June 11, 2021: Historic Monetary Inflation: Q1 2021 Z.1

June 11, 2021: Historic Monetary Inflation: Q1 2021 Z.1
Doug Noland Posted on June 11, 2021

Total Non-Financial Debt (NFD) expanded $879 billion during Q1 to a record $62.032 TN. NFD expanded an unprecedented $7.671 TN, or 14.1%, over the past five quarters. And with Financial Sector Debt increasing $236 billion and Foreign US borrowings gaining $95 billion, Total Debt increased $1.210 TN during the quarter to a record $84.7 TN. Total Debt expanded $9.199 TN, or 12.2%, over five quarters.

On a Seasonally Adjusted and Annualized (SAAR) basis, NFD expanded $3.521 TN during Q1. For perspective, annual NFD growth averaged $1.829 TN during the period 2009 through 2019. NFD surged $6.792 TN during 2020 and inflated $7.671 TN over five quarters. NFD as a percent of GDP slipped to 281% – yet compares to 227% at year-end 2007 and 184% to end the nineties.

Washington remains the insatiable debt glutton. Treasury Securities rose $342 billion during Q1 to a record $23.943 TN. While this was the weakest growth since Q2 2019, overall spending was supported by the Treasury’s significant draw down of its cash balance held at the Fed. The Federal Reserve Liability, “Due to Federal Government – Treasury Cash Holdings,” dropped $607 billion during the quarter (to $1.122 TN).

Over the past five quarters, outstanding Treasuries surged an incredible $4.924 TN, or almost 26%. In just 15 months, the ratio of Treasuries-to-GDP inflated from 87% to 109%. Treasury Securities-to-GDP ended the seventies at 57.8%, the eighties at 63.0%, and the nineties at 58.7%. This ratio had jumped to 76.1% to close out 2009 and 85.4% to conclude 2010. It’s now gone parabolic.

Q1 Federal Receipts were up 3% y-o-y to an annualized $3.866 TN. Meanwhile, Expenditures inflated 67% y-o-y to an annualized $8.171 TN. State & Local Receipts rose 11% y-o-y to an annualized $3.090 TN, while Expenditures increased 2% to annualized $3.053 TN.

The U.S. Department of the Treasury is not the only Washington institution ballooning its balance sheet. GSE (government-sponsored enterprises) Assets rose another $150 billion during the quarter to a record $7.879 TN. Over five quarters, GSE Assets inflated an unprecedented $749 billion, or 10.5%. Total Agency Securities (debt and MBS) rose $140 billion during Q1 to a record $10.226 TN, with three-year growth of $1.354 TN (15%).

Bank (“Private Depository Institutions”) Assets jumped $767 billion during the quarter to a record $24.215 TN, though $678 billion of the increase is explained by a jump in Reserve Assets at the Federal Reserve. Loans (Assets) declined $72.7 billion during Q1 to $12.023 TN. Bank Loans contracted $278 billion, or 2.3%, over the past year.

The banking system continues to load up on securities. Debt Securities holdings jumped $408 billion during the quarter to a record $6.199 TN, with Agency/MBS rising $230 billion (to a record $3.606 TN); Corporate Bonds gaining $115 billion (to a record $802bn); and Treasuries increasing $60 billion (to a record $1.263 TN). With momentous effects throughout the securities markets, banking system Debt Securities holdings surged $1.551 TN over the past five quarters. Agency/MBS holdings jumped $972 billion in 15 months, with Treasuries up $384 billion, and Corporate Bonds increasing $147 billion.

Meanwhile, on the Bank Liability side, Bank Total Deposits surged $844 billion during Q1 to a record $19.707 TN. Over five quarters, Total Deposits inflated an incredible $4.175 TN, or 27%, reflecting one of history’s most spectacular monetary inflations. Total Deposits doubled over the past decade. Total Bank Deposits-to-GDP ended the quarter at 89%, up from 71% to end 2019, 63% to conclude 2010, 55% to end 2005, and 47% to wrap up the nineties.

Securities Broker & Dealer Assets declined $93 billion during Q1 to $3.608 TN (down $149bn, or 4%, y-o-y). Treasury holdings sank a notable $182 billion to $19 billion, with a one-year contraction of $247 billion. Meanwhile, the Broker/Dealer lending business boom rages on. Loans expanded $90 billion, or 67% annualized, during Q1 to a record $629 billion. Loans surged $255 billion, or 68%, over the past three quarters.

Some smaller sectors posted notable growth. Credit Union Assets expanded another $116 billion (25% annualized) to a record $1.940 TN, with unprecedented one-year growth of $335 billion, or 20.9% (up $405bn in five quarters). Money Market Funds gained $164 billion, or 15% annualized, to $4.500 TN. “Other Financial Business” (the old Wall Street “Funding Corps”) jumped $177 billion, or 37% annualized, to a decade-high $2.080 TN (up $562bn in five quarters). Total Mortgage debt rose $177 billion during Q1 to a record $16.958 TN. The year-over-year increase of $780 billion (4.8%) was the strongest mortgage lending since 2007.

Fed Funds & Repurchase Agreements dropped $166 billion during the quarter and $716 billion for the year (to $4.063 TN). Meanwhile, Exchange-Traded Funds (ETFs) jumped $460 billion during the quarter to a record $5.910 TN, with one-year growth of $1.924 TN, or 62.4%. ETF Assets are now up 174% in five years. Over this period, Equities ETFs surged 186% (to $3.544 TN) and Taxable Bond ETFs jumped 179% (to $1.000 TN).

Federal Reserve Assets expanded $112 billion during the quarter to a record $7.769 TN, with one-year growth of $1.589 TN. Over seven quarters, Fed Assets have swelled an incredible $3.759 TN, or 94%. Over this period, holdings of Treasuries surged $2.958 TN (to $5.273 TN) and Agency Securities jumped $690 billion (to $2.275 TN).

Total Debt Securities (TDS) increased $656 billion during the quarter to a record $54.563 TN, with one-year growth of $6.193 TN, or 12.8%. Over seven quarters, TDS inflated $8.818 TN, or 19.3%. At 247%, TDS-to-GDP declined slightly during the quarter to 247% – although it was up significantly from Q4’s 2019’s 218%. This ratio ended 2009 at 223%, the nineties at 158%, and the eighties at 124%. Corporate Bonds jumped $119 billion during the quarter to a record $15.401 TN, with one-year growth of $1.280 TN, or 9.1% (fastest expansion since 2007).

Total Equities jumped $4.784 TN during Q1 to a record $69.991 TN, with a one-year surge of $26.941, or 62.6%. Total Equities-to-GDP ended March at a record 317%, up from previous cycle peaks 188% (Q3 2007) and 210% (Q1 2000). Total (Debt & Equities) Securities jumped $5.440 TN during the quarter to a record $124.554 TN – with stunning one-year growth of $33.134 TN, or 36.4%. Total Securities have now inflated $77.227 TN, or 163%, since 2008. Total Securities-to-GDP ended March at a record 565% (up from March 2019’s 449%) and compares to previous cycle peaks 387% (Q3 2007) and 368% (Q1 2000).

The Household (and Non-Profits) Sector balance sheet continues to be a Bubble Analysis focal point. Household Assets inflated $5.184 TN, or almost 14% annualized, during Q1 to a record $154.161 TN. Over nine quarters, Household Assets have ballooned $32.749 TN, or 27%. Household Assets-to-GDP ended the quarter at a record 699% of GDP – up 100 percentage points in 14 quarters.

With Household Liabilities increasing $188 billion during Q1 (to $17.244 TN), Household Net Worth (Assets less Liabilities) surged $4.997 TN during the quarter to a record $136.917 TN. For perspective, growth in Net Worth averaged $830 billion quarterly over the 20-year period prior to 2019. Net Worth inflated $31.399 TN over five quarters, or 29.8%. Household Net Worth ended March at a record 621% of GDP. This was up from previous cycle peaks 491% (Q1 2007) and 445% (Q1 2000).

The value of Household Real Estate holdings jumped $968 billion (second only to Q4 ‘20’s $1.017 TN) to a record $37.558 TN. Real Estate was up $3.335 TN, or 9.7%, y-o-y. Real Estate-to-GDP ended the quarter at 170%, only somewhat lagging the cycle peak 190% from Q3 2006.

Household holdings of Financial Assets jumped $4.027 TN (15.3% annualized) during the quarter to a record $109.562 TN, with one-year growth of $22.395 TN, or 25.7%. The ratio of Household Financial Assets-to-GDP ended Q1 at a record 497% of GDP. This was up from cycle trough 325% during Q1 2009 – and compares to cycle peaks 374% (Q3 2007) and 354% (Q1 2000).

Total (Equities and Mutual Funds) Equities jumped $2.832 TN to end Q1 at a record $39.946 TN. Total Equities jumped $15.535 TN, or 63.6%, y-o-y. Total Equities-to-GDP ended March at a record 181%. This was up from Q1 2009’s cycle trough 54%, while significantly surpassing previous cycle peaks 104% (Q2 2007) and 115% (Q1 2000).

Rest of World (ROW) holdings of U.S. Financial Assets rose $1.274 TN, or 12.8%, during Q1, with one-year growth of $8.892 TN, or 27.6%. In only nine quarters, ROW Assets have inflated $11.168 TN, or 37.3%. ROW Assets have now almost tripled since the end of 2008. Total U.S. Equities holdings jumped $724 billion, or 25%, to a record $12.276 TN, with a one-year gain of $4.758 TN, or 63.3%. Foreign Direct Investment rose $738 billion during Q1 to a record $11.540 TN. Debt Securities holding contracted $253 billion during the quarter to $12.618 TN, though they were up $427 billion, or 3.5%, y-o-y. ROW holdings of U.S. Financial Assets ended the quarter at a record 186% of GDP. This is up from Q4 2008’s 95%, 2007’s 108%, 1999’s 74%, 1996’s 51%, and 1990’s 30%.

It’s right there in the data: one of history’s most spectacular monetary inflations and asset Bubbles. May Consumer Prices were up 5.0% y-o-y, the strongest consumer inflation since 2008. Ten-year Treasury yields dropped 10 bps this week to a three-month low of 1.45%. Markets are broken – and there will be more on this subject next week.

For the Week:

The S&P500 added 0.4% (up 13.1% y-t-d), while the Dow declined 0.8% (up 12.7%). The Utilities rose 0.9% (up 4.0%). The Banks sank 3.6% (up 32.0%), and the Broker/Dealers slipped 0.6% (up 25.7%). The Transports fell 0.9% (up 22.6%). The S&P 400 Midcaps gained 0.9% (up 19.3%), and the small cap Russell 2000 jumped 2.2% (up 18.3%). The Nasdaq100 advanced 1.7% (up 8.6%). The Semiconductors were little changed (up 14.8%). The Biotechs surged 7.7% (up 4.3%). With bullion down $14, the HUI gold index fell 1.9% (up 2.6%).

Three-month Treasury bill rates ended the week at 0.02%. Two-year government yields were unchanged at 0.15% (up 3bps y-t-d). Five-year T-note yields fell four bps to 0.74% (up 38bps). Ten-year Treasury yields sank 10 bps to 1.45% (up 54bps). Long bond yields dropped nine bps to 2.14% (up 49bps). Benchmark Fannie Mae MBS yields fell four bps to 1.80% (up 46bps).

Greek 10-year yields dropped eight bps to 0.73% (up 11bps y-t-d). Ten-year Portuguese yields fell 10 bps to 0.35% (up 32bps). Italian 10-year yields sank 13 bps to 0.74% (up 20bps). Spain’s 10-year yields dropped 10 bps to 0.36% (up 31bps). German bund yields declined six bps to negative 0.27% (up 30bps). French yields fell six bps to 0.10% (up 44bps). The French to German 10-year bond spread was little changed at 37 bps. U.K. 10-year gilt yields dropped eight bps to 0.71% (up 51bps). U.K.’s FTSE equities index increased 0.9% (up 10.4% y-t-d).

Japan’s Nikkei Equities Index was little changed (up 5.5% y-t-d). Japanese 10-year “JGB” yields dropped five bps to 0.04% (up 1bps y-t-d). France’s CAC40 rose 1.3% (up 18.9%). The German DAX equities index was about unchanged (up 14.4%). Spain’s IBEX 35 equities index recovered 1.3% (up 14.0%). Italy’s FTSE MIB index increased 0.6% (up 15.7%). EM equities were mixed. Brazil’s Bovespa index declined 0.5% (up 8.8%), while Mexico’s Bolsa jumped 1.6% (up 16.4%). South Korea’s Kospi index added 0.3% (up 13.1%). India’s Sensex equities index increased 0.7% (up 9.9%). China’s Shanghai Exchange was little changed (up 3.4%). Turkey’s Borsa Istanbul National 100 index jumped 1.9% (down 1.1%). Russia’s MICEX equities index gained 0.9% (up 16.8%).

Investment-grade bond funds saw inflows of $3.232 billion, while junk bond funds posted outflows of $642 million (from Lipper).

Federal Reserve Credit last week jumped $25.5bn to a record $7.905 TN. Over the past 91 weeks, Fed Credit expanded $4.179 TN, or 112%. Fed Credit inflated $5.095 Trillion, or 181%, over the past 448 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week jumped $11.5bn to $3.548 TN. “Custody holdings” were up $141bn, or 4.1%, y-o-y.

Total money market fund assets declined $6.9bn to $4.605 TN. Total money funds declined $113bn y-o-y, or 5.3%.

Total Commercial Paper dropped $9.6bn to $1.176 TN. CP was up $148bn, or 14.4%, year-over-year.

Freddie Mac 30-year fixed mortgage rates declined three bps to 2.96% (down 25bps y-o-y). Fifteen-year rates fell four bps to 2.23% (down 39bps). Five-year hybrid ARM rates sank nine bps to 2.55% (down 55bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 3.09% (down 37bps).

Currency Watch:

For the week, the U.S. Dollar Index increased 0.5% to 90.56 (up 0.7% y-t-d). For the week on the upside, the South Korean won increased 0.5%, the Mexican peso 0.4%, and the Swiss franc 0.3%. On the downside, the South African rand declined 2.1%, the Brazilian real 1.3%, the New Zealand dollar 1.2%, the Canadian dollar 0.6%, the Swedish krona 0.6%, the euro 0.5%, the Australian dollar 0.4%, the Norwegian krone 0.4%, the British pound 0.4%, the Japanese yen 0.1%, and the Singapore dollar 0.1%. The Chinese renminbi declined 0.05% versus the dollar this week (up 2.01% y-t-d).

Commodities Watch:

June 8 – Wall Street Journal (Chuin-Wei Yap): “A yearlong steep climb in commodity prices is testing an economics maxim: High prices cure themselves by spurring supply and quenching demand. Languishing commodity prices led producers to slash capital spending on major resources by nearly half over the last decade, shrinking stocks of industrial metals to two-decade lows and reducing supplies across commodities. The crunch is now converging with a buying spree in key markets to supercharge prices—and there is no quick fix. Since 2011, investments to develop the energy and mining sectors have fallen 40%, according to… Schroders, leaving many producers unprepared for a recent boom in manufacturing and spending in the world’s two largest economies.”

June 9 – Bloomberg (Kim Chipman): “In the world of crops, angst over the weather has reached a fevered pitch. Global inventories are shrinking and demand is on a tear as drought plagues farms in key producers from the U.S. and Brazil to Russia. As a result, every rain shower and dry spell is coming under extreme scrutiny. Grain futures touched near-decade highs last month before paring gains amid a strong planting season. Now, too little or too much rainfall in key producers will go a long way in determining if crop prices rally again or further retreat. In the U.S., traders and investors usually focus on giant corn and soybean growers like Iowa and Illinois. Now, they’re obsessing over droughts in second-tier producers in the Northern Plains. Dry weather has already hurt Brazil’s corn crop at a time when China is scouring the globe for all the grains it can find to feed its hog herd, the biggest in the world.”

The Bloomberg Commodities Index added 0.3% (up 21.7% y-t-d). Spot Gold dipped 0.7% to $1,878 (down 0.7%). Silver increased 0.4% to $27.92 (up 5.7%). WTI crude gained $1.29 to $70.91 (up 46%). Gasoline dipped 1.1% (up 55%), while Natural Gas surged 6.4% (up 30%). Copper added 0.2% (up 29%). Wheat declined 1.0% (up 7%). Corn gained 3.1% (up 26%). Bitcoin increased $111, or 0.3%, this week to $37,281 (up 28%).

Coronavirus Watch:

June 7 – CNBC (Nate Rattner): “The U.S. is reporting an average of about 14,500 daily infections over the past week…, as average daily cases have held below 15,000 for three days straight. About 960,000 vaccinations are being reported administered each day nationwide… More than half of Americans have received at least one dose of a vaccine and 42% are fully vaccinated.”

June 7 – Bloomberg (Bhuma Shrivastava): “The coronavirus variant driving India’s devastating Covid-19 second wave is the most infectious to emerge so far. Doctors now want to know if it’s also more severe. Hearing impairment, severe gastric upsets and blood clots leading to gangrene, symptoms not typically seen in Covid patients, have been linked by doctors in India to the so-called delta variant. In England and Scotland, early evidence suggests the strain… carries a higher risk of hospitalization. Delta, also known as B.1.617.2, has spread to more than 60 countries over the past six months…”

Market Mania Watch:

June 8 – Wall Street Journal (Gunjan Banerji): “The meteoric rally in meme stocks such as AMC Entertainment Holdings Inc. and GameStop Corp. has unleashed a burst of options trading, upending traditional dynamics in the market for stock bets. The rush into the stocks coincided with frenzied trading for options—contracts that allow investors to bet on price moves in stocks or protect their portfolios. The once-obscure corner of the market has boomed this year like never before, with many new investors trying their hands during the pandemic shutdowns… Traders last week spent $11.6 billion on options contracts tied to AMC, more than on the SPDR S&P 500 ETF Trust, Invesco QQQ Trust and Tesla Inc. combined… Options on those stocks are typically among the market’s most popular.”

June 7 – Bloomberg (Yakob Peterseil): “A once-obscure but increasingly influential dynamic in the options market may explain why U.S. equities have been so two-faced lately. As meme mania rages, companies such as AMC Entertainment Holdings Inc. are whipsawing traders like never before… To the likes of Tallbacken strategist Michael Purves, it’s all about action in derivatives — or in the case of the index, lack of action. Options dealers have been increasingly accused of moving stocks over the past year as they hedge their exposures. The thinking is that they’ve caused phenomenon like ‘gamma squeezes,’ in which a dealer buys a rising stock to balance their exposure to contracts they have sold, only to drive prices further up and so be forced into buying even more.”

June 7 – Bloomberg (Katie Greifeld): “The Federal Reserve delivered such a gift to the exchange-traded fund industry amid the throes of the pandemic that analysts say its exit will hardly be felt. The central bank… will start reversing its surprise decision last March to scoop up bond ETFs as part of efforts to keep credit flowing amid the coronavirus crash. That move ushered a surge of inflows into bond ETFs, meaning that even though the Fed itself ended up buying just $8.6 billion of debt funds, the market ballooned to be worth $1.1 trillion. The Fed’s foray into the credit market was perceived as a stamp of approval on a structure that’s long been the subject of criticism and hyperbole. Critics cautioned that fixed-income ETFs… would exacerbate selling pressure in a downturn.”

June 5 – Wall Street Journal (James T. Areddy): “Bitcoin enthusiasts prize the cryptocurrency as beyond the reach of any government. Yet up to three-quarters of the world’s supply has been produced in just one country, China, where a government push to curtail output is now causing global bitcoin turbulence. The amount of electricity needed to power vast numbers of computers used to create new bitcoin are at odds with China’s recent climate goals. The government, which manages its national currency with a tight fist, also frowns on cryptocurrency generally… Few governments have embraced bitcoin, but fallout from Beijing’s threats demonstrated how its grip on production left the cryptocurrency vulnerable.”

June 7 – CNBC (Yun Li): “The U.S. Securities and Exchange Commission said… it’s keeping a close eye on the wild trading in meme stocks recently to ensure market stability. ‘SEC staff continues to monitor the market in light of the ongoing volatility in certain stocks to determine if there have been any disruptions of the market, manipulative trading, or other misconduct,’ an SEC spokesperson told CNBC. ‘In addition, we will act to protect retail investors if violations of federal securities laws are found.’”

June 8 – Reuters (David Randall): “Lower prices for growth stocks as a result of the inflation-driven selloff that began in February should mean that Ark Investment’s portfolios should see a ‘more than tripling’ over the next five years, star fund manager and firm founder Cathie Wood said in a webinar…”

Market Instability Watch:

June 8 – Bloomberg (Tara Lachapelle): “Never mind the return to normal, Wall Street’s private equity shops are staging a return to abnormal. Leveraged buyouts are happening at a speed and extravagance that had been unique to 2006 and 2007, the run-up to the financial crisis. Private equity firms have already made $470 billion of acquisitions this year… At this rate, the value of private equity purchases in 2021 will surpass the total for all of 2020 in just a few weeks… This year might even break the 2007 record.”

June 9 – CNBC (Holly Ellyatt): “Market volatility and the next moves by central banks have to be watched ‘very carefully,’ veteran investor Mark Mobius has warned, describing ‘crazy moves’ in assets such as bitcoin as being driven by ‘disorientation and confusion.’ Market speculation over when central banks, and particularly the U.S. Federal Reserve, could begin to taper asset purchases, has been rife for months given a nascent recovery from the coronavirus pandemic and the specter of rising inflation. Mark Mobius… told CNBC that central bank moves have to be watched closely. ‘Any pullback in the money supply as a result of central banks pulling back will be, I think, very bad for the markets. So I think we have to watch this very carefully,’ Mobius told CNBC…”

Inflation Watch:

June 6 – CNBC (Emma Newburger): “U.S. Treasury Secretary Janet Yellen said that President Joe Biden’s $4 trillion spending proposal would be positive for the country, even if it leads to a rise in interest rates… The former Federal Reserve chair said the president’s plans would total about $400 billion each year — a level of spending she argued was not enough to create an inflation over-run. ‘If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,’ Yellen told Bloomberg. ‘We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,’ she said. She added that if the packages help at all to ‘alleviate things then that’s not a bad thing — that’s a good thing.’”

June 9 – CNN (Hanna Ziady): “Steel, lumber, plastic and fuel. Corn, soybeans, sugar and sunflower oil. Houses, cars, diapers and toilet paper. Prices are rising almost everywhere you look. The post-pandemic recovery is in full swing and the global economy is struggling to keep up. Following a collapse at the start of the pandemic as businesses closed and millions of workers lost jobs, demand has rebounded with a vengeance, spurred by government stimulus and consumers flush with savings. But companies that idled factories or put workers on furlough during lockdowns are now unable to secure enough raw materials to build the houses, make the cars or assemble the appliances that are suddenly in high demand. Companies are furiously trying to restock inventories following last year’s global recession, straining supply chains already reeling from the pandemic to breaking point. A shortage of shipping containers and bottlenecks at ports have made matters worse and increased the cost of moving products around the world. Throw in accidents, cyberattacks, extreme weather and the huge disruption caused by the desperate hunt for cleaner sources of energy, and you have a perfect storm.”

June 10 – Wall Street Journal (Annie Gasparro): “Soup, Spam and Shake Shack burgers are all getting more expensive as food companies pass along higher costs to consumers. General Mills Inc., Campbell Soup Co., Unilever PLC, and J.M. Smucker Co. are among food makers raising prices at supermarkets. Restaurants including Chipotle Mexican Grill Inc. and Cracker Barrel Old Country Store Inc. have raised menu prices. Executives say they expect more price increases this summer as costs remain elevated for labor, commodities and transport. ‘We’re in a period of unprecedented commodity inflation,’ Unilever Chief Executive Officer Alan Jope told investors… He said Unilever would recover some of those costs in part by selling smaller packages of some foods at the same price as a larger size.”

June 9 – Bloomberg: “Surging costs of imported commodities drove China’s factory-gate inflation to its highest level since 2008, raising the odds that exporters will begin passing on higher prices and boost inflationary pressures in the global economy. The producer price index climbed 9% in May from a year earlier, driven by price increases for oil, metals and chemicals… Consumer inflation increased only 1.3% from a year ago, missing an estimate of 1.6% and suggesting retailers aren’t hiking prices yet due to sluggish domestic demand. Intense competition among manufacturers in China, which is the world’s top exporter, has had a deflationary impact on global consumer prices since the 1990s. Now, rising costs and surging export demand mean some factories could soon start hiking prices…”

June 7 – CNBC (Jeff Cox): “Inflation may look like a problem that will go away, but is more likely to persist and lead to a crisis in the years ahead, according to a warning from Deutsche Bank economists. In a forecast that is well outside the consensus from policymakers and Wall Street, Deutsche issued a dire warning that focusing on stimulus while dismissing inflation fears will prove to be a mistake if not in the near term then in 2023 and beyond. The analysis especially points the finger at the Federal Reserve and its new framework in which it will tolerate higher inflation for the sake of a full and inclusive recovery. The firm contends that the Fed’s intention not to tighten policy until inflation shows a sustained rise will have dire impacts.”

June 9 – Yahoo Finance (Ihsaan Fanusie): “Rising lumber prices have contributed significantly to the increase in home prices, according to a new Bank of America (BAC) Global Research Report… Its key findings included record-tight supply and low affordability, the overheating of the housing market as a whole, and high construction costs. Among these high construction costs is the price of lumber. Lumber prices have spiked in 2021, driving up housing prices even higher. ‘Given the rapid rise in lumber prices,’ the report says, ‘the total cost of lumber and manufactured lumber products for an average single family home has soared 184% from April 2020 to April 2021, rising to $48,316.’”

June 10 – Bloomberg (Agnieszka de Sousa and Megan Durisin): “The world’s food-import bill is expected to climb to an all-time high this year, with the soaring cost of staples hitting poor nations particularly hard and threatening to fuel global inflation. The cost of importing food is set to rise by 12% to $1.72 trillion, led by increases in grains, vegetable oils and oilseeds, the United Nations’ Food & Agriculture Organization said…. Developing countries face a 21% jump in the total bill, compared with a 6% increase for the richest ones, according to a provisional forecast.”

June 7 – Wall Street Journal (Tom Fairless, Alistair MacDonald and Jesse Newman): “The run-up in commodity prices is casting a cloud over the global economic recovery, slamming vulnerable businesses and households and adding to fears that inflation could become more persistent. The world hasn’t seen such across-the-board commodity-price increases since the beginning of the global financial crisis, and before that, the 1970s. Lumber, iron ore and copper have hit records. Corn, soybeans and wheat have jumped to their highest levels in eight years. Oil recently reached a two-year high.”

June 8 – CNBC (Amelia Lucas): “Chipotle Mexican Grill has hiked menu prices by roughly 4% to cover the cost of raising its workers’ wages. Across the restaurant industry, chains such as Chipotle, Starbucks and McDonald’s have been increasing hourly pay for employees of company-owned locations in a bid to attract new workers and retain their current ones. Consumer demand has come roaring back for restaurant meals, but the workforce has been slower to return, pushing eateries to sweeten the deal… In May, Chipotle said that it would raise hourly wages for its restaurant workers to reach an average of $15 an hour…”

Biden Administration Watch:

June 6 – New York Times (Alan Rappeport): “Treasury Secretary Janet L. Yellen secured a landmark international tax agreement over the weekend, one that has eluded the United States for nearly a decade. But with a narrowly divided Congress and resistance from Republicans and business groups mounting, closing the deal at home may be an even bigger challenge. The Biden administration is counting on more than $3 trillion in tax increases on corporations and wealthy Americans to help pay for its ambitious jobs and infrastructure proposals. Republicans have expressed opposition to any rise in taxes and have warned that President Biden’s big spending plans are fueling inflation and will deter business investment. Business groups have complained that higher taxes pose a threat to the economic recovery and will put American companies at a competitive disadvantage.”

June 7 – Reuters (David Morgan and David Lawder): “Several top U.S. Senate Republicans… rejected Treasury Secretary Janet Yellen’s G7 deal to impose a global minimum corporate tax and allow more countries to tax big multinational firms, raising questions about the U.S. ability to implement a broader global agreement. The opposition from Republicans may push President Joe Biden to attempt to use budget procedures to pass the initiatives with only Democratic votes. It left lawyers and tax experts in Washington wondering whether it could get done without crafting a new international treaty, which requires approval by a two-thirds majority in the evenly split 100-member Senate.”

June 8 – Reuters (Trevor Hunnicutt, David Morgan and Susan Cornwell): “President Joe Biden… broke off talks on an infrastructure bill with a key Republican, instead reaching out to a bipartisan group, after one-on-one talks with Senator Shelley Capito were described as hitting a ‘brick wall.’ Biden changed course after Capito, the leader of a group of six Senate Republicans handling the negotiations, offered $330 billion in new spending on infrastructure, far short of Biden’s reduced $1.7 trillion offer.”

June 9 – Reuters (David Morgan and Susan Cornwell): “A bipartisan group of 10 senators is trying to craft a plan to revitalize U.S. roads and bridges without tax hikes, lawmakers said…, though some of President Joe Biden’s fellow Democrats fretted that such an approach on infrastructure legislation would fail. Revamping America’s infrastructure is a high priority for Biden, but his sweeping $1.7 trillion proposal has run into trouble in a Congress that his party only narrowly controls, making Republican support pivotal. Republican Senator Mitt Romney told reporters that members of the group have reached ‘tentative conclusions’ on their plan but did not provide details. The proposal is expected to total nearly $900 billion.”

June 8 – Yahoo Finance (Jessica Smith): “The Biden administration released the findings of its 100-day review of critical supply chains — detailing vulnerabilities and making a series of recommendations to strengthen U.S. supply chains and boost American manufacturing. ‘For too many years we’ve let our production capacity for critical goods migrate overseas, rather than making investments to support U.S. manufacturing and U.S. workers,’ said a senior administration official… ‘While amplified by the public health and economic crisis, decades of underinvestment and public policy choices led to fragile supply chains across a range of sectors and products,’ says a White House fact sheet. ‘Unfair trade practices by competitor nations and private sector and public policy prioritization of low-cost labor, just-in-time production, consolidation, and private sector focus on short-term returns over long-term investment have hollowed out the U.S. industrial base, siphoned innovation from the United States, and stifled wage and productivity growth.’”

June 7 – Wall Street Journal (Josh Mitchell): “The Biden administration has raised an estimate of losses on the federal government’s student loan portfolio by $53 billion, reflecting lower repayment rates and pandemic-relief efforts. The new estimate… is based on updated data on how much money the nation’s 43 million student loan borrowers have sent to the government in recent years to repay their loans. A year ago, the federal budget projected that taxpayers would ultimately lose $15 billion on all outstanding student debt, which currently comes to $1.6 trillion. The administration’s proposed $6 trillion budget now projects long-term losses will reach $68 billion.”

Federal Reserve Watch:

June 7 – Wall Street Journal (Kevin Warsh): “My mentor, the late George Shultz, would often say ‘an economist’s lag is a politician’s nightmare.’ Changes in economic policy take several quarters to affect the real economy. Politicians usually aren’t that patient. The Federal Reserve announced a new policy doctrine almost a year ago. In essence, the Fed said it would no longer consider lags when making monetary policy, forsaking the policy of ‘pre-emption’ that was standard… Jerome Powell’s Fed believes the party is just getting started and won’t remove the punch bowl until the fun is in full swing and the neighbors know it. Most in Washington can barely contain their enthusiasm for the new doctrine. Wall Street loves it too. Optimism about the future, however, should be matched by memories of the past. Real economic growth is surging more than it did during the Reagan years. U.S. government spending is growing at the fastest clip since World War II. The housing market is running hotter than it did in the runup to 2008. Financial-market ebullience is stronger and broader than during the dot-com boom at the turn of the century. And economic output will shortly surpass historic highs.”

June 8 – Bloomberg (Rich Miller): “Former Federal Reserve Vice Chairman Donald Kohn voiced concern… the U.S. central bank is not well-positioned to deal with a rising threat of faster inflation. ‘There are risks to the upside for inflation,’ Kohn, who served 40 years at the Fed including four as vice chair, said. He told… the American Enterprise Institute that a new monetary framework that policy makers adopted last year heightened the chances of faster price gains. This is ‘a framework that’s not designed to deal with the upside risks to inflation,’ Kohn… said. ‘That’s the worrisome piece.’ The danger is that the central bank will end up having to raise interest rates further and faster to keep inflation in check, he added.

June 7 – Reuters (Gertrude Chavez-Dreyfuss): “The Federal Reserve’s reverse repurchase facility on Monday attracted $486.1 billion in cash, a record high, with financial institutions lending to the U.S. central bank at a 0% interest rate in a sign there are few investment options available in a low yield environment. The financial market has been awash in cash over the last few months given the Fed’s asset buying program and the U.S. Treasury’s payments to various institutions, entities, and individuals for pandemic relief. That cash has found its way to the reverse repo facility launched in 2013 to mop up excess liquidity in the repo market.”

June 7 – CNBC (Steve Liesman): “The Federal Reserve is in the early stages of a campaign to ready markets for reducing its $120 billion in monthly asset purchases to stimulate the economy. Comments by Fed officials in the past several weeks suggest the issue of tapering looks likely to be discussed as soon as the Federal Open Markets Committee meeting next week, and the Fed may be on track to begin asset reductions later this year or early next year. At least five Fed officials have publicly commented on the likelihood of those discussions in recent weeks…”

June 9 – Bloomberg (Peter Coy): “You would think the Federal Reserve would have a hard time attracting funds by offering an interest rate of 0.00%, and for a long time that was true. After all, why earn nothing on your money when there’s Bitcoin and AMC Entertainment Holdings Inc. and lumber and houses in Boise? Many days last year and early this year there were no takers. Starting in April, though, no interest started looking interesting to certain investors with too much cash on their hands. The amount of money they placed at the Fed overnight at 0.00% grew from nothing to single-digit millions to billions and, as of June 8, $497.4 billion. That’s the most ever.”

June 9 – Wall Street Journal (Nina Trentmann and David Benoit): “U.S. companies are holding on to billions of dollars in cash. Their banks aren’t sure what to do with it. When the coronavirus pandemic hit last year, corporate executives rushed to raise money. Banks have been holding that cash ever since… Bankers say they thought the improving economy would reduce companies’ desire for holding cash, but deposit inflows have continued in recent weeks. Chief financial officers and treasurers, many still wary of the pandemic’s impact, say they aren’t ready for big changes, even if they earn little or nothing on their deposits.”

U.S. Bubble Watch:

June 10 – CNBC (Jeff Cox): “The U.S. budget deficit passed the $2 trillion mark in May amid a continuing flow of fiscal largesse to a rapidly expanding economy… Government red ink for the month was just below $132 billion, the lowest monthly shortfall of the year but still enough to put the total deficit at $2.063 trillion… With four months left to go for the fiscal year, the government is on pace to come close to 2020′s record $3.13 trillion deficit.”

June 8 – Wall Street Journal (Justin Lahart): “Employers aren’t only struggling to hire new workers, they look as if they are having a hard time hanging onto the workers they already have. The Labor Department… reported that as of the last day of April there were a seasonally adjusted 9.3 million unfilled job openings at U.S. employers, up from 8.3 million a month earlier. That put the job opening rate—job openings as a share of filled and unfilled positions—at a record 6%. The report underscores the difficulties companies have had staffing up as the Covid-19 crisis has eased. But it also showed that employers made 6.1 million hires, which would be a record if not for the four-month period following the shutting down of the economy in April last year…”

June 8 – Reuters: “U.S. job openings surged by nearly one million to a new record high in April, while more people voluntarily left their employment, strengthening the view that a recent moderation in job growth was due to supply constraints. Job openings, a measure of labor demand, increased by 998,000 to 9.3 million on the last day of April, the highest level since the series began in December 2000, the Labor Department said in its monthly Job Openings and Labor Turnover Survey, or JOLTS report…”

June 8 – Bloomberg (Joe Weisenthal): “This morning we got news that there’s a record-high level of job openings in the U.S. right now… This morning’s National Federation of Independent Business survey showed the same thing, with a record high 48% of companies saying they have unfilled openings. But it’s not just that hiring is strained. Workers are also quitting at increasing rates… And it’s especially acute in the food and hotel industries. Per this morning’s JOLTS report, 5.6% of workers in the accommodation and food-services industry quit their job in April, up from 5.4% the previous month. This is record territory.”

June 8 – Reuters (Evan Sully): “U.S. small-business confidence edged lower last month, the first decline in four months, as a nationwide labor shortage and inflation worries weighed on business owners’ economic outlook… The National Federation of Independent Business (NFIB) Optimism Index fell 0.2 point to a reading of 99.6 in May… ‘If small business owners could hire more workers to take care of customers, sales would be higher and getting closer to pre-COVID levels,’ NFIB Chief Economist Bill Dunkelberg said… ‘In addition, inflation on Main Street is rampant and small business owners are uncertain about future business conditions.’”

June 9 – Yahoo Finance (Ihsaan Fanusie): “A severe supply-demand imbalance coupled with high construction costs will make for a troubling journey to normalize the housing market, a recent Bank of America (BAC) Global Research report says… ‘Mortgage purchase applications and existing home sales have been declining this year and we expect further slippage,’ the report noted. ‘In contrast, we see upside for new home sales and housing starts but with speed bumps due to high costs.’ Home prices have risen sharply over the past year; 2021 alone has yielded an increase of 13%. The report describes the current price trajectory as unsustainable and predicts that price appreciation will cool next year.”

June 10 – CNBC (Diana Olick): “Homeowners are getting richer and richer as prices keep soaring – and the numbers are staggering. Those with mortgages — about 62% of all properties — saw their equity jump by 20% in the first quarter from a year earlier, according to CoreLogic. This represents a collective cash gain of close to $2 trillion. Per borrower, the average gain was $33,400. The massive gain is thanks to soaring home prices, which CoreLogic said were up over 11% in March… from a year earlier. That’s the sharpest gain since 2006. Prices rose an even stronger 13% in April.”

June 10 – CNBC (Jeff Cox): “Consumer prices for May accelerated at their fastest pace in nearly 13 years as inflation pressures continued to build in the U.S. economy, the Labor Department reported… The consumer price index, which represents a basket including food, energy, groceries, housing costs and sales across a spectrum of goods, rose 5% from a year earlier. Economists… had been expecting a gain of 4.7%. The reading represented the biggest CPI gain since the 5.3% increase in August 2008, just before the financial crisis sent the U.S. spiraling into the worst recession since the Great Depression.”

June 10 – Bloomberg (Payne Lubbers): “Applications for U.S. state unemployment insurance fell for a sixth straight week, consistent with further improvement in the labor market and robust economic growth. Initial claims in regular state programs decreased by 9,000 to 376,000 in the week… Continuing claims for ongoing state benefits fell by 258,000 in the week ended May 29, the biggest drop since mid-March, to 3.5 million.”

June 7 – Associated Press (Paul Wiseman): “The U.S. economy is sparking confusion and whiplash almost as fast as it’s adding jobs. Barely more than a year after the coronavirus caused the steepest economic fall and job losses on record, the speed of the rebound has been so unexpectedly swift that many companies can’t fill jobs or acquire enough supplies to meet a pent-up burst of customer demand. ‘Things exploded — it was like a light switch,’ said Kirby Mallon, president of Elmer Schultz Services, a family-owned Philadelphia firm that repairs and maintains kitchen equipment for restaurants and other clients. ‘The labor market is just out of control. We literally cannot hire technicians … We ramped up so quickly, the supply chain wasn’t ready for it.’”

June 6 – Associated Press (David A. Lieb): “Just a year ago, the financial future looked bleak for state governments as governors and lawmakers scrambled to cut spending amid the coronavirus recession that was projected to pummel revenue. They laid off state workers, threatened big cuts to schools and warned about canceling or scaling back building projects, among other steps. Today, many of those same states are flush with cash, and lawmakers are passing budgets with record spending. Money is pouring into schools, social programs and infrastructure. At the same time, many states are socking away billions of dollars in savings. ‘It’s definitely safe to say that states are in a much better fiscal situation than they anticipated,’ said Erica MacKellar, a fiscal analyst with the National Conference of State Legislatures.”

June 7 – Reuters (Evan Sully): “A record-low percentage of U.S. consumers believe now is a good time to buy a home, with worries about surging prices and a small supply of houses on the market outweighing improved sentiment about their jobs and income, a survey from… Fannie Mae showed… The percentage of consumers who said it is a good time to buy a home declined in May to 35% from 47%, Fannie Mae said in its monthly survey… This reading, the lowest since Fannie Mae began the survey about a decade ago, marked the second straight monthly decline and represented a drop of 18 percentage points since March. In comparison, the percentage of consumers indicating that now is a bad time to purchase a home increased to 56% from 48% last month.”

June 7 – Yahoo Finance (Alexandre Tanzi): “For millions of Americans, there’s an unwelcome side of the return to business-as-usual after the pandemic: They’ll have to start repaying their student loans again. More than 40 million holders of federal loans are due to start making monthly instalments again on Oct. 1, when the freeze imposed as part of Covid-19 relief measures is due to run out. It covered payments worth about $7 billion a month… Their resumption will eat a chunk out of household budgets, in a potential drag on the consumer recovery. Americans now owe about $1.7 trillion of student debt, more than twice the size of their credit-card liabilities. Politicians recognize it’s not sustainable.”

June 5 – Wall Street Journal (Christopher Mims): “In 2015, Elon Musk said self-driving cars that could drive ‘anywhere’ would be here within two or three years… In 2021, some experts aren’t sure when, if ever, individuals will be able to purchase steering-wheel-free cars that drive themselves off the lot. In contrast to investors and CEOs, academics who study artificial intelligence, systems engineering and autonomous technologies have long said that creating a fully self-driving automobile would take many years, perhaps decades. Now some are going further, saying that despite investments already topping $80 billion, we may never get the self-driving cars we were promised…. Even those who have hyped this technology most—in 2019 Mr. Musk doubled down on previous predictions, and said that autonomous Tesla robotaxis would debut by 2020—are beginning to admit publicly that naysaying experts may have a point.”

June 8 – New York Times (Alan Rappeport): “The 25 richest Americans, including Jeff Bezos, Michael Bloomberg and Elon Musk, paid relatively little — and sometimes nothing — in federal income taxes between 2014 and 2018, according to an analysis from the news organization ProPublica that was based on a trove of Internal Revenue Service tax data. The analysis showed that the nation’s richest executives paid just a fraction of their wealth in taxes — $13.6 billion in federal income taxes during a time period when their collective net worth increased by $401 billion… The documents reveal the stark inequity in the American tax system, as plutocrats like Mr. Bezos, Mr. Bloomberg, Warren Buffett, Mr. Musk and George Soros were able to benefit from a complex web of loopholes in the tax code and the fact that the United States puts its emphasis on taxing labor income versus wealth.”

China Watch:

June 7 – Bloomberg: “China’s exports continued to surge in May, although at a slower pace than the previous month, fueled by strong global demand as more economies around the world opened up. Imports soared, boosted by rising commodity prices. Exports grew almost 28% in dollar terms in May from a year earlier…, weaker than forecast and below the pace in April, but still well above historical growth rates. Imports soared 51.1%, the fastest pace since March 2010, leaving a trade surplus of $45.5 billion for the month.”

June 6 – Reuters (Liangping Gao and Ryan Woo): “China’s trade surplus with the United States stood at $31.78 billion in May…, up from a $28.11 billion surplus in April. For the first five months of 2021, China’s trade surplus with the United States stood at $132.46 billion, compared with a $100.68 billion surplus in January-April.”

June 8 – Bloomberg: “A first-of-its-kind debt restructuring in China’s $862 billion market for corporate dollar bonds is underscoring risks global money managers face from complex pledges underpinning many of those securities. Peking University Founder Group… won approval from creditors late last month for a debt resolution proposal. It marks the first major case where a Chinese state-linked firm addressed its onshore creditors and offshore bondholders in a single restructuring plan. But the amount of money that those broad groups of investors may expect to recover differ. Much of that comes down to a structure called keepwell deeds used in over half of the company’s $3 billion of dollar bonds. That’s essentially a gentleman’s agreement that commits to maintaining an issuer’s solvency while stopping short of making any payment guarantee.”

June 8 – Bloomberg (Rebecca Choong Wilkins): “A bond selloff in two of China’s most prolific debt issuers is widening concern over contagion risks in the country’s $862 billion dollar bond market. Bonds of China Evergrande Group, Asia’s largest seller of junk-rated dollar debt, have slumped in recent weeks amid a barrage of negative news. That’s added to the sense of unease created by China Huarong Asset Management Co., one of the biggest issuers of investment-grade securities… Both firms have about $21 billion of dollar bonds. While China’s credit market is no stranger to bouts of volatility, the fresh wave is challenging long-held assumptions that the state would bail out investors in the country’s biggest firms.”

June 8 – Bloomberg: “Chinese regulators have instructed major creditors of China Evergrande Group to conduct a fresh round of stress tests on their exposure to the world’s most indebted developer, according to people familiar with the matter. Authorities… recently told lenders including Industrial & Commercial Bank of China Ltd. to assess the potential hit to their capital and liquidity should Evergrande run into trouble, the people said… It’s unclear whether the results will lead to any official action.”

June 7 – Wall Street Journal (Xie Yu): “China Evergrande Group was forced to defend itself against online allegations and dwindling investor confidence for the second time in less than a year, saying its business was operating normally and threatening individuals who spread unfounded rumors with legal action. Shares of Evergrande, one of China’s biggest and most indebted property developers, have fallen in recent months, nearing lows hit in March 2020. Its bonds also have dropped in price in recent weeks, sending yields soaring, with the yield on one bond due in January 2024 topping 20%… Last week, internet users shared posts describing deep discounts to apartment prices offered by Evergrande. A May 27 article by Caixin, a Chinese financial-media outlet, said regulators were likely to scrutinize Evergrande’s dealings with Shengjing Bank Co., a bank in which it owns a major stake…”

June 6 – Wall Street Journal (Stephanie Yang): “The latest salvos in China’s campaign against its tech companies make one thing clear: Jack Ma’s businesses aren’t the only ones under the regulatory microscope. What started out as a government crackdown on anticompetitive practices among Chinese internet giants has grown into a broader effort to clean up how the country’s fast-growing — and, until recently, freewheeling — tech sector operates. Not a week seems to go by without Chinese regulators calling out tech companies for alleged offenses ranging from inconsistent pricing to imperiling user privacy to difficult working conditions.”

June 8 – Bloomberg: “China’s efforts to control raw materials costs could include price limits on its runaway coal market, underscoring the government’s tough stance on taming inflation. Beijing is considering imposing a cap on the price of thermal coal as it struggles to contain stubbornly high energy costs ahead of peak demand over the summer. The move would be the latest in a largely successful campaign across commodities that began in April to prevent inflationary pressures harming the economy. One idea under discussion for coal is to limit the price at which miners sell, according to people familiar…”

Global Bubble Watch:

June 7 – CNBC (Kevin Breuninger): “A global shortage of semiconductors will continue to strain markets for months to come, Commerce Secretary Gina Raimondo said… ‘For the next year or so, this will be a daily challenge,’ Raimondo said… The scarcity of chips, which are required for an ever-growing variety of products, has already taken a heavy toll on American manufacturing, especially in the automobile industry. Raimondo’s prediction is rosier than that of some analysts, who believe the shortage or its knock-on effects may still be felt in 2023.”

June 6 – Financial Times (Harry Dempsey): “The global chip shortage disrupting the car industry and threatening the supply of consumer technology products will last for at least another year, one of the world’s largest electronics contract manufacturers has warned. The forecast from Flex, the world’s third-biggest such manufacturer, is one of the gloomiest yet for a crisis that is forcing car and consumer electronics groups to re-examine their global supply chains.”

June 8 – Financial Times (Kathrin Hille): “The spread of Covid-19 into Taiwan’s electronics factories is threatening to delay semiconductor shipments, according to companies and analysts, raising the prospect of renewed disruption to an industry gripped by a global shortage. The country, viewed as a linchpin in the world’s chip supply chain, is suffering from its first large coronavirus outbreak. It has come against a backdrop of escalating warnings about the depth of the semiconductor shortage, which has hit everything from cars to consumer electronics.”

Central Banker Watch:

June 10 – Financial Times (Martin Arnold): “The European Central Bank will maintain the pace of its bond purchases in the coming weeks, it said…, despite increasing its forecasts for eurozone growth and inflation. The… institution resisted calls from some policymakers to start reining in its monetary stimulus as the eurozone economy recovers from the impact of the coronavirus pandemic, and kept its main policy measures unchanged. The central bank said bond purchases under the €1.85tn pandemic emergency purchase programme (PEPP) — its main crisis-fighting policy — would continue in the three months to September at ‘a significantly higher pace than during the first months of the year’.”

June 10 – Reuters (Balazs Koranyi and Francesco Canepa): “The European Central Bank raised its growth and inflation projections… but pledged a steady flow of stimulus over the summer, fearing that a retreat now would accelerate a concerning rise in borrowing costs and choke off the recovery. Already buying up most of the new debt issued by euro zone governments, the ECB said it would buy bonds at a ‘significantly higher’ pace than during the early months of the year, reaffirming its pledge from March as most ECB watchers had expected. ‘We believe that the steady hand is actually the right response,’ ECB President Christine Lagarde told a news conference, stressing that tapering, exiting or transitioning away from the 1.85 trillion euro Pandemic Emergency Purchase Programme had not even been discussed.”

June 11 – Bloomberg (Anya Andrianova): “The Bank of Russia delivered its third straight increase in interest rates and said more will be necessary as soon as next month as it struggles to contain a spike in inflation. The benchmark rate was hiked 50 basis points to 5.5% on Friday, the highest level in more than a year… The central bank considered a raise of 100 bps, which would have been the biggest increase since the 2014 ruble devaluation, but decided to wait for more data, Governor Elvira Nabiullina said…”

Europe Watch:

June 9 – Financial Times (Tommy Stubbington and Sam Fleming): “The EU is preparing to wade into increasingly choppy bond markets as it embarks on the European Commission’s biggest-ever borrowing programme. Debt managers at the commission have held calls with banks and investors this week ahead of the sale of the first bond backing its €800bn NextGenerationEU recovery fund — the groundbreaking vehicle agreed last summer to fund the region’s pandemic response with debt backed jointly by member states. Bankers are expecting the deal to price next week, raising more than €10bn…”

EM Watch:

June 11 – Reuters (Marco Aquino and Marcelo Rochabrun): “Peru’s presidential election front-runner Pedro Castillo was poised for victory on Friday night, despite legal wrangles over the ultra-close vote count that had ignited tensions in the Andean nation. ‘We call on the Peruvian people to stay alert,’ Castillo told supporters in the middle of last-minute legal disputes over the tight vote count.”

June 9 – Bloomberg (Maria Eloisa Capurro and Max de Haldevang): “Latin America’s top central banks are coming under growing pressure to raise interest rates, as inflation stands way above the target ceiling in Brazil and Mexico. Consumer prices in both countries came in above forecasts in May, showing persistent inflationary shocks… The data came ahead of interest rate decisions in both countries. Brazil’s central bank is expected to lift interest rates by 75 bps next week, its third consecutive hike of that magnitude this year. Mexico’s central bank… will revisit later this month its decision to hold the benchmark rate at a near five-year low of 4%. Consumer prices in Brazil jumped 8.06% in May from a year earlier… In Mexico, annual inflation slowed slightly to 5.89%, still way above the 3% goal.”

June 7 – Reuters (Andrey Ostroukh): “Russia’s annual consumer inflation accelerated to 6.0% in May, overshooting expectations and adding arguments for tighter monetary policy days before the central bank’s rate-setting meeting… Inflation, the central bank’s main area of responsibility, accelerated to its highest since October 2016 when the central bank’s key interest rate was at 10%.”

Japan Watch:

June 9 – Reuters (Leika Kihara): “Japan’s wholesale prices rose at their fastest annual pace in 13 years reflecting higher commodity costs…, a sign global inflationary pressures are pinching firms already struggling amid the coronavirus pandemic. With companies seen slow in passing on the higher costs on to households, the uptick in wholesale inflation is unlikely to prod the Bank of Japan into withdrawing its massive stimulus any time soon, analysts say… The corporate goods price index (CGPI), which measures the prices companies charge each other for their goods, rose 4.9% in May from a year earlier…”

Leveraged Speculation Watch:

June 9 – Financial Times (Emma Boyde): “Securities lending by exchange traded funds has almost doubled since 2017, data from EquiLend show, reflecting the huge growth in assets under management in the ETF industry… The value of ETFs’ on-loan balances — the value of securities on loan at any point in time — rose 77%, from an average of $37.5bn in 2017 to $66bn between January 1 and mid-May… This dwarfed an overall increase of 21% in the wider securities lending market… According to data from ETFGI…, ETF assets under management jumped 85%, from $4.7tn at the end of 2017 to $8.7tn at the end of April.”

June 11 – Bloomberg (Dominic Lau): “Melvin Capital and Light Street Capital, two U.S. hedge funds hurt by shorting meme stocks earlier this year, suffered further losses in May, Financial Times reports. Melvin lost another 4% last month, taking the fund’s losses this year to 44.7%, report said… Light Street’s flagship fund lost a further 3% in May and is now down 20.1% this year…”

June 8 – Bloomberg (Cristin Flanagan): “Clover Health Inc… was swept up in meme-stock mania on Tuesday, posting a second day of wild gains as retail investors banded together to punish short-sellers betting against the company. Clover rallied 86% to close at $22.15 in New York trading after briefly doubling intraday… Trading volume in Clover was more than 29 times the three-month daily average on Tuesday, with a record 718 million shares changing hands.”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 7 – Reuters (Sharon Bernstein): “Despite a massive reduction in commuting and in many commercial activities during the early months of the pandemic, the amount of carbon in Earth’s atmosphere in May reached its highest level in modern history, a global indicator… showed. Scientists… said the findings, based on the amount of carbon dioxide in the air at NOAA’s weather station on Mauna Loa in Hawaii, was the highest since measurements began 63 years ago. The measurement, called the Keeling Curve after Charles David Keeling, the scientist who began tracking carbon dioxide there in 1958, is a global benchmark for atmospheric carbon levels.”

June 4 – CNBC (Emma Newburger): “Nearly three-fourths of the U.S. West is grappling with the most severe drought in the recorded history of the U.S. Drought Monitor, as hot and arid conditions are set to exacerbate the threat of wildfires and water supply shortages this summer. Parts of California, Nevada and Washington experienced sweltering triple-digit temperatures over the past week amid the drought… Conditions this spring are much worse than a year ago. In fact, nearly half of the continental U.S. is in a moderate to exceptional drought, marking the most significant spring drought in the country since 2013, according to… the National Oceanic and Atmospheric Administration.”

June 10 – Reuters (Andrea Januta and Daniel Trotta): “The reservoir created by Hoover Dam… has sunk to its lowest level ever, underscoring the gravity of the extreme drought across the U.S. West. Lake Mead, formed in the 1930s from the damming of the Colorado River at the Nevada-Arizona border about 30 miles (50 km) east of Las Vegas, is the largest reservoir in the United States. It is crucial to the water supply of 25 million people including in the cities of Los Angeles, San Diego, Phoenix, Tucson and Las Vegas. As of 11 p.m. PDT Wednesday, the lake surface fell to 1,071.56 feet above sea level, dipping below the previous record low set on July 1, 2016.”

June 6 – Associated Press: “Energy Secretary Jennifer Granholm… called for more public-private cooperation on cyber defenses and said U.S. adversaries already are capable of using cyber intrusions to shut down the U.S. power grid. ‘I think that there are very malign actors who are trying,’ she said. She added: ‘Even as we speak, there are thousands of attacks on all aspects of the energy sector and the private sector generally.’”

Geopolitical Watch:

June 8 – Bloomberg: “China firmly opposes U.S. senators’ June 6 visit to Taiwan by a military cargo plane, Defense Ministry spokesman Wu Qian says…, calling it a serious political provocation and a challenges to the one-China principle. The move is ‘extremely irresponsible’ and also ‘very dangerous’, as it seriously undermines the foundation of China-US relations and peace and stability across the Taiwan Strait. Wu also calls for the U.S. to immediately stop all forms of official and military contacts with Taiwan.”

June 7 – Reuters: “A report on the origins of COVID-19 by a U.S. government national laboratory concluded that the hypothesis of a virus leak from a Chinese lab in Wuhan is plausible and deserves further investigation, the Wall Street Journal said…, citing people familiar… The study was prepared in May 2020 by the Lawrence Livermore National Laboratory in California and was referred to by the State Department when it conducted an inquiry into the pandemic’s origins during the final months of the Trump administration…”

June 9 – Reuters (David Shepardson): “The U.S. Senate voted 68-32… to approve a sweeping package of legislation intended to boost the country’s ability to compete with Chinese technology. An indignant China responded to the vote by saying it objected to being cast as an ‘imaginary’ U.S. enemy. The desire for a hard line in dealings with China is one of the few bipartisan sentiments in the deeply divided U.S. Congress… The measure authorizes about $190 billion for provisions to strengthen U.S. technology and research – and would separately approve spending $54 billion to increase U.S. production and research into semiconductors and telecommunications equipment…”

June 8 – Reuters (Trevor Hunnicutt and Michael Martina): “The United States will target China with a new ‘strike force’ to combat unfair trade practices, the Biden administration said…, as it rolled out findings of a review of access to critical products, from semiconductors to electric-vehicle batteries. The ‘supply chain trade strike force,’ led by the U.S. trade representative, is looking for specific violations that contributed to a hollowing out of supply chains that could be addressed with tariffs or other remedies, including toward China, White House senior director for international economics and competitiveness Peter Harrell told reporters.”

June 7 – Financial Times (Demetri Sevastopulo, Sam Fleming and Michael Peel): “Ever since he entered the White House in January, Joe Biden has articulated one foreign policy goal above others — to work with allies to restrain China. After the drama and tantrums of the Trump years, when the US talked tough on China but also picked fights with its closest partners, Biden has been trying to stitch back together Washington’s global coalition, with Beijing as its main focus. Biden spelt out the project in February when he told the Munich Security Conference that the US, Europe and Asia had to ‘push back against the Chinese government’s economic abuses and coercion.’ The Biden plan has had some success in Asia, where common ground has been found with countries such as Japan, South Korea and Australia. But as the president prepares for his maiden overseas trip, he faces the most delicate task yet — trying to coax a wary Europe to work more closely with Washington on China.”

June 9 – Wall Street Journal (Michael R. Gordon): “U.S. Defense Secretary Lloyd Austin issued a directive to speed up work to develop the military forces to deter China and address Pentagon difficulties in carrying out a years-old strategy that called Beijing a principal threat. The directive… is based on the recommendation of a high-level Pentagon task force that identified a ‘say-do’ gap between the Defense Department’s objective to counter Chinese aggression and its efforts to meet that goal, a senior Defense official said. That task force was led by Ely Ratner, a former top aide to President Biden who has been named to serve as the Pentagon’s top official on Asia-Pacific affairs.”

June 8 – Bloomberg (Peter Martin): “China has only itself to blame for a global backlash against its policies, the White House’s top official for Asia said. ‘Over the last year or two the country that has done the most to create problems for China is not the United States but China,’ Kurt Campbell, the U.S. coordinator for Indo-Pacific affairs on the National Security Council said… Campbell said the Chinese foreign policy establishment understands that the country’s policies, which include militarizing artificial islands and outcroppings in the South China Sea and a more assertive approach to global diplomacy, have helped to cause a global backlash against Beijing.”

June 5 – Bloomberg (Rosalind Mathieson): “President Vladimir Putin said Russia doesn’t want to stop using the dollar as he accused the U.S. of exploiting the currency’s dominance for sanctions and warned the policy may rebound on Washington. Russia has to adopt other payment methods because the U.S. ‘uses its national currency for various kinds of sanctions,’ Putin said… ‘We don’t do this deliberately, we are forced to do it.’ Settlements in national currencies with other countries in areas such as defense sales and reductions in foreign-exchange reserves held in dollars eventually will damage the U.S. as the greenback’s dominance declines, Putin said. ‘Why do U.S. political authorities do this? They’re sawing the branch on which they sit,’ he said.”

June 8 – Bloomberg (Jason Scott): “As worsening geopolitical tensions with China spill into trade reprisals, Australian Prime Minister Scott Morrison is heading to the U.K. to meet global leaders this week with a message: There’s strength in numbers. ‘Patterns of cooperation within the liberal rules-based order that has benefited us for so long are under renewed strain,’ Morrison said… In order to support a ‘world order that favours freedom over autocracy and authoritarianism,’ he urged ‘active cooperation among like-minded countries and liberal democracies not seen for 30 years.’ Since Australia-China relations went into a tailspin after Morrison’s government last year called for Beijing to allow independent investigators to probe the origins of the pandemic, he’s become a vocal proponent of bolstering partnerships between what he calls ‘like-minded democracies.’”

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