June 14, 2024: Potential Catalyst and Q1 2024 Z.1

June 14, 2024: Potential Catalyst and Q1 2024 Z.1
Doug Noland Posted on June 15, 2024

Ominous. Global risk off is gathering momentum, and there’s now a clear and present potential de-risking/deleveraging catalyst. The NASDAQ100 gained 3.5% to close the week at an all-time high. Nvidia surged another 9% this week, increasing y-t-d gains to 166%. Nvidia’s market capitalization added about $270 billion this week to $3.244 TN. Broadcom rose 23%, with Micron and Apple jumping 8%. At this point, the U.S. equities Bubble has dodged so many bullets that there’s no longer a fear of guns.

June 10 – Financial Times (Leila Abboud): “Emmanuel Macron has an oft-repeated catchphrase he uses behind closed doors with ministers and advisers: Il faut prendre son risque, you must be willing to take risks. The president of France has done that in spades by calling for snap elections after his centrist alliance took a drubbing on Sunday from Marine Le Pen’s far-right Rassemblement National… In doing so, he has again shown the daring that has marked his political career since he was elected as a little-experienced outsider in 2017. ‘I have confidence in the French people to make the right choice now to enable the country to face the great challenges ahead of it,’ he said… The bet could also backfire spectacularly if the two-round vote on June 30 and July 7 forces him into a power-sharing government… with the RN. It would be the first time under the fifth republic founded in 1958 for the president and prime minister to hold such diametrically opposite views on how the country should be run.”

No need to listen to me when I contend that these elections have potentially momentous ramifications. But I wouldn’t dismiss market alarm. Things are going haywire in the European bond market. The spread between French (3.13%) and German (2.36%) 10-year government yields surged 29 this week to 77 bps, the largest widening in data back to the year 2000. This was the first double-digit spread gain since the 11 bps widening in Covid crisis June 2020. Spreads widened significantly throughout peripheral European bonds. Italian spreads to bunds widened 23 to 157 bps, the largest weekly gain since December 2022. Greek spreads widened 24 bps, Spain 21 bps, and Portugal 19 bps. Amazingly, France’s yields ended the week within three bps of Portugal.

France’s CAC40 equities index was hammered 6.2%, with bank stocks under heavy selling pressure. BNP Paribas sank 12% this week, with Credit Agricole down 11.0%. Worry was not limited to France. The Italian All-Share Banks Index was slammed 9.0%, while the European STOXX 600 Banks Index slumped 5.5%. European (subordinated) bank CDS surged 31.5 to a six-month high 135 bps. This was the largest increase since the U.S. bank crisis week of March 17, 2023. European high yield/“crossover” CDS surged 42 to 332 bps, also the largest jump since the banking mayhem.

No reason to let a bout of European political turmoil get in the way of a historic stock mania. But I’ll nonetheless note that U.S. bank CDS suffered their largest weekly price gains in two months (4-5 bps). High yield CDS jumped nine Friday to a six-week high 347 bps, the largest daily increase since April. Investment-grade CDS gained 2.6 Friday to a six-week high 53.8 bps, the biggest daily rise since April 15th. U.S. bank stocks (BKX) dropped 2.6% this week (2-wk loss 4.2%), the largest weekly decline since the week of April 12th.

June 12 – Financial Times (Sarah White, Adrienne Klasa and Leila Abboud): “Marine Le Pen’s big-spending, populist plans to help poorer and working class voters with tax cuts and promises to lower the retirement age may have been easy to tout when her French far-right party was in opposition. Now the Rassemblement National is waking up to the reality that those economic pledges may be difficult to enact if it takes power following snap elections — and could turn into a ‘Liz Truss-style’ liability on the campaign trail. Rivals from president Emmanuel Macron’s centrist party have already pounced, warning that a debt crisis like the UK gilt market turmoil in 2022 could ensue if they end up in a power-sharing situation with the RN… Analysts have even said it could be worse: the impact from the RN’s spending would be twice as painful as what might have happened under Truss, blowing out France’s deficit to economic output ratio by an extra 3.9 percentage points a year, according to consultancy Asterès.”

June 14 – Reuters (John Irish and Elizabeth Pineau): “France is facing a ‘very serious’ moment as parliamentary elections loom, said President Emmanuel Macron on Friday, with financial markets rattled by the country’s far-right and far-left political blocs currently leading polls… ‘We are at a very serious moment in the history of our country. There are major issues at stake, with wars, and with unprecedented economic challenges,’ said Macron… A first series of opinion polls have projected that the RN, which has promised to cut electricity prices and VAT on gas and increase public spending, could win the election and be in a position to run the government. A poll conducted for Le Point magazine, published on Friday evening, forecast National Rally as in the lead in the first round of the parliamentary election, narrowly ahead of a coalition of left-wing parties called the ‘Popular Front’.”

“Le Pen Victory Threatens ‘Liz Truss-Style’ Debt Crisis in France.” French election stakes are arguably much greater than the Truss fiasco. The fledgling UK Prime Minister backtracked and resigned, and the gilts market soon recovered. There will be no quick market fix if the extremists assume effective control of French policymaking.

Also, unlike the fleeting UK debt crisis, French election results have the potential to reverberate throughout European debt markets and beyond. According to reports, hedge funds have been huge buyers at European debt auctions, often taking 20 to even as much as 50%. Moreover, the great U.S. “basis trade” has purportedly taken hold in Europe.

So, it’s safe to assume that the European debt market, especially at the periphery, is highly levered. And this speculative leverage is on top of the typical vulnerability associated with European banks’ huge holdings of the region’s bonds. The traditional “doom loop” of simultaneous gloom enveloping bonds and the banking system is today even doomier with the highly levered hedge funds so actively involved.

Let’s take the France vs. Liz Truss debt crisis comparison one step further. A UK debt crisis would never pose an existential threat to the British pound. I’ve repeated over the years that I doubt the Germans and Italians will share a common currency indefinitely. As far as I’m concerned, the jury is still out on the euro monetary experiment. Indeed, I’ve expected a big global de-risking/deleveraging financial crisis would risk another euro crisis of confidence. And don’t count on a Draghi “whatever it takes” massive monetary inflation to work such wonders the second go around. The entire highly levered global speculative Bubble is at risk when euro sustainability fears materialize.

That the shock European Parliamentary Elections followed by a week the shock Mexico election raise odds of problematic de-risking/deleveraging. Levered EM “carry trades” were already under pressure. This week, the Colombian peso dropped 5.0%, the Hungarian forint 2.6%, the Polish zloty 2.4%, the Chilean peso 1.5% and the Czech koruna 1.3%.

Ten-year Treasury yields sank 20 bps this week, despite a more hawkish leaning “dot plot” and Powell press conference. The market ended the week pricing a 4.83% policy rate at the Fed’s December 18th meeting – or two full rate cuts – despite the median Fed forecast of only one. “Treasury Yields Slide After Encouraging Inflation Data.” It was more a case of German and U.S. yields sinking on urgent safe haven buying.

The “Periphery and Core” dynamic can be fascinating. Heightened instability at the “Periphery” and attendant sinking “Core” Treasury yields bolstered the big tech speculative melt-up – even in the face of rising odds of a problematic global de-risking/deleveraging episode. Such market dysfunction seems to ensure a particularly destabilizing adjustment if risk aversion takes hold.

And it’s a good time to remind yourself that contemporary global liquidity is “fungible.” A deleveraging in EM “carry trades” coupled with European bond “carry” and “basis” trades would pressure liquidity globally, increasing the likelihood of contagion and broad instability. There is now a near-term potential catalyst for the type of deleveraging that could trigger major instability and dislocation throughout the levered trades and derivatives universe, including the beloved “basis trade.”

June 14 – Bloomberg (William Horobin): “A coalition of France’s left-wing parties presented a manifesto to pick apart most of President Emmanuel Macron’s seven years of economic reforms and set the country on a collision course with the European Union over fiscal policy. The group — which unveiled its program days after Macron called a snap legislative election — wants to reverse the government’s pension reform, reinstate the right to retire at 60, raise the minimum wage, and impose an extra tax on the profits of certain industrial firms, their leaders told reporters Friday. ‘We will finance all of this very ambitious project by taking from the pockets of those who have the means to give,’ Socialist Party head Olivier Faure said.”

There was a lot going on this week, including Thursday’s release of the Q1 2024 Z.1 report. Over the years, I’ve often pondered how much time Fed officials spend with their own Credit data. During the mortgage finance Bubble period, I could only assume they avoided the Z.1. Sifting through Thursday’s data deluge, I imagined FOMC officials around a table discussing the report. It’s my imagination, and I took liberties.

Chicago Fed President Austan Goolsbee: “Policy is working just as we expected. A little slower perhaps, but we’re pretty much there. I see proof of sufficiently restrictive policy everywhere. Bank loans actually contracted during the quarter. The pace of non-financial debt slowed for the third straight quarter. The inflationary fuel has dissipated.”

Fed Governor Michelle Bowman: “Don’t get too carried away Austan. We all know that bank lending is a diminished force in the U.S. economy. Overall Credit growth remains excessive. Treasury deficit spending reduces the relevance of bank Credit. Besides, the Wall Street securitization machine continues to operate in overdrive.”

Dallas Fed President Lorie Logan: “The broker/dealers posted yet another strong quarter. And the repo market continues to expand. And why would corporations borrow from the banking system when conditions remain so easy throughout the debt markets? I wish we had a better understanding of how hedge fund leveraging is impacting these markets.”

Philadelphia Fed President Patrick Harker: “M2 barely expanded for the quarter. Bank time and savings deposits flatlined during Q1. Conditions are definitely tight.”

Richmond Fed Tom President Barkin: “Come on Pat, this is 2024. Money market fund assets continue to expand at a double-digit pace. Market risk premiums and liquidity indicators suggest financial conditions remain loose.”

Fed Governor Lisa Cook: “Tight conditions are biting households. Consumer Credit expanded at a less than 2% pace.”

Kansas City Fed President Jeffrey Schmid: “I don’t think our consumer data captures this “buy now pay later” phenomenon and these other new consumer financial intermediaries. Finance companies continue their brisk growth. Besides, the overall household sector is benefiting tremendously from higher rates on their cash holdings and from stock dividends. Households are sitting on a record amount of liquid assets, and household net worth experienced another quarter of extraordinary gains.”

Atlanta Fed President Raphael Bostic: “I don’t know about you all, but my annoyance is turning into frustration with these Wall Street talking heads saying we’re confused.”

Cleveland Fed President Loretta Mester: “If you’re not confused, you don’t understand the problem. Doesn’t Wall Street recognize they’re a big part of the problem? They keep front running our shift to a less restrictive policy stance. They loosen prematurely – and that stimulative effect works to delay our rate cuts. If there is any inconsistency or indecision on our part, it’s because of the unpredictability of these markets.”

Minneapolis Fed President Neel Kashkari: “I’m in agreement with Raphael and Loretta. I’ve worked with some of these guys. They make an art out of pressuring us to loosen policy to juice the markets, while framing the discussion as if they’re out to protect the interests of the working class.”

Fed Chair Powell: “John, does your team see much potential impact from the outcome of the French elections?”

New York Fed President John Williams: “Well, only exorbitant European market and economic repercussions would potentially effectuate R star (the neutral rate).”

Powell: “The markets, John, the markets.”

Williams: “I’ll get back to you on that. We’ve had some turnover, and much of the staff is already off to the Hamptons. But it is an interesting issue you raise.”

Non-Financial Debt (NFD) expanded at a seasonally adjusted and annualized rate (SAAR) of $3.339 TN during Q1 to a record $74.587 TN. Q1 growth was down somewhat from Q4’s $3.429 TN – but up significantly from Q1 ‘23’s $2.639 TN. For perspective, prior to Covid year 2020, 2007 held the record for NFD growth at $2.530 TN.

Total Household debt growth jumped to SAAR $578 billion from Q4’s $450 billion, with Mortgages increasing to SAAR $280 billion. Total Business borrowings rose sharply to SAAR $834 billion (from Q4’s SAAR $136bn), with Corporate borrowings surging to SAAR $658 billion after Q4’s SAAR $16 billion contraction. It was the strongest quarter of Corporate Credit growth since Q2 2022. At SAAR $99 billion, Q1 posted the strongest State & Local Government borrowings back to Q2 2021. And at SAAR $312 billion, Rest of World boosted borrowings in the U.S. at the briskest pace since Q3 2022.

And while all sectors increased borrowings during the quarter, it was the Federal Government that continues to power system Credit excess. Federal borrowings expanded SAAR $1.828 TN (to a record $26.809 TN), down from Q4’s SAAR $2.878 TN – but up significantly from Q1 2023’s SAAR $1.195 TN. Treasury Securities increased nominal $582 billion. One-year Treasury growth of $2.527 TN (10.4%) matched record pre-Covid total system NFD growth. Over 16 quarters, Treasury Securities inflated a staggering $7.208 TN, or 37.9%. Since 2007, Treasuries have ballooned $20.757 TN, or 343%.

At $32.438 TN, Total Treasury Liabilities ended the quarter at a record 115% of GDP, up from 99% to end 2019 and 55% to conclude 2007.

GSE growth has slowed markedly. After expanding $1.115 TN in the four quarters ended Q1 2023, Agency Securities basically flatlined during Q1 at $11.974 TN. Combined Treasury and Agency Securities ended Q1 at a record $38.782 TN, or 137% of GDP. With FHLB contracting $42 billion, GSE Assets declined $26 billion during Q1 to $9.315 TN.

Corporate Bonds expanded nominal $230 billion to a record $15.827 TN, with the strongest two-quarter growth ($543bn) since Q2/Q3 2021. Non-Financial Bonds expanded $112 billion, the largest increase since Q1 2023. Domestic Financial (i.e., bank and broker) Bonds gained $76 billion to a record $4.787 TN. ABS expanded another $22.2 billion, with growth at a 9.5% pace over three quarters (to a record $1.391 TN). Broker/Dealers issued bonds at the strongest rate ($22bn) in two years. Finance Company bonds expanded $35 billion to a record $1.114 TN, with one-year growth of $106 billion, or 10.6%.

Total Debt Securities expanded nominal $885 billion (6% annualized) to a record $59.986 TN, with one-year growth of $3.093 TN. Debt Securities inflated $16.288 TN, or 37.3%, over 18 quarters. Total Debt Securities ended the quarter at 212% of GDP, versus previous cycle peaks 194% at Q1 2008 and 147% to end 1999.

Equities inflated $6.470 TN during the quarter to a record $84.040 TN, with two-quarter growth of $13.477 TN (matching the gain from the 2020 Covid recovery). Equities ballooned $15.255 TN, or 22.2%, over the past year, and $33.270 TN, or 65.5%, over 18 quarters. Equities ended March at 297% of GDP. This compares to previous cycle peaks 188% during Q3 2007 and 210% to conclude 1999.

Total (Debt and Equities) Securities surged $7.355 TN to a record $144.026 TN, with one-year growth of $18.349 TN (14.6%). Total Securities ended the quarter at 510% of GDP, up from pre-Covid Q4 2019’s 454%, and compared to previous cycle peaks 376% (Q3 2007) and 357% (Q1 2000). Total Securities ballooned $59.558 TN, or 52.5%, over the past 18 quarters.

Broker/Dealer Assets expanded $282 billion, or 23% annualized, during Q1 to a record $5.158 TN. Debt Securities holding surged $93.8 billion to a 14-year high $542 billion, with one-year growth of $121 billion, or 28.8%. The Broker/Dealer Loans asset expanded $36.2 billion (to a six-quarter high of $688 billion), the strongest growth in 11 quarters. The repo market continues to be the chief source of funding for Broker/Dealer securities holdings. Repo Liabilities surged nominal $171 billion to a record $2.281 TN, with one-year growth of $262 billion, or 13.0%. It’s worth noting that five-quarter repo growth of $655 billion was the strongest since the 2006/07 Bubble period.

Money Market Fund (MMF) Assets expanded $81 billion to a record $6.441 TN, with one-year growth of $748 billion, or 13.1%. Treasury holdings surged $294 billion during the quarter, as MMF liquidated $284 billion of repo positions (winding down Fed reverse repo). Money Fund Assets inflated an unprecedented $2.438 TN, or 51.2%, over 17 quarters, in one of history’s great monetary inflations.

Federal Reserve Assets declined nominal $320 billion to $6.473 TN, with a one-year contraction of $1.274 TN. Treasury holding declined $227 billion to $4.176 TN, while Agencies shrank $92 billion to $2.029 TN. Total Liabilities fell $291 billion to $7.482 TN. The Fed’s Securities Repo Liability dropped $414 billion to $977 billion (down $1.766 TN y-o-y). The Liability “Bank Reserves” jumped $211 billion to $3.346 TN

With the Fed winding down its Repo operation, the Total Federal Funds and Security Repurchase Agreements Assets declined $198 billion during Q1 to $6.709 TN. Money Market Fund repo holdings contracted $284 billion to $2.382 TN (down $854bn y-o-y). Meanwhile, Broker/Dealer repo borrowings jumped $171 billion for the quarter and $262 billion y-o-y. ROW repo Liabilities were little changed for the quarter, but up a notable $461 billion over five quarters to $1.622 TN. Excluding the Fed’s position, the repo market expanded $198 billion during the quarter to a record $4.981 TN, with five-quarter growth of $1.306 TN, or 36%.

The banking system balance sheet also exemplifies the dominance of securities finance. Bank (Private Depository Institutions) Assets expanded $232 billion, or 3.5% annualized, during Q1 to a record $26.387 TN, with one-year growth of $262 billion, or 1.0%. Loans actually contracted $35 billion for the quarter to $14.447 TN (up $308bn, or 2.2%, y-o-y). Mortgages increased $30 billion, or 1.8% annualized, to a record $6.772 TN, while Consumer Credit contracted $58 billion, or 8.4% annualized, to $2.706 TN. Meanwhile, Debt Securities holdings rose $113 billion, or 7.5% annualized, led by a $100 billion increase in Treasuries (to $1.615 TN) and a $46 billion jump in Corporate bonds (to $954bn). Total Debt Securities holdings ballooned $1.490 TN, or 31.8%, over 17 quarters.

The Household Balance Sheet remains fundamental to Bubble Analysis. Household Assets inflated $5.182 TN during the quarter to a record $181.429 TN. And with Liabilities up $65 billion, Household Net Worth surged $5.117 TN to a record $160.844 TN. Net Worth inflated $12.946 TN, or 8.8%, y-o-y; $24.457 TN, or 17.9%, over three years; and $50 TN, or 45.1%, over four years.

For the quarter, Real Estate holdings rose $907 billion to a record $49.997 TN, with three-year growth of $12.027 TN, or 31.7%. Financial Asset holdings inflated $4.178 TN during Q1 to a record $122.516 TN, with Total Equities (Equities and Mutual Funds) surging $3.261 TN. Total Equities ended March at 162% of GDP, up from pre-Covid (Q4 ’19) 143%, and the previous cycle peaks 104% (Q3 2007) and 116% (Q1 2000). Household Net Worth ended Q1 at 569% of GDP, up from pre-Covid 537%, and the previous cycle peaks 488% (Q1 2007) and 444% (Q1 2000).

Household holdings of liquid assets (Treasuries, Agencies, Deposits and Money Funds) rose another $123 billion during Q1 to a record $21.859 TN. These liquid assets inflated $897 billion (4.3%) over the past year; $3.441 TN (18.7%) over three years; and $5.398 TN (32.8%) over four years.

Rest of World (ROW) holdings of U.S. financial assets inflated $2.777 TN during Q1 to a record $50.897 TN. Debt Securities increased $129 billion to a record $14.006 TN, with Treasuries rising $80 billion (to $8.136 TN) and Corporate Bonds gaining $60 billion (to $4.209 TN). Debt Securities were up $1.054 TN over the four quarters (Treasuries $578bn, Agencies $122bn, Corporate $398bn). Holdings of Total U.S. Equities jumped $1.240 TN to a record $15.744 TN. Repo Liabilities added $3 billion to a record $1.622 TN, with one-year growth of $350 billion, or 27.5%. ROW holdings jumped $7.647 TN, or 17.7%, over the past year, and $14.934 TN, or 41.5%, over 15 quarters.


For the Week:

The S&P500 gained 1.6% (up 13.9% y-t-d), while the Dow slipped 0.5% (up 2.4%). The Utilities dipped 0.3% (up 10.5%). The Banks dropped 2.6% (up 4.5%), and the Broker/Dealers declined 1.1% (up 10.9%). The Transports fell 1.4% (down 6.9%). The S&P 400 Midcaps declined 0.9% (up 4.1%), and the small cap Russell 2000 lost 1.0% (down 1.0%). The Nasdaq100 jumped 3.5% (up 16.8%). The Semiconductors surged 5.9% (up 34.1%). The Biotechs fell 1.0% (down 4.2%). While bullion rallied $39, the HUI gold index declined 0.4% (up 7.7%).

Three-month Treasury bill rates ended the week at 5.2375%. Two-year government yields dropped 18 bps this week to 4.70% (up 45bps y-t-d). Five-year T-note yields sank 22 bps to 4.24% (up 39bps). Ten-year Treasury yields fell 21 bps to 4.22% (up 34bps). Long bond yields dropped 21 bps to 4.35% (up 32bps). Benchmark Fannie Mae MBS yields were 20 bps lower to 5.68% (up 40bps).

Italian yields dipped three bps to 3.93% (up 23bps y-t-d). Greek 10-year yields slipped two bps to 3.64% (up 59bps). Spain’s 10-year yields declined seven bps to 3.29% (up 30bps). German bund yields sank 26 bps to 2.36% (up 34bps). French yields rose three bps to 3.13% (up 57bps). The French to German 10-year bond spread spiked 29 bps to 77 bps. U.K. 10-year gilt yields dropped 21 bps to 4.06% (up 52bps). U.K.’s FTSE equities index declined 1.2% (up 5.3% y-t-d).

Japan’s Nikkei Equities Index increased 0.3% (up 16% y-t-d). Japanese 10-year “JGB” yields declined three bps to 0.94% (up 33bps y-t-d). France’s CAC40 sank 6.2% (down 0.5%). The German DAX equities index slumped 3.0% (up 7.5%). Spain’s IBEX 35 equities index dropped 3.6% (up 8.8%). Italy’s FTSE MIB index sank 5.8% (up 7.6%). EM equities were mostly lower. Brazil’s Bovespa index declined 0.9% (down 10.8%), and Mexico’s Bolsa index fell 1.4% (down 9.0%). South Korea’s Kospi index rose 1.3% (up 3.9%). India’s Sensex equities index added 0.4% (up 6.6%). China’s Shanghai Exchange Index declined 0.6% (up 1.9%). Turkey’s Borsa Istanbul National 100 index rallied 3.3% (up 40.2%). Russia’s MICEX equities index dipped 0.5% (up 3.8%).

Federal Reserve Credit declined $908 million last week to $7.221 TN. Fed Credit was down $1.668 TN from the June 22, 2022, peak. Over the past 248 weeks, Fed Credit expanded $3.495 TN, or 94%. Fed Credit inflated $4.411 TN, or 157%, over the past 605 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.7bn last week to $3.331 TN. “Custody holdings” were down $79 billion y-o-y, or 2.3%.

Total money market fund assets jumped $28bn to a record $6.121 TN. Money funds were up $664bn, or 12.2%, y-o-y.

Total Commercial Paper added $1.5bn to $1.269 TN. CP was up $139bn, or 12.3%, over the past year.

Freddie Mac 30-year fixed mortgage rates declined four bps to a nine-week low 6.95% (up 28bps y-o-y). Fifteen-year rates dropped 12 bps to 6.17% (up 10bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up three bps 7.33% (up 32bps).

Currency Watch:

June 12 – Financial Times (Martin Arnold): “The euro’s share of global foreign exchange holdings fell last year amid concerns that plans to use frozen Russian assets to finance Ukraine could further erode the appeal of Europe’s single currency. Other countries cut euro assets in their central bank reserves by about €100bn last year, a drop of nearly 5%… That reduced the single currency’s share of global foreign exchange reserves to a three-year low of 20%.”

For the week, the U.S. Dollar Index gained 0.6% to 105.55 (up 4.2% y-t-d). For the week on the upside, the South African rand increased 2.8%, the Swiss franc 0.7%, the New Zealand dollar 0.6%, the Australian dollar 0.5%, the Norwegian krone 0.4%, the Swedish krona 0.3%, and the Canadian dollar 0.2%. On the downside, the South Korean won declined 1.0%, the euro 0.9%, the Brazilian real 0.6%, the Japanese yen 0.4%, the Mexican peso 0.4%, the British pound 0.3%, and the Singapore dollar 0.1%. The Chinese (onshore) renminbi declined 0.11% versus the dollar (down 2.15% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index added 0.6% (up 3.8% y-t-d). Spot Gold rallied 1.7% to $2,333 (up 13.1%). Silver recovered 1.4% to $29.555 (up 24.2%). WTI crude recovered $2.92, or 3.9%, to $78.45 (up 10%). Gasoline increased 0.7% (up 14%), while Natural Gas declined 1.3% to $2.88 (up 15%). Copper slipped 0.2% (up 15%). Wheat dropped 2.4% (down 2%), while Corn increased 0.3% (down 5%). Bitcoin dropped $3,500, or 5.0%, to $65,890 (up 55%).

Middle East War Watch:

June 10 – Reuters (Suleiman Al-Khalidi, John Davison and Dan Williams): “Israel has intensified covert strikes in Syria against weapons sites, supply routes and Iranian-linked commanders, seven regional officials and diplomats said, ahead of a threatened full-scale assault on Tehran’s key ally Hezbollah in Lebanon. A June 2 air raid that killed 18 people, including an adviser with Iran’s elite Revolutionary Guards, targeted a clandestine, fortified weapons site near Aleppo, three of the sources said. In May, an air strike hit a convoy of trucks headed to Lebanon carrying missile parts and another raid killed Hezbollah operatives…”

June 12 – Reuters (James Mackenzie and Laila Bassam): “Hezbollah fired the most rockets it has launched at Israel in a single day since cross-border hostilities broke out eight months ago, as part of its retaliation… for an Israeli strike which killed a senior Hezbollah field commander. The Iran-backed Hezbollah and Israel have been trading fire since the eruption of the Gaza war in October, in steadily intensifying hostilities that have fuelled concern of a bigger confrontation… The Israeli strike in the south Lebanon village of Jouaiyya late on Tuesday killed three Hezbollah fighters alongside the senior field commander Taleb Abdallah, also known as Abu Taleb… He was the most senior Hezbollah commander killed during eight months of hostilities…”

June 8 – Reuters (Maayan Lubell and Nidal Al-Mughrabi): “Israeli forces rescued four hostages held by Hamas since October in a raid in Gaza… that Palestinian officials said killed more than 200 people, one of the single bloodiest Israeli assaults of the eight-month-old war. The hostage rescue operation and an intense accompanying air assault took place in central Gaza’s al-Nuseirat, a densely built-up and often embattled area in the conflict between Israel and Hamas, the Palestinian territory’s ruling Islamist group.”

June 13 – Reuters (Ari Rabinovitch): “Air raid sirens sounded across cities in northern Israel on Thursday and about 40 rockets had been fired from Lebanon in the afternoon, Israel’s military said. State broadcaster Kan aired footage of numerous mid-air interceptions of rockets above Israeli towns… some 7.5 miles from the border. Two people were wounded by shrapnel, Israel’s national ambulance service said, and a number of wildfires were set off by rockets that landed in open areas.”

June 12 – Financial Times (Oliver Telling and Robert Wright): “Yemen’s Iran-backed Houthis have staged their first successful attack with a sea drone since they began targeting ships in November, underscoring the rebel group’s persistent threat to commercial vessels in the Red Sea. The Royal Navy’s UK’s Maritime Trade Operations office… said it received reports of a ship being struck on the stern about 66 nautical miles south-west of Yemen’s Hodeida port… The vessel’s master warned it was taking on water and not under the command of the crew, before reporting that it had been struck for a second time by an airborne projectile.”

June 12 – Bloomberg (Yongchang Chin): “Singapore’s port, already one of the busiest in the world, is facing a sustained period of congestion as vessel diversions to avoid the Red Sea push more container ships to the Asian maritime hub. The attacks by Yemen’s Houthi rebels have resulted in shipowners opting not to transit the Suez canal… That means they don’t get a chance to refuel or unload cargo at ports in the Middle East, leading to worsening marine gridlock in the waters off Singapore. The Houthi attacks have reverberated through global supply chains, but the effects are particularly acute in Singapore, which is located on one of the world’s busiest shipping routes linking Europe and the Middle East to China. The growing logjam at the port… will result in delays to goods being delivered and will also put more upward pressuring on shipping rates.”

Ukraine War Watch:

June 14 – Reuters (John Revill and Emma Farge): “World leaders gather in Switzerland on Saturday for a summit aimed at pressuring Russia to end its war in Ukraine, but the absence of powerful allies of Moscow such as China will blunt its potential impact. Dozens of allies of Ukraine will take part in the summit, but China is staying away after Russia was frozen out of proceedings on the grounds it had dismissed the event as a waste of time and had no interest in attending. Without China, hopes of isolating Moscow have faded, while recent military reverses have put Kyiv on the back foot. The war in Gaza between Israel and Hamas has also diverted attention from Ukraine.”

France Instability Watch:

June 13 – Bloomberg (James Hirai): “French bonds tumbled, driving yields over safer German peers to the highest level in seven years, amid concerns Marine Le Pen’s far-right National Rally party will usher in looser fiscal policies if it wins upcoming elections. The spread between French and German 10-year yields widened to close at 70 bps on Thursday, the most since 2017. That followed an Elabe poll for daily newspaper Les Echos, which showed President Emmanuel Macron’s approval rating has fallen to its lowest level since 2018. The premium that France pays on its debt relative to Germany has soared more than 20 bps this week, on pace for the biggest move stretching back to the European debt crisis in 2011.”

June 10 – Reuters (Leila Abboud and Adrienne Klasa): “In a glossy video released days before the European Parliament elections, France’s far-right double act appeared side by side in brilliant white shirts to deliver their final address. ‘Do your patriotic duty,’ said Marine Le Pen, the leading figure of the National Rally (RN) party and de facto frontrunner for the 2027 presidential election. ‘I ask you to go to vote for Jordan Bardella. Offer France the most beautiful victory.’ The video has notched nearly 5 million views since it was posted on Bardella’s wildly popular TikTok account two days ago. It’s part of a slick political rebrand… that has allowed the RN to shed its racist reputation as the former National Front, and storm to victory in Sunday’s vote. The RN’s strong showing… is partly due to the formidable political tag team that Bardella and Le Pen have formed… They have fused youthful enthusiasm with battle-hardened experience to devastating electoral effect.”

June 10 – Financial Times (Leila Abboud and Adrienne Klasa): “France’s mainstream parties have rejected an offer by President Emmanuel Macron to form an alliance ahead of snap elections in a bid to halt the rise of Marine Le Pen’s far right. Macron made the shock move to dissolve the National Assembly on Sunday night after his centrist alliance suffered a bruising defeat in European parliament elections by Le Pen’s Rassemblement National. He justified the high-stakes gamble as being necessary for voters to set a clear direction for the country and end the parliamentary gridlock in place since his centrist alliance lost its majority in 2022. With little time before the first round of voting on June 30, Macron made his public pitch to centre-left parties such as the Socialists and the Greens, as well as the centre-right Les Republicains on Sunday night. But his potential allies have so far rejected his offer.”

June 11 – Financial Times (Ben Hall and Adrienne Klasa): “President Emmanuel Macron’s surprise decision to dissolve parliament means there is a real chance he will be forced to share power with a government formed by his opponents. In France this is known as cohabitation. For the first time, it could involve the far right. Macron may be hoping that French voters will balk at giving the Rassemblement National… a mandate to govern in snap parliamentary elections called for June 30 and July 7. He is also counting on moderate parties joining forces to keep the RN out of power. But the RN is already the biggest opposition party in the National Assembly, with 88 out of 577 seats, and it has real momentum after its resounding victory among French voters in the European parliament elections…”

June 11 – New York Times (Liz Alderman): “Investors made clear… the depth of their concerns over President Emmanuel Macron’s gamble to call for new elections in France, driving up the nation’s borrowing costs, pushing down stock prices and prompting the Moody’s ratings agency to warn it may downgrade French sovereign debt as risks of political instability rise… The turmoil has focused attention on France’s fragile finances, and the prospect of legislative gridlock that could undermine the government’s ability to address it. ‘This decision will not ease the economic challenges facing the country,’ Philippe Ledent, senior economist at ING Bank, wrote… ‘Public finances and the performance of the French economy will be ‘at the heart of the electoral campaign,’ he added.”

June 11 – Bloomberg (Frank Connelly, James Regan and William Horobin): “Finance Minister Bruno Le Maire warned that France would be plunged into a debt crisis similar to one sparked in the UK two years ago if far-right leader Marine Le Pen were to win legislative elections slated for the end of the month and implement her economic program. He said… that policies the National Rally party has in the past supported — such as cutting sales taxes and reducing the retirement age — would cost hundreds of billions of euros. ‘A debt crisis is possible in France, a Liz Truss scenario is possible,’ he said, referring to the former UK prime minister whose short term in office sparked a selloff in government bonds.”

June 11 – Bloomberg (Ania Nussbaum and Samy Adghirni): “Emmanuel Macron’s decision to plunge into an election campaign with his party unprepared and the French public shunning him is causing consternation among the very people he needs to win. Lawmakers and officials from the 46-year-old president’s Renaissance party were still struggling to come to terms with the plan… Some reacted with rage, others were trying to fathom the political logic, and many were downbeat about their prospects. Prime Minister Gabriel Attal and the president of the National Assembly, Yael Braun-Pivet, were both opposed to the decision…”

June 10 – Reuters (Elizabeth Pineau and Michel Rose): “The far-right National Rally was forecast on Monday to win a snap election in France but fall short of an absolute majority in the first opinion poll published after President Emmanuel Macron’s shock decision to dissolve parliament.”

Market Instability Watch:

June 12 – Financial Times (Adrienne Klasa and Mary McDougall): “France’s finance minister has warned that the country could face a debt crisis akin to the UK’s gilt market turmoil under former prime minister Liz Truss if the far-right Rassemblement National wins snap elections this month and next…. ‘If the RN implements its programme, a debt crisis is possible. A Liz Truss-style scenario is possible,’ finance minister Bruno Le Maire told local party officials…”

June 12 – Bloomberg (Greg Ritchie and Alice Gledhill): “The hierarchy of European sovereign debt markets is being reordered as a flareup in French political risk puts the nation’s bonds on par with those once at the heart of the region’s debt crisis. French bonds, traditionally considered one of the safest assets in the euro area, sold off so sharply since President Emmanuel Macron called snap elections on Sunday that some now yield more than debt from Portugal and just a handful of bps less than those issued by Spain. For European bond veterans, it’s remarkable the bloc’s second-largest economy and a market heavyweight is now on an equal footing with economies that are lower-rated — and were so indebted they once threatened to bring down the euro zone.”

June 7 – Financial Times (Christine Murray and Michael Stott): “The day after Mexico’s leftwing ruling party Morena won a landslide victory in presidential, congressional and state elections, one executive stayed in bed all afternoon eating ice cream to try to cope. A wealthy woman in Mexico City told friends it was time to ‘move to the house in Houston’, while another business leader said his WhatsApp chats were marked by a mood of ‘collective suicide’. President-elect Claudia Sheinbaum and Morena’s victory last Sunday was not a surprise, but the scale of their triumph was. Sheinbaum vaulted 31 points clear of her nearest challenger…, and Morena is now poised to push through radical changes to the constitution after greatly increasing its majority in congress.”

June 14 – Bloomberg (Malavika Kaur Makol): “The appeal of currency carry trades may wane in the long term due to increased volatility and the prospect of a dovish turn by the Federal Reserve, according to JPMorgan… Carry trade baskets – where investors borrow in low-yielding currencies and invest in higher-yielding ones – have posted significant losses in the past month, analysts including Meera Chandan wrote… They also flagged concerns around the more resilient side of the trade involving Group-of-10 currencies. ‘Ultimately, forces against global FX carry are multiplying,’ the analysts wrote. Potential losses will arise ‘if softening of US inflation is confirmed and then followed by a dovish Fed in the future.’”

June 12 – New York Times (Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Michael J. de la Merced, Lauren Hirsch, Ephrat Livni, Benjamin Mullin and Vivienne Walt): “The bull market rally is continuing to run on Thursday. The S&P 500 is poised to set yet another record, as investors see inflation in retreat — even if Fed policymakers don’t quite see it that way. The gulf between investors and the central bank is widening again. After Wednesday’s tepid Consumer Price Index report, the odds in the futures market have risen for two interest rate cuts this year, a prospect that has triggered a stocks-and-bonds buying spree. Not so fast? The Fed’s ‘dot plot’ projection released Wednesday sees just one cut this year, down from its previous forecast of three… That makes the Fed more hawkish than other central banks, especially those in Europe…”

June 12 – Reuters (David Lawder): “The U.S. government recorded a $347 billion May budget deficit, up sharply from the $240 billion deficit a year earlier due to the pre-payment of some June benefits and higher outlays for interest, Social Security and defense… The Treasury said outlays for May rose to $671 billion, a record for the month and a 22% increase from May 2023, but this was due in part to the payment of $93 billion in June federal benefit payments during May… May receipts totaled $324 billion, a 5% increase from May 2023… For the first eight months of the 2024 fiscal year, the government’s deficit was $1.202 trillion, up 3% from the $1.165 trillion recorded in the year-ago period.”

June 10 – Financial Times (Patrick Jenkins): “Not far from Times Square in Midtown Manhattan, a giant screen displays a fast-changing string of 14 digits. Soon the number will flip above $35tn, as the quantity of US government debt spirals to a new record. There is space on the US debt clock for another couple of digits… The only snag: the trajectory of America’s debt burden already feels unsustainable. Over dinner at the swanky Cafe Boulud on New York’s Upper East Side, Hungarian-born brokerage billionaire Thomas Peterffy regaled me with stories of his business successes while also striking an alarming note about the debt burden. ‘It’s inevitable,’ he predicted. ‘Whether it’s five years from now, or 20 years from now, the US will default on its national debt.’ Peterffy… sounded strangely sanguine about the idea, citing the debt restructurings of other major economies, including during the Eurozone crisis of the early 2010s. But there can be little question that for the world’s biggest economy, and the home of the world’s reference currency, debt default would cause a major global meltdown.”

June 8 – Financial Times (Claire Jones and Martha Muir): “The IMF’s second-in-command has urged the US to shrink its mounting fiscal burden, saying strong growth in the world’s largest economy gave it ‘ample’ room to rein in spending and raise taxes. Gita Gopinath, the fund’s first deputy managing director, said it was time for advanced economies to ‘invest in fiscal consolidation’ and address how they plan to bring debt burdens back down to pre-pandemic levels. ‘For the US, we see ample ground for them to reduce the size of their fiscal deficits, also given the strength of the US economy,’ she told the Financial Times…”

Global Credit Bubble Watch:

June 13 – Bloomberg (Caleb Mutua and Ellen Schneider): “A group of private credit funds backed by firms like Blackstone Inc. and Ares Management Corp. have found a cheap place to raise money, at a time when they already have record levels of cash: the investment-grade corporate bond market. Private credit funds known as business development companies have raised over $13.4 billion in the US investment-grade bond market so far this year… That’s already nearly double the $8 billion raised over the entire course of 2023, and the highest since 2021, when $21.4 billion was sold.”

June 10 – Bloomberg (Maria Clara Cobo): “Corporate bond investors are finding that their interest income is jumping after rates have been rising since 2022, and as they reinvest that money in the investment-grade credit market, valuations can stay relatively high, according to… Bank of America… The total income generated by the corporate bond market should be about 15% higher in 2024 than the year before, BofA strategists including Yuri Seliger wrote… From June to December, total coupon payments should equal about $220 billion, while net supply is likely to likely to be around $89 billion, the BofA strategists wrote.”

June 10 – Bloomberg (Katie Greifeld): “The biggest ETF tracking collateralized loan obligations has reached $10 billion in assets, helping Janus Henderson further tighten its grip on the quickly growing niche. The Janus Henderson AAA CLO exchange-traded fund (ticker JAAA) now commands more than $10 billion in assets, giving it roughly 90% share of the market for top-rated CLO ETFs…”

June 12 – Financial Times (Euan Healy): “Investment vehicles that scoop up risky loans are being launched at a record rate in Europe this year, in response to demand from investors hunting for yields. More than €22.7bn of so-called collateralised loan obligations have been issued in the first five months of this year, according to Bank of America… These vehicles — which snap up dozens of junk loans, repackage them into different rating categories and then sell slices to investors — were shunned in the wake of the 2008 global financial crisis as a result of the havoc wreaked by their close cousins, collateralised debt obligations.”

Bubble and Mania Watch:

June 11 – Yahoo Finance (Josh Schafer): “Consumers are the most bullish they’ve been on the outlook for stocks since May 2021. The latest survey of consumer expectations from the Federal Reserve Bank of New York showed the mean perceived probability that stocks will be higher in the next 12 months rose to 40.5% in May, up from 38.7% in April.”

June 13 – Bloomberg (Natalia Kniazhevich): “Mutual funds that have lagged the broader stock market may finally get a chance to deliver much-needed returns by raising their technology holdings. On average, US equity mutual funds underperformed the S&P 500 in two of the past three years. Until recently, the group that manages $13.2 trillion in assets failed to own enough of the best-performing US tech stocks to keep up with benchmarks. But since the beginning of 2024, mutual funds have been increasing exposure to tech that could finally boost their performance… Funds pushed their overweight on tech to an all-time high and reduced exposure to nearly all other sectors across cyclicals and defensives, Barclays data shows.”

June 10 – Bloomberg (Natalie Wong): “A New York City office building owned by a Related Cos. affiliate is set to be sold at a steep discount. Empire Capital Holdings and Namdar Realty Group agreed to purchase the property at 321 W. 44th St. for less than $50 million… That’d be a roughly 67% discount from the nearly $153 million that Related Fund Management paid for it in 2018. The deal was a short sale, meaning Related and its lenders agreed to sell the property for less than the outstanding amount on the mortgage…”

June 14 – Bloomberg (Dana Hull and Kara Carlson): “Tesla Inc. investors re-approved Elon Musk’s compensation and cleared the company moving its legal home to Texas, offering votes of confidence in the chief executive despite a sales slump and falling stock price. The proposal to ratify an award of stock options worth up to $55.8 billion passed with around 72% of votes cast in favor, Tesla said in a regulatory filing Friday.”

Global Banking Watch:

June 12 – New York Times (Matthew Goldstein): “A perfect storm of plunging property values for aging buildings, weak tenant demand coming out of the pandemic and high interest rates for new loans and refinancing has left the $2.4 trillion office building sector wobbling. For some real estate investors, that may be a good thing. Several big office buildings nationwide — including in Manhattan — have recently sold at steep discounts of as much as 70% to opportunistic buyers… In April, a little-known firm, Yellowstone Real Estate Investments, paid $185 million for 1740 Broadway, a storied office tower near Columbus Circle in Manhattan. The investment giant Blackstone had paid $600 million for the building a decade earlier. And this week, two real estate firms snapped up a Midtown Manhattan tower for less than $50 million…”

June 11 – Bloomberg (Laura Benitez): “Pacific Investment Management Co. expects more regional bank failures in the US because of a ‘very high’ concentration of troubled commercial real estate loans on their books. ‘The real wave of distress is just starting’ for lenders to everything from malls to offices, John Murray, Pimco’s head of global private commercial real estate team, said… His division sits within Pimco’s $173 billion alternatives business.”

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

June 12 – Bloomberg (Alberto Nardelli): “Group of Seven leaders will call on China to stop enabling and sustaining Russia’s war against Ukraine… Kyiv’s allies are accusing Beijing of providing Russia with technologies and parts — either found in weapons or necessary to build them — aiding Moscow’s efforts to get around wave after wave of G-7 trade restrictions on many of those goods. Banned materials often get to Russia through third countries such as China and Turkey or networks of intermediaries. ‘China’s ongoing support for Russia’s defense industrial base has significant and broad-based security implications,’ says the draft statement, which could still change before it’s agreed by leaders at a summit in Italy…”

June 11 – Reuters (Guy Faulconbridge): “Russia said… its troops had started the second stage of drills to practise the deployment of tactical nuclear weapons alongside Belarusian troops after what Moscow said were threats from Western powers. Russia says the United States and its European allies are pushing the world to the brink of nuclear confrontation by giving Ukraine billions of dollars worth of weapons, some of which are being used against Russian territory.”

June 12 – Financial Times (Guy Chazan and Sam Jones): “Germany is to reintroduce a limited form of military service, though the plan falls far short of the defence ministry’s original goal of restoring the system of conscription scrapped 13 years ago. ‘Everyone must ask themselves what they’d be prepared to do if we were attacked,’ said defence minister Boris Pistorius… ‘The question is… how do we secure our civilian life if war breaks out?’ Russia’s invasion of Ukraine has prompted Germany to take a much more robust approach to defence, investing heavily in its armed forces and preparing to station an armoured brigade in Lithuania — its first permanent foreign deployment since the second world war.”

De-globalization and Iron Curtain Watch:

June 12 – Financial Times (Andy Bounds, Alice Hancock and Gloria Li): “Brussels will impose tariffs of up to almost 50% on Chinese electric vehicles, brushing aside German government warnings that the move risks starting a costly trade war with Beijing. The European Commission notified carmakers… that it would provisionally apply additional duties of between 17 and 38% on imported Chinese EVs from next month. The duties will be applied on top of existing 10% tariffs on all Chinese EVs…”

June 12 – Reuters (Arshad Mohammed, David Lawder and Karen Freifeld): “The United States… dramatically broadened sanctions on Russia, including by targeting China-based companies selling semiconductors to Moscow, as part of its effort to undercut the Russian military machine waging war on Ukraine. Among the steps, the U.S. Treasury said it was raising ‘the risk of secondary sanctions for foreign financial institutions that deal with Russia’s war economy,’ effectively threatening them with losing access to the U.S. financial system. It also said it was moving to restrict the Russian military industrial base’s ability to exploit certain U.S. software and information technology services and, with the State Department, targeting more than 300 individuals and entities in Russia and beyond, including in Asia, Europe and Africa.”

June 12 – Financial Times (Anastasia Stognei and Joseph Cotterill): “Russia’s main exchange has halted trading in dollars and euros after a sharp escalation in US sanctions targeted the remaining links between the Russian financial system and foreign banks. Russia’s central bank said exchange rates for the rouble will now reflect interbank transactions, after US sanctions announced on Wednesday on the Moscow Exchange (Moex)… The changes mean that pricing of the rouble will become more opaque, affecting its convertibility and raising costs for importers and exporters after sweeping sanctions that the US Treasury described as targeting Russia’s ‘war economy’.”

June 12 – Wall Street Journal (Ryan Dubé and James T. Areddy): “In this serene town on South America’s Pacific coast, China is building a megaport that could challenge U.S. influence in a resource-rich region that Washington has long considered its backyard. The Chancay deep-water port, rising here among pelicans and fishermen in small wooden boats, is important enough to Beijing that Chinese leader Xi Jinping is expected to inaugurate it at the end of the year in his first trip to the continent since the pandemic. Majority-owned by the giant China Ocean Shipping group, known as Cosco, Chancay promises to speed trade between Asia and South America, eventually benefiting customers as far away as Brazil with shorter sailing times across the Pacific for everything from blueberries to copper.”

Inflation Watch:

June 12 – CNBC (Jeff Cox): “The consumer price index showed no increase in May as inflation slightly loosened its stubborn grip on the U.S. economy… The CPI… held flat on the month though it increased 3.3% from a year ago… Excluding volatile food and energy prices, core CPI increased 0.2% on the month and 3.4% from a year ago, compared with respective estimates of 0.3% and 3.5%… Price increases were held in check, though, by a 2% drop in the energy index and just a 0.1% increase in food. Within the energy component, gas prices tumbled 3.6%. Another nettlesome inflation component, motor vehicle insurance, saw a 0.1% monthly decline though was still up more than 20% on an annual basis.”

June 13 – Reuters (Lucia Mutikani): “U.S. producer prices unexpectedly fell in May amid lower energy costs, another indication that inflation was subsiding after surging in the first quarter. The producer price index for final demand dropped 0.2% last month after advancing by an unrevised 0.5% in April…”

Federal Reserve Watch:

June 12 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chair Jerome Powell’s approach to cutting interest rates based on forecasts that inflation will continue moving lower could be summed up by the phrase ‘Trust, but verify’… Most officials projected they could lower rates once or twice at four remaining meetings this year, suggesting a start to cuts no sooner than September… ‘We’re looking for something that gives us confidence that inflation is moving sustainably down,’ Powell said at a press conference in which he used the word ‘confident’ or ‘confidence’ 20 times… In 2021, Fed officials held rates near zero despite a run-up in prices in the view—mistaken, in hindsight—that pressures would be short-lived. ‘After an event like that, you’re going to be more worried about your credibility. You don’t want to make the same mistake twice,’ said Jan Hatzius, chief economist at Goldman Sachs.”

June 12 – Wall Street Journal (Nick Timiraos and David Uberti): “Federal Reserve officials penciled in just one interest-rate cut for this year, indicating most are in no hurry to lower rates, even after a widely watched report Wednesday showed inflation improved last month… New economic projections showed 15 of 19 officials expect the Fed will reduce rates this year, with that group roughly split between one or two rate cuts. The median, or midpoint, of those projections reflected expectations of one reduction…”

June 13 – Bloomberg (Michael Mackenzie): “Bond traders loaded back up on interest-rate-cut bets — and even the pushback coming out of the Federal Reserve did little to shake their conviction… ‘Powell clearly wants to retain optionality,’ said Michael de Pass, global head of rates trading at Citadel Securities. ‘Powell wanted to come across more even handed and make sure he didn’t fan the flames following the softer-than -expected inflation print.’ The markets, of course, have jumped the gun repeatedly in recent years, anticipating that a Fed pivot was imminent only to be whipsawed by another painful reset when the central bank held its course.”

Biden Administration Watch:

June 11 – Bloomberg (Mackenzie Hawkins and Ian King): “The Biden administration is considering further restrictions on China’s access to chip technology used for artificial intelligence, targeting new hardware that’s only now making its way into the market, people familiar… said. The measures being discussed would limit China’s ability to use a cutting-edge chip architecture known as gate all-around, or GAA… GAA promises to make semiconductors more powerful and is currently being introduced by chipmakers.”

U.S. Economic Bubble Watch:

June 10 – CNBC (Greg Iacurci): “Home equity is near all-time highs. But tapping it may be tough due to high interest rates… Total home equity for U.S. mortgage holders rose to more than $17 trillion in the first quarter of 2024… Average equity per borrower increased by $28,000 — to about $305,000 total — from a year earlier, according to CoreLogic. Chief Economist Selma Hepp said that’s up almost 70% from $182,000 before the Covid-19 pandemic. About 60% of homeowners have a mortgage. Their equity equals the home’s value minus outstanding debt. Total home equity for U.S. homeowners with and without a mortgage is $34 trillion.”

June 12 – Bloomberg (Vince Golle): “Mortgage applications for home purchases in the US rose for the first time in five weeks as mortgage rates eased closer to 7%. The Mortgage Bankers Association’s index of mortgage applications to buy a home increased 8.6% in the week ended June 7 to 143.7, the highest level since May 3…”

June 11 – Reuters (Lindsay Dunsmuir): “U.S. small-business confidence and hiring plans increased in May to their highest levels of the year, but the looming U.S. presidential election also drove uncertainty to nearly a four-year high… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index rose eight-tenths of a point to 90.5 last month… Twenty-two percent of owners reported that inflation was their single most important problem in operating their business, unchanged from April. The share of businesses planning price hikes increased two points to 28%… ‘For 29 consecutive months, small business owners have expressed historically low optimism and their views about future business conditions are at the worst levels seen in 50 years,’ said Bill Dunkelberg, NFIB’s chief economist, as inflation once again topped the list of small business owners’ concerns.”

June 13 – Bloomberg (Nina Trentmann): “US companies added to their cash stockpiles in the first quarter, sending holdings to a record $4.11 trillion as a resilient economy and relatively high interest rates helped boost returns. Holdings rose 12.6% from the prior-year period, and were $1.28 trillion above their pre-Covid baseline…”

June 13 – Associated Press (Matt Ott): “The number of Americans filing for jobless benefits jumped to the highest level in 10 months last week… Unemployment benefit applications for the week ending June 8 rose by 13,000 to 242,000, up from 229,000 the week before… That’s significantly more than the 225,000 new claims analysts were expecting and the most since August of 2023.”

June 10 – Wall Street Journal (Paul Berger): “Dockworkers at America’s East Coast and Gulf Coast seaports canceled labor talks that were due to start this week and raised the possibility of a strike later this year at some of the country’s biggest trade gateways. The International Longshoremen’s Association canceled talks set for Tuesday in Newark, N.J., to protest the use of automated machinery at some ports… The withdrawal from the bargaining table marks a harsh start to negotiations aimed at securing a contract covering more than 45,000 dockworkers at ports from Maine to Texas ahead of the current agreement’s expiration Sept. 30.”

June 11 – Bloomberg (Matt Day and Spencer Soper): “ Inc. committed $1.4 billion to its Housing Equity Fund, extending a push to back affordable housing in the Seattle, Nashville and Washington metro areas. The funds will be used to create 14,000 affordable units in those locales…, and brings Amazon’s total housing pledge to $3.6 billion. The company in 2021 earmarked some $2 billion for low-interest loans and grants, joining tech industry peers in an effort to help make housing more affordable, particularly in the expensive West Coast cities where they’re based. Critics had long accused Amazon and other tech giants… of exacerbating regional housing shortages by bringing in highly paid engineers able to outbid the locals.”

June 11 – Bloomberg (Mark Niquette and Michael Sasso): “American businesses and consumers started the year thinking interest rates would finally come down, making big plans to buy equipment or a house. Now all of that is on hold, slowing large swaths of the economy for the foreseeable future… S&P Global Market Intelligence projects capital investments in manufacturing will rise by only 3.9% this year, down from a January estimate of 6.7%. US business bankruptcy filings increased by more than 40% during the past year through the end of March, while personal filings rose 15%…”

China Watch:

June 14 – Bloomberg: “China’s credit growth received a boost from more government bond sales in May, but loans slowed again in a sign of stalling demand. The stock of aggregate financing — a broad measure of credit — expanded 8.4% from a year ago, slightly above April’s figure. The acceleration was largely due to a pickup in government borrowing, with 1.2 trillion yuan ($165bn) of bonds issued in the month. But the stock of outstanding loans grew at an 8.9% pace, the slowest on record, and the broad M2 measure of money supply growth also weakened.”

June 12 – Bloomberg: “China’s consumer prices rose less than expected in May and factory prices dropped for the 20th month in a row, stoking concerns over persistently weak demand. The consumer price index rose 0.3% from a year earlier…, hovering above zero for the fourth straight month… Core inflation… rose 0.6%. The producer price index slid 1.4% in May from a year earlier after a 2.5% decline in April, largely due to rises in commodity prices.”

June 10 – Bloomberg (Pearl Liu and Dorothy Ma): “The list of Chinese developers facing court-ordered liquidation in Hong Kong is getting longer, after a builder of homes in an affluent eastern coastal region was ordered to wind up. Dexin China Holdings Co. received the order Tuesday, three months after a petition was filed by China Construction Bank (Asia), and a year and half after it defaulted.”

June 6 – Bloomberg: “In Shanghai, a finance worker must clear her overdue mortgage or her bank will press charges. In Hangzhou, a couple have delayed having a baby and are relying on their parents to help pay their home loan, while another man is forced to sell two properties at a 1 million yuan ($138,000) loss after his repayments spiraled. As China’s property downturn grinds into a fourth year and house prices continue their downward march, an increasing number of mortgages are slipping underwater, placing fresh financial strain on both households and banks. Now, with income growth slowing and job losses increasing, people are questioning whether it’s worth the struggle to pay a loan on a property that’s in negative equity. The specter of negative equity is also concerning banks.”

June 12 – Bloomberg (Alfred Cang and Jessica Zhou): “A giant state-owned Chinese commodities trader is nursing losses after a shipment of copper from Russia worth nearly $20 million went missing, reigniting fears over fraud in the often secretive market for buying and selling raw materials. Wuchan Zhongda Group Co., which had sales of 580 billion yuan ($80bn) in 2023, bought 2,000 tons of refined copper from a Russian smelter that should have been delivered last month. It never made it to port…”

June 11 – Bloomberg (Krystal Chia and Claire Ballentine): “Even in a city famed for outsized real estate swings, Hong Kong’s deepening property slump stands out. The home-price downturn in this packed metropolis will soon reach its five-year mark, the longest retreat since the depths of the SARS crisis more than two decades ago. When combined with losses in commercial property, at least HK$2.1 trillion ($270bn) has been erased from real estate values in the city since 2019, according to… Bloomberg Intelligence. Forecasters at UBS Group AG and CBRE Group Inc. predict more pain to come.”

June 11 – Bloomberg (Jacob Gu and Alan Wong): “A prominent UK judge who resigned from Hong Kong’s top court has warned of ‘grave danger’ to the finance hub’s coveted legal system, in a scathing critique of China’s crackdown on dissent in the city. Jonathan Sumption, who served as an overseas judge at the city’s Court of Final Appeal, claimed the former British colony ‘is slowly becoming a totalitarian state’ in an opinion piece published in the Financial Times… His comments come as a wave of foreign judges quit the city’s highest court, potentially undermining confidence in one of its main attractions for global businesses. ‘Hong Kong, once a vibrant and politically diverse community is slowly becoming a totalitarian state… The rule of law is profoundly compromised in any area about which the government feels strongly.’”

Central Bank Watch:

June 10 – Reuters (Balazs Koranyi): “European Central Bank interest rates are not on a linear downwards path and policymakers could at times wait more than one meeting before cutting them again, ECB President Christine Lagarde said… The ECB cut rates from a record high last week but held off committing to any more policy easing given stubbornly high wage growth and yet another increase in inflation projections. ‘We’ve made the appropriate decision, but it doesn’t mean interest rates are on a linear declining path,’ Lagarde told several major European newspapers… ‘There might be periods where we hold rates again’…”

June 10 – Bloomberg (Jana Randow): “The European Central Bank may not cut interest rates again for a while as it watches to see how quickly inflation recedes to its 2% target, according to Governing Council member Joachim Nagel. Policymakers must remain cautious amid still-high uncertainty around the economy and the evolution of price pressures, Nagel — who also heads Germany’s Bundesbank — said… ‘Metaphorically speaking: I don’t see us on a mountain top from which we will inevitably come down,’ Nagel said. ‘Rather, I see us on a ridge where we still have to find the right point for a further descent.’”

Global Bubble Watch:

June 10 – Bloomberg (Jay Zhao-Murray): “Pessimism about the Canadian economy is starting to thaw. The Bloomberg Nanos Canadian Consumer Confidence index — a measure of economic mood — rose to 54 last week, the highest since May 2022. The index gained about three points in the last month.”

June 9 – Bloomberg (Jack Wittels, Jordan Fitzgerald, Yongchang Chin and Archie Hunter): “Coming any minute now to a sky near you: a plane packed with people going on vacation, leaving wispy white contrails in its wake and memories of Covid-19 that seem like a bad dream. The world is flying again. In the third quarter, 10.5 million flights are scheduled to crisscross the skies… The International Air Transport Association is anticipating record passenger numbers this year, and planes that will be about as full as they were before the virus using record amounts of fuel.”

June 12 – Bloomberg (Swati Pandey): “Australian unemployment dipped last month and job gains exceeded estimates, highlighting the resilience of the country’s labor market to elevated interest rates and high immigration. The economy added 39,700 roles — driven by full-time jobs — versus a forecast 30,000 gain, official data showed Thursday. The jobless rate edged down to 4% in May from 4.1%…”

June 10 – Bloomberg (Swati Pandey): “Australia’s business confidence turned negative and conditions slipped to below-average levels, suggesting high interest rates and darkening consumer outlook are dragging on the corporate sector. Business confidence fell 4 points to minus 3 after staying at or above zero since November… The survey recorded falls in conditions across most consumer-facing industries including retail and recreation & personal services…”

Europe Watch:

June 12 – Bloomberg (Mark Schroers and Alexander Weber): “The euro zone’s underlying consumer price growth is proving stubborn, according to European Central Bank Governing Council member Joachim Nagel… The Bundesbank president reiterated that he and his colleagues won’t simply lower borrowing costs automatically, but rather judge conditions at each meeting as it comes. ‘It’s true that core inflation is still very sticky,’ Nagel said… ‘We are on a bumpy road, but we all know that the last mile is the most complicated one.’”

Japan Watch:

June 14 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan is making investors wait until its July meeting for details on its paring of bond buying, leaving the yen vulnerable to further declines. The central bank’s decision Friday to stand pat on interest rates was widely expected, but traders were surprised by it just flagging a cut in debt purchases without laying out any figures or a timeline… Ueda has repeatedly shown a determination to gradually normalize policy after more than a decade of massive stimulus, but the perceived pushing back of a change in bond buying points to lingering cautiousness on the board.”

June 11 – Reuters (Leika Kihara): “Japan’s wholesale inflation jumped in May at the fastest annual pace in nine months…, a sign the weak yen was adding upward pressure on prices by pushing up the cost of raw material imports… The corporate goods price index (CGPI), which measures the price companies charge each other for their goods and services, rose 2.4% in May from a year earlier, BOJ data showed, exceeded a median market forecast for a 2.0% gain.”

June 9 – Reuters (Leika Kihara and Kentaro Sugiyama): “Japan’s service sector sentiment worsened in May to levels unseen in nearly two years…, as rising fuel and food costs from a weak yen dragged on household spending… An index measuring sentiment among service-sector firms like taxi drivers and restaurants stood at 45.7 in May, down 1.7 point from the previous month and hitting the lowest level since August 2022…”

June 12 – Bloomberg (Masaki Kondo and Daisuke Sakai): “Japanese investors sold the largest amount of foreign debt in nine years amid a shift in global central bank policy. Net sales totaled ¥2.65 trillion ($16.9bn) in the week through June 7, the most since April 2015… That followed purchases of ¥2.3 trillion in May.”

Emerging Market Watch:

June 10 – Reuters (Rodrigo Campos and Noe Torres): “The Mexican governing party’s unexpectedly lopsided victory last week has investors concerned that it may use its mandate to sweep aside some of the checks on presidential power which have long been a source of comfort to the business community. The possibility that current president Andres Manuel Lopez Obrador could push through some of those changes during his final month in office in September has some investors especially on edge. Preliminary results showed his Morena ruling party and its allies gained a super majority in the lower house of Congress but fell just short of a super majority, or two-thirds of legislators, in the Senate. Even if on paper that does not give Morena automatic power to rewrite the country’s constitution…”

June 11 – Bloomberg (Anisah Shukry and Kok Leong Chan): “Bank Negara Malaysia is exploring new measures to ensure that the ringgit remains stable, according to the central bank’s deputy governor. ‘We are still looking at what are the various other measures which we can undertake, initiatives that we can undertake to ensure that the ringgit remains stable and supported,’ Deputy Governor Adnan Zaylani Mohamad Zahid said… It’s important for the ringgit to ‘perform like we expect it to perform to reflect the strength of our fundamentals,’ he added.”

Leveraged Speculation Watch:

June 12 – Bloomberg (Denitsa Tsekova): “A diverse range of hedge fund strategies is paying off this year after money managers ramped up their exposures across momentum-fueled markets… Thanks to reliable trading patterns, 104 of the 106 indexes tracking fast-money strategies are up this year, according to a Hedge Fund Research gauge. That’s driven a 5.6% gain in a broad industry metric for the second-strongest start to a year since 2010, surpassed only by the late rallies of the zero-rate era. ‘If you look across the hedge fund performance landscape, it ranges from being good to very good,’ said Adam Singleton, chief investment officer of the external alpha strategy at the London firm Man Group. ‘It’s very unusual to have such broad-based strength.’”

June 11 – Bloomberg: “Chinese regulators are considering tougher restrictions on how banks sell financial products to the public, in a move that could cut off a major distribution channel for some of the nation’s largest hedge funds, according to people familiar… The revised bank distribution regulations, if enacted, would add to challenges in the 5.2 trillion yuan ($717bn) hedge fund industry, which is already under pressure from a much higher asset threshold and other restrictions in new rules set to take effect in August.”

Geopolitical Watch:

June 9 – Financial Times (Bita Ghaffari): “Iranian authorities have disqualified prominent moderates as candidates in the snap presidential election scheduled for later this month, narrowing the field to five hardline candidates and one mid-ranking reformist. The Guardian Council, Iran’s constitutional watchdog responsible for vetting election candidates, announced the approved list on Sunday. Iran is set to hold early polls following the helicopter crash that claimed the life of Ebrahim Raisi, the country’s president. Mohammad Bagher Ghalibaf, the current parliamentary Speaker, is seen by analysts as the leading hardline candidate.”

June 11 – Financial Times (A. Anantha Lakshmi): “The Philippines faces an ‘existential issue’ from Beijing’s threats in the contested South China Sea and will not back down from asserting its claims despite Chinese ‘bullying’, its defence secretary has said. Beijing and Manila are locked in a territorial dispute in the South China Sea, where confrontations have escalated in recent months. China claims nearly all of the resource-rich waters, but the Philippines has taken a more assertive stance under President Ferdinand Marcos Jr. Last month, Marcos warned that any death of a Philippine citizen by ‘a wilful act’ would be considered very close to an ‘act of war’.”

June 11 – Reuters (Hyonhee Shin): “North Korean leader Kim Jong Un has said his country is an ‘invincible comrade-in-arms’ with Russia in a message to President Vladimir Putin, state media KCNA said…, amid speculation over Putin’s impending visit to North Korea. Marking Russia’s National Day, Kim said his meeting with Putin at a Russian space launch facility last year elevated the ties of their ‘century-old strategic relationship’.”

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