regulator backed off a ‘swing pricing’ proposal that the industry opposed. The new rules are meant to discourage runs like the one in March 2020 and shield remaining…”

July 13 – Bloomberg (Malavika Kaur Makol and Nurin Sofia): “Global carry traders are facing a growing sense of anxiety toward anything that threatens to derail one of 2023’s hottest investments. From the risk of a hawkish Bank of Japan policy shift that may revalue popular funding currency the yen, to a signal in bond markets that the Federal Reserve will hike the US economy into recession, concern is growing among investors that the beneficial low-volatility FX environment may be on its last legs. A return of large swings is often fatal to the strategy of borrowing where interest rates are low and investing in higher-yield, often emerging market currencies.”

July 11 – Financial Times (Will Louch and Robert Smith): “New York-listed insurance company Assured Guaranty has amassed more than $10bn of exposure to some of the most heavily indebted UK water utilities, underlining how the risks in the troubled sector have spilled beyond the country’s borders. Assured Guaranty could end up having to pay out to lenders if companies such as Thames Water and Southern Water default or fail to make interest repayments. UK water utilities… are labouring under £60bn of debt… The group has… built up about $1.9bn in exposure to Thames Water alone, with Southern Water its largest non-US exposure at $2.2bn… Assured Guaranty’s exposure to UK water companies is nearly equal to the group’s total “claims-paying resources”, which stood at $10.8bn at the end of March. It reported net income of $124mn last year.”

July 12 – Reuters (Harriet Clarfelt): “Options traders are taking advantage of muted U.S. stock market gyrations to load up on contracts that would jump in value should equities see a big drop, boosting the number of open contracts on Wall Street’s most popular volatility gauge near a record high. The one-month moving average of open contracts on the Cboe Volatility Index (.VIX) hit 13.80 million on Wednesday, close to the record high of 13.85 million contracts logged in late June…”

July 13 – Bloomberg (Toru Fujioka): “Hidden beneath convulsions in the global bond and currency market is an emerging sense of caution about the possibility the Bank of Japan may tweak yield-curve control policy at the end of July… Ten-year swap rates, popular with international funds, have climbed well beyond the central bank’s ceiling for equivalent yields. And positioning in the yen points at further gains for the recently under-pressure currency, even if short-covering carry traders were responsible for igniting its July rebound.”

July 13 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan will probably adjust its yield curve control program at its policy meeting this month given that inflation is stronger than expected, according to a former executive director at the bank. ‘I expect they will make some kind of adjustment to YCC this month,’ former director Hideo Hayakawa said… ‘If they don’t, it doesn’t make sense.’ Hayakawa, who is also a former BOJ chief economist, said that the central bank must raise its inflation outlook for this fiscal year to match reality.”

July 10 – Reuters (David Milliken and Andy Bruce): “More than 20 U.S. House Republican hardliners warned Speaker Kevin McCarthy… they will try to block their party’s fiscal 2024 appropriations bills unless spending levels are cut below levels that McCarthy and Democratic President Joe Biden agreed to in May. The hardliners, including members of the House Freedom Caucus, also called on McCarthy to delay appropriations votes in the House of Representatives until all 12 government funding bills have been finalized and can be subjected to a side-by-side review. The threat comes in the face of a looming showdown between the Republican-controlled House and Democratic-led Senate, potentially complicating efforts to avoid a government shutdown after the current fiscal year ends on Sept. 30.”

Bubble and Mania Watch:

July 11 – Wall Street Journal (Jennifer Williams-Alvarez): “Deal activity has slumped considerably from the highs reached during the pandemic… For some companies, the turbulence creates an opening for a good deal, and some finance chiefs say they are looking for opportunities in mergers and acquisitions. But sellers aren’t eager to lower valuations and sell at the bottom of the market. The disconnect, in some cases, is significant enough that companies are walking away from deals…”

July 11 – Bloomberg (Yumi Teso and Masaki Kondo): “Japanese investors bought the most overseas bonds in seven years during the six months through June, exacerbating weakness in the yen as they chased higher yields from the US to the UK. Funds purchased a net ¥14.4 trillion ($102bn) of overseas debt during the first half, the second-largest amount for data going back to 1996…”

July 14 – Bloomberg (Tasos Vossos and Eleanor Duncan): “The world’s riskiest borrowers are starting to run out of easy-money era financing and feeling the pinch as they return to a tougher market shadowed by aggressive central banks. Junk-rated companies staring down a $785 billion maturity wall are in a race against time to replace debt that they secured when major central banks across the world slashed rates and boosted quantitative easing programs… On average, these companies now have 4.7 years to put fresh financing in place, the least amount of time ever…”

July 13 – Reuters (Niket Nishant, Hannah Lang, Chris Prentice and Luc Cohen): “Alex Mashinsky, the founder and former CEO of bankrupt cryptocurrency lender Celsius Network, was arrested and charged with fraud…, while three federal regulatory agencies sued him and his company.”

July 11 – Reuters (Joseph White and Ben Klayman): “The U.S. electric vehicle market is growing, but not fast enough during the latest quarter to prevent unsold EVs from stacking up at some automakers’ dealerships… Automakers North America have billions of dollars in EV-related investments riding on how the next several quarters play out. If production of EVs continues to outpace demand, automakers will have to choose between slashing prices and profit margins, or slowing assembly lines. More than 90 new EV models are expected to hit the U.S. market through 2026, according to AutoForecast Solutions.”

Ukraine War Watch:

July 11 – Reuters (Lidia Kelly): “Dmitry Medvedev, the deputy secretary of Russia’s powerful Security Council chaired by President Vladimir Putin, said… that the increase in military assistance to Ukraine by the NATO alliance brings World War Three closer. Commenting on the first day of the summit of the U.S.-led alliance in Lithuania…, Medvedev said the aid would not deter Russia from achieving its goals in Ukraine. ‘The completely crazy West could not come up with anything else … In fact, it’s a dead end. World War Three is getting closer,’ Medvedev wrote… ‘What does all this mean for us? Everything is obvious. The special military operation will continue with the same goals.’”

July 13 – Reuters (Guy Faulconbridge): “A Russian general said he had been dismissed as a commander after telling the military leadership about the dire situation at the front in Ukraine, where he said Russian soldiers had been stabbed in the back by the failings of the top military brass… Major General Ivan Popov, who commanded the 58th Combined Arms Army, said in a voice message… that he had been dismissed after telling the truth to the top brass about the situation at the front. ‘The Ukrainian army could not break through our ranks at the front but our senior chief hit us from the rear, viciously beheading the army at the most difficult and intense moment,’ Popov said.”

July 8 – Reuters (Robert Muller, Jason Hovet, Pavel Polityuk and Olena Harmash): “The United States announced… that it would supply Ukraine with widely banned cluster munitions for its counteroffensive against occupying Russian forces… Rights groups and the United Nations secretary-general questioned Washington’s decision on the munitions, part of an $800 million security package that brings total U.S. military aid to more than $40 billion since Russia’s February 2022 invasion of Ukraine.”

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

July 12 – Wall Street Journal (Dustin Volz, Robert McMillan and Warren P. Strobel): “Hackers linked to China breached email accounts at more than two dozen organizations including some U.S. government agencies…, part of a suspected cyber-espionage campaign to access data in sensitive computer networks. The new penetration has prompted alarm among some officials and security researchers and is being viewed as part of an espionage campaign that potentially compromised valuable information belonging to the U.S. government… Senior Western intelligence officials have grown increasingly worried in recent years about the ability of Chinese hackers to orchestrate especially impressive and stealthy attacks that in some cases have been able to evade detection for years.”

July 11 – Financial Times (Kathrin Hille): “Taiwan will hold its first large-scale evacuation drill in decades this month in a sign that it is trying to harden civil defences against a potential Chinese attack. The drill will take place across Taiwan and will cover districts that collectively are home to 3mn of its 23mn people. Police and civil defence officials will lead everyone who is on the streets at the time of the drill into bomb shelters… The plans mark a drastic change from past iterations of the annual Wan’an air raid drill, triggered by a growing Chinese military intimidation campaign.”

July 14 – Bloomberg (Isabel Reynolds): “Aid to Taiwan from the US and other countries should be sped up to bolster its deterrence capabilities, the chairman of the US Joint Chiefs of Staff said. ‘The speed at which we, the US, or other countries assist Taiwan in improving their defensive capabilities, I think that probably needs to be accelerated in years to come,’ General Mark Milley said at a roundtable for reporters in Tokyo… ‘If Taiwan has a military capability to signal to the leadership in Beijing that the cost of an attack on Taiwan would exceed any potential benefit, then theoretically if the leaders in Beijing are rational they won’t do that militarily… So, yes I think it’s important that Taiwan’s military and their defensive capabilities be improved.”

De-globalization and Iron Curtain Watch:

July 13 – Financial Times (Guy Chazan, Laura Pitel and Patricia Nilsson): “Germany warned its companies to reduce their dependence on Beijing as it adopted its first China strategy, stressing that the government would not pick up the tab if they fell victim to mounting geopolitical risk. Foreign minister Annalena Baerbock told companies overly-dependent on China that they would ‘have to bear more of the financial risk themselves’ in future. She delivered the stark message… as she unveiled the landmark document with a focus on ‘de-risking’ economic relations between Europe’s largest economy and its biggest trading partner. Baerbock said the responsibility for ‘risky corporate decisions’ must become clearer as her country strives to learn the lessons of Russia’s full-scale invasion of Ukraine…”

Inflation Watch:

July 13 – Bloomberg (Reade Pickert): “US producer prices barely rose in June from a year earlier, another sign of cooler inflation that will likely comfort Federal Reserve officials. The producer price index for final demand rose 0.1% from a year earlier, the smallest advance since 2020… On a monthly basis, the PPI also increased 0.1% after falling in the prior month.”

July 8 – Wall Street Journal (Jesse Newman): “If you’re planning a cookout this summer, the chicken breasts and pork chops are finally a little cheaper. It’s the ketchup, potato chips and crackers that will cost you. The laws of supply and demand have tamed prices for goods such as meat, eggs, produce and gas… Prices, though, are stubbornly rising for what retail and food executives refer to as ‘the center store’… Prices for potato chips rose an average 17% to $3.05 per package for the 52 weeks ended May 27, compared with the previous year, according to NielsenIQ, a market-research firm. Mayonnaise increased 23% to $4.93 per container. Applesauce jumped 22%.”

July 10 – Bloomberg (Keith Naughton): “Used-car prices in the US fell 4.2% in June, their biggest monthly drop since the early days of the pandemic… Rising interest rates and bigger discounts on new cars are sapping demand for used vehicles, which is lowering the prices they fetch at auctions… Pricing also is taking a hit because dealers have almost fully replenished inventory on used-car lots that were depleted by shutdowns and supply shortages during the pandemic.”

July 14 – New York Times (Emily Flitter): “Insurers are trapped in a riddle: In a world where the risk of costly disasters is rising but high premiums are squeezing policyholders and angering state regulators, how can they continue to make money? That question was at the center of the decision by Farmers Insurance this week to stop renewing almost a third of the policies it has written in Florida, becoming the latest insurer to pull business from a state as the industry grapples with the rising costs of covering damage tied to floods, hurricanes, wildfires and other climate-related disasters.”

July 7 – Bloomberg (Christopher Anstey): “Former Treasury Secretary Lawrence Summers warned against any sense of achievement by policymakers in bringing inflation down notably from its peak last year, and predicted a further selloff in bonds as investors adjust to the need for more monetary tightening. ‘Nobody ever thought we were an underlying 8% inflation country,’ Summers said on Bloomberg… ‘So the fact that the rate has come down shouldn’t be confused with saying that ‘we can be confident that we’re on a path of this all being OK.’’”

July 13 – Financial Times (Thomas Hale): “The investment chief at one of the world’s top hedge funds has warned the US battle with inflation is far from over, and bets on a rapid series of interest rate cuts from the Federal Reserve next year are premature. The comments from Bob Prince… of Bridgewater Associates, pour cold water on this week’s global rally… ‘Inflation has come down but it is still too high, and it is probably going to level out where it is — we’re likely to be stuck around this level of inflation… The big risk right now is that you get a bounce in energy prices when wages are still strong’, which could drive a rebound in inflation…’”

July 12 – Bloomberg (Siddhartha Singh and Pratik Parija): “India, the world’s biggest rice shipper, is considering banning exports of most varieties, a move that may send already lofty global prices higher as the disruptive El Niño weather pattern returns. The government is discussing a plan to ban exports of all non-Basmati rice… That’s because of rising domestic prices and authorities want to avoid the risk of more inflation…”

July 12 – Financial Times (George Steer in London and Barney Jopson): “Prices for olive oil are surging further in to record-breaking territory after an extended period of unusually dry weather in southern Europe damaged crops. European prices first moved above €4 per kilogramme in September but have now shot up to more than €7 per kg owing to soaring temperatures and a lack of rainfall in Spain, the world’s largest producer, as well as in Italy and Portugal.”

Biden Administration Watch:

July 13 – Bloomberg (Christopher Condon and Viktoria Dendrinou): “Treasury Secretary Janet Yellen is traveling to India and Vietnam next week, seeking to strengthen ties with two increasingly important US partners and shore up economic resilience through diversified supply chains. Yellen will first head to Gandhinagar, India, for a meeting of Group of 20 finance and central bank heads, where she will push for reforming global lending institutions to boost the size and scope of their firepower and for advancing talks on easing the debt burden for poorer nations…”

Federal Reserve Watch:

July 10 – Bloomberg (Liz Capo McCormick, Alexandra Harris and Jonnelle Marte): “Tucked away in hours of congressional testimony by Federal Reserve Chair Jerome Powell last month was an admission that the central bank was blindsided by the impact of shrinking its balance sheet four years ago. While Powell assured lawmakers the Fed is committed to avoiding a repeat of 2019 — when the repo market, a key part of US financial plumbing, seized up — Wall Street economists and strategists caution that quantitative tightening remains complex and hard to predict. Known as QT, it involves letting Fed bond holdings mature without replacement, draining cash from the financial system. In the coming months, the full brunt of the Fed’s current QT program is set to be felt…”

July 10 – Bloomberg (Rich Miller, Sam Kim and Matthew Boesler): “Three Federal Reserve officials on Monday said policymakers will need to raise interest rates further this year to bring inflation back to the central bank’s goal. ‘We’ve made a lot of progress in monetary policy, the work that we need to do, over the last year,’ Federal Reserve Vice Chair for Supervision Michael Barr told a Bipartisan Policy Center meeting… ‘I would say we’re close, but we still have a bit of work to do.’”

July 13 – Reuters (Michael S. Derby): “Federal Reserve Governor Christopher Waller said Thursday he’s not ready to call an all clear on U.S. inflation and favors more rate rises this year, saying the upcoming July meeting should bring an increase. ‘The robust strength of the labor market and the solid overall performance of the U.S. economy gives us room to tighten policy further,’ Waller said… Waller said he supports the Fed hiking by two more quarter percentage point increases this year, and noted ‘I see no reason why the first of those two hikes should not occur at our meeting later this month.’”

July 10 – Reuters (Michael S. Derby): “Federal Reserve Bank of Cleveland President Loretta Mester said… still-strong levels of underlying inflation pressures are pointing the central bank toward more rate rises. ‘The economy has shown more underlying strength than anticipated earlier this year, and inflation has remained stubbornly high, with progress on core inflation stalling,’ Mester said… ‘In order to ensure that inflation is on a sustainable and timely path back to 2%, my view is that the funds rate will need to move up somewhat further from its current level and then hold there for a while as we accumulate more information on how the economy is evolving,’ she said.”

July 10 – Reuters (Ann Saphir): “San Francisco Federal Reserve Bank President Mary Daly… repeated that she believes two more rate hikes this year will likely be needed to bring down too-high inflation in the face of a strong labor market. ‘We’re likely to need a couple more rate hikes over the course of this year to really bring inflation’ sustainably back to the Fed’s 2% goal, Daly said… ‘We may end up doing less because we need to do less; we may end up doing just that; we could end up doing more. The data will tell us.’ The risks of doing too little still outweigh the risks of doing too much…”

U.S. Bubble Watch:

July 13 – Reuters (David Lawder): “The U.S. government posted a $228 billion budget deficit for June, up 156% from a year earlier as revenues continued to weaken and July benefit payments were accelerated into June, the U.S. Treasury Department said… The deficit compares to a June 2022 budget gap of $89 billion. June receipts fell $42 billion, or 9% from a year ago, to $418 billion, while June outlays rose $96 billion, or 18%, to $646 billion… For the first nine months of the 2023 fiscal year, which ends Sept. 30, receipts fell $423 billion, or 11%, from the year-ago period to $3.413 trillion… The Federal Reserve has earned $93 billion less this year because it is paying higher interest on bank reserves and no longer has positive net income – a situation that a Treasury official said was expected to continue. Year-to-date outlays rose $455 billion, or 10% from a year earlier to $4.805 trillion. Higher outlays for Social Security this year have been driven by cost-of-living adjustments, while the interest on the public debt so far this year has risen $131 billion, or 25%, to $652 billion due to higher interest rates.”

July 11 – Reuters (Safiyah Riddle): “U.S. small business confidence climbed to a seven-month high in June as pessimism about the economic outlook diminished sharply and sales expectations improved, but a still-tight labor market continued to drive concerns about inflation… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index rose 1.6 points to 91 last month, the greatest month-to-month improvement since August 2022… One-in-four firms plan near-term capital spending, up from a three-year low earlier in the spring, and nearly a third reported intentions to raise prices – a seven-month peak.”

July 11 – Reuters (David Shepardson): “The head of the United Auto Workers, which represents 150,000 U.S. hourly workers at General Motors, Ford Motor and Chrysler-parent Stellantis, said the union is not afraid to strike any of the automakers without a fair contract. ‘The Big Three is our strike target. And whether or not there’s a strike, it’s up to Ford, General Motors and Stellantis,’ UAW President Shawn Fain said… ‘They’ve made a quarter of a trillion dollars in North American profits over the last 10 years and they can afford to make things right for our members. If the Big Three don’t give us our fair share, then they’re choosing to strike themselves and we’re not afraid to take action,’ Fain said.”

July 11 – Financial Times (Claire Bushey): “The three largest US carmakers and the union representing more than 400,000 of their workers are squaring off for negotiations that industry watchers expect to be the most contentious in years. Representatives of Ford, General Motors, Stellantis and the United Auto Workers are meeting this week in Detroit to start the next stage of negotiations on a new contract for hourly workers. Both sides are grappling with how increasing electrification will affect the industry’s workforce. After a historic election at the union swept in a new president determined to restore benefits lost in the wake of the Great Recession of 2007-09, the UAW is calling it ‘our generation’s defining moment’.”

July 12 – Reuters (Dan Burns): “The interest rate on the most popular U.S. home loan leapt back over 7% last week for the first time since last fall… The average contract rate on a 30-year fixed-rate mortgage jumped 22 bps to 7.07% in the week ended July 7, the Mortgage Bankers Association said… That was the highest since November and brings that rate to within 10 basis points of last October’s two-decade high in home loan borrowing costs.”

July 10 – Bloomberg (Reade Pickert): “US consumer borrowing slowed to a more than two-year low in May, reflecting the first decline in non-revolving credit since the onset of the pandemic. Total credit rose $7.2 billion, the smallest advance since November 2020… Non-revolving credit, such as loans for school tuition and vehicle purchases, decreased $1.3 billion, the first decline since April 2020… Revolving credit outstanding, which includes credit cards, rose $8.5 billion… Credit cards issued by commercial banks carried a 20.68% rate in May, a record in Fed data back to 1972.”

July 10 – CNBC (Diana Olick): “Home prices hit a record high in May, rising 0.7% nationally compared with April at a seasonally adjusted rate, according to the Black Knight Home Price Index. Prices… were 0.1% higher in May than a year earlier. ‘There is no doubt that the housing market has reignited from a home price perspective,’ said Andy Walden, vice president of enterprise research at Black Knight. ‘Though the backward-looking annual growth rate dipped to 0.1%, May’s exceptionally strong +0.7% month-over-month gain would equate to an annualized growth rate of 8.9…’, Walden added.”

July 11 – Wall Street Journal (Kate King): “New York City’s luxury residential market is gaining momentum after stumbling early in the year, another sign that pockets of the U.S. housing market are stirring to life despite high mortgage rates. Manhattan’s most expensive homes posted their second-best June for contracts signed since at least 2006. Signs of a potential turnaround have defied expectations that rising interest rates and a weakening economy would keep even the most affluent buyers on the sidelines for much of 2023. Instead, a rebounding stock market and fading recession fears boosted activity among well-heeled New Yorkers.”

July 10 – Wall Street Journal (Veronica Dagher): “An adjustable-rate mortgage will save home buyers little, if any, money right now. When 30-year fixed-mortgage rates go up like they are now, borrowers tend to flock to ARMs because they can help them pay less in the early days of homeownership or potentially make a larger offer on a house. ARMs start with low rates and then adjust higher years down the road. But right now, the average rate on ARMs—6.5% to 7.21%, depending on the loan—is nearly equivalent to the average 30-year fixed rate of 6.95% as of July 5, according to Bankrate…”

Fixed Income Watch:

July 12 – Financial Times (Harriet Clarfelt): “The $1.35tn US junk bond market has shrunk by almost $200bn since its all-time peak in late 2021, helping to anchor prices at levels that investors say could give false signals about the health of the world’s largest economy. A steep rise in interest rates since early last year has helped deter companies from selling new bonds, while several companies have climbed out of the high-yield market into investment grade territory. Meanwhile, more borrowers are turning to private markets for fresh funds. Altogether, this has wiped 13% off the total value of US junk bonds in issue since the record high.”

China Watch:

July 13 – Bloomberg: “China is facing pressure on trade as foreign shipments drop off and domestic demand remains weak, with a darkening global growth outlook and geopolitical tensions making a reprieve unlikely anytime soon. The country’s exports fell 12.4% in dollar terms in June from a year earlier… That was the second straight month of declines and the biggest drop since the pandemic hit in early 2020. Imports slumped 6.8%… The weakness in export demand was widespread. Exports to the US fell almost 24%…”

July 9 – Bloomberg: “China’s consumer inflation rate was flat in June while factory-gate prices fell further, fueling concerns about deflation risks and adding to speculation about potential economic stimulus. The consumer price index was unchanged last month from a year earlier… That was the weakest rate since February 2021… Core inflation… slowed to 0.4% from 0.6%. Producer prices fell 5.4% from a year earlier, the deepest pace since December 2015. ‘The risk of deflation is very real,’ said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd.”

July 10 – Reuters (Liangping Gao, Ella Cao and Ryan Woo): “China’s producer prices fell at their fastest pace in over seven years in June, while consumer prices teetered on the edge of deflation, adding to the case for policymakers to use more stimulus to revive sluggish demand. The worsening factory-gate price deflation and the move by consumer prices towards deflation for the first time since February 2021 bode ill for China’s economic growth… ‘We think the more challenging deflation environment and sharp slowdown in growth momentum support our view that the PBOC has entered a rate-cutting cycle,’ said economists at Barclays… The producer price index (PPI) fell for a ninth consecutive month in June, down 5.4% from a year earlier…”

July 14 – Bloomberg: “The People’s Bank of China hinted at more policy support for the economy, while also urging patience for the recovery to take hold. Top central bank officials said they have enough room to ease monetary policy if needed and hinted at possible adjustments to the reserve requirement ratio for banks and further targeted easing of property controls. ‘We still have ample policy room to deal with unexpected challenges and changes,’ Deputy Governor Liu Guoqiang told reporters… ‘We need to be patient and confident in the economy’s continued and steady growth.’”

July 11 – Bloomberg: “China signaled more economic support measures are imminent after authorities took a small step toward supporting the ailing property market by extending loan relief for developers. Top state-run financial newspapers ran reports Tuesday flagging the likely adoption of more property supportive policies, along with measures to boost business confidence.”

July 11 – Bloomberg: “Investors in Chinese bank stocks are getting a painful reminder of who’s likely to bear the brunt of government efforts to shore up the embattled real estate sector and revive economic growth. A Bloomberg Intelligence stock index of Chinese lenders has tumbled 14% from this year’s high in May… Already under pressure from China’s monetary loosening and tepid demand, banks are facing renewed scrutiny after authorities asked the sector to extend debt relief to developers as the nation’s housing crisis continues. Some Wall Street analysts also have turned cautious, with Goldman Sachs… taking a bearish view on the industry, a move that drew a rare rebuttal from a state-run Chinese newspaper last week.”

July 13 – Wall Street Journal (Lingling Wei): “Desperate for capital and with their economies struggling, China’s cities are wooing Western businesses with previously unavailable goodies. Beijing has labeled 2023 the ‘Year of Investing in China’ and local officials have embarked on promotional tours overseas… That effort is running headlong into President Xi Jinping’s national-security agenda… A Xi-led campaign this year has hit Western management consultants, auditors and other firms with a wave of raids, investigations and detentions. Meanwhile, an expanded anti-espionage law has added to foreign executives’ worry that conducting routine business activities in China, such as market research, could be construed as spying. The perception that doing business in China has become much riskier is choking the flow of capital into an economy already struggling…”

July 12 – Bloomberg: “China’s state pension fund has suggested that its asset managers sell some bonds including those from riskier local government financing vehicles and private developers after a review, people familiar with the matter said. The National Council for Social Security Fund asked some mutual funds that handle its money to conduct a thorough review of their holdings last week, and then advised them to sell after the results… The move underscores the difficult balancing act facing Chinese authorities as they try to diffuse risks in the nation’s credit markets without destabilizing the financial system.”

July 13 – Bloomberg: “Investors in China’s local government financing vehicles are cutting the length of time they are prepared to extend credit and demanding higher returns, as cracks appear in the $9.1 trillion market. In the first half of 2023 the average tenor — the length of time before a debt matures — of onshore LGFV bond issuance fell to 2.51 years… That’s down from 2.95 years in 2022 and the shortest since at least 1999 when the data series began. Additionally, the average coupon on LGFV yuan bonds jumped to 4.39% in the first six months of the year from 3.94% last year despite the fact that China is easing monetary policy.”

July 13 – Financial Times (Thomas Hale): “Chinese property developer Shimao Group Holdings paid Rmb24bn ($3.3bn) in 2017 for land earmarked for a prestige commercial project that would be dominated by a 500-metre-tall skyscraper, with commanding views of Shenzhen. The price was a record at the time…, but six years on, those plans are unrealised and the land was put back up for sale this month at a heavily discounted $1.8bn. Yet it still received no bids in the online auction ordered by a Beijing court after Shimao had defaulted on its debts. The undeveloped and unwanted plot is one among many examples of a paralysis that has for almost two years gripped a real estate industry that is critical to China’s economy.”

July 10 – Financial Times (Chan Ho-him in Hong Kong and Thomas Hale): “A Singapore hedge fund has filed a petition in Hong Kong to wind up defaulted developer Kaisa, marking one of the first cases dealing with a Chinese developer’s mainland debt following a property sector meltdown in the country. The court filing by hedge fund Broad Peak Investment Advisers in Hong Kong comes during a liquidity crunch for Chinese property developers… A number of Hong Kong-listed Chinese developers including Evergrande, the world’s most indebted property developer, are battling winding-up petitions in Hong Kong.”

July 8 – New York Times (Keith Bradsher): “China, which has lent nearly $1 trillion to some 150 developing countries, has been reluctant to cancel large debts owed by countries struggling to make ends meet. That is at least in part because China is facing a debt bomb at home: trillions of dollars owed by local governments, their mostly off-the-books financial affiliates, and real estate developers. One of the main issues for… Yellen during her visit to Beijing this week is whether she can persuade China to cooperate more to address an evolving debt crisis facing lower-income countries. But China’s state-controlled banking system is wary of accepting losses on foreign loans when it faces far greater losses on loans within China.”

July 12 – Bloomberg: “Chinese households added 11.9 trillion yuan ($1.7 trillion) in savings in the first six months of the year, up 15% from a year earlier, according to… the People’s Bank of China. That’s the largest amount of new deposits for the period on record, and it pushed up total household savings to almost 132 trillion yuan. Banks have made 2.8 trillion yuan in new loans to households through June, up 28% from a year earlier.”

July 10 – Bloomberg (Tom Hancock): “China’s fiscal policies need to play a bigger role in helping the economy since cutting interest rates would likely encourage people to save rather than spend, according to a former central bank official. Sheng Songcheng — a former director of the People’s Bank of China’s statistics and analysis department — argued that China’s macroeconomic conditions are not suitable for sustained rate cuts. Authorities should instead consider issuing more central government bonds and making more cuts to bank reserve requirements, he said.”

July 10 – Bloomberg: “A bearish research report on Chinese banks by Goldman Sachs… has drawn fresh criticism from a major lender and one of the nation’s largest macro hedge funds after receiving a backlash from state media. Goldman’s assumptions have ‘misled some investors and caused them to worry about the asset quality,’ China Merchants Bank Co. said… Shanghai Banxia Investment Management Center also dismissed the note on Monday, saying the US bank’s prediction that local government debts would sink Chinese banks’ profits and push up their bad loans will likely be proven wrong.”

July 9 – Bloomberg: “A group of Chinese female economists and entrepreneurs who dined with… Janet Yellen have been blasted by online nationalists for betraying their country by interacting with the US official. While the Treasury department skipped identifying attendees from the meeting…, a group photograph of the gathering posted to China’s Twitter-like Weibo was used to identify some participants… ‘There’s no such thing as a free meal,’ wrote Shen Yi, a professor in international politics at Fudan University, who has over two million followers… ‘They’ll need deliver KPIs in exchange,’ he added, using the acronym for key performance indicators, implying the women would have to give something to the US government.”

Central Banker Watch:

July 12 – Reuters (Steve Scherer and Ismail Shakil): “The Bank of Canada… hiked its key overnight rate by a quarter of a percentage point to a 22-year high of 5.0%, and said it could raise rates further because of the risk of inflation stalling above its 2% target. The move to increase borrowing costs by 25 bps for the second time in as many months was expected… After a five-month pause, the BoC raised its overnight rate in June, saying monetary policy was not sufficiently restrictive… ‘If new information suggests we need to do more, we are prepared to increase our policy rate further,’ BoC Governor Tiff Macklem told reporters… ‘But we don’t want to do any more than we have to.’”

July 13 – Financial Times (Olaf Storbeck): “Some eurozone rate-setters believe more interest rate rises will be necessary after the summer amid concerns that inflation was staying ‘too high for too long’… The minutes of the June meeting of the 25-member governing council… support economists’ expectations that interest rates could need to keep rising to tame persistent inflation. ‘It was seen as essential to communicate that monetary policy had still more ground to cover to bring inflation back to target in a timely manner,’ the document stated, adding that ‘interest rates beyond July’ could be considered ‘if necessary’.”

July 14 – Reuters (Wayne Cole): “Australia has appointed the first female head of its central bank, passing over the current governor to elevate his deputy to the high-profile job amid a public backlash over steeply rising interest rates. Australian Treasurer Jim Chalmers and Prime Minister Anthony Albanese… announced Michele Bullock would head the Reserve Bank of Australia (RBA) for the next seven years, having chosen not to reappoint Governor Philip Lowe for a second term.”

July 11 – Bloomberg (Tracy Withers): “New Zealand’s central bank kept interest rates unchanged for the first time in almost two years amid signs that the weaker economy is slowing inflation. The Reserve Bank’s Monetary Policy Committee held the Official Cash Rate at 5.5%…”

Global Bubble Watch:

July 12 – Reuters (Jorgelina Do Rosario): “Global public debt surged to a record $92 trillion in 2022 as governments borrowed to counter crises, such as the COVID-19 pandemic, with the burden being felt acutely by developing countries, a United Nations report said. Domestic and external debt worldwide has increased more than five times in the last two decades… Developing countries owe almost 30% of the global public debt, of which 70% is represented by China, India and Brazil. Fifty-nine developing countries face a debt-to-GDP ratio above 60% – a threshold indicating high levels of debt.”

Europe Watch:

July 11 – Bloomberg (Priscila Azevedo Rocha and Elena Mazneva): “Heat is blanketing Europe from Germany to the Balkans, putting pressure on the region’s energy and transport systems as rivers such as the Rhine and Rhone are impacted. Germany’s national forecaster warned of “extreme heat stress on the Upper Rhine” on Tuesday. A similar alert was issued by the Italian weather service, with the mercury in Sardinia exceeding 40C (104F).”

Japan Watch:

July 12 – Bloomberg (Takashi Nakamichi): “SBI Holdings Inc., Rakuten Group Inc. and Monex Group Inc. are among brokerages in Japan that sold Credit Suisse’s riskiest bonds to retail investors, highlighting the widening fallout of these products in the country. The operators of the nation’s three major online brokerages offered the Swiss lender’s Additional Tier 1 notes for a minimum purchase amount of $200,000…”

Emerging Market Watch:

July 11 – Financial Times (Mary McDougall): “The gap in government borrowing costs between emerging and developed markets has fallen to the lowest level since 2007… The spread this week fell to less than 2.9 percentage points, the narrowest in 16 years, down from 4.8 points a year ago, according to… Allianz Global Investors. ‘There has been a massive divergence between local currency emerging market debt and developed markets this year,’ said Richard House, chief investment officer for emerging market debt at Allianz Global Investors.”

July 10 – Reuters (Seunggyu Lim): “South Korea’s financial services regulator has asked major commercial banks to prepare around $4 billion in financing to support a credit cooperative hit by customer withdrawals… An official… said it could not confirm the amount or other details, but it had asked the banks for cooperation in preparing liquidity through repurchase-agreement facilities to aid MG Community Credit Cooperatives (MGCCC). ‘(Authorities) are closely monitoring the liquidity of MGCCC,’ the official said, declining to be named due to the sensitivity of the matter.”

Leveraged Speculation Watch:

July 13 – Bloomberg (Nishant Kumar): “The first half of 2023 proved to be a washout for some of the world’s biggest macro traders as they struggle to recoup losses sparked by volatile bond markets. Andrew Law’s Caxton Macro hedge fund deepened its decline in June to end the first half down 20%, while Jeff Talpins’s Element Capital Management suffered a 7.7% loss last month to extend its slump this year to 15.4%, people with knowledge of the matter said. Others such as Said Haidar and billionaire Chris Rokos made money in June, but fell short of recovering their losses from March this year when the collapse of Silicon Valley Bank sent shock waves across global markets and hurt their leveraged bets in the rates market.”

July 10 – Reuters (Carolina Mandl): “Global hedge funds posted gains of 2.2% in June, as artificial intelligence-related stocks surged and the banking crisis eased, data provider HFR said… In the first half of the year, hedge funds added 3.45% to their investors… Equity hedge funds, which bet stocks will fall or rise, posted the best performance among all four categories tracked by HFR, both in June and in the year, with gains of 2.94% and 5.55%, respectively. Still, equity hedge funds lagged the S&P 500 index, which soared 16.9% in the first half of 2023. Macro hedge funds ended June down 0.47% in the year, as they were able to erase some losses earlier in the year last month, up 1.47%.”

July 10 – Bloomberg (Russell Ward): “Carl Icahn is getting breathing room from banks more than two months after Hindenburg Research disclosed its short-selling report against the billionaire’s investment firm… Icahn finalized amended agreements with banks on Sunday that untie his personal loans from the trading price of his company’s shares, increase his collateral and set up a plan to fully repay the borrowings in three years… Icahn, 87, has borrowed billions against his shares in Icahn Enterprises LP, raising the prospect of a margin call if the price keeps sinking.”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 13 – Bloomberg (Brian K. Sullivan): “The world just had its hottest June ever for land and sea, with ocean temperatures setting new highs for the third month in a row. Combined ground and ocean temperatures across the Earth were 1.89F degrees above the 20th-century average of 59.9F, making this the warmest June in data going back 174 years, the US National Centers for Environmental Information said…”

July 11 – CNN (Nouran Salahieh and Lauren Mascarenhas): “Intense rainstorms that inundated the Northeast turned streets into rivers, forced evacuations and prompted officials in Vermont’s capital, Montpelier, to close the downtown area. ‘Make no mistake, the devastation and flooding we’re experiencing across Vermont is historic and catastrophic,’ Gov. Phil Scott told reporters… Floodwaters in some areas ‘surpassed levels seen during Tropical Storm Irene,’ the governor said. Irene hit the United States as a hurricane in August 2011 and left entire communities submerged, killing more than 40 people in several Eastern states. The current flooding claimed thousands of homes and businesses, Scott added.”

July 13 – Reuters (Renee Maltezou and Angelo Amante): “Southern Europe sweltered under a fierce heatwave on Thursday, with a warning that temperatures could hit record highs for the continent next week… Weather alerts were in place across Spain’s Canary Islands, Italy, Cyprus and Greece, with the Greek authorities expecting temperatures to reach as high as 43 Celsius (109.4 Fahrenheit) or 44 Celsius on Friday or Saturday.”

July 10 – Wall Street Journal (Richard Vanderford): “Business insurance has been roiled by severe weather and inflation, the same forces disrupting home insurance markets in catastrophe-prone areas of the U.S., with companies facing tougher conditions as they try to insure their properties against disaster. The problem of how—or even if—properties can be insured in areas at risk of wildfires, hurricanes and other damaging weather has come to the fore as several insurance companies have in recent weeks stopped writing new home insurance policies in California and elsewhere. The U.S. Treasury Department last month warned that climate risk poses a major challenge to the insurance industry.”

July 10 – Reuters (Gabrielle Tétrault-Farber): “Antarctic sea ice levels reached record lows last month, the World Meteorological Organization (WMO) said…, a development climate change experts described as worrisome. WMO said that Antarctic sea ice levels last month – the hottest June ever recorded — were at their lowest since satellite observations began, at 17% below average. ‘We’re used to seeing these big reductions in sea ice in the Arctic, but not in the Antarctic. This is a massive decrease,’ Michael Sparrow, Chief of World Climate Research Programme, told reporters…”

Geopolitical Watch:

July 14 – Bloomberg (Jon Herskovitz): “North Korea’s newest long-range missile increases the chances it could deliver a strike to the US mainland, giving Kim Jong Un more leverage in his dealings with the Biden administration. The Hwasong-18 solid-fuel intercontinental ballistic missile North Korea launched this week flew longer than any of its other ICBMS and appeared designed to carry a multiple nuclear weapons payload, which increases the chances at least one bomb could slip past interceptors…”

July 10 – Reuters (Jack Kim): “North Korea accused the United States… of violating its airspace by conducting surveillance flights and warned that, while Pyongyang was exercising restraint, such flights may be shot down. Provocative military actions by the United States were bringing the Korean peninsula closer to a nuclear conflict, an unnamed spokesperson of North Korea’s Ministry of National Defence said in a statement carried by the official KCNA news agency.”

July 14 – Reuters (Sakura Murakami): “Japan called on China to approach the release of radioactive water from the Fukushima nuclear power plant in a ‘scientific manner’ at a meeting held between Japanese Foreign Minister Yoshimasa Hayashi and Chinese top diplomat Wang Yi… In a move that has caused alarm among neighbouring countries and local fishermen, Japan is set to start releasing more than 1 million tonnes of water from the wrecked Fukushima Dai-ichi Nuclear Power Plant this summer. China has emerged as the most vocal of those critics, saying the plan would endanger the environment and human lives.”

July 12 – Bloomberg (Michelle Fay Cortez and Ka Ho Cheuk): “Hong Kong restaurants are looking for new seafood supplies as authorities plan to ban imports of aquatic products from 10 Japanese regions if the country releases treated water from the Fukushima nuclear disaster site.”

July 11 – Reuters (Stefanno Sulaiman and Fransiska Nangoy): “Indonesia’s coast guard said… it seized an Iranian-flagged supertanker suspected of involvement in the illegal transshipment of crude oil, and vowed to toughen maritime patrols… The Very Large Crude Carrier (VLCC) was suspected of transferring oil to another vessel without a permit on Friday, the Southeast Asian nation’s maritime security agency said.”

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