MARKET NEWS / CREDIT BUBBLE WEEKLY

June 9, 2023: Q1 ’23 Z1: Shedding Light on Liquidity Dislocation

MARKET NEWS / CREDIT BUBBLE WEEKLY
June 9, 2023: Q1 ’23 Z1: Shedding Light on Liquidity Dislocation
Doug Noland Posted on June 10, 2023

Not surprisingly, considering the March banking crisis, Non-Financial Debt (NFD) growth was tepid for the second straight quarter. At a 3.50% rate, Q1 NFD growth (from the Fed’s Z1 report) was up somewhat from Q4’s 3.19%, though it was notably slower than the annual rates in 2022 (5.72%), 2021 (6.35%) and 2020 (12.40%). Seasonally-adjusted and annualized, Q1 NFD growth of $2.409 TN compares to 2022’s $3.728 TN, 2021’s $3.891 TN and 2020’s record $6.760 TN.

And while the NFD growth rate was steady, there were notable shifts. Household debt growth slowed from Q3’s 6.43% and Q4’s 3.33% to a rate of 2.20%. Household Mortgage debt growth slumped to 2.45% from the year ago (Q1 ’22) 8.79%. Consumer Credit had been holding up better, with Q4 growth of 7.43%. But it slowed markedly to a 4.27% pace during Q1. Meanwhile, Corporate debt growth bounced back from Q4’s weak 1.78% to 4.81%.

Mortgage lending stalled across the board. Household mortgage debt expanded only $50 billion (nominal) during Q1, down from Q2 ’22’s peak $281 billion and Q4’s $164 billion. Commercial Mortgage growth dropped from Q4’s $56 billion and Q2 22’s all-time record $94 billion to $30 billion. And Multifamily Mortgage growth sank from Q4’s $40 billion and Q2’s record $65 billion to only $10 billion.

The historic bank lending boom came to a screeching halt. Loan growth slumped to only $31 billion, down from Q4’s $356 billion and Q2’s near-record $549 billion (second only to Q1 ‘20’s $561bn). Loan growth had averaged an unprecedented $370 billion quarterly over the preceding five quarters – which was just above the $363 billion annual average from 2000 through 2019.

The rapid Credit slowdown would typically be associated with recessionary conditions. But there’s a second key storyline from Q1’s Z1 data: Financial Sector debt growth jumped to a 12.3% annual pace – up from Q4’s already heady 10.5%. For perspective, 2022’s 9.80% growth in Financial Sector borrowings was the strongest since 2007’s 13.50% – and compares to a 10-year annual average (2012-2021) of 2.67%.

This line of analysis tends to turn complex and confusing. It’s also critical for deeper understanding of today’s extraordinary economic, financial and market environments. Think in terms of a banking system crisis of confidence, tightened bank standards, and a rapid slowdown in (non-financial) lending to the real economy. Meanwhile, the financial sector is in flux, with hugely impactful shifts in financial flows, Fed and GSE liquidity injections, and changes in financial sector risk intermediation. Importantly, the hasty expansion of financial sector borrowings created liquidity excesses to further distort highly speculative markets.

While bank lending slowed sharply, this was more than offset by the powerful nexus of Federal Reserve and FHLB liquidity, money market funds, the repurchase agreement (“repo”) marketplace, and the Broker/Dealers.

Federal Reserve “Financial Assets” jumped $244 billion during Q1 to $7.747 TN, the first expansion in five quarters. The Fed’s “Interbank Loans” surged $319 billion – with “Discount Window” borrowings up $65 billion, the new “Bank Term Funding Program” rising $65 billion, and “Other Credit Extensions” jumping $180 billion. The asset “Security Repurchase Agreements” (Fed lending in the “repo” market) increased from zero to $45 billion.

On the liability side of the Fed’s balance sheet, “Depository Institution Reserves” surged $499 billion to $3.184 TN, while “Due to Federal Government” dropped $269 billion to $178 billion. The Fed’s “Repo” liability fell $147 billion to $2.743 TN.

Extraordinary GSE (government-sponsored enterprises) growth is worthy of close examination. GSE assets expanded a record $352 billion during Q1 to an all-time high $9.540 TN. This surpassed the previous record increase of $325 billion during pandemic crisis Q1 2020. The pre-pandemic record was tumultuous (subprime crisis) Q3 2007’s $144 billion, which exceeded the previous record $136 billion during Russia/LTCM crisis period Q4 1998 – that had eclipsed the previous $60 billion quarterly high from bond/derivative/Mexico crisis period Q4 1994.

GSE assets inflated a record $1.022 TN, or 12.0%, over the past four quarters. This was double peak one-year growth from 2020 ($523bn). Record pre-Covid peak one-year growth was Q2 2008’s $418 billion, which exceeded Q3 1999’s one-year gain of $353 billion, and trounced Q4 1994’s at the time record $151 billion.

The bottom line is that GSE growth has been nothing short of phenomenal. GSE assets surged $1.248 TN, or 15%, over five quarters, and $2.410 TN, or 33.8%, since the start of the pandemic (13 quarters). FHLB (Federal Home Loan Banks) Loans/Advances surged a record $222 billion during the quarter to a record $1.042 TN. But, as informed by FHLB financial statements, booming Q1 growth was not limited to loans/advances to member banks. Strong expansions in “repo” and “Fed funds” assets – other key avenues for bolstering system liquidity – powered record ($317 billion) FHLB growth to an all-time high $1.564 TN of total assets (having doubled year-over-year).

With its AAA rating and attractive liquidity profile (especially during crisis periods!), GSE obligations are the perfect asset for money market funds. Moreover, with flows gravitating to the perceived safety of money funds during risk averse market backdrops, the money market fund complex becomes a powerful mechanism for system Credit and liquidity expansion. As I’ve previously explained, the GSEs (chiefly the FHLB of late) issue short-term debt to the money funds. They use this liquidity to fund member banks’ deposit outflows – with much of this liquidity flowing back to the money funds – providing buying power to purchase additional GSE debt (the old “fractional reserve banking” “deposit multiplier” on steroids).

Money Market Funds expanded $470 billion during Q1, to a record $5.693 TN. This growth was second only to Q1 2020 – while exceeding Q2 2008’s $357 billion pre-pandemic record. Money Fund assets have ballooned $1.690 TN, or 35.5%, in the 13 quarters since the start of the pandemic.

The “repo” market is integral to this market-based risk intermediation and Credit/liquidity creation mechanism. “Fed Funds and Security Repurchase Agreements” assets surged a stunning $815 billion, or 46% annualized, during Q1 to a record $7.895 TN. This growth exceeded Q1 2020’s $474 billion and Q1 2007’s $393 billion. At a record $3.235 TN, money funds are by far the largest holders/investors in “repo” assets. Money fund “repo” holdings surged $259 billion during Q1 (34.8% annualized), with one-year growth of $858 billion, or 36.1%. And a number worthy of deep contemplation, money fund holdings of “repo” assets ballooned $1.993 TN, or 160%, in the 13 quarters since Covid.

Wall Street is both a key borrower and lender in the “repo” marketplace. Broker/Dealer “repo” liabilities/borrowings jumped a record $393 billion during Q1 to an all-time high $2.019 TN – exceeding the previous record ($324bn) growth from Q1 2007. Broker/Dealer “repo” borrowings were up $495 billion, or 32.5%, over four quarters.

Total Broker/Dealer assets jumped $452 billion, or 41.4% annualized, during Q1 to $4.823 TN (the high since Q3 ’08). “Repo” assets (lending) rose a quarterly record $208 billion, or 57% annualized, to an all-time high $1.669 TN. “Repo” assets were up $345 billion, or 26%, over the past year. Debt Securities holdings increased $98 billion to $409 billion.

Pondering the data, there’s a strong argument that market-based Credit/liquidity has run completely amuck – a historic dislocation. Certainly not unrelated, the Nasdaq100 closed this week with a year-to-date (5 months) gain of 33%.

The Household Balance Sheet certainly benefited from the extraordinary inflation of financial sector Credit/liquidity and stock prices. Household Assets jumped $3.049 TN during Q1 to $168.5 TN, led by a $3.577 TN gain in Financial Assets (to $114.3 TN). And with Liabilities little changed at $19.619 TN, Household Net Worth surged $3.036 TN to $148.8 TN – just off of Q1 2022’s record $152.6 TN. While down y-o-y, Household Net Worth has surged $32.2 TN, or 30%, over the past three years. Household Net Worth-to-GDP ended Q1 at 562%. This compares to previous cycle peaks 491% for Q1 2007 and 445% to end Q1 2000.

Rest of World (ROW) holding of U.S. Financial Assets jumped $2.434 TN to $43.876 TN, with about a third of the growth explained by the jump in Equities holdings. ROW assets inflated $11.657 TN, or 36.2%, over 12 quarters. Treasury holdings jumped $221 billion during Q1 to $7.536 TN, with Agency Securities up $65 billion (to $1.363 TN) and Corporate Bonds rising $141 billion (to $3.881 TN). On the liability side, “repos” rose $138 billion to $1.299 TN.

Treasury borrowings will now be playing catch up. Treasury Q1 issuance slowed to $124 billion to a record $26.956 TN. Outstanding Treasury debt surged $7.937 TN, or 41.7%, over the past 13 quarters. Since the end of 2007, Treasury debt has inflated $20.905 TN, or 345%. After ending 2007 at 41%, Treasury debt closed the quarter at 102% of GDP.

Examining Z.1 data and recent market dynamics leaves me apprehensive. The massive shot of destabilizing financial sector Credit and liquidity triggered the reemergence of market Bubble Dynamics. A major ongoing short squeeze is exacerbating liquidity excess. Meanwhile, a derivatives-induced market melt-up – call options in the big technology stocks and indices in particular – has fueled a self-reinforcing liquidity-creation dynamic and upside market dislocation.

But this liquidity and speculation bonanza poses serious risk to highly levered bond markets (at home and abroad) – Fed “skip” notwithstanding. A problematic shift in market liquidity dynamics doesn’t seem a low probability scenario. A spike in yields would spur another bout of liquidity destroying de-risking/deleveraging. Faltering bonds could spark an equities market reversal, with recent powerful derivatives-related buying abruptly shifting to aggressive selling. And after months of liquidity abundance and strong markets, risk hedges have either matured or been abandoned throughout the marketplace. A sudden return of “risk off” would catch many poorly positioned, with a mad rush to re-establish hedges exacerbating market liquidity issues.

June 7 – Bloomberg (Erik Hertzberg and Randy Thanthong-Knight): “The Bank of Canada defied expectations by restarting its interest-rate tightening campaign, saying the economy is running too hot. Policymakers led by Governor Tiff Macklem raised the overnight lending rate to 4.75%…, the highest since 2001. The move was expected by only about one in five economists…, and markets had put the odds at about a coin flip. ‘Overall, excess demand in the economy looks to be more persistent than anticipated,’ the bank said… ‘Monetary policy was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the 2% target,’ the bank said, citing an ‘accumulation of evidence’ that includes stronger-than-expected first quarter output growth, an uptick in inflation and a rebound in housing-market activity.”

For the Week:

The S&P500 added 0.4% (up 12.0% y-t-d), and the Dow increased 0.3% (up 2.2%). The Utilities rose 1.9% (down 7.5%). The Banks gained 2.3% (down 18.6%), and the Broker/Dealers jumped 2.5% (up 3.5%). The Transports increased 0.7% (up 6.4%). The S&P 400 Midcaps rose 1.5% (up 4.6%), and the small cap Russell 2000 jumped 1.9% (up 5.9%). The Nasdaq100 was little changed (up 32.8%). The Semiconductors added 0.7% (up 39.2%). The Biotechs slipped 0.2% (up 1.5%). While bullion rallied $13, the HUI gold equities index declined 1.1% (up 5.8%).

Three-month Treasury bill rates ended the week at 5.10%. Two-year government yields jumped 10 bps this week to 4.60% (up 17bps y-t-d). Five-year T-note yields gained seven bps to 3.91% (down 9bps). Ten-year Treasury yields increased five bps to 3.74% (down 14bps). Long bond yields slipped a basis point to 3.88% (down 8bps). Benchmark Fannie Mae MBS yields dipped four bps to 5.46% (up 7bps).

Greek 10-year yields declined four bps to 3.64% (down 92bps y-t-d). Italian yields gained four bps to 4.11% (down 58bps). Spain’s 10-year yields rose five bps to 3.36% (down 15bps). German bund yields gained six bps to 2.38% (down 7bps). French yields increased six bps to 2.92% (down 6bps). The French to German 10-year bond spread was little changed at 54 bps. U.K. 10-year gilt yields jumped eight bps to 4.24% (up 57bps). U.K.’s FTSE equities index declined 0.6% (up 1.5% y-t-d).

Japan’s Nikkei Equities Index jumped 2.4% (up 23.6% y-t-d). Japanese 10-year “JGB” yields added a basis point to 0.43% (up 1bp y-t-d). France’s CAC40 declined 0.8% (up 11.4%). The German DAX equities index slipped 0.6% (up 14.6%). Spain’s IBEX 35 equities index was little changed (up 13.1%). Italy’s FTSE MIB index increased 0.3% (up 14.6%). EM equities were mostly higher. Brazil’s Bovespa index surged 4.0% (up 6.6%), and Mexico’s Bolsa index rose 2.4% (up 12.5%). South Korea’s Kospi index advanced 1.5% (up 18.1%). India’s Sensex equities index was about unchanged (up 2.9%). China’s Shanghai Exchange Index was unchanged (up 4.6%). Turkey’s Borsa Istanbul National 100 index rallied 10.0% (up 2.1%). Russia’s MICEX equities index declined 0.4% (up 25.7%).

Investment-grade bond funds posted inflows of $539 million, and junk bond funds reported positive flows of $2.500 billion (from Lipper).

Federal Reserve Credit declined $26.7bn last week to $8.353 TN. Fed Credit was down $548bn from the June 22nd peak. Over the past 195 weeks, Fed Credit expanded $4.627 TN, or 124%. Fed Credit inflated $5.542 TN, or 197%, over the past 552 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $2.5bn last week to $3.407 TN. “Custody holdings” were up $12.6bn, or 0.4%, y-o-y.

Total money market fund assets jumped another $36.7bn to a record $5.457 TN, with a 13-week gain of $563bn (54% annualized). Total money funds were up $904bn, or 19.9%, y-o-y.

Total Commercial Paper was little changed at $1.111 TN. CP was down $47bn, or 4.0%, over the past year.

Freddie Mac 30-year fixed mortgage rates dropped 15 bps to 6.78% (up 155bps y-o-y). Fifteen-year rates also fell 15 bps to 6.16% (up 178bps). Five-year hybrid ARM rates dipped three bps to 6.38% (up 226bps) – near the high since October 2008. Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 10 bps to 7.05% (up 148bps).

Currency Watch:

June 7 – Bloomberg: “China’s four big state lenders have effectively cut dollar deposit rates…, at a time when strong demand for the US currency in the banking system helped push the yuan to a six-month low. The banks have recently lowered the ceiling on the rates… for both companies and individuals… Some of the lenders’ provincial branches now offer around 5.7% on dollar deposits to their biggest clients, down from 6% previously…”

June 5 – Reuters (Marc Jones): “Signs of de-dollarisation are unfolding in the global economy, strategists at the biggest U.S. bank JPMorgan said…, although the currency should maintain its long-held dominance for the foreseeable future. The strains of steep U.S. interest rate rises and sanctions that have frozen Russia out of the global banking system have seen a fresh push by the ‘BRICS’ nations, Brazil, Russia, India, China and South Africa, to challenge the dollar’s hegemony. JPMorgan strategists Meera Chandan and Octavia Popescu said that while overall dollar usage is within its historical range and the greenback remains at the top of the pack, a closer look shows a more bifurcated picture.”

For the week, the U.S. Dollar Index declined 0.4% to 103.56 (up 0.1% y-t-d). For the week on the upside, the South African rand increased 4.1%, the Norwegian krone 2.3%, the Australian dollar 2.0%, the Brazilian real 1.6%, the Mexican peso 1.6%, the South Korean won 1.1%, the New Zealand dollar 1.0%, the British pound 1.0%, the Swiss franc 0.6%, the Canadian dollar 0.6%, the Singapore dollar 0.5%, the euro 0.4% and the Japanese yen 0.4%. On the downside, the Swedish krona declined 0.6%. The Chinese (onshore) renminbi declined 0.45% versus the dollar (down 3.25%).

Commodities Watch:

June 7 – Bloomberg (Sybilla Gross): “China increased its gold reserves for a seventh straight month, signaling ongoing strong demand for the precious metal from the world’s central banks. China raised its gold holdings by about 16 tons in May… Total stockpiles now sit at about 2,092 tons, after adding a total of 144 tons from November through last month. Central banks bought a record volume of gold last year as nations stockpiled the precious metal amid rising geopolitical uncertainty and stubborn global inflation.”

The Bloomberg Commodities Index rallied 1.1% (down 10.5% y-t-d). Spot Gold gained 0.7% to $1,961 (up 7.5%). Silver jumped 2.9% to $24.29 (up 1.4%). WTI crude dropped $1.57, or 2.2%, to $70.17 (down 13%). Gasoline rallied 3.7% (up 5%), and Natural Gas recovered 3.8% to $2.25 (down 50%). Copper gained 1.6% (down 1%). Wheat rose 1.8% (down 20%), while Corn declined 0.5% (down 11%). Bitcoin fell $1,570, or 5.8%, this week to $25,700 (up 55%).

Global Bank Crisis Watch:

June 5 – Wall Street Journal (Andrew Ackerman): “U.S. regulators are preparing to force large banks to shore up their financial footing, moves they say will help boost the resilience of the system after a spate of midsize bank failures this year. The changes… could raise overall capital requirements by roughly 20% at larger banks on average, people familiar… said. The precise amount will depend on a firm’s business activities, with the biggest increases expected to be reserved for U.S. megabanks with big trading businesses. Banks that are heavily dependent on fee income—such as that from investment banking or wealth management—could also face large capital increases.”

June 4 – Financial Times (Stephen Gandel, Joshua Chaffin, Eric Platt and Joshua Oliver): “Some US banks are preparing to sell off property loans at a discount even when borrowers are up to date on repayments, a sign of their determination to reduce exposure to the teetering commercial real estate market. The willingness of some lenders to take losses on so-called performing real estate loans follows multiple warnings that the asset class is the ‘next shoe to drop’ after the recent turmoil in the US regional banking industry. ‘The fact that banks want to sell loans is coming up in a lot of conversations,’ said Chad Littell, an analyst at CoStar… ‘I am hearing more about it than any time in the past decade.’”

June 6 – Reuters (Bianca Flowers and Priyamvada C): “Tighter lending standards from regional banks are making it harder for U.S. hotel developers to secure funding, slowing construction of new hotels at a time Americans’ appetite for travel is ripe. Hotel developers, private equity firms, and general contractors told Reuters the financial stress on regional banks — the largest lenders to hotels and other commercial real estate markets — has forced developers to postpone projects or find other creative ways to raise capital. The hotel industry’s predicament highlights the impact on the broader U.S. economy of the regional banking crisis, which resulted in the failure of three mid-sized U.S. lenders and prompted a flight in deposits to larger banks.”

June 7 – Bloomberg (Max Reyes): “Citizens Financial Group Inc. said it would no longer originate indirect auto loans as financial services firms continue to curb their exposure to the sector… Citizens will continue to retain and service auto loans already on its balance sheet, it said. The bank had started to deemphasize auto loan origination volume and reduce the number of active relationships with car dealers in the third quarter of 2022…”

Debt Ceiling Watch:

June 5 – Reuters (David Lawder and Andy Sullivan): “Republicans and Democrats are touting a hastily-written debt ceiling deal that staves off a devastating U.S. default, but does little to slow a massive buildup of total federal debt now on pace to exceed $50 trillion in a decade. The deal’s first problem, budget experts say, is it only curbs non-defense discretionary spending, or just about one-seventh of this year’s $6.4 trillion federal budget. Defense, veterans’ care and big-ticket safety-net programs are spared. Longer term, it fails to alter the U.S.’s chronic and growing revenue shortfall, thanks to health and retirement spending on the country’s aging population and Congress’s failure to raise taxes. ‘If you’re worried about the deficit and debt problem, this thing does nothing,’ said Dennis Ippolito, a public policy professor and fiscal expert at Southern Methodist University. ‘What you’ve got in place is essentially Democratic spending policy and Republican tax policy, and there is nothing in the works that suggests any change to either of those,’ he said.”

June 7 – Bloomberg (Billy House): “House Speaker Kevin McCarthy called off votes for the remainder of the week and sent lawmakers home as a revolt by Republican hard-liners halted business in the chamber for a second day. The blockade by a band of 11 ultra-conservatives heightened tensions among Republicans following the speaker’s backing of a compromise with the White House to avert a US debt default. It also showcased their capacity to grind the chamber to a halt even if holding off, for now, on a push for McCarthy’s ouster. ‘There’s a little chaos going on,’ McCarthy told reporters…”

Market Instability Watch:

June 7 – Bloomberg (Ruth Carson and Masaki Kondo): “Global bonds are slumping after two shock interest-rate hikes this week served traders a reality check that central banks are far from done fighting inflation. Shorter-maturity Treasury yields are close to their highest since March, while their Australian equivalents have jumped to levels last seen more than a decade ago. Investors are back ditching sovereign debt after the Bank of Canada joined the Reserve Bank of Australia in surprising markets with more rate hikes to combat stubbornly fast consumer-price gains.”

June 7 – Wall Street Journal (Eric Wallerstein): “Investors are bracing for a flood of more than $1 trillion of Treasury bills in the wake of the debt-ceiling fight, potentially sparking a new bout of volatility in financial markets. Some on Wall Street fear that roughly $850 billion in bond issuance that was shelved until a debt-ceiling deal was passed—sales expected between now and the end of September, according to JPMorgan analysts—will overwhelm buyers, jolting markets and raising short-term borrowing costs. Few expect major upheaval, but many worry about the potential for unforeseen problems in the financial plumbing… Many remember how money-market rates skyrocketed in 2019 during a period of low liquidity, necessitating intervention by the Federal Reserve.”

June 7 – Financial Times (Kate Duguid): “A $1tn US government borrowing spree is set to increase the strain on the country’s banking system as Washington returns to the markets in the aftermath of the debt ceiling fight, traders and analysts say. Following the resolution of that dispute — which had previously prevented the US from increasing its borrowing — the Treasury department will seek to rebuild its cash balance, which last week hit its lowest level since 2017. JPMorgan has estimated that Washington will need to borrow $1.1tn in short-dated Treasury bills by the end of 2023, with $850bn in net bill issuance over the next four months.”

June 4 – Financial Times (Adam Samson): “Turkey’s new finance minister has vowed to return to ‘rational’ policies after years in which President Recep Tayyip Erdoğan’s unconventional strategy put the country’s $900bn economy under intense strain and sent the lira to record lows. ‘Transparency, consistency, predictability and compliance with international norms will be our basic principles in achieving the goal of raising social welfare,’ Mehmet Şimşek said… ‘Turkey has no choice but to return to a rational basis,’ he said, adding: ‘We will prioritise macro financial stability.’”

June 7 – Bloomberg (Lu Wang and Ye Xie): “The once-hot Wall Street trades of 2023 are all falling apart, in a fresh blow to market pros blindsided again and again ever since the pandemic broke out. Nearly half way into the year, a slew of consensus bets are losing big time as the US economy defies the recession bears, the artificial-intelligence craze heats up and more. Misfiring strategies include selling Big Tech stocks, snubbing the dollar, and buying into the promise of emerging market equities as China emerged from Covid lockdowns. Instead, US growth shares are on the cusp of a full-blown melt-up, while Chinese stocks sink into a bear market. Rather than falling, the greenback has strengthened, including a 6% surge versus the Japanese yen.”

June 8 – Financial Times (Steve Johnson): “There is currently $103bn invested in leveraged or inverse ETF worldwide, according to data from Morningstar… $80bn in the US alone. These funds provide investors with a means to speculate on up to five times the daily return of either a basket of securities or an individual security, such as Tesla, Airbnb or Ferrari, allowing investors access to funds that are intentionally riskier than individual securities. Net flows to leveraged and inverse funds hit a record $28bn last year, equivalent to 3.7% of all purchases of exchange traded products, comfortably erasing the previous high of $17.1bn and 2.3% in 2020…”

June 5 – Bloomberg (Garfield Reynolds and Yumi Teso): “The scourge of negative-yielding debt refuses to go away for investors as the Bank of Japan’s continued reluctance to roll back quantitative easing has pushed some local yields back below zero. For a brief moment in January, there were no bonds anywhere in the world being bought at prices that guaranteed losses over the lifetime of the debt. That came after then-BOJ Governor Haruhiko Kuroda’s shock December decision to double the benchmark yield ceiling set off a storm of speculation that policymakers would soon move to dismantle the globe’s loosest monetary settings. Instead, Kuroda followed up with a wave of bond purchases to restrain yields…”

June 5 – Financial Times (George Steer): “Retail investors have increased their exposure to technology stocks after missing out on the market rally driven this year by artificial intelligence… Net purchases of US stocks by retail investors hit almost $1.5bn on May 30 and 31, the highest daily figures in three months… Tech stocks were among the main beneficiaries, at the end of a month in which retail interest in AI-associated companies began to broaden and benefit the likes of Palantir, Marvell Technology and UiPath… After weeks on the sidelines, individual investors were ‘starting to chase the tech rally’, said Marco Iachini, VandaTrack’s vice-president. ‘Fear of missing out looks to be kicking in.’”

June 7 – Bloomberg: “A gauge of leveraged activity in China’s money market has notched another record as onshore financial institutions take advantage of ample liquidity to boost borrowing. Turnover of so-called overnight pledged repo trades surged to an all-time high $1.1 trillion on Tuesday… While officials discourage signs of leverage in the financial system, the data suggests some traders are betting the People’s Bank of China will opt to keep easy money conditions to support a still fragile-economy.”

Bubble and Mania Watch:

June 5 – Bloomberg (Laura Benitez and Loukia Gyftopoulou): “First came the debt specialists and the private equity firms. Then, hedge funds and wealth managers saw an opening. Now everyone from sovereign wealth funds to venture capitalists are spouting Wall Street’s favorite buzzword: private credit… The private credit market — which began by catering to private equity businesses and grew rapidly as banks pulled back after the global financial crisis — has roughly tripled in size since 2015 to $1.5 trillion. Apollo Global Management, the biggest alternative credit manager, says the industry could grow to replace as much as $40 trillion of the debt markets.”

June 6 – Wall Street Journal (Konrad Putzier): “Nearly $1.5 trillion in commercial mortgages are coming due over the next three years, according to… Trepp. Many of the commercial landlords on the hook for the loans are vulnerable to default in part because of the way their loans are structured. Unlike most home loans, which get paid down each year, many commercial mortgages are known as interest-only loans. Borrowers make only interest payments during the life of the loan, with the entire principal due at the end. Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021, up from 51% in 2013…”

June 5 – Bloomberg (Patrick Clark): “Park Hotels & Resorts Inc. has stopped making payments on a loan tied to two large San Francisco hotels, as lagging office occupancy and mounting public safety concerns in the California city weigh on lodging demand. Park… is working with servicers on the $725 million loan to determine the best path forward for the two properties — the 1,921-room Hilton San Francisco Union Square and the 1,024-room Parc 55 San Francisco… The company expects that it will eventually remove the hotels from its portfolio.”

June 5 – Financial Times (Joshua Oliver): “About half of large multinationals are planning to cut office space in the next three years as they adapt to the rise of homeworking since the coronavirus pandemic. A Knight Frank survey of executives in charge of real estate at 350 companies round the world that together employ 10mn people found that… the largest number was aiming to reduce space by 10 to 20%. ‘Better but less space is probably the strap line for the larger organisations,’ said Lee Elliott, a commercial real estate expert at Knight Frank. ‘It is not the death knell of property markets because what you are seeing is a shortfall of supply, and therefore an increase in rents, for the prime buildings.’”

June 7 – Bloomberg (Silla Brush): “PGIM Chief Executive Officer David Hunt said the market for office real estate is heading for a shakeout, with about 60% of buildings in ‘purgatory’ because they aren’t up to standards to draw tenants. ‘We are going to have a big workout for that purgatory set over the next 24 months,’ Hunt said… ‘Prices will come down.’ Offices built since 2016 in prime locations are getting good rents and are ‘real winners’ at the moment… But the 60% of the market in purgatory often isn’t in good shape or upgraded to climate and hospitality standards, he added. The last 20% of the market is ‘probably going to get the keys handed in on it,’ Hunt said.”

June 5 – Wall Street Journal (Will Parker): “Historic numbers of new rental apartments opening over the next 18 months are poised to decrease profits for the largest publicly traded landlords, who are already contending with slower or declining rent growth. Nationally, more than 950,000 multifamily units are under construction, according to the U.S. Census Bureau. That equals three times the number for apartment construction from two decades ago. Sunbelt cities are the most exposed to the recent ramp-up in new supply, according to… Green Street.”

June 5 – Bloomberg (Richard Henderson): “Morgan Stanley strategists anticipate a sudden pullback in corporate earnings will slam the brakes on a US equity rally, a call at odds with Wall Street estimates… Earnings per share for the S&P 500 are set to drop 16% this year, according to Morgan Stanley strategists led by Andrew Sheets. That’s one of the most bearish predictions among those tracked by Bloomberg, and contrasts with bullish forecasts from the likes of Goldman Sachs Group Inc., which anticipates mild growth.”

Crypto Watch:

June 5 – Bloomberg (Sidhartha Shukla and Suvashree Ghosh): “The US Securities and Exchange Commission’s lawsuit against crypto exchange Binance and its head Changpeng Zhao injects fresh uncertainty into a sector that’s struggling to maintain mainstream relevance. The SEC accused Binance Holdings Ltd. and Zhao of mishandling customer funds, misleading investors and regulators, and breaking securities rules. The action adds to the regulatory heat on the largest digital-asset trading platform. It’s also another black eye for crypto after a rout in 2022 that contributed to rival FTX’s downfall amid a flurry of fraud allegations. The market faces an uphill task to restore trust…”

June 6 – Financial Times (Nikou Asgari and Stefania Palma): “The US securities regulator’s lawsuits against crypto exchanges Binance and Coinbase this week marks its most aggressive legal assault on the digital asset market. The Securities and Exchange Commission accused Binance and Coinbase, two of the industry’s biggest companies, of violating US securities laws, offering unregistered securities and operating as unregistered venues, among other charges. The duo account for half of global trading in digital assets. Binance was also accused of mixing billions of dollars of customer cash with a separate trading firm owned by its chief executive and inflating its US platform’s trading volume.”

June 8 – Reuters (Hannah Lang): “Other U.S. crypto exchanges are likely to be in the firing line after the Securities and Exchange Commission (SEC) this week sued Coinbase and Binance, two of the world’s largest crypto exchanges, for allegedly breaching its rules. The SEC… alleged Coinbase traded at least 13 crypto assets that are securities and which should have been registered, while on Monday it also accused Binance, the world’s largest cryptocurrency exchange, of offering 12 cryptocurrency coins without registering them as securities… That raises questions about other exchanges that have also allowed U.S. investors to trade those tokens, such as Kraken, Gemini, Crypto.com and Okcoin, and whether they could be at risk of regulatory action, industry executives said.”

June 6 – CNBC (Rohan Goswami): “The $2.2 billion of U.S. customer assets held by Binance is at ‘significant risk’ of being stolen by founder Changpeng Zhao unless a freezing order is in put place, federal regulators said in a filing…, after the crypto regulator was charged by the Securities and Exchange Commission. Lawyers from the SEC filed an emergency motion earlier, citing a risk of capital flight and asking a judge to repatriate and freeze U.S. customer assets to prevent illicit transfers by Zhao or Binance entities. The SEC sued Binance and Zhao on Monday, alleging they engaged in the unregistered offer and sale of securities and commingled investor funds with their own.”

June 6 – Bloomberg (Olga Kharif): “The Securities and Exchange Commission said it’s seeking to freeze Binance.US’s assets and protect customer funds, including through the repatriation of client investments held abroad. The agency said… it filed an emergency action application to a court for a temporary restraining order. The regulator also asked the judge to back steps to ‘ensure that Binance.US customers’ assets are protected and remain in the US through the resolution of the SEC’s pending litigation of this matter’… In a lawsuit Monday, the SEC accused Binance and its Chief Executive Officer Zhao of mishandling customer funds, misleading investors and regulators, and breaking securities rules.”

June 7 – Reuters (Jody Godoy): “Determining whether digital tokens are securities will be central to the high-stakes case brought by U.S. regulators alleging crypto platform Coinbase violated the law by failing to register as a securities exchange, broker and clearing agency. To argue that crypto assets are securities, the SEC has relied on a U.S. Supreme Court case from 1946. The case dealt with investors in Florida orange groves owned by the W. J. Howey Co. The court ruled that ‘an investment of money in a common enterprise with profits to come solely from the efforts of others,’ is a kind of security called an investment contract. The SEC had jurisdiction to seek to prevent Howey from selling to out-of-state investors fractional land interests with a contract to provide profit from the harvest, the court said. Securities, as opposed to other assets such as commodities, are strictly regulated and require detailed disclosures to inform investors of potential risks.”

Ukraine War Watch:

June 6 – Financial Times (Ben Hall): “After weeks of Ukrainian drone strikes on Russian territory and cross-border raids — a prelude to the long-awaited counter-offensive now gathering pace — it is Russia’s turn to distract and destabilise its enemy. The destruction of the Kakhovka dam over the Dnipro river is far more than a psychological game. It will have long-lasting humanitarian and environmental consequences and military implications. Russia, which controls the area, has denied responsibility and blamed Ukrainian ‘sabotage’ for the dam’s breach. These claims are implausible. Kyiv had nothing to gain from a catastrophic flood. It is possible that the structure, damaged in previous strikes, could have given way. Russian occupying authorities had allowed the water in the reservoir behind to rise to unusually high levels, which would make it a case of criminal neglect. But the timing of an accident seems too fortuitous for the Kremlin…”

June 7 – Reuters (Viktoriia Lakezina and Max Hunder): “Ukrainians abandoned inundated homes as floods crested across a swathe of the south on Wednesday after the destruction of a huge hydro-electric dam on front lines between Russian and Ukrainian forces… Residents slogged through flooded streets carrying children on their shoulders, dogs in their arms and belongings in plastic bags while rescuers used rubber boats to search areas where the waters reached above head height. Ukraine said the deluge would leave hundreds of thousands of people without access to drinking water, swamp tens of thousands of hectares of agricultural land and turn at least 500,000 hectares deprived of irrigation into ‘deserts’.”

June 3 – Reuters (Olena Harmash): “Ukraine is ready to launch its long-awaited counteroffensive to recapture Russian-occupied territory, President Volodymyr Zelenskiy said… ‘We strongly believe that we will succeed,’ Zelenskiy told the Wall Street Journal. ‘I don’t know how long it will take. To be honest, it can go a variety of ways, completely different. But we are going to do it, and we are ready.’”

June 9 – Bloomberg: “Russia will begin moving tactical nuclear weapons to Belarus next month, President Vladimir Putin told his Belarusian counterpart Alexander Lukashenko… Construction of storage facilities in Belarus will be completed by July 7-8, allowing the transfer of the weapons to begin, Putin said in televised comments at the meeting in Russia’s Black Sea resort of Sochi.”

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

June 6 – Financial Times (Felicia Schwartz): “The US is prepared to address China’s ‘increasing level of aggressiveness’ in the Taiwan Strait and South China Sea after Beijing conducted two ‘unsafe’ intercepts in recent days, a senior official said… The warning from John Kirby, National Security Council spokesperson, underscores increasing US alarm over dangerous interactions between US and Chinese forces… It comes as Beijing has rebuffed American attempts to re-establish military communications between the countries. Kirby said the intercepts were ‘part and parcel’ of an ‘increasing level of aggressiveness’ by China’s People’s Liberation Army, particularly in the area around the Taiwan Strait and South China Sea.”

June 3 – Financial Times (Demetri Sevastopulo and Kathrin Hille): “US defence secretary Lloyd Austin… criticised China for conducting dangerous aerial intercepts over the South China Sea and warned that Washington would not be deterred by threatening behaviour in the Indo-Pacific region. China was conducting ‘an alarming number of risky intercepts of US and allied aircraft flying lawfully in international airspace’, Austin said… His remarks came days after the Pentagon released a video showing a Chinese fighter jet flying dangerously near a US spy plane. ‘We do not seek conflict or confrontation, but we will not flinch in the face of bullying or coercion,’ Austin said.”

June 3 – Associated Press (Dave Rising): “U.S. Secretary of Defense Lloyd Austin vowed… that Washington would not stand for any ‘coercion and bullying’ of its allies and partners by China, while assuring Beijing that the United States remains committed to maintaining the status quo on Taiwan and would prefer dialogue over conflict. Speaking at the Shangri-La Dialogue, an annual forum bringing together top defense officials, diplomats and leaders in Singapore, Austin lobbied for support for Washington’s vision of a ‘free, open, and secure Indo-Pacific within a world of rules and rights’ as the best course to counter increasing Chinese assertiveness in the region.”

June 3 – Reuters (Ben Blanchard): “China’s military rebuked the United States and Canada for ‘deliberately provoking risk’ after the countries’ navies staged a rare joint sailing through the sensitive Taiwan Strait. The U.S. Navy’s 7th Fleet said the guided-missile destroyer USS Chung-Hoon and Canada’s HMCS Montreal conducted a ‘routine’ transit of the strait on Saturday ‘through waters where high-seas freedoms of navigation and overflight apply in accordance with international law’… ‘The countries concerned deliberately create incidents in the Taiwan Strait region, deliberately provoke risks, maliciously undermine regional peace and stability, and send the wrong signal to ‘Taiwan independence’ forces,’ it said…”

June 3 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “China has warned western militaries to stay out of waters and airspace near its borders if they want to avoid dangerous run-ins with the People’s Liberation Army, highlighting the growing risk of unintended conflict in Asia… The blunt message from General Li Shangfu, China’s new defence minister, followed a near-collision between a Chinese warship and a US destroyer in international waters on Saturday. The Chinese ship cut directly ahead of the US vessel, which was sailing through the Taiwan Strait with a Canadian warship. ‘Why does this all happen near China’s sovereign waters and airspace? Chinese ships and aircraft never go near other countries’ airspace and waters,’ Li said…”

June 8 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “The US, Taiwan and Japan are to share real-time data from naval reconnaissance drones, according to four people familiar with the project, demonstrating Washington’s push to strengthen co-ordination in the event of a Chinese attack on Taiwan. US defence contractor General Atomics is due to deliver four MQ-9B Sea Guardian drones to Taipei beginning in 2025. The maritime variant of the Reaper drone that the US Air Force widely used in Afghanistan, Iraq, Libya and Syria, it can find, track and target enemy ships and radars. That capability would be crucial in a war over Taiwan, a scenario in which Chinese surface warships and submarines would operate around the island.”

De-globalization and Iron Curtain Watch:

June 5 – Financial Times (Gideon Rachman): “An unheralded revolution has taken place in America’s approach to international economics. As the new thinking emerges, it is reshaping the global economy and the western alliance. The approach was set out most clearly in a speech by Jake Sullivan on April 27. The fact that Sullivan is President Joe Biden’s national security adviser is a clue. Strategic rivalry with China is central to the new thinking. But Sullivan’s speech ranged well beyond geopolitics. It was a highly ambitious effort to pull together the domestic and international goals of the Biden administration… The US intends to use a new strategic industrial policy to simultaneously revitalise the American middle-class and US democracy, while combating climate change and establishing a lasting technological lead over China.”

June 3 – Bloomberg: “While the US ponders whether to reopen its embassy in Libya, Vladimir Putin’s new ambassador is preparing to take up his post in the capital, extending Russian influence across an oil-producing nation on the doorstep of Europe. Russia’s Wagner Group… already has access to key oil facilities and supported last year’s monthslong blockade that hit exports at the height of the energy crisis triggered by the invasion of Ukraine. Moscow’s decision to reestablish its diplomatic presence in Tripoli… is the clearest sign yet that Putin is looking to make inroads beyond his traditional support for military commander Khalifa Haftar in the east.”

Inflation Watch:

June 8 – Reuters (Joe Cash): “China’s factory gate prices fell at the fastest pace in seven years in May and quicker than forecasts, as faltering demand weighed on a slowing manufacturing sector… The producer price index (PPI) for May fell for an eighth consecutive month, down 4.6%… That was the fastest decline since February 2016…”

Biden Administration Watch:

June 5 – Reuters (Andrea Shalal): “The White House said… that actions by China in the Taiwan Strait and South China Sea reflect a ‘growing aggressiveness’ by Beijing’s military that raises the risk of an error where someone gets hurt. The U.S. Navy… released a video of what it called an ‘unsafe interaction’ in the Taiwan Strait, in which a Chinese warship crossed in front of a U.S. destroyer. ‘It won’t be long before somebody gets hurt,’ White House spokesperson John Kirby told reporters… ‘It wouldn’t take much for an error in judgment or a mistake to get made.’”

June 8 – Washington Post (John Hudson): “Last fall, President Biden vowed to impose ‘consequences’ on Saudi Arabia for its decision to slash oil production amid high energy prices and fast-approaching elections in the United States. In public, the Saudi government defended its actions politely via diplomatic statements. But in private, Crown Prince Mohammed bin Salman threatened to fundamentally alter the decades-old U.S.-Saudi relationship and impose significant economic costs on the United States if it retaliated against the oil cuts…”

Federal Reserve Watch:

June 5 – Bloomberg (Craig Torres): “The Federal Reserve’s June meeting is shaping up to be one of the trickiest in its 15-month campaign to tame inflation: Chair Jerome Powell seems intent on skipping an interest-rate increase, while explaining to the public that officials aren’t done yet. The strategy is sensible, confusing and risky all at once… Since March 2022, the US central bank has raised its policy rate at 10 consecutive meetings, to a range of 5% to 5.25%, with the last two increases following bank runs that led to the collapse of four lenders. Now, Powell and several of his colleagues want to take a break at their June 13-14 meeting to assess the outlook… ‘The reason they want to pause is risk management: There are a lot of uncertainties, and they want to gather more data,’ said former Fed Governor Laurence Meyer. ‘But if you think you are going to do one or two more, and you don’t hike in June, the question is: Why not?’”

June 7 – Associated Press (Christopher Rugaber): “Don’t call it a ‘pause.’ When the Federal Reserve meets next week, it is widely expected to leave interest rates alone — after 10 straight meetings in which it has jacked up its key rate to fight inflation. But what might otherwise be seen as a ‘pause’ will likely be characterized instead as a ‘skip.’ The difference? A ‘pause’ might suggest that the Fed may not raise its benchmark rate again. A ‘skip’ implies that it probably will — just not now. The purpose of suspending its rate hikes is to give the Fed’s policymakers time to look around and assess how much higher borrowing rates are slowing inflation. Calling next week’s decision a ‘skip’ is also a way for Chair Jerome Powell to forge a consensus among an increasingly fractious committee of Fed policymakers. One group of Fed officials would like to pause their hikes and decide, over time, whether to increase rates any further.”

June 7 – Bloomberg (Michael Mackenzie): “The Treasury market restored the full pricing of Federal Reserve tightening by July, which would be the last interest-rate hike in 2023. The latest shift in expectations for Fed policy was accompanied by a slide bonds, with the yields on two- and five-year Treasuries up at least 11 bps. Selling picked up after the Bank of Canada cited stubborn inflation pressures for delivering a quarter-point hike…. The rate on swap contracts linked to the July gathering climbed to 5.33% on Wednesday, or 25 bps above the current effective fed funds rate of 5.08%.”

U.S. Bubble Watch:

June 8 – Dow Jones (Jeffry Bartash): “Layoffs are low and many businesses still hiring. The numbers: The number of Americans who applied for unemployment benefits in early June jumped to a 21-month high of 261,000, but most of the increase took place in Ohio and California. Most other states showed little change. New jobless claims in the seven days ended June 3 climbed 28,000 from 233,000 in the prior week…”

June 5 – Bloomberg (Augusta Saraiva): “The US service sector nearly stagnated in May as business activity and orders downshifted, while a measure of prices paid slid to a three-year low. The Institute for Supply Management’s overall gauge of services fell to 50.3, the weakest level this year, from 51.9 in April… The business activity index… fell for a fourth month to a three-year low of 51.5. Combined with softer orders, the decline indicates service providers are experiencing sluggish demand. The new-orders gauge…, declined to 52.9 from 56.1 a month earlier… The ISM measure of prices paid for materials and services dropped more than 3 points to 56.2 in May.”

June 7 – Reuters (Lucia Mutikani): “The U.S. trade deficit widened by the most in eight years in April as imports of goods rebounded while exports of energy products declined… The trade deficit jumped 23.0% to $74.6 billion. Data for March was revised to show the trade gap narrowing to $60.6 billion instead of the previously reported $64.2 billion.”

June 7 – Wall Street Journal (Austen Hufford and Anthony DeBarros): “Americans imported more goods from abroad in April while becoming less reliant on products from China, another sign of strong U.S. economic momentum this spring. The share of goods shipments the U.S. receives from China has declined to the lowest level since 2006. In recent years, imports from other countries in Asia have grown to meet the healthy demand for foreign products.”

June 7 – Bloomberg (Reade Pickert): “US mortgage applications for home purchases fell for a fourth week as 30-year fixed rates held close to an almost seven-month high. The Mortgage Bankers Association index of applications for home purchases dropped 1.7% in the week ended June 2 to 151.7, the second-lowest level since 1995.”

June 7 – Wall Street Journal (Jennifer Williams-Alvarez): “Buy now, pay later options have boosted sales for some companies in recent quarters, but growing signs that consumers who tap the no- or low-fee loans are struggling suggest businesses could soon feel a squeeze. BNPL options—from providers including Klarna, Affirm Holdings and Afterpay—gained popularity during the pandemic as shoppers leaned into the payment option for everything from cardigans to workout equipment and couches… With living costs up from a year ago and interest rates rising, the appeal of BNPL options has only gone up. In 2022, the share of online purchases using BNPL grew by 14% compared with a year earlier… In the first two months of this year, the order share was up by 10% from a year ago, the data show.”

Fixed Income Watch:

June 5 – Bloomberg (Ronan Martin and Olivia Raimonde): “Companies are feeling the pinch from a sharp jump in interest payments after global rate hikes, with S&P Global Ratings estimating that junk-rated firms are paying the highest interest on debt since 2010. Speculative-grade firms are now paying an effective rate of 6.1% on average, up from 5.1% last year…”

June 5 – Bloomberg (Katie Greifeld): “Investors are piling cash into the largest junk bond exchange-traded fund at the quickest pace in nearly three years amid a broad rebound in risk assets. More than $2 billion flooded into the $17 billion iShares iBoxx High Yield Corporate Bond ETF (ticker HYG) last week… That was the biggest haul among fixed-income ETFs and the HYG’s largest weekly influx since November 2020.”

June 6 – Bloomberg (Skylar Woodhouse): “US public transit systems have faced a slew of challenges from trying to bring riders back after a pandemic-induced slump to struggling with financial shortfalls. The latest hurdle will be trying to avoid credit-rating downgrades that will make borrowing more expensive. California’s Bay Area Rapid Transit District had its credit rating lowered two-notches to A+ by S&P Global Ratings last week… It’s one of several public-transit agencies put on notice by S&P, including the San Francisco Municipal Transportation Agency and DC’s Washington Metropolitan Area Transit Authority. Both S&P and Moody’s Investors Service have negative outlooks on the public-transit sector broadly.”

China Watch:

June 5 – Bloomberg: “China’s bid to reassure investors over its soaring local debt did little to soothe concerns over financial stability risks in the world’s second-largest economy. Xinhua News agency published a report… quoting an unidentified official from the Ministry of Finance saying government finances are healthy and safe, and authorities had enough resources to tackle risks. Systemic risks would be avoided, the official said. Economists said the statement didn’t provide any new detail that would give investors confidence the debt — which Goldman… estimates was $22 trillion last year when including off balance-sheet borrowing — could be brought under control… ‘Beijing is trying to send a message that there’s no need to panic,’ said Wei Yao, chief economist for Asia-Pacific and China at Societe Generale SA. ‘But the report will only have limited effect soothing concerns — the data is public and speaks for itself.’”

June 9 – Bloomberg: “China’s local government financing vehicles are merging and reshuffling assets among themselves at record speed, as authorities seek to use consolidation to help ease debt pressure and improve fundraising. LGFVs, which mostly fund infrastructure projects, were involved in 240 deals including mergers and asset transfers between January and May, more than double on year…”

June 5 – Bloomberg: “China is taking targeted steps to help specific sectors of the economy, like property and manufacturing, suggesting broader stimulus measures like interest rate cuts could be off the table for now. The State Council… announced a limited economic package on Friday to boost consumption of electric vehicles, pledging to extend tax exemptions on purchases. Officials are working on a new basket of measures to support the ailing housing market as well, according to people familiar with the matter. Tax breaks for high-end manufacturing companies are also being planned.”

June 7 – Bloomberg: “Some of China’s biggest banks lowered rates on a range of deposit products, responding to the government’s call for help in boosting growth in the world’s second-largest economy. Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of China Ltd., Bank of Communications Co. and China Construction Bank Corp. cut rates on three-year and five-year deposits by 15 bps, respectively, and annualized rates for demand deposits by 5 bps…”

June 7 – Bloomberg: “Chinese exports fell for the first time in three months in May, adding to risks in the world’s second-largest economy as global demand weakens. Overseas shipments shrank 7.5% from a year ago to $284 billion…, worse than the median forecast for a 1.8% drop. Exports to most destinations contracted, with double-digit declines to places including the US, Japan, Southeast Asia, France and Italy. Imports declined 4.5% to $218 billion, better than an expected drop of 8%, leaving a trade surplus of $66 billion.”

June 5 – Reuters (Ellen Zhang and Ryan Woo): “China’s services activity picked up in May, a private-sector survey showed…, as a rise in new orders shored up a consumption-led economic recovery in the second quarter. The Caixin/S&P Global services purchasing managers’ index (PMI) rose to 57.1 in May from 56.4 in April… The survey… contrasts with the official PMI released last week that showed a slower pace of expansion in the services sector.”

June 8 – Wall Street Journal (Frances Yoon): “It was a false dawn, in hindsight. Asia’s junk-bond market had a brief flicker of life earlier this year, when a Chinese company sold a $400 million bond in January… Wanda Properties’ two deals raised hopes that a once-busy market was starting to return to health. Four months later, Wanda has been downgraded by major credit-rating companies, its recently issued bonds have lost around half of their value and no other Chinese company has sold a high-yield bond. ‘It’s really bad,’ said Thu Ha Chow, head of Asian fixed income at Robeco, about the market for junk bonds sold by Chinese property developers, once the biggest source of supply in Asia. ‘Think back to the global financial crisis. That wasn’t as messy as this. There was two-way action then, but this feels like things are moving in one direction’… Issuance of dollar junk bonds by Chinese companies fell to $573 million last year, compared with more than $58 billion in 2019, according to Dealogic.”

June 7 – Reuters (Clare Jim): “Some of China’s distressed property developers face the risk of being delisted, which would reduce their options for restructuring and make them more vulnerable to liquidation, S&P Global Ratings said… China’s private developers have been in turmoil since mid-2021 after Beijing’s crackdown on debt impacted first Evergrande Group and then spread across the sector. Property companies were among the biggest high-yield issuers in Asia and many aim to use shares of their listed entities to restructure offshore debt after having defaulted on their repayment obligations.”

June 5 – Wall Street Journal (Dan Strumpf): “Big American companies in China were counting on a postpandemic boom to boost global revenue. For many, it isn’t happening. From chip maker Qualcomm to industrial bellwethers Caterpillar and DuPont, companies are reporting weak results out of China… While some retailers are seeing benefits from the reopening, other firms have said they are expecting the weakness to continue through this year and have cut company outlooks based on the slow recovery. ‘I think the overall expectation is, following the reopening, the China market was going to bounce back,’ Qualcomm Chief Executive Cristiano Amon told investors… ‘We have not seen those signs yet.’”

June 3 – Financial Times (Primrose Riordan, Chan Ho-him Andy Lin, and Joe Leahy): “China will soon account for less than half of the US’s low-cost imports from Asia for the first time in more than a decade…, as western companies shift operations out of the country. According to an annual reshoring index from Kearney, the… management consulting firm, US efforts to reduce reliance on China, as well as price-sensitive American buyers, are driving trade towards lower-cost alternatives in Asia. ‘By the end of 2023, China’s portion of US imports’ from low-cost Asian countries, which excludes Japan and South Korea, ‘will definitely have dropped below 50%’, said Patrick Van den Bossche, one of the report’s authors.”

June 8 – Bloomberg: “China asked fund vendors and asset managers to stop displaying real-time estimates of their mutual funds’ net value by mid-June…, though some flexibility will be allowed over the timeline for the rollout… The change was first reported by the Securities Times, which stated that real-time display of estimated fund values could lead to ‘irrational buying and selloff.’”

June 5 – Reuters (Ella Cao and Ryan Woo): “Chinese universities are drastically increasing tuition fees this year, with some making their first rises in two decades, hurt by a reduced national budget for tertiary education and tight local government finances. The higher fees come amid a financial crunch among local governments after three years of disruptive COVID-19 policies, a property crisis and a sluggish economy. Chinese universities, almost all public, rely heavily on state funding. Shanghai-based East China University of Science and Technology raised tuition fees by 54% to 7,700 yuan ($1,082) annually for some freshmen majoring in science, engineering and physical education, and by 30% in the liberal arts… Tuition for science and engineering rose by 40% at Shanghai Dianji University, while students majoring in management, economics and literature will have to pay 30% more…”

Central Banker Watch:

June 5 – Reuters (Balazs Koranyi): “The European Central Bank still needs several more interest rate hikes to rein in inflation and it is not certain that rates could peak this summer, Bundesbank President Joachim Nagel said… The ECB has raised rates at the fastest pace on record in the past year after inflation hit double-digit territory last autumn… Nagel’s comments are among the most hawkish on the 26-member Governing Council and cast doubt on market bets that the deposit rate will peak at 3.75% in July before falling next year. ‘From today’s perspective, several more rate hikes are still necessary,’ Nagel said… ‘For me, it is not certain that we will reach the interest rate peak in the summer.’”

June 6 – Bloomberg (Alexander Weber and Jana Randow): “European Central Bank President Christine Lagarde said inflation pressures remain powerful and borrowing costs will be raised further to tackle them — cementing expectations for another interest-rate hike at next week’s meeting. With the full effects of the ECB’s already historic monetary-tightening campaign still materializing, Lagarde reiterated that there’s no clear evidence that underlying inflation has peaked. Food inflation, for one, remains elevated, she said… ‘Price pressures remain strong,’ Lagarde told European Union lawmakers in Brussels.”

June 7 – Bloomberg (Diederik Baazil and Cagan Koc): “European Central Bank officials called for interest rates to be lifted further… Dutch central bank chief Klaas Knot said he’s ‘not yet convinced that the current tightening is sufficient,’ telling lawmakers… that ‘inflation could well remain too high for a long time and further rate hikes will then be necessary.’ Ireland’s Gabriel Makhlouf said ‘more work is needed from monetary policy in the short run,’ while ECB Executive Board member Isabel Schnabel said there’s ‘more ground to cover’ on borrowing costs.”

June 5 – Bloomberg (Swati Pandey): “Australia’s central bank unexpectedly raised its key interest rate and kept the door open to further hikes, fretting that policy needs to be tighter in order to be confident that inflation will return to target in mid-2025. The Reserve Bank raised its cash rate by a quarter-percentage point to 4.1%, the highest level since April 2012… Only 10 of 30 economists predicted the rate rise while money markets saw about a one-in-three chance… ‘The decision to hike was clearly driven by upside risks to inflation,’ said Andrew Boak, chief economist for Australia at Goldman Sachs…”

Global Bubble Watch:

June 7 – Bloomberg (William Horobin): “The global economy is set for a weak recovery from the shocks of Covid and Russia’s war in Ukraine, dogged by persistent inflation and the restrictive policies of major central banks seeking to contain price pressures, the OECD said. The… organization’s latest Economic Outlook forecasts a 2.7% expansion of world output this year and only a modest pickup to 2.9% in 2024, both below the 3.4% average in the seven years before the pandemic… The situation creates a particular headache for central banks as they must continue to react to core price pressures that are proving stronger than expected, while not overly hurting growth, the OECD said.”

June 7 – Associated Press (David McHugh): “The global economy must steer through a precarious recovery this year and next as inflation keeps dragging on household spending and higher interest rates weigh on growth, banks and markets. That was the takeaway… from the latest economic outlook by the… The path ahead is fraught with risks, from escalation of Russia’s war in Ukraine — with a dam collapse Tuesday that the sides blamed on each other — to debt troubles in developing countries and rapid interest rate hikes having unforeseen effects on banks and investors.”

June 6 – Bloomberg (Swati Pandey): “Australia’s economy slowed more than expected last quarter as aggressive policy tightening weighed on household spending and construction, while accelerating labor costs underlined the nation’s inflation challenge… Gross domestic product advanced 0.2% from the prior quarter, the weakest three-month expansion since September 2021 and below a forecast 0.3% gain…”

Europe Watch:

June 8 – Reuters (Philip Blenkinsop): “The euro zone economy fell into a technical recession in the first three months of 2023… as signs emerge that central bank rate hikes will crimp the region’s future growth prospects. Gross domestic product (GDP) for the 20-country euro zone fell by 0.1% in the first quarter compared with the final quarter of 2022, when GDP also slipped by 0.1%, revised from a previous reading of zero.”

June 7 – Financial Times (Ian Johnston): “The EU’s debt costs are set to double in 2024 due to higher interest rates, the commission’s budget chief said…, raising concerns over the bloc’s ability to respond to further financial shocks. The EU has borrowed heavily in recent years to finance NextGenerationEU grants, part of the historic €800bn Covid-19 recovery programme agreed by member states in 2020… But rising inflation… has led the European Central Bank to raise interest rates… and prompted unforeseen financing costs for the EU, the commissioner in charge of the budget, Johannes Hahn, told MEPs… ‘The cost of borrowing almost doubled compared to the amount initially forecast for 2024,’ he said. ‘Based on 2020, all of us were relying on the interest rate situation of that period.’”

June 9 – Wall Street Journal (Eliot Brown): “One of the world’s most overstretched real-estate markets has a knotty problem. Many of its top property tycoons own stakes in rival companies—and when one firm wobbles, others can feel the pain. The market is Sweden, which has become an emblem of the strains caused when interest rates rise. Major commercial landlord SBB is buckling under a roughly $8 billion debt load… Adding to concerns is an unusually tangled web of shareholdings, whereby a few dozen industry leaders, wealthy families and corporations own large chunks of many property companies. In many cases, these holdings were funded with debt. Thirteen chief executives and families own sizable stakes in at least 34 property companies, according to researchers at Colliers.”

Japan Watch:

June 7 – Reuters (Kantaro Komiya): “Japan’s economy grew more than initially thought in January-March, revised data showed on Thursday, as a post-pandemic pickup in domestic spending and company restocking helped offset the hit to exports from slowing global demand. With inflation running at a four-decade high, further growth in the world’s third-largest economy will depend on sustained wage hikes, which the Bank of Japan and the government regard as core policy objectives.”

June 5 – Reuters (Kaori Kaneko): “Japan’s service sector activity expanded at a record pace in May, a private-sector survey showed… The final au Jibun Bank Japan Services purchasing managers’ index (PMI) rose to a seasonally adjusted 55.9 last month from the previous peak of 55.4 in April… ‘Firms were buoyed by the easing of the few remaining pandemic restrictions and have noted strong increases in demand, notably from overseas and inbound tourism,’ said Usamah Bhatti, economist at S&P Global Market Intelligence. ‘The upward trend looks set to continue in the near and medium term,’ as outstanding business expanded at a record rate and business optimism held near an all-time high.”

June 9 – Bloomberg (Toru Fujioka and Sumio Ito): “Bank of Japan officials see little need to adjust its yield curve control program at a policy meeting next week given improvement in the functioning of the bond market and the smooth shape of the yield curve, according to people familiar… The officials also recognize that inflation is running stronger than they expected…”

Leveraged Speculation Watch:

June 7 – Reuters (Carolina Mandl and Davide Barbuscia): “Big U.S. hedge fund and family office investors… cautioned that despite the U.S. economy showing resilience, a recession and more bank failures remained likely in an environment of persistent inflation. U.S. investor Stanley Druckenmiller, chairman… at Duquesne Family Office, said he still expected a hard landing for the U.S. economy – a scenario where the Federal Reserve’s rate-hiking pushes the economy into a recession. ‘I think the probabilities would suggest that Silicon Valley Bank, Bed Bath & Beyond, they’re probably the tip of the iceberg,’ he said…”

June 7 – Bloomberg (Katherine Burton): “Billionaire Ray Dalio, founder of Bridgewater Associates, said the US is seeing stubbornly high inflation along with elevated real interest rates. ‘We are at the beginning of a late, big-cycle debt crisis when you are producing too much debt and have a shortage of buyers,’ Dalio said…”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 6 – Reuters (Ismail Shakil): “Canada is on track for its worst-ever year of wildfire destruction as warm and dry conditions are forecast to persist through to the end of the summer after an unprecedented start to the fire season, officials said… Blazes are burning in nearly all Canadian provinces and territories… ‘The distribution of fires from coast to coast this year is unusual. At this time of the year, fires usually occur only on one side of the country at a time, most often that being in the west,’ said Michael Norton, an official with Canada’s Natural Resources ministry.”

June 8 – Reuters (Nia Williams): “Forest fires continued to burn across Canada… as the country endured its worst-ever start to wildfire season, forcing thousands of people from their homes and sending a smoky haze billowing across U.S. cities. About 9.4 million acres have already burned, roughly 15 times the 10-year average… Warm, dry conditions were expected to persist in the months ahead… Although wildfires are common in Canada, it is unusual for blazes to be burning simultaneously in the east and west, stretching firefighting resources and forcing the Canadian government to send in the military to help.”

June 5 – Associated Press (Michael R. Blood): “Two insurance industry giants have pulled back from California’s home insurance marketplace, saying that increasing wildfire risk and soaring construction costs have prompted them to stop writing new policies in the nation’s most populous state. State Farm announced last week it would stop accepting applications for all business and personal lines of property and casualty insurance, citing inflation, a challenging reinsurance market and ‘rapidly growing catastrophe exposure’… Allstate, another insurance powerhouse, announced in November it would pause new homeowners, condo and commercial insurance policies in California to protect current customers.”

June 5 – CNBC (Sam Meredith): “European policymakers are battling to get to grips with a growing water crisis ahead of what researchers fear could be yet another climate crisis-fueled summer of drought. Water resources in Europe are growing increasingly scarce because of the deepening climate emergency, with record-breaking temperatures through spring and a historic winter heatwave taking a visible toll on the region’s rivers and ski slopes. Reservoirs in Mediterranean countries like Italy have fallen to water levels typically associated with summer heatwaves in recent weeks, threatening agricultural production, while protests have broken out over water shortages in both France and Spain. It comes as temperatures are poised to climb through summer and many fear Europe’s already ‘very precarious’ water problem could get even worse.”

June 6 – Bloomberg: “Sweltering temperatures across China are killing livestock and stretching power grids, an early heat wave that portends another summer of disruption for Asia’s industry and food supply. The mercury has been rising in nearly every corner of the world’s second-largest economy. In southern regions, electricity demand hit peak levels in late May, a month earlier than last year, while Beijing in the north is expected to see temperatures hit a high of 98F on Wednesday. Shanghai broke a 150-year-old record for the highest-ever May temperature last week.”

Geopolitical Watch:

June 8 – Wall Street Journal (José de Córdoba): “Cuba’s deal to allow China to set up an electronic surveillance facility on the island in exchange for cash is the latest high-stakes twist in decades of strained relations with the U.S. as Havana struggles with its worst economic crisis since the breakup of the Soviet Union. The agreement has echoes of Cold War tensions that have long marked Cuban relations with the U.S. In 1962, Cuba allowed the Soviet Union to place nuclear missiles on the island… For years the Soviets operated a large eavesdropping facility at the Lourdes military base near Havana, which was shut down after the breakup of the U.S.S.R.”

June 7 – Reuters (Albee Zhang, Ryan Woo and Liz Lee): “China and Russia conducted a joint air patrol on Tuesday over the Sea of Japan and East China Sea for a sixth time since 2019, prompting neighbouring South Korea and Japan to scramble fighter jets. China’s defence ministry said the patrol was part of the two militaries’ annual cooperation plan. South Korea scrambled fighter jets… after four Russian and four Chinese military aircraft entered its air defence zone in the south and east of the Korean peninsula. Japan’s military said it had scrambled fighter jets after verifying that two Russian bombers had joined two Chinese bombers over the Sea of Japan…”

June 4 – Reuters (Chen Lin and Kanupriya Kapoor): “Chinese Defence Minister Li Shangfu told Asia’s top security summit… that conflict with the United States would be an ‘unbearable disaster’ but that his country sought dialogue over confrontation. Speaking at the Shangri-La Dialogue in Singapore, Li said the world was big enough for China and the U.S. to grow together… ‘China and the U.S. have different systems and are different in many other ways,’ he said… ‘However, this should not keep the two sides from seeking common ground and common interests to grow bilateral ties and deepen cooperation,’ he said. ‘It is undeniable that a severe conflict or confrontation between China and the U.S. will be an unbearable disaster for the world.’”

June 4 – Reuters (Sabine Siebold): “Germany will send two warships to the Indo-Pacific in 2024, Defence Minister Boris Pistorius said…, amid rising tensions between China and Taiwan and over the disputed South China Sea. Speaking at the Shangri-La Dialogue in Singapore, Asia’s most important security conference, Pistorius said countries needed to stand up for the rules-based international order and the protection of major maritime passages.”

June 7 – Financial Times (Laura Pitel): “Germany will lead more than two dozen nations in Nato’s largest ever air exercise as the alliance aims to prove how fast it can respond to potential Russian aggression against one of its members. Starting next week, the Air Defender exercise will last 10 days and involve up to 10,000 troops and 250 aircraft from 23 Nato member states. Sweden… will also take part, along with Japan. The operation will be conducted from three hubs across Germany, placing the country centre stage as it strives to take a more prominent role in European security. It will feature aircraft including F-35, Eurofighter, Tornado and Gripen jets as well as Reaper drones, helicopters, cargo aircraft and tankers.”

June 6 – Reuters (Daphne Psaledakis): “The United States imposed sanctions… on more than a dozen people and entities in China, Hong Kong and Iran, including Iran’s defense attache in Beijing, over accusations they helped procure parts and technology for key actors in Iran’s ballistic missile development. Earlier on Tuesday, the official IRNA news agency reported Iran had presented what officials described as its first domestically made hypersonic ballistic missile, an announcement likely to heighten Western concerns about Tehran’s missile capabilities.”

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