June 23, 2023: Liquidity Risks

June 23, 2023: Liquidity Risks
Doug Noland Posted on June 24, 2023

For the most part, things seem to look and feel as they did during the old cycle. Loose financial conditions persist, and securities markets remain energized. The latest hot technology innovation has succumbed to mania and Bubble Dynamics. And, no matter what, central bankers have everything under control. They might talk tough on inflation, but fragilities ensure they remain primed to do whatever it takes to keep markets liquid and buoyant.

Yet this week provided a timely reminder that things have indeed changed – that there are new cycle dynamics at work. The UK is emblematic.

June 21 – Bloomberg (Tom Rees and Philip Aldrick): “UK inflation remained higher than expected for a fourth month, leading to a flurry of bets that the Bank of England will raise interest rates to near 6% and drive up the cost of mortgages. The Consumer Prices Index rose 8.7% in May, the same as the month before… Core inflation, excluding food and energy, accelerated unexpectedly to a 31-year high of 7.1%.”

June 22 – Bloomberg (Andrew Atkinson and Reed Landberg): “British businesses said staff shortages that are forcing them to drive up wages are adding to the cost of services, underlying pressures the Bank of England wants to choke off. S&P Global Market Intelligence said its closely watched purchasing managers survey indicated that while manufacturers are cutting the cost of goods leaving factory gates, service companies reported a steep increase in the average prices they charge. Higher costs to employ staff are being passed on to customers, S&P said… The findings highlight the wage-price spiral that prompted the central bank to accelerate its fight against inflation on Thursday…”

June 22 – Bloomberg (Philip Aldrick): “The Bank of England unexpectedly raised its benchmark interest rate by a half percentage point, stepping up its fight against the worst bout of inflation since the 1980s and warning it may have to hike again. The nine-member Monetary Policy Committee voted 7-2 for an increase to 5%, the highest level in 15 years and the biggest move since February.”

“UK National Debt Breaches 100% of GDP for First Time Since 1961.” “Stubborn UK Inflation Triggers Mortgage Crisis for Million.” “London Home Asking Prices Slide as Rate Rises Stretch Buyers.” “Persistent UK Inflation Should Worry Everyone.”

It has been a long time since a major developed economy faced such a confluence of inflation, economic stagnation, and financial fragility.

After peaking at 4.65% prior to the Bank of England’s September emergency intervention, two-year UK yields were back down to 3% by mid-November. The view, shared by markets and BOE officials, was that crisis dynamics had placed a cap on the UK rate hiking cycle. Tightened financial conditions and recession would surely crush inflation. This view could not have been more wrong.

With its surprise 50 bps increase to 5.0%, the BOE policy rate has now more than doubled since October to the highest level since 2008. And, importantly, despite weak growth dynamics and heightened fragilities, there is today little confidence that inflationary pressures will dissipate – certainly not anytime soon back down to the central bank target. UK two-year yields closed the week up another 23 bps to 5.16%, with a three-week 81 bps yield spike.

Two-year U.S. Treasury yields traded to 4.81% in Thursday trading, up about 10 bps w-t-d to the high since March 9th. The market is now pricing a peak Fed funds rate for the November 1st FOMC meeting at 5.32% – a major repricing from about 4% in March and 4.54% on May 10th. Ten-year Treasuries traded to 3.80% in Thursday trading, near the high since March 9th, seemingly poised for an upside breakout.

But global yields reversed sharply lower Friday on the back of weak economic data out of the Eurozone. After trading Thursday near eight-week highs, French yields sank 15 bps to 2.88%. It was a similar story for bunds, with German yields dropping 14 bps to 2.35%. Yields dropped 13 bps in Italy, Portugal and Spain.

June 23 – Bloomberg (Andrew Langley): “Economic momentum in the euro area almost came to a halt in June, signaling an end to the revival the bloc demonstrated since its winter downturn. A purchasing managers index compiled by S&P Global… fell to a five-month low of 50.3, missing analyst estimates for a slight decline from May to 52.5. The slump was led by France, which has been battered by strikes, though Germany’s struggling factories also played a role… Manufacturing remained the ‘principal area of weakness’ in June, though service-sector expansion ‘slowed sharply’ as the recent bounce-back in spending lost momentum.”

June 21 – Reuters (Maria Martinez): “The German economy will contract more than previously expected this year as sticky inflation takes its toll on private consumption, the Ifo Institute said… ‘The German economy is only very slowly working its way out of the recession,’ Ifo’s head of economic forecasts, Timo Wollmershaeuser, said. German gross domestic product is expected to fall by 0.4% this year, more than the 0.1% forecast by the Ifo Institute in March.”

The euro traded above 110 to the US dollar in Thursday trading, near 15-month highs. The yen versus the euro was at the weakest level since August 2008, while the yen traded to a record low against the Swiss franc. The yen fell to the weakest level versus the dollar since November. With this week’s 0.73% loss boosting y-t-d declines to 3.91%, China’s renminbi ended the week at a seven-month low. Currency markets, especially the yen and renminbi, appear vulnerable to disorderly trading.

Not a fear in the world for equities. The VIX (equities volatility) Index traded Thursday down to 12.73, the low since January 2020. Persistent inflation is forcing central bankers to tighten more forcefully, risking a surge in yields and associated market and economic instability. So, what’s keeping the VIX so depressed?

I would argue that the pandemic period fundamentally changed market perceptions and structure. Last week’s CBB mentioned the $6 TN increase in Household liquid assets (deposits, money funds, Treasuries and Agency Securities). Unprecedented monetary inflation, spurred by massive central bank monetization and government deficit spending, created Trillions of liquidity that still sloshes about the system.

The historic scope of policy responses took perceptions of “whatever it takes” market guarantees to a whole new level. While concerns grew that monetary policy tightening could jeopardize the central bank liquidity backstop, those fears were quickly allayed. The BOE in September hastily restarted QE to thwart a bond market crash, and then the Fed in March expanded its balance sheet by almost $400 billion over a few weeks to thwart a systemic run on bank deposits. With banking system stability in the crosshairs, markets understandably assume the “Fed put” is as big and even more reliable than ever.

It is not unreasonable for the stock market to see liquidity abundance and FOMO as far as eyes can see. In a world with such prevailing financial and economic fragilities, along with extreme geopolitical risk, we are witnessing a formidable degree of complacency. And this is all rather old cycle.

But there are new cycle realities that markets cannot disregard forever. For one, pricing dynamics have been structurally altered. This is not the idiosyncratic previous cycle dynamic, where loose financial conditions and related inflationary dynamics remained conveniently contained within the asset markets. Inflationary pressures have decisively taken root throughout the economy.

Importantly, there’s (George Soro’s) “reflexivity” at work. Markets’ perception of liquidity abundance creates the reality of ongoing over-liquefied markets. The Fed and global central bank community repeatedly employed progressively intrusive interventions, to the point where markets now virtually disregard the risk of a destabilizing de-risking/deleveraging episode. The FHLB joined Fed liquidity operations this year in a momentous liquidity injection. Acute fragilities revealed within the banking system solidified confidence that the Federal Reserve would not risk the consequences – including market instability – of tighter financial conditions.

The upshot is distorted pricing and availability of derivatives risk “insurance.” This has worked to promote risk-taking and speculative leverage, both of which have exacerbated market liquidity excess. In particular, the Fed/FHLB market liquidity bailout came after the risk markets rally had already attained momentum. A speculative Bubble then took hold among the big technology stocks, pushing the “A.I.” Bubble into dangerous manic excess.

As they tend to do, the liquidity injection turned self-reinforcing. A powerful short squeeze and unwind of risk hedges stoked FOMO and performance-chasing flows into the risk markets. And with the big tech stocks favorite derivatives targets within a marketplace enamored with options trading, the market melt-up added Trillions of market capitalization – along with enormous amounts of speculative leverage.

As an analyst of Credit and Bubbles, the first sentence from a December 6, 2022, Reuters article (Marc Jones) is etched in my memory: “Pension funds and other ‘non-bank’ financial firms have more than $80 trillion of hidden, off-balance sheet dollar debt in FX swaps, the Bank for International Settlements (BIS) said.”

It has been my view that global speculative leverage began mounting shortly after the “great financial crisis.” Back in 2014, BofA/Merrill Lynch analysts (Ajay Singh Kapur, Ritesh Samadhiya and Umesha de Silva) published a compressive report (“Pig in a Python”) on emerging market debt and “carry trade” speculative leverage, arguing that QE had inflated dangerous Bubbles. Their report warned of the consequences of a multi-trillion increase in EM debt and speculative leverage. This report is now more than nine years old. Was the analysis flawed? Or is it more a case of major excess evolving into historic global Bubbles without precedence – EM and developed economies?

Markets readily dismiss Bubble concerns so long as liquidity remains abundant. But what could upset the apple cart? Disorderly currency trading would be problematic for highly levered “carry trades.”

For years, I’ve pondered how much speculative leverage has accumulated in higher yielding Chinese debt instruments. It’s reasonable to assume that a quasi-pegged renminbi, along with faith in Beijing’s capacity to ensure stability, incentivized a protracted cycle of leveraged speculation. And there is no doubt that the yen – and negative-yielding Japanese debt – have been a major source of cheap finance for “carry trade” leverage around the globe. The Bank of Japan’s refusal to begin reversing one of history’s most reckless monetary experiments has been a boon to leveraged speculation and global liquidity.

A spike in bond yields would also place the global liquidity Bubble at serious risk. September revealed how contagion from UK bond de-risking/deleveraging can reverberate globally. Friday’s weak European data and bond rally notwithstanding, global bonds today face the reality of sticky inflation and central banks struggling to get pricing pressures under control. Meanwhile, Bubble excess in equities and other risk markets has fueled inflation-promoting liquidity excess – certainly including embedded speculative leverage in the derivatives marketplace. Moreover, both global policy tightening and surging yields would place the yen and BOJ under intensifying pressure.

There are various possible scenarios for a de-risking/deleveraging episode. I can envisage one where heightened currency instability triggers the paring of risk in leveraged global “carry trades.” Rising global yields would then pressure more generalized deleveraging and hedging, certainly including in gilts and Treasuries.

U.S. yields would be further pressured by the impending massive issuance of Treasuries to finance huge deficit spending and rebuild the government’s cash balance. A yield surge would particularly pressure the highly elevated growth stocks. A sharp reversal in the big tech names (and related indices) would trigger deleveraging, margin debt, but, more significantly, the enormous derivative leverage that accumulated during the speculative melt-up.

Moreover, an equities reversal would trigger a flurry of risk hedging for a marketplace likely unhedged at this point. And the hedge funds and global leveraged speculating community, which has increasingly leaned on the long exposures for performance over recent months, would quickly move to boost shorting to rebalance exposures.

There’s certainly the possibility that weakening global dynamics in China, Europe and elsewhere can help hold bond yields in check. At least in China, more stimulus will be forthcoming. A downside surprise with Chinese growth would raise the odds of accelerating crisis dynamics, unleashing instability that would not be contained within China. It has the look of a long, hot summer.

For the Week:

The S&P500 fell 1.4% (up 13.3% y-t-d), and the Dow dropped 1.7% (up 1.8%). The Utilities slumped 2.6% (down 8.6%). The Banks sank 5.0% (down 23.1%), and the Broker/Dealers fell 3.2% (up 2.6%). The Transports slipped 0.7% (up 9.7%). The S&P 400 Midcaps reversed 2.5% lower (up 3.5%), and the small cap Russell 2000 dropped 2.9% (up 3.4%). The Nasdaq100 fell 1.3% (up 36.1%). The Semiconductors sank 4.5% (up 38.5%). The Biotechs declined 1.6% (up 1.9%). With bullion down $37, the HUI gold equities index sank 4.8% (up 0.8%).

Three-month Treasury bill rates ended the week at 5.1375%. Two-year government yields increased three bps this week to 4.74% (up 31bps y-t-d). Five-year T-note yields added a basis point to 3.99% (down 1bp). Ten-year Treasury yields dipped three bps to 3.73% (down 14bps). Long bond yields declined four bps to 3.81% (down 15bps). Benchmark Fannie Mae MBS yields rose six bps to 5.49% (up 10bps).

Greek 10-year yields dropped 18 bps to 3.58% (down 98bps y-t-d). Italian yields declined six bps to 3.98% (down 72bps). Spain’s 10-year yields fell seven bps to 3.31% (down 20bps). German bund yields dropped 12 bps to 2.35% (down 9bps). French yields fell 10 bps to 2.88% (down 10bps). The French to German 10-year bond spread widened two to 53 bps. U.K. 10-year gilt yields declined nine bps to 4.32% (up 65bps). U.K.’s FTSE equities index dropped 2.4% (up 0.1% y-t-d).

Japan’s Nikkei Equities Index dropped 2.7% (up 25.6% y-t-d). Japanese 10-year “JGB” yields declined four bps to 0.37% (down 5bp y-t-d). France’s CAC40 dropped 3.0% (up 10.7%). The German DAX equities index was hit 3.2% (up 13.7%). Spain’s IBEX 35 equities index fell 2.4% (up 12.6%). Italy’s FTSE MIB index lost 2.3% (up 14.8%). EM equities were mostly lower. Brazil’s Bovespa index added 0.2% (up 8.4%), while Mexico’s Bolsa index dropped 2.9% (up 10.1%). South Korea’s Kospi index fell 2.1% (up 14.9%). India’s Sensex equities index dipped 0.6% (up 3.5%). China’s Shanghai Exchange Index slumped 2.3% (up 3.5%). Turkey’s Borsa Istanbul National 100 index rallied 2.0% (up 1.3%). Russia’s MICEX equities index slipped 0.2% (up 29.8%).

Investment-grade bond funds posted inflows of $2.170 billion, and junk bond funds reported positive flows of $265 million (from Lipper).

Federal Reserve Credit declined $17.9bn last week to $8.335 TN. Fed Credit was down $566bn from the June 22nd peak. Over the past 197 weeks, Fed Credit expanded $4.608 TN, or 124%. Fed Credit inflated $5.524 TN, or 197%, over the past 554 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $16.3bn last week to $3.425 TN. “Custody holdings” were up $22.1bn, or 0.7%, y-o-y.

Total money market fund assets declined $18.2bn to $5.434 TN, but have posted a 15-week gain of $540bn (38% annualized). Total money funds were up $891bn, or 19.6%, y-o-y.

Total Commercial Paper gained $13.4bn $1.144 TN. CP was unchanged over the past year.

Freddie Mac 30-year fixed mortgage rates declined four bps to 6.63% (up 82bps y-o-y). Fifteen-year rates dipped four bps to 6.03% (up 111bps). Five-year hybrid ARM rates sank 31 bps to 6.12% (up 171bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up six bps to 7.07% (up 118bps).

Currency Watch:

For the week, the U.S. Dollar Index gained 0.6% to 102.90 (down 0.6% y-t-d). For the week on the upside, the Brazilian real gained 0.8%, and the Canadian dollar increased 0.1%. On the downside, the South African rand declined 3.0%, the Australian dollar 2.8%, the South Korean won 2.5%, the Norwegian krone 2.4%, the New Zealand dollar 1.5%, the Japanese yen 1.3%, the Singapore dollar 1.1%, the British pound 0.8%, the Mexican peso 0.5%, the Swedish krona 0.5%, the euro 0.4%, and the Swiss franc 0.4%. The Chinese (onshore) renminbi declined 0.73% versus the dollar (down 3.91%).

Commodities Watch:

The Bloomberg Commodities Index dropped 2.7% (down 9.3% y-t-d). Spot Gold lost 1.9% to $1,921 (up 5.3%). Silver sank 7.3% to $22.43 (up 6.4%). WTI crude dropped $2.62, or 3.7%, to $69.16 (down 13.8%). Gasoline sank 6.1% (up 2%), while Natural Gas jumped 3.7% to $2.73 (down 39%). Copper declined 2.1% (unchanged). Wheat rallied 6.6% (down 7%), while Corn declined 1.5% (down 7%). Bitcoin surged $4,460, or 17%, this week to $30,746 (up 86%).

Global Bank Crisis Watch:

June 22 – Reuters (Pete Schroeder): “U.S. banks are pushing to soften a major regulatory proposal to hike bank capital requirements, worried it could prove too onerous, especially for lenders still reeling from the March banking crisis, according to six people briefed on the matter. Bank regulators led by the U.S. Federal Reserve are finalizing the proposal which would implement international capital standards agreed by the Basel Committee on Banking Supervision in the aftermath of the 2007-2009 financial crisis.”

June 22 – Bloomberg (Katanga Johnson): “The regulator that oversaw the federal takeover of Silicon Valley Bank says the lender’s failure shows the need for tougher capital requirements for midsize banks. US banks with at least $100 billion in assets would face new rules to put aside more capital in the event of unexpected stress, Martin Gruenberg, chairman of the Federal Deposit Insurance Corp., said… Community banks will be exempt from such rules…”

June 22 – Associated Press (David McHugh): “Switzerland’s central bank said the government and regulators should carry out an in-depth review of rules aimed at preventing disastrous bank collapses, saying key guardrails failed to prevent Credit Suisse from needing to be rescued by Swiss competitor UBS. The Swiss National Bank scrutinized several of the safeguards imposed in the wake of the 2008-2009 global financial crisis that were aimed at preventing a repeat. The central bank concluded that several ‘too big to fail’ rules designed to avoid the collapse of a major global bank were inadequate and may even have delayed action to ward off disaster.”

UK Crisis Watch:

June 21 – Bloomberg (Tom Rees and Philip Aldrick): “UK inflation remained higher than expected for a fourth month, leading to a flurry of bets that the Bank of England will raise interest rates to near 6% and drive up the cost of mortgages. The Consumer Prices Index rose 8.7% in May, the same as the month before… Core inflation, excluding food and energy, accelerated unexpectedly to a 31-year high of 7.1%.”

June 19 – Bloomberg (Damian Shepherd and Alice Gledhill): “The squeeze on UK finances is set to intensify after a key mortgage rate climbed to its highest point this year and the cost of government borrowing reached a level not seen since the financial crisis. The average two-year fixed-rate home loan jumped above 6% Monday, edging closer to the 14-year highs reached at the end of 2022…”

June 20 – Bloomberg (William Schomberg): “Britain’s public sector net debt surpassed 100% of gross domestic product in May as borrowing came in higher than expected, the Office for National Statistics said… Public sector net debt, excluding that of state-controlled banks, hit 2.567 trillion pounds ($3.28 trillion), equivalent to 100.1% of gross domestic product. That represented the first time that debt stood above 100% of GDP since 1961…”

June 19 – Bloomberg (Lucy White): “Homesellers in London cut prices more than any UK region in June as surging borrowing costs stretched affordability in the country’s most expensive property market, a survey found. Asking prices in the capital slid 1.6% from May, according to property portal Rightmove. Nationally, prices were broadly unchanged, leaving them just 1.1% higher than a year earlier.”

June 21 – Bloomberg (Joe Easton): “British lenders are facing a ‘pain game’ as interest rate hikes hurt the outlook for both loans and deposits, analysts at Exane BNP Paribas warned before a hot inflation number… sent UK bond yields even higher… ‘Back in the danger zone,’ Stebbings said… ‘Higher rates lift bank earnings but at a certain level this equation breaks down.’ He added that ‘we are well past this point.’”

June 19 – Bloomberg (William Shaw and Lucy White): “The Bank of England is examining how hedge funds, pension funds and other financial firms behave under pressure and how this could threaten the UK’s financial stability. The central bank will ask firms to consider how they would react to a severe stress to global financial markets, the BOE said as it launched the exercise on Monday. The BOE will then analyze their collective responses, for example a fire sale of assets.”

Market Instability Watch:

June 19 – Bloomberg (Yumi Teso): “Weakness in the yen is broadening with a trade-weighted gauge of the currency falling to the lowest in more than two decades as officials in Tokyo issue more warnings about sharp moves. Deutsche Bank AG’s measure of the yen’s strength versus its global trading peers closed at a record low Monday, according to data going back to 2000.”

June 22 – Bloomberg (Yumi Teso and Michael G. Wilson): “The yen fell to a record low against the franc amid the growing monetary policy divergence between Japan and Switzerland, with the Swiss National Bank announcing the latest rate hike Thursday in a tightening cycle that began more than a year ago. In earlier trading, the Japanese currency dropped to about 159.22 per franc, surpassing the previous low seen in 1979.”

June 23 – Reuters (Can Sezer, Huseyin Hayatsever, Orhan Coskun, Nevzat Devranoglu, Karin Strohecker): “Turkey’s lira weakened as much as 3.3% to a record low on Friday, extending losses a day after the central bank’s large rate hike failed to assure markets that President Tayyip Erdogan was abandoning his long-held unorthodox policies… The central bank raised its key rate by a hefty 650 bps to 15% on Thursday, falling well short of expectations of a larger initial tightening that analysts said would have underlined a longer-term commitment to battle inflation.

June 20 – Bloomberg (Chester Yung): “The cost for banks to borrow Hong Kong dollars from each other for a month rose to the highest level since 2007 after prolonged currency intervention shrank the city’s liquidity pool and demand for cash climbed toward quarter-end. The one-month Hong Kong interbank offered rate for the local currency — known as Hibor — increased eight bps to 5.10%, having more than doubled from this year’s low set in February.”

June 22 – Financial Times (Emma Boyde): “More than $40bn flooded into US exchange traded funds in the week ended June 14, making it the sixth-largest weekly haul on record, according to… the Investment Company Institute. The bonanza for ETFs came as money continued to leach from mutual funds, which recorded outflows of more than $7bn in the same week. However, the huge disparity between the two figures suggests that investors are not simply switching from one vehicle to another. Shelly Antoniewicz, senior director of industry and financial analysis at the ICI, said the majority of the flows, some $29bn, had gone to domestic equity ETFs and that half of that had arrived in just one day on June 14.”

June 20 – Bloomberg (Katie Greifeld): “What was billed as the year of fixed-income is morphing into a massive game of catch-up for investors trying to capture some of the stock market’s gains. After a tepid start to 2023, nearly $102 billion has flowed into equity exchange-traded funds so far this year… That compares to $93 billion for fixed-income ETFs, which had been sitting on a bigger year-to-date haul than stock funds up until this month. The shift fits with an old adage in investing: flows follow performance.”

June 18 – Financial Times (Steve Johnson): “Assets invested in global exchange traded funds have hit a record of $10.32tn off the back of rallying stock markets and resilient inflows. The figure exceeds the $10.26tn mark set at the end of 2021 when markets peaked before Russia’s invasion of Ukraine and a global surge in inflation, according to… ETFGI… ‘Investor acceptance and preference for ETFs is strong and continuing, and the market move has pushed the ETF industry to record highs,’ said Deborah Fuhr, managing partner of ETFGI.”

June 17 – Associated Press (Suzan Fraser and Ayse Wieting): “Turkey’s central bank delivered a large interest rate hike Thursday, signaling a shift toward more conventional economic policies to counter sky-high inflation following criticism that President Recep Tayyip Erdogan’s approach has made a cost-of-living crisis worse. The bank raised its key rate by 6.5 percentage points, boosting it to 15%. The increase — a jump from the current 8.5% — is the first since March 2021 but is lower than market expectations.”

June 19 – Reuters (Takaya Yamaguchi, Makiko Yamazaki and Paritosh Bansal): “Japan’s financial regulator has sounded out top domestic banks about China risks and whether they have plans in place if Sino-Western tensions escalate… The Financial Services Agency’s (FSA) request… is to ensure Japan’s megabanks are thinking about the risks and are prepared to respond if the geopolitical situation worsens, including over the issue of Taiwan’s political status…”

June 21 – Bloomberg (Carmen Reinicke): “Short sellers are ramping up bets against US stocks even as paper losses on the positions surpass $100 billion. Total US short interest… exceeded $1 trillion this month as the S&P 500 Index extended its advance, S3 Partners LLC data show. The tally reached the highest since April 2022 before retreating slightly with stocks down for a third straight day.”

June 21 – Bloomberg (Ksenia Galouchko, Tom Keene and Lisa Abramowicz): “The powerful rally in technology stocks isn’t going to stop until the Federal Reserve gets more aggressive and breaks the economy, according to Wells Fargo’s Chris Harvey. The market now resembles the tech boom of 1999 and 2000, which didn’t end until tighter monetary policy had roiled stocks, the head of equity strategy at Wells Fargo Securities said…”

Bubble and Mania Watch:

June 21 – Bloomberg (Alexandra Harris): “The US money-market industry, one of the big winners on Wall Street as the Federal Reserve hiked interest rates, is getting another lift with more tools at its disposal to attract investors and expand its unprecedented mountain of cash. That’s the backdrop for Wednesday’s kickoff of Crane’s Money Fund Symposium, the marquee annual event for a business that has seen assets grow by some $1 trillion in the past year to a record of almost $5.5 trillion.”

June 20 – Wall Street Journal (Eric Wallerstein): “Money-market funds are placing less cash in a Federal Reserve borrowing program, a sign that efforts to replenish government coffers after the debt-ceiling fight haven’t disrupted markets. Analysts said funds are instead likely stepping up to buy new Treasury bills that the government is issuing as it looks to borrow up to $1 trillion through the end of the year… The Fed’s facility for what are called reverse repurchase agreements—which borrows from money-market funds and other firms in exchange for securities such as Treasurys, then returns the money the next day—had its biggest drain in roughly six months on Thursday. Reverse repo fell below $2 trillion for the first time since June 2022, after peaking above $2.5 trillion at the end of last year.”

June 22 – Bloomberg (Natalie Wong, John Gittelsohn, Jack Sidders and Shawna Kwan): “In New York and London, owners of gleaming office towers are walking away from their debt rather than pouring good money after bad. The landlords of downtown San Francisco’s largest mall have abandoned it… The creeping rot inside commercial real estate is like a dark seam running through the global economy. Even as stock markets rally and investors are hopeful that the fastest interest-rate increases in a generation will ebb, the trouble in property is set to play out for years. After a long buying binge fueled by cheap debt, owners and lenders are grappling with changes in how and where people work, shop and live in the wake of the pandemic… Higher interest rates are making it more expensive to buy or refinance buildings. A tipping point is coming: In the US alone, about $1.4 trillion of commercial real estate loans are due this year and next…”

June 17 – Financial Times (Tabby Kinder): “Lenders to San Francisco’s beleaguered commercial real estate market are braced for defaults on billions of dollars of debt after the owners of the city’s largest shopping mall and biggest hotel ceased loan payments and handed back the keys on what was once the city’s most valuable property. This week, Westfield and Brookfield Properties announced they had stopped making payments on a $558mn loan secured against San Francisco’s sprawling downtown mall that they have owned since 2002, and would surrender the premises to its lenders. Days earlier, …Park Hotels & Resorts said it expected to hand over ownership of two of its prime San Francisco hotels — the Hilton Union Square and Parc 55 — after it stopped making payments on a $725mn loan. The hotels were valued at more than $1.5bn when the loan was issued in 2016, suggesting that its owners believe their value has more than halved.”

June 21 – Wall Street Journal (Peter Grant): “Silicon Valley companies are dumping office space at an accelerating pace, as tech leaders such as Google and Facebook parent Meta Platforms close locations and reassess their commitments to the workplace. Office-vacancy rates in Silicon Valley… were up to 17% in June from 11% in 2019, according to… CoStar Group. In some spots, such as Menlo Park and Mountain View, the rate surpassed 20% this spring… The level of surplus office space remains below what is available just north in San Francisco, where the vacancy rate has more than tripled from 2019 to more than 25%.”

June 20 – Wall Street Journal (Heather Gillers): “Wall Street is betting against America’s downtowns. Investors are paying less for bonds linked to New York subways and buses. Downtown-focused real-estate investment trusts trade at less than half their prepandemic levels. Bondholders are demanding extra interest to hold office-building debt. Downtowns have been a mother lode for American cities over the years, providing billions of dollars in tax revenue along with their distinctive skylines. In turn, investors who bet on downtown office towers, or on the trains and buses delivering workers to them, could generally trust they held a winning hand. Now, with white-collar workers spending more time in their home offices…, investments linked to downtowns are trading at falling prices in volatile markets. ‘You could see this as a slow-motion change or as the beginning of a slow-moving train wreck,’ said Richard Ciccarone, president emeritus of Merritt Research Services… ‘I hope it’s not a train wreck, but it could be.’”

June 19 – Bloomberg (Katharine Hidalgo): “After a stellar decade for direct lending funds, things are about to get more difficult for some private debt managers. Returns for private credit funds — which make money by investing in illiquid assets — are likely to diverge more significantly as company defaults tick up. The pressures of higher interest rates and a slowing economy have already meant that some direct lending firms have had to take over companies in their portfolios. That suggests trickier times ahead for funds in the $1.5 trillion industry.”

June 20 – Financial Times (Tabby Kinder): “Investment in military tech start-ups is booming as the war in Ukraine and geopolitical tensions with China lead to growing confidence that the US government will give lucrative contracts to Silicon Valley companies making cutting-edge defence systems. US venture capitalists have agreed more than 200 defence and aerospace deals in the first five months of this year worth nearly $17bn — more than the sector raised during the entire of 2019, according to… PitchBook. This boom has mirrored the gold rush also experienced by the artificial intelligence sector, even as investment in start-ups in other parts of the tech industry has plummeted in recent months amid a broader downturn.”

Ukraine War Watch:

June 24 – Bloomberg (Andrew Atkinson and Reed Landberg): “Convoys of mercenaries loyal to Wagner leader Yevgeny Prigozhin advanced toward Moscow on Saturday, intensifying the most serious threat in decades to the authority of President Vladimir Putin who accused them of ‘treason.’ The insurrection is without precedent in Putin’s nearly quarter-century rule in Russia, jolting a country trying to sustain a war in Ukraine that’s the biggest conflict in Europe since World War II. It’s unfolding against the backdrop of a Ukrainian counteroffensive across some of the area where Wagner’s troops deployed for months in the war’s longest and bloodiest battle. In a televised address to the nation Saturday, a grave-looking Putin said those who ‘organized and prepared a military mutiny, who took up arms against their comrades, betrayed Russia and will answer for it.’”

June 22 – Reuters (Tom Balmforth and Anna Pruchnicka): “President Volodymyr Zelenskiy said… Ukrainian spies believe Russia was plotting an incident to release radiation from Europe’s largest nuclear plant, an allegation denied by the Kremlin… Zelenskiy said Kyiv was sharing its information with international partners about the Russian-occupied Zaporizhzhia plant in southern Ukraine. ‘Intelligence has received information that Russia is considering the scenario of a terrorist act at the Zaporizhzhia nuclear plant – a terrorist act with a release of radiation,’ he said. ‘They have prepared everything for this.’”

June 17 – Reuters (Andrew Osborn): “President Vladimir Putin said… his deployment of tactical nuclear weapons to Belarus, something he confirmed for the first time had already happened, was a reminder to the West that it could not inflict a strategic defeat on Russia. Speaking at Russia’s flagship economic forum in St Petersburg, Putin said Russian tactical nuclear warheads had already been delivered to close ally Belarus, but stressed he saw no need for Russia to resort to nuclear weapons for now.”

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

June 20 – Wall Street Journal (Bojan Pancevski): “NATO is conducting the largest air force exercise in its history in the skies above Europe in wargames that allied commanders say are producing valuable lessons for deterring potential Russian and Chinese aggression. The Germany-led exercises involve around 250 aircraft—including strategic bombers and more than 10,000 troops from members of the North Atlantic Treaty Organization as well as Japan and Sweden—simulating a response to an attack from an adversary resembling Russia.”

June 19 – Reuters (Humeyra Pamuk): “China and the United States agreed… to stabilize their intense rivalry so it does not veer into conflict, but failed to produce any major breakthrough during a rare visit to Beijing by U.S. Secretary of State Antony Blinken. Chinese President Xi Jinping welcomed ‘progress’ after shaking hands with Blinken at the Great Hall of the People, a grand venue usually reserved for greeting heads of state.”

June 20 – Financial Times (Demetri Sevastopulo): “US secretary of state Antony Blinken raised concerns with China about its alleged electronic spying facilities in Cuba during a two-day mission to Beijing aimed at stabilising turbulent relations between the powers… Blinken said he had discussed the subject of Chinese spying operations in Cuba in his meetings with top officials. Asked if he had brought up the issue, he said: ‘I did. I’m not going to characterise their response, but I told them that this is a serious concern for us.’”

June 18 – Financial Times (Edward White and Sun Yu): “When the Chinese Communist party leadership gathered in Beijing for its quinquennial congress last October, the media spotlight was firmly on President Xi Jinping securing a precedent-shattering third term… Overlooked by many at the time was the rise of a new group of political leaders in the top echelons of power whose background diverges from the usual careers in provincial government or Communist party administration. Instead, they all have deep experience in China’s military-industrial complex. Their swift advancement is part of Xi’s efforts to reinvigorate China’s long-running project of ‘military-civil fusion’, a policy that seeks to harness new technologies from the private sector for the benefit of the country’s rapidly modernising military.”

June 20 – Wall Street Journal (Warren P. Strobel, Gordon Lubold, Vivian Salama and Michael R. Gordon): “China and Cuba are negotiating to establish a new joint military training facility on the island, sparking alarm in Washington that it could lead to the stationing of Chinese troops and other security and intelligence operations just 100 miles off Florida’s coast, according to current and former U.S. officials. Discussions for the facility on Cuba’s northern coast are at an advanced stage but not concluded, U.S. intelligence reports suggest.”

De-globalization and Iron Curtain Watch:

June 21 – Wall Street Journal (Yoko Kubota): “The confidence of international businesses in China is at a record low as the hoped-for recovery in the world’s second-largest economy fizzles and Beijing’s relations with its biggest trading partners deteriorate. Almost two-thirds of respondents in a European Union Chamber of Commerce in China poll said business became harder over the past year, up 4 percentage points from the previous year and the highest since the surveys began. Eleven percent of respondents said they have shifted investments out of China, or made the decision to do so… A further 7% said they were considering doing so.”

Inflation Watch:

June 19 – Financial Times (Divya Chowdhury): “A quarter of workers surveyed by PwC expect to change jobs in the next 12 months, up from 19% last year, as they are increasingly left cash-strapped in a cooling economy while dealing with inflationary pressures. Even as the ‘Great Resignation’ continues, around 42% of the employees surveyed by PwC in its new study of the global workforce said they are planning to demand pay rises to cope with the higher cost of living, up from 35% last year.”

June 23 – Reuters (Lisa Baertlein and Bianca Flowers): “Workers at aerospace supplier Spirit AeroSystems were the latest U.S. union employees to reject a contract their leaders negotiated with their employer, joining freight railroad employees, airline pilots and others who are growing more fed up with stagnant pay, high healthcare costs, scanty sick time and uncertain scheduling. In the past two years, Spirit employees, pilots at American and United airlines, factory workers at farm and construction equipment makers CNH Industrial and Deere & Co and freight rail laborers have all rebuffed deals despite pay raises that in some contracts appeared significant.”

June 19 – Yahoo Finance (Ronda Lee): “Home insurers have already exited markets along the Eastern Seaboard as hurricane risks increase. But State Farm’s exit from California last month due to wildfire hazards caused a stir. ‘So now that they’ve bowed out, that’s going to be a real issue, especially in those heavy fire markets where you’re paying premium for that,’ Josh Altman, co-founder of The Altman Brothers, told Yahoo… ‘Now, that’s going to be a major, major blow to those properties.’ State Farm cited ‘historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market’ for its decision.”

June 17 – Bloomberg (Joanna Ossinger): “Inflation in the US won’t come down as quickly as markets are currently pricing, according to strategists at Goldman Sachs… ‘Although we expect further declines in inflation going forward, markets appear considerably more optimistic than we are about the pace of cooling,’ the strategists said.”

Biden Administration Watch:

June 21 – Financial Times (Joe Leahy and Demetri Sevastopulo): “China has responded with outrage after US president Joe Biden called his counterpart Xi Jinping a ‘dictator’ in a row that threatens the nascent attempt to stabilise the deteriorating relationship between the powers. Biden said… that Xi had not known about an alleged spy balloon that flew over the US this year. The incident sent bilateral ties plunging to the lowest point in decades. ‘That’s what’s a great embarrassment for dictators, when they didn’t know what happened,’ the US president told about 130 supporters… The Chinese foreign ministry described Biden’s remarks as ‘extremely absurd and irresponsible’, adding that they ‘seriously violate basic facts, diplomatic protocols and China’s political dignity’.”

June 21 – Associated Press (Christopher Rugaber and Ken Sweet): “President Joe Biden’s three nominees for the Federal Reserve’s Board of Governors pledged to fight inflation during a confirmation hearing… that drew only modest pushback from Republican members of the Senate Banking Committee. Last month, Biden nominated Adriana Kugler, a Georgetown University economist, to serve as a Fed governor, a position that would make her the first Latina to serve on the board… He also nominated Philip Jefferson, who joined the board last year, for the spot of vice chair… Also in May, Biden nominated Lisa Cook to serve a full 14-year term on the board.”

Federal Reserve Watch:

June 22 – Reuters (Howard Schneider and Ann Saphir): “U.S. Federal Reserve Chair Jerome Powell said… the central bank would move interest rates at a ‘careful pace’ from here as policymakers edge towards a stopping point for their historic round of monetary policy tightening. ‘We’re at least close to where we think our destination is…and it only makes common sense to move…at a careful pace,’ Powell said at a hearing before the Senate Banking Committee.”

June 21 – Associated Press (Christopher Rugaber): “With inflation in the United States still excessive, most Federal Reserve officials expect to raise interest rates further this year, Chair Jerome Powell told a House committee… ‘Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go,’ Powell said… Even so, the Fed last week kept interest rates unchanged after 10 straight hikes so it could take time to gauge how higher borrowing rates have affected the economy, Powell said. The contrast between the Fed’s stated concern over still-high inflation and its decision to skip a rate hike has heightened uncertainty about its next moves. The hazier messaging suggests that Powell is seeking to balance competing demands from those Fed officials who want to keep raising rates and others who feel the central bank has done enough.”

June 22 – Bloomberg (Rich Miller): “Jerome Powell would like to make one thing clear: the Federal Reserve is not done hiking interest rates. Seeking to clear up confusion about policy and play down the significance of last week’s break in its 15-month credit tightening campaign, the Fed chair suggested officials were on course for two more rate increases this year. In presenting the Fed’s semiannual economic update to Congress…, Powell hammered home the message that the central bank was laser focused on reducing elevated inflation back to target despite Democrat lawmakers’ concerns that tighter credit will push up unemployment. ‘The process of getting inflation down to 2% has a long way to go,’ he told the House Financial Services Committee…”

June 20 – Bloomberg (Catarina Saraiva and Rich Miller): “Three Federal Reserve nominees — two of them current central bank policymakers — said tackling US inflation would be their top priority if confirmed to roles at the central bank. Governor Philip Jefferson, selected by President Joe Biden to be elevated to vice chair, said the economy faces multiple challenges, including inflation and banking-sector stress, in remarks to be delivered at his confirmation hearing Wednesday before the Senate Banking committee. ‘Inflation has started to abate, and I remain focused on returning it to our 2% target,’ Jefferson said…”

U.S. Bubble Watch:

June 22 – Reuters (Dan Burns): “The number of people filing for state unemployment benefits for the first time held steady at a 20-month high last week… Data… showed 264,000 new claims were filed for jobless benefits on a seasonally adjusted basis… Meanwhile, the ranks of all those continuing to receive benefits beyond the first week fell to 1.759 million in the week ended June 10 from a revised 1.772 million the week before.”

June 23 – Bloomberg (Augusta Saraiva): “US business activity expanded in early June at the slowest pace in three months, held back by a deeper contraction at factories. The S&P Global flash June composite purchasing managers index fell 1.3 points to 53… The report offered mixed news on inflation. A gauge of factory input prices shrank the most in over three years while a similar measure for service providers climbed to a five-month high… The group’s overall services gauge remained elevated on robust demand, which helped drive a measure of expectations to a more than one-year high…”

June 20 – Reuters (Dan Burns): “Groundbreaking on U.S. single-family homebuilding projects surged in May by the most in more than three decades and permits for future construction also climbed… Housing starts rose to a seasonally adjusted annual rate of 1.631 million units last month from April’s downwardly revised 1.34 million… May’s rate was the highest since April 2022, which was then the highest since 2006. The 291,000-unit increase in starts was the most since January 1990, and the 21.7% rise was the largest percentage gain since October 2016.”

June 22 – Bloomberg (Augusta Saraiva): “Sales of previously owned US homes barely rose in May as high mortgage rates continued to crimp demand and discourage owners from listing their properties. Contract closings edged up 0.2% to a 4.3 million annualized pace… Compared with a year earlier, sales were down more than 18%… The median selling price declined 3.1% from a year earlier, the most since 2011, to $396,100… The number of homes for sale fell 6.1% from a year earlier to 1.08 million units. That’s the lowest inventory level for any May in data back to 1999.”

June 21 – Bloomberg (Lara Sanli): “The number of homes for sale in the US fell to record low levels in May, according to… Redfin Corp., as high mortgage rates continue to deter people from moving. Active listings fell 7.1% on a seasonally adjusted basis in May, and were down 38.6% from pre-pandemic levels… The brokerage said just 1.4 million homes were up for sale in May — lower than any month on its records, which date back to 2012… The low number of homes for sale has driven price increases in some markets. Nearly half of Redfin’s offers were met with bidding wars in May, while more than two-thirds of homes sold went for above list price.”

June 19 – Dow Jones (Robb M. Stewart): “Confidence among U.S. home builders shifted into positive territory in June for the first time in 11 months amid solid demand and a lack of existing inventory and improving supply-chain efficiency, according to… the National Association of Home Builders. Here are the report’s main takeaways: The NAHB’s housing-market index, which gauges builder confidence in the market for single-family housing, rose to 55 from 50 in May. The reading marked a sixth straight month of improved confidence and the first time the index rose above the 50 neutral midpoint since July 2022.”

June 21 – CNBC (Diana Olick): “Mortgage applications to purchase a home increased 2% for the week but were 32% lower than the same week a year ago. Homebuyers are starting to get used to higher interest rates, but the continued drop in new listings of homes for sale is keeping sales low. Federal Housing Administration demand rose more than conventional loan demand.”

June 22 – Wall Street Journal (Richard Vanderford): “Fraud against the Paycheck Protection Program was widespread enough to bump up real-estate prices within certain U.S. ZIP Codes, researchers at the University of Texas concluded, blaming the abuse on some of the financial technology companies that provided the loans. House prices in ZIP Codes with high fraud were 5.7 percentage points higher than in low-fraud ZIP Codes in the same county, even when controlling for a range of other possible factors, researchers at the University of Texas at Austin’s McCombs School of Business said in a study…”

Fixed Income Watch:

June 20 – Financial Times (Eric Platt and Harriet Clarfelt): “Corporate America is feeling the pinch from the slowdown in Wall Street’s $1.4tn market for junk-rated loans, with a growing list of companies forced either to pay more or abandon borrowing plans. Borrowers have been hit by shifts in the market for collateralised loan obligations, or CLOs, the investment vehicles that own roughly two-thirds of lowly rated US corporate loans. A loan extension for California utility PG&E was shelved last month, while Heartland Dental…, and… Internet Brands had to pay lenders more or agree to tougher investor protections in return for extending loan maturities… More generally, many CLOs are reining in their debt purchases — restricting the financing possibilities of lower-rated borrowers — because of limits on when and what they can buy as well as the broader economic environment.”

China Watch:

June 20 – Bloomberg: “Chinese policymakers are facing growing calls for economic stimulus, this time from several prominent state media and top government advisers. The country’s three main state-run securities newspapers ran front-page articles… saying the central bank is likely to ease monetary policy further, citing well-known economists. Separately, Xinhua News Agency reported that Wang Huning, the No. 4 official in China’s ruling Communist Party, held a meeting… with representatives of other Chinese political parties to discuss policy suggestions on reviving consumption.”

June 19 – Bloomberg: “Chinese banks followed the central bank by lowering their benchmark lending rates on Tuesday, although a relatively modest reduction to the mortgage reference rate disappointed investors. The one-year and five-year loan prime rates were reduced by 10 basis points each, according to a statement by the People’s Bank of China.”

June 21 – Reuters (Qiaoyi Li and Liz Lee): “China unveiled… a 520 billion yuan ($72.3bn) package of tax breaks over four years for electric vehicles (EVs) and other green cars, its biggest yet for the industry as it seeks to boost slower auto sales growth. Weakening sales growth in the world’s biggest auto market has raised concern over China’s economic growth and while financial support was widely expected after an earlier government pledge to promote the industry…”

June 19 – New York Times (Keith Bradsher, Daisuke Wakabayashi and Claire Fu): “When China suddenly dismantled its lockdowns and other Covid precautions last December, officials in Beijing and many investors expected the economy to spring back to life. It has not worked out that way. Investment in China has stagnated this spring after a flurry of activity in late winter. Exports are shrinking. Fewer and fewer new housing projects are being started. Prices are falling. More than one in five young people is unemployed. China has tried many fixes over the last few years when its economy had flagged, like heavy borrowing to pay for roads and rail lines. And it spent huge sums on testing and quarantines during the pandemic. Extra stimulus spending now with borrowed money would spur a burst of activity but pose a difficult choice for policymakers already worried about the accumulated debt.”

June 18 – Bloomberg: “Chinese homeowners are losing conviction in their decades-long belief that property is a reliable store of wealth, undermining even coveted markets like Shanghai… Asking prices in the financial hub have slumped for three straight months, falling to the lowest level since before China emerged from Covid lockdowns at the end of last year… Despite surging inventory, transactions in the city tanked by one third to about 16,000 units in May compared with March, the Economic Observer reported… Interviews with homeowners, real estate agents and analysts suggest the downturn has been fueled by waning faith that property will always be one of China’s safest investments.”

June 21 – Bloomberg: “China has begun a fresh round of nationwide inspections to work out how much money local governments’ owe, according to people familiar with the matter, a sign that authorities are preparing to take concrete steps to tackle a key financial risk. Local officials will be pressed to come clean about their so-called hidden debt as national leaders attempt to get a fuller picture of liabilities across all levels of government, the people said…”

June 18 – Wall Street Journal (Cao Li): “China’s small businesses are cutting staff, struggling to pay off debt and nervous about the future. Their plight paints a grim picture of the country’s flagging recovery. The country’s small and medium-size enterprises are crucial to the economy; they employed around 233 million people by the end of 2018… But official data, recent disclosures from lenders and interviews with small-business owners show that many of these companies are suffering. ‘The biggest problem for small and micro enterprises now is survival,’ said Ji Shaofeng, the founder of a micro loan trade association based in China’s eastern Jiangsu province.”

June 18 – Reuters (Xie Yu, Ziyi Tang and Julie Zhu): “From cutting salaries and bonuses and asking staff not to wear expensive clothes and watches at work, to reining in travel and entertainment expenses, Chinese financial firms have jumped on an austerity drive as Beijing pushes to bridge the wealth gap. The steps come as authorities vow to clamp down on corruption in the country’s $57 trillion financial sector and as growth in the world’s second-largest economy weakens, with youth unemployment hitting a record high… China’s top graft-busting watchdog earlier this year vowed to eliminate ideas of a Western-style ‘financial elite’ and rectify the hedonism of excessive pursuit of ‘high-end taste’.”

June 22 – Reuters (Ryan Woo and Tingshu Wang): “The temperature in Beijing breached 41 degrees Celsius on Thursday and shattered the record for the hottest day in June as heatwaves that had seared northern China a week earlier returned to the Chinese capital.”

June 21 – Reuters (Elida Moreno): “The Panama Canal will expand restrictions on the largest ships crossing the waterway, one of the world’s busiest trade passages…, citing shallower waters due to drought. The measure follows a series of depth restrictions in the 50-mile canal since the beginning of the year due to a drought, which authorities had hoped would ease by the start of the Central American country’s rainy season… The new restrictions, which will take effect Sunday, limit neo-Panamax container ships to a depth limit of 43.5 feet meaning they must either carry less cargo or shed weight in order to float higher.”

Central Banker Watch:

June 19 – Wall Street Journal (Tom Fairless and Paul Hannon): “The world’s central banks underestimated inflation last year. They are trying not to make the same mistake twice. Across affluent countries, central bankers are sharply lifting inflation forecasts, penciling in further interest-rate increases and warning investors that interest rates will stay high for some time. Some have set aside plans to keep interest rates on hold. Roughly a year into their campaign against high inflation, policy makers are some way from being able to declare victory. In the U.S. and Europe, underlying inflation is still around 5% or higher even as last year’s heady increases in energy and food prices fade from view. On both sides of the Atlantic, wage growth has stabilized at high levels and shows few signs of steady declines.”

June 22 – Bloomberg (Alexander Weber and Jana Randow): “The European Central Bank’s deposit rate hasn’t reached a ‘high enough’ level yet, with the next steps to depend on incoming data, Governing Council member Joachim Nagel says… ‘When we’ve reached the peak, interest rates will remain at this level for as long as necessary. Breaking inflation requires vigorous action as well as perseverance.’”

June 19 – Bloomberg (Andrew Langley): “European Central Bank Executive Board member Isabel Schnabel said officials can’t afford to be complacent about inflation and shouldn’t worry about raising borrowing costs too far. ‘We need to remain highly data-dependent and err on the side of doing too much rather than too little… Risks of both a de-anchoring of inflation expectations and weaker monetary policy transmission suggest that there is a limit to how long inflation can stay above our 2% target.’”

June 22 – Reuters (John Revill): “The Swiss National Bank raised its policy interest rate by 25 bps… as the central bank pressed ahead with its campaign to dampen stubborn inflation and signalled that more tightening was likely to come. Chairman Thomas Jordan pointed to rising inflationary pressures and the danger of price increases becoming entrenched as the SNB hiked Swiss rates for the fifth time in succession… ‘The marked decline in recent months is very welcome,’ Jordan said. ‘Nevertheless the underlying inflationary pressure has risen further. That means most likely that tighter monetary policy is necessary to bring inflation sustainably below 2%… But we can also afford the more gradual approach.’”

June 22 – Bloomberg (Ott Ummelas and Alice Gledhill): “Norway’s central bank accelerated interest-rate increases and pledged more aggressive tightening, intensifying its response to stubborn inflation and a weak currency. Norges Bank lifted its key deposit rate on Thursday by 50 bps to 3.75%, prompting the krone to post its biggest advance in two weeks.”

Global Bubble Watch:

June 19 – Bloomberg (Charles Daly and Anton Wilen): “Sweden’s beleaguered property sector suffered another blow when one of the largest office landlords in the capital was downgraded to junk status by Moody’s… FastPartner AB saw its rating cut one step to Ba1 with the possibility for further downgrades to come if the company cannot shore up its finances. The cut ‘reflects the rapid increase in interest rates combined with subsequently challenging capital markets,’ Moody’s said…”

Global Bubble Watch:

June 19 – New York Times (Natasha Frost): “Michael Wilson was hopeful when he put his three-bedroom house up for sale: Over a dozen would-be buyers came to the initial showing. But about a year later, the property is still for sale. Offer after offer fell through because the prospective buyers were unable to sell their homes. Welcome to New Zealand, one of the world’s most troubled housing markets. Over the last 18 months, homeowners and investors have lost billions of dollars in wealth after prices that spiked during the Covid pandemic started plunging as mortgage rates also soared. ‘If we listed it, say, two months before we originally did, it would have literally sold the next day,’ Mr. Wilson said.”

Europe Watch:

June 20 – Bloomberg (William Wilkes): “Auto sales in Europe continued their upward trajectory in May, rising for the 10th month in a row as demand for electric cars outpaced the broader market. New-car registrations increased 18% to 1.12 million vehicles… Sales of battery-electric vehicles jumped 66% last month…”

June 23 – Financial Times (Martin Arnold and Guy Chazan): “German house prices fell at a record rate of 6.8% in the first quarter of this year, as higher borrowing costs, inflation and weaker economic growth took their toll on Europe’s largest property market. The year-on-year fall in the index of German residential property prices was the biggest since records began in 2000… Falling house prices are the latest sign of trouble in the German residential housing market, where housebuilding is also slowing. Just 21,200 flats were approved for construction in April, 31.9% less than a year before. That was the biggest decline since March 2007.”

Japan Watch:

June 22 – Bloomberg (Erica Yokoyama): “Japan’s consumer prices rose at a faster pace than expected in May while the deeper inflation trend continued to strengthen, outcomes that could fuel speculation the central bank will raise its inflation forecasts in July and even tweak its stimulus program. Prices excluding those for fresh food gained 3.2% from a year ago, decelerating from a 3.4% rise in April…”

June 20 – Bloomberg (Toru Fujioka): “A Bank of Japan board member hinted at the need to consider revising the yield curve control program, supporting the view among some economists that the bank may adjust its signature policy framework next month. ‘Yield curve control seemed, in some aspects, to have hampered smooth financing and the bank could consider revising its conduct at this time; however, it was appropriate to wait and see a little longer in light of the situation in global financial markets,’ one of nine board members said, according to the minutes of the April policy meeting…”

June 22 – Reuters (Leika Kihara and Takahiko Wada): “Bank of Japan (BOJ) board member Asahi Noguchi said… the central bank must maintain ultra-loose monetary policy to ensure wages, seen as key to driving inflation to its 2% target, continue to increase as a trend. Noguchi said core consumer inflation, which has remained above 2% for more than a year, will likely fall below that level around September or October as the effect of past rises in raw material costs dissipates… ‘What’s most important now is for the BOJ to maintain monetary easing and ensure budding signs of wage growth become a sustained, strong trend,’ he said…”

Leveraged Speculation Watch:

June 19 – Bloomberg (Silas Brown, Abhinav Ramnarayan and Paula Seligson): “They’re the gilded class of high finance, whose shrewd bets and jumbo-sized paydays are the envy of Wall Street. Yet for all their savvy dealmaking, even the titans of private equity are getting caught out by the swift rise in interest rates — which is costing the companies they own billions in extra interest and threatens to push scores of them into default. Lulled by a decade of cheap money and easy profits, boldface names like KKR & Co., Platinum Equity and Clayton Dubilier & Rice now face a reckoning of their own making. By failing to appreciate just how much central banks would jack up rates, many private equity firms opted against hedging arrangements that could have shielded companies saddled with $3 trillion in floating-rate debt from rising interest costs…”

June 22 – Bloomberg (Aaron Kirchfeld, Thomas Seal, Eyk Henning and Dinesh Nair): “Dealmakers brave enough to attempt big acquisitions are increasingly running into difficulties, as transactions get held up by everything from government haggling to regulatory worries. In just the last week, news emerged of about $50 billion of deals running into trouble… Meanwhile, private equity firms have are also having difficulty getting transactions over the line, with around $30 billion of deals hitting trouble in recent weeks due to heady price demands and difficult financing markets.”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 17 – Financial Times (Sarah Neville and Amy Borrett): “When Paddy Scott developed agonising stomach pains in 2017, the possibility of cancer never entered his head. The British expedition photographer and film-maker… was just 34 years old and prided himself on his physical fitness. After his GP referred Scott to hospital for a colonoscopy, the clinician who administered it asked if he would take part in a trial of a new blood test designed to detect tumours… Later he received the devastating news that he had advanced bowel cancer which had spread to his liver… The past 30 years have seen an upsurge in cases of so-called ‘early onset’ cancer in the under-50s. So marked is the increase, leading epidemiologists have suggested it should be called an epidemic.”

June 19 – Bloomberg (Sreeja Biswas): “Rapidly melting glaciers in Asia’s Hindu Kush Himalayan region — home to the world’s highest mountains — are threatening the lives and livelihoods of as many as two billion people downstream, according to a new study. The glaciers thawed 65% faster in the 2011 to 2020 period compared with the preceding decade and may lose 80% of their current volume by the end of this century on current emissions trajectories, the International Centre for Integrated Mountain Development, or ICIMOD, found… This may over time drastically reduce freshwater supplies in 12 rivers that flow across 16 nations in the region, it said.”

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