June 3, 2022: Hurricane Peerless

June 3, 2022: Hurricane Peerless
Doug Noland Posted on June 4, 2022

The week arguably offered some clarity on key facets of today’s murky financial, economic and policy backdrops. At this point, the U.S. economy is anything but falling off a cliff. A stronger-than-expected 390,000 jobs were added during May (April revised slightly higher to 436k). The unemployment rate was unchanged at a multi-decade low 3.6%. Wednesday’s JOLTS data registered a larger-than-expected 11.4 million available jobs in April, down from March’s (revised higher) record 11.855 million. At 200,000, weekly unemployment claims remain exceptionally low from a historical perspective.

Some pointed to the 0.3% monthly gain (5.2% y-o-y) in Average Hourly Earnings as indicating waning wage growth momentum. Unprecedented labor market tightness will keep pressure on companies to continue to boost pay to attract and retain workers. And there is little reason to believe Wage/Price Spiral Dynamics will offer Fed officials much breathing room anytime soon. There are segments of the economy that will be absolutely booming this summer.

The strongest pushback to the recent dovish tightening cycle narrative was delivered Monday by Fed Governor Christopher Waller.

May 30 – Reuters (Lindsay Dunsmuir and Tom Sims): “The Federal Reserve needs to move interest rates much higher and soon if high inflation does not begin to subside, Fed Governor Christopher Waller said… ‘If inflation doesn’t go away, that… rate is going a lot higher, and soon,’ Waller said… ‘We are not going to sit there and wait six months…I am advocating 50 on the table every meeting until we see substantial reductions in inflation. Until we get that, I don’t see the point of stopping.’”

A similar view was espoused by Vice Chair Lael Brainard: “From where I sit today, market pricing for 50 bps, potentially in June and July, from the data we have in hand today, seems like a reasonable path. Right now it’s very hard to see the case for a pause. We’ve still got a lot of work to do to get inflation down to our 2% target.” Cleveland Fed president Loretta Mester also weighed in: “I’m going to come into that September meeting and if I don’t see compelling evidence, then I could easily be a 50 bps in that meeting as well.”

We also learned this week that JPMorgan CEO Jamie “storm clouds could dissipate” Dimon is not the optimist portrayed by the media last week.

June 1 – Bloomberg (Sally Bakewell): “JPMorgan… Chief Executive Officer Jamie Dimon warned of a ‘hurricane’ as the economy struggles against fiscally induced growth, quantitative tightening and Russia’s invasion of Ukraine. Dimon, who had said in May that there were storm clouds looming over the US economy, said he wanted to change that assessment given the challenges faced by the Federal Reserve as it braces for an unprecedented environment.”

Dimon: “It’s a hurricane. Right now it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy – or Andrew. You better brace yourself.”

I’ll place my bet on Sandy-like. And that’s the Fed’s historic predicament. There’s a Cat Five Hurricane lurking somewhere out there, yet the various models – unreliable in the best of times – these days greatly diverge in the timing, size, location and ferocity of Hurricane Peerless’ landfall. Meanwhile, each month of elevated price pressures ensures inflation becomes more deeply entrenched and difficult to contain.

WTI Crude jumped another $3.80 this week to $118.87, the high since the March price spike, while boosting 2022 gains to 71%. Heading into the busy summer driving season, Gasoline futures jumped another 5.9% this week to a record high, while increasing y-t-d gains to 91%. And while Natural Gas declined 2.3%, prices are still up 129% this year.

The bond market’s dovish Fed narrative relief rally was notably short-lived. Ten-year Treasury yields surged 20 bps this week to 2.96%. In general, the prospect of Hurricane Peerless has maintained downward pressure on bond yields. And low market yields and loose financial conditions continue to support elevated inflation. At some point, however, I expect bond market focus – Hurricane Peerless notwithstanding – to gravitate to increasingly ingrained inflation dynamics.

Importantly, elevated inflation is unrelenting – and it’s global. “Eurozone inflation hit a record 8.1% in May amid surging energy and food costs” (from AP) – as German consumer inflation hit a record 8.7%. Meeting next Thursday, the Apathetic ECB is widely expected to delay the start of baby-step (25bps) rate increases until next month. Despite a few outspoken hawks, Christine Lagarde and the doves are not dissuaded. From Bloomberg (Alexander Weber): “Italy’s Ignazio Visco pushed back on Tuesday against the prospect of a more aggressive rate step, saying the ECB must proceed in an ‘orderly’ manner to avoid potential bond-market turbulence.”

“Potential bond-market turbulence”? Even with steadfast ECB dovishness, European bond-markets are turning increasingly disorderly. I wonder how Bank of Italy Governor Visco processed Italian 10-year yields surging a disconcerting 50 bps this week to 3.40% – up 131 bps in nine sessions to the highest yield since November 2018. Portuguese yields jumped 40 bps this week (110bps in 9 sessions) to 2.47%, the high since September 2017. Spanish yields rose 40 bps (97bps) to 2.44% (high since August 2014).

Importantly, this is not a typical bout of periphery bond bludgeoning. French yields jumped 32 bps (78bps in nine sessions) to 1.80% – the high since June 2014. German bund yields rose 31 bps to 1.27% (72bps), also the high since June 2014. Moreover, German two-year yields surged 30 bps to 0.64%, the high all the way back to November 2011.

UK yields rose 24 bps to 2.16%, the high since June 2014. Canadian yields jumped 28 bps to 3.06%, and Australian yields rose 23 bps to 3.48%. EM bonds were not spared. Yields jumped 28 bps in Romania, 25 bps in Mexico and 25 bps in Peru. In dollar-denominated bond land, Mexico’s yields rose 17 bps and Brazil 25 bps.

Are European yields – embarking on another leg higher as the ECB drags its feet with interest rates still negative – foreshadowing a surge higher in U.S. and global yields? Are we now witnessing a not so subtle shift to bond markets losing patience with wimpy inflation-fighting monetary policies? Moreover, bonds reacting more constructively to hawkish monetary policy would be one more dynamic suggesting a major cycle change. When push comes to shove, bond markets will be central bankers’ greatest priority.

I’ll stick my neck out with the view that bonds have commenced a new bear market phase. There is newfound recognition that global central bankers lack the fortitude to mount the type of aggressive fight required at this point to rein inflation in. It is also becoming clear that inflation is in a secular upswing that will likely prove resilient even in the face of faltering financial Bubbles and weakening economies. Energy, food and commodities are fundamentally altered in today’s “iron curtain” world, while markets and supply chains for many things (including “tech”) are in the crosshairs.

June 1 – Bloomberg: “A deluge of new special local government bonds worth more than an entire year’s supply pre-pandemic may hit China’s debt market this month as the country revs up infrastructure investment to support the Covid-battered economy. Regions in China already have issued a combined 1.97 trillion yuan ($295bn) of new special debt from January to May… Given Beijing’s order to use up the rest of this year’s 3.65 trillion yuan quota by the end of this month, that leaves 1.68 trillion yuan worth of bonds to be sold, more than what was issued in all of 2018.”

June 2 – Bloomberg: “Chinese banks are facing growing pressure to support cash-strapped developers after months of pleas by regulators failed to boost lending to the industry. Local branches at the People’s Bank of China have called for meetings with banks in multiple cities since last week to assess why loans have slowed, along with the difficulties faced by banks and how regulators can help… The move represents increasing concern from officials following repeated so-called window guidance for faster property lending in previous months, the people said…”

June 2 – Bloomberg: “Beijing is turning to state-owned policy banks once again to help rescue an economy under strain, ordering them to provide 800 billion yuan ($120bn) in funding for infrastructure projects. The stimulus, announced at a State Council meeting chaired by Premier Li Keqiang, could help finance a significant chunk of infrastructure costs this year and give some relief to local governments grappling with plunging revenues. President Xi Jinping has called for an all-out effort to boost infrastructure this year, turning to an old playbook of driving up growth through public investment. Funding the extra spending has proven to be tricky though, after a plunge in land sales and widespread Covid outbreaks battered government revenue.”

Copper was up 3.8% this week. Platinum surged 6.2%, while lead, nickel, tin and zinc all posted strong gains. Are the industrial metals responding to Chinese stimulus prospects? Beijing appears to have finally hit the panic button. The upshot could be massive, prolonged and historic fiscal stimulus.

I recall years of “bridges to nowhere,” as Tokyo responded to Japan’s collapsing Bubble. China’s Bubble has been at a whole different level. Moreover, Japan wasn’t fixated on achieving global economic and military superpower status. There was no life and death “arms race” – economic, military and geopolitical – with the U.S.

Beijing is increasingly assuming a war footing, an economic and financial war that could easily escalate into a hot war. For China’s communist leadership, the stakes apparently couldn’t be greater. Especially in response to the unfolding geopolitical backdrop, I expect Beijing to counteract faltering Bubbles with overwhelming force and determination. And we can assume inflation is not today at the top of their list of concerns.

For the past couple of years, I’ve posited that vulnerable Chinese Bubbles were a significant factor in restraining Treasury and global bond yields in the face of mounting inflation risk. Today, collapsing Bubbles still pose disinflationary risks. Increasingly, however, there is a risk of powerful countervailing inflationary impulses out of China. I can certainly see the possibility of Beijing compelled to administer aggressive shock therapy stimulus, as it attempts to reverse the profound “Covid zero” hit to general confidence.

Moreover, the Ukraine war and unfolding “iron curtain” dynamic elevate the risk that massive Chinese stimulus measures exacerbate global inflationary impulses. Ponder how things have evolved: A year ago, the preponderance of risk was with a collapsing China Bubble unleashing disinflationary forces upon a world of relatively contained inflation. As recently as four months ago, a faltering Bubble would counter heightened global inflation.

Now, following the Ukraine/Russia War, “Covid zero” lockdowns and surging worldwide inflationary impulses, a disparate risk profile has emerged. Beijing now appears poised to embark on historic stimulus measures in a world of powerful and increasingly embedded inflationary forces. As such, the likelihood of disinflationary outcomes has significantly receded, with this dynamic now being priced into global bond markets.

U.S. equities and corporate Credit were resilient this week in the face of surging Treasury yields. High-yield spreads (to Treasuries) traded below 400 bps for the first time in a month, down from 481 bps on May 24th. Junk bond funds enjoyed a rare week of big inflows. After the slowest May in twenty years, the junk bond market was open again for new issues. At more than $7 billion, this week’s issuance was “the busiest since mid-January.”

But this could be the eye of the storm. Wind and rain reemerged Friday. High-yield CDS rose 13 bps (after collapsing 66 bps the previous week), as junk spreads widened nine bps. The Semiconductor (SOX) dropped 3.0% in Friday trading, with the Nasdaq100 down 2.7%. The unimpressive crypto rally also ran aground. Tesla was slammed 9.2% in Friday trading, with Micron down 7.2%, and Etsy falling 7.2%. No reason to back away from the bursting tech Bubble thesis.

Friday offered inklings of Hurricane Peerless. I have posited for a while now that highly levered contemporary markets are acutely vulnerable to a surge in Treasury yields accompanied by a risk-off jump in CDS and options prices, along with widening Credit spreads. It is this combination that is most problematic to a wide range of levered strategies. And the announcements from hedge funds hit by big losses are starting to pile up – which equates to heightened industry-wide vulnerability.

It’s now definitely not a low probability scenario: yields spike on heightened inflation concerns, exacerbating faltering Bubbles (certainly including “tech”) at home and abroad. And with the general economy resilient and inflation relentless, the Fed would remain focused on its inflation-fighting credentials. The Newly Amorphous – and Precarious – Fed Put.

It was another week where it seems the U.S., the global epicenter of technology development and excess, has become the proverbial eye of the storm. A faltering dollar would be a feature of the Hurricane Peerless scenario, providing additional fuel to global commodities booms, while weakening international confidence in U.S. securities markets and policymaking. It’s as if everyone is prepared to hold their ground – determined to enjoy a tranquil summer market respite (trying really hard not to think ahead to the Autumn Market Hurricane Season). I wouldn’t bank on peaceful: long, hot and illiquid summer; lots of storm warnings.

For the Week:

The S&P500 fell 1.2% (down 13.8% y-t-d), and the Dow declined 0.9% (down 9.5%). The Utilities lost 1.2% (up 2.2%). The Banks slumped 1.7% (down 13.5%), and the Broker/Dealers dropped 2.3% (down 15.1%). The Transports were unchanged (down 12.3%). The S&P 400 Midcaps dipped 0.7% (down 11.3%), and the small cap Russell 2000 slipped 0.3% (down 16.1%). The Nasdaq100 declined 1.1% (down 23.1%). The Semiconductors fell 1.7% (down 22.4%). The Biotechs dropped 2.6% (down 16.5%). Though bullion slipped $3, the HUI gold index increased 0.7% (up 1.3%).

Three-month Treasury bill rates ended the week at 1.125%. Two-year government yields jumped 18 bps to 2.66% (up 192bps y-t-d). Five-year T-note yields surged 22 bps to 2.94% (up 167bps). Ten-year Treasury yields rose 20 bps to 2.94% (up 143bps). Long bond yields gained 12 bps to 3.09% (up 119bps). Benchmark Fannie Mae MBS yields jumped 21 bps to 4.09% (up 202bps).

Greek 10-year yields rose 22 bps to 3.71% (up 239bps y-t-d). Ten-year Portuguese yields surged 40 bps to 2.47% (up 201bps). Italian 10-year yields spiked 50 bps higher to 3.40% (up 223bps). Spain’s 10-year yields surged 40 bps to 2.44% (up 187bps). German bund yields jumped 31 bps to 1.27% (up 145bps). French yields rose 32 bps to 1.80% (up 160bps). The French to German 10-year bond spread widened one to 53 bps. U.K. 10-year gilt yields jumped 24bps to 2.16% (up 118bps). U.K.’s FTSE equities index dipped 0.7% (up 2.0% y-t-d).

Japan’s Nikkei Equities Index rallied 3.7% (down 3.6% y-t-d). Japanese 10-year “JGB” yields were unchanged at 0.23% (up 16bps y-t-d). France’s CAC40 slipped 0.5% (down 9.3%). The German DAX equities index was little changed (down 9.0%). Spain’s IBEX 35 equities index fell 2.3% (unchanged). Italy’s FTSE MIB index slumped 1.9% (down 11.6%). EM equities were mixed. Brazil’s Bovespa index declined 0.7% (up 6.0%), and the Mexico’s Bolsa index sank 3.4% (down 4.9%). South Korea’s Kospi index rallied 1.2% (down 10.3%). India’s Sensex equities index gained 1.6% (down 4.3%). China’s Shanghai Exchange Index recovered 2.1% (down 12.2%). Turkey’s Borsa Istanbul National 100 index surged 6.7% (up 40.0%). Russia’s MICEX equities index sank 4.1% (down 39.1%).

Investment-grade bond funds saw outflows of $3.026 billion, while junk bond funds enjoyed inflows of $4.769 billion (from Lipper).

Federal Reserve Credit last week contracted $21.7bn to $8.879 TN. Over the past 142 weeks, Fed Credit expanded $5.152 TN, or 138%. Fed Credit inflated $6.068 Trillion, or 216%, over the past 499 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $29.1bn to a two-year low $3.396 TN. “Custody holdings” were down $140bn, or 4.0%, y-o-y.

Total money market fund assets slipped $3bn to $4.526 TN. Total money funds were down $86bn, or 1.9%, y-o-y.

Total Commercial Paper increased $6.8bn to $1.139 TN. CP was down $46.5bn, or 3.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 5.09% (up 210bps y-o-y). Fifteen-year rates added a basis point to 4.32% (up 205bps). Five-year hybrid ARM rates dropped 16 bps to 4.04% (up 140bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 13 bps to 5.37% (up 225bps).

Currency Watch:

For the week, the U.S. Dollar Index gained 0.5% to 102.14 (up 6.8% y-t-d). For the week on the upside, the South Korean won increased 1.1%, the Canadian dollar 1.0%, the Australian dollar 0.6%, the Swedish krona 0.4%, the Norwegian krone 0.3%, the South African rand 0.3% and the Mexican peso 0.1%. On the downside, the Japanese yen declined 2.9%, the British pound 1.1%, the Brazilian real 0.9%, the Swiss franc 0.6%, the Singapore dollar 0.5%, the New Zealand dollar 0.3%, and the euro 0.2%. The Chinese (onshore) renminbi increased 0.59% versus the dollar (down 4.57% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index was unchanged (up 34.9% y-t-d). Spot Gold was little changed at $1,851 (up 1.2%). Silver declined 0.8% to $21.93 (down 5.9%). WTI crude jumped $3.80 to $118.87 (up 58%). Gasoline surged 5.9% (up 91%), while Natural Gas declined 2.3% (up 129%). Copper jumped 3.8% (unchanged). Wheat dropped 10.2% (up 50%), and Corn fell 6.5% (up 23%). Bitcoin gained $910, or 3.2%, this week to $29,680 (down 36%).

Market Instability Watch:

June 1 – Bloomberg (Vince Golle): “Jamie Dimon warned investors to prepare for an economic ‘hurricane’ as the economy struggles against an unprecedented combination of challenges, including tightening monetary policy and Russia’s invasion of Ukraine. ‘That hurricane is right out there down the road coming our way,’ the JPMorgan… chief executive officer said… ‘We don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.’”

June 1 – Bloomberg (Matthew Boesler): “The Federal Reserve is about to start shrinking its $8.9 trillion balance sheet, deploying a second tool along side higher interest rates to curb inflation, though officials don’t know just how effective it will be. After doubling in size through asset purchases in the first two years of the pandemic, the balance sheet will be reduced at a pace that’s almost twice as fast as after the last financial crisis. While the process officially commences on Wednesday, the first US Treasury securities won’t run off until $15 billion mature on June 15. The Fed is capping monthly runoff at $47.5 billion — $30 billion for Treasuries and $17.5 billion for mortgage-backed securities — until September. Those thresholds will then double to a combined $95 billion. That compares to a peak of $50 billion a month when the Fed performed the exercise starting in 2017.”

May 31 – Bloomberg (Katie Greifeld): “A rebound in risk assets could prove to be a problem for a Federal Reserve trying to curb excesses across markets. Stocks have bounced sharply since mid-May’s lows and credit spreads have tightened back to levels seen ahead of the March liftoff of interest-rate hikes… Taken together, a Bloomberg measure of US financial conditions — a cross-asset measure of market health — has returned to levels seen before March’s hike. That potentially poses a problem for policy makers. Fed chief Jerome Powell has repeatedly said that financial conditions will compress as the central bank removes monetary support in a bid to combat the hottest inflation readings in four decades. Should price pressures build and growth remain robust while markets continue to rally, the Fed may need to tighten the reins even more, according to 22V Research founder Dennis DeBusschere.”

June 2 – Bloomberg (Sridhar Natarajan): “A top Goldman Sachs… executive echoed Jamie Dimon’s pessimistic economic tone, warning of tougher economic times ahead amid a string of shocks rattling the global economy. ‘This is among — if not the most — complex, dynamic environments I’ve ever seen in my career,’ Goldman President John Waldron said… ‘The confluence of the number of shocks to the system to me is unprecedented.’ Waldron’s comments echoed the stark warning… from Dimon… Waldron said he’ll avoid ‘using any weather analogies,’ but spelled out his fear that risks from inflation, changing monetary policy and Russia’s invasion of Ukraine could kneecap the global economy. ‘We expect there’s going to be tougher economic times ahead,’ Waldron said. ‘No question we are seeing a tougher capital-markets environment.’”

June 3 – Bloomberg (Sonali Basak): “Mark Spitznagel is paid to be prepared for when the market’s weakest links are exposed in a big way. Right now, the Universa Investments founder, whose fund aims to protect clients during black swan events, says the financial system is most vulnerable to ‘the greatest credit bubble of human history.’ ‘If this credit bubble ever pops, it’s going to be the most catastrophic market failure that anyone has ever read about — but let’s hope that doesn’t happen,” Spitznagel, …Universa’s chief investment officer, said… ‘We’ve gotten ourselves into a tough spot.’”

May 29 – Reuters (Ruth Carson and Masaki Kondo): “Hedge funds are doubling down on bearish Treasuries bets just as traditional money managers grow more positive in anticipation that the worst of the global debt selloff is over. Leveraged funds boosted short positions on US sovereign debt to the most since October 2020 last week… Asset managers — including pension funds, insurers and mutual funds — ramped up long positions to the highest since April 2020…”

May 30 – Reuters (Marc Jones): “Another 9% plunge in Turkey’s lira this month and debt market danger gauges at levels last seen during the 2008 global crash have prompted investor concerns that a fresh crisis might be brewing in the country. Whether President Tayyip Erdogan’s government can avoid market turmoil, just five months after the last bout, will have big implications for his re-election prospects… The latest lira slump – it is down 20% this year – combined with soaring global energy and food prices means inflation is now at 70% and rising, while emergency measures Ankara adopted at the height of last year’s turmoil are about to be seriously tested.”

Bursting Bubble/Mania Watch:

June 1 – Reuters (Sujata Rao): “The private equity industry has grown into a pyramid scheme that will create casualties in around three to five years, the chief investment officer of Europe’s biggest asset manager said… Vincent Mortier, the CIO of Amundi, said deals were being done at exorbitant valuations and private equity firms were on both sides of the transactions. ‘In some parts the private equity market may be like a Ponzi scheme,’ Mortier told reporters. What you see is that the vast majority of deals currently are being done between private equity firms. One private equity firm will sell to another who is happy to pay a high price as they have attracted a lot of investors. ‘The bulk of deals are like this.’ Private equity firms have been a major force in driving M&A activity during the pandemic, snapping up assets from sports clubs to supermarkets.”

May 29 – Wall Street Journal (Meghan Bobrowsky and Vipal Monga): “After years of funneling cash into startups’ grand ambitions, Silicon Valley’s investors are engaging in the grim ritual of delivering survival advice to their portfolio companies. In recent online slide presentations, blog posts and social-media threads, venture-capital doyens including Lightspeed Venture Partners, Craft Ventures, Sequoia Capital and Y Combinator are telling the founders that they need to take emergency action for what could be the sharpest turn in more than a decade. Their advice includes cutting costs, preserving cash and jettisoning hopes that hedge funds or other investors will swoop in with big checks. ‘The boom times of the last decade are unambiguously over,’ Lightspeed, which has backed companies including social network Snap Inc. and crypto exchange FTX, wrote…”

June 2 – Reuters (Tiyashi Datta): “U.S. employers in the technology sector cut nearly nine times more jobs in May than in the first four months of the year as rising inflation and slowing demand force companies to cut corners. Though overall layoffs in the country reported by global outplacement firm Challenger, Gray & Christmas on Thursday fell 14.7% in May from April, thanks to strong demand in the labor market, the technology sector cut 4,044 jobs, up from the 459 between January and April. It is the highest monthly total since December 2020…”

June 1 – Wall Street Journal (AnnaMaria Andriotis and John Stensholt): “‘Buy now, pay later’ companies promised a credit revolution that would change the way people pay for things. Rising delinquencies and a slowing economy are clouding that outlook. Payment plans that allow shoppers to split up the cost of things such as clothing, makeup and home appliances were all the rage last year. The companies behind the plans saw their valuations surge. Scores of retailers rushed to add them at checkout… But late payments or related losses are piling up for the industry’s biggest players— Affirm Holdings Inc., Afterpay and Zip Co. Their borrowing costs, meanwhile, are rising. Buy-now-pay-later companies sometimes rely on credit lines whose rates rise and fall along with the Federal Reserve’s benchmark rate…”

June 2 – Financial Times (Joshua Oliver, Scott Chipolina and Eva Szalay): “Traders are shifting away from investments linked to decentralised finance, in the latest sign of how the $40bn collapse of cryptocurrency luna has sent shockwaves through a key portion of the digital asset market. Ether, the world’s second-biggest crypto token and a proxy for sentiment on the $100bn DeFi market, has shed more than a third of its value over the past month. Its fall is significantly more severe than the 23% decline for bitcoin, the oldest and most valuable digital token by market value. Many crypto advocates consider DeFi to be one the most promising innovations in the digital asset industry…”

Russia/Ukraine War Watch:

May 29 – Reuters (Ronald Popeski): “The ‘liberation’ of Ukraine’s Donbas region is an ‘unconditional priority’ for Moscow, while other Ukrainian territories should decide their future on their own, Russian Foreign Minister Sergei Lavrov said… Lavrov was speaking… with France’s TF1 television… as Russia pressed on with its offensive to secure control of key towns in Donbas, Ukraine’s traditional industrial heartland made up of the Donetsk and Luhansk regions.”

May 29 – Financial Times (Javier Espinoza, Valentina Pop and Andy Bounds): “Europe’s unity on sanctions against Russia is ‘starting to crumble’, Germany’s economy minister has warned as diplomats highlight continued divisions over a package of sanctions set to be discussed by member states on Monday. Robert Habeck spoke as EU ambassadors meeting in Brussels on Sunday failed to agree on the bloc’s latest package of sanctions against Moscow, including a plan to stop imports of Russian oil which Hungary has been blocking for weeks.”

Economic War/Iron Curtain Watch:

May 30 – Wall Street Journal (Alistair MacDonald, Will Horner and Patrick Thomas): “Across Ukraine, farmers are navigating mines, traversing bombed bridges and risking dangerous maneuvers at overworked ports to circumvent a Russian blockade and get their grains to a world desperate for them. But for all their efforts, Ukraine’s strained infrastructure has little hope of being able to handle the 30 million metric tons of corn, wheat and sunflower oil that is expected after harvesting starts in June… Less than half of that harvest is likely to be exported…, depriving the world of over 8% of all cereal exports and threatening to further stoke food prices and exacerbate shortages. Russia’s seizure of Ukrainian ports and blocking of ships around the Black Sea has closed the route that almost all of Ukraine’s grain would usually take.”

June 2 – Bloomberg (Giulia Morpurgo, Laura Benitez and Sydney Maki): “Russia was judged to have breached the terms on a bond after missing a $1.9 million interest payment and triggering an insurance payout potentially worth billions of dollars. The Credit Derivatives Determinations Committee said a ‘failure-to-pay’ event occurred on credit-default swaps because Russia didn’t include the additional interest in a late bond payment made at the start of last month.”

June 2 – Bloomberg (Ana Monteiro): “The US and Taiwan unveiled a fresh blueprint to deepen their trade relationship focusing on ending forced labor and ‘harmful non-market policies and practices’ as Washington and Beijing vie for sway in the region. The plan — known as the US-Taiwan Initiative on 21st Century Trade — aims to ‘develop an ambitious roadmap for negotiations for reaching agreements with high-standard commitments’ on areas such as trade facilitation, regulatory practices, agriculture, anti-corruption and supporting small businesses, the Office of the US Trade Representative said…”

June 2 – Associated Press (Joe McDonald): “China’s government… accused Washington of jeopardizing peace after U.S. envoys began trade talks with Taiwan aimed at deepening relations with the self-ruled island democracy claimed by Beijing. Talks that started Wednesday cover trade, regulation and other areas based on ‘shared values’ as market-oriented economies, according to the Office of the U.S. Trade Representative. It did not mention China but the talks add to gestures that show U.S. support for Taiwan amid menacing behavior by Beijing, which threatens to invade. Trade dialogues ‘disrupt peace and stability in the Taiwan Strait,’ said a foreign ministry spokesman, Zhao Lijian. He called on Washington to ‘stop negotiating agreements with Taiwan that have sovereign connotations and official nature.’”

May 31 – Bloomberg: “The emerging multi-polar world now includes foreign-exchange markets — as China and Russia, the biggest challengers to U.S. supremacy, boost direct trading between their currencies. Monthly volumes on the ruble-yuan pair have surged 1,067% to almost $4 billion since the start of the war in Ukraine as the two nations seek to reduce their reliance on the dollar and boost bilateral trade to overcome current and potential U.S sanctions… For China, it creates the latest boost for the internationalization of the yuan just when growing tensions with the U.S. are slowing that process.”

U.S./Russia Watch:

June 1 – New York Times (David E. Sanger and William J. Broad): “The old nuclear order, rooted in the Cold War’s unthinkable outcomes, was fraying before Russia invaded Ukraine. Now, it is giving way to a looming era of disorder unlike any since the beginning of the atomic age. Russia’s regular reminders over the past three months of its nuclear might, even if largely bluster, were the latest evidence of how the potential threat has resurfaced in more overt and dangerous ways. They were enough to draw a pointed warning to Moscow on Tuesday from President Biden in what amounted to a tacit acknowledgment that the world had entered a period of heightened nuclear risks.”

China/Russia/U.S. Watch:

June 1 – Bloomberg: “China’s top diplomat said Beijing will work with Moscow to promote ‘real democracy,’ reaffirming his country’s ties with Russia. ‘China is willing to work together with Russia and the global community to promote real democracy based on nations’ own conditions,’ Chinese Foreign Minister Wang Yi said… via video link at a China-Russia think tank summit… The event was attended by his Russian counter part Sergei Lavrov. Wang added that ‘monopolizing’ the definition of democracy and human rights to influence other nations was a tactic ‘doomed to fail,’ in a veiled swipe at the United States…”
June 3 – Washington Post (Cate Cadell and Ellen Nakashima): “Russian officials have raised increasingly frustrated requests for greater support during discussions with Beijing in recent weeks, calling on China to live up to its affirmation of a ‘no limits’ partnership made weeks before the war in Ukraine began. But China’s leadership wants to expand assistance for Russia without running afoul of Western sanctions and has set limits on what it will do, according to Chinese and U.S. officials. Moscow has on at least two occasions pressed Beijing to offer new forms of economic support — exchanges that one Chinese official described as ‘tense.’”

Europe/Russia/China Watch:

May 30 – Associated Press (Samuel Petrequin and Lorne Cook): “European Union leaders agreed Monday to embargo most Russian oil imports into the bloc by year-end as part of new sanctions on Moscow worked out at a summit focused on helping Ukraine with a long-delayed package of new financial support. The embargo covers Russian oil brought in by sea, allowing a temporary exemption for imports delivered by pipeline, a move that was crucial to bring landlocked Hungary on board… EU Council President Charles Michel said the agreement covers more than two-thirds of oil imports from Russia. Ursula Von der Leyen, the head of the EU’s executive branch, said the punitive move will ‘effectively cut around 90% of oil imports from Russia to the EU by the end of the year.’”

May 31 – Bloomberg (Katie Greifeld): “Russia cut off gas supplies to more European buyers, stepping up its use of energy as a weapon and sowing further division in the continent. Gazprom PJSC halted pipeline shipments to the Netherlands and Denmark this week, and then surprised markets by also cutting off a small contract supplying Germany. Shell Plc and wind giant Orsted A/S refused to comply with President Vladimir Putin’s demand for payments to be made in rubles, and Gazprom responded by halting flows. Russia is keeping its grip on the European Union’s gas market just as the bloc moved to impose its harshest energy sanctions so far in response to the invasion of Ukraine.”

Inflation Watch:

June 1 – Wall Street Journal (Ryan Dezember): “Natural gas isn’t the only power-plant fuel on fire this year. Thermal-coal prices from Appalachia to Australia have soared, threatening more increases in manufacturing costs and power bills this summer. Futures for coal delivered to northwestern Europe have risen 137% so far this year, to $323.50 a metric ton. The benchmark price in the Pacific region, set at an Australian export facility, is up 143% this year. Cash prices in central Appalachia have climbed 40% in 2022—and more than doubled over the past year—to $129.65 a short ton last week, the highest price on record.”

June 2 – Bloomberg (Chunzi Xu and Lucia Kassai): “The supply crisis on the East Coast is growing worse, raising the specter of fuel rationing just as the US enters what is typically the heaviest time of year for consumption. East Coast distillates stockpiles, comprised of diesel and heating oil, drained to a new low in records going back to 1990, according to weekly data from the Energy Information Administration. Gasoline inventories in the New York-region fell to their lowest level for this time of year in records going back to 1993.”

May 28 – Wall Street Journal (Christopher M. Matthews and Peter Santilli): “A shortage of fuel-making facilities is pushing U.S. gasoline and diesel prices to record levels, just as drivers prepare for the summer driving season. Gasoline prices topped $4 a gallon in all 50 U.S. states in recent days for the first time ever… Higher crude oil prices are contributing to the cost of gasoline, but the primary culprit behind the pain at the pump is a lack of global refining capacity, say energy executives and analysts.”

May 31 – Wall Street Journal (Leslie Scism): “Car owners need to buckle up: Higher premiums are starting to arrive as insurers get state approval for rate increases to offset inflation and an increase in serious crashes. Rates are rising as much as 20% in some locations, as insurers seek increases to compensate for what they believe will be more sustained inflation.”

June 2 – Yahoo Finance (Brian Sozzi): “Airline ticket price increases are hitting eye-popping levels as the major airlines look to recoup higher costs for jet fuel and staffing shortages. ‘Yes,’ long-time airline analyst Helane Becker told Yahoo Finance Live when asked if she has been surprised by the ticket price inflation. ‘We have seen a 34% increase [in fares] this year. We forecast 7% in April, May, and June and we seem to be seeing that. Yes, I am surprised they were able to pass that along [to consumers]. Then again, it comes back to very strong demand.’”

May 28 – Wall Street Journal (Patrick Thomas): “Burgers and steaks are set to stay pricey as U.S. cattle ranchers shrink their herds, further constraining U.S. beef production in the months ahead. Rising costs for feed and other expenses are leading ranchers to sell their calves into feedlots at a faster pace…, leaving fewer cattle available for slaughter later this year and in 2023. Persistent drought conditions in the Western U.S. have parched grazing pastures, requiring cattlemen to spend more on supplemental feed… Beef production in 2023 is expected to decline 7% and cattle prices are expected to increase to record highs…”

Biden Administration Watch:

May 31 – Associated Press (Josh Boak, Christopher Rugaber and Zeke Miller): “Focused on relentlessly rising prices, President Joe Biden plotted inflation-fighting strategy Tuesday with the chairman of the Federal Reserve, with the fate of the economy and his own political prospects increasingly dependent on the actions of the government’s central bank. Biden hoped to demonstrate to voters that he was attuned to their worries about higher gasoline, grocery and other prices whiles still insisting an independent Fed will act free from political pressure… The president said he would not attempt to direct that course as some previous presidents have tried. ‘My plan to address inflation starts with simple proposition: Respect the Fed, respect the Fed’s independence,’ Biden said.”

May 31 – Wall Street Journal (Nick Timiraos and Ken Thomas): “President Biden discussed steps to address high inflation at a White House meeting with Federal Reserve Chairman Jerome Powell as his administration signals growing urgency to ease rapidly rising prices that threaten the U.S. economy. The Tuesday meeting highlighted how much the White House is relying on outside forces to help combat the highest inflation in four decades… It was the third meeting between the two men. They most recently met last November for Mr. Biden’s interview that led him to offer a second four-year term to Mr. Powell. They were joined Tuesday by Treasury Secretary Janet Yellen, who is Mr. Powell’s immediate predecessor as Fed chair.”

May 31 – Reuters (Ben Blanchard, Martin Pollard and Michael Martina): “The United States is planning on ‘cooperation’ between its National Guard and Taiwan’s military, Taiwan President Tsai Ing-wen said…, deepening security ties in the face of what Taipei’s government complains is a rising threat from China. The United States is Chinese-claimed Taiwan’s most important international supporter and arms supplier, despite the lack of formal diplomatic ties. China has been stepping up its military activities near Taiwan, and its military said last week it had recently conducted an exercise around Taiwan as a ‘solemn warning’ against ‘collusion’ with the United States.”

Federal Reserve Watch:

May 30 – Financial Times (James Politi): “A senior Federal Reserve official has called for the US central bank’s main interest rate to rise to a level at which it starts to stunt economic growth by the end of the year, brushing off concerns that a sharp monetary tightening would hurt the labour market. In a speech…, Christopher Waller, a Fed governor, said he backed increasing interest rates by another 50 bps ‘for several meetings’ and would not stop that pace ‘until I see inflation coming down closer to our 2% target’. ‘By the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labour, bringing it more in line with supply and thus helping rein in inflation,’ Waller said.”

June 2 – CNBC (Craig Torres and Catarina Saraiva): “Federal Reserve Vice Chair Lael Brainard said expectations for half-percentage-point increases in interest rates this month and next were reasonable, and saw no case for pausing the central bank’s tightening campaign afterward. ‘From where I sit today, market pricing for 50 bps, potentially in June and July, from the data we have in hand today, seems like a reasonable path,” Brainard said… ‘Right now it’s very hard to see the case for a pause. We’ve still got a lot of work to do to get inflation down to our 2% target.’”

June 1 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard urged policy makers to raise interest rates aggressively to bring down inflation near a four-decade high, adding the long-term outlook is for a reversal of some of the hikes currently planned. In late 2019, prior to the Covid-19 pandemic, the Fed policy rate was 1.55%, the 10-year Treasury yield was 1.86% and mortgage rates were below 4%, Bullard said… ‘This may provide a practical benchmark for where the constellation of rates may settle once inflation comes under control in the U.S.,’ Bullard said.”

June 1 – Bloomberg (Sally Bakewell and Steve Dickson): “The Federal Reserve should tighten policy until inflation begins trending down toward its 2% goal, San Francisco Federal Reserve Bank President Mary Daly said, adding officials should remain data-dependent and temper rate increases once price growth moderates. ‘I certainly am comfortable to do what it takes to get inflation trending down to the level we need it to be,’ Daly said… ‘What the Fed needs to do — and this is how I am thinking about the economy — is remove the accommodation, but then be open to the data, be data-dependent.’”

U.S. Bubble Watch:

June 3 – Bloomberg (Olivia Rockeman): “US employers hired at a robust clip in May while wage gains held firm, suggesting the economy continues to power forward as the Federal Reserve raises interest rates at a steep pace to tame red-hot inflation. Nonfarm payrolls increased 390,000 last month after a revised 436,000 gain in April… The unemployment rate held at 3.6%, and the labor force participation rate crept higher. The median estimate in a Bloomberg survey of economists called for a 318,000 advance… and for the unemployment rate to fall to 3.5%… Average hourly earnings rose a less-than-forecast 0.3% from April, the same as the previous month. They were up 5.2% from a year earlier, a slowdown from 5.5% in April.”

June 1 – Reuters (Lucia Mutikani): “U.S. job openings fell in April, but remained at significantly high levels, suggesting that wages would continue to rise as companies scramble for workers, and contribute to inflation staying uncomfortably high for a while. The Job Openings and Labor Turnover Survey, or JOLTS report… also showed layoffs at a record low, underscoring the jobs market tightness. The Federal Reserve… is trying to bring demand and supply of labor back into alignment without driving the unemployment rate too high. So far, there are few signs that the U.S. central bank’s aggressive monetary policy stance is cooling demand in the overall economy.”

June 2 – Financial Times (Jeff Cox): “Job creation at companies decelerated to the slowest pace of the pandemic-era recovery in May, payroll processing firm ADP reported… Private sector employment rose by just 128,000 for the month, falling well short of the 299,000 Dow Jones estimate and a decline from the downwardly revised 202,000 in April, initially reported as a gain of 247,000. The big drop-off marked the worst month since the massive layoffs in April 2020…”

June 2 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits unexpectedly fell last week as demand for labor remained strong, helping to underpin the economy amid rising interest rates and tightening financial conditions… Initial claims for state unemployment benefits fell 11,000 to a seasonally adjusted 200,000 for the week ended May 28… The second straight weekly decline unwound recent increases, which had lifted claims to their highest level since January.”

June 2 – Bloomberg (Reade Pickert): “More than half of US small-business owners said they had open positions they could not fill in May, matching the record set in September and highlighting persistent hiring difficulties for firms in an extremely tight labor market. Fifty-one percent of firms had vacancies last month, up four percentage points from April, according to… the National Federation of Independent Business. A near-record 49% of small-business owners said they raised compensation.”

June 3 – Reuters (Lucia Mutikani): “U.S. services industry growth slowed for a second straight month in May, but businesses reported strong gains in new domestic and export orders… The Institute for Supply Management said its non-manufacturing activity index fell to a reading of 55.9 last month from 57.1 in April… The ISM’s measure of new orders received by services businesses rebounded to a reading of 57.6 last month from 54.6 in April. Spending is shifting back to services from goods. Businesses also reported an increase in export orders. Its services industry employment gauge also rebounded to 50.2 from a reading of 49.5 in April… Services inflation continued to run high. A measure of prices paid by services industries for inputs slipped to a still-high reading of 82.1 from 84.6 in April.”

June 1 – Bloomberg (Vince Golle): “US manufacturing activity unexpectedly advanced in May as new orders and output growth quickened, suggesting underlying demand remains solid. The Institute for Supply Management’s gauge of factory activity increased to 56.1 last month from 55.4 in April… The figure exceeded most economists’ estimates… ‘The US manufacturing sector remains in a demand-driven, supply chain-constrained environment,’ Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee, said… He added that ‘sentiment remained strongly optimistic regarding demand, with five positive growth comments for every cautious comment.’ The report also points to lingering capacity constraints related to labor, shipping delays and materials shortages.”

May 31 – CNBC (Diana Olick): “Nationally, home prices were 20.6% higher than they were in March 2021, according to the S&P CoreLogic Case-Shiller Home Price Index. That is higher than the 20% gain in February. The index is a three-month running average ending in March… Regionally, Phoenix slipped from the top gainer spot for the first time in three years, with Tampa, Florida, taking over. Tampa, Phoenix and Miami continued to see the highest annual gains, with increases of 34.8%, 32.4% and 32.0% respectively. Seventeen of the 20 cities reported higher price increases in the year ended in March 2022 versus the year ended in February 2022.”

May 31 – Bloomberg (Katherine Chiglinsky): “Home-price growth in 20 US cities picked up for the fourth straight month with Tampa, Florida, showing the biggest gains. A measure of prices in those 20 cities climbed 21.2% through March following a 20.3% gain in February, the S&P CoreLogic Case-Shiller index showed… All 20 cities reported double-digit price increases for the year ended March and prices in Tampa jumped 34.8%… ‘Those of us who have been anticipating a deceleration in the growth rate of US home prices will have to wait at least a month longer,’ Craig Lazzara, a managing director at S&P Dow Jones Indices, said… Nationally, prices rallied 20.6%, but S&P Dow Jones Indices’ Lazzara warned that a deceleration could be on the horizon.”

June 1 – Reuters (Diana Olick): “Mortgage demand slipped to the lowest level since December 2018, even after rates declined slightly last week. Applications for a mortgage to purchase a home fell 1% last week compared with the previous week, according to the Mortgage Bankers Association… Volume was 14% lower than the same week one year ago.”

June 2 – Bloomberg (Alex Tanzi): “Home listings increased for the first time since June 2019, according to Realtor.com data, suggesting the US housing supply hit a turning point… The number of active listings rose 8% year-over-year in May, probably driven by new sellers and a slowdown in would-be buyers deterred by high prices… The largest increases in new listings were in the West and the South, in cities including Austin, Texas, and Phoenix, Arizona. Still, the uptick in inventory doesn’t necessarily mean that the housing market exuberance is softening. Listings remain 48.5% below their May 2020 level…”

June 1 – Bloomberg (Alexandre Tanzi): “More than a third of Americans earning at least $250,000 annually say they are living paycheck to paycheck, underscoring how inflation is taking a bigger bite out of Americans’ budgets at all ends of the pay spectrum. Some 36% of households taking in nearly four times the median US salary devote nearly all of their income to household expenses, according to a survey by… Pymnts.com and LendingClub Corp. It’s particularly true among millennials, who are now in their mid-20s to early 40s: More than half of top earners in that generation report having little left at the end of the month.”

May 28 – Financial Times (Amanda Chu): “The coronavirus pandemic and rising energy prices have left millions of US households in arrears on their electric and gas bills, and some are now about to lose service as moratoria on utility shut-offs expire. More than 20mn households were behind on utility payments worth $23bn at the end of February, nearly double the number behind in 2019, according to the National Energy Assistance Directors Association…”

Economic Disruption Watch:

May 30 – Wall Street Journal (Sarah Chaney Cambon and Harriet Torry): “Many Americans hoped this would be the first normal summer after two years of Covid-19 disruptions. A chronic labor shortage means it probably won’t be. In Phoenix, less than half of the public pools are opening because the city can’t hire enough lifeguards, despite offering a $2,500 incentive payment. Trolley lines in coastal Maine that service beaches are shutting down for the summer due to a dearth of drivers. Across the country, restaurants in tourist destinations are operating on limited hours because they don’t have enough staff to stay open longer. The shortages push up labor costs, adding to inflationary pressure on items including airfares and beach menus.”

May 30 – Yahoo Finance (Dani Romero): “The shock of the war in Ukraine and China’s zero-COVID policy continues to signal that the pandemic supply chain woes are far from being done. ‘We have a huge supply shock with what’s going on with the war,’ Citi Global Head of Public Sector Group Julie Monaco told Yahoo Finance… ‘So that exasperated things. … We have to remind people all the time: This pandemic is not over. Certainly in China, it’s very disruptive to the supply chains.’”

May 29 – Bloomberg (Nurin Sofia): “Companies from retailers to manufacturers will hold greater levels of inventory this summer as global supply chain snarls force a shift from a just-in-time mentality to a just-in-case one, according to EmergeVest, a… global investment firm that specializes in logistics. ‘If you’re a retail business, what is more expensive — to carry some additional inventory or miss out on the sale completely?,’ EmergeVest Chief Executive Officer Heath Zarin said… Zarin said that in Shanghai… as many as 300,000 containers have yet to leave the city’s port. This summer, ocean freight disruptions could be ‘similar, if not worse’ than last year, he added.”

Fixed-Income Bubble Watch:

May 30 – Wall Street Journal (Matt Wirz): “A $5.5 trillion bond market supporting the U.S. mortgage industry is being roiled by fears it will be hit in the Federal Reserve’s battle against inflation. Prices are falling for bonds backed by agency mortgage loans from government-owned lenders Fannie Mae and Freddie Mac. That is primarily because the Fed has started raising interest rates…, but also because it might start selling some of its $2.7 trillion holdings of the bonds… Analysts worry that Fed sales of existing bonds could flood the market, driving down prices and pushing yields higher as bond investors demand more compensation to lend money.”

June 1 – Wall Street Journal (Sam Goldfarb): “Meme stocks are fading. Crypto has cooled. The latest hot investment for individual investors: U.S. government bonds. Lured by higher interest rates and spooked by turmoil in stocks, investors poured a net $20 billion into mutual and exchange-traded funds that focus on buying ordinary U.S. Treasurys over the four-week period ended May 25, according to Refinitiv Lipper. That marked the largest infusion over a four-week span in records going back 29 years. That is just the start. Individual investors grabbed $928 million of two-year notes at a recent government-debt auction, the most in more than 15 years…”

May 31 – Bloomberg (Giulia Morpurgo): “JPMorgan… strategists again pruned back their forecast for sales of European junk bonds this year with war in Ukraine and rising interest rates now seen whittling down issuance to its lowest level in a decade. High-yield borrowers are expected to sell about 55 billion euros ($59bn) of debt in 2022, down from a previous estimate of 90 billion euros, strategists led by Daniel Lamy wrote…”

China Watch:

May 30 – Bloomberg: “Chinese authorities are facing an uphill battle convincing companies and households to boost borrowing as long as Covid outbreaks and lockdowns continue to crush confidence. After loan growth weakened in April to the worst level in almost five years, several indicators suggest the data for May won’t be much better. Housing sales have continued to slump, indicating a lack of appetite for mortgages… The reluctance to borrow stems in large part from uncertainty over China’s Covid curbs, and whether future outbreaks could lead to repeated lockdowns like the one that crippled activity in Shanghai for weeks. ‘The sluggish credit demand points to worsening expectations among market entities and slowing business expansion,’ said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group…”

June 2 – Bloomberg: “Chinese officials have vowed to carry out a slew of government policies to stimulate growth following Premier Li Keqiang’s recent call to avoid a Covid-fueled economic contraction this quarter. Ministry of Finance authorities said… they would accelerate refunds of value-added taxes, make it easier for small companies to bid on government purchasing projects, and ensure that local special bonds — which are mainly used to fund infrastructure projects — are issued in a smooth manner… At a separate press conference, People’s Bank of China officials promised to step up their plans to implement monetary policy to help maintain growth. The urgency with which government authorities talk about the economy has been intensifying in recent weeks…”

May 31 – Reuters (Stella Qiu, Samuel Shen and Ryan Woo): “China’s cabinet announced a package of 33 measures covering fiscal, financial, investment and industrial policies… The stimulus package… underscores Beijing’s shift toward growth, after COVID-19 control measures pounded the economy and threaten Beijing’s 5.5% growth target for the year. To revive investment and consumption, the government ordered localities not to expand curbs on auto purchases and said those which already have curbs in place should gradually increase their quotas on car ownership. The Ministry of Finance also said… it would halve the purchase tax for small-engined cars.”

May 30 – CNBC (Evelyn Cheng): “The Chinese government faces a growing shortfall of cash, analysts say, as they predict an increase of debt to fill the gap. ‘The latest wave of Omicron and the widespread lockdowns in place since mid-March have resulted in a sharp contraction in government revenue, including land sales revenue,’ Ting Lu, chief China economist at Nomura… said… They estimate a funding gap of about 6 trillion yuan ($895.52bn) — roughly 2.5 trillion yuan in decreased revenue due to tax refunds and weaker economic production, and another 3.5 trillion yuan of lost land sales revenue. ‘Much of the incoming ‘stimulus measures’, be it special government bonds or incremental lending by policy banks, will be merely used to fill this funding gap,’ the Nomura analysts said.”

June 1 – Bloomberg (Chang Shu): “China’s Caixin PMI survey for May reinforces the impression that the economy is moving beyond the worst of its downturn. But it highlighted challenges that were also evident in Tuesday’s official PMI data — small private firms continue to take a beating and employment is still under severe pressure. An economic recovery may have started but it’s going to be tough going. The Caixin manufacturing PMI rose to 48.1 from 46.0 in April. This was a touch above our projection of 48.0, but below the consensus forecast of 49.0.”

May 30 – Reuters (Ellen Zhang, Ella Cao and Ryan Woo): “China’s factory activity fell at a slower pace in May as COVID-19 curbs in major manufacturing hubs eased, but movement controls continued to weigh on demand and production… The official manufacturing purchasing managers’ index (PMI) rose to 49.6 in May from 47.4 in April…, beating forecasts in a Reuters poll for 48.6. China’s factory slowdown is affecting production lines in other major Asian economies with both Japan and South Korea reporting sharp declines in output.”

May 31 – Bloomberg (Dorothy Ma): “A debt crisis in China’s property industry has sparked a record wave of defaults and dragged more developer bonds down to distressed levels. Risks are now spreading to even higher-rated borrowers. A property firm long considered among the nation’s most resilient, Greenland Holdings Corp., shocked investors last week with a proposed dollar-bond payment delay. Earlier this month, China’s fourth-largest developer, Sunac China Holdings Ltd., became one of the biggest to default. That suggested most private Chinese developers face the risk of a missed payment if they can’t access fresh financing… Refinancing in global debt markets is out of the question for many firms after average yields on their junk dollar notes jumped above 20%.”

June 1 – Bloomberg: “Several Chinese traders are complaining that they were duped into providing loans against artificially inflated aluminum stockpiles, less than a decade after the market was roiled by a similar scandal on a much bigger scale. At least three companies lent a total of more than 500 million yuan ($75 million) against stockpiles of the metal stored in a warehouse in the southern province of Guangdong that turned out to be worth significantly less than that…”

June 2 – Bloomberg (Alfred Cang): “Regular operations in at least three Chinese warehouses have been suspended to check on-site metal inventories… The suspensions came after several domestic traders alleged they were duped into providing loans against artificially inflated aluminum stockpiles in one facility. The warehouse in China’s southern Guangdong province, managed by Foshan Zhongjin Shengyuan Warehouse Management Co., halted operations after the local police received complaints from creditors…”

May 30 – Bloomberg: “Global investors returned in earnest to China’s stock markets in May, erasing much of the year’s earlier outflows, as investors bet that policy support and the emergence of key cities from Covid-lockdowns will spark a revival. They added 16.9 billion yuan ($2.5bn) of Shanghai and Shenzhen shares via trading links this month, narrowing year-to-date outflows to just 1.2 billion yuan.”

May 30 – Reuters (Samuel Shen and Andrew Galbraith): “China is using the digital yuan to stimulate consumption in its pandemic-hit economy, with more e-CNY applications expected in future to boost transparency and effectiveness of government policies. The southern city of Shenzhen started distributing 30 million yuan ($4.50 million) worth of free digital cash on Monday to revive consumption and aid businesses. It comes days after Xiong’an New Area in northern Hebei province, launched a similar campaign to hand out 50 million yuan worth of e-CNY ‘red packets’ as gifts.”

May 29 – Wall Street Journal (Liyan Qi and Shen Lu): “For many Chinese who saw Shanghai as a magical place to pursue their dreams, the city’s two-month-long Covid-19 lockdown has been a wake-up call. It wasn’t just the isolation and living under the threat of being hauled to a quarantine center. Many describe how a forced switch to survival mode created a deep sense of insecurity. Now, some are outlining drastically altered life plans. Earlier this year, Sandra Shen… was discussing with her husband, also from Shanghai, whether they would soon have children. She was hesitating. Now, she has decided: It’s a firm no. It wasn’t any one thing… First came authorities’ decision to lock down the whole city—after officials signaled no such move would be necessary. Then came the difficulty in securing online grocery delivery and the forced entry by officials into apartments… Perhaps the last straw for Ms. Shen, who has two dogs, was video footage of a corgi being beaten to death by a community worker after the owner was taken to quarantine.”

June 3 – Bloomberg: “China’s financial capital warned of a Covid-19 resurgence, bolstering testing capacity as cases reappear in the community and residents start to move around more freely after the easing of most lockdown curbs. Shanghai reported seven new Covid infections outside of government-mandated quarantine sites for Thursday… There were another three cases outside isolation on Friday.”

Central Banker Watch:

May 29 – Financial Times (Valentina Romei): “Central banks are raising rates rapidly in the most widespread tightening of monetary policy for more than two decades… Policymakers around the world have announced more than 60 increases in current key interest rates in the past three months… — the largest number since at least the start of 2000.”

June 1 – Reuters (Julie Gordon): “The Bank of Canada… raised its policy interest rate to 1.5% from 1.0%, its second consecutive 50-bps hike, and said it was prepared to act ‘more forcefully if needed’ to bring inflation back to target. The central bank said Canada’s economy was clearly operating in excess demand and it sees inflation moving higher in the near-term, so interest rates would need to rise further. ‘The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well-anchored,’ it said… ‘Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target,’ the bank added.”

June 1 – Bloomberg (Marton Eder): “The latest all-time high for euro-zone inflation strengthens the case for the European Central Bank to lift interest rates by a half-point in July, according to Governing Council member Robert Holzmann. The Austrian central bank chief, a top ECB hawk who’d already been urging a hike of that size, said a lack of ‘decisive action’ now would risk expectations about the path for consumer prices becoming unanchored, requiring tougher measures later on that could trigger a recession. ‘A 50 bps rise would send the necessary clear signal that the ECB is serious about fighting inflation,’ Holzmann said…”

May 30 – Financial Times (Martin Arnold): “The European Central Bank’s chief economist has said quarter-percentage point interest rate rises in July and September will be its ‘benchmark pace’, rebuffing calls for a bigger increase to end its negative rate policy instantly this summer. Economists said the ECB was likely to face rising pressure to ditch its ultra-loose monetary policy more quickly after inflation in Germany soared to a record high of 8.7% in May. But its chief economist Philip Lane said the process of removing its stimulus ‘should be gradual’. ‘Normalisation [of monetary policy] has a natural focus on moving in units of 25 bps, so increases of 25 bps in the July and September meetings are a benchmark pace,’ he told… Cinco Días.

Global Bubble and Instability Watch:

June 3 – Bloomberg (Ari Altstedter): “Toronto home prices fell for the third straight month, as rising interest rates spur an abrupt reversal in a city recently at the heart of one of the world’s hottest housing markets. The average selling price for a home in Canada’s largest city fell 3.1% in May to C$1.18 million (about $938,000) on a seasonally-adjusted basis…”

Europe Watch:

May 30 – Bloomberg (Jana Randow): “German inflation hit another all-time high, adding urgency to the European Central Bank’s exit from crisis-era stimulus after numbers from Spain also topped economists’ estimates. Driven by soaring energy and food costs…, consumer prices in the continent’s biggest economy jumped 8.7% from a year ago in May. Analysts surveyed by Bloomberg predicted an 8.1% advance. The report comes just 10 days before a crucial ECB meeting…”

May 31 – Associated Press (Kelvin Chan): “Eurozone inflation hit a record 8.1% in May amid surging energy and food costs fueled in part by Russia’s war in Ukraine. Annual inflation in the 19 countries that use the euro currency soared past the previous record of 7.4% reached in March and April… Inflation in the eurozone is now at its highest level since recordkeeping for the euro began in 1997… Energy prices jumped 39.2%…”

June 2 – Financial Times (Martin Arnold): “Eurozone producer prices have surged at the fastest pace since the launch of the single currency more than two decades ago, prompting central bankers to warn that inflationary pressures are becoming too broad as well as too high. Prices charged by industrial producers in the 19 countries that share the euro rose 37.2% in the year to April, up from March’s all-time high of 36.9%, with wholesale prices of consumer goods such as food and drink contributing to the surge…”

May 31 – Reuters (Leigh Thomas): “France’s economy shrank unexpectedly in the first quarter as consumers struggled to cope with surging inflation… The… euro zone’s second-biggest economy contracted 0.2% in the three months through March from the previous quarter.”

EM Bubble Watch:

May 28 – Financial Times (Jonathan Wheatley): “Emerging market bonds are suffering their worst losses in almost three decades… The benchmark index of dollar-denominated EM sovereign bonds, the JPMorgan EMBI Global Diversified, has delivered total returns of around minus 15% so far in 2022, its worst start to the year since 1994. The decline has only been slightly eased by the broad rally across global markets in recent days… Nearly $36bn has flowed out of emerging market mutual and exchange traded bond funds since the start of the year…; equity market flows have also gone into reverse since the start of this month.”

June 3 – Reuters (Ezgi Erkoyun and Nevzat Devranoglu): “Turkey’s annual inflation rate jumped to a 24-year high of 73.5% in May, fuelled by the war in Ukraine, rising energy prices and a tumbling lira — though the figure was slightly lower than economists had feared. Inflation has surged since last autumn, when the lira slumped after the central bank launched a 500 basis-point easing cycle sought by President Tayyip Erdogan. The latest figure surpassed the 73.2% touched in 2002 and is the highest since October 1998…”

June 2 – Bloomberg (Maria Elena Vizcaino, Amy Stillman and Michael O’Boyle): “Petroleos Mexicanos raised less money than expected to refinance some of its outstanding debt to suppliers this week, even after it offered buyers a discount… The company, known as Pemex, sold $1.5 billion in bonds due 2029…, compared with the $2 billion it had planned to raise… The debt was sold at a discount of about 97.6 cents on the dollar to yield 9.25%, above the 8.75% coupon.”

Japan Watch:

May 29 – Reuters (Tetsushi Kajimoto): “Bank of Japan Governor Haruhiko Kuroda pledged… to patiently stick to powerful monetary easing to help the economy recover from the COVID-19-induced doldrums, shrugging off any suggestion about a departure from its stimulus policy. Kuroda told parliament the yen was regaining stability after its recent rapid weakening, which was ‘undesirable,’ adding that the situation was due to the dollar’s pullback. The yen is now trading around 127 per dollar. The Japanese currency weakened to two-decade lows beyond 131 to the dollar earlier this month…”

Leveraged Speculation Watch:

June 2 – Bloomberg (Hema Parmar): “Losses at Tiger Global Management reached 52% this year, prompting the firm to cut management fees and create separate accounts for the illiquid wagers of customers who want to redeem. The firm’s hedge fund sank 14.2% last month, buffeted by losses in several stocks and substantial markdowns in its private assets…”

June 3 – Reuters (Svea Herbst-Bayliss): “Hedge fund investors are bracing for a river of red ink as firms begin reporting returns for May when the stock market hovered near bear territory on disappointing earnings and worries about aggressive rate hikes, investors and fund managers said… Data from Hedge Fund Research shows the HFRX Global Hedge Fund Index slipped 1% in May, leaving it down 3.31% for the first five months of 2022. But preliminary numbers from some firms show far bigger losses, especially at funds that had invested heavily in technology and biotechnology stocks… RTW Investments, one of the industry’s hottest biotech funds, told investors that performance estimates for its RTW Flagship Fund including designated investments show the portfolio losing 9.51% in May. For the year, it has fallen 34.5%. Life sciences and biopharma hedge fund Perceptive Advisors lost 19.4% in May, leaving the fund down 41.5% for the year following double digit losses in 2021…”

May 31 – Financial Times (Laurence Fletcher, Harriet Agnew and Samuel Agini and Joe Rennison): “CQS, the hedge fund manager founded by billionaire trader Sir Michael Hintze, is closing a portfolio that invests across a range of internal strategies following a drop in assets. The London-based firm, which runs $20bn in assets under management and suffered large losses during the early stages of the coronavirus pandemic, told clients… directors of the CQS Diversified Fund had voted to wind it down… The closure of the Diversified fund comes during a testing period for much of the $4tn hedge fund industry. A number of big-name equity hedge funds have suffered heavy losses as the prospect of rising interest rates has prompted a rout in high-growth technology stocks, although computer-driven funds betting on market trends have prospered.”

June 3 – Bloomberg (Hema Parmar): “In a year of brutal losses for hedge funds Light Street Capital Management and Honeycomb Asset Management are also feeling the pain. Both hedge funds, which invest in public stocks and closely held companies, are deep underwater — led by Light Street’s 40% drop through May, while Honeycomb slumped 27%… Many hedge funds have posted sharp declines amid turbulence in global equities…”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 1 – Financial Times (Tommy Stubbington): “Investors are underestimating the severity of the ‘global food shock’, which is set to hammer public finances and stir up social unrest in emerging market countries for years to come, according to… S&P Global. Food prices have soared since Russia’s invasion of Ukraine stymied the flow of agricultural produce from one of the world’s top exporters of wheat and other grains as well as sunflower oil. Combined with an accompanying surge in oil prices, this is likely to pressure the creditworthiness of a slew of emerging economies, S&P Global said… ‘Rising energy and food prices represent yet further balance-of-payments, fiscal, and growth shocks to the majority of emerging markets. This intensifies strains on their public finances and ratings, which are already impacted negatively by the global pandemic,’ said Frank Gill, sovereign specialist for Europe, Middle East and Africa at the ratings firm.”

June 1 – CNBC (Emma Newburger): “Sweeping restrictions on outdoor water use go into effect on Wednesday for more than 6 million residents in Southern California as officials work to conserve water during a severe drought. The conservation rules, among the strictest ever imposed in the state, were set by the Metropolitan Water District of Southern California, one of the largest water distributors in the country. Households are now forbidden from watering their lawns more than once a week in many jurisdictions. The goal is to slash water use by 35% as the state enters its third straight year of drought.”

June 1 – Associated Press (Seth Borenstein): “Batten down the hatches for another nasty hurricane season. Nearly every natural force and a bunch of human-caused ones — more than just climate change — have turned the last several Atlantic hurricane seasons into deadly and expensive whoppers. The season that starts Wednesday looks like another note in a record-breaking refrain because all those ingredients for disaster are still going strong, experts warn. They say these factors point to but don’t quite promise more trouble ahead: the natural climate event La Nina, human-caused climate change, warmer ocean waters, the Gulf of Mexico’s deep hot Loop Current, increased storminess in Africa, cleaner skies, a multi-decade active storm cycle and massive development of property along the coast. ‘It’s everything and the kitchen sink,’ Colorado State University hurricane researcher Phil Klotzbach said.”

Geopolitical Watch:

June 1 – Reuters (Ryan Woo and Ben Blanchard): “The Chinese military said… it had conducted a combat ‘readiness patrol’ in the seas and airspace around Taiwan in recent days, saying it was a necessary action to respond to ‘collusion’ between Washington and Taipei. China… has stepped up its military manoeuvres around the island over the past two years or so, as it seeks to pressure Taipei to accept its sovereignty claims… In a statement, the People’s Liberation Army Eastern Theatre Command said the combat ‘readiness patrol’ had happened around Taiwan in recent days and was ‘a necessary action against U.S.-Taiwan collusion’.”

May 30 – Reuters (Ben Blanchard): “Taiwan… reported the largest incursion since January by China’s air force in its air defence zone, with the island’s defence ministry saying Taiwanese fighters scrambled to warn away 30 aircraft in the latest uptick in tensions… The latest Chinese mission included 22 fighters, as well as electronic warfare, early warning and antisubmarine aircraft, the Taiwan ministry said.”

June 1 – Bloomberg: “The United States is ‘over-stretching’ the concept of national security by imposing supply chain sanctions on China to stymie its growth, according to Chinese Foreign Ministry spokesman Zhao Lijian. ‘Such moves gravely undermine the legitimate rights and interests of Chinese companies and deprive China of its right to development,’ he said… Zhao added that such a strategy would only push the world’s two largest economies to ‘confrontation and conflict.’ US Commerce Secretary Gina Raimondo said… the US is mulling adding more Chinese firms to the government’s banned entity list, which effectively blocks access to US exports…”

May 31 – Bloomberg (Isabel Reynolds): “China blasted Japan for a ‘selfish’ claim over an area of the Pacific Ocean larger than France, reigniting a longstanding territorial fight between Asia’s two largest economies. Japan has long claimed Okinotori, which is approximately halfway between Taiwan and Guam, as its southernmost island. China says it’s merely a reef, and doesn’t entitle Japan to benefits such as a 200 nautical-mile radius exclusive economic zone or continental shelf that would apply to an island under international law. ‘Japan, in pursuit of selfish interest, has illegally staked claim to nearly 700,000 square kilometers of jurisdictional waters based on the tiny reef,’ Chinese Foreign Ministry Spokesperson Zhao Lijian said…”

May 29 – Reuters (Daren Butler): “Turkish President Tayyip Erdogan said talks with Finland and Sweden about their joining NATO were not at the ‘expected level’ and Ankara cannot say yes to ‘terrorism-supporting’ countries… Turkey has objected to Sweden and Finland joining the Western defence alliance, holding up a deal… Erdogan’s latest comments indicated his opposition continued. ‘For as long as Tayyip Erdogan is the head of the Republic of Turkey, we definitely cannot say ‘yes’ to countries which support terrorism entering NATO,’ he was cited as telling reporters…”

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June 21, 2024: Greatest Threat
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