MARKET NEWS / CREDIT BUBBLE WEEKLY

July 5, 2024: Nothing Matters

MARKET NEWS / CREDIT BUBBLE WEEKLY
July 5, 2024: Nothing Matters
Doug Noland Posted on July 5, 2024

The CBB will be back to “normal” next Friday.

Two-year Treasury yields dropped 14 bps this week, to the low (4.60%) since March 27th. Ten-year yields fell 12 bps to 4.28% (within a few bps of the low since March), while benchmark MBS yields sank 16 bps to 5.73% (also near lows back to March). The market ended the week pricing a 4.82% policy rate for the Fed’s December 18th meeting, implying 51 bps of rate reduction (two cuts). The rate was down six bps this week, for the lowest close since May 15th.

Bonds have turned notably receptive to indications of economic softening. With the Fed signaling the importance of labor market performance, markets this week reacted to weaker-than-expected June Non-Farm payroll (and household survey) and ADP data. While total non-farm payrolls increased a stronger-than-expected 206,000 (est. 190k), private payrolls rose a meaningfully weaker-than-expected 136,000 (est. 160k). Manufacturing jobs declined 8,000 versus a forecast of a gain of 5,000. Previous months payroll additions were revised lower. ADP job gains were reported at 150,000 versus the 165,000 median forecast.

The grossly imbalanced U.S. economy may be weaker – but not weak. It is certainly vulnerable. Yet I remain unconvinced that we are observing the start of a major downturn. Financial conditions remain exceptionally loose. Meanwhile, the bond market has developed a propensity for lower yields. Stronger data tend to be ignored, while yields quickly fall after weaker economic reports.

Especially with the interplay of highly speculative market dynamics, loose conditions, and robust system Credit expansion, I don’t want to dismiss the importance of lower market yields. Probabilities remain reasonably high that the market response (lower yields and looser conditions) to weaker data will underpin economic activity.

It’s reasonable for the Wall Street consensus to interpret recent bond market behavior as confirmation of a downturn about to trigger a Fed easing cycle. But I tend to view global bond yields as reacting to mounting risks, latent fragilities, and heightened vulnerability at the “periphery.” It’s more about fragile market structure than economic activity.

July 3 – Financial Times (Adrienne Klasa and Leila Abboud): “France’s leftist and centrist parties have pulled hundreds of candidates from Sunday’s high-stakes election in a co-ordinated attempt to keep the far-right Rassemblement National out of power. By a deadline on Tuesday evening, more than 200 third-placed candidates from the left and centre had dropped out as their parties sought to avoid splitting the anti-RN vote and decrease the likelihood of it achieving an absolute majority. The figure… represents more than two-thirds of the three-way races produced by last weekend’s first-round vote.”

July 4 – Bloomberg (James Regan): “Marine Le Pen’s National Rally is set to fall well short of an absolute majority in the French legislative election on Sunday, according to projections from polling companies. The far-right group and its allies are on course to win between 190 and 250 of the 577 seats in the National Assembly, based on four surveys released on Wednesday and Thursday. That would be significantly below the 289 that would enable it to pass bills easily and push through its agenda.”

French – and European and even global – markets were comforted by the prospect of political gridlock (better than the alternative).

France’s CAC 40 equities index rallied 1.8%. French yields dropped nine bps to 3.21%. With German bund yields reversing five bps higher to 2.56%, the spread between French and German yields narrowed about 15 bps to 65 bps (reversing almost half of the recent widening). Italian spreads collapsed 19 bps (to 138bps), and Greek spreads narrowed 20 bps (to 20bps). Société Generali CDS dropped 11 to 49 bps, with BNP Paribas CDS falling 10 to 42 bps – both now within a few bps of pre-election levels. European Bank (subordinated) debt CDS sank 20 to 109 bps, having spiked to 135 bps from a near multi-year low on June 6th of 103 bps. The euro rallied 1.2% this week, more than reversing its post-election decline.

The Nasdaq100 surged 3.4% this week to an all-time high. It’s no coincidence that the AI/Tech mania Bubbles along, even as stress builds at the “periphery.” For one, elevated global risk boosts shorting and hedging. This bearish positioning is susceptible to market-fueling squeezes. Weak-handed (low pain threshold) shorts help the market climb the proverbial wall of worry. Little wonder that risk is disregarded, and complacency reigns supreme at this late cycle phase.

Delving a little deeper into “no coincidence” analysis, it’s important to appreciate that rising global political instability and manic speculative Bubbles are both long-term manifestations of monetary disorder. Unprecedented debt and monetary inflation have fueled historic asset inflation and wealth inequality. And the greater level of inequality and intensity of speculative Bubbles, the more confident Wall Street becomes that the Federal Reserve (and global central banks) wouldn’t dare risk a blowup. Friday NYT headline: “Political Unrest Worldwide Is Fueled by High Prices and Huge Debts.”

Years of Bubble Dynamics ensure bifurcated economies both at home and abroad. Using the weak and suffering as justification, a self-serving Wall Street beckons the Fed to loosen monetary policy. And the prospect for lower policy rates only stokes asset inflation and Bubbles, exacerbating systemic fragilities and gross wealth disparities.

The Fed erred in taking rate hikes off the table, while signaling prospective rate cuts. The inflationist crowd will invariably argue that the Fed miscalculated by not cutting rates sooner. Instead, the grave policy error was the Fed’s failure to impose sufficiently tight financial conditions. Sure, Wall Street strategists and market pundits will claim otherwise. But it is categorically reckless monetary management to discuss rate cuts when markets are in the throes of a historic speculative mania and global AI/tech arms race.

It’s certainly possible that French voters deny Le Pen’s National Rally party a majority of Parliamentary seats and control of the government. Markets this week celebrated the likelihood of French political paralysis. But this is just speculative market shortsightedness. The global populism movement is just gathering momentum. Government debt problems are about to get underway.

A historic speculative melt-up certainly helps mask the reality of decades of inflationism coming home to roost. Markets can disregard root causes and ramifications of French and UK elections. And they can ignore the increasingly alarming geopolitical environment. Ditto for the deranged climate. Apparently, Nothing Matters so long as the AI and big tech stocks are running.

But each passing week global markets become only more fragile and susceptible to an unexpected bout of de-risking/deleveraging. My worries only grow when Bubble markets demonstrate an incapacity to react to – and adjust for – myriad mounting risks.

July 2 – Financial Times (Martin Arnold): “The head of the Federal Reserve has warned the US economy is too strong to justify running such high deficits and urged Washington to address its fiscal imbalance ‘sooner rather than later’, in a sign of monetary policymakers’ rising concern about rampant government spending. Jay Powell warned that the Biden administration was taking excessive risks by ‘running a very large deficit at a time when we are at full employment’ and said ‘you can’t run these levels in good economic times for very long’. The jobless rate in the world’s largest economy has not exceeded its current level of 4% for more than two years, longer than at any time since Powell was ‘a teenager’, the Fed chair said.”

Only higher yields and market discipline will force Washington to start the process of getting its financial house in order. And surely market discipline would have imposed Washington spending restraint some years ago, if not for the Fed’s recurring QE gambles. It’s worth noting that Gold jumped 2.8% and Silver 7.1% this week. The metals are sniffing out inflation risk and financial asset fragility. Sunday’s French election will be interesting. And if markets can plug their noses and get through French politics, it’s only four months from a real stink bomb U.S. election.

For the Week:

The S&P500 rose 2.0% (up 16.7% y-t-d), and the Dow added 0.7% (up 4.5%). The Utilities increased 0.7% (up 9.0%). The Banks slipped 0.2% (up 8.6%), while the Broker/Dealers added 0.7% (up 14.2%). The Transports declined 0.9% (down 3.9%). The S&P 400 Midcaps lost 1.2% (up 4.1%), and the small cap Russell 2000 fell 1.0% (unchanged). The Nasdaq100 jumped 3.6% (up 21.2%). The Semiconductors rose 3.4% (up 35.5%). The Biotechs slipped 0.6% (down 3.0%). With bullion surging $65, the HUI gold index rallied 6.0% (up 16.7%).

Three-month Treasury bill rates ended the week at 5.22%. Two-year government yields fell 14 bps this week to 4.60% (up 35bps y-t-d). Five-year T-note yields dropped 14 bps to 4.23% (up 38bps). Ten-year Treasury yields fell 12 bps to 4.28% (up 40bps). Long bond yields declined eight bps to 4.48% (up 45bps). Benchmark Fannie Mae MBS yields sank 16 bps to 5.73% (up 46bps).

Italian yields dropped 14 bps to 3.94% (up 24bps y-t-d). Greek 10-year yields fell 14 bps to 3.61% (up 55bps). Spain’s 10-year yields declined eight bps to 3.34% (up 35bps). German bund yields gained six bps to 2.56% (up 53bps). French yields dropped nine bps to 3.21% (up 65bps). The French to German 10-year bond spread narrowed 15 bps to 65 bps. U.K. 10-year gilt yields declined five bps to 4.13% (up 59bps). U.K.’s FTSE equities index added 0.5% (up 6.1% y-t-d).

Japan’s Nikkei Equities Index jumped 3.1% (up 22.3% y-t-d). Japanese 10-year “JGB” yields were unchanged at 1.08% (up 47bps y-t-d). France’s CAC40 rallied 2.6% (up 1.8%). The German DAX equities index rose 1.3% (up 10.3%). Spain’s IBEX 35 equities index increased 0.7% (up 9.1%). Italy’s FTSE MIB index jumped 2.5% (up 12.0%). EM equities were mixed. Brazil’s Bovespa index rallied 1.9% (down 5.9%), while Mexico’s Bolsa index slipped 0.2% (down 8.8%). South Korea’s Kospi index rose 2.3% (up 7.8%). India’s Sensex equities index gained 1.2% (up 10.7%). China’s Shanghai Exchange Index declined 0.6% (down 0.8%). Turkey’s Borsa Istanbul National 100 index rose 1.9% (up 45.3%).

Federal Reserve Credit declined $18.0 billion last week to $7.190 TN. Fed Credit was down $1.700 TN from the June 22, 2022, peak. Over the past 251 weeks, Fed Credit expanded $3.463 TN, or 93%. Fed Credit inflated $4.379 TN, or 156%, over the past 608 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $4.4bn last week to $3.319 TN. “Custody holdings” were down $113 billion y-o-y, or 3.3%.

Total money market fund assets surged $51.2 billion to $6.154 TN. Money funds were up $723 billion, or 13.3%, y-o-y.

Total Commercial Paper slipped $2.0 billion to $1.288 TN. CP was up $138bn, or 12.0%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose nine bps to 6.95% (up 8bps y-o-y). Fifteen-year rates gained nine bps to 6.25% (down 2bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up seven bps 7.39% (up 5bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 0.9% to 104.875 (up 3.5% y-t-d). For the week on the upside, the Brazilian real increased 2.5%, the British pound 1.3%, the euro 1.2%, the Australian dollar 1.2%, the Mexican peso 1.2%, the Norwegian krone 1.1%, the Swedish krona 1.1%, the New Zealand dollar 0.9%, the Singapore dollar 0.6%, the Swiss franc 0.4%, the Canadian dollar 0.3%, the Japanese yen 0.1%, and the South African rand 0.1%. On the downside, the South Korean won declined 0.3%. The Chinese (onshore) renminbi was little changed versus the dollar (down 2.32% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index rallied 1.5% (up 3.9% y-t-d). Spot Gold jumped 2.8% to $2,392 (up 16.0%). Silver surged 7.1% to $31.219 (up 31.2%). WTI crude jumped $1.62, or 2.0%, to $83.16 (up 16%). Gasoline rose 2.3% (up 22%), while Natural Gas sank 10.8% to $2.319 (down 8%). Copper jumped 5.9% (up 20%). Wheat rose 3.4% (down 9%), and Corn jumped 3.5% (down 13%). Bitcoin sank $3,430, or 5.7%, to $56,700 (up 33%).

Middle East War Watch:

July 2 – Financial Times (Andrew England and Bita Ghaffari): “An adviser to Iran’s supreme leader has warned that if Israel launches an all-out offensive against Hizbollah, it would risk triggering a regional war in which Tehran and the ‘axis of resistance’ would support the Lebanese militant movement with ‘all means’. Kamal Kharrazi, foreign affairs adviser to Ayatollah Ali Khamenei, told the Financial Times the Islamic republic was ‘not interested’ in a regional war and urged the US to put pressure on Israel to prevent further escalation. But asked if Iran would support Hizbollah — its most important and powerful proxy — militarily in the event of a full-blown conflict, Kharrazi said: ‘All Lebanese people, Arab countries and members of the axis of resistance will support Lebanon against Israel.’”

Ukraine War Watch:

July 5 – Washington Post (David L. Stern): “By relentlessly attacking Ukraine’s power sector for the past two years with missiles and drones, Russian President Vladimir Putin has inadvertently accelerated the country’s shift to greener energy options. Even as Ukrainians look toward one of the coldest and darkest winters in their history, authorities see a potential upside: Ukraine can now begin anew and create a cleaner, eco-friendly energy sector. ‘The war, of course, is a tragedy, but it depends on you, how you react to it,’ said Volodymyr Kudrytskyi, CEO of Ukraine’s state electricity distributor, Ukrenergo. ‘You can say ‘Okay, it’s a horrible situation, and we are just victims’ — or we can try to build back better, to come back in better shape.’”

July 2 – Bloomberg (Alberto Nardelli, Jennifer Jacobs, and Alex Wickham): “Chinese and Russian companies are developing an attack drone similar to an Iranian model deployed in Ukraine, European officials familiar with the matter said, a sign that Beijing may be edging closer to providing the sort of lethal aid that western officials have warned against. The companies held talks in 2023 about collaborating to replicate Iran’s Shahed drone, and started developing and testing a version this year in preparation for shipment to Russia, said the officials… The Chinese drones have yet to be used in Ukraine, they said. Providing Russia a Shahed-like attack drone would mark a deepening of Beijing’s support for Russia despite repeated warnings from the US and its allies.”

France Instability Watch:

July 3 – Bloomberg (Phil Serafino and Valentine Baldassari): “Marine Le Pen’s National Rally is scrambling to get an absolute majority in the final round of France’s legislative election Sunday as rival parties are maneuvering to keep the far-right party out of power. President Emmanuel Macron’s centrist group and the broad, left-wing New Popular Front alliance have pulled their candidates out of 215 runoffs with more than two candidates to avoid splitting the vote against the far right… In response, the National Rally has been seeking allies to help it win a majority in the 577-seat lower house of parliament in order to enable it to implement a program that includes reversing the government’s pension reform, reducing value-added tax and cutting certain aid for foreigners.”

July 2 – Reuters (Michel Rose): “Opponents of France’s far right sought to build a united front to block the path to government of Marine Le Pen’s National Rally (RN)…, after the party made historic gains to win the first round of a parliamentary election. The RN and its allies won Sunday’s round with 33% of the vote, followed by a left-wing bloc with 28% and well ahead of President Emmanuel Macron’s broad alliance of centrists, who scored just 22%…”

July 2 – Bloomberg (Phil Serafino and Richard Bravo): “Marine Le Pen is seeking support beyond her far-right National Rally party in case she falls short of an absolute majority as mainstream parties move to block her from taking control in Sunday’s runoff. ‘If we’re just a few members of parliament away from a majority, we’ll try to go find them,’ Le Pen told France Inter radio… ‘We’re going to go and see the others, and we’re going to say to them: ‘Are you ready to join us in a new majority?’’”

July 4 – Bloomberg (Franklin Nelson): “The European Central Bank must guide investors that policymakers won’t easily come to the rescue of France in the event of financial-market stress, according to former Chief Economist Peter Praet. Officials face ‘a test of fiscal dominance’ that will determine their resolve to support budget discipline in the euro area, and they’ll be worried about how that will play out, the Belgian told… Bloomberg… ‘The markets are expecting probably a little bit too much from central bankers at this stage, so I think they should be tough,’ Praet said. ‘The bar must be very high.”

July 5 – Bloomberg (Francois de Beaupuy and Petra Sorge): “Marine Le Pen’s energy plans risk throwing a spanner into the workings of Europe’s electricity market. The National Rally’s proposals for tackling the high cost of living include policies that could disrupt power flows across national borders, weaken Europe’s biggest power supplier Electricite de France SA, and make the whole region’s energy supplies less secure, according to political and business leaders.”

UK Instability Watch:

July 5 – Financial Times (Craig Stirling): “Labour has won a historic landslide victory in the UK general election, returning to government after 14 years in opposition… New prime minister Sir Keir Starmer told Britons that his administration would be ‘unburdened by doctrine’ as he promised to ‘rebuild’ the country. As of 11.40am, Labour had won 411 House of Commons seats out of a total of 650 and secured a majority of 172, despite gaining only about 34% of the national vote, the lowest-ever winning share. The result is similar in scale to the 179-seat majority won by Tony Blair in the 1997 election. The Conservative party becomes the official opposition, having won 121 seats on 24% of the vote — its worst-ever general election performance. The centrist Liberal Democrats have secured 71 seats, beating their modern-era record of 62, while populist party Reform UK has four MPs…”

July 5 – Reuters (Andrew Macaskill, Elizabeth Piper and Alistair Smout): “Keir Starmer vowed to rebuild Britain as its next prime minister after his Labour Party on Friday surged to a landslide victory in a parliamentary election, ending 14 years of often tumultuous Conservative government. The centre-left Labour won a massive majority in the 650-seat parliament. Rishi Sunak’s Conservatives suffered the worst performance in the party’s long history as voters punished them for a cost of living crisis, failing public services, and a series of scandals. ‘We did it,’ Starmer said… ‘Change begins now … We said we would end the chaos, and we will, we said we would turn the page, and we have. Today, we start the next chapter, begin the work of change, the mission of national renewal and start to rebuild our country.’”

Taiwan Watch:

July 3 – Bloomberg (Cindy Wang, Yian Lee and Foster Wong): “China detained a Taiwanese fishing boat and its crew, a move that risks worsening tensions with the island’s new president. The vessel was stopped by the Chinese Coast Guard… near the Taiwanese island of Kinmen… Kinmen is roughly 1.9 miles from China.”

Market Instability Watch:

July 1 – Wall Street Journal (Enes Morina and Paul Hannon): “Governments should cut back on borrowing to ease one of the biggest threats to the stability of the global financial system and support efforts to tame inflation, the Bank for International Settlements said… In its annual report on the global economy, the central bank for central banks warned that rising debt levels exposed governments to the risk of a crisis similar to that which roiled the U.K. in 2022… ‘Markets could at some point question fiscal sustainability,’ Claudio Borrio, head of the BIS economic department, said… ‘We know from experience that things look sustainable until, suddenly, they no longer do.’”

July 2 – Reuters (Marc Jones): “The United States, France and major economies are unlikely to halt the rises in their debt levels in the next few years, credit rating firm S&P Global warned… The assessment comes ahead of upcoming elections in the U.S., Britain and France where governments are pledging to improve economies, social services and voters’ daily lives. ‘We estimate that –for the U.S., Italy, and France– the primary balance would have to improve by more than 2% of GDP cumulatively for their debt to stabilize; this is unlikely to happen over the next three years,’ S&P said in a report.”

July 2 – Bloomberg (Carter Johnson and Michael Mackenzie): “Financial giants from Goldman… to Morgan Stanley and Barclays Plc. are taking a fresh look at how a Donald Trump victory in November could play out in the bond market. After last week’s debate hurt President Joe Biden’s chances of winning reelection, Wall Street strategists are urging clients to position for sticky inflation and higher long-term bond yields. At Morgan Stanley… in a weekend note argued that ‘now is the time’ to wager on long-term interest rates rising relative to short-term ones.”

July 2 – Bloomberg (Alexandra Harris): “A key rate tied to the day-to-day borrowing needs of the financial system hit the highest level since the beginning of the year as chunky Treasury auction settlements and clogged primary dealer balance sheets curbed lending capacity. The Secured Overnight Financing Rate spiked seven bps to 5.40% on July 1…”

Global Credit Bubble Watch:

July 1 – Bloomberg (Ameya Karve): “Dollar loan sales for the first half across Asia excluding Japan tumbled to their lowest since 2010 as higher borrowing costs in the greenback deterred companies… The amount of loans… declined 44% to about $45.5 billion in the period, the lowest since 2010 when $34.9 billion of deals were done in the first six months… The figure is in stark contrast with global US-currency loan sales, which jumped 37% to nearly $2 trillion in the first half of 2024, the highest in three years.”

AI Bubble Watch:

July 1 – Wall Street Journal (Jennifer Hiller and Sebastian Herrera): “Tech companies scouring the country for electricity supplies have zeroed in on a key target: America’s nuclear-power plants. The owners of roughly a third of U.S. nuclear-power plants are in talks with tech companies to provide electricity to new data centers needed to meet the demands of an artificial-intelligence boom. Among them, Amazon Web Services is nearing a deal for electricity supplied directly from a nuclear plant on the East Coast with Constellation Energy, the largest owner of U.S. nuclear-power plants… In a separate deal in March, the Amazon.co subsidiary purchased a nuclear-powered data center in Pennsylvania for $650 million. The discussions have the potential to remove stable power generation from the grid while reliability concerns are rising across much of the U.S. and new kinds of electricity users—including AI, manufacturing and transportation—are significantly increasing the demand for electricity in pockets of the country.”

July 2 – Reuters (Lewis Krauskopf): “A U.S. stock rally supercharged by excitement over artificial intelligence is drawing comparisons with the dotcom bubble two decades ago, raising the question of whether prices have again been inflated by optimism over a revolutionary technology. AI fever, coupled with a resilient economy and stronger earnings, has lifted the S&P 500 index to fresh records this year following a run of more than 50% from its October 2022 low. The tech-heavy Nasdaq Composite index has gained over 70% since the end of 2022.”

July 2 – New York Times (Erin Griffith): “For two years, many unprofitable tech start-ups have cut costs, sold themselves or gone out of business. But the ones focused on artificial intelligence have been thriving. Now the A.I. boom that started in late 2022 has become the strongest counterpoint to the broader start-up downturn. Investors poured $27.1 billion into A.I. start-ups in the United States from April to June, accounting for nearly half of all U.S. start-up funding in that period, according to PitchBook… In total, U.S. start-ups raised $56 billion, up 57 percent from a year earlier and the highest three-month haul in two years.”

Bubble and Mania Watch:

July 5 – CNBC (Ryan Browne): “Cryptocurrencies plunged Friday as investors focused on the payout of nearly $9 billion to users of collapsed bitcoin exchange Mt. Gox. As of 10:50 a.m. London time, bitcoin’s price slumped nearly 6% in 24 hours to hit $54,500.53, marking the first time it’s traded below the $55,000 level since Feb. 27… Rival token ether sank around 9% to $2,872.10. Altogether, the entire cryptocurrency market has shed more than $170 billion in combined market capitalization in the last 24 hours…”

July 5 – Reuters (Ankur Banerjee, Tom Westbrook, Sameer Manekar and Iain Withers): “Bitcoin was set for its biggest weekly fall in more than a year on Friday, as traders fretted over the likely dumping of tokens from defunct Japanese exchange Mt. Gox and further selling by leveraged players after the cryptocurrency’s strong run. The price of the world’s largest cryptocurrency slid as much as 8% on the day to $53,523, its lowest since late February. It was on track for a more than 12% weekly decline, its biggest since early November 2022.”

July 3 – Financial Times (Richard Bernstein): “No economic model would have predicted stocks would be at all-time highs and credit spreads would be very narrow after the Federal Reserve raised its benchmark interest rate by 5.25 percentage points since early 2022… The Fed seems ready to declare victory in its fight against inflation, but the outperformance of highly speculative investments suggests that even such a sharp increase in interest rates hasn’t been a big enough mop to soak up the excess liquidity sloshing around the financial markets. Central banks still don’t seem to understand that financial bubbles are sources of future real asset inflation. Bubbles misallocate capital within an economy to unneeded assets (cryptocurrencies and meme stocks, perhaps?). And capital doesn’t flow to productivity-enhancing investment. Indeed, the US consumer price index finally peaked at 5.6% subsequent to the technology bubble in 2008.”

July 3 – Financial Times (Will Schmitt): “Investors are shovelling cash into exchange traded funds that invest in a handpicked array of bonds, with record inflows since January that are pushing the industry towards its first $1tn annual haul. Actively managed fixed-income ETFs took in $7bn in June and have garnered $41bn over the first half of 2024, surpassing 2023’s record of $33bn for the entire year, according to… State Street Global Advisors… Most investors think of passive equity strategies such as index trackers when they think of ETFs… but active ETFs and bond ETFs in particular have been capturing a growing share of new money from investors in the $9tn US ETF industry.”

July 1 – Wall Street Journal (Peter Grant): “Starwood Capital Group’s move to severely tighten restrictions on investor withdrawals from its $10 billion real-estate fund is rippling through the $90 billion private real-estate fund business. After the giant investment firm announced the new restrictions in May, sponsors of similar funds said they experienced a jump in redemption requests. Investors in these funds… appear worried that their funds might also tighten the withdrawal spigot, forcing them to wait indefinitely in line if they want to cash out. ‘When Starwood started cutting redemptions, the first thing you think about is: what’s my guy going to do,’ said Kevin Gannon, chief executive of Robert A. Stanger… ‘There’s a natural knee-jerk reaction.’”

July 4 – New York Times (Joe Rennison and Julie Creswell): “It might seem like a great time to own apartment buildings. For many landlords, it is. Rents have soared in recent years because of housing shortages across much of the country and a bout of severe inflation. But a growing number of rental properties, especially in the South and the Southwest, are in financial distress. Only some have stopped making payments on their mortgages, but analysts worry that as many as 20% of all loans on apartment properties could be at risk of default. Although rents surged during the pandemic, the rise has stalled in recent months. In many parts of the country, rents are starting to fall. Interest rates, ratcheted higher by the Federal Reserve to combat inflation, have made mortgages much more expensive for building owners.”

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

July 2 – Wall Street Journal (Warren P. Strobel): “Images captured from space show the growth of Cuba’s electronic eavesdropping stations that are believed to be linked to China, including new construction at a previously unreported site about 70 miles from the U.S. naval base at Guantanamo Bay… The study from the Center for Strategic and International Studies… follows reporting last year by The Wall Street Journal that China and Cuba were negotiating closer defense and intelligence ties, including establishing a new joint military training facility on the island and an eavesdropping facility.”

De-globalization and Iron Curtain Watch:

July 4 – Bloomberg (Alberto Nardelli and Jorge Valero): “The European Union moved ahead with plans to impose provisional tariffs on electric vehicles imported from China that would raise rates to as high as 48%, a step likely to escalate trade tensions with Beijing. The EU confirmed… it would apply provisional duties on three Chinese manufacturers that were sampled for its anti-subsidy investigation.”

Inflation Watch:

July 3 – Bloomberg (Prashant Gopal): “Owning a house is less affordable for average earners in the US than at anytime in 17 years. The costs of a typical home — including mortgage payments, property insurance and taxes — consumed 35.1% of the average wage in the second quarter, the highest share since 2007 and up from 32.1% a year earlier, according to… Attom.”

July 2 – Bloomberg (Mary Schlangenstein and Danny Lee): “Alaska Air Group Inc.’s unionized flight attendants are in line to get an average pay increase of 32% as part of a new “record contract” with the US carrier, according to a union statement… The Association of Flight Attendants Alaska disclosed further details of its tentative three-year agreement, which, among a slew of improved changes to remuneration and conditions, includes around 21 months of retroactive pay.”

Biden Administration Watch:

July 5 – Bloomberg (Amanda Gordon): “A coalition of top business leaders is taking their campaign to get President Joe Biden to drop his re-election bid one step further, penning a letter to him signed by billionaires and top executives. Christy Walton, Michael Novogratz and Paul Tagliabue are among the 168 signatories of the letter from the Leadership Now Project… It states that ‘nothing short of American democracy is at stake this November’ and follows an unsigned statement Wednesday that said the group of business leaders has ‘heard from many individuals who share our deep concerns about the present course but fear speaking out.’”

July 5 – Bloomberg (Michael Nienaber, Donato Paolo Mancini and Samy Adghirni): “There was a time when US President Joe Biden’s allies abroad would make allowances for his age, let the slip-ups slide, gently bring him back to the fold when he appeared to wander off. No longer. His calamitous presidential debate performance changed the calculus. Now even Brazilian President Luiz Inacio Lula da Silva — a leading South American leftist who wants a Democrat in the White House and is hosting the next G-20 summit — is saying the quiet part out loud. ‘I think Biden has a problem,’ Lula… told a local radio station. ‘He’s moving more slowly, he is taking longer to answer questions. The US elections are very important for all the world.’”

Federal Reserve Watch:

July 3 – Reuters (Howard Schneider): “Federal Reserve officials at their last meeting acknowledged the U.S. economy appeared to be slowing and that ‘price pressures were diminishing,’ but still counseled a wait-and-see approach before committing to interest rate cuts, according to minutes of the June 11-12 session. The minutes… noted in particular a weak May reading in the consumer price index as one among ‘a number of developments in the product and labor markets’ that supported a view that inflation was falling.”

July 5 – Reuters (Lindsay Dunsmuir): “The Federal Reserve has taken great strides in lowering inflation back down toward its 2% target rate but is still ‘a way’ from achieving the goal, New York Fed Bank President John Williams said… ‘We have seen significant progress in bringing it down,’ Williams said… ‘But we still have a way to go to reach our 2% target on a sustained basis. We are committed to getting the job done.’”

July 2 – Bloomberg (Philip Aldrick and Francine Lacqua): “Federal Reserve Bank of Chicago President Austan Goolsbee said policymakers should cut interest rates if US inflation continues to fall back to the 2% target. The Chicago Fed chief… said he feels ‘we are on a path to 2%’ inflation and ‘if you just hold the rates where they are while inflation comes down, you are tightening — so you should do that by decision, not by default.’”

U.S. Economic Bubble Watch:

July 5 – Bloomberg (Matthew Boesler): “US hiring and wage growth stepped down in June while the jobless rate rose to the highest since late 2021… Nonfarm payrolls rose by 206,000 and job growth in the prior two months was revised down by 111,000… The median forecast… called for a 190,000 increase. The unemployment rate rose to 4.1% as more people entered the labor force, and average hourly earnings cooled.”

July 2 – Bloomberg (Jarrell Dillard): “US job openings unexpectedly rose in May, interrupting a months-long downtrend that underscored a gradual slowdown in labor demand. Available positions increased to 8.14 million from a downwardly revised 7.92 million reading in the prior month…, the Bureau of Labor Statistics Job Openings and Labor Turnover Survey, known as JOLTS, showed… The median estimate… called for 7.95 million openings. Both hiring and layoffs picked up in a sign of churn in the job market. The quits rate was unchanged.”

July 5 – Bloomberg (Jarrell Dillard): “Hiring at US companies grew in May at the slowest pace since the start of the year… Private payrolls increased 152,000 last month, according to the ADP Research Institute… ‘Job gains and pay growth are slowing going into the second half of the year,’ Nela Richardson, chief economist at ADP, said… ‘The labor market is solid, but we’re monitoring notable pockets of weakness tied to both producers and consumers’… Wage growth slowed for workers who changed jobs for the second month, to 7.8% from a year ago… Earnings gains for workers who stayed in their job held at 5%, the slowest since 2021.”

July 3 – Reuters (Shariq Khan): “High fuel costs and the threat of a hurricane are not expected to dampen Americans’ desire to hit the road this summer, with vacationers preparing for record travel to kick off Fourth of July holiday festivities. Motorist group AAA expects a record of almost 71 million people to travel around the U.S. Independence Day holiday, growth similar to a pre-pandemic trajectory. Some 60 million people will drive with nearly 6 million flying to their destinations, while around 4.6 million people will take buses, trains or cruises during the holiday period, according to AAA’s forecast.”

July 3 – New York Times (Jeanna Smialek): “The travel industry is in the midst of another hot summer as Americans hit the road and make for the airport to take advantage of slightly cheaper flights and gas. But the 2024 vacation outlook isn’t all sunny: Like the rest of the American consumer experience this year, it is sharply divided. Many richer consumers… are feeling good this year as a strong stock market and rising home values boost their wealth. While they have felt the bite of rapid inflation over the last few years, they are likely to have more wiggle room in their budgets and more options to ease the pain by trading down… Poorer families have had less room to maneuver to avoid the brunt of high prices.”

July 3 – Bloomberg (Vince Golle): “The US services sector contracted in June at the fastest pace in four years due to a sharp pullback in business activity and declining orders. The Institute for Supply Management’s composite gauge of services slumped 5 points to 48.8… The ISM’s business activity index — which parallels the group’s factory output gauge — plunged 11.6 points last month, the steepest slide since April 2020. Orders placed with service providers shrank for the first time since the end of 2022.”

July 3 – Bloomberg (Chris Middleton): “S&P Global releases June US services purchasing managers’ index. Index rises to 55.3 from 54.8 in May; year ago 54.4. Highest reading since April 2022. Seventeenth consecutive month of expansion. Employment rises to 52.3 vs 49.4 in May. Highest reading since May 2023… New business rises vs prior month. Highest reading since June 2023.”

July 2 – Bloomberg (Alex Tanzi): “More older lower-rate mortgages are being replaced by newer borrowing with higher financing costs, gradually pushing up the average loan rate for US homes, Intercontinental Exchange Inc. data show. Four million first-lien mortgages originated since 2022 have a rate above 6.5%, and about 1.9 million these have a rate of 7% or higher… ‘As of May, 24% of homeowners with mortgages now have a current interest rate of 5% or higher,’ Andy Walden, vice president of ICE Research and Analysis, said… ‘As recently as two years ago an astonishing nine of every 10 mortgage holders were below that threshold.’”

July 2 – CNBC (Scott Cohn): “An insurance crisis that has sent premiums skyrocketing and caused carriers to flee coastal states like Florida and California is spreading, and it is fundamentally changing the real estate market in states across the country. ‘Not only is the cost higher than people anticipated, but just the inability to secure insurance at all makes deals fall through before they even happen,’ said Bill Baldwin, owner of Boulevard Realty in Houston. Increasingly… he and other brokers are seeing insurance companies swoop in just as deals are about to close, making nearly impossible demands. ‘A new roof, for roofs that are only seven years old, or 10 years old. They want trees cut down that are within 20 feet of the edge of the house. Oftentimes those trees are on the neighbor’s property,’ he said. ‘And when that can’t happen, you can’t get insurance, which causes the sale to fall through.’”

July 2 – New York Times (Stacy Cowley): “After an unprecedented three-year timeout on federal student loan payments because of the pandemic, millions of borrowers began repaying their debt when billing resumed late last year. But nearly as many have not. That reality, along with court decisions that regularly upend the rules, has complicated the government’s efforts to restart its system for collecting the $1.6 trillion it is owed. At the end of March, six months after the hiatus ended, nearly 20 million borrowers were making their payments as scheduled. But almost 19 million were not, leaving their accounts delinquent, in default or still on pause…”

China Watch:

July 1 – Bloomberg: “The Chinese Communist Party’s top ranks gather this month for one of the country’s biggest annual policy meetings, with everything from chip technology to land reform and a revamp to the nation’s biggest tax source possibly on the cards. What isn’t expected is the kind of major policy pivot that’s often been seen in the past. The so-called Third Plenum gathers some 400 government bigwigs, military chiefs, provincial bosses and academics in Beijing to steer the political and economic course. But investors this year have low expectations… A slew of official readouts, articles and state media editorials over the past weeks suggest instead a reinforcement of President Xi Jinping’s long-tern goals.”

July 1 – Financial Times (Cheng Leng): “China’s central bank plans to intervene directly in bond markets in a sign of officials’ growing discomfort with a rally that has pushed borrowing costs to the lowest level in two decades. The People’s Bank of China said… it would ‘borrow sovereign bonds from primary traders in the open market in the near future’. The decision was made on ‘prudent observation and evaluations of current market situations’ in order to ‘maintain the stable operation of the bond market’.”

July 2 – New York Times (Keith Bradsher): “Four months ago, China’s leaders announced what seemed like a straightforward and proven plan to recharge the economy: Subsidize consumers who want to replace old cars and household appliances. The early results are not promising. Only 113,000 cars qualified for trade-in subsidies through June 25 — a blip in a country where monthly sales exceed two million cars. And buyers of new appliances such as washing machines and refrigerators are being offered discounts of only about 10%… The incentives are not enough to bring customers into stores. ‘If it is not needed, people will not go out of their way to find an old machine to participate,” said Dai Yu, the manager of an appliance store in Jingdezhen…”

July 2 – Bloomberg: “Chinese developers are facing headwinds offloading new home inventory, despite a rebound in second-hand transactions in mega cities. In Shenzhen, new home sales fell 4% in June compared with last year, even after the government relaxed measures to stimulate the market. Midland Realty said developer inventory remains high, adding to the polarizing results between new and existing apartment sales. In the capital of Beijing, new property sales underperformed existing ones in June… Buyers remain cautious toward new apartments in China’s so-called first-tier cities…”

July 3 – Bloomberg: “A Chinese online financing company has failed to pay investors who bought equity-backed products partially underpinned by projects linked to China Vanke Co… Shenzhen-based Penging, which is partially owned by Vanke, used revenue from real estate projects related to the developer as underlying assets for products it then sold to some Vanke staff… Investors failed to receive payments starting a few months ago…”

July 2 – Reuters (Liangping Gao and Ryan Woo): “China’s services activity expanded at the slowest pace in eight months and confidence hit a four-year low in June, dragged by slower growth in new orders, a private-sector survey showed… The Caixin/S&P Global services purchasing managers’ index (PMI) eased to 51.2 from 54.0 in May, marking the lowest reading since October 2023 but remaining in expansionary territory for the 18th straight month. The 50-mark separates expansion from contraction… The new orders subindex fell to 52.1 in June from 55.4 the previous month. Overseas demand also eased slightly even on top of strong exports in May.”

July 5 – Bloomberg: “Chinese stocks cap their seven straight weeks of losses — the longest downturn streak since early 2012 — as investor sentiment continued to weaken ahead of a key policy meeting this month.”

July 5 – Bloomberg: “Some exchange traded funds favored by China’s sovereign wealth fund have seen spikes in inflows after the country’s stocks tumbled below a key psychological level… The increasing inflows into the ETFs, including the nation’s biggest Huatai-Pinebridge CSI 300 ETF, added to signs that the so-called ‘national team’ may have stepped in to shore up market confidence ahead of the Communist Party’s Third Plenum later this month.”

July 3 – Financial Times (Sun Yu): “China is demanding acts of loyalty from its young professionals living and working in the US, sometimes putting them at odds with local law and immigration requirements, as it seeks more control over expatriates amid rising tensions between the two countries. The demands are increasingly being placed on Chinese nationals who joined the country’s Communist party as students or young professionals before they left home, in the hopes of career advancement once they eventually return. By some estimates, at least 10,000 members of the party are studying or working in the US. This is a small fraction of its 5.4mn Chinese diaspora but many are in top roles at leading universities and corporations in the technology and finance sectors.”

July 2 – Financial Times (Kaye Wiggins, Cheng Leng and Thomas Hale): “Western financial institutions in China have cut their investment banking workforce by the most in years after a market slowdown hit profits and halted years of expansion in the country. The cuts in 2023 came as five of the seven Chinese securities units that are part of Wall Street and European banks either made a loss or reported tumbling profits… The seven units employed 1,781 people last year, a fall of 13% from 2022. China’s capital markets activity has slowed in a weaker economy dominated by a prolonged property slowdown and the fallout from rising geopolitical tension between Washington and Beijing.”

Global Bubble Watch:

July 4 – Wall Street Journal (David Uberti): “U.S. tourists are flooding foreign locales from Japanese temples to Hungarian thermal baths at an opportune moment: The American dollar is soaring. An economy that is outrunning many peers is pulling investment stateside, driving the value of the dollar near its highest levels of the year. The U.S. currency has gained 15% against the yen and 2.3% against the euro since the end of 2023… A rising dollar boosts Americans’ relative purchasing power by making imports cheaper. At the same time, it generally hurts exports—except the type who carry luggage.”

July 2 – Bloomberg (Swati Pandey): “Australian retail sales rose by more than expected in May with spending largely driven by discounts in the face of elevated borrowing costs, an outcome that further strengthens the case for an interest rate hike this year. Sales advanced 0.6% from the prior month, making it the biggest increase in four months… The outcome, which was double the pace that analysts forecast, follows a 0.1% gain in April.”

Europe Watch:

July 1 – Reuters (Jonathan Cable and Leika Kihara): “Manufacturing activity in Europe suffered a setback last month but Asian factories enjoyed solid momentum, offering policymakers some hope the region can weather the hit from soft Chinese demand, surveys showed. The downturn in Europe was widespread, with Italy the only big player not to see a fall in its Purchasing Managers’ Index (PMI)… HCOB’s final euro zone manufacturing PMI, compiled by S&P Global, fell to 45.8 in June from May’s 47.3.”

July 2 – Reuters (Balazs Koranyi): “Euro zone inflation eased last month but a crucial services component remained stubbornly high, likely fuelling concern among some European Central Bank policymakers that domestic price pressures could stay at elevated levels. Consumer inflation in the 20 nations sharing the euro currency slowed to 2.5% in June from 2.6% a month earlier…, as a rise in energy and unprocessed food costs moderated… This closely watched core inflation figure held steady at 2.9%, coming above expectations for 2.8%, mostly on a continued 4.1% rise in services prices.”

July 1 – Reuters (Maria Martinez): “The downturn in Germany’s manufacturing sector, which accounts for about a fifth of Europe’s biggest economy, experienced a fresh setback in June as output and new orders declined at a faster pace, a survey showed… The HCOB final Purchasing Managers’ Index (PMI) for German manufacturing fell to 43.5 in June from 45.4 in May…”

Japan Watch:

July 5 – Reuters (Satoshi Sugiyama and Leika Kihara): “Japanese household spending fell unexpectedly in May as higher prices continued to squeeze consumers’ purchasing power…, complicating the central bank’s decision on how soon to raise interest rates… Consumer spending fell 1.8% in May from a year earlier, far short of the median market forecast for a 0.1% uptick… Japanese firms offered to hike pay by 5.1% on average this year, the biggest increase in 33 years and far outpacing inflation now hovering at about 2%, a labour union survey showed…”

June 30 – Reuters (Kaori Kaneko): “Japan’s land prices in 2023 rose at the fastest pace since comparable data available in 2010…, suggesting a recovery gathered pace helped by brisk tourism after the coronavirus pandemic. Average land prices climbed 2.3% last year, rising for the third straight year, a National Tax Agency survey showed, extending gains from a 1.5% increase in 2022 and a 0.5% rise in 2021.”

July 2 – Reuters (Satoshi Sugiyama): “Japanese service activity contracted for the first time in nearly two years in June as domestic demand cooled…, although business confidence and hiring indicators remained upbeat. The service sector has been propelling economic growth in Japan, offseting feeble manufacturing performance. The final au Jibun Bank Service purchasing managers’ index (PMI) slipped to 49.4 in June from 53.8 in May, snapping 21 straight months of expansion…”

Emerging Market Watch:

July 1 – Bloomberg (Selcuk Gokoluk, Jorgelina do Rosario and Vinícius Andrade): “After a blockbuster six months, the sale of emerging-market bonds in hard currencies is set to slow down sharply in a second-half that’s littered with political risk. The amount of debt sold by government and corporate borrowers in developing markets has reached $321 billion in the busiest first-half since 2021… Still, forecasts from JPMorgan… and Bank of America Corp. show issuance is poised to slow more than usual after borrowers rushed to meet their funding needs at the beginning of the year. As governments from France to Bolivia face political upheaval…”

July 4 – Bloomberg (Kelsey Butler): “Venture capital dealmaking in Latin America has hit the slowest pace in six years, in part due to a pullback from US investors in the region. In the first six months of the year, there were 323 deals valued at $2 billion in Latin America, according to PitchBook… The second quarter, with 142 instances of capital put into startups, is the slowest in the region since the fourth quarter of 2018.”

Leveraged Speculation Watch:

July 2 – Bloomberg (Shelley Robinson and Katherine Burton): “Ken Griffin’s Citadel and Izzy Englander’s Millennium Management extended their year-to-date gains in June, underlining their reputations for delivering steady returns. Citadel posted an 8.1% return in its main Wellington hedge fund in the first half of the year… Its Tactical Trading Fund climbed 2.3% in June, taking its 2024 gain to 13.7%… Millennium gained 6.9% in the same period…”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 3 – Financial Times (Attracta Mooney and Aditi Bhandari): “Hurricane Beryl became the earliest hurricane on record to develop into a category five storm, meaning its winds and sea surges could prove catastrophic, as warming oceans fuelled destruction across the south-eastern Caribbean. Forecasters said it was expected to bring ‘life-threatening’ winds and storm surges to Jamaica before hitting the Cayman Islands.”

July 2 – Reuters (Julie Steenhuysen and Jennifer Rigby): “Scientists tracking the spread of bird flu are increasingly concerned that gaps in surveillance may keep them several steps behind a new pandemic, according to… dozen leading disease experts. Many of them have been monitoring the new subtype of H5N1 avian flu in migratory birds since 2020. But the spread of the virus to 129 dairy herds in 12 U.S. states… signals a change that could bring it closer to becoming transmissible between humans. Infections also have been found in other mammals, from alpacas to house cats. ‘It almost seems like a pandemic unfolding in slow motion,’ said Scott Hensley, a professor of microbiology at the University of Pennsylvania. ‘Right now, the threat is pretty low… but that could change in a heartbeat.’”

July 3 – Reuters (Brendan O’Brien and Rich Mckay): “A huge swath of the United States will experience dangerously high temperatures on Wednesday – just ahead of the long Fourth of July weekend – meteorologists said, while a fast-moving California wildfire has forced thousands of residents to evacuate their homes. Some 110 million people in 21 states across the West, the southern Plains and the Mid-Atlantic will spend their holiday under heat-related advisories and warnings. Temperatures were expected to soar well past 100 degrees Fahrenheit over the next several days…”

July 4 – Reuters (Bernard Orr and David Stanway): “China is facing hotter and longer heatwaves and more frequent and unpredictable heavy rain as a result of climate change, the weather bureau warned…, as the world’s second-biggest economy braces for another scorching summer. In its annual climate ‘Blue Book’, the China Meteorological Administration (CMA) warned that maximum temperatures across the country could rise by 1.7-2.8 degrees Celsius within 30 years, with eastern China and the northwestern region of Xinjiang set to suffer the most.”

July 4 – Reuters (Guy Faulconbridge): “Russians were braving some of the hottest weather seen in more than a century on Thursday with Moscow breaking a 1917 record and cities across the world’s biggest country sizzling in temperatures well above 95 Fahrenheit. In Moscow, where temperatures can fall to minus 40 degrees Celsius in the legendary Russian winter, the mercury rose to 32.7 degrees Celsius on July 3, breaking the 1917 record for that day…”

Geopolitical Watch:

July 5 – Financial Times (Nicholas Megaw, Madison Darbyshire and James Fontanella-Khan): “Attended by prominent figures such as tech billionaire Michael Dell, Blackstone chief Stephen Schwarzman and Yasir Al-Rumayyan, the head of Saudi Arabia’s $925bn Public Investment Fund, the FII Priority conference in Miami in February was one of the most high-profile business events in the US this year. The first morning audience listened to former US secretary of state Mike Pompeo who warned the investors that it had become ‘impossible to separate geopolitical risk from capital allocation’… When the futures and derivatives industry convened up the coast in Boca Raton the following month, a prominent historian was brought in to lecture attendees on the ‘era of rising political turbulence’. At the Milken Institute conference…, there were speakers from the US state department, the White House National Security Council, West Point and Nato, a former major general and multiple current and former world leaders.”

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