Remember early in the Fed’s tightening cycle, when Chair Powell would invoke the legacy of Paul Volcker? And there were press conferences where “financial conditions” were a focal point – referenced about a dozen times. Wednesday’s was good for a couple. In their quarterly Summary of Economic Projections (“dot plot”) update, committee members raised forecasts for inflation, GDP and policy rates, while lowering the expected unemployment rate.
Powell: “It’s reasonable. It’s common sense to go a little slower… Gives us more information to make decisions. We may try to make better decisions.”
I’m all for the Fed trying to make better decisions. But such complex analysis must go much deeper than “common sense”. The so-called “hawkish skip” is both messy and problematic. It has left analysts confounded, while a highly speculative stock market couldn’t be happier. Loose conditions as far as the eye can see; latent fragilities safeguarding the “Fed put”.
Count me skeptical that inflation can be contained without a sustained period of tightened financial conditions. “Immaculate disinflation” is close kin to “transitory.”
Powell: “The committee is completely unified in the need to get inflation down to 2%, and will do whatever it takes to get it down to 2% over time. That is our plan.”
Almost everyone – including Fed officials and the markets – is convinced this tightening cycle is quickly winding down. Moreover, it can all be accomplished virtually pain-free. Soft-landing and perpetual bull market. And these fanciful misperceptions are exactly what the Fed should have worked diligently to foil. Resulting loose financial conditions exacerbate two major systemic vulnerabilities: inflation and financial instability.
June 16 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “U.S. equity funds saw their most substantial weekly net purchases since early 2021 during the seven days leading up to June 14… According to Refinitiv Lipper data, U.S. equity funds drew a net $18.85 billion worth of inflows in their biggest weekly net buying since mid-February 2021.”
For the record, the Nasdaq100 was up 15% in the six weeks ahead of Wednesday’s Fed (telegraphed “skip”) decision – closing Friday with a year-to-date gain of 38%. The index is up almost 8% since the Fed’s first rate increase on March 16th, 2022. The Semiconductors (SOX) sport a 45% 2023 gain (up 14% from the start of tightening). A full-fledged mania has erupted in anything associated with A.I. – with Nvidia’s stock having tripled y-t-d to a Trillion-dollar market cap. The S&P500’s almost 16% 2023 return puts the index up about 3% since the start of tightening. The VIX (equities volatility) Index traded Friday at a tightening cycle low 13.53 (low since June 2021). It was particularly inopportune timing for a display of waning inflation resolve.
June 15 – Bloomberg (Lu Wang): “The gravity-defying bull market is handing stock investors a fresh conundrum as an unusually big pile of options expires Friday: Chase gains via bullish derivatives or hedge with bearish bets? It’s decision traders always face, but the stakes are higher this time. About $4.2 trillion of contracts tied to stocks and indexes are scheduled to mature, according to an estimate by Rocky Fishman, founder of derivatives analytical firm Asym 500. That’s 20% more than a year ago. The event know as OpEx obliges Wall Street managers to either roll over existing positions or start new ones. It usually involves portfolio adjustments known for causing spikes in trading volume and sudden price swings.”
After spiking to 111 bps last September, investment-grade CDS ended the week at 69 bps – only two bps higher than March 16th, 2022. High-yield CDS in September surged to 627 bps, but has since dropped back down to 436 bps – up a modest 60 bps since the start of the tightening cycle for a market sector that should have been hyper-sensitive to financial tightening. In spite of 14 months of “tightening” and an eruption of banking system instability, JPMorgan CDS closed Friday (63bps) meaningfully below the level from March 16, 2022 (72.5bps).
The unemployment rate has ticked up only a tenth since the Fed commenced rate increases – remaining at a near multi-decade low of 3.7%. Job openings remain above 10 million, with 1.8 openings for every unemployed individual.
Financial conditions remaining so loose in the face of aggressive Fed rate hikes has been a huge surprise. Importantly, when it comes to modern-day financial conditions and market structure, there’s a thin line between things “breaking” and the intensification of Bubble excess. A major de-risking/deleveraging episode could bring this fragile boom to an abrupt conclusion. But it is this acute fragility that ensures policymakers respond quickly and forcefully against fledgling instability (BOE in September and Fed in March), ensuring that deeply entrenched speculative impulses are sustained. That which does not burst a Bubble only makes it stronger.
The banking crisis could have easily triggered major de-risking/deleveraging. Instead, the Fed expanded assets/liquidity by $364 billion in three weeks, while also creating a new lending facility and swap arrangement with global central banks. And I must reiterate extraordinary Q1 and one-year financial sector growth dynamics.
GSE assets expanded a record $352 billion during Q1 to an all-time high $9.540 TN. GSE assets inflated a record $1.022 TN, or 12.0%, over the past four quarters (FHLB asset up $802bn, or 105%). Total Broker/Dealer assets jumped $452 billion, or 41.4% annualized, during Q1 to $4.823 TN (the high since Q3 ’08). “Fed Funds and Security Repurchase Agreements” assets surged $815 billion, or 46% annualized, during Q1 to a record $7.895 TN – with one-year growth of $1.757 TN, or 28.6%.
It’s one freaky “tightening” cycle when you see such rampant financial sector inflation. Z.1 data help illuminate why the financial system has remained awash in liquidity. It’s also helpful to recognize the phenomenal inflation of Household sector liquid assets since the start of the pandemic. An analytical focus on declining deposits and the M2 monetary aggregate misses a crucial dynamic.
While Total (checking and savings) Household Deposits dropped $415 billion during Q1, Money Market Funds jumped $300 billion, or 39.1% annualized. Treasury holdings surged $549 billion – with Agency Securities up another $280 billion.
Household liquid asset growth over the past 14 quarters has been nothing short of amazing – with clear systemic ramifications. Total Deposits inflated $3.797 TN, or 35.8%. Money Market Funds surged $1.215 TN, or 56.5%. Household Treasury holdings rose $520 billion, or 29.7%, and Agency Securities jumped $580 billion, or 74.9%. In total, in only three and a half years, Household holdings of Deposits, Money Market Funds, Treasuries and Agency Securities inflated a staggering $6.112 TN, or 40.3%.
Historic monetary inflation has altered structures. Millions over the long bull market have become impassioned speculators – stocks, ETFs, options and derivatives, crypto – with the financial resources to stay in the game. Households have been granted Trillions of additional liquid assets and tens of Trillions of additional perceived wealth, while the Fed did exactly what it needed to avoid: its words and deeds further solidified the perception that the Fed is backstopping the markets.
June 16 – Reuters (Howard Schneider): “U.S. Federal Reserve officials struck a hawkish tone in their first comments since the central bank held the policy interest rate steady… ‘Core inflation is not coming down like I thought it would,’ Federal Reserve Gov. Christopher Waller said… ‘Inflation is just not moving and that’s going to require, probably, some more tightening to try to get that going down.’ In earlier prepared remarks he said that changes in U.S. credit conditions since the failure of Silicon Valley Bank… were ‘in line’ with financial tightening that was already underway due to Federal Reserve interest rate increases — comments that downplayed the idea a worse-than-anticipated contraction in credit might make further Fed rate increases less necessary. ‘It is still not clear that recent strains in the banking sector materially intensified the tightening of lending conditions’…”
The Financial Sector has been hellbent on breakneck expansion. The Household sector, bolstered by a historic financial windfall, has been keen to borrow, spend and speculate. Powerful forces – “inflationary biases” – have thwarted Fed tightening.
But it would be deficient analysis to fixate only on domestic developments. Japan’s Nikkei Equities Index ended the week with a 29.2% y-t-d gain. Major stock indices are up 18% in Germany, 14% in France, 18% in Italy, 17% in South Korea, 22% in Taiwan, and 13% in Mexico. Market liquidity is “fungible” globally – and loose global conditions are surely playing a significant role in bolstering U.S. market liquidity.
June 16 – Reuters (Leika Kihara and Tetsushi Kajimoto): “The Bank of Japan maintained its ultra-easy monetary policy on Friday despite stronger-than-expected inflation, signalling it will remain a dovish outlier among global central banks and focus on supporting a fragile economic recovery. The central bank also reiterated its view that inflation will slow later this year and a pledge to ‘patiently’ sustain stimulus… ‘We expect trend inflation to heighten as economic activity strengthens and the labour market tightens. But there’s very high uncertainty on next year’s wage negotiations and the sustainability of wage growth,’ Governor Kazuo Ueda told a briefing.”
June 13 – Bloomberg (Masaki Kondo and Yumi Teso): “Bank of Japan Governor Kazuo Ueda’s dovish stance has cemented the yen’s status as the most attractive funding currency for carry traders… Thanks to the BOJ’s negative-rate policy, the yen stands alone in terms of low implied yield — a gauge of funding costs — with a three-month rate of minus 0.4% compared to the 30 other currencies analyzed by Bloomberg which have yields above zero. That’s about 180 bps below the Swiss franc, another popular funding currency. A proxy of sorts for the yen carry trade — lending in the currency by foreign bank branches in Japan to their offices abroad — has climbed 48% since the end of 2021 to 12.9 trillion yen ($92.4bn) at the end of April.”
Borrowing (by hedge funds, global banks and non-banks, Japanese households and financial institutions, etc.) at negative rates to leverage in much higher returning assets globally might be history’s greatest leveraged speculative Bubble. Kazuo Ueda and the BOJ are understandably reluctant to initiate long-overdue policy normalization. But leverage, along with distortions to financial, market and economic structures, only compounds over time.
The yen dropped 1.7% against the dollar this week, while the Dollar Index declined 1.2%. The yen this week sank 4.9% against the South African rand, 3.7% versus the Australian dollar, 3.7% against the British pound, 3.6% against the Norwegian krone, and 3.5% versus the euro.
“Carry trade” speculative leverage is not limited to Japan. One-year rates are below 1% in Switzerland. While the ECB raised the deposit rate to 3.50% Thursday, with consumer price inflation still above 6%, real rates remain deeply negative. And with Italian government (10-yr) yields above 4% – and Greek yields at 3.76% – we can assume European periphery bond markets continue as popular “carry trade” targets. Surely, enormous speculative leverage has accumulated in high-yielding Chinese debt instruments.
June 16 – Bloomberg (Li Liu): “China must adopt ‘more forceful’ measures to support economic recovery, state television reports, citing a State Council meeting chaired by Premier Li Qiang. China is studying economic policy controls, and policies to expand demand, consolidate the economy and prevent risks in key sectors… China’s economic recovery is hurt by the ‘more complex and severe’ external environment, slowdown in global trade and investment, the State Council says…”
More weak economic data out of China this week. Weaker-than-expected lending data was the most concerning.
At $220 billion, May growth in Aggregate Financing (China’s system Credit metric) was 18% below forecast. China’s Credit data can vary significantly month-to-month. A weak month is typically followed by stronger lending. This time, a slow May followed what was a dismal April (after a booming March). It was the slowest two-month expansion since Oct./Nov. 2018.
New Loans of $191 billion, while up from April’s $100 billion, were 12% below expectations and 28% below May 2022. Corporate Bank Loans expanded $120 billion, down from the year ago $215 billion. At $52 billion, Consumer (chiefly mortgage) Loans recovered from April’s $34 billion contraction – though Q2 lending has slowed sharply from Q1’s $357 billion.
But despite all the commentary on weak Chinese Credit growth, Aggregate Financing still increased $4.7 TN, or 9.8%, over the past year. Loans expanded $3.36 TN, or 11.8%, in four quarters, with Corporate Loans up $2.58 TN, or 14.2% (2-yr growth 28.3% and 5-yr 79%). Government Bonds expanded $970 billion, or 12.4% (2-yr 32% and 5-yr 81%). Chinese bank assets surged an unprecedented $2.5 TN during Q1 to a record $55.7 TN, with one-year growth of $5.52 TN, or 11%.
Ominously, China’s recovery has weakened in the face of ongoing historic Credit excess. Things could get interesting if Beijing decides to bring out the big stimulus guns.
The Bloomberg Commodities Index rallied 4.1% this week, bolstered by the weak dollar and prospects for aggressive Chinese stimulus measures. Stocks succumbed to melt-up dynamics into “quadruple witch” quarterly options expiration, as nascent signs of disorderly trading appeared in currency markets. It all leaves me questioning the sustainability of Treasury market stability.
UK two-year yields spiked 40 bps this week to 4.93% (2-wk gain 58bps) – surpassing late-September crisis levels to the highest yield since the summer of 2008. Two-year yields were up 20 bps in Sweden, 21 bps in Germany, 20 bps in France, and 16 bps in Italy. Australian two-year yields jumped 20 bps this week to 4.20% – to the high since the summer of 2011.
Two-year Treasury yields rose 12 bps this week to 4.71%, the high since the SVB blowup. The market sees a 72% probability of a 25 bps hike at the Fed’s July 26th meeting, with peak Fed funds now at 5.30% for the September 20th meeting. The market is pricing only one rate cut by the January 31, 2024, meeting.
What a big week for the major global central banks – one increase (ECB), two no actions (Fed and BOJ), and a cut (PBOC). In all cases, there was a sense of things kind of slipping away. It’s been a while since markets questioned whether Beijing has everything under control. At both the Fed and ECB, central bankers face inflation and stability risks, with loose conditions and speculative Bubbles on a crash course. The Bank of Japan locked in reckless rate and monetization policies is inviting a currency crisis. This degree of global uncertainty is not conducive to speculative leverage, especially in vulnerable bond markets.
For the Week:
The S&P500 jumped 2.6% (up 14.8% y-t-d), and the Dow gained 1.2% (up 3.5%). The Utilities increased 1.4% (down 6.2%). The Banks dipped 0.5% (down 19.0%), while the Broker/Dealers jumped 2.4% (up 6.0%). The Transports surged 3.9% (up 10.5%). The S&P 400 Midcaps gained 1.5% (up 6.2%), and the small cap Russell 2000 added 0.5% (up 6.5%). The Nasdaq100 advanced 3.8% (up 37.9%). The Semiconductors jumped 4.2% (up 45.1%). The Biotechs rose 2.0% (up 3.6%). With bullion slipping $3, the HUI gold equities index was little changed (up 5.8%).
Three-month Treasury bill rates ended the week at 5.0675%. Two-year government yields jumped 12 bps this week to 4.71% (up 29bps y-t-d). Five-year T-note yields rose seven bps to 3.98% (down 2bps). Ten-year Treasury yields added two bps to 3.76% (down 12bps). Long bond yields declined three bps to 3.85% (down 11bps). Benchmark Fannie Mae MBS yields fell four bps to 5.43% (up 4bps).
Greek 10-year yields jumped 12 bps to 3.76% (down 81bps y-t-d). Italian yields fell eight bps to 4.04% (down 66bps). Spain’s 10-year yields increased two bps to 3.39% (down 13bps). German bund yields jumped 10 bps to 2.47% (up 3bps). French yields gained six bps to 2.98% (unchanged). The French to German 10-year bond spread narrowed about four to 51 bps. U.K. 10-year gilt yields surged 17 bps to 4.41% (up 74bps). U.K.’s FTSE equities index gained 1.1% (up 2.6% y-t-d).
Japan’s Nikkei Equities Index surged 4.5% (up 29.2% y-t-d). Japanese 10-year “JGB” yields declined two bps to 0.41% (down 1bp y-t-d). France’s CAC40 rallied 2.4% (up 14.1%). The German DAX equities index jumped 2.6% (up 17.5%). Spain’s IBEX 35 equities index rose 2.0% (up 15.4%). Italy’s FTSE MIB index jumped 2.6% (up 17.5%). EM equities were mostly higher. Brazil’s Bovespa index increased 1.5% (up 8.2%), and Mexico’s Bolsa index added 0.7% (up 13.3%). South Korea’s Kospi index dipped 0.6% (up 17.4%). India’s Sensex equities index gained 1.2% (up 4.2%). China’s Shanghai Exchange Index rallied 1.3% (up 6.0%). Turkey’s Borsa Istanbul National 100 index dropped 2.7% (down 0.6%). Russia’s MICEX equities index surged 3.4% (up 30.3%).
Investment-grade bond funds posted inflows of $4.003 billion, and junk bond funds reported positive flows of $615 million (from Lipper).
Federal Reserve Credit dipped $0.5bn last week to $8.353 TN. Fed Credit was down $548bn from the June 22nd peak. Over the past 196 weeks, Fed Credit expanded $4.626 TN, or 124%. Fed Credit inflated $5.542 TN, or 197%, over the past 553 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $1.9bn last week to $3.409 TN. “Custody holdings” were up $11.3bn, or 0.3%, y-o-y.
Total money market fund assets slipped $0.5bn to $5.452 TN, with a 14-week gain of $558bn (42% annualized). Total money funds were up $911bn, or 20.1%, y-o-y.
Total Commercial Paper jumped $19.4bn $1.130 TN. CP was up $4bn, or 0.4%, over the past year.
Freddie Mac 30-year fixed mortgage rates dropped 11 bps to 6.67% (up 89bps y-o-y). Fifteen-year rates fell nine bps to 6.07% (up 126bps). Five-year hybrid ARM rates increased five bps to 6.43% (up 210bps) – the high since October 2008. Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 7.01% (up 112bps).
For the week, the U.S. Dollar Index declined 1.2% to 102.30 (down 1.2% y-t-d). For the week on the upside, the South African rand increased 3.1%, the Australian dollar 2.0%, the British pound 2.0%, the Norwegian krone 1.9%, the euro 1.8%, the New Zealand dollar 1.8%, the Swedish krona 1.6%, the South Korean won 1.5%, the Brazilian real 1.2%, the Mexican peso 1.1%, the Swiss franc 1.1%, the Canadian dollar 1.1%, and the Singapore dollar 0.4%. On the downside, the yen dropped 1.7%. The Chinese (onshore) renminbi increased 0.05% versus the dollar (down 3.20%).
The Bloomberg Commodities Index rallied 4.1% (down 6.8% y-t-d). Spot Gold slipped 0.2% to $1,958 (up 7.3%). Silver declined 0.4% to $24.20 (up 1.0%). WTI crude recovered $1.61, or 2.3%, to $71.78 (down 11%). Gasoline rallied 3.4% (up 9.0%), and Natural Gas surged 16.8% to $2.63 (down 41%). Copper jumped 2.9% (up 2.3%). Wheat surged 9.2% (down 13%), and Corn rallied 6.0% (down 6%). Bitcoin gained $600, or 2.4%, this week to $26,280 (up 58.6%).
Global Bank Crisis Watch:
June 14 – Bloomberg (Finbarr Flynn): “Riskier bonds issued by banks are recovering further from the turmoil caused by US regional lenders and Credit Suisse Group AG’s crisis, offering some of the best gains in debt markets and as demand returns for new deals. Prices of such capital securities, including the riskiest Additional Tier 1 notes, climbed on Tuesday to their highest since Silicon Valley Bank’s collapse on March 10…”
June 14 – New York Times (Rob Copeland): “Every quarter for the past several years, Ken Vecchione printed out a spreadsheet comparing the growth of the bank he runs, Western Alliance, with its three principal competitors: First Republic, Signature Bank and Silicon Valley Bank. And each time, Mr. Vecchione was annoyed because the analysis would show that Western Alliance’s loans and deposits were growing similarly to the others — its total assets tripled in five years — but that its stock price wasn’t soaring as high. ‘We were, I have to admit, a bit envious of them,’ said Mr. Vecchione, who has been chief executive of the Phoenix bank since 2018. Now all three of those competitors are kaput… Western Alliance and other banks that just a few months ago were far from household names are fighting to prove they are unlike their collapsed rivals. ‘We certainly didn’t see this coming,’ Mr. Vecchione admitted…”
June 15 – Reuters (Niket Nishant, Saeed Azhar and Chris Prentice): “The U.S. Federal Reserve and the Securities and Exchange Commission are investigating Goldman Sachs Group’s role in two deals with Silicon Valley Bank that preceded the latter’s collapse, the Wall Street Journal reported… Silicon Valley Bank had booked a $1.8 billion loss on the sale of a bond portfolio to Goldman. The Wall Street giant was also an underwriter for a failed share sale by the bank that eventually paved the way for its meltdown. The Fed and the SEC are seeking documents related to Goldman’s role as both buyer of the securities portfolio and adviser on the capital raise… They are looking to see if Goldman’s investment banking side and its trading division were improperly communicating about the portfolio sale, the report added.”
Debt Ceiling Watch:
June 12 – Bloomberg (Billy House and Erik Wasson): “Hard-line conservatives angered by House Speaker Kevin McCarthy’s debt-ceiling deal are insisting on power-sharing and budget-cutting concessions in exchange for allowing legislation to move on the House floor. In agreeing Monday to temporarily lift a nearly week-long blockade of the House floor, some of the lawmakers threatened to stall business again if McCarthy didn’t meet their demands.”
June 13 – Bloomberg (Erik Wasson): “The US government faces a greater risk of a shutdown in October following a new budget-cutting deal House Speaker Kevin McCarthy forged to quell a revolt among ultra-conservative Republicans. McCarthy agreed this week to push through the House spending cuts $120 billion deeper than caps set barely two weeks ago as part of a hard-fought compromise the GOP leader reached with President Joe Biden to avert a catastrophic debt default. Democrats balked at McCarthy’s move to abandon the deal. ‘If we disregard the law of the land, we all but guarantee a government shutdown,’ Representative Rosa DeLauro, the top Democrat on the Appropriations Committee, said.”
Market Instability Watch:
June 12 – Bloomberg (Lu Wang): “Big money managers are slashing bearish wagers and boosting equity exposure ahead of a week of potentially market-moving news. Large speculators, mostly hedge funds, trimmed net short positions in S&P 500 e-mini futures from a record high, according… the Commodity Futures Trading Commission. The reduction of almost 90,000 contracts over the week through Tuesday ranks among the five biggest episodes of short covering since 2018.”
June 15 – Reuters (Andy Bruce and Sinead Cruise): “Bedlam in Britain’s 1.5 trillion-pound ($1.9 trillion) mortgage market, fuelled by ructions in money markets, threatens to trigger a renewed slump in housing activity and financial pain for homeowners on a par with the late 1980s. Lenders have repeatedly re-priced and pulled home loan offerings in recent weeks in a scramble to keep up with soaring funding costs… It’s not just prospective home buyers and sellers who are worried, but also existing mortgage holders who face eye-watering increases in repayments when their fixed-term deals expire. ‘Anxiety is at a high level,’ one of Britain’s most senior bankers’ said… ‘It’s the anxiety that this creates that causes longer damage,’ the banker said.”
Bubble and Mania Watch:
June 12 – Wall Street Journal (Jim Carlton): “The owner of the Westfield San Francisco Centre said… it is turning the shopping mall over to its lender, in another blow to the city’s struggling downtown. The decision comes six weeks after the mall’s main anchor, Nordstrom, announced it was shutting down the location. San Francisco Centre owner Unibail-Rodamco-Westfield cited ‘challenging operating conditions’ in downtown San Francisco… There has been an exodus of retailers and other businesses from the mid-Market Street area of downtown amid rampant public drug use and homelessness. ‘We have made the difficult decision to begin the process to transfer management of the shopping center to our lender to allow them to appoint a receiver to operate the property going forward,’ the French mall operator said…”
June 12 – Wall Street Journal (Kate King): “San Francisco’s once thriving hotel market is suffering its worst stretch in at least 15 years, pummeled by the same forces that have emptied out the city’s office towers and closed many retail stores. Hotel owners in New York and Los Angeles are filling nearly as many rooms this year as they did in 2019, according to hotel-data firm STR. Their revenue per available room exceeds what it was before the pandemic. But in San Francisco, hotels are still struggling badly in both occupancy and room rates compared with before the pandemic. Revenue per available room was nearly 23% lower in April compared with the same month in 2019.”
June 10 – Financial Times (Stephen Gandel): “Goldman Sachs was hit by a surge in commercial real estate loan delinquencies in the first quarter, fuelled in part by Elon Musk’s refusal to pay Twitter’s rent. The value of loans to commercial real estate borrowers (CRE) behind on repayments climbed 612% in the first quarter to $840mn… That was much higher than the rise in delinquent CRE loans reported by the entire US banking industry, which were up 30% over the same period to just over $12bn…”
June 15 – Bloomberg (Claire Ruckin and Silas Brown): “Private credit firms are encroaching on the business of investment banks even further — by increasing their share of lending for take-private deals. Private debt managers at Blackstone Inc. and Goldman Sachs Asset Management this month led a £1.25 billion ($1.58bn) deal to support EQT AB’s acquisition of Dechra Pharmaceuticals Plc, beating banks to a deal that was the biggest European take-private of the year. Barings LLC, meanwhile, provided a chunk of the debt backing IK Investment Partners Ltd’s deal for telemedicine firm Medica Group Plc in April.”
June 13 – Bloomberg (Lisa Pham): “The exuberance surrounding artificial intelligence has driven a lot of capital into a small corner of the market in a very short space of time, and that has implications for tech-heavy ESG funds. According to James Penny, the chief investment officer of TAM Asset Management…, the current mood is reminiscent of the early days of the tech bubble that burst in 2000 and wiped more than 70% off the Nasdaq. ‘Companies that even mention the word AI in their earnings are seeing boosts to their share price, and that smells very much like the dot-com era,’ Penny… said…”
June 13 – Bloomberg (Dinesh Nair, Claire Ruckin, Swetha Gopinath and Eleanor Duncan): “Private equity firms hunting for acquisitions with their $1.5 trillion of unspent capital are struggling to seal deals as they hit roadblocks from heady price demands to difficult financing markets. Buyout funds have seen around $30 billion of potential deals hit trouble in recent weeks.”
Ukraine War Watch:
June 11 – Associated Press (Lori Hinnant, Sam McNeil and Illia Novikov): “The destruction of the Kakhovka Dam was a fast-moving disaster that is swiftly evolving into a long-term environmental catastrophe affecting drinking water, food supplies and ecosystems reaching into the Black Sea. The short-term dangers can be seen from outer space — tens of thousands of parcels of land flooded, and more to come. Experts say the long-term consequences will be generational. For every flooded home and farm, there are fields upon fields of newly planted grains, fruits and vegetables whose irrigation canals are drying up. Thousands of fish were left gasping on mud flats. Fledgling water birds lost their nests and their food sources. Countless trees and plants were drowned.”
June 14 – Reuters (Guy Faulconbridge and Vladimir Soldatkin): “President Vladimir Putin said… any further mobilisation would depend on what Russia wanted to achieve in the war in Ukraine, adding that he faced a question only he could answer – should Russia try to take Kyiv again? More than 15 months since Putin sent troops into Ukraine, Russian and Ukrainian forces are still battling with artillery, tanks and drones along a 600-mile front line, though well away from the capital Kyiv. Using the word ‘war’ several times, Putin offered a barrage of warnings to the West, suggesting Russia may have to impose a ‘sanitary zone’ in Ukraine to prevent it attacking Russia and saying Moscow was considering ditching the Black Sea grain deal… Many in the United States, Putin said, did not want World War Three, though Washington gave the impression it was unafraid of escalation.”
June 14 – Associated Press: “Belarusian President Alexander Lukashenko declared… that his country had already received some of Russia’s tactical nuclear weapons and warned that he wouldn’t hesitate to order their use if Belarus faced an act of aggression. The brash comments from Lukashenko contradicted earlier statements by Russian President Vladimir Putin, who said Russian nuclear weapons would be deployed to Belarus next month and emphasized that they would remain under Moscow’s exclusive control.”
June 14 – Reuters (Guy Faulconbridge): “A close ally of Russian President Vladimir Putin said… there was no reason for Moscow not to destroy its enemies’ undersea communication cables given what he said was Western complicity in the Nord Stream pipeline blasts… ‘If we proceed from the proven complicity of Western countries in blowing up the Nord Streams, then we have no constraints – even moral – left to prevent us from destroying the ocean floor cable communications of our enemies,’ Medvedev, a former Russian president who is now deputy chairman of Russia’s Security Council, said…”
U.S./Russia/China/Europe Geo Watch:
June 12 – Wall Street Journal (Lingling Wei): “As Beijing and Washington move gingerly toward restoring high-level exchanges, Xi Jinping is stepping up his effort to gird China for conflict. Since late last month, the Chinese leader has twice urged the nation to prepare for what he described as extreme scenarios or conditions—trotting out a phraseology implying the possibilities of escalating tensions as the competition between the U.S. and China intensifies. At a top-level meeting focused on national security on May 30, the Chinese leader said, ‘We must be prepared for worst-case and extreme scenarios, and be ready to withstand the major test of high winds, choppy waters and even dangerous storms.’ A week later, Xi extended that concept to the economic arena. While inspecting an industrial park in Inner Mongolia, Xi said efforts to build up the domestic market are aimed at ‘ensuring normal operation of the national economy under extreme circumstances.’”
June 15 – Bloomberg (Iain Marlow): “Former US Secretary of State Henry Kissinger said he believes military conflict between China and Taiwan is likely if tensions continue on their current course, though he still holds out for dialogue that will lead to de-escalation… ‘On the current trajectory of relations, I think some military conflict is probable,’ Kissinger said…, when asked about the possibility that China would invade Taiwan. ‘But I also think the current trajectory of relations must be altered.’”
June 12 – Wall Street Journal (Dion Nissenbaum): “When Western researchers examined an Iranian drone brought down over Ukraine this spring, they said they made an important discovery: One Chinese-made part was manufactured this year. The revelation shows that Chinese parts have continued to flow to Iran, providing the building blocks for its drone program, despite increasing pressure from the U.S. to choke off the global supply chain. And it demonstrates how quickly Iran is able to help Russia with its war in Ukraine…”
De-globalization and Iron Curtain Watch:
June 14 – CNBC (Natasha Turak): “Saudi Arabia sees China as a key partner in a multipolar world — with the two countries expected to only come closer as their common interests grow, Saudi Minister of Investment Khalid Al-Falih told CNBC. ‘This is, in a way, a multipolar global order that has emerged — it’s not emerging. China is a significant player in it’… A multipolar world in this context signifies a global system that isn’t dominated by the West or defined as a struggle between two major powers, as it was during the Cold War. ‘We like to believe, and I think it’s been proven, that the kingdom is a significant part of this multipolar world that has emerged. And we’re going to play our part, not only in developing our own economy, but also developing our region, and spreading what we have in terms of development opportunities, also to Africa, Central Asia, the Indian subcontinent… And we believe that economic cooperation between China and Saudi Arabia and the GCC (Gulf Cooperation Council), and the entire Arab region, will be a significant part of that.’”
June 13 – Reuters (Balazs Koranyi): “Euro zone banks in Russia should leave quickly, the bloc’s top supervisor said…, making a rare explicit call on those lenders to wind down operations more than a year after Russia’s invasion of Ukraine. ‘I think that it is important that banks remain very focused on reducing further their exposures and, ideally, exiting the market as soon as they can,’ Andrea Enria, the European Central Bank’s chief supervisor, told a conference.”
June 13 – Reuters (Ariba Shahid and Asif Shahzad): “Pakistan paid for its first government-to-government import of discounted Russian crude oil in Chinese currency…, a significant shift in its U.S. dollar-dominated export payments policy. Discounted crude offers a respite as Pakistan faces an economic crisis with an acute balance of payments problem, risking a default on its external debt. The foreign exchange reserves held by the central bank are scarcely enough to cover a month of controlled imports.”
June 13 – Bloomberg (Reade Pickert): “US inflation slowed in May… Both the consumer price index and the core CPI — which excludes food and energy — decelerated on an annual basis, highlighting inflation’s descent since peaking last year. At 4%, year-over-year inflation is now at its lowest level since March 2021… That said, a key gauge of prices closely watched by the Fed continued to rise at a concerning pace. The core CPI rose 0.4% for a third straight month, in line with estimates. The overall CPI, however, increased a smaller 0.1%, aided by lower gasoline prices.”
June 15 – Wall Street Journal (Paul Berger): “West Coast dockworkers won a 32% pay increase through 2028 and will get a one-time ‘hero bonus’ for working through the pandemic under a tentative contract agreement reached with port employers, according to people familiar… The agreement announced late Wednesday, which must be ratified by employers and dockworkers, includes improvements in benefits and other provisions reached after more than a year of contentious negotiations… The six-year pact is the latest in a series of labor agreements reached in recent months that have delivered big wage increases for transport workers, including those who kept people and cargo moving during Covid-19.”
June 13 – Bloomberg (Guillermo Molero): “US Transportation Secretary Pete Buttigieg said there’s ‘no question’ the collapse of a section of Interstate 95 in northeastern Philadelphia will result in higher prices of goods on the East Coast… The 1,924-mile interstate runs from Miami to the Maine-Canada border. It’s part of a critical long-distance trucking and commuting route. The portion of the highway, which collapsed after a tanker-truck fire on Sunday, carried an average of 160,000 vehicles a day, he said, 8% of which were commercial trucks.”
June 10 – Reuters (Mumbi Gitau and Dayanne Sousa): “There’s an aisle of the grocery store where inflation is looking exceptionally sticky: indulgent treats. Think coffee, chocolates and your favorite snacks. Prices of soft commodities have soared this year because of supply constraints. The return of El Niño and prospects of hotter, drier weather in producing countries is now threatening to exacerbate tight supply.”
June 12 – CNBC (Lee Ying Shan): “Chocolate lovers are in for a bitter pill to swallow — prices of their favorite food are set to rise further on the back of elevated cocoa costs. Chocolate prices have risen by 14% in the past year… And according to some market watchers, they are about to rise further due to strained supplies of cocoa, which is a significant component of the much-loved foodstuff. ‘The cocoa market has experienced a remarkable surge in prices … This season marks the second consecutive deficit, with cocoa ending stocks expected to dwindle to unusually low levels,’ S&P Global Commodity Insights’ Principal Research Analyst Sergey Chetvertakov told CNBC…”
June 13 – CNBC (Jeff Cox): “Consumers are growing more optimistic that inflation is on the way down, according to a New York Federal Reserve survey… The central bank’s monthly Survey of Consumer Expectations for May showed one-year inflation expectations down 0.3 percentage point to a 4.1% rate. That’s the lowest annual outlook since May 2021, just as inflation was beginning to spike to its highest level in more than 41 years. The one-year expectation then was 4%; inflation as measured by the consumer price index actually would rise to 8.6% a year later.”
Biden Administration Watch:
June 14 – Associated Press (Matthew Lee): “U.S. Secretary of State Antony Blinken will travel to China this weekend as part of the Biden administration’s push to repair deteriorating ties between Washington and Beijing and keep lines of communication open… Blinken will be the most senior U.S. official to visit China since President Joe Biden took office. His visit had initially been planned for early this year but was postponed indefinitely after the discovery and shootdown of what the U.S. said was a Chinese spy balloon over the United States.”
June 13 – Bloomberg (Ari Natter and Jennifer Jacobs): “The US plans to purchase about 12 million barrels of oil this year as it begins to refill its depleted emergency reserve amid falling crude prices, according to two people familiar… An Energy Department spokesperson said they will continue to ‘seek opportunities for additional repurchases as market conditions and the constraints of SPR operations allow.’”
Federal Reserve Watch:
June 14 – Associated Press (Christopher Rugaber): “The Federal Reserve kept its key interest rate unchanged… after having raised it 10 straight times to combat high inflation. But in a surprise move, the Fed signaled that it may raise rates twice more this year, beginning as soon as next month… The central bank’s 18 policymakers envision raising their key rate by an additional half-point this year, to about 5.6%… The economic projections revealed a more hawkish Fed than many analysts had expected. Twelve of the 18 policymakers forecast at least two more quarter-point rate increases. Four supported a quarter-point increase. Only two envisioned keeping rates unchanged. The policymakers also predicted that their benchmark rate will stay higher for longer than they did three months ago.”
June 12 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chair Jerome Powell finds himself in a place no central banker wants to be: working to avert a credit crunch, which calls for looser monetary policy, while fighting high inflation, which demands the opposite. Strains in the banking industry… help explain why some central bank officials are leaning toward holding interest rates steady at their meeting this week—even though the economy and inflation haven’t slowed as much as they expected… But current and former central bankers say if stresses worsen, the Fed will face a more difficult trade off. Powell and his colleagues would have to choose between focusing on failing banks or high inflation. ‘They’re between a rock and a hard place. It’s a very, very tough situation,’ said Raghuram Rajan, a former governor of the Reserve Bank of India. ‘You’re damned if you raise rates significantly more and put even more pressure on the banks, but you’re damned if you don’t’ and inflation accelerates.”
June 14 – Yahoo Finance (Alexandra Canal): “Fed officials now see interest rates coming down to 4.6% in 2024, higher than March’s outlook for rates to finish next year at 4.3%. This month’s expectations for rates next year were also less widely distributed compared to March’s projections. The SEP indicated the Federal Reserve sees core inflation peaking at 3.9% this year — higher than March’s projection of 3.6% — before cooling to 2.6% next year and 2.2% in 2025. Officials see unemployment rising to 4.1% this year, well below the previous 4.5% forecast. Unemployment is expected to tick slightly higher to 4.5% next year and remain at that level through 2025. The Fed also sees slightly stronger economic growth, with the economy forecast to grow 1% this year — up from March’s 0.4% projection — before picking up slightly to 1.1% in 2024 and 1.8% in 2025.”
June 12 – Bloomberg (Jonnelle Marte and Augusta Saraiva): “Federal Reserve officials are rethinking their view that wage gains are fueling inflation, a key intellectual shift that bolsters the case for a pause in their tightening campaign this week. Until recently, many top policymakers at the US central bank maintained that the road to lower inflation ran through the job market. The idea was that, because labor costs make up a substantial portion of the cost of providing services — an area where price pressures have been especially persistent — workers would need to feel some ‘pain’ in the form of smaller wage increases for inflation to be brought under control. But new research and commentary from officials and economists suggest the link between wages and prices may not be so direct.”
U.S. Bubble Watch:
June 13 – Reuters (Lucia Mutikani): “U.S. small business confidence rebounded in May, but worries about the economy’s outlook and inflation remained, according to a survey… that also showed businesses still eager to hire more workers. The National Federation of Independent Business (NFIB) said its Small Business Optimism Index rose 0.4 point to 89.4 last month. It was the 17th straight month that the index stayed below the 49-year average of 98… Twenty-five percent of small business owners reported that inflation was their single most important problem, up two points from April. The share was, however, 12 points lower than last July’s peak, which was the highest reading since the fourth quarter of 1979.”
June 14 – CNBC (Diana Olick): “Applications for a mortgage to purchase a home increased 8% for the week but were 27% lower than the same week one year ago. ‘Rates that are still more than a percentage point higher than a year ago, and low for-sale inventory continue to constrain homebuying activity in many markets,’ said Joel Kan, an MBA economist… ‘The average loan size on a purchase loan decreased for the third straight week, as we continue to see more first-time homebuyer activity in the purchase market.’”
June 14 – Yahoo Finance (Gabriella Cruz-Martinez): “Getting a mortgage hasn’t been this tough in a decade, as lenders lose their appetite for riskier loans after this spring’s banking turmoil. An index measuring overall mortgage availability slid for the third month in a row to the lowest level since January 2013, according to… the Mortgage Bankers Association (MBA). The index gauging availability for government-backed home loans — which attract entry-level buyers of modest means — also decreased to the lowest point since January 2013. The one measuring availability for conforming mortgages — those guaranteed by Fannie Mae and Freddie Mac — dropped to the lowest level in the series’ history dating back to 2011.”
June 14 – Bloomberg (Nina Trentmann and Dayana Mustak): “As the Federal Reserve signals it will likely tighten the money supply further, corporate treasurers are scrambling to cope with the impact of more than a year of central bank rate hikes, taking steps like cutting costs and paying down debt. Interest costs at US companies rose by 22% in the first quarter compared to a year earlier, soon after the Federal Reserve started raising rates, according to a recent survey of about 1,700 businesses by Calcbench…”
June 11 – Bloomberg (Aradhana Aravindan): “The US economy remains ‘very, very hot,’ though not as much as it was six to 12 months ago, said former Treasury Secretary Lawrence Summers. ‘The United States is, today, an underlying 4.5-5% inflation country,’ Summers said… At the same time, soft landings ‘represent the triumph of hope over experience,’ and commercial real estate is one area where there are likely to be ‘pockets of distress,’ said Summers…”
Fixed Income Watch:
June 12 – Financial Times (Harriet Clarfelt): “Defaults in the $1.4tn US junk loan market have climbed sharply this year as the Federal Reserve’s aggressive campaign of interest rate rises increases the pressure on risky companies with ‘floating’ borrowing costs. There were 18 debt defaults in the US loan market between January 1 and the end of May totalling $21bn — greater in number and total value than for the whole of 2021 and 2022 combined, according to a Goldman Sachs analysis… May alone saw three defaults totalling $7.8bn — the highest monthly dollar amount since the depths of the Covid-19 crisis three years ago.”
June 12 – Wall Street Journal (Matt Grossman): “Inflation, slowing growth and rising interest rates often spell trouble for people with car loans and credit-card debt. Wall Street is instead laying more bets that most American borrowers will sail through… Over the past few months, the easing of bank stress has helped keep the economy on course, and the recent debt-ceiling deal erased another source of risk. That has turned investors more bullish on the roughly $300 billion public market for U.S. car- and credit-card debt, known as asset-backed securities. Yields on consumer-backed ABS have declined significantly relative to those on Treasurys so far this year.”
June 11 – Wall Street Journal (Stella Yifan Xie): “After years of heavy borrowing, many in China are focused on paying down their debts this year—and the result could be weaker growth for a long time to come. The world’s No. 2 economy binged for years on credit to finance everything from canyon-spanning bridges to new apartments. Now China finds itself facing a protracted period of what economists call deleveraging… Total credit to the nonfinancial sector was $49.9 trillion last September, more than triple the level 10 years ago, according to the Bank for International Settlements…”
June 12 – Bloomberg (Shuli Ren): “China is at a crossroad. Recent data are so dismal that narratives in the mainland have shifted quickly from whether to stimulate the economy to how. The country is entering a strange economic aberration its policymakers are not used to. It is exhibiting what some fear is a ‘balance-sheet recession,’ in that rather than maximizing profit, people are busy minimizing debt. The cost of borrowing has come down, but consumers are not buying big-ticket items, using their savings to speed up payments on existing mortgages instead. Companies are not investing for the future, either.”
June 13 – Bloomberg: “China is ramping up policy stimulus to boost its faltering economy, although soaring debt levels and concerns about financial stability mean the measures are likely to be limited compared with support packages in previous downturns… In addition to these monetary policy actions, officials are considering a broad package of stimulus proposals, which include support for areas such as real estate and domestic demand, according to people familiar with the matter. The moves suggest a shift in stance by President Xi Jinping’s government from its cautious approach to stimulus, underscoring policymakers’ concerns about the economy’s slowdown…”
June 15 – Bloomberg: “China’s weakening economy prompted the central bank to cut interest rates for the first time since August, and expectations are growing for more stimulus targeted at ailing industries including the property sector. The People’s Bank of China reduced the rate on its one-year loans on Thursday after lowering short-term rates earlier this week.”
June 15 – Bloomberg (Selina Xu and Emma Dong): “China’s home prices grew at the slowest pace in four months in May, underscoring the challenges the market is facing as economic growth loses momentum. New-home prices in 70 cities… increased 0.1% last month from April, when they grew 0.32%… Prices declined 0.23% in the secondary market, snapping three months of gains. The figures add to evidence of renewed weakness in the residential property market after sales and prices rallied briefly following a historical slump.”
June 14 – CNBC (Jihye Lee): “Weakness in China’s real estate sector could be a drag on the economy for years to come and could even impact countries in the wider region, Wall Street banks have warned. ‘We see persistent weaknesses in the property sector, mainly related to lower-tier cities and private developer financing, and believe there appears no quick fix for them,’ Goldman Sachs economists led by China economist Lisheng Wang said… Goldman’s economists said the property market is expected to see an ‘L-shaped recovery’ — defined as steep declines followed by a slow recovery rate. ‘We only assume an ‘L-shaped’ recovery in the property sector in coming years,’ they said.”
June 11 – Bloomberg: “China’s struggling real estate industry is expected to see an L-shaped recovery in the coming years, placing a drag on the world’s second-largest economy, according to a research note by Goldman Sachs… The US investment bank said policy makers appear determined not to use the property sector as a short-term stimulus tool and instead want to reduce the economy’s reliance on the industry… The country is expected to see a multi-year slowdown due to ‘falling demographic demand, a shift in policy focus to support strategically important sectors, and weaker housing affordability,’ Goldman analysts led by Wang Lisheng said.”
June 15 – Reuters (Albee Zhang, Ellen Zhang and Kevin Yao): “China’s industrial output rose 3.5% in May from a year earlier…, slightly missing expectations, as faltering demand at home and abroad adds pressure on policymakers to shore up a shaky economic recovery. May’s expansion marked the slowest growth since February… Retail sales, a key gauge of consumption, jumped 12.7% in May from a year earlier…, slowing from the 18.4% gain in April. Analysts had expected a 13.6% increase. Fixed asset investment expanded 4.0% in the first five months of 2023 from the same period a year earlier, versus expectations for a 4.4% rise.”
June 14 – Reuters (Laurie Chen): “Strikes at Chinese factories have surged to a seven-year high and are expected to become more frequent as weak global demand forces exporters to cut workers’ pay and shut down plants, one rights group and economists say… Some factories closed or are struggling to pay wages or severance for laid-off workers as a result… That has led to a spike in labour disputes that hurts consumer and business confidence just as it was recovering from three years of COVID-19 curbs, they said.”
June 15 – Bloomberg: “China’s youth jobless rate edged up to a fresh record in May as the economy’s recovery slowed, adding to challenges for policymakers as new graduates join the workforce. The unemployment rate among those aged between 16 and 24 reached 20.8%, up from 20.4% in April… That’s four times the overall surveyed jobless rate, which was unchanged at 5.2%.”
June 14 – Financial Times (Cheng Leng and Robin Harding): “China plans to deploy billions of renminbi from a national deposit insurance fund to resolve a group of failed provincial banks, setting an important precedent for its approach to a future financial crisis. The People’s Bank of China has agreed to share the cost of refunding customers with the local government in Henan province, clarifying the circumstances in which the deposit insurance system will pay out…”
Central Banker Watch:
June 15 – Financial Times (Martin Arnold): “The European Central Bank has raised interest rates by a quarter-point to 3.5% and signalled that it will increase them again in July, warning that inflation is far from vanquished. The ECB’s decision… to increase its benchmark deposit rate to its highest level in 22 years came as it raised its inflation forecast and trimmed its growth prediction for the next three years. Christine Lagarde… said after the meeting that rate-setters ‘still have ground to cover’ and they were ‘very likely’ to tighten borrowing conditions again at the next policy meeting on July 27 unless there was a ‘material change’ to the economic data. The ECB said rising wages risked feeding into higher prices and repeated its warning that it expected inflation ‘to remain too high for too long’, not returning to its 2% target even by 2025.”
June 15 – Reuters: “The European Central Bank raised its key interest by 25 bps… to 3.5% and left the door open to more hikes… Following are highlights of ECB President Christine Lagarde’s comments at a news conference after the policy meeting. ‘We are not seeing a second-round effect. We are not seeing this wage-price spiral… The sooner the better in terms of when do we bring inflation back to 2%, but we have also to be realistic and measured in the response that we give.’ ‘We will be as restrictive as long as needed in order to make sure that we reach that destination. Under the current parameters 2.2% in 2025 is not satisfactory and it’s not timely. Which is why we’re making the decisions that we are making today.’ ‘In terms of having to pause or having to skip – as I said, number one – we have not discussed it at all and we have not begun thinking about it because we have work to do.’”
June 16 – Bloomberg (Jana Randow and Alexander Weber): “Bundesbank President Joachim Nagel kicked off warnings from hawkish officials that the European Central Bank’s historic campaign of interest-rate hikes may need to extend into the fall. ‘As I see it, we still have more ground to cover,’ Nagel said… ‘We may need to keep raising rates after the summer break.’ That prospect was backed by policymakers from Austria, Slovenia and Lithuania. Belgian central bank chief Pierre Wunsch even suggested monetary tightening might need to persist beyond September.”
June 13 – Bloomberg (Alexander Weber, Libby Cherry and Alice Gledhill): “The European Central Bank is about to test the resilience of the continent’s banking industry by making lenders repay about half a trillion euros in cheap pandemic-era loans — in one go. While the €4 trillion or so of excess liquidity sloshing around the financial system should limit the overall impact of the giant repayment, individual firms and countries could be strained… Smaller Italian lenders are the biggest concern, with Greek banks not far behind. Italy’s outstanding borrowing under the ECB’s TLTRO program is more than the excess cash its lenders have parked at the ECB… Greek lenders’ excess reserves are more or less equal to what they owe the ECB. As €476.8 billion of TLTRO loans come due on June 28, specific firms in Germany, France or other euro-zone nations could also feel the pinch…”
June 13 – Financial Times (Chris Giles, Delphine Strauss, George Steer and George Parker): “Inflation is ‘taking a lot longer’ than hoped to come down, Bank of England governor Andrew Bailey said…, as investors bet on further interest rate rises on the back of strong wage data. Following the release of figures showing annual private-sector wage growth climbing to 7.6% in the three months to April, short-term gilt yields rose above the highs reached during the turmoil around Liz Truss’s ‘mini’ Budget last autumn. ‘As I’m afraid this morning’s numbers illustrate, we’ve got a very tight labour market,’ Bailey said. ‘We still think the rate of inflation is going to come down, but it’s taking a lot longer than we expected.’”
June 13 – Bloomberg (Philip Aldrick): “The UK jobs market is ‘very tight’ with so few available workers that employers are having to hoard labor, Bank of England Governor Andrew Bailey told the House of Lords… The governor said there are signs that the supply of labor is recovering but ‘very slowly, frankly’… ‘Employers say they are finding it so hard to recruit labor in this market that they are not going to release labor, they are labor hoarding. They will adjust hours if they need but will be very reluctant to make people redundant.’”
June 12 – Reuters (David Milliken and Suban Abdulla): “Central banks like the Bank of England will find it hard to communicate the end of their rate-tightening cycle and should not sweat over this at the expense of taking steps to bring down inflation, BoE policymaker Catherine Mann said… ‘Fine-tuning is something that monetary policy is not very good at if the ultimate objective is to focus on inflation,’ Mann said… ‘I called it a policy boogie … you hike, you cut, you hold and you’re just kind of giving signals that are hard to determine and hard for the market to understand why you’re doing it,’ she added.”
June 16 – Bloomberg (Andrew Atkinson): “Public confidence in the Bank of England is at an all-time low as officials struggle to get a grip on inflation, a survey found. Only 21% of people declared themselves satisfied with the performance of the central bank when it comes to controlling prices, the lowest figure in records going back to 1999. Meanwhile, 34% said they were dissatisfied, close to an all-time high.”
Global Bubble Watch:
June 12 – Bloomberg (Swati Pandey): “Australia’s consumer confidence stabilized at ‘near recession lows’ as a significant rise in the minimum wage offset the Reserve Bank unexpectedly raising interest rates for a second straight month… ‘For the last year the index has held around levels we have not seen on a sustained basis since the deep recession of the late 1980s/early 1990s,’ said Bill Evans, chief economist at Westpac. ‘Confidence in the labor market, the one consistent positive, has now turned.’”
June 14 – Bloomberg (Swati Pandey): “Australian employment smashed expectations in May and unemployment surprisingly declined, bolstering the case for the Reserve Bank to raise interest rates further… The currency advanced and three-year government bond yields spiked after data showed… employers added 75,900 roles from a month earlier, more than four times the forecast gain.”
June 16 – Reuters (Simon Johnson, John O’Donnell and Marie Mannes): “Sweden’s government is ready to step in to stem the fallout from a property rout if tumbling prices cause a wider crisis – a potential harbinger of trouble across Europe. High debts, rising interest rates and a wilting economy has produced a toxic cocktail for Sweden’s commercial property companies… House prices are also down by around one-fifth since their March 2022 peak, according to the Organisation for Economic Cooperation and Development…”
June 14 – Bloomberg (Laurie Chen): “Japan’s exports expanded at the weakest pace in over two years amid a global economic slowdown, adding to uncertainty over the country’s growth outlook amid speculation Prime Minister Fumio Kishida may be considering an early election. The value of exports rose 0.6% from a year earlier in May…”
Emerging Market Watch:
June 12 – Bloomberg (Beril Akman): “Turkey’s current-account gap unexpectedly widened in April, adding to a record deficit and underscoring the challenge facing President Recep Tayyip Erdogan and new Finance Minister Mehmet Simsek… The deficit reached $5.4 billion… Official reserves have been used mostly to finance the deficit. They dropped by $8.2 billion in April, bringing the total decline in the first four months of this year to $22.4 billion.”
June 11 – Bloomberg (Katia Dmitrieva and Shinhye Kang): “Bank of Korea Governor Rhee Chang-yong flagged growing financial sector risks amid a rise in real estate loan delinquencies— even as the broader housing market slowly recovers. ‘In the mid- to long-term, it is necessary to find a way to smoothly deleverage household debt in cooperation with relevant institutions so that financial imbalances don’t accumulate again,’ Rhee said…”
June 14 – Reuters (Jorge Otaola): “Argentina’s annual inflation rate topped 114% in May… The monthly rise in the consumer price index (CPI) clocked in at 7.8%…”
June 12 – Bloomberg (Robert Brand and Colleen Goko): “South Africa’s reliance on deep local markets to finance most government borrowing is no longer a given. Domestic investors are demanding ever-higher yields as foreigners pull back from the market, just as the National Treasury gears up to refinance almost 1 trillion rand ($53 billion) of debt over the next three years.”
June 11 – Reuters (Nayera Abdallah): “Egypt’s annual core inflation rose to 40.3% in May from 38.6% in April… Inflation has risen sharply over the last year in Egypt after a series of currency devaluations, a prolonged shortage of foreign currency, and continuing delays in getting imports into the country. Month on month, it increased to 2.9% in May from 1.7% in April… Egypt has devalued its currency by half since March 2022…”
Leveraged Speculation Watch:
June 12 – Bloomberg (Ruth Carson): “Hedge funds extended their record selling streak of short-dated Treasuries amid bets the Federal Reserve’s fight with inflation is far from done. Leveraged investors boosted their net-short two-year Treasury positions for an eleventh straight week in the period to June 6, the latest Commodity Futures Trading Commission… showed. That’s the longest run on record, according to data going back to 2006.”
June 12 – Bloomberg: “A top-performing Chinese macro hedge fund has slashed its holdings in property stocks, as their declines hurt returns just two months after predicting a major rebound in the sector. Shanghai Banxia Investment Management Center’s flagship Banxia Macro Fund slumped 9.8% in May, the biggest monthly loss since at least 2018, after it sold property-related shares and cut commodities positions…”
Social, Political, Environmental, Cybersecurity Instability Watch:
June 13 – Financial Times (Anjana Ahuja): “When UK temperatures hit a record 40C last year, Imperial College climate scientist Friederike Otto responded to comparisons with the 1976 heatwave by observing: ‘By definition unprecedented means it hasn’t happened before.’ Prepare for more of the same. Last week, the US National Oceanic and Atmospheric Administration announced the official arrival of the El Niño weather phenomenon — which occurs about every two to seven years but not predictably. The change, linked to rising sea surface temperatures, will push more heat into an already-warming atmosphere… El Niño’s arrival heralds a new period of climate uncertainty — and one that, with its associated risk of extreme weather, economists and politicians ignore at their peril. Even the best-laid plans to tackle the escalating cost of living will need to factor in crop failures and spiralling commodity prices. It also offers a preview of what might be coming down the track.”
June 12 – Bloomberg (Ben Sharples, Brian K Sullivan, Eric Roston and Adrian Leung): “As the world struggles to recover from Covid-19 and Russia’s war in Ukraine grinds on, the arrival of the first El Niño in almost four years foreshadows new damage to an already fragile global economy. The shift to a warming phase from the cooler La Niña can generate chaos, especially in fast-growing emerging economies. Power grids strain and blackouts become more frequent. Extreme heat creates public health emergencies, while drought adds to fire risks. Crops are lost, roads are flooded and homes are destroyed. According to Bloomberg Economics modeling, previous El Niños resulted in a marked impact on global inflation, adding 3.9 percentage points to non-energy commodity prices and 3.5 points to oil… Combined with more extreme weather and hotter temperatures due to accelerated climate change, the stage is now set for the world’s costliest El Niño cycle since meteorologists started keeping track.”
June 15 – Bloomberg (Brian K. Sullivan): “The world’s oceans were the warmest on record in April and May, a development that could mean more severe weather over the next few months and trigger a rise in sea levels. Ocean temperatures from March to May — meteorological spring in the Northern Hemisphere — were also the highest in the 174-year record, according to the US National Centers for Environmental Information. When land and sea temperatures were combined, the world had its third-hottest May ever.”
June 12 – CNBC (Charmaine Jacob): “Water scarcity is seen as the most significant and potentially most impactful component of the wider climate crisis, and researchers say that large Asian economies like India and China will be the most affected from these water shortages. Asia is an industrialization hub that is experiencing the most rapid rates of urbanization, and this would require a copious amount of water, Arunabha Ghosh, the CEO of the Council on Energy, Environment and Water, told CNBC… ‘It’s not just the old industries like steel making, but newer ones like manufacturing semiconductor chips and the transition to clean energy that are going to require a lot of water,’ Ghosh said.”
June 15 – Bloomberg: “On a sprawling riverside industrial complex about 10 miles from Shanghai’s gleaming downtown skyscrapers, a massive power plant is burning as much as 800 tons of coal an hour to keep the city cool. A heat wave is scorching China, killing livestock and straining electricity grids across the country. Temperatures in Beijing soared to as high as 39C (102F) on Thursday… In Shanghai, the Waigaoqiao power plant — the second-largest coal-fired facility in China and the fifth-biggest in the world — has ramped up generation since the start of the month to cope with the hot weather…”
June 11 – Bloomberg (William Wilkes and Natalia Drozdiak): “The airspace above Germany will swarm with military aircraft for almost two weeks starting Monday as NATO conducts the biggest air exercise in the alliance’s history, a display of force in the wake of Russia’s invasion of Ukraine more than a year ago. Dubbed Air Defender 23, the operation involves more than 20 partner nations and about 250 aircraft that include US and Dutch Lockheed Martin Corp.-built F-35s as well as AWACS reconnaissance planes, in-air refueling units and even transport carriers from the Japanese Air Force.”
June 12 – AFP: “The world’s nine nuclear-armed states jointly spent $82.9 billion on their arsenals last year, with the United States accounting for more than half of that, according to… the International Campaign to Abolish Nuclear Weapons (ICAN). The Stockholm International Peace Research Institute (SIPRI) meanwhile released a report showing that the total number of nuclear warheads held by Britain, China, France, India, Israel, North Korea, Pakistan, Russia and the United States was down to 12,512 at the outset of this year… ‘We are approaching, or maybe have already reached, the end of a long period of the number of nuclear weapons worldwide declining,’ SIPRI director Dan Smith told AFP.”
June 11 – Reuters (Hyonhee Shin): “North Korean leader Kim Jong Un has vowed to ‘hold hands’ with Russian President Vladimir Putin and bolster strategic cooperation on their shared goal of building a powerful country, state media KCNA reported… Kim made the pledge in a message to Putin marking Russia’s National Day, defending his decision to invade Ukraine and displaying ‘full support and solidarity.’ ‘Justice is sure to win and the Russian people will continue to add glory to the history of victory,’ Kim said…”