July 2, 2021: Hedge Fund Treasury Trading and Funding Fragility

July 2, 2021: Hedge Fund Treasury Trading and Funding Fragility
Doug Noland Posted on July 3, 2021

Last week’s CBB focused on a fundamental flaw in contemporary central bank doctrine – using securities markets as the primary mechanism for managing system financial conditions. What began with Greenspan’s liquidity assurances following the “Black Monday” 1987 market crash – soon stretching in the early-nineties to interest-rate and yield curve manipulation to bolster market-based Credit – has morphed into $120 billion monthly liquidity injections in an environment of manic securities, housing and asset markets.

Greenspan’s policy shift was instrumental in generating extraordinary returns and rapid growth for the hedge fund industry, and leveraged speculation more generally. Fed and GSE backstops were key to the leveraged speculating community surviving the 1994 bursting bond/derivatives Bubble. Speculative leverage expanded rapidly, ensuring only greater backstops and bailouts during the 1998 Russia/LTCM fiasco.

Following the “tech” Bubble collapse, the Fed aggressively slashed rates and resorted to stoking unprecedented mortgage Credit growth and associated leveraged speculation in the name of system reflation. The resulting Bubble collapse in 2008 was met with the introduction of QE to the tune of $1.0 TN. There’s been no turning back, as Federal Reserve holdings have surpassed $8.0 TN – ballooning almost ten-fold since 2007.

This week saw an interesting addition to the Federal Reserve staff working papers in The Finance and Economics Discussion Series: “Hedge Fund Treasury Trading and Funding Fragility: Evidence from the COVID-19 Crisis” (Mathias S. Kruttli, Phillip J. Monin, Lubomir Petrasek and Sumudu W. Watugala).

I noted last week the omission of hedge fund leveraging in Loretta Mester’s “Financial Stability and Monetary Policy…” presentation. This week’s Fed paper helped fill in a few analytical holes.

“Hedge fund gross U.S. Treasury (UST) exposures doubled from 2018 to February 2020 to $2.4 trillion, primarily driven by relative value arbitrage trading and supported by corresponding increases in repo borrowing… Since 2018Q2 there has been a significant increase in repo borrowing, indicating a marked increase in long UST securities holdings.”

Data in the report are illuminating (i.e. “exposures doubled from 2018 to February 2020”), while corroborating the Bubble Thesis. Still, the research only covers a segment of the global leveraged speculating community. “The hedge fund data used in this paper are primarily from Form PF. In our analysis, we use the set of qualifying hedge funds (QHFs) that file this form quarterly.” Unregulated and “offshore” entities are excluded, including the massive “family office” complex.

Clearly, the past few years have witnessed a tremendous expansion in leveraged speculation. While this paper focused on levered trading in Treasury securities, March 2020’s volatility throughout fixed-income (i.e. high-yield and investment-grade corporate Credit, MBS, municipal bonds…) indicated the historic Bubble in speculative leveraging has seeped into every nook and cranny.

This particular Fed research focused on hedge fund activity in the Treasury market and, more specifically, in the popular “basis trade” strategy (leveraging long cash Treasuries primarily financed in the repo market, while simultaneously shorting Treasury futures/derivatives). With meager spreads/arbitrage opportunities available in these types of Treasury trades, they become enticing only through significant leverage. And extreme leverage creates fragility and vulnerability to systemic shocks and market dislocation, as was experienced early in the pandemic.

“In March 2020—as investors around the world engaged in a flight to cash and liquidity amid an unprecedented, sudden economic shutdown—there was a sharp divergence in the UST spreads that hedge funds generally bet will converge.”

“While UST securities play a vital role in the global financial system, hedge funds’ impact on UST market functioning is not well understood because they are less regulated than traditional broker-dealers and provide few disclosures. Further, compared to other asset managers, hedge funds employ substantial leverage coupled with investment strategies that are less liquid.”

“Compared to other UST trading funds during the March 2020 turmoil, the subset of UST hedge funds that predominantly engaged in the cash-futures basis trade faced greater margin pressure stemming from their short futures positions, requiring immediate liquidity infusions or position liquidations.”

This Fed paper included a number of illuminating charts that confirm the extraordinary increase in speculation that commenced in 2018 – in hedge fund “Gross Assets,” “Long Exposures,” “Repo Borrowing,” “Brokerage Borrowing,” and “Repo Securities & Other Collateral.” The most dramatic growth is displayed in the parabolic rise in “Basis Traders” “US Treasury Exposures” and “Repo Borrowing” – with Treasury exposures and repo borrowings more than doubling in 2018 to almost $750 billion (“Gross Assets” doubling to about $1.7 TN).

Recall the new Fed Chair’s hope for normalizing interest rates and somewhat weening the markets from Fed backstopping was DOA following the late-2018 eruption of market instability. Powell’s dovish “pivot” reversed what would have been a destabilizing de-risking/deleveraging episode. The Fed’s charts confirm that speculative leverage was expanding again by early-2019, only to begin a downturn during that summer’s bout of repo market instability.

Rather than tolerate a much overdue – and greatly needed – adjustment for a dangerously over-leveraged marketplace, the Fed resorted in September 2019 to so-called “insurance” stimulus – QE in the face of near-record stock prices and multi-decade low unemployment. This is key, and I doubt history will get this right. The Fed used extreme monetary stimulus to bolster an increasingly fragile leveraged speculating community – not to support either a weakening economy or a problematic Credit slowdown. Simply, the Fed moved to sustain the Bubble.

The predictable outcome is apparent in the Fed’s charts. Hedge fund Long Exposures, Repo Borrowing, and Brokerage Borrowing all quickly recovered and inflated to record highs right into the March 2020 crisis. Ditto for “Basis Traders” Treasury Exposures and Repo Borrowing.

From the Fed paper: “Compared to these [“tech bubble”, August 2007, September 2008] crisis episodes, the March 2020 shock is unprecedented, particularly in the speed at which extreme moves occurred and in its impact on otherwise safe and liquid markets such as the UST market.”

“This indicates that during the COVID-19 crisis in March, these hedge funds were under a significant amount of stress, to a greater extent than at any point since Form PF reporting started in 2012. Clearly, the current crisis unfolded more precipitously than the global financial crisis in 2007-2009, which was characterized by relatively longer periods of a buildup of uncertainty from 2007 onward.”

Recall that the Federal Reserve’s initial March 2020 crisis measures failed to reverse a powerful “risk off” de-risking/deleveraging dynamic. The Fed was forced to rapidly employ open-ended QE, increasing holdings by over $2.0 TN in five weeks ($2.85 TN in 12 weeks). In addition to massive liquidity measures, the Fed established numerous financing vehicles (i.e. PMCCF, SMCCF, MMLF, CPFF, MSBLP, TALF…) to direct liquidity to specific markets. Moreover, the Fed announced it would take the leap into corporate debt and fixed-income ETF purchases.

“The March 2020 extreme market stress period lasted less than three weeks until the Fed’s intervention, too brief a period for hedge fund investors to redeem their shares at a significant scale during the stress period itself, given the share restrictions of the typical fund.”

In my March 20, 2020, CBB, I wrote: “I understand we can’t allow the system to collapse, but Please Don’t Completely Destroy the Soundness of Central Bank Credit and Government Debt. Does anyone realize what’s at stake?”

Too many times over recent decades my worst fears have been realized. And over the past 15 months, the worst-case scenario has materialized. The Fed’s March 2020 system bailout reversed speculative deleveraging, and then almost $4.0 TN of QE fueled historic Bubble blow-off excess.

“…Although there is no evidence of significant deleveraging, the results suggest that hedge funds actively managed the risk of their portfolios in March 2020. Despite significant negative returns depleting NAV, hedge funds held leverage ratios unchanged by scaling down their gross exposures proportionately to their capital base.”

“The March 2020 shock to the UST market was unprecedented in scale, but due to the speed and extent of Federal Reserve interventions, relatively short-lived.”

Rather than self-reinforcing and destabilizing outflows from an impaired leveraged speculating community, booming markets and strong performance spurred inflows, risk-taking and only more speculative leverage.

“Our findings indicate that the quick intervention of the Federal Reserve to stabilize Treasury markets likely prevented a deleveraging spiral where hedge funds further sold off exposures in a declining market, realizing more losses and further depleting their equity. Compared to previous crisis episodes, the March 2020 shock was unprecedented, particularly in the speed and scale at which extreme moves occurred and in its impact on otherwise safe and liquid markets such as the UST market.”

“In contrast, we show that hedge funds, while experiencing large losses in March, experienced relatively low outflows and shored up the liquidity of their holdings. Their use of long share restrictions were largely stabilizing.”

It is a central tenet of Credit Bubble Theory that unchecked speculative leverage has a propensity to turn highly destabilizing. And it is a grave development when liquidity associated with a Bubble in levered speculation becomes the marginal source of system liquidity.

The Fed should not be in the business of managing financial conditions through market liquidity injections. QE has significant effects on market perceptions for both the risk and potential return from leveraged speculation – therefore should be employed only temporarily for system stabilization in the most extreme crisis backdrops. Open-ended QE is reckless. So-called “insurance” QE is policy negligence. Sticking with $120 billion of QE in today’s circumstance of robust economic recovery and manic market Bubbles is a policy abomination.

It’s being called a “mixed” June payrolls report. With a stronger-than-expected 850,000 jobs added – strongest in 10 months – I’ll downplay the bump in the unemployment rate (and small decline in Average Weekly Hours) and label this robust data. It follows on the heels of the lowest weekly Initial Jobless Claims since before the pandemic; the Challenger, Gray & Christmas job cuts report at the “lowest level since June 2000”; and Wednesday’s much stronger-than-expected ADP employment gain (692k).

Meanwhile, 10-year Treasury yields dropped 10 bps this week to a near four-month low 1.42%. Where would yields be today without Trillions of levered hedge fund and derivatives trades? Without QE? Without the emboldened leveraged speculating community fearless that the Fed will have no alternative than to move immediately with massive support in the event of market instability?

July 2 – Bloomberg (Simon Kennedy): “Former Treasury Secretary Lawrence Summers said the surge in U.S. house prices is ‘scary’ and questioned the wisdom of the Federal Reserve continuing to purchase mortgage-backed securities as part of its stimulus campaign. Three days after data showed home prices jumped the most in 30 years in April, Summers told Bloomberg… that such gains are inflationary and would likely drive other prices higher. ‘This is scary,’ said Summers… ‘Rising house prices in most people’s common sense of the world represents inflation… I cannot understand why the Federal Reserve, in the face of this, continues to be every month a major buyer of mortgage backed securities…”

When it comes to today’s scary markets, housing is but one of many. And this notion gaining traction associating the Fed’s MBS purchases with surging home prices is misplaced. It is the awry Treasury market – the foundation of market prices – that has become the epicenter of dangerous levered speculation and epic market distortions that feed through to asset market Bubbles.

I just can’t shake the notion that Treasuries have one eye on Chinese financial fragility. It’s worth noting that Chinese stocks took it on the chin late in the week after the communist party’s 100-year anniversary powwow. From my vantage point, it sure appeared hubris aplenty for a system hoisted by one of history’s most spectacular Credit Bubbles (with cracks abounding).

For the Week:

The S&P500 rose 1.7% (up 15.9% y-t-d), and the Dow gained 1.0% (up 13.7%). The Utilities were little changed (up 1.5%). The Banks fell 1.1% (up 28.6%), and the Broker/Dealers declined 0.9% (up 24.9%). The Transports increased 0.4% (up 20.2%). The S&P 400 Midcaps slipped 0.6% (up 17.5%), and the small cap Russell 2000 fell 1.2% (up 16.8%). The Nasdaq100 advanced 2.7% (up 14.3%). The Semiconductors jumped 2.3% (up 18.6%). The Biotechs declined 0.5% (up 3.4%). With bullion rising $6, the HUI gold index gained 0.5% (down 9.8%).

Three-month Treasury bill rates ended the week at 0.0375%. Two-year government yields declined three bps to 0.235% (up 11bps y-t-d). Five-year T-note yields fell seven bps to 0.86% (up 50bps). Ten-year Treasury yields dropped 10 bps to 1.43% (up 51bps). Long bond yields sank 11 bps to 2.04% (up 40bps). Benchmark Fannie Mae MBS yields fell nine bps to 1.81% (up 47bps).

Greek 10-year yields declined five bps to 0.79% (up 17bps y-t-d). Ten-year Portuguese yields dropped 12 bps to 0.35% (up 32bps). Italian 10-year yields sank 15 bps to 0.77% (up 23bps). Spain’s 10-year yields fell 11 bps to 0.37% (up 32bps). German bund yields dropped eight bps to negative 0.235% (up 33bps). French yields sank 10 bps to 0.09% (up 43bps). The French to German 10-year bond spread narrowed two to about 34 bps. U.K. 10-year gilt yields fell eight bps to 0.70% (up 51bps). U.K.’s FTSE equities index slipped 0.2% (up 10.3% y-t-d).

Japan’s Nikkei Equities Index fell 1.0% (up 4.9% y-t-d). Japanese 10-year “JGB” yields a basis point to 0.05% (up 3bps y-t-d). France’s CAC40 declined 1.1% (up 18.0%). The German DAX equities index added 0.3% (up 14.1%). Spain’s IBEX 35 equities index dropped 2.1% (up 10.3%). Italy’s FTSE MIB index fell 0.9% (up 13.7%). EM equities were mostly lower. Brazil’s Bovespa index increased 0.3% (up 7.2%), while Mexico’s Bolsa declined 0.6% (up 14.0%). South Korea’s Kospi index slipped 0.6% (up 14.2%). India’s Sensex equities index declined 0.8% (up 9.9%). China’s Shanghai Exchange dropped 2.5% (up 1.3%). Turkey’s Borsa Istanbul National 100 index fell 1.1% (down 6.8%). Russia’s MICEX equities index gained 0.9% (up 17.5%).

Investment-grade bond funds saw inflows of $3.431 billion, and junk bond funds posted positive flows of $893 million (from Lipper).

Federal Reserve Credit last week declined $11.5bn to $8.039 TN. Over the past 94 weeks, Fed Credit expanded $4.313 TN, or 116%. Fed Credit inflated $5.229 Trillion, or 186%, over the past 451 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week sank $17.6bn to a six-month low $3.523 TN. “Custody holdings” were up $109bn, or 3.2%, y-o-y.

Total money market fund assets dropped $20bn to $4.527 TN. Total money funds declined $128bn y-o-y, or 2.8%.

Total Commercial Paper sank $54.6bn to $1.109 TN. CP was up $91bn, or 9.0%, year-over-year.

Freddie Mac 30-year fixed mortgage rates fell four bps to 2.98% (down 9bps y-o-y). Fifteen-year rates dropped eight bps to 2.26% (down 30bps). Five-year hybrid ARM rates added a basis point to 2.54% (down 46bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down six bps to 3.08% (down 24bps).

Currency Watch:

June 30 – Financial Times (Diana Choyleva): “China has already made one attempt to turn the renminbi into an international currency and reduce its dependence on the dollar. It is now trying again, and this time things really could be different. The renewed effort to dethrone the dollar is based in large part on China’s technological prowess. It is banking that the development of the necessary financial infrastructure, the country’s world-beating mobile payments systems and a successful launch of the digital version of the renminbi will make it easier to use and promote the currency beyond China’s borders. The approach is unorthodox. But if Beijing succeeds in its quest it will undermine the dollar-led global order, at least in China’s sphere of geopolitical influence, and challenge the way America wields power.”

For the week, the U.S. Dollar Index increased 0.4% to 92.23 (up 2.6% y-t-d). For the week on the upside, the Mexican peso increased 0.3%. On the downside, the Brazilian real declined 2.5%, the Norwegian krone 1.2%, the Australian dollar 0.8%, the South African rand 0.7%, the New Zealand dollar 0.7%, the South Korean won 0.6%, the Swedish krona 0.6%, the euro 0.6%, the British pound 0.4%, the Swiss franc 0.4%, the Singapore dollar 0.3%, the Japanese yen 0.3% and the Canadian dollar 0.2%. The Chinese renminbi declined 0.26% versus the dollar this week (up 0.84% y-t-d).

Commodities Watch:

June 28 – Reuters (Liz Hampton): “Even with oil prices surging toward $75 a barrel, U.S. shale producers are keeping their pledges to hold the line on spending and keep output flat, a departure from previous boom cycles. This year’s run up in crude prices, and oil output curbs imposed by the OPEC+ producers group, historically would have triggered a drilling boom. But investors are demanding financial returns over more volume and energy financiers are shifting to renewables, so shale firms are determined to stay disciplined.”

June 30 – CNBC (Yun Li): “The great lumber bubble of 2021 has popped. After a jaw-dropping rally this spring, lumber prices have come back down to earth as supply increased, speculative trading action cooled and homebuilding demand eased. Lumber futures have tanked 42% in June alone, on pace for their worst month on record back to 1978. The building commodity is down more than 13% in 2021, headed for the first negative first half since 2015. At its peak on May 7, lumber prices hit an all-time high of $1,670.50 per thousand board feet on a closing basis, which was more than six times higher than its pandemic low in April 2020.”

The Bloomberg Commodities Index jumped 2.7% (up 21.7% y-t-d). Spot Gold increased 0.3% to $1,787 (down 5.9%). Silver rose 1.4% to $26.47 (up 0.3%). WTI crude gained $1.11 to $75.16 (up 55%). Gasoline added 1.6% (up 63%), and Natural Gas jumped 5.8% (up 46%). Copper slipped 0.3% (up 22%). Wheat rose 1.9% (up 2%). Corn rallied 11.7% (up 20%). Bitcoin recovered $1,369, or 4.2%, this week to $33,732 (up 16.0%).

Coronavirus Watch:

June 27 – Wall Street Journal (Josh Ulick): “Based on a recent government projection, the Delta variant of the Covid-19 virus could become the dominant type of this coronavirus in the U.S. within a month, making it one of most aggressive variants to take hold in the country. Delta is the latest in a series of variants that have spread throughout the U.S. Like all viruses, coronaviruses mutate as they reproduce. Some of these genetic changes make them better at infecting human cells or evading our immune defenses. As newer, better-adapted variants emerge, they push aside earlier versions of the virus.”

July 1 – Reuters (William Schomberg): “Britain reported 27,989 new cases of COVID-19, government data showed on Thursday, the highest number since Jan. 29 and taking the rise in cases between June 25 and July 1 to nearly 72% compared with the previous seven days.”

Market Mania Watch:

June 30 – Reuters (Marc Jones): “Vaccine programmes and some of the biggest fiscal and central bank stimulus ever seen have made for compelling viewing. Oil’s 45% surge will be its best start to a year since 2009, world stocks are on course for their second best H1 since 1998, wood is on fire and amateur traders’ much-loved ‘meme’ stocks AMC and GameStop are up more than 2,500% and 1,000% respectively. Add to that another wild run for bitcoin, digital art selling for tens of millions of dollars despite being free on the internet and major gyrations in government bond markets and you start to get the picture. ‘It has been extremely dramatic year,’ SEB investment management’s head of asset allocation Hans Peterson said. ‘The swings have been absolutely enormous. It has not been an easy year, it has been quite tumultuous.’ World equities have recorded an 11% gain but mainstay U.S. and German government bond markets have had their toughest H1 since 2013 despite a better last few months.”

June 26 – Bloomberg (Swetha Gopinath and Myriam Balezou): “Companies are racing to public markets like never before, cashing in on record-high stock prices. An all-time high of almost $350 billion has been raised in initial public offerings in the first six months of this year, according to… Bloomberg, surpassing the previous peak of $282 billion from the second half of 2020 and enriching entrepreneurs and bankers alike. When the rush for IPOs kicked off last year, stay-at-home technology dominated the scene, seizing on investor interest in anything digital, while special-purpose acquisition companies also flooded the market. This year, with stocks continuing to push skyward, the trend has broadened to include renewable-energy companies and online retailers… As long as the stock market is rising, the flow of IPOs is unlikely to dry up, and total proceeds this year are on track to eclipse the record of $420.1 billion set in 2007.”

June 27 – Bloomberg (Lu Wang and Vildana Hajric): “If you think a rush by companies to sell their shares is a bad omen for the market, imagine a scenario where most of the sales come from firms that don’t make money. It’s happening now. Since the end of March, almost 100 unprofitable U.S. companies, including GameStop Corp. and AMC Entertainment Holdings Inc., have raised money through secondary offerings, twice as many as coming from profitable firms, according to… Bloomberg. During the past 12 months, almost 750 money-losing firms have sold shares in the secondary market, exceeding those that make profits by the biggest margin since at least 1982… In fact, the previous two periods in which unprofitable firms dominated the pool of equity offerings, the S&P 500 Index was either at the start of a bear market, or already in one.”

July 1 – Reuters (Anirban Sen and Noor Zainab Hussain): “Robinhood Markets Inc, the online brokerage at the center of Wall Street’s recent retail trading frenzy, revealed a huge surge in revenue on Thursday as it set the stage for one of the most anticipated stock market listings of the year. The company, hit with a $70 million fine by regulators this week for systemic failures and providing false and misleading information, reported a 245% jump in revenue last year…”

June 30 – Bloomberg (Luke McGrath): “Charlie Munger is not shy about his thoughts on Robinhood. In an interview with CNBC…, Munger, 97, continued a spat between Berkshire Hathaway Inc. executives and the trading platform, saying the company is ‘beneath contempt…’ ‘Robinhood is a ‘gambling parlor masquerading as a respectable business,’ Munger added.”

June 28 – Bloomberg (Maria Elena Vizcaino): “Investors poured money into exchange-traded funds that buy emerging-market stocks and bonds last week, for the 34th straight week of inflows and a total intake of nearly $50 billion since the streak began.”

Market Instability Watch:

June 27 – Bloomberg (Tracy Alloway): “One of the hallmarks of last year’s market crash was the speed with which the Federal Reserve responded to it, stepping in to purchase billions of dollars worth of U.S. government debt within days of the Treasury market seizing up. A new staff working paper from the Federal Reserve helps explain the urgency behind the central bank’s actions, exploring the mayhem that engulfed the Treasury market in 2020 when the yield on the benchmark 10-year jumped by 65 bps in fewer than 10 days as hedge funds unwound billions of dollars worth of leveraged trades. The trade typically saw hedge funds borrow money in the repo market to arbitrage the difference between Treasuries in the cash market and futures. But in March of 2020, as investors stampeded into the most liquid contracts in the market (Treasury futures), the spread between the two suddenly went haywire, leaving hedge funds to nurse significant losses.”

June 30 – Bloomberg (Jesse Hamilton and Alexandra Harris): “The Financial Stability Board released a 63-page report… advising an overhaul of regulations for money-market funds, aiming to fix flaws exposed by early-pandemic turmoil that froze vital financial markets. The funds should penalize investors trying to grab money quickly in a crisis, according to the report. The FSB, in a set of proposals made to financial regulators worldwide, also suggested barring investors from yanking all their money out. The almost-$9 trillion global industry is experiencing deja vu. The 2008 financial crisis exposed major issues with money-market funds, which are supposed to be boring places to park cash and earn a little interest.”

June 28 – CNBC (Jeff Cox): “Federal Reserve officials are underestimating inflation and risking that the U.S. could fall into another recession, Mohamed El-Erian, chief economic advisor at Allianz, told CNBC… Central bank leaders insist that the recent round of price pressures will subside once short-term supply chain bottlenecks clear and the 2020 economic shutdown period is no longer part of the year-over-year comparisons. But El-Erian said he sees growing evidence that the Fed is wrong. ‘I have concerns about the inflation story… Every day I see evidence of inflation not being transitory, and I have concern that the Fed is falling behind and that it may have to play catch-up, and history makes you very uncomfortable if you end up in a world in which the Fed has to play catch-up.’”

June 25 – Reuters (Saqib Iqbal Ahmed): “While major U.S. stock indexes reach new highs, options data suggests traders see the market as vulnerable to a big drop should bears gain the upper hand, according to strategists at Goldman Sachs. Apparent calm in the stock market masks heightened expectations for big stock market gyrations over the next three months, Goldman strategists said… One indication of how anxious investors are is the fact that the 3-month downside implied volatility skew, which compares put option prices with at-the-money option prices, has reached new all-time highs, the note said.”

June 29 – Wall Street Journal (Paul J. Davies): “The recent failure of U.S.-based Archegos Capital Management, a family office that made large, risky bets on a handful of stocks, could be a sign of how more investors might get tripped up by overreacting to inflationary risks, the global club of central banks warned… Shocks to financial markets from higher inflation could result from enormous government spending plans and a rapid release of household savings built up during the Covid-19 pandemic, said the Bank for International Settlements…”

Inflation Watch:

June 30 – Bloomberg (Katia Dmitrieva): “Americans are enjoying outsized pay boosts this year from desperate employers, but the raises are failing to keep pace with surging prices for everyday goods. U.S. wages likely posted a third strong monthly gain to fuel a 3.6% increase in June from a year earlier, according to economists’ forecasts… Companies… are raising wages to attract staff. At the same time, prices for everything from milk to car rentals and gasoline are rising at a rapid clip, eating into those income gains. The Federal Reserve’s preferred consumer-price gauge rose 3.9% in the 12 months through May, the fastest since 2008.”

June 29 – Wall Street Journal (Nora Naughton): “The sticker price on cars isn’t sticking. In some cases, it’s going up. Auto makers typically set what is known as the manufacturer’s suggested retail price, or MSRP, a figure that appears on the window sticker of a new model. But with inventory tight and customers clamoring for cars and trucks, auto dealers are charging more, increasing the price above sticker and in some cases requiring customers buy certain add-ons, such as protective coatings and accessories, as part of the increase. Some buyers say they have encountered dealerships asking for thousands of dollars above MSRP. And analysts and dealers say the practice is becoming more widespread and occurring on a wider range of vehicles, including more mainstream models that typically wouldn’t be targeted for such price increases.”

July 1 – Wall Street Journal (Ryan Dezember): “Propane has rarely been so expensive this time of year, and prices may have to move higher yet to ensure ample supply for winter, when millions of rural Americans rely on the fuel to heat their homes. At hubs in Mont Belvieu, Texas, and Conway, Kan., propane futures traded Wednesday at $1.09 and 95 cents a gallon… Those prices are roughly twice their levels during the past two summers. Spot prices have moved in a similar way. Retail prices have also risen… The Energy Information Administration said U.S. households can expect to spend an average of 14% more on propane this winter than they did during last year’s—and significantly more than that if the weather is colder than forecast.”

June 28 – Bloomberg (Saleha Mohsin): “Former Treasury Secretary Robert Rubin said there’s a ‘material risk’ that the U.S. could see persistently elevated inflation and urged policy makers to be careful to avoid overheating. Rubin… also said ex-Obama administration adviser Larry Summers has done ‘a great public service’ by ringing alarm bells that the recent spike in prices may fail to dissipate amid trillions of dollars in pandemic-relief spending.”

Biden Administration Watch:

June 27 – Associated Press (Zeke Miller): “A bipartisan deal to invest nearly $1 trillion in the nation’s infrastructure appeared to be back on track… after a stark walk-back by President Joe Biden to his earlier insistence that the bill be coupled with an even larger Democrat-backed measure in order to earn his signature. Republican senators who brokered the agreement with the White House and Democrats to fund badly needed investments in roads, bridges, water and broadband internet indicated they were satisfied with Biden’s comments that he was dropping the both-or-nothing approach.”

July 1 – Reuters (David Morgan): “The Democratic-controlled U.S. House of Representatives approved a $715 billion surface transportation and water infrastructure bill on Thursday in what Democrats see as an early step toward sweeping infrastructure legislation that Congress hopes to complete in September.”

June 28 – Reuters (David Morgan): “U.S. Senate Republican leader Mitch McConnell urged President Joe Biden… to get the two top Democrats in Congress to abandon a plan to link a $1.2 trillion bipartisan infrastructure deal to a larger reconciliation package that Republicans oppose. On Saturday, Biden withdrew a threat to not sign the bipartisan bill unless it was accompanied by a separate package focused on what he called ‘human infrastructure,’ including help for home healthcare. McConnell said that separating the two would be the only way for Congress to revamp America’s roads and bridges.”

June 28 – Politico (Leah Nylen): “The White House is crafting an executive order aimed at promoting competition throughout the U.S. economy, a move aimed at lessening the stranglehold of dominant players in industries ranging from banking and agriculture to shipping and air travel, according to three people familiar… The order, which could be issued as soon as this week, fits in with a growing theme for President Joe Biden, who has elated progressives by appointing advocates of tougher antitrust enforcement to top jobs at the White House and agencies such as the Federal Trade Commission.”

June 30 – Bloomberg (Betty Hou and Samson Ellis): “The U.S. and Taiwan agreed to hold regular talks on issues ranging from technology supply chains to meat imports following their first Trade and Investment Framework Agreement meeting in five years. The two sides will establish working groups to discuss topics including labor rights and intellectual property, the Office of the U.S. Trade Representative said… following Wednesday’s meeting in Taipei. Taiwan’s chief trade negotiator John Deng said the meeting was an important step toward eventually signing a full trade deal with the U.S., though that will take time. ‘A deal cannot happen in just a single meeting,’ he said… ‘There will be a lot of conversations going forward.’”

June 27 – Financial Times (Kathrin Hille, Aime Williams and Demetri Sevastopulo): “Taiwan and the US will discuss supply chain security and digital trade in their first trade talks in five years, as the countries seek to deepen economic ties in the face of growing tension with China. The negotiations are due to start on Wednesday and will allow both sides to put a stronger focus on trade to match their efforts to bolster security and political ties amid increasing strains with Beijing… ‘We want to elevate our trade relationship to the next level of co-operation, a level fit for the future,’ John Deng, Taiwan’s trade representative, told the Financial Times.”

June 27 – Reuters (Phil Stewart): “The United States said… it carried out another round of air strikes against Iran-backed militia in Iraq and Syria, this time in response to drone attacks by the militia against U.S. personnel and facilities in Iraq… The U.S. military said it targeted operational and weapons storage facilities at two locations in Syria and one location in Iraq.”

June 29 – Reuters (Phil Stewart and Idrees Ali): “U.S. President Joe Biden’s latest strikes against Iran-backed militia in Syria and Iraq were not the first nor likely the last of his young presidency. For some of Biden’s fellow Democrats, the crucial question is: does the pattern of attacks and counter-attacks amount to an undeclared conflict? If it does, they say, there is a risk that the United States could stumble into a direct war with Iran without the involvement of Congress, an issue that is becoming more politically fraught after two decades of ‘forever wars.’ ‘It’s hard to argue, given the pace of attacks against U.S. troops and, now, the increasing frequency of our responses, this isn’t war,’ Senator Chris Murphy, a Democrat who leads a key Senate foreign relations subcommittee, told Reuters.”

Federal Reserve Watch:

June 30 – New York Times (Jeanna Smialek and Jim Tankersley): “Federal Reserve officials spoke with one voice throughout the pandemic downturn, promising that monetary policy would be set to full-stimulus mode until the crisis was well and truly behind America. Suddenly, they are less in sync. Central bankers are increasingly divided over how to think about and respond to emerging risks after months of rising asset values and faster-than-expected price increases. While their political counterparts in the White House have been more unified in maintaining that the recent jump in price gains will fade as the economy gets past a reopening burst, Washington as a whole is wrestling with how to approach policy at a moment of intense uncertainty.”

June 27 – Financial Times (James Politi and Lauren Fedor): “Fresh from a breakfast with Jay Powell, Pat Toomey sat down in his Washington office this week with mixed reviews of the chair of the Federal Reserve. ‘Look, he’s a very capable guy,’ the… Republican senator from Pennsylvania said… ‘He and I have a significant disagreement about the extent of the accommodation and how long it’s gone on. But I do have a lot of respect for him personally.’ Toomey has emerged as a leading congressional critic of the Biden administration’s hefty fiscal response and the Fed’s ultra-easy monetary policy, defying the prevailing ‘go big’ mantra in Washington… ‘Every stop I make in Pennsylvania. I hear people sort of really worried that, ‘how can we be spending money at this rate — It’s like somebody in Washington thinks this is Monopoly money, but it’s not,’ he said.”

July 1 – Bloomberg (Rich Miller): “Federal Reserve Chairman Jerome Powell says controlling inflation expectations is key to achieving the central bank’s twin goals of price stability and maximum employment. The trouble is that it is far from clear the Fed can do that as the economy emerges from the pandemic. Expectations among consumers can vary widely… and are not particularly sensitive to what the central bank does and says. What’s more, the attitudes of businesses — arguably the most important players in the inflation process because they set prices — are a bit of a mystery because there are few surveys of their thinking on the subject. ‘It certainly is difficult’ to manage expectations, said former Fed Governor Randall Kroszner… ‘Especially when you don’t know exactly how to do it.’”

June 28 – Wall Street Journal (Paul Kiernan): “As Federal Reserve officials discuss how to eventually scale back their easy-money policies, they are debating whether to start by reducing purchases of mortgage-backed securities to avoid adding more fuel to the housing boom. The Fed has bought $982 billion of the mortgage bonds since March 5, 2020, and currently plans to keep buying at least $40 billion each month. Those purchases, along with the Fed’s monthly purchases of $80 billion of Treasury debt, aim to hold down long-term borrowing costs to stimulate the economy as it recovers from the effects of the pandemic.”

June 29 – Reuters (Ann Saphir): “A ‘very optimistic’ Federal Reserve Governor Christopher Waller… said the U.S. central bank may need to start dialing down its massive asset purchase program as soon as this year to allow the option of raising interest rates by late next year. ‘The unemployment rate would have to drop fairly substantially, or inflation would have to really continue at a very high rate, before we would take seriously a rate hike in 2022, but I’m not ruling it out,’ Waller told Bloomberg… Waller said he would be ‘all in favor’ of phasing out MBS purchases first. ‘Right now the housing markets are on fire; they don’t need any other unnecessary support,’ he said. ‘And it’s an easy sell to the public…’ The economy has improved much more quickly than he and other policymakers had expected last December, he said… ‘I think everybody anticipates that tapering could move up earlier than when they originally thought… Whether that’s this year, we’ll see, but it certainly could.’”

June 30 – Reuters (Ann Saphir): “Federal Reserve Bank of Dallas President Robert Kaplan said… he would like the Fed to start reducing its support for the economy before the end of the year, in part to make an abrupt policy tightening less likely later on. ‘I would prefer sooner’ than the end of the year for reducing the Fed’s pace of asset purchases, Kaplan said…, adding that the taper should be gradual. Supply and demand balances in the labor market will likely persist, making ‘explosive’ growth in jobs unlikely, he said; and while inflation will step down to 2.4% next year from 3.5% this year…”

June 28 – Financial Times (James Politi and Colby Smith): “A senior Federal Reserve official has warned the US cannot afford a ‘boom and bust cycle’ in the housing market that would threaten financial stability, in a sign of growing concern over rising property prices at the central bank. ‘It’s very important for us to get back to our 2% inflation target but the goal is for that to be sustainable,’ Eric Rosengren, the president of the Boston Fed, told the Financial Times. ‘And for that to be sustainable, we can’t have a boom and bust cycle in something like real estate. I’m not predicting that we’ll necessarily have a bust. But I do think it’s worth paying close attention to what’s happening in the housing market,’ he said.”

June 28 – Yahoo Finance (Brian Cheung): “A top Federal Reserve policymaker cautioned that skyrocketing home prices could jeopardize progress on recovering the millions of American jobs lost in the pandemic. Federal Reserve Bank of Boston President Eric Rosengren told Yahoo Finance… the hot real estate market is ‘not at a point where we should be panicked.’ But Rosengren said the Great Depression and other downturns were examples of economic expansions that died at the hands of a real estate bubble. ‘The last thing we want to do is to try to get to full employment, and then unintentionally cause a boom and bust of the housing sector that prevents us from getting to full employment or staying at full employment,’ Rosengren said.”

July 1 – Wall Street Journal (Michael S. Derby): “Federal Reserve Bank of Philadelphia President Patrick Harker said… that while an interest rate rise lies some ways in the distance, he is ready for the U.S. central bank to begin slowing the pace of its asset buying stimulus this year. ‘I am in the camp of starting the tapering process,’ Mr. Harker said…, referring to slowing the pace of the Fed’s $120 billion a month in bond purchases, which aim to augment the central bank’s near zero short-term interest rate target range. Asked if the process should start this year, Mr. Harker said ‘yes,’ adding that, ‘I would like to see tapering begin. I’d like to see it happen sooner rather than later. I’d like to see it being a slow, methodical process.’”

June 28 – Reuters (Lindsay Dunsmuir): “The U.S. Federal Reserve has made ‘substantial further progress’ toward its inflation goal in order to begin tapering asset purchases, Federal Reserve Bank of Richmond President Thomas Barkin said…, as he indicated U.S. employment numbers may soon follow. ‘It’s pretty clear to me we have had substantial further progress against our inflation goal,’ Barkin said… ‘I’m pretty optimistic about the labor market. … If the labor market opens as I suggested it might, then I think we’re going to get there in relatively short order.’ Barkin added that he would wait until next year to determine whether the U.S. central bank had hit its inflation and employment mandates for beginning to raise interest rates from near zero.”

June 27 – Bloomberg (Steve Matthews and Craig Torres): “The Federal Reserve might consider an interest-rate hike from near zero as soon as late 2022 as the labor market reaches full employment and inflation is at the central bank’s goal, Federal Reserve Bank of Boston President Eric Rosengren said. ‘The criteria is that we have a sustainable inflation rate, that’s 2% or above, and that we’re at full employment,’ Rosengren said… ‘I do expect that it’s quite possible that we will see that by the end of next year, but it does depend on whether the economy progresses as strongly as I’m expecting.’”

U.S. Bubble Watch:

July 1 – CNBC (Jeff Cox): “The federal government will be swimming in $3 trillion of red ink by the end of fiscal 2021, according to a Congressional Budget Office estimate Thursday that swelled 33% from the last forecast. As a result of multiple stimulus measures aimed at combating the pandemic’s economic impact, Congress will run a budgetary shortfall this year equivalent to 13.4% of GDP, the second-largest level since 1945 and exceeded only by the 2020 spending. The CBO last released a deficit estimate in February, when it saw a deficit $745 billion smaller than the one projected now. Under the current projections, the $23 trillion portion of government debt held by the public would bump to 103% by the end of the current fiscal year.”

June 27 – Wall Street Journal (Orla McCaffrey and Shane Shifflett): “The coronavirus pandemic plunged Americans into recession. Instead of emerging poorer, many came out ahead. U.S. households added $13.5 trillion in wealth last year, according to the Federal Reserve, the biggest increase in records going back three decades… That challenged the conventions of previous economic downturns. In 2008, for example, U.S. households lost $8 trillion… The stock market, in turn, became the driver of the household wealth gain, accounting for nearly half the total increase. That has produced a lopsided distribution of the wealth gains, since well-off households are more likely to own stocks. More than 70% of the increase in household wealth went to the top 20% of income earners. About a third went to the top 1%.”

June 29 – Financial Times (Mamta Badkar): “US home price growth accelerated in April at the fastest pace in more than three decades… The S&P Case-Shiller national home price index, which covers all nine US census divisions, rose 14.6% year on year in April… That followed a 13.3% annual jump in March, and was ‘the highest reading in more than 30 years’… Meanwhile, the 20-city composite, which covers US metropolitan areas including Dallas, Miami, New York and San Francisco, rose 1.6% from the previous month and 14.9% year on year… ‘April’s performance was truly extraordinary,’ said Craig Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices.”

June 29 – Reuters (Evan Sully): “U.S. single-family home prices in 20 key urban markets rose in April from a year earlier by the most in over 15 years as the shortage of homes available to buy drives up prices at the fastest rate seen since before the financial crisis, a closely watched survey said… The S&P/Case Shiller composite index of 20 metropolitan areas gained 14.9% through the 12 months ended in April, the largest annual price increase since December 2005… On a month-to-month basis, the 20-city composite index rose 1.6% from March… Among the twenty cities, Phoenix, San Diego, and Seattle reported the highest year-over-year gains in April… Similar data out Tuesday from the U.S. Federal Housing Finance Agency showed its home price index gained a record-high 15.7% through the 12 months ended in April.”

June 30 – CNBC (Diana Olick): “The pandemic-induced housing boom may not be over quite yet. Despite recent months of softening sales, buyers came back remarkably strongly in May. Pending home sales, a measure of signed contracts on existing homes, jumped an unexpectedly high 8% in May compared with April, according to the National Association of Realtors. Analysts expected a 1% drop. This is the highest level of sales activity for May since 2005. Sales were up 13% from May 2020…”

June 30 – CNBC (Diana Olick): “Record high home price appreciation is sidelining ever more buyers and finally taking the bang out of the pandemic-induced housing boom. Weekly mortgage demand is falling along with it, down 6.9% for the week according to the Mortgage Bankers Association… That is the lowest level in almost a year and a half. Mortgage applications to purchase a home dropped 5% for the week and were 17% lower annually. That is the slowest pace since the start of May 2020, when lockdowns were in full force.”

June 30 – Reuters (Lucia Mutikani): “U.S. private payrolls increased more than expected in June as companies rushed to boost production and services amid a rapidly reopening economy, though a shortage of willing workers continues to hang over the labor market recovery… Private payrolls increased by 692,000 jobs in June. Data for May was revised lower to show 886,000 jobs added instead of the initially reported 978,000. Economists… had forecast private payrolls would increase by 600,000 jobs.”

July 1 – CNBC (Jeff Cox): “Initial filings for unemployment insurance fell sharply last week, indicating continued improvement in the U.S. jobs market… First-time jobless claims totaled 364,000 for the week ended June 26, compared with the 390,000 Dow Jones estimate. That marked a new pandemic-era low and a decline of 51,000 from the previous week.”

June 26 – Bloomberg (Augusta Victoria Saraiva): “Almost one in five young adults in the U.S. was neither working nor studying in the first quarter as Black and Hispanic youth remain idle at disproportionate rates. In the first three months of the year, about 3.8 million Americans age 20 to 24 were not in employment, education or training, known as the NEET rate, the Center for Economic Policy and Research said… That’s up by 740,000, or 24%, from a year earlier…”

June 29 – CNBC (Jessica Dickler): “Before Covid, Blaze Bullock, 34, was on the road one week a month as a marketing consultant in the auto industry. Then, when the country shut down, Bullock began working remotely. ‘Now they want me to start traveling again and visiting car dealerships,’ he said. ‘I don’t want to do that at all.’ Bullock said he likes working from home and spending more time with his friends and family… ‘I realized this is the only way I want to live.’ The pandemic has caused a lot of people to reevaluate, particularly when it comes to work.”

June 28 – Bloomberg (Katia Dmitrieva): “The U.S. labor market is entering one of its strangest summers ever, with a powerful economic rebound generating record demand for workers just as roadblocks distort employment and wage levels. While economic growth will clock 10% this quarter and 7% next, according to Bloomberg surveys — well above pre-pandemic trends — millions of Americans remain reluctant or unable to take up the unprecedented number of job openings available.”

June 29 – Associated Press (Martin Crutsinger): “U.S. consumer confidence rose for a fifth month in June to the highest level since the pandemic began last year as households responded to increased vaccinations and the further re-opening of businesses. The Conference Board reported… its consumer confidence index increased to 127.3 in June, up from a May reading of 120.0. The June increase reflected an improvement in consumers’ assessment of current conditions.”

June 29 – Reuters (Lisa Baertlein and Jonathan Saul): “Suppliers to Walmart, Target, Amazon.com and other major retailers told Reuters they are placing holiday orders for Chinese-made merchandise weeks earlier this year, as a global shipping backlog threatens to leave many gift buyers empty-handed this Christmas shopping season. Reuters surveyed nearly a dozen suppliers and retailers… All expect weeks-long delays in holiday inventory due to shipping bottlenecks… The risk for retailers is a rash of out-of-stock items just as shoppers are ready to open their wallets to splurge on toys, clothing and other merchandise. ‘It’s going to be a major, major mess,’ said Isaac Larian, chief executive of… MGA Entertainment Inc, which sells LOL Surprise, Bratz, Little Tikes and other toy brands to Amazon, Walmart and Target.”

July 1 – Financial Times (Ortenca Aliaj and Kaye Wiggins): “Private equity firms have had their busiest six months since records began four decades ago, striking deals worth more than $500bn and helping to propel global mergers and acquisitions activity to an all-time high. Buyout groups have announced 6,298 deals since the beginning of January, worth $513bn even before counting a $34bn megadeal for the medical supply company Medline, the strongest half-year result since at least 1980 according to… Refinitiv. Wider corporate dealmaking continued at a frenzied pace, with overall transaction volumes hitting an all-time high of $1.5tn this quarter, the fourth consecutive quarter in which it has topped $1tn…”

July 1 – CNBC (Diana Olick): “The epic housing shortage that began before the pandemic and then was exacerbated by it may finally be starting to ease up. More supply is suddenly coming on the market, which will certainly help frustrated buyers and could, in the longer term, take some of the heat out of home prices. In June, new listings increased 5.5% year over year and 10.9% compared with May, according to Realtor.com. Among the nation’s larger cities, the 10 markets with the highest new listings increases posted gains of 20% or more from a year ago.”

June 25 – Associated Press (Marcy Gordon): “Groundbreaking legislation is advancing in Congress that would curb the market power of tech giants Facebook, Google, Amazon and Apple and could force them to untie their dominant platforms from their other lines of business. Hostility toward Big Tech has grown in recent years with the belief that its size and swagger have stifled competition, limited consumer choice and raised prices. The bipartisan legislation targets the companies’ structure and points toward breaking them up, a dramatic step for Congress to take against a powerful industry whose products are woven into everyday life. Its backers say it would help ensure lower prices and more choices for consumers, and a fairer playing field for smaller businesses to compete.”

June 30 – CNBC (Michael Wayland): “Ford Motor is significantly cutting its North American vehicle production in July due to an ongoing shortage of semiconductor chips impacting the global automotive industry. The automaker said… it will idle or reduce production at eight plants, including six in the U.S., for varying periods of time next month and into early August due to the problem. Affected products range from the Ford F-150 and Ford Bronco Sport to the Ford Mustang and Ford Explorer.”

July 1 – Bloomberg (Natalie Wong): “Even as Manhattan’s workers trickle back to their desks, the supply of available office space continues to set records. The availability rate reached 18% in the second quarter, the highest in data going back three decades, according to Savills.”

June 29 – New York Times (Cecilia Kang and David McCabe): “Lawyers at Kellogg, Hansen, Todd, Figel & Frederick, a top corporate law firm, were abuzz on Monday as they grappled with a federal judge’s rulings about antitrust cases related to their client: Facebook. Last month, lawyers at Cravath, Swaine & Moore, one of the country’s elite law firms, advised Amazon over its acquisition of MGM, which is facing antitrust scrutiny… And a slate of litigators for the prominent law firm Gibson, Dunn & Crutcher gave closing arguments for Apple in an antitrust lawsuit brought by Epic Games. The mounting legal and regulatory scrutiny facing Big Tech has led to a wave of lawsuits, investigations and proposed legislation aimed at ending the dominance of Amazon, Apple, Facebook and Google. Whether those efforts succeed may take years to sort out, but there is already one clear winner: the nation’s legal industry.”

Fixed-Income Bubble Watch:

June 30 – Wall Street Journal (Julia-Ambra Verlaine): “Commercial real-estate bonds backed by single borrowers or properties are roaring back. Banks have sold billions of dollars of debt in recent sessions backed by solitary properties, or pools of properties with the same ownership. JPMorgan… put together a $4.65 billion bond backed by a portfolio of Extended Stay America Inc. hotels. Credit Suisse bundled $335 million of debt tied to one operator’s near-dozen office properties. That marks a significant recovery after issuance of so-called single-asset, single-borrower bonds ground to a halt last spring, when the Covid-19 pandemic emptied commercial real estate across the country.”

China Watch:

June 30 – Financial Times (Hudson Lockett and Edward White): “Rising investor concerns over shaky finances in China’s most economically fragile provinces have prompted a sell-off in state-run groups’ bonds, as analysts warn of a surge in defaults in the country’s $17tn credit market. The median yield on bonds issued by state-owned enterprises in six large provinces and municipalities that suffer from weak finances jumped to more than 5% in the second quarter, up from less than 3.5% a year ago. That contrasts with a nationwide trend in which most SOE bond yields have crept lower over the past six months… The financial stresses underscore how Covid-19 and China’s subsequent economic recovery have deepened the divide between the country’s more dynamic regional economies and its less-developed ones. They also come as global investors increasingly scrutinise China’s bond market, where confidence has been rattled by a series of state-linked defaults.”

June 30 – Reuters (Stella Qiu and Ryan Woo): “China’s factory activity expanded at a softer pace in June, as the resurgence of COVID-19 cases in the export province of Guangdong and supply chain woes drove output growth to the lowest in 15 months, a private survey showed… The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 51.3 last month from May’s 52, marking the 14th month of expansion, but it came below analyst expectations…”

June 29 – Reuters (Colin Qian, Stella Qiu and Ryan Woo): “Activity in China’s services sector grew at a slower pace in June, official data showed on Wednesday as COVID-19 curbs from a resurgence in cases in Southern China restrained a rebound in consumption. The official non-manufacturing Purchasing Managers’ Index (PMI) fell to 53.5 in June from 55.2 in May…”

June 30 – Bloomberg (Krystal Chia and Alfred Cang): “China is pausing industrial activity from coal mining and steel making to even some port operations to clear air pollution ahead of the Chinese Communist Party’s 100th anniversary celebration later this week. Some, such as coal mining, will be closed for as long as a week in the country’s key producing hubs. Others like steel are being put on hold for just one day. Port operations are also being suspended, with trucks delaying loading fuel until Thursday afternoon in some refiners.”

June 29 – Bloomberg: “China’s brokers and money managers are grappling with the highest short-term funding costs in five months, showing how a cash squeeze could be taking hold just as Beijing prepares to celebrate the Communist Party’s 100th birthday. A gauge of overnight borrowing costs in China’s exchange market — a popular venue for non-bank financial institutions seeking capital — surged to as high as 6% on Tuesday from from last week’s low of 1.7%. That sent the premium over a similar funding rate for mostly commercial lenders to the widest since late January.”

June 30 – Bloomberg: “Moody’s… downgraded China Evergrande Group’s credit rating by one notch to B2, the second downgrade by a global ratings agency in less than two weeks. Concern has been building over the troubled… developer, which… tried to reassure investors about its financial health, saying it has reduced its net debt-to-equity ratio to below 100%, as required by Chinese regulators. Evergrande has also said it pared total borrowings to about 570 billion yuan ($88bn) from 717 billion yuan in December. ‘Although Evergrande has been reducing its debt to improve its financial stability, the company still faces sizeable maturing debt and puttable bonds over the next 12-18 months… In addition, its trade payables increased to 622 billion yuan at the end of 2020 from 545 billion yuan at the end of 2019, which funded part of the debt reduction,’ it said.”

June 27 – Bloomberg: “China has asked one of its biggest state-owned conglomerates to examine the finances of China Huarong Asset Management Co., people familiar with the matter said, adding a new twist to the drama that has roiled the world’s second-largest credit market for months. Citic Group, whose businesses span everything from banking to securities and mining, recently dispatched a team to Huarong to pore over the embattled distressed-debt manager’s books…”

June 30 – Bloomberg: “A company backed by a prestigious Chinese university has failed to make coupon payment on one of its dollar bonds after a grace period, becoming the country’s latest state-linked defaulter. Some bondholders of Tus-Holdings Co.’s 6.95% $550 million dollar note due 2022 have not received the coupon payment as of Wednesday afternoon…”

June 28 – Reuters (Jessie Pang and James Pomfret): “Hong Kong police arrested a former senior journalist with the now-closed Apple Daily newspaper on Sunday night on a suspected national security offence as he was trying to catch a flight out of the city… Police… said… a 57-year-old man had been arrested at the airport for ‘conspiring to collude with foreign countries or foreign forces to endanger national security’.”

June 29 – Financial Times (Yuan Yang): “Last summer, a friend of mine told me that she found China’s biggest social media platform Weibo was becoming ‘unusable’ for feminists and liberals such as her. Tempers were so heated, Bao told me, that disagreements easily became personal pile-ons. After a friend became the centre of a social media storm, she posted a message: ‘We’re all just blades of grass, what’s the point of fighting with each other’’ Bao ended up becoming the next target. At the time, we put it down to Covid-19, which, across the world, left people stuck at home, bored and anxious. They were just venting. But a year on, Chinese nationalist sentiment is even greater online. It used to be outsiders, a US politician criticising the government for instance, who received the worst of the attacks from bloggers. Now insiders bear the brunt. Recently, Weibo influencers have gone after journalists at the Global Times, the English-language, state-owned tabloid, for being ‘traitors’.”

Global Bubble Watch:

July 1 – Reuters (Leigh Thomas): “Most of the countries negotiating a global overhaul of cross-border taxation of multinationals have backed plans for new rules on where companies are taxed and a tax rate of at least 15%, they said on Thursday after two days of talks. The Paris-based Organisation for Economic Cooperation and Development, which hosted the talks, said a global minimum corporate income tax of at least 15% could yield around $150 billion in additional global tax revenues annually. It said 130 countries, representing more than 90% of global GDP, had backed the agreement at the talks.”

July 1 – Bloomberg (Michelle F Davis, Manuel Baigorri, and Myriam Balezou): “After a subdued start to 2020, dealmaking surged to record levels in the first half of this year as economic confidence rebounded and companies put money to use after holding off during the pandemic. Acquisition-hungry buyers have announced $2.5 trillion of deals so far in 2021, an unprecedented number that puts this year on track to be the most active ever. Private equity firms have finally started to spend significant amounts of dry powder, sealing more than $550 billion of deals in the busiest six months on record.”

June 30 – Bloomberg: “From the U.S. to the U.K. to China, housing is riding an extended boom. Global valuations are soaring at the fastest pace since 2006, according to Knight Frank, with annual price increases in double digits. Frothy markets are flashing the kind of bubble warnings that haven’t been seen since the run up to the financial crisis… On the ground, outrageous stories are rife, with desperate buyers promising to name their first-born after sellers and derelict buildings selling for mansion prices. The drivers for the frenzy are remarkably consistent: cheap mortgages, a post-pandemic desire for more space, newly remote workers taking city cash to regional locations — and, crucially, a pervasive fear that if you don’t buy now you may never be able to. As prices mount, so do the risks for both individuals and society.”

June 28 – Bloomberg (Suvashree Ghosh): “South Asia’s reliance on state-led development is concealing vulnerabilities to growing levels of unsustainable debt that could lead to financial crises, the World Bank warned. Governments in the region, including India and Pakistan, are exposed to the risk of ‘hidden debt’ via funding guarantees by state-owned banks and enterprises, as well as public-private partnerships, the World Bank said…, which also included policy reforms to help alleviate the risks.”

June 29 – Reuters (William Schomberg): “British house prices jumped by the most in more than 16 years this month, soaring by 13.4% from June 2020, and demand is expected to stay strong while a coronavirus emergency tax break remains in place, mortgage lender Nationwide said.”

Central Banker Watch:

June 28 – Financial Times (Paul J. Davies): “The head of Germany’s central bank has called for the European Central Bank’s pandemic-related bond purchases to be ‘reduced step-by-step’ and warned that inflationary pressures are mounting in the eurozone. Jens Weidmann said there were ‘upside risks’ to the outlook for inflation and energy prices could be pushed higher than economists expect by governments’ policies to fight climate change. The ECB’s stimulus programme to ease the economic impact of the pandemic should end ‘as soon as the emergency situation has been overcome’, Weidmann said…”

June 30 – Bloomberg (Lizzy Burden and Marc Daniel Davies): “Bank of England Chief Economist Andy Haldane said inflation is likely to finish the year close to 4%, posing the biggest challenge to policy makers since the pound plunged in 1992. The forecast would be double the central bank’s target and over the 3% the BOE estimated earlier this month. Haldane, leaving his post on Wednesday, used his last speech to urge his colleagues to shift their attention away from stimulating the economy and toward controlling the pace of price increases. Delaying action, he said, will require bigger action later. ‘This would leave monetary policy needing to play catch-up to re-anchor inflation expectations through materially larger and/or faster interest rate rises than are currently expected… If this risk were to be realized, everyone would lose — central banks with missed mandates needing to execute an economic hand-brake turn, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt-servicing costs.’”

June 28 – Reuters (Francesco Canepa): “European Central Bank policymakers… started a public debate about ending emergency bond purchases launched at the start of the coronavirus pandemic last year, with faultlines already emerging between so-called hawks and doves. Germany’s Jens Weidmann and Austria’s Robert Holzmann became the first ECB rate-setters to openly debate the prospect of winding down its 1.85 trillion euro Pandemic Emergency Purchase Programme (PEPP) as the economy improves. Both central bank governors are outspoken ‘hawks’ who favour tighter monetary policy to keep inflation in check.”

June 28 – Bloomberg (Anya Andrianova and Francine Lacqua): “The Bank of Russia is ready to consider a key interest rate increase of 25 bps to 1 percentage point in July in response to surging inflation, Governor Elvira Nabiullina told Bloomberg… ‘We don’t see that inflation acceleration is transitory as in many other countries, but more persistent,’ Nabiullina said…. The central bank aims to react fast, but predictably on rates, she said, adding that current policy remains accommodative.”

Europe Watch:

July 1 – Reuters (Jonathan Cable and Leika Kihara): “European factories continued to ramp up their post-lockdown recovery in June but Asian manufacturers saw momentum weaken amid rising input costs and the reintroduction of curbs to combat a new wave of coronavirus infections, surveys showed. Euro zone manufacturing activity expanded at its fastest pace on record last month while Britain’s factories extended their post-lockdown recovery and went on a hiring spree.”

EM Watch:

June 30 – Financial Times (Jonathan Wheatley): “Developing countries have yet to feel the full economic impact of the coronavirus crisis but will not be able to rely on the world’s leading central banks for support as they scale back their pandemic-era stimulus, the head of the Bank for International Settlements has warned. Agustín Carstens, general manager of the BIS…, said developing economies are close to exhausting their capacity to borrow and to use fiscal and monetary policy. ‘They have to start facing the music of how to get growth going [with] all these things working against them… reduced fiscal space, they don’t have monetary space, they have higher corporate debt and higher sovereign debt,’ as well as an entrenched low capacity for growth, he told the Financial Times.”

June 27 – Reuters (Manoj Kumar): “Indian Commerce Minister Piyush Goyal has ratcheted up the heat on U.S. ecommerce giants like Amazon and Walmart, accusing them of arrogance and of flouting local laws by indulging in predatory pricing practices. Goyal said companies were using their scale and access to large pools of low-cost capital to indulge in predatory pricing practices ‘to the detriment of mom-and-pop stores.’ ‘A number of these large ecommerce companies have come into India and very blatantly flouted the laws of the land in more ways than one,’ he told a virtual event…”

Japan Watch:

June 29 – Bloomberg (Masaki Kondo and Chikako Mogi): “The Bank of Japan cut bond purchases for the next three months while shifting to a quarterly-buying plan to offer more certainty to markets. The quarterly plan… showed a reduction of at least 25 billion yen ($226 million) in purchases of each of the one-to-three, five-to-10 years and 10-to-25 year buckets… ‘The BOJ appears to want to avoid its own buying being used as a catalyst to move markets or lead to more price actions,’ said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities…. ‘It cut amounts in key maturities to help maintain market mechanism over the long run.’”

June 30 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Confidence at Japanese big manufacturers rose for a fourth straight quarter due to a boost to exports and profits from a pick-up in external demand, a key ‘tankan’ survey by the central bank showed… The headline index for big manufacturers’ sentiment rose to plus 14 from plus 5 in March…”

Leveraged Speculation Watch:

June 29 – Financial Times (Colby Smith and Laurence Fletcher): “Investors are reassessing their commitment to the reflation trade that has captivated Wall Street this year after a hawkish tilt by the US central bank inflicted losses on some fund managers. Betting against the price of US government bonds was a winning play earlier this year, with hedge funds and other investors raking in sizeable gains as the economic recovery gathered pace. But recent gyrations and the spectre of a policy pivot from the Federal Reserve have heaped significant doubt on whether investors should remain in the trade. ‘It is obvious that the reflation trade got rinsed,’ said Thanos Bardas, deputy chief investment officer… at Neuberger Berman. ‘The market overreacted, [but] the uncertainty has increased.’ Several big-name hedge fund were caught up in the maelstrom, including Andrew Law’s Caxton Associates and Chris Rokos’s Rokos Capital.”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 30 – Bloomberg (Eric Roston and Leslie Kaufman): “It looked like a mistake several days ago when weather models began forecasting temperatures of approximately 115° Fahrenheit heat in Portland, Oregon. Then it happened. The National Weather Service has now recorded 116°F (46.7°C) at the Portland International Airport. The heat in the Pacific Northwest is unprecedented but the dynamics involved are straightforward. Summertime heat warms air above the ground or ocean, which then rushes up into the atmosphere to create a dome air that blocks new systems from moving in… ‘Usually, the correct-enough intuition to meteorologists is to say, ‘yeah, something’s wrong’ or ‘there’s some bug in the code,’’ says Daniel Swain, a climate scientist at UCLA… This time, however, there was no mistake… Swain, who trained as both a meteorologist and a climate scientist, calls the Pacific Northwest heat dome ‘mind-blowing.’ Hot spells generally stand out because they max out a single metric, such as a record daytime high, duration, high nighttime temperatures. Not so with the heatwave across the Western U.S. ‘In this case, all of those things are literally off the charts,’ he says. ‘There really aren’t any records that this heatwave isn’t breaking.’”

June 28 – Bloomberg (Amanda Little): “Water has been generating conflicts and controversies in the U.S. for centuries, but the American West could be heading toward the most severe water shortages and skirmishes in the nation’s history. The latest clash broke out this month along California’s border with Oregon in the Klamath River basin, where drought is decimating wild salmon populations. To minimize the kill, federal officials cut off water to nearby fields growing potatoes and alfalfa, leading to grave concern from farmers and protests from anti-government activists. Meanwhile, all the other Klamath River stakeholders — indigenous tribes with ancient claims, utility managers for growing cities in Southern Oregon and Northern California, dams running hydroelectric plants, golf courses and homeowners — are clamoring for their piece of the river.”

July 1 – Wall Street Journal (Danny Dougherty and Peter Santilli): “The Southwest is suffering through one of its worst droughts on record amid a critical reduction in the amount of water from snowpack runoff. Roughly 9.8% of the U.S. is currently in what climate experts refer to as exceptional drought, the most severe designation, which is characterized by widespread crop and pasture losses and shortages in reservoirs, streams and wells amounting to water emergencies. About 44% of the nation is experiencing some level of drought, with a further 13% currently affected by drier-than-normal conditions… The current drought is on pace to be one of the worst ever. One of the hardest-hit states is California, home to about 70,000 farms and ranches with a combined output of about $50 billion a year. The dairy industry accounts for the largest chunk of the state’s agricultural revenue, followed by almonds and grapes.”

June 29 – Bloomberg (Michael Hirtzer, Marcy Nicholson and Kim Chipman): “The world is counting on farmers in North America for big harvests of everything from corn to canola this year. Due to weird weather patterns, growers will likely come up short. The U.S. and Canada are seeing unusual variability in climate, with some crops withering from severe heat and drought while others see flooding. Meanwhile, demand is surging as economies recover from the coronavirus pandemic, so much so that every grain counts. The culprit is an abnormal, high pressure system that’s likely to remain in place during a key period of the growing season when plants are blooming and developing.”

Geopolitical Watch:

June 30 – Bloomberg: “President Xi Jinping struck a defiant tone in a speech marking the Communist Party’s 100-year anniversary, calling China’s quest to gain control of Taiwan a ‘historic mission’ and warning the country’s adversaries to avoid standing in the way of his government. In a nationwide address from above the portrait of Mao Zedong in Tiananmen Square, Xi hailed the party’s successes, saying China wanted to promote peace in the world and was open to ‘constructive criticism.’ Yet he quickly warned that the country would no longer listen to ‘sanctimonious preaching’ and that ‘the time when the Chinese nation could be bullied and abused by others was gone forever.’”

July 1 – CNBC (Evelyn Cheng): “Chinese President Xi Jinping spoke… about China’s firm resolve to stand up to foreign pressure while laying out national aspirations at the celebration of the 100th anniversary of China’s ruling Communist Party. China will not accept ‘sanctimonious preaching from those who feel they have the right to lecture us, Xi said… Xi said China would never allow any foreign force to bully it, and anyone attempting to do so would ‘find themselves on a collision course with a great wall of steel forged by over 1.4 billion people.’ ‘A century ago China was declining and withering away in the eyes of the world… Today, the image it presents to the world is one of a thriving nation, that is advancing with unstoppable momentum toward rejuvenation.’”

July 1 – Reuters (Yew Lun Tian and Ryan Woo): “China’s President Xi Jinping… warned that foreign forces attempting to bully the nation will ‘get their heads bashed’, and hailed a ‘new world’ created by its people as the ruling Communist Party marked the centenary of its founding. In an hour-long address from Tiananmen Square, Xi pledged to build up China’s military, committed to the ‘reunification’ of Taiwan and said social stability would be ensured in Hong Kong while protecting China’s security and sovereignty. ‘The people of China are not only good at destroying the old world, they have also created a new world,’ said Xi, China’s most powerful leader since Mao Zedong, the founder of the People’s Republic. ‘Only socialism can save China.’”

July 1 – Reuters (Yew Lun Tian and Yimou Lee): “Chinese President Xi Jinping pledged… to complete ‘reunification’ with self-ruled Taiwan and vowed to ‘smash’ any attempts at formal independence, drawing a stern rebuke from Taipei, which lambasted the Communist Party as a dictatorship. China, which considers democratically-ruled Taiwan its own territory, has stepped up efforts under Xi to assert its sovereignty claims, including regular flights by fighter jets and bombers close to the island. ‘Solving the Taiwan question and realising the complete reunification of the motherland are the unswerving historical tasks of the Chinese Communist Party and the common aspiration of all Chinese people,’ Xi said… ‘All sons and daughters of China, including compatriots on both sides of the Taiwan Strait, must work together and move forward in solidarity, resolutely smashing any ‘Taiwan independence’ plots.’”

June 30 – Financial Times (Dimitri Sevastopoulo and the Kathryn Hill): “The United States and Japan are conducting joint war games and exercises in the event of a conflict with China over Taiwan, amid mounting concerns about the assertive activity of the Chinese military. US and Japanese military officials began serious planning for a potential conflict in the final year of the Trump administration… The activity includes top-secret tabletop war games and joint exercises in the South China Sea and East China Shinzo Abe, then Japanese Prime Minister, decided in 2019 to significantly expand military planning due to the Chinese threat to Taiwan and the Senkaku Islands in the East China Sea. This work has continued under the administrations of Joe Biden and Japanese Prime Minister Yoshihide Suga…”

June 30 – Wall Street Journal (Georgi Kantchev and Thomas Grove): “Russian President Vladimir Putin challenged U.S. leadership in world affairs…, arguing that an era of U.S. hegemony has come to an end as he touted Moscow’s growing military strength and increasingly assertive foreign policy. Mr. Putin spoke during an annual event at which he answers questions from ordinary Russians. The remarks come two weeks after a summit with President Biden in Geneva where the two leaders sought to ease tensions but achieved little tangible progress. At the same time, Mr. Biden depicted the Kremlin leader as presiding over a country increasingly isolated by sanctions and struggling economically. At Wednesday’s event, Mr. Putin pushed back, portraying the U.S. as a waning power.”

June 28 – Reuters (Idrees Ali and Phil Stewart): “U.S. troops came under rocket fire in Syria on Monday, but escaped injury, in apparent retaliation for weekend U.S. air strikes against Iran-aligned militia in Syria and Iraq. A U.S. military spokesman said U.S. forces had responded to the multiple rockets by firing back at the positions in self-defense.”

June 27 – Bloomberg (Sudhi Ranjan Sen): “India has redirected at least 50,000 additional troops to its border with China in a historic shift toward an offensive military posture against the world’s second-biggest economy. Although the two countries battled in the Himalayas in 1962, India’s strategic focus has primarily been Pakistan since the British left the subcontinent, with the long-time rivals fighting three wars over the disputed region of Kashmir. Yet since the deadliest India-China fighting in decades last year, Prime Minister Narendra Modi’s administration has sought to ease tensions with Islamabad and concentrate primarily on countering Beijing. Over the past few months, India has moved troops and fighter jet squadrons to three distinct areas along its border with China…”

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