July 23, 2021: Dangerous Addiction

July 23, 2021: Dangerous Addiction
Doug Noland Posted on July 24, 2021

July 20 – Reuters (Karen Pierog): “Risk-off sentiment that drove Monday’s sell-off on Wall Street and rally in U.S. Treasuries widened credit spreads on corporate bonds to multi-month highs. The spread on the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, spiked from 318 bps on Friday to 344 bps as of the last update late Monday, its highest level since late March, according to Refinitiv data. It was also the biggest widening in a day since last June.”

The S&P500 dropped 1.6% in Monday trading, as U.S. stocks followed global equities lower. The VIX Index spiked to 25, a two-month high, while 10-year Treasury yields dropped to a five-month low 1.17%. Germany’s DAX and France’s CAC 40 indices sank 2.6% and 2.5% – to lows since May. Hong Kong’s Hang Seng Index fell another 1.8%, with the Hang Seng China Financials Index trading this week at an eight-month low. Global “Risk Off” was gathering momentum.

July 20 – Bloomberg: “Fresh signs of a cash crunch at China Evergrande Group sent shares and bonds of the world’s most indebted developer to new lows on Tuesday, stoking fears of broader market contagion. The property giant’s stock tumbled to the lowest level since April 2017, extending its two-day loss to 25%. Several of Evergrande’s local and offshore bonds sank to records, with its dollar note due 2025 falling to as low as 54 cents. Bonds of other junk-rated Chinese borrowers declined, while a gauge of developer shares dropped to a nearly three-year low. The nation’s bank stocks also slumped.”

July 20 – Bloomberg (Rebecca Choong Wilkins and Alice Huang): “Rising concerns over the financial health of China Evergrande Group are weighing down the broader market of high-yield bonds as contagion fears rise. Property developers are leading declines among China’s offshore junk bonds Tuesday. Kaisa Group Holdings Ltd.’s 2025 note fell 3.3 cents on the dollar to 92.3 cents, and Guangzhou R&F Properties Co.’s bond due 2023 declined 1.6 cents to 96.8 cents… Deepening doubts over Asia’s biggest issuer of dollar junk bonds are spilling over into other parts of the offshore market as investors cut their exposure to riskier borrowers.”

After a brief respite, Chinese Credit stress contagion was again escalating – at least early in the week. But the S&P500 then surged 3.6% in four sessions to end the week at all-time highs. No adjustments. No corrections.

July 22 – Bloomberg (Alexander Weber, Jeannette Neumann and Carolynn Look): “Christine Lagarde promised that the European Central Bank has learned from the errors of past crises and won’t derail the current economic recovery by withdrawing emergency support too early. The ECB president spoke Thursday as the central bank put into action the new monetary policy strategy it hammered out over the past 18 months. It revised guidance on interest rates, tying policy shifts more tightly to hitting its new 2% inflation goal, and said it won’t necessarily react immediately if price growth exceeds that target for a ‘transitory’ period. The measures reinforce the ECB’s efforts to convince markets that it will keep ultra-loose policy… in place for as long as needed to revive price stability.”

German bund yields ended the week at a five-month low negative 0.42%. Italian yields declined another nine bps to 0.62%, with Greek yields down two bps to 0.65%. Ten-year Treasury yields ended the week at 1.28%, despite abundant evidence from company quarterly earnings reports of heightened inflationary pressures and further price increases. Again this week, it seemed rather obvious that QE and associated liquidity excess have severely distorted both global bond and stock markets.

“One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing.” Chairman Ben Bernanke, CBS’s 60 Minutes, March 2009

“Sometimes you hear that the Fed is printing money in order to pay for the securities that we acquire… As a literal fact, the Fed is not printing money to acquire these securities… The amount of currency in circulation has not been affected by these activities. What has been affected is… reserve balances. Those are the accounts that commercial banks hold with the Fed, and they’re assets of the banking system – and liabilities of the Fed – and that’s basically how we pay for those securities. The banking system has a large quantity of these reserves, but they are electronic entries at the Fed – they basically just sit there. They’re not in circulation. They’re not part of any broad measure of the money supply. They’re part of what’s called the monetary base. They certainly aren’t cash.” Fed chair Ben Bernanke, presentation at George Washington University, May 2012

While the Bank of Japan first dabbled with QE in 2001, it was the Federal Reserve’s adoption of quantitative easing during the 2008 financial crisis that initiated a fundamental change in global monetary management. The globe’s preeminent central bank, guardian of the world’s reserve currency, unleashed monetary inflation around the globe. It was one of the most momentous governmental policy actions of the past century.

I argued back in 2008 against Dr. Bernanke’s assertion that the Fed wasn’t “printing money.” I didn’t want to believe he was being blatantly untruthful. Yet it seemed more than semantics – “printing money” versus “currency in circulation” and “cash.” I was left with the uncomfortable feeling the astute academic economist turned preeminent Fed theorist and lead official didn’t fully comprehend the nature of contemporary market-based finance.

It was exhausting. I would try to explain how Fed purchases created new reserve balances that flowed into the banking system in exchange for new deposits. These new bank deposits created purchasing power in the securities and asset markets, as well as for the real economy. Invariably, I would get responses akin to Bernanke’s assertions: “They are electronic entries between the Fed and the banking system; they basically just sit there. They can’t be in two places at once.” Conventional analysis completely disregarded the simultaneous expansion of bank deposits. There was no serious discussion of QE logistics and impacts.

Granted, the Fed’s initial QE program worked to accommodate the deleveraging of speculative securities holdings. Much of the Fed’s balance sheet expansion was essentially a transfer of positions from leveraged speculators (i.e. Lehman and the broker/dealers, AIG and other non-banks, hedge funds, commercial banks, etc.) to the Federal Reserve. While Fed QE did create new bank deposits, there was during that cycle the simultaneous unwind of securities Credit (deleveraging). The end result was somewhat of a “wash” in terms of the monetary aggregates.

Importantly, there was generalizing from the workings of QE during the 2008/2009 deleveraging episode, and how the mechanism would function during different market and economic backdrops. We’ve witnessed since March 2020 a QE program that, rather than accommodating deleveraging, actually spurred further speculative leverage. The Fed’s QE-related purchases created new Fed liabilities then exchanged for bank deposits, while additional deposits were created during the process of expanding speculative leverage (also from lending in the economy). M2 expanded about $300 billion in 2009. It surged $4.9 TN, or 32%, in the first 15 months of the pandemic (March 2020 through May 2021).

These days, it would be indefensible for Bernanke or anyone else to suggest the Fed is not directly responsible for a massive inflation of the money supply – i.e. “printing money.” And, finally, there is a credible investigation of the impact of QE – compliments of The Economic Affairs Committee of the U.K.’s House of Lords, with their insightful report, “Quantitative Easing: A Dangerous Addiction?” We can only hope this commences a serious debate regarding the precarious effects of history’s most monumental global monetary inflation.

Cogent insight from the UK report: “What is quantitative easing? Quantitative easing is a monetary policy tool that central banks can use to inject money into the economy through the purchase of ‘financial assets’, usually government bonds. Quantitative easing is also known as ‘asset purchasing’… Whenever the Monetary Policy Committee decides that it needs to undertake additional quantitative easing, the Bank of England creates new money to purchase Government or corporate bonds from private sector entities, such as pension funds or insurance companies. Once the Bank of England has purchased bonds from, for example, a pension fund, the pension fund receives new money in the form of a deposit in a commercial bank. The commercial bank has the deposit (a liability to the pension fund) and additional interest-paying reserves—a type of money that commercial banks use to pay each other—in the Bank of England (an asset).”

The Economic Affairs Committee should be commended for its 62-page comprehensive examination of the Bank of England’s QE program. I’ve extracted key passages that certainly apply to the Federal Reserve, along with global central banks more broadly.

“While the UK can be proud of the economic credibility of the Bank of England, this credibility rests on the strength of the Bank’s reputation for operational independence from political decision-making in the pursuit of price stability. This reputation is fragile, and it will be difficult to regain if lost. While the Bank has retained the confidence of the financial markets, it became apparent during our inquiry that there is a widespread perception, including among large institutional investors in Government debt, that financing the Government’s deficit spending was a significant reason for quantitative easing during the COVID-19 pandemic. These perceptions were entrenched because the Bank of England’s bond purchases aligned closely with the speed of issuance by HM Treasury. Furthermore, statements made by the Governor in May and June 2020 on how quantitative easing helped the Government to borrow lacked clarity and were likely to have added to the perception that recent rounds of asset purchases were at least partially motivated to finance the Government’s fiscal policy. We recognise that it is not easy to distinguish actions aiming to stabilise bond prices and the economy from actions oriented to funding the deficit. Nevertheless, if negative perceptions continue to spread, the Bank of England’s ability to control inflation and maintain financial stability could be undermined significantly.”

“We took evidence from a wide range of prominent monetary policy experts and practitioners from around the world. We concluded that the use of quantitative easing in 2009, in conjunction with expansionary fiscal policy, prevented a recurrence of the Great Depression and in so doing mitigated the growth of inequalities that are exacerbated in economic downturns. It has also been particularly effective at stabilising financial markets during periods of economic turmoil. However, quantitative easing is an imperfect policy tool. We found that the available evidence shows that quantitative easing has had a limited impact on growth and aggregate demand over the last decade. There is limited evidence that quantitative easing had increased bank lending, investment, or that it had increased consumer spending by asset holders. Furthermore, the policy has also had the effect of inflating asset prices artificially, and this has benefited those who own them disproportionately, exacerbating wealth inequalities. The Bank of England has not engaged sufficiently with debate on trade-offs created by the sustained use of quantitative easing. It should publish an accessible overview of the distributional effects of the policy, which includes a clear outline of the range of views as well as the Bank’s view.”

“No central bank has managed successfully to reverse quantitative easing over the medium to long term. In practice, central banks have engaged in quantitative easing in response to adverse events but have not reversed the policy subsequently. This has had a ratchet effect and it has only served to exacerbate the challenges involved in unwinding the policy. The key issue facing central banks as they look to halt or reverse quantitative easing is whether it will trigger panic in financial markets, with effects that might spill over into the real economy.”

“The Bank of England expects these actions to have effects that will boost the economy. These effects are sometimes referred to as ‘transmission mechanisms’ and they include: Portfolio rebalancing: by buying large amounts of Government bonds, quantitative easing pushes up their price and lowers their interest rate for investors. Because interest rates on Government bonds tend to affect other interest rates in the economy, the Bank of England hopes that this will lower long-term interest rates offered on other loans, such as mortgages or business loans, making it cheaper for businesses and households to borrow and spend money. When investors sell assets to the Bank of England, their bank accounts are credited with the proceeds which provides liquidity. Some, or all, of that new money will be spent on purchasing a range of financial or real assets, such as shares or property, thus raising their price. Those higher asset prices should stimulate spending, either directly or by lowering the cost of financing new investment.”

“Signalling: by purchasing bonds, the Bank of England in effect signals to the financial markets and lenders that it will keep interest rates low for a longer period of time. This reduces long-term interest rates in the economy and provides some certainty to banks that people can afford to borrow money. Market liquidity: by buying Government bonds, the Bank of England reassures investors that they can sell these bonds if they wish. That makes them a safe asset to hold and reassures investors that they will be able to access liquidity by selling them even when financial markets are in distress. Wealth effects: quantitative easing can boost a range of financial asset prices, such as bonds and shares. This increases the value of these assets, which makes businesses and households holding them wealthier. The Bank of England hopes that this makes them more likely to spend money on goods and services, which would boost economic activity.”

“Some witnesses warned of the risks of giving central banks too many objectives which may bring them into conflict. Otmar Issing, President of the Center for Financial Studies and former Chief Economist at the European Central Bank, said, ‘Too many targets make it almost impossible to focus monetary policy on maintaining price stability.’ Daniel Gros, Distinguished Fellow at the Centre for European Policy Studies, said, ‘The more independent a central bank is, the narrower its mandate has to be.’ Lord Macpherson of Earl’s Court… said, ‘if we overload the Bank with objectives—bear in mind that it only has so many instruments—we risk dragging it into political areas where it will be criticised unnecessarily.’”

Answering the report’s overarching question, former Bank of England governor Mervyn King’s Bloomberg Opinion piece was titled “Quantitative Easing Is a ‘Dangerous Addiction’: QE is not a cure-all. Central banks have seemed to assume that any adverse shock justifies another round of bond buying. QE has become a universal remedy for almost any macroeconomic setback. But only certain shocks merit a monetary-policy response. The explanations provided by central banks to justify the scale of QE in 2020 changed over the course of the year, and failed to distinguish between shocks that justified a monetary response and those that didn’t… QE poses risks for central-bank independence. The committee looked closely at the relationship between QE and the public finances. QE has made it easier for governments to finance exceptionally large budget deficits in the extraordinary circumstances of Covid-19.”

I am not alone in recognizing the Dangerous Addiction – the central role QE has played in dangerously fueling massive government indebtedness, market dysfunction, speculative assets Bubbles, and inflation. The debate has begun. Tragically, it’s too late.

For the Week:

The S&P500 gained 2.0% (up 17.5% y-t-d), and the Dow increased 1.1% (up 14.6%). The Utilities declined 0.8% (up 4.5%). The Banks slipped 0.3% (up 23.7%), while the Broker/Dealers added 0.9% (up 21.3%). The Transports rose 1.8% (up 18.0%). The S&P 400 Midcaps jumped 2.1% (up 15.9%), and the small cap Russell 2000 rallied 2.1% (up 11.9%). The Nasdaq100 advanced 2.9% (up 17.3%). The Semiconductors surged 4.3% (up 17.3%). The Biotechs recovered 1.6% (up 0.2%). With bullion down $10, the HUI gold index fell 2.3% (down 13.6%).

Three-month Treasury bill rates ended the week at 0.0425%. Two-year government yields slipped two bps to 0.20% (up 8bps y-t-d). Five-year T-note yields dropped six bps to 0.71% (up 35bps). Ten-year Treasury yields dipped one basis point to 1.28% (up 36bps). Long bond yields were unchanged at 1.92% (up 27bps). Benchmark Fannie Mae MBS yields declined three bps to 1.72% (up 38bps).

Greek 10-year yields declined two bps to 0.65% (up 3bps y-t-d). Ten-year Portuguese yields fell seven bps to 0.19% (up 16bps). Italian 10-year yields dropped nine bps to 0.62% (up 8bps). Spain’s 10-year yields slipped two bps to 0.27% (up 22bps). German bund yields sank seven bps to negative 0.42% (up 15bps). French yields dropped seven bps to negative 0.09% (up 25bps). The French to German 10-year bond spread was little changed at 33 bps. U.K. 10-year gilt yields declined four bps to 0.58% (up 39bps). U.K.’s FTSE equities index added 0.3% (up 8.8% y-t-d).

Japan’s Nikkei Equities Index fell 1.6% (up 0.4% y-t-d). Japanese 10-year “JGB” yields declined less than a basis point to 0.02% (unchanged y-t-d). France’s CAC40 rallied 1.7% (up 18.3%). The German DAX equities index increased 0.8% (up 14.2%). Spain’s IBEX 35 equities index jumped 2.5% (up 8.0%). Italy’s FTSE MIB index rose 1.3% (up 13.0%). EM equities were mixed. Brazil’s Bovespa index declined 0.7% (up 5.1%), while Mexico’s Bolsa added 0.2% (up 14.1%). South Korea’s Kospi index fell 0.7% (up 13.3%). India’s Sensex equities index dipped 0.3% (up 10.9%). China’s Shanghai Exchange increased 0.3% (up 2.2%). Turkey’s Borsa Istanbul National 100 index lost 0.9% (down 8.5%). Russia’s MICEX equities index fell 0.9% (up 13.5%).

Investment-grade bond funds saw outflows of $1.198 billion, and junk bond funds posted negative flows of $742 million (from Lipper).

Federal Reserve Credit last week surged $97.5bn to a record $8.174 TN. Over the past 97 weeks, Fed Credit expanded $4.448 TN, or 119%. Fed Credit inflated $5.363 Trillion, or 191%, over the past 454 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.0bn to $3.526 TN. “Custody holdings” were up $124.2bn, or 3.6%, y-o-y.

Total money market fund assets gained $7.2bn to $4.487 TN. Total money funds declined $102bn y-o-y, or 2.2%.

Total Commercial Paper increased $2.8bn to $1.132 TN. CP was up $111bn, or 10.9%, year-over-year.

Freddie Mac 30-year fixed mortgage rates sank 10 bps to a five-month low 2.78% (down 23bps y-o-y). Fifteen-year rates fell 10 bps to 2.12% (down 42bps). Five-year hybrid ARM rates increased two bps to 2.49% (down 60bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates slipping a basis point to 3.03% (down 15bps).

Currency Watch:

For the week, the U.S. Dollar Index added 0.2% to 92.91 (up 3.3% y-t-d). For the week on the upside, the Canadian dollar increased 0.4%. On the downside, the South African rand declined 2.8%, the Brazilian real 1.6%, the South Korean won 0.9%, the Mexican peso 0.9%, the Australian dollar 0.5%, the Japanese yen 0.4%, the New Zealand dollar 0.4%, the euro 0.3%, the Singapore dollar 0.3%, the Norwegian krone 0.2%, the British pound 0.1%, and the Swedish krona 0.1%. The Chinese renminbi slipped 0.03% versus the dollar this week (up 0.71% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index gained 1.3% (up 22.6% y-t-d). Spot Gold slipped 0.5% to $1,802 (down 5.1%). Silver fell 1.9% to $25.18 (down 4.6%). WTI crude recovered 26 cents to $72.07 (up 49%). Gasoline jumped 1.7% (up 63%), and Natural Gas surged 10.5% (up 60%). Copper rose 1.8% (up 25%). Wheat declined 1.2% (up 7%). Corn fell 1.6% (up 12%). Bitcoin rallied $2,522 this week to $33,786 (up 16.2%).

Coronavirus Watch:

July 22 – CNBC (Rich Mendez): “The delta Covid variant is one of the most infectious respiratory diseases ever seen by scientists, the director of the Centers for Disease Control and Prevention said… The variant is highly contagious, largely because people infected with the delta strain can carry up to 1,000 times more virus in their nasal passages than those infected with the original strain, according to new data. ‘The delta variant is more aggressive and much more transmissible than previously circulating strains,’ CDC Director Dr. Rochelle Walensky told reporters… ‘It is one of the most infectious respiratory viruses we know of, and that I have seen in my 20-year career.’”

July 20 – CNN (Madeline Holcombe and Theresa Waldrop): “The more contagious Delta variant of coronavirus now makes up 83% of sequenced samples in the United States, US Centers for Disease Control and Prevention (CDC) Director Dr. Rochelle Walensky said… ‘This is a dramatic increase, up from 50% for the week of July 3, Walensky said… Health experts have said the Delta variant is more transmissible than any other identified variant so far. ‘We should think about the Delta variant as the 2020 version of Covid-19 on steroids,’ Andy Slavitt, a former senior adviser to Joe Biden’s Covid Response Team, told CNN… ‘It’s twice as infectious,’ Slavitt said. ‘Fortunately, unlike 2020, we actually have a tool that stops the Delta variant in its tracks: It’s called vaccine.’”

July 20 – Reuters (Carl O’donnell and Mrinalika Roy): “The Delta variant of the coronavirus is the cause of more than 80% of new U.S. COVID-19 cases, but the authorized vaccines remain more than 90% effective in preventing hospitalizations and deaths, said top U.S. infectious disease expert Anthony Fauci during U.S. Senate hearing…”

July 21 – CNBC (Saheli Roy Choudhury): “The world is in the early stages of another wave of Covid-19 infections and death, World Health Organization Director-General Tedros Adhanom Ghebreyesus said… Tedros said the global failure to share vaccines, tests and treatments is fueling a ‘two-track pandemic.’ Countries that have adequate resources like vaccines are opening up, while others are locking down in a bid to slow the virus’ transmission. ‘This is not just a moral outrage, it’s also epidemiologically and economically self-defeating,’ Tedros said… ‘The pandemic is a test and the world is failing.’”

Market Mania Watch:

July 19 – CNBC (Arjun Kharpal): “The price of bitcoin dropped below $30,000 late Monday night for the first time since Jun. 22, dragging other digital coins lower with it… At one point early Tuesday, about $89 billion was wiped off the entire cryptocurrency market in a 24-hour period. Since bitcoin’s all-time high of nearly $65,000 in mid-April, its price has plunged over 50%.”

July 17 – Wall Street Journal (Alexander Osipovich): “One of the hottest trends in cryptocurrencies is a financial activity that dates back to biblical times: lending money to earn interest. Instead of just waiting for their bitcoin, ether or other digital coins to rise in value, cryptocurrency investors are now actively chasing returns by lending out their crypto holdings or pursuing other strategies to earn yield. Such ‘yield farming’ can earn double-digit interest rates… It is a high-stakes endeavor. Investors run the risk of having their digital wealth stolen by scammers or erased by sudden bouts of volatility. The space is also largely unregulated. Yield farmers aren’t protected by the Federal Deposit Insurance Corp…”

July 19 – Bloomberg (Justina Lee): “Bitcoin has long been known for its violent swings in price. But the volatility isn’t just driven by tweets from Elon Musk or warnings from Chinese regulators: It’s also fed by a massive derivatives industry that has boomed on the back of voracious demand for leverage and speculative tools in cryptocurrency markets. In some ways it’s a tale as old as Wall Street, but now in a new digital wrapper. For instance, when Bitcoin plunged as much as 30% in a day in May, leveraged-up positions in futures and options were wiped out… In one 24-hour period ending July 19, for instance, Binance, the largest crypto exchange, recorded $42 billion of derivative volume, more than four times the activity in spot trades, Coinmarketcap data show.”

Market Instability Watch:

July 22 – Bloomberg (Ameya Karve): “Junk bonds in Asia tumbled as investor concerns mounted about the fate of China Evergrande Group, the biggest issuer of such securities in the region. Average prices of Asian high-yield dollar notes fell about 2 cents Thursday…, putting them on track for the worst drop since March 2020 and the lowest level in more than a year… The plight of Evergrande is central to Asia’s speculative-grade credit markets given its sheer size, with worst-case scenarios drawing comparisons to how related debt losses with Turkey or Argentina had previously hurt emerging-market assets.”

July 21 – Bloomberg (Liz Capo McCormick and Alexandra Harris): “The imminent return of the U.S. debt ceiling is causing angst for money-market traders once again. While the risk that Uncle Sam might default by missing a payment on a bill or two is minuscule, investors are wondering if and how the Treasury can slash its giant cash pile to the level the department has indicated would be consistent with its policies and the 2019 act that suspended the limit. And they’re concerned about the impact any moves could have on short-term funding markets, which underpin much of the global financial architecture. The Treasury Department has indicated it would reduce its cash balance to $450 billion by July 31, when the debt cap’s suspension ends.”

Inflation Watch:

July 21 – Bloomberg (Olivia Rockeman and Peyton Forte): “Temporary may well extend into 2022. The outsize gains in U.S. inflation measures that exceeded forecasts over the last four months have been borne out in recent corporate earnings calls, with many executives highlighting greater pricing power. During the kickoff to the current earnings season, companies including paints and coatings producer PPG Industries Inc., beverage maker Coca-Cola Co. and industrial supplies distributor Fastenal Co. have telegraphed building price pressures. ‘This inflation cycle is much higher than anyone anticipated and we’re continuing on a business by business basis, working to secure further selling price increases,’ PPG’s Chief Executive Officer Michael McGarry said…”

July 21 – Bloomberg (Ben Holland): “Single-family home rental prices in the U.S. jumped 6.6% in May from a year earlier, according to CoreLogic Inc., signaling that the housing boom may add to inflationary pressures in the economy. The increase was the fastest since at least 2005… Single-family homes… have seen a surge in demand during the pandemic as Americans sought to move to less densely populated neighborhoods… The increase in single-family rents was steepest at the top end of the market, with freestanding homes climbing by 9.2% while attached properties — like condos or townhouses — rose 3.6%, CoreLogic said.”

July 22 – Wall Street Journal (Theo Francis, Thomas Gryta and Gwynn Guilford): “American companies are starting to test the extent of their pricing power. Faced with rising costs for materials, transportation and workers, companies are charging more for products from metal fasteners to Oreo cookies, helping fuel inflation like the U.S. hasn’t seen in more than a decade. As customers accept the price hikes, some big companies said they expect to raise prices even more. Others are more cautious, unsure if U.S. consumers have the appetite to absorb additional increases. What companies decide will go a long way to answering a question that has surged to the top of executives’ and economists’ agendas this year: Is the recent jump in inflation transitory, as the Federal Reserve predicts, or persistent, as some executives warn?”

July 22 – Bloomberg (Thomas Buckley): “Unilever Plc warned that costs for raw materials that go into shampoo, detergents and ice cream are increasing at the fastest pace in more than a decade, forcing the company to scale back profitability goals for this year. The maker of Cif cleaners and Dove soap lowered its guidance for profitability Thursday, forecasting 2021 margins near last year’s level as improvement becomes more difficult. The shares fell as much as 5.8%… Unilever is joining rivals such as Procter & Gamble Co. in warning of rising price pressure. Higher raw material costs have become a growing concern for manufacturers as economies emerge from Covid-19 lockdowns.”

July 20 – New York Times (Eduardo Porter): “McDonald’s is raising wages at its company-owned restaurants. It is also helping its franchisees hang on to workers with funding for backup child care, elder care and tuition assistance. Pay is up at Chipotle, too, and Papa John’s and many of its franchisees are offering hiring and referral bonuses. The reason? ‘In January, 8% of restaurant operators rated recruitment and retention of work force as their top challenge,’ Hudson Riehle, senior vice president for research at the National Restaurant Association, said… ‘By May, that number had risen to 72%.’”

July 21 – Financial Times (Mercedes Ruehl and Kathrin Hille): “South-east Asia’s crucial technology supply chain has been hit by record levels of Covid-19 infections, a development that could exacerbate a global shortage of chips. Malaysia and Vietnam, economies that play critical roles in producing electronics as well as packaging and testing components that go in everything from vehicles to smartphones, are facing their worst outbreaks since the pandemic began. The situation threatens to further squeeze the global technology supply chain…”

July 16 – Bloomberg (Katia Dmitrieva): “High inflation rates in the U.S. won’t last for long even though the economy is undergoing an unprecedented experiment with fiscal policy, according to a top proponent of Modern Monetary Theory. The surge in consumer prices, which are rising at the fastest pace in more than a decade, is ‘by and large’ a sign of ‘growing pains of an economy that’s emerging from a pandemic and reopening’, according to Stephanie Kelton, professor of economics and public policy at Stony Brook University… ‘I situate myself pretty squarely in the transitory camp,’ she said… She added that elements that would cause entrenched inflationary pressure are missing.”

July 21 – Associated Press (Tom Krisher and Mike Householder): “For months, anyone who wandered onto a dealer lot to look for a used car could be forgiven for doing a double take — and then wandering right off the lot. Prices had rocketed more than 40% from their levels just before the viral pandemic struck, to an average of nearly $25,000. The supply of vehicles had shrunk. And any hope of negotiating on price? Good luck with that. But now, a sliver of hope has emerged. The seemingly endless streak of skyrocketing used-vehicle prices appears to be coming to a close. Not that anyone should expect bargains. Though average wholesale prices that dealers pay are gradually dropping, they’ll likely remain near record levels. So will the retail prices for consumers. Supply remains tight.”

July 22 – Bloomberg (Josyana Joshua): “Natural gas futures soared to $4 per million British thermal units in the U.S. for the first time since December 2018 as summer heat intensified concerns about tight supplies later this year.”

Biden Administration Watch:

July 21 – Reuters (Susan Cornwell, David Morgan and Makini Brice): “U.S. Senate Republicans blocked a move to open debate on Wednesday on a $1.2 trillion bipartisan infrastructure measure that is a top priority for Democratic President Joe Biden, but the chamber was poised to take it up again as early as Monday. Republicans objected to opening debate on the bill because it was not yet written, although it is not unusual for the chamber to vote on a skeleton ‘shell’ bill to move the legislative process along.”

July 22 – Wall Street Journal (William Mauldin and Vivian Salama): “The Biden administration is raising the pressure on China, confronting it on cyberattacks and human rights and making tentative progress rallying allies to its side, while so far avoiding deep engagement with Beijing. The emerging Biden policy will get a test this weekend when the State Department’s No. 2 official, Wendy Sherman, travels to China for the first face-to-face meeting of senior officials in more than three months. The discussions… will center on U.S. concerns and areas of possible alignment. The U.S. has in recent weeks begun to accelerate moves to pressure China. It issued twin advisories to American businesses about the reputational, legal and other risks of operating in Hong Kong and Xinjiang, regions where Beijing is tightening its grip with crackdowns. This week it publicly called out China’s chief intelligence service for sponsoring hacking around the world—and got dozens of allies to join it in the condemnation.”

July 19 – Reuters (Steve Holland and Andrea Shalal): “U.S. President Joe Biden… said an increase in prices was expected to be temporary, but his administration understood that unchecked inflation over the longer term would pose a ‘real challenge’ to the economy and would remain vigilant. Biden said he told Federal Reserve Board Chair Jerome Powell recently that the Fed was independent and should take whatever steps it deems necessary to support a strong, durable recovery. ‘As our economy comes roaring back, we’ve seen some price increases,’ Biden said, while rejecting concerns the recent increases could be a sign of persistent inflation.”

Federal Reserve Watch:

July 22 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are set to accelerate deliberations at their meeting next week over how to scale back their easy-money policies amid a stronger U.S. economic recovery than they anticipated six months ago. Fed Chairman Jerome Powell has said their discussions are focusing on two important questions: When to start paring their monthly purchases of $80 billion in Treasury securities and $40 billion in mortgage securities, and how quickly to reduce, or taper, them. The answers matter greatly to financial markets because Fed officials have said they aren’t likely to consider raising interest rates from near zero until they are done tapering the asset purchases. Some officials have discussed concluding the purchases around October 2022 so they could lift rates later that year if the recovery is stronger or inflation is higher than now anticipated.”

U.S. Bubble Watch:

July 22 – Associated Press (Alex Veiga): “Sales of previously occupied U.S. homes rose in June, snapping a four-month losing streak, while strong demand for higher-end properties and ultra-low mortgage rates helped push prices to new highs. Existing homes sales rose 1.4% last month from May to a seasonally-adjusted annual rate of 5.86 million units… While sales of homes under $150,000 fell in June from a year earlier, buyers who purchased properties that sold for $250,000 or above helped push the median U.S. home price 23.4% higher from a year earlier to an all-time high $363,300… At the end of June, there were 1.25 million unsold homes for sale, an increase of 3.3% from May, but down 18.8% from June 2020. At the current sales pace, that amounts to a 2.6 months’ supply, the NAR said.”

July 20 – Reuters (Lucia Mutikani): “U.S. homebuilding increased more than expected in June, but permits for future home construction fell to an eight-month low… Though lumber prices are coming down from record highs, builders are paying more for steel, concrete and lighting, and are grappling with shortages of appliances like refrigerators. ‘Reports of multi-month delays in the delivery of windows, heating units, refrigerators and other items have popped up across the country, delaying delivery of homes and forcing builders to cap activity, and many builders continue to point to a shortage of available workers as a separate challenge,’ said Matthew Speakman, an economist at Zillow.”

July 22 – Wall Street Journal (Nicole Friedman): “Continued strong demand pushed the median U.S. home price to a record high in June… Existing-home sales rose 1.4% in June from the prior month to a seasonally adjusted annual rate of 5.86 million, the National Association of Realtors said Thursday. June sales rose 22.9% from a year earlier. The median existing-home price rose to $363,300, in June, up 23.4% from a year earlier, setting a record high, NAR said, extending steady price increases amid limited inventory.”

July 22 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits rose to a two-month high last week… Initial claims for state unemployment benefits increased 51,000 to a seasonally adjusted 419,000 for the week ended July 17, the highest level since mid-May.”

July 21 – Reuters (Evan Sully): “The number of applications for U.S. home mortgages declined last week, driven by a decrease in both refinancing and purchase activity as mortgage rates rose… ‘Limited inventory and higher prices are keeping some prospective homebuyers out of the market,’ Joel Kan, MBA’s associate vice president of economic and industry forecasting, said… Purchase applications declined 6.4% to their lowest level since May 2020.”

July 22 – Wall Street Journal (Julia Carpenter): “For first-time buyers looking for starter homes in this year’s hot housing market, a decadeslong trend could further delay this long-awaited money milestone. The supply of entry-level housing, which Freddie Mac defines as homes up to 1,400 square feet, is near a five-decade low, and data on new construction from the National Association of Home Builders shows that single-family homes are significantly bigger than they were years ago. Homeowners from previous generations had access to smaller homes at the start of their financial lives. In the late 1970s, an average of 418,000 new units of entry-level housing were built each year… By the 2010s, that number had fallen to 55,000 new units a year. For 2020, an estimated 65,000 new entry-level homes were completed.”

July 22 – Wall Street Journal (Katherine Clarke and E.B. Solomont): “As the ink dried on a $122.7 million deal for the sale of a contemporary oceanfront Palm Beach mansion this past February, real-estate agent Ryan Serhant toasted his success with a glass of Champagne and a lobster at a table for one at the area’s iconic hotel, The Breakers… Over the past roughly 16 months, buyers have poured billions of dollars into property in Palm Beach, a 16-mile barrier island off Florida’s Atlantic coast with roughly 2,500 homes. Since March 2020, there have been at least 22 sales north of $40 million in Palm Beach County, with two over $100 million and about 35 over $30 million…”

July 22 – Bloomberg (Oshrat Carmiel): “Hamptons home prices reached a record high as New Yorkers stepped up their bidding for a dwindling supply of listings in the Long Island resort towns. The median price of homes that changed hands in the second quarter jumped 30% from a year earlier to $1.405 million, the highest in data going back to 2005, according to… Miller Samuel Inc. and Douglas Elliman Real Estate. Of the 675 deals in the period, 21% were for more than the asking price.”

Fixed-Income Bubble Watch:

July 21 – Bloomberg (Caleb Mutua and Aysha Diallo): “The great refinancing wave continues to slosh through the U.S. junk bond market, as companies hit worst by the pandemic keep replacing expensive debt they were forced to sell last year. Cruise operator Carnival Corp. is among the latest to capitalize on the dramatic drop in junk-bond yields to near record lows. It’s selling $2.4 billion of bonds to buy back about half the debt it sold in April of last year, when the company’s ability to weather Covid was in question. The borrowing cost is dramatically lower: around 4% now… versus 11.5% on the 2020 bonds.”

China Watch:

July 21 – Bloomberg (Shuli Ren): “In the past, China Evergrande Group has always been able to wiggle out of trouble. In turbulent times, billionaire founder Hui Ka Yan would turn to his tycoon friends to prop up his stocks and bonds. The persistent support they’ve provided — buying up Evergrande debt — is why the developer is also Asia’s largest dollar junk bond issuer. Hui’s pals were at it again earlier this week. As the real estate developer’s bonds tumbled to record lows, CST Group Ltd. said in a filing that it had bought $11 million worth of Evergrande bonds… Billionaire Cheung Chung Kiu — one of Hui’s buddies in what’s called the Big Two poker club — has a stake in CST. Last September, during another credit crunch, the investment firm bought Evergrande bonds as well…”

July 20 – Bloomberg: “China Evergrande Group bonds are suffering steep haircuts in a key onshore funding market, showing just how risky the bonds are perceived to be by mainland dealers. Holders of Evergrande’s 2023 yuan bond are being forced to accept a 53% discount to pledge the note as collateral in the repo market…, versus 28% in April. A markdown of around 57% of the bond’s face value was seen in the wake of the developer’s previous liquidity crisis in October, the data showed.”

July 21 – Bloomberg: “HSBC Holdings Plc, Bank of China Ltd.’s Hong Kong unit and at least two other major lenders stopped providing mortgages to buyers of China Evergrande Group’s unfinished residential properties in Hong Kong, the latest sign of dwindling confidence in the developer’s financial strength. The lenders, which also include Hang Seng Bank and Bank of East Asia, suspended new mortgages for Evergrande’s two projects under construction in Hong Kong after re-evaluating the risks of such loans… Industrial and Commercial Bank of China (Asia) also halted providing mortgages to Evergrande’s unfinished flats…”

July 23 – Bloomberg: “At least two of Hong Kong’s biggest lenders are reconsidering halts on mortgages for China Evergrande Group’s unfinished properties, after the decisions were questioned by the city’s de facto central bank, according to people familiar with the matter.”

July 22 – Bloomberg: “Pressure is mounting on China Evergrande Group’s billionaire founder as fears of a default by the world’s most indebted developer drive away banks and send the company’s bonds tumbling. The latest blow to Hui Ka Yan’s property empire came on Wednesday, when at least four of Hong Kong’s largest lenders stopped providing mortgages to buyers of Evergrande’s unfinished apartments in the city. That followed a slew of reports in recent weeks about wary banks and overdue payments to suppliers. Evergrande’s dollar bonds sank to record lows on Thursday morning, before recovering on news that the company resolved a dispute with a Chinese bank over repayment of a 132 million yuan ($20 million) loan.”

July 21 – Financial Times (Sun Yu): “Local governments in China are racing to launch rescue funds worth billions of dollars to bail out state-owned groups after a flurry of high-profile bond defaults that shook international investors. Public records showed that six Chinese provinces have committed at least Rmb110bn ($17bn) to the funds since the end of last year, as a cash crunch among indebted state-owned enterprises hit local economies. The wave of defaults included companies such as Yongcheng Coal and Electricity Holding Group, which threw the local economy of central province of Henan into crisis when it missed an Rmb1bn debt payment last year and stopped paying some of its 180,000 workers… Distressed bonds issued by state-owned enterprises totalled Rmb119bn last year, the highest since China started allowing SOEs to default in 2014, and up from Rmb22bn in 2019. The defaults have worried investors, who previously had assumed the bonds would be backed by the state.”

July 22 – Reuters (Cheng Leng, Dominique Patton, Hallie Gu, Muyu Xu and Yi-Mou Lee): “The floods drenching central China and submerging swathes of a major economic and transport hub are threatening supply chains for goods ranging from cars and electronics to pigs, peanuts and coal. Power had been partly restored and some trains and flights were running on Thursday but analysts said disruption could last for several days, pushing up prices and slowing business across densely populated Henan and neighbouring provinces. Zhengzhou, Henan’s capital of 12 million people, 650 km (400 miles) southwest of Beijing, is the junction for the major north-south and east-west high-speed rail lines, with connections to most major Chinese cities from one of Asia’s largest stations. Transport of coal, which generates most of China’s power, from top mining regions like Inner Mongolia and Shanxi via Zhengzhou to central and eastern China was ‘severely impacted’, the state planner said…, just as power plants scramble for fuel to meet peak summer demand.”

July 19 – Bloomberg: “Key Chinese cities have warned that homes and factories face new power outages as historic demand and supply shortages strain energy grids. Populous centers including Beijing and Xi’an have alerted electricity users there will be scheduled disruptions as grid operators struggle to maintain overloaded networks. Eleven provinces including eastern manufacturing hubs and landlocked central China, which also suffered outages during last winter’s cold spell, reported record demand and peak-load surges last week…”

Global Bubble Watch:

July 20 – Reuters (Rodrigo Campos): “Foreign flows to China’s local currency government bond market could balloon to $400 billion annually, an analysis from the Institute of International Finance showed… Central banks were behind 60% of the flows to local currency Chinese government bonds in the first quarter of 2021 as allocation of reserves to Chinese bonds continued to increase, the data showed.”

July 23 – Bloomberg (Harriet Habergham): “The customary summer slowdown couldn’t come sooner for the participants in Europe’s debt market after an intense 18 months of deals and travel bans kept them tied to their desks. Junk debt sales for the year to date are already close to surpassing 2020’s record amount — and the deals keep on coming. Investment grade issuance has slowed from the ferocious levels of debt-raising when the pandemic first struck, but activity throughout 2021 remained brisk right up until this week. September is looking no less busy.”

July 23 – Bloomberg (Elliot Smith): “Global IPO activity had its hottest second quarter in two decades by volumes and proceeds, and momentum will continue for the rest of the year, according to… EY. Amid strong global stock market momentum and ample liquidity, traditional IPOs came back to the fore in the second quarter after the first was dominated by SPACs, the British professional services giant found. In the first half of 2021, EY counted 1,070 IPOs that raised $222 billion in proceeds, respective annual increases of 150% and 215%.”

July 21 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Global venture capital investments are at record levels this year, boosted by a surge in equities, higher liquidity and an increased interest in sectors that have benefited from the coronavirus pandemic. According to Refinitiv data, global venture capital funds invested $268.7 billion so far in 2021, far outstripping their total investments of $251.2 billion a year earlier. The bulk of those deals were in software, e-commerce, digital healthcare and fin-tech companies, whose products and services have seen strong demand during the pandemic…”

July 21 – Bloomberg (Kevin Orland and Ari Altstedter): “They’re the kind of exotic mortgages that one typically associates with the reckless, go-go housing market that gripped the U.S., circa 2005: Put down 5% cash and get 3% back; or, wilder yet, put down nothing at all. So when these products — and others like them — started popping up in the normally cautious Canadian financial industry, it raised alarm among policy makers in Ottawa. This is year twenty-five of the great Canadian housing bull market, a nearly uninterrupted straight line up that has few parallels in the world. At a time of soaring real-estate prices all over the globe, only one major economy — New Zealand — has a frothier housing market than Canada… And after all those years of price gains, including a 21% surge since the pandemic began, millions of middle-class Canadians have no chance of scrounging together the money needed to make a conventional down payment of 20%.”

July 20 – Reuters (Jonathan Saul and Roslan Khasawneh): “‘I’ve seen grown men cry,’ says Captain Tejinder Singh, who hasn’t set foot on dry land in more than seven months and isn’t sure when he’ll go home… ‘People don’t know how their supermarkets are stocked up.’ Singh and most of his 20-strong crew have criss-crossed the globe on an exhausting odyssey: from India to the United States then on to China, where they were stuck off the congested coast for weeks waiting to unload cargo… They are among about 100,000 seafarers stranded at sea beyond their regular stints of typically 3-9 months, according to the International Chamber of Shipping (ICS), many without even a day’s break on land. Another 100,000 are stuck on shore, unable to board the ships they need to earn a living on.”

Central Banker Watch:

July 22 – Bloomberg (Alexander Weber): “The European Central Bank revised its guidance on when interest rates might rise to convince investors it won’t withdraw support too hastily and derail the economic recovery. The move is aimed at strengthening the ECB’s long-running efforts to push up inflation, but it also means policy makers won’t necessarily react immediately if price growth overshoots their target for a period. Not all policy makers were on board with the decision, which followed an 18-month strategy review in which the ECB raised its inflation goal to 2% from just-under 2%… President Christine Lagarde said backing for the change in guidance wasn’t unanimous, though there was an ‘overwhelming majority’ behind it.”

July 22 – Bloomberg (Alexander Weber, Jana Randow and Carolynn Look): “Bundesbank President Jens Weidmann and Belgian Governor Pierre Wunsch opposed new European Central Bank policy guidance that signals a longer period of record-low interest rates… The two Governing Council members were concerned about wording that can be seen as making too much of a long-term commitment to loose monetary policy, the people said. Other officials agreed to the forward guidance on the condition that it only affects interest rates, not asset purchases, according to one official.”

July 19 – Bloomberg (Mervyn King): “Introduced as an emergency response to a severe fall in aggregate demand at the end of 2008 and the beginning of 2009, quantitative easing has since become the main policy tool of advanced-economy central banks. In principle, there is nothing wrong with this. Central banks have long bought and sold government bonds to influence the money supply. But the enormous scale of purchases during 2020 and 2021, in circumstances where the case for a substantial monetary injection was far from clear, led to concerns about its impact on inflation… The Economic Affairs Committee of the U.K.’s House of Lords, of which I’m a member, has just issued a report on the challenges of using large-scale bond purchases as an instrument of monetary policy. Its title pointedly asks: ‘Quantitative Easing: A Dangerous Addiction?’ In a word, our answer to that question is ‘yes.’”

July 22 – Financial Times (Martin Arnold): “The European Central Bank’s move to become more tolerant of inflation before raising interest rates has sparked immediate criticism from some of its more hawkish policymakers in an early indication of the divisions that will fuel its debate on when to scale back bond-buying. After its latest policy-setting meeting on Thursday the ECB said it would keep buying bonds and maintain its deeply negative interest rates in an attempt to shift the eurozone economy out of its persistent pattern of sluggish inflation, and was prepared to tolerate a moderate and transitory overshoot of its price growth target. But the wording of its new stance drew criticism from the leaders of the German and Belgian central banks, who both sit on its 25-person governing council, according to people familiar with the discussions.”

July 23 – Reuters (Francesco Canepa): “European Central Bank policymaker Pierre Wunsch said… he was uncomfortable with the ECB’s new guidance, which financial markets have taken as a commitment not to raise interest rates for ‘five or six years’. Wunsch was one of just two ECB governors who dissented from Thursday’s decision to push out the timing of any rate hike… Wunsch said his disagreement ‘shouldn’t be dramatised’ but went on to say the ECB had tied its hands for years to come and could face questions about its independence from governments — even firing a rare shot at some of his colleagues.”

July 23 – Reuters (Andrey Ostroukh): “Russia’s central bank increased its key interest rate to 6.5% on Friday to curb stubbornly high inflation and indicated that further rate increases were possible even after the 100 bps hike, its sharpest since late 2014… Central Bank Governor Elvira Nabiullina, presenting the rate move, said the bank also considered 50 and 75-basis-point hikes but opted for a more aggressive move to pull inflation back to its 4% target.”

EM Watch:

July 19 – Bloomberg (Netty Ismail and Selcuk Gokoluk): “South Africa’s unfolding turmoil is putting emerging-market political risks at the fore, and traders are hunting for currencies vulnerable to political hazards and playing them off against their more stable peers. Citigroup Inc. and Deutsche Bank AG were among the lenders recommending investors to short the South African rand last week as deadly riots threatened to derail an incipient economic recovery. Chile’s peso could also swing in the coming months, depending on the outcome of the nation’s presidential vote.”

July 22 – Reuters (Frank Jack Daniel): “Mexican annual inflation rose higher than market expectations during the first half of July…, which may trigger additional interest rate hikes as the central bank seeks to tame higher consumer prices. National statistics agency INEGI reported annual inflation up to 5.75% during the first two weeks of this month, accelerating slightly from the previous two-week period. Central bank board member Jonathan Heath described the latest inflation data as ‘definitely bad’… shortly after it was released.”

Japan Watch:

July 21 – Financial Times (Kathrin Hille): “On the cover of Japan’s annual defence white paper released last week, a legendary 14th-century Samurai rides towards the viewer — a stark contrast with last year’s Mount Fuji and cherry blossoms. The invocation of the famed warrior caste is no accident: Japan is putting stronger emphasis on defence and taking on a bigger role in regional security. Front and centre is China, the giant neighbour on which Japan’s economy depends heavily but which the country’s politicians have also identified as its primary security threat. ‘The steps China has taken in its regional security disputes — India, the South China Sea, Taiwan and the East China Sea — have put further fuel on a fire that was already burning,’ says Bates Gill, a professor for Asia-Pacific security studies at Macquarie University. Within the first five lines of the white paper, defence minister Nobuo Kishi accuses China of attempting to change the status quo in regional waters.”

July 20 – Reuters (Tetsushi Kajimoto): “Japan’s exports rose 48.6% in June from a year earlier, Ministry of Finance data showed… The rise compared with a 46.2% increase expected by Economists…”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 22 – Bloomberg (Michael Hirtzer, Marcy Nicholson and Brian K. Sullivan): “Drought is withering crops on both sides of the U.S.-Canadian border, prompting farmers to take the rare measure of baling up their wheat and barley stems to sell as hay. The bales are providing much-needed forage for livestock operators struggling against a lack of pasture and soaring feed costs, and also signal smaller grain harvests that could keep crop prices high in the months to come. Temperatures are expected to soar next week in the Great Plains, further threatening parched farm fields. The dry conditions highlight how extreme weather is affecting agriculture and stoking higher prices that have fueled food-inflation concerns.”

July 22 – Bloomberg (Michael Hirtzer, Marcy Nicholson and Brian K. Sullivan): “Drought is withering crops on both sides of the U.S.-Canadian border, prompting farmers to take the rare measure of baling up their wheat and barley stems to sell as hay. The bales are providing much-needed forage for livestock operators struggling against a lack of pasture and soaring feed costs, and also signal smaller grain harvests that could keep crop prices high in the months to come. Temperatures are expected to soar next week in the Great Plains, further threatening parched farm fields.”

July 18 – Associated Press (Geir Moulson): “German Chancellor Angela Merkel surveyed what she called a ‘surreal, ghostly’ scene in a devastated village on Sunday, pledging quick financial aid and a redoubled political focus on curbing climate change as the death toll from floods in Western Europe climbed above 180. Merkel toured Schuld, a village on a tight curve of the Ahr River in western Germany where many buildings were damaged or destroyed by rapidly rising floodwaters Wednesday night.”

July 21 – Reuters (Ryan Woo and Stella Qiu): “At least 25 people have died in China’s flood-stricken central province of Henan, a dozen of them in a subway line in its capital Zhengzhou, and more rains are forecast for the region. About 100,000 people have been evacuated in Zhengzhou, an industrial and transport hub, where rail and road links were disrupted. From Saturday to Tuesday, 617.1 mm (24.3 inches) of rain fell in Zhengzhou, almost the equivalent of its annual average… The three days of rain matched a level seen only ‘once in a thousand years’, the Zhengzhou weather bureau said.”

July 21 – Los Angeles Times (David Pierson, Alice Su, Molly Hennessy-Fiske): “Torrents of murky brown water gushed past the train window, flowing fast through the subway tunnel. Inside, passengers stood on top of seats… Some gasped for air. Others sent desperate last messages to family members… ’The water outside has already come this high,’ one frightened woman said, reaching out to the subway car door in a video that spread quickly online. ‘My phone is almost dead. I don’t know if this is my last WeChat message.’ The woman, one of some 500 people trapped on a subway amid catastrophic flooding… in Zhengzhou, in China’s Henan province, reportedly survived… The scenes of desperation and devastation in Zhengzhou added to a portfolio of disasters this year that have raised the specter of irreversible climate change as never before and offered glimpses of what it means to live on a warming planet where human survival grows more fraught.”

Leveraged Speculation Watch:

July 19 – Bloomberg (Cecile Gutscher and Cormac Mullen): “Even the fast money has been caught off-guard by the latest leg of a relentless bond rally that’s stumping traders and strategists across Wall Street. Data on positioning among the biggest leveraged traders, the ranks of which are dominated by hedge funds, show the cohort has been increasing bets against longer-dated Treasuries for weeks, setting up for the reflation trade to get back on track as data points to an economic resurgence. Instead, U.S. bonds have surged, with the yield on 10-year Treasuries hitting the lowest since February…”

July 19 – Financial Times (Tommy Stubbington): “Investors have been warming to the greenback since the Federal Reserve indicated last month that interest rates could rise earlier than previously thought. Now, there are signs that dollar bears are throwing in the towel as the US currency builds on its gains. Bullish wagers on the dollar have jumped sharply this month, according to… the Commodity Futures Trading Commission tracking the futures market. The net long position of speculative investors on the dollar index… has reached its highest level in more than a year at 11,257 contracts. A net long position marks the difference between positive and negative bets.”

July 21 – Reuters (Maiya Keidan): “Some hedge funds are holding onto their bets against Treasuries even after a sharp U.S. government bond rally bruised bearish investors earlier this week. Leveraged funds were net short several longer-dated maturities of Treasuries in futures markets, the latest data from the Commodity Futures Trading Commission showed… This potentially left them vulnerable to the bond rally as some market participants exited the so-called reflation trade on concerns that U.S. growth will slow in the second half of the year.”

Geopolitical Watch:

July 19 – Financial Times (Kiran Stacey, Helen Warrell and Hannah Murphy): “The White House and its western allies have accused the Chinese government of teaming up with criminal gangs to commit widespread cyber attacks, including one on Microsoft this year that affected tens of thousands of organisations. The accusation came as the US Justice department unsealed an indictment alleging that four Chinese nationals affiliated with the Ministry of State Security had overseen a separate campaign to infiltrate companies, universities and government bodies in the US and overseas between 2011 and 2018. Antony Blinken, US secretary of State, said China’s actions represented ‘a major threat to’ economic and national security. ‘Responsible states do not indiscriminately compromise global network security nor knowingly harbour cyber criminals — let alone sponsor or collaborate with them,’ he added.”

July 20 – Reuters (Steve Holland, Doina Chiacu, Nandita Bose, David Shepardson, Lisa Lambert and Gabriel Crossley): “The United States and its allies accused China… of a global cyberespionage campaign, mustering an unusually broad coalition of countries for an initiative angrily rejected by Beijing. The United States was joined by NATO, the European Union, Australia, Britain, Canada, Japan and New Zealand in condemning the spying, which U.S. Secretary of State Antony Blinken said posed ‘a major threat to our economic and national security’. Simultaneously, the U.S. Department of Justice charged four Chinese nationals – three security officials and one contract hacker – with targeting dozens of companies, universities and government agencies in the United States and abroad.”

July 19 – New York Times (Nicole Perlroth): “Nearly a decade ago, the United States began naming and shaming China for an onslaught of online espionage, the bulk of it conducted using low-level phishing emails against American companies for intellectual property theft. On Monday, the United States again accused China of cyberattacks. But these attacks were highly aggressive, and they reveal that China has transformed into a far more sophisticated and mature digital adversary than the one that flummoxed U.S. officials a decade ago. The Biden administration’s indictment for the cyberattacks, along with interviews with dozens of current and former American officials, shows that China has reorganized its hacking operations in the intervening years. While it once conducted relatively unsophisticated hacks of foreign companies, think tanks and government agencies, China is now perpetrating stealthy, decentralized digital assaults of American companies and interests around the world.”

July 20 – Associated Press (Joe McDonald): “China… rejected an accusation by Washington and its Western allies that Beijing is to blame for a hack of the Microsoft Exchange email system and complained Chinese entities are victims of damaging U.S. cyberattacks. A foreign ministry spokesman demanded Washington drop charges… against four Chinese nationals accused of working with the Ministry of State Security to try to steal U.S. trade secrets, technology and disease research…. ‘The United States ganged up with its allies to make unwarranted accusations against Chinese cybersecurity,’ said the spokesman, Zhao Lijian. ‘This was made up out of thin air and confused right and wrong. It is purely a smear and suppression with political motives.’”

July 18 – Bloomberg: “The Chinese People’s Liberation Army and Navy held joint amphibious landing exercises on Friday, a day after a second U.S. military aircraft landed on Taiwan in less than two months… The exercises, in waters off the eastern province of Fujian near Taiwan, should be seen as warnings and a deterrent to the U.S. as well as ‘Taiwan secessionists,’ the newspaper cited an unidentified military expert as saying. More complex drills will likely be staged in the future, the report said. The drills followed the Chinese defense ministry’s warning on Thursday that foreign planes entering the country’s airspace without its approval would lead to ‘serious consequences.’”

July 21 – Associated Press (Rod McGuirk): “Japan’s relationship with China was no better than notoriously strained Sino-Australian relations, the Japanese ambassador to Australia said… Japan’s ties with China are often held up as an example to Australia of how productive relations can be maintained with Beijing despite national differences. But Ambassador Shingo Yamagami said he had encountered a common misperception in Australia about the state of Japan’s relations with China… ‘The nutshell of that argument is Japan is doing far better than Australia when it comes to dealing with Japan’s neighbor, China,’ Yamagami told the National Press Club of Australia. ‘My simple answer is: no way. I’m afraid I don’t subscribe to such an argument. Why? Because each and every day Japan is struggling,’ Yamagami added.”

July 20 – Reuters (Tim Kelly and Irene Wang): “Britain said… it would permanently deploy two warships in Asian waters after its Queen Elizabeth aircraft carrier and escort ships sail to Japan in September through seas where China is vying for influence with the United States and Japan. Plans for the high-profile visit by the carrier strike group come as London deepens security ties with Tokyo, which has expressed growing alarm in recent months over China’s territorial ambitions in the region, including Taiwan.”

July 20 – Reuters (Josh Smith, Ben Blanchard Yimou Lee, Tim Kelly and Idrees Ali): “Asia is sliding into a dangerous arms race as smaller nations that once stayed on the sidelines build arsenals of advanced long-range missiles, following in the footsteps of powerhouses China and the United States, analysts say. China is mass producing its DF-26 – a multipurpose weapon with a range of up to 4,000 kilometres – while the United States is developing new weapons aimed at countering Beijing in the Pacific. Other countries in the region are buying or developing their own new missiles, driven by security concerns over China and a desire to reduce their reliance on the United States. Before the decade is out, Asia will be bristling with conventional missiles that fly farther and faster, hit harder, and are more sophisticated than ever before – a stark and dangerous change from recent years, analysts, diplomats, and military officials say.”

July 22 – Reuters (Phil Stewart and Idrees Ali): “Reeling from a surge in battlefield losses, Afghanistan’s military is overhauling its war strategy against the Taliban to concentrate forces around the most critical areas like Kabul and other cities, border crossings and vital infrastructure, Afghan and U.S. officials say. The politically perilous strategy will inevitably cede territory to Taliban insurgents. But officials say it appears to be a military necessity as over-stretched Afghan troops try to prevent the loss of provincial capitals, which could deeply fracture the country.”

July 19 – Bloomberg (Peter Millard and Jonathan Tirone): “International monitors are watching Iran’s fast-expanding nuclear program with growing alarm, as Tehran refuses to extend an expired inspections pact and insists the experts must trust that it’s accurately documenting uranium-enrichment activities. Iran claims it’s still preserving data captured by International Atomic Energy Agency monitoring equipment, the agency’s director general, Rafael Mariano Grossi, said…”

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