MARKET NEWS / CREDIT BUBBLE WEEKLY

March 1, 2024: Speak Truth to Crazy

MARKET NEWS / CREDIT BUBBLE WEEKLY
March 1, 2024: Speak Truth to Crazy
Doug Noland Posted on March 2, 2024

Before quickly moving on to March and beyond, posterity beckons for some documentation of an extraordinary February. For the month, Bitcoin surged $18,972 (45%), surpassing October 2021’s previous monthly record gain ($17,540). Nvidia surged 29%, Meta 29%, Lattice Semiconductor 26%, Coherent Corp 25%, and Applied Materials 23%. The Semiconductors (SOX) returned 11.1%.

The Nasdaq Composite returned 6.2% for the month, and it wasn’t only tech driving the gains. The Nasdaq Transports returned 7.7%, Nasdaq Industrials 7.2%, Nasdaq Insurance 6.6%, and the Nasdaq Financials 5.9%. There were 49 stocks in the Nasdaq Composite that at least doubled in price during the month. And indicative of the highly speculative market environment, the Goldman Sachs Most Short Index surged 16.6% for the month.

The major indices all posted big months. The Nasdaq100’s (NDX) 5.4% slightly bettered the S&P500’s 5.3% return. The broader market outperformed. The S&P400 Midcaps’s 5.9% somewhat led the small cap Russell 2000’s 5.7% return. The “average stock” Value Line Arithmetic Index returned 4.0% during February.

While uneven, global equities generally posted solid gains. Japan’s Nikkei 225 returned 8.0%, posting a record high for the first time since the bursting of their Bubble 34 years ago. Germany’s DAX returned 4.6%, France’s CAC40 3.5%, and Italy’s MIB 6.0%. An abrupt rally saw China’s CSI300 recover 9.4% during the month.

While certainly not as captivating as crypto and equities melt-ups, Credit market developments were no less spectacular. Following record January issuance of $189 billion, early-month forecasts projected February would approach the monthly record set just last year ($150bn). As it turned out, February’s issuance of $198 billion crushed the previous record by almost a third. At about $400 billion in two months, 2024 is off to nothing short of a rip-roaring historic start.

March 1 – Bloomberg (Gowri Gurumurthy): “The broad rally in risk assets has propelled CCCs, the riskiest part of the junk bond market, to the top as the best performing asset class in February. Returns for the month were 1.7% after climbing for six consecutive sessions.”

With stunning gains and record equities prices, record corporate issuance, and multiyear lows in corporate spreads and CDS prices, there is ample support for the thesis that market financial conditions have turned the loosest since the mortgage finance Bubble period.

March 1 – Bloomberg (Alexandra Harris): “Federal Reserve Bank of New York President John Williams said he doesn’t see a need for officials to tighten policy further and reiterated that he expects the central bank to cut rates later this year. Williams acknowledged that inflation has retreated from multi-decade highs, but he emphasized officials want to see inflation return to 2% and remain there on a sustained basis. ‘I expect us to cut interest rates later this year,’ he said… ‘We’re going to move interest rates back to more normal levels.’”

February 29 – Yahoo Finance (Jennifer Schonberger): “Cleveland Fed president Loretta Mester said Thursday that the latest reading on inflation doesn’t alter her calculus for three rate cuts later in 2024… She is still predicting three cuts in 2024, an estimate she first made in December. ‘Right now that feels about right to me if the economy evolves as I anticipate it will,’ Mester said.”

March 1 – Bloomberg (Carter Johnson): “Chicago Fed President Austan Goolsbee said officials should keep interest rates elevated only until they’re convinced inflation is on track to return to the 2% target. ‘If you look historically, we’re high. And the longer we stay at that — if inflation continues falling — we’re going to have to start thinking about the employment side of the mandate,’ Goolsbee said… ‘How long do we want to stay in that restrictive environment? The answer, I think, should be: Only as long as we have to, that we’re convinced that we’re on path to get to the target inflation.”

When you think everyone is crazy, it’s not a bad idea to do a mirror check. Not looking any younger and overdue for a haircut, but I appear sane enough. Why do Fed officials persist with all the rate cut talk in the face of persistent inflation, economic resilience, and conspicuously wild speculative excess? By now, I would hope they recognize that their “dovish pivot” during a market melt-up was a significant blunder. Yet they continue to throw gas on the fire.

March 1 – Bloomberg (Mohamed A. El-Erian): “The time has come to discard the excessive data dependency that risks making the Fed too backward looking in its thinking, overly reactive in policy implementation and too narrow in its discussions of economic and financial issues. Historic data should not be the sole determinant of policy making. This ongoing obsession with the numbers should give way to an approach that also incorporates strategic vision and forward-looking insights on where the economy is heading. The extent to which the world’s most powerful central bank succeeds at this may well be the difference between the much-desired soft landing for the US economy and yet another Fed policy mistake that undermines economic well-being.”

I’m no fan of “excessive data dependency” – and am all for the Fed adopting a sound “strategic vision and forward-looking insights.” But I part ways with El-Erian on today’s overarching monetary policy issue. Policies that accommodate asset inflation and speculative Bubbles place economic well-being in peril. I disagree with anyone who argues the Fed should move forward with rate cuts in the face of extremely loose financial conditions and perilous speculative excess. Moreover, albeit Fed official or analyst, to neglect the paramount role of financial conditions is to ensure an inferior analytical framework.

March 1 – Bloomberg (Carter Johnson): “Apollo Management Chief Economist Torsten Slok said that a re-accelerating US economy, coupled with a rise in underlying inflation, will prevent the Federal Reserve from cutting interest rates in 2024. ‘The bottom line is that the Fed will spend most of 2024 fighting inflation,’ Slok wrote… ‘As a result, yield levels in fixed income will stay high’… ‘The market now has to realize that the data is just not slowing down, and the Fed pivot has given an additional tailwind to the economy and to financial markets and financial conditions and to capital markets. All that is likely to continue to be supporting growth in consumer spending, in capex spending, in hiring for most likely the better part of this year.’”

There aren’t many, but a few analysts are willing to Speak Truth to Crazy.

March 1 – Bloomberg (Simon Kennedy): “The US national debt is rising $1 trillion every 100 days, helping to explain why assets such as gold and Bitcoin are trading at around all-time highs, according to strategists at Bank of America Corp. The pace of the debt swelling is also accelerating, the strategists led by Michael Hartnett said in a report… They estimate it will take just 95 days for the burden to climb to $35 trillion from $34 trillion, compared to the 92 days it took to grow to $33 trillion from $32 trillion.”

Torsten Slok and Michael Hartnett’s notes were delivered to clients on the first day of March, a session that suggested a month potentially crazier even than February. The Semiconductors surged 4.3% Friday to another all-time high, boosting four-month returns to 50.3%. Nvidia’s 4% advance increased its four-month return to 94.4%. This stock closed the week for the first time with a $2 TN market capitalization, joining only Apple and Microsoft in the $2 TN club. Bitcoin rose another $1,160, or 1.9%, Friday, boosting the week’s gain to a blistering 22.6% – and the four-month melt-up to 76.5%.

Along with the usual crazies, even commodities markets mustered gains. The Bloomberg Commodities Index rallied 1.9% this week. Crude futures jumped 4.5%, with gasoline futures rising 4.2%. And an interesting thing happened on the day Slok and Hartnett were Speaking Truth: the precious metals came to life. Gold surged $38.61, or 1.9%, to a record closing price of $2,082.92. Silver jumped 2.0% in Friday trading, with Platinum up almost 1.0%. Crude rose 2.2% to trade to a four-month high.

Market dynamics can be fascinating. I’ve witnessed some phenomenal short squeezes over my career. They tend to erupt and then proceed to take on lives of their own. Often, there’s a George Soros “reflexivity” dynamic at work. Surging stock prices invariably spawn bullish Wall Street narratives that entice speculative flows, setting in motion inflating markets, loose conditions, faster growth, and strong company earnings. Squeeze-related market advances can be powerful catalysts for bullish perceptions that then create their own bullish realities.

This dynamic was unleashed with the spectacular “Everything Squeeze” back in November. The huge short squeeze and derivatives unwind (stocks and bonds) powered a momentous loosening of conditions. Not surprisingly, economic growth has fueled solid company results, validating the bullish narrative.

But there’s a new dynamic that has not been an issue over recent decades. In today’s late cycle backdrop, inflation is a serious issue. A reflexive dynamic sees loose conditions validate the growth and profits components of the bullish narrative. Meanwhile, loose conditions and resulting market and economic booms conspire to underpin inflationary dynamics. The bullish Wall Street narrative, premised on inflation quickly returning to the Fed’s 2% target level, only has the appearance of coming to fruition. The unfolding reality is something quite different: runaway speculative Bubbles and inflation poised to surprise with its tenacity.

After a string of almost universally strong economic data, this week offered more of a mixed picture. Consumer confidence (Conference Board and University of Michigan) took a hit in February. ISM Manufacturing was weak (47.8), with New Orders and Employment both down month-over-month.

With the Fed still talking rate cuts, the market responds more to weak data than to strength. Two-year Treasury yields dropped 16 bps this week to 4.53%. I’m skeptical that the economy is downshifting. But when it does, rest assured that bond yields will decline, as the market swiftly prices imminent rate cuts. And this inflationary bias in bond prices will work to sustain loose conditions, while underpinning economic activity and inflationary pressures.

It has been intriguing to watch a resilient gold price in the face of a bullish narrative of disinflation and booming securities markets. And then to see bullion break to the upside this week, as Fed officials blatantly disregard loose conditions and runaway speculative Bubbles. In the “old days,” the Fed would take note of such unmistakable manifestations of overly accommodative monetary policy. The fixation these days is on the next inflation data.

The Truth is there will be a huge price to pay for all the craziness. Powell and Fed officials repeatedly assured us that they had learned from history. They understood the risk of resurgent inflation in the event of premature loosening of monetary policy. But that’s exactly what they’ve done. Sure, they can contend that they have held firm with a “restrictive” policy rate. But the Truth is they orchestrated a dovish pivot and attendant dramatic loosening of conditions. Plain and simple: they stoked a historic super-cycle market speculative blowoff. And they apparently cannot refrain from more stoking.

For the Week:

The S&P500 increased 0.9% (up 7.7% y-t-d), while the Dow was little changed (up 3.7%). The Utilities declined 0.5% (down 3.0%). The Banks increased 0.5% (up 0.4%), and the Broker/Dealers jumped 2.1% (up 3.6%). The Transports declined 0.6% (down 0.4%). The S&P 400 Midcaps rose 1.8% (up 4.6%), and the small cap Russell 2000 surged 3.0% (up 2.4%). The Nasdaq100 advanced 2.0% (up 8.8%). The Semiconductors surged 6.8% (up 18.1%). The Biotechs jumped 2.5% (down 1.9%). With bullion surging $48, the HUI gold index rallied 2.0% (down 13.4%).

Three-month Treasury bill rates ended the week at 5.2175%. Two-year government yields dropped 16 bps this week to 4.53% (up 28bps y-t-d). Five-year T-note yields fell 12 bps to 4.16% (up 31bps). Ten-year Treasury yields declined seven bps to 4.18% (up 30bps). Long bond yields fell four bps to 4.33% (up 30bps). Benchmark Fannie Mae MBS yields dropped 10 bps to 5.72% (up 44bps).

Italian yields rose nine bps to 3.89% (up 19bps y-t-d). Greek 10-year yields gained eight bps to 3.48% (up 43bps). Spain’s 10-year yields increased six bps to 3.31% (up 32bps). German bund yields added five bps to 2.41% (up 39bps). French yields jumped eight bps to 2.90% (up 34bps). The French to German 10-year bond spread widened about three to 49 bps. U.K. 10-year gilt yields rose eight bps to 4.11% (up 58bps). U.K.’s FTSE equities index slipped 0.3% (down 0.7% y-t-d).

Japan’s Nikkei Equities Index rose 2.1% (up 19.3% y-t-d). Japanese 10-year “JGB” yields were unchanged at 0.72% (up 10bps y-t-d). France’s CAC40 slipped 0.4% (up 5.2%). The German DAX equities index gained 1.8% (up 5.9%). Spain’s IBEX 35 equities index declined 0.7% (down 0.4%). Italy’s FTSE MIB index increased 0.7% (up 8.5%). EM equities were mixed. Brazil’s Bovespa index dipped 0.2% (down 3.7%), and Mexico’s Bolsa index dropped 2.0% (down 3.2%). South Korea’s Kospi index declined 0.9% (down 0.5%). India’s Sensex equities index added 0.8% (up 2.1%). China’s Shanghai Exchange Index increased 0.7% (up 1.8%). Turkey’s Borsa Istanbul National 100 index fell 3.0% (up 21.8%). Russia’s MICEX equities index rallied 4.0% (up 5.4%).

Federal Reserve Credit declined $7.9bn last week to $7.540 TN. Fed Credit was down $1.350 TN from the June 22nd, 2022, peak. Over the past 233 weeks, Fed Credit expanded $3.813 TN, or 102%. Fed Credit inflated $4.729 TN, or 168%, over the past 590 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $14.7bn last week to a one-month low $3.354 TN. “Custody holdings” were little changed y-o-y.

Total money market fund assets surged $49.9bn to a record $6.059 TN. Money funds were up $1.238 TN, or 25.7%, y-o-y.

Total Commercial Paper jumped $9.7bn to a 13-month high $1.277 TN. CP was up $63bn, or 5.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates gained four bps to an 13-week high 6.94% (up 20bps y-o-y). Fifteen-year rates dipped three bps to 6.26% (up 27bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down five bps 7.32% (up 15bps).

Currency Watch:

February 26 – Financial Times (Hudson Lockett): “Chinese regulators are taking measures to keep the renminbi’s dollar exchange rate stable as Beijing seeks to bolster confidence in the country’s currency and economy ahead of a key leadership summit. The moves from authorities — such as holding off on cuts to short-term interest rates and keeping the currency’s dollar trading band firm despite the spot price pushing towards its official floor — have helped to stave off further falls for the currency… Those efforts come as markets look forward to potential policy signals from the ‘two sessions’ gathering of top Communist party cadres in Beijing, set to begin on March 4 and where authorities have historically sought to minimise market volatility.”

February 26 – Reuters (Winni Zhou and Vidya Ranganathan): “Chinese banks purchased the most dollars from their clients via FX swaps in January, official data… showed on Monday, suggesting exporters preferred to only temporarily acquire the local currency while holding on to dollars. Chinese banks’ foreign exchange purchases via swaps from their clients hit $50.9 billion in January, the highest level on record, data from the State Administration of Foreign Exchange (SAFE) showed.”

For the week, the U.S. Dollar Index was little changed at 103.86 (up 2.5% y-t-d). For the week on the upside, the South African rand increased 1.1%, the Brazilian real 0.8%, the Mexican peso 0.6%, the Japanese yen 0.3%, the euro 0.2%, the Norwegian krone 0.1%, and the Swedish krona 0.1%. On the downside, the New Zealand dollar declined 1.5%, the Australian dollar 0.5%, the Canadian dollar 0.4%, the Swiss franc 0.3%, the British pound 0.1%, and the Singapore dollar 0.1%. The Chinese (onshore) renminbi was little changed versus the dollar (down 1.35% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index rallied 1.9% (down 1.4% y-t-d). Spot Gold jumped 2.3% to $2,083 (up 1.0%). Silver increased 0.8% to $23.12 (down 2.8%). WTI crude rose $3.48, or 4.5%, to $79.97 (up 11.6%). Gasoline jumped 4.2% (up 24%), and Natural Gas surged 8.0% to $1.84 (down 27%). Copper declined 1.0% (down 1%). Wheat fell 2.4% (down 11%), while Corn rallied 3.1% (down 13%). Bitcoin surged $11,480, or 22.6%, to $62,256 (up 46.5%).

Middle East War Watch:

February 26 – Reuters (Suleiman Al-Khalidi): “Jordan’s King Abdullah warned… of the dangers of a planned Israeli military operation in Rafah, Gaza, and reiterated his appeal for an immediate ceasefire to protect civilians and bring in aid… The king also said the only way to end the decades-old conflict was to find a ‘political horizon’ for Palestinians that would create a Palestinian state on territory Israel occupied in the 1967 Arab-Israeli war, including east Jerusalem.”

February 26 – Reuters (Jonathan Saul and Mohamed Ghobari): “Yemen’s Houthis fired a missile that likely targeted the Torm Thor in the Gulf of Aden on Feb. 24 but missed the U.S.-flagged oil tanker, the U.S. Central Command (CENTCOM) said…, as the Iran-aligned militia steps up attacks on ships. Shipping risks have escalated due to repeated Houthi drone and missile strikes in the Red Sea and Bab al-Mandab Strait since November in support of Palestinians in Gaza. U.S. and British forces have responded with several strikes on Houthi facilities but have so far failed to halt the attacks.”

February 24 – Bloomberg (Sharon Cho and Alex Longley): “Longstanding warnings from the oil tanker industry that too few of the ships are being built are coming back to haunt the market after Houthi attacks… Just two new supertankers are due to join the fleet in 2024 — the fewest additions in almost four decades and about 90% below the yearly average this millennium. But after owners increasingly started to shun the southern Red Sea, the lack of new capacity is starting to bite: rates have seen spikes, and voyage durations are going up.”

Ukraine War Watch:

February 25 – Reuters (Guy Faulconbridge): “The Kremlin warned on Tuesday that conflict between Russia and the U.S.-led NATO military alliance would be inevitable if European members of NATO sent troops to fight in Ukraine. The war in Ukraine has triggered the worst crisis in Russia’s relations with the West since the 1962 Cuban Missile Crisis and President Vladimir Putin has previously warned of the dangers of a direct confrontation between NATO and Russia.”

Taiwan Watch:

February 27 – Reuters: “China’s government said… that its coast guard patrols around a group of Taiwanese islands near the Chinese coast were ‘beyond reproach’, and dismissed complaints the boarding of a Taiwan tourist boat had caused panic. China’s coast guard this month began regular patrols around the Taiwan-controlled Kinmen islands, which face China’s Xiamen and Quanzhou cities, where two Chinese nationals died trying to flee Taiwan’s coast guard after their boat entered prohibited waters.”

February 26 – Financial Times (Kathrin Hille, Josh Gabert-Doyon and Chris Cook): “Chinese maritime research vessels have dramatically increased incursions into waters just 24 nautical miles off Taiwan’s coast, as Beijing signals its growing surveillance capabilities and collects data crucial for naval warfare. The latest operations include an unprecedented sailing by China’s newest research ship, a drone carrier with links to the People’s Liberation Army, down the full length of Taiwan’s east coast in November. The Zhu Hai Yun’s voyage was one of nine such intrusions since September, a sharp uptick from just two in each of the previous three years…”

Market Instability Watch:

February 26 – Bloomberg (Edward Bolingbroke): “Hedge fund interest in a popular trading strategy that’s meant to profit from price gaps between cash Treasuries and futures appears to be fading, according to Deutsche Bank AG. Leveraged fund short positions in Treasury 2-year, 5-year and 10-year contracts have declined somewhat in recent weeks ‘suggesting a potential reduction in the Treasury basis’ and relative value positions, Deutsche Bank strategists including Steven Zeng said…”

February 28 – Bloomberg (Masahiro Hidaka): “The risk of the Bank of Japan roiling markets in March appears to be increasing, with economists on high alert for a policy shift after some traders dialed back their bets in recent months. Traders of overnight indexed swaps — who last year were certain that the central bank would end its negative-interest-rate policy by the March 18-19 gathering — now see the chances around 34%.”

February 26 – Bloomberg: “In a sign that foreign demand for Chinese bonds may slow, some financial institutions have cut back on swapping the dollar for yuan, according to people familiar… At least three offshore institutions have reduced their swap trading in the past week… The foreign exchange swap had in recent months been a popular instrument to help dollar investors buy yuan debt. The moves reflected the need to increase risk control at the institutions, after a significant ramp-up in the trade to fund purchases of Chinese bonds, the people said. The development suggests foreign appetite in the world’s second-largest debt market may be waning…”

February 26 – Financial Times (Alyson Velati): “Over the past decade, ETF assets have surged substantially more quickly than the money sitting in mutual funds… In fact, when looking at the 10 largest providers of both products, assets in ETFs have ballooned three times as quickly over the past decade as the money sitting in mutual funds, according to an Ignites analysis… Combined, the 10 shops had $12.01tn in open-end mutual fund assets as of the end of 2023 — up 114% from a decade earlier…”

February 26 – Bloomberg (Lisa Lee): “Goldman Sachs… and Morgan Stanley are increasingly willing to temporarily hold onto some of the riskiest parts of new collateralized loan obligations, in a bid to win more market share in the once again booming business of helping firms package leveraged loans into bonds. The Wall Street banks have in recent months been selectively offering to underwrite the so-called equity portions of CLOs as part of a push to win deals… CLOs bundle leveraged loans into slices of varying risk and return. The equity piece, while offering potentially juicy profits, is the last to be repaid, often making it difficult for firms that run the structures, known as collateral managers, to drum up demand.”

Bank Watch:

February 29 – Associated Press (Damian J. Troise): “Fewer banks tightened lending standards as 2023 came to a close, a hopeful sign for businesses that broader loan access is on the horizon. A January survey from the Federal Reserve showed that the share of banks who tightened lending standards for commercial and industrial loans fell to 14.8% in the fourth quarter. That’s down from 33.9% in the third quarter and a significant drop from 50.8% in the second quarter of 2023. The survey showed a similar pattern for consumer loans and credit cards…”

February 26 – CNBC (Jeff Cox): “JPMorgan… CEO Jamie Dimon thinks there’s a better-than-even chance that the U.S. is heading for a recession, though he doesn’t see systemic issues looming. Speaking Monday…, the head of the largest U.S. bank by assets said markets probably aren’t pricing in a strong enough probability that interest rates could stay higher for longer… ‘It’s always a mistake to look at just the year,’ Dimon said. ‘All these factors we talked about: QT, fiscal spending deficits, the geopolitics, those things may play out over multiple years. But they will play out and they will have an effect and in my mind I’m just kind of cautious about everything.’”

February 27 – Financial Times (Joshua Franklin): “Goldman Sachs chief executive David Solomon has warned investors not to get too confident that the Federal Reserve can engineer a ‘soft landing’ for the US economy in its battle to tame inflation. Speaking at an industry conference…, Solomon said ‘the world is set up for a soft landing’, but there was a ‘higher level uncertainty’ due to remaining inflationary pressure in the economy and geopolitical risks. ‘The market is way weighted to a very soft landing. And when you look at the pattern of facts the last three or four years, it’s hard for me to see it’s going to be that simple,’ Solomon said.”

Global Bond Watch:

February 27 – Bloomberg (Maria Elena Vizcaino): “The world’s long-term sovereign debt issuance will balloon to about $11.5 trillion this year — more than 50% above its pre-pandemic level — as fiscal spending remains high ahead of a raft of elections, according S&P Global Ratings. Sales of debt with a maturity of one or more years will rise from $10.7 trillion in 2023 and $9.7 trillion the year before that, though it won’t reach the peak of $11.6 trillion set in 2021. The outstanding debt stock will hit a record $71.3 trillion, up from $66.2 trillion last year.”

February 24 – Bloomberg (Olivia Raimonde and Allison Nicole Smith): “Demand has grown so fervent for corporate bonds that investors are once again willing to finance big mergers and acquisitions — something they hesitated to do for much of last year. In just the past two weeks, about $50 billion of bonds have been sold to help finance acquisitions and spinoffs. The deluge… marks a steep surge in M&A financing after the slowest year for dealmaking in a decade.”

February 28 – Bloomberg (Liz Capo McCormick, Ye Xie and Garfield Reynolds): “What was supposed to be the darling trade of 2024 has unraveled, thanks to the Federal Reserve upending predictions over how fast it would lower interest rates. The market entered January aggressively betting on sharp rate cuts. By doing so, traders looked to profit from the US Treasury yield curve returning to a traditional upward slope, a transition known as a steepener… When Goldman Sachs Asset Management rolled out its 2024 investment outlook, it declared the steepener, or the return to normality, the ‘easiest trade out there in rates.’ Such calls have backfired as short-term yields went even further above long-term ones as a resilient economy and sticky inflation led Fed officials to push back hard against market speculation cuts would begin in March.”

February 27 – Bloomberg (James Crombie): “With all the tales of Goldilocks and great opportunity in credit, it’s worth keeping an eye on how different rating tiers trade against each other. Pricing on junk bonds rated BB compared to those with a B grade shows the most bullish positioning in almost 10 years. Credit spreads on bonds in the BB tier — the best-quality junk — have compressed by 14 bps this year, lagging an 18 bps tightening in the high-yield index overall. Both are eclipsed by a 33 bps squeeze in debt rated B — the riskiest you can get in high yield without default probability really shooting up. That’s crushed the gap between BB and B rated bonds to the least since 2014…”

February 28 – Bloomberg (Hannah Benjamin-Cook and Paul Cohen): “Investors have put in a record €2.6 trillion ($2.8 trillion) of orders for new bond sales in Europe so far this year, outbidding the debt on offer by the most ever. Total orders have reached more than five times the record €507 billion of issuance in Europe’s syndicated primary market in the first two months of 2024… That’s higher than any subscription ratio covering similar amounts and periods since at least 2018, when Bloomberg first started collating the data. Cash-rich investors are piling into corporate and public-sector debt sales to snap up yields that have picked up in recent weeks back toward the decade-highs seen last year. Hedge funds in particular are scooping up new securities paying a decent premium over government bonds, before the onset of global rate cuts is expected to drive down yields.”

February 26 – Bloomberg (Amy Or): “A long-awaited wave of convertible bonds made landfall last week, with Global Payments Inc. and Lyft Inc. among the companies tapping investors for relief from the so-called maturity wall at relatively attractive prices. Convertible issues had their busiest week in a year, with five issues raising a combined $5.18 billion in the seven-day period ending Friday…That’s just shy of the $5.99 billion raised in the week of Feb. 20 last year.”

AI Bubble Watch:

February 27 – Wall Street Journal (Isabelle Bousquette and Steven Rosenbush): “The blockbuster earnings report last week from chip maker Nvidia proved that companies are willing to spend big for artificial intelligence. In corporate settings, that money is often allocated directly from the top. Unlike previous waves of innovation that were funded by information-technology departments’ internal budgets, some companies are setting up allocations just for AI. The money is often earmarked by the chief executive officer, a sign that using the technology is a priority at the highest level.”

February 27 – Bloomberg (Davey Alba): “February was shaping up to be a banner month for Google’s ambitious artificial intelligence strategy. The company rebranded its chatbot as Gemini and released two major product upgrades to better compete with rivals on all sides in the high-stakes AI arms race. In the midst of all that, Google also began allowing Gemini users to generate realistic-looking images of people… Starting on Feb. 20 and continuing throughout the week, users on X flooded the social media platform with examples of Gemini refraining from showing White people — even within a historical context where they were likely to dominate depictions, such as when users requested images of the Founding Fathers or a German soldier from 1943. Before long, public figures and news outlets with large right-wing audiences claimed, using dubious evidence, that their tests of Gemini showed Google had a hidden agenda against White people.”

February 26 – Reuters (Saqib Iqbal Ahmed): “Investors’ fervor for all things AI-related is leaving its mark on the U.S. options market, as traders pile in to derivatives bets to gain exposure to the red-hot investing theme. Options on artificial-intelligence darling Nvidia accounted for 25 cents of every dollar of premium – the price of contracts – traded in U.S. single-stock options over the past month, nearly $3 billion in options premium traded in the chipmaker’s options every day on average… During several recent sessions, Nvidia surpassed Tesla as the option market’s most heavily traded name for the day.”

February 28 – Yahoo Finance (Daniel Howley): “It seems like every day another company announces a new generative AI product or service. From apps that summarize your meetings to platforms that help with photo editing and customer support bots, generative AI is all any tech firm wants to talk about. Still, not every piece of generative AI software is going to be a breakthrough like OpenAI’s ChatGPT… But don’t expect that to slow the seemingly endless parade of platforms and tools coming to market. Even if some of those products appear doomed from the outset. ‘I think we are in kind of a ‘spaghetti-at-the-wall’ stage,’ explained Emily DeJeu, assistant teaching professor at Carnegie Mellon University’s Tepper School of Business. ‘We’re just trying to find … what is the use-case for this? And in order to figure that out, it’s almost like …we’re going to do everything with it.’”

Bubble and Mania Watch:

February 27 – Bloomberg (Silas Brown, Laura Benitez, John Sage, Kat Hidalgo, and Ellen Schneider): “The meteoric rise of private credit funds has been powered by a simple pitch to the insurers and pensions who manage people’s money over decades: Invest in our loans and avoid the price gyrations of rival types of corporate finance. The loans will trade so rarely — in many cases, never — that their value will stay steady, letting backers enjoy bountiful and stress-free returns. This irresistible proposal has transformed a Wall Street backwater into a $1.7 trillion market. Now, though, cracks in that edifice are starting to appear. Central bankers’ rapid-fire rate hikes over the past two years have strained the finances of corporate borrowers, making it hard for many of them to keep up with interest payments. Suddenly, a prime virtue of private credit — letting these funds decide themselves what their loans are worth rather than exposing them to public markets — is looking like one of its greatest potential flaws.”

February 28 – Bloomberg (David Pan and Olga Kharif): “After a dry spell of several years, leverage is roaring back into crypto — helping to fuel a new bull run in Bitcoin and a fresh wave of worries. The largest cryptocurrency jumped as much as 13% to $63,968 on Wednesday, the biggest intraday rise since last March… It was the fifth consecutive day of progressively higher prices, spurred in part by optimism over inflows into exchange-traded funds approved last month. ‘What started earlier as a potentially spot-led market off the back of increased demand and ETF inflow data has now transitioned to a full-fledged frenzy for upside expressed through perpetual futures,’ said Chris Newhouse, a DeFi analyst at Cumberland Labs.”

February 27 – Yahoo Finance (Kerry Hannon): “The number of folks with $1 million or more saved in their 401(k) accounts jumped 20% from September to the end of December, according to Fidelity Investments. All told, there were 422,000 retirement savers in Fidelity 401(k) plans sporting balances of seven figures and beyond as of Dec. 31, up from 349,000 at the end of September and 299,000 at the end of 2022… ‘We are encouraged to see retirement balances increase so dramatically this quarter, reflecting the improving market conditions and enabling retirement savers to see significant gains in their account balances and retirement preparedness,’ Michael Shamrell, vice president of thought leadership for Fidelity Workplace Investing, told Yahoo…”

February 25 – Financial Times (Eric Platt and Harriet Clarfelt): “Buyout firms are shaving tens of millions of dollars off interest costs by refinancing debts racked up in private credit markets with publicly traded bonds and loans, delivering a windfall for the Wall Street banks that arrange them. Roughly $10bn of so-called private credit loans have been refinanced in public markets, as borrowers pay down burdensome loans in favour of a cheaper alternative, according to… Bank of America. Private equity firms that buy out companies are taking advantage of a recovery in global corporate bond and loan markets, after the Federal Reserve signalled that inflation had been sufficiently tamed for it to begin cutting interest rates.”

February 27 – Bloomberg (Suvashree Ghosh and Sidhartha Shukla): “The combined value of the cryptocurrency market has jumped to around $2 trillion for the first time on almost two years on the back of the ETF-fueled rally in Bitcoin.”

February 27 – Bloomberg (Ben Stupples): “Leon Black sold Apollo Global Management Inc. stock for the first time, making the move almost three years after he exited the buyout giant that made him one of Wall Street’s richest billionaires. Black unloaded $172.8 million of stock… last week…”

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

February 29 – Financial Times (Max Seddon and Courtney Weaver): “Vladimir Putin has said that western support for Ukraine risks triggering a global war, in his most explicit threat to use nuclear weapons since he ordered the full-scale invasion of Ukraine two years ago. In his state of the nation speech…, the Russian president told the country’s political elite that claims his country intended to attack Europe were ‘nonsense’. But he said any increase in western support for Ukraine ‘really risks a conflict using nuclear weapons, which means the destruction of all of civilisation’… ‘Now the consequences for possible interveners will be much more tragic… We also have weapons that can strike targets on their territory.’ Putin said that western supplies of advanced weaponry and the prospect of a Nato troop deployment risked provoking nuclear conflict. ‘They think this is some kind of game. They are blinded by their own superiority complex,’ he said.”

March 1 – Politico (Stuart Lau): “NATO’s No. 2 official said Russian President Vladimir Putin’s nuclear threat is currently just ‘psychological intimidation.’ Putin issued the warning Thursday as French President Emmanuel Macron stood by his message that the West could not rule out sending troops to help Ukraine fend off Putin’s full-scale invasion. ‘This really threatens a conflict with nuclear weapons,’ Putin said. NATO Deputy Secretary-General Mircea Geoană characterized Putin’s nuclear saber-rattling as ‘a discourse that delves into the logic of psychological intimidation rather than real intentions’…”

February 29 – Reuters (Vladimir Soldatkin and Andrew Osborn): “President Vladimir Putin told Western countries… they risked provoking a nuclear war if they sent troops to fight in Ukraine, warning that Moscow had the weapons to strike targets in the West. The war in Ukraine has triggered the worst crisis in Moscow’s relations with the West since the 1962 Cuban Missile Crisis. Putin has previously spoken of the dangers of a direct confrontation between NATO and Russia, but his nuclear warning on Thursday was one of his most explicit. Addressing lawmakers and other members of the country’s elite, Putin, 71, repeated his accusation that the West was bent on weakening Russia, and he suggested Western leaders did not understand how dangerous their meddling could be in what he cast as Russia’s own internal affairs.”

February 27 – Financial Times (Max Seddon and Chris Cook): “Vladimir Putin’s forces have rehearsed using tactical nuclear weapons at an early stage of conflict with a major world power, according to leaked Russian military files… The classified papers, seen by the Financial Times, describe a threshold for using tactical nuclear weapons that is lower than Russia has ever publicly admitted…The cache consists of 29 secret Russian military files drawn up between 2008 and 2014, including scenarios for war-gaming and presentations for naval officers, which discuss operating principles for the use of nuclear weapons. Criteria for a potential nuclear response range from an enemy incursion on Russian territory to more specific triggers, such as the destruction of 20% of Russia’s strategic ballistic missile submarines.”

February 27 – Reuters (Liz Lee): “China and Russia should strengthen communication and coordination in Asia Pacific affairs and jointly safeguard regional security, stability and development, the Chinese foreign ministry reported… China’s Vice Foreign Minister Sun Weidong, who was in Moscow… for talks on bilateral relations, said China and Russia should play a ‘better role as an anchor of stability in the changing circumstances of the century’, according to the ministry. China stands ready to continuously strengthen strategic coordination between both sides in international multilateral platforms, Sun said in Moscow.”

De-globalization and Iron Curtain Watch:

February 25 – Financial Times (James Kynge and Keith Fray): “Even during the first blush of the honeymoon period that attended China’s accession to the World Trade Organization in 2001, it was clear that Washington and Beijing were — as a Chinese idiom has it — ‘sharing a bed but dreaming different dreams’. Bill Clinton… hailed China’s membership as ‘removing [Beijing’s] government from vast areas of people’s lives’ and promoting political reform. Jiang Zemin… had a different take. He warned that America’s real motive was to ‘westernise and divide socialist countries’. More than 20 years later, that early friction has metastasised. The WTO… has fallen hostage to sharp divisions between the US and China as trade friction escalates between China and the west.”

Inflation Watch:

February 29 – Bloomberg (Augusta Saraiva): “The Federal Reserve’s preferred gauge of underlying inflation rose in January at the fastest pace in nearly a year, helping explain policymakers’ patient approach to start cutting interest rates. The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, increased 0.4% from December… From a year ago, it advanced 2.8%… The core PCE data, on a six-month annualized basis, registered at 2.5% in January, rebounding above the Fed’s 2% target after briefly trailing it in the prior two months.”

March 1 – New York Times (Jeanna Smialek): “Grocery store shoppers are noticing something amiss. Air-filled bags of chips. Shrunken soup cans. Diminished detergent packages. Companies are downsizing products without downsizing prices, and consumer posts from Reddit to TikTok to the New York Times comments section drip with indignation at the trend, widely known as ‘shrinkflation.’ The practice isn’t new. Sellers have been quietly shrinking products to avoid raising prices for centuries… But outrage today is acute.”

February 29 – New York Times (Talmon Joseph Smith): “Job growth, wage growth and business growth are all lively, and inflation has steeply fallen from its 2022 highs. But consumer sentiment, while improving, is still sour. One reason may be sticker shock from some highly visible prices… The cost of car insurance is a key example. Motor vehicle insurance rose 1.4% on a monthly basis in January alone and has risen 20.6% over the past year, the largest jump since 1976. It has been a huge hit for those driving the roughly 272 million private and commercial vehicles registered in the country… The average annual premium for full-coverage car insurance in 2024 is $2,543, compared with $2,014 in 2023 and $1,771 in 2022.”

February 28 – Reuters (Howard Schneider): “U.S. Federal Reserve officials say they are confident housing inflation will finally cool in coming months, a key and long-awaited component of their effort to control overall price increases and secure their turn to interest rate cuts. The real challenge on that front, however, may be just over the horizon when a pipeline of new apartments starts to run dry while the stock of single-family homes remains short, a recipe for future price pressure in a category accounting for about a third of the Consumer Price Index… ‘You think you can snap your fingers and housing can be created…The reality is that is not the case,’ said Jay Lybik, national director of multifamily analytics for… CoStar. After a surge of building boosted apartment supply, CoStar’s data signals new unit volumes in sharp decline by early next year, falling to perhaps 50,000 or 60,000 per month versus the estimated 100,000 needed to keep pace with demand.”

February 27 – Wall Street Journal (Will Feuer): “Hotel owners have been on an epic hiring spree. Yet even after clawing back hundreds of thousands of jobs during the past two years, the industry is still light on staff and often struggling to adapt. Daily housekeeping for all guests, room service and other amenities that were reduced or eliminated during the pandemic are still lacking at many properties. At the same time, hotels across the U.S. have held their daily room rates near all-time highs this winter, in part to offset the increase in wages to lure workers back. Hotels will collectively pay $123 billion in compensation this year, up more than 20% from 2019…”

February 25 – Wall Street Journal (Andrew Beaton): “Before every NFL offseason, the sport’s top decision makers await the release of a single number that will define their plans. The league’s salary cap determines every team’s strategy as they attempt to piece together the best possible roster before hitting the league’s financial ceiling. This year, that number is taking an unprecedented leap. When the NFL unveiled a salary cap of $255.4 million for the upcoming season, it represented an increase of more than $30 million over last season… Since 2013, when the ceiling was $123 million, the number has more than doubled.”

Biden Administration Watch:

March 1 – Reuters (Phil Stewart, Idrees Ali and Nandita Bose): “U.S. President Joe Biden announced on Friday plans to carry out a first military airdrop of food and supplies into Gaza, a day after the deaths of Palestinians queuing for aid threw a spotlight on an unfolding humanitarian catastrophe in the crowded coastal enclave. Biden said the U.S. airdrop would take place in the coming days but offered no further specifics. Other countries, including Jordan and France, have already carried out airdrops of aid into Gaza.”

Federal Reserve Watch:

February 27 – Wall Street Journal (Eric Wallerstein): “Participation is dwindling in a Federal Reserve program that has helped the U.S. government limit its borrowing costs… The overnight reverse repurchase facility, known on Wall Street as reverse repo, enables large financial firms such as money-market funds to briefly swap extra cash for high-quality securities on the central bank’s balance sheet and pocket some interest. The Fed program has been used heavily in recent years, at one point hitting $2.5 trillion of daily balances, but that number has shrunk steadily and recently fell below $500 billion… ‘It is undoubtedly easier for the market to absorb bill supply if you have a large amount of cash in an overnight facility waiting to be deployed,’ said Michael de Pass, global head of rates trading at Citadel…”

March 1 – Wall Street Journal (Nick Timiraos): “At issue is a program known as the overnight reverse repurchase facility, which allows money-market funds and other non-bank financial firms to park extra cash on the central banks balance sheet. The Fed program, which has been used heavily in recent years at one point hitting $2.5 trillion of daily balances is designed to give the Fed better control over short-term interest rates. The amount of money parked in the facility, known on Wall Street as reverse repo, has declined steadily and recently fell to around $500 billion. Dallas Fed President Lorie Logan, who from 2019 to 2022 was the top Fed official in charge of overseeing the central banks asset portfolio, said… there shouldn’t be a significant amount of cash in the reverse repo program after periods where the Fed has expanded its asset portfolio to address market turmoil. The Feds operating regime is intended to supply ample reserves to banks but only ample reserves and not more than that, Logan said…”

February 27 – Bloomberg (Katanga Johnson): “Wall Street lenders must do more to spot risks from firms they do business with as the Federal Reserve steps up oversight of counterparty risks, according to the central bank’s vice chair for supervision. Michael Barr said… banks should bolster how they assess the credit risk of trading partners and their leverage. He cited the blowup of Archegos Capital Management, which led to more than $10 billion of reported losses across several lenders, as an example of what can happen if lenders don’t fully understand their exposures. ‘Banks need reliable, comprehensive, granular, and frequent information about their counterparties to make prudent decisions,’ Barr said… ‘Obtaining this information can be challenging because of client activity happening away from the bank.’”

February 28 – Bloomberg (Alexandra Harris, Steve Matthews and Craig Torres): “Three Federal Reserve officials said the pace of interest-rate cuts will depend on incoming economic data, suggesting the path to lower borrowing costs may look different than in previous rate-cutting cycles. Boston Fed President Susan Collins and New York’s John Williams said the Fed’s first rate cut will likely be appropriate ‘later this year,’ while Atlanta’s Raphael Bostic said he’s currently penciling in a cut for sometime this summer… ‘With respect to rate cuts and pace, it’s got to be driven by economic conditions, as well as inflation,’ Williams told reporters…, adding that in the past officials have gotten into regular patterns. “It’s not going to be calendar based, and not be on a specific fixed schedule, but focused on the data.’”

February 28 – Bloomberg (Alexandra Harris): “Federal Reserve Bank of New York President John Williams said the US central bank will likely cut its benchmark lending rate ‘later this year,’ adding that he still expects three rate cuts in 2024 is ‘a reasonable starting point.’ ‘The economy is still strong, we expect to see positive growth and inflation to keep coming down,’ Williams told reporters… ‘So something like three rate cuts is a reasonable starting point when you think about it.’ Williams added the pace of rate cuts will depend on economic data, not the calendar…”

February 26 – Reuters (Ann Saphir): “Kansas City Federal Reserve Bank President Jeffrey Schmid… used a debut speech on policy to signal that he remains focused on the threat of high inflation and is in no rush to cut interest rates. ‘With inflation running above target, labor markets tight and demand showing considerable momentum, my own view is that there is no need to preemptively adjust the stance of policy,’ Schmid said in his first extensive public remarks since he began the job last August. ‘Instead, I believe that the best course of action is to be patient, continue to watch how the economy responds to the policy tightening that has occurred, and wait for convincing evidence that the inflation fight has been won.’”

February 27 – Bloomberg (Reade Pickert): “Federal Reserve Governor Michelle Bowman repeated her expectation that inflation will continue to decline further with interest rates held at their current level, but said it’s too soon to begin rate cuts… ‘Should the incoming data continue to indicate that inflation is moving sustainably toward our 2% goal, it will eventually become appropriate to gradually lower our policy rate to prevent monetary policy from becoming overly restrictive,’ Bowman said… ‘In my view, we are not yet at that point.’”

U.S. Bubble Watch:

February 27 – Reuters (Jason Lange): “Worries about political extremism or threats to democracy have emerged as a top concern for U.S. voters and an issue where President Joe Biden has a slight advantage over Donald Trump ahead of the November election, a new Reuters/Ipsos poll showed. Some 21% of respondents in the three-day poll, which closed on Sunday, said ‘political extremism or threats to democracy’ was the biggest problem facing the U.S., a share that was marginally higher than those who picked the economy – 19% – and immigration – 18%.”

February 28 – Reuters (Lucia Mutikani): “U.S. economic growth in the fourth quarter was lowered slightly, but its composition was much stronger than initially thought, which bodes well for the near-term outlook even as activity got off to a weak start because of freezing temperatures. The Commerce Department’s slight downward revision to gross domestic product growth… reflected a downgrade to inventory investment. There were upgrades to consumer spending, state and local government investment as well as residential and business outlays.”

February 26 – Associated Press: “This year looks to be a much better one for the U.S. economy than business economists were forecasting just a few months ago… The economy looks set to grow 2.2% this year after adjusting for inflation, according to the National Association for Business Economics. That’s up from the 1.3% that economists from universities, businesses and investment firms predicted in the association’s prior survey, which was conducted in November.”

February 29 – Dow Jones (Greg Robb): “The numbers: Initial jobless benefit claims rose by 13,000 to 215,000 in the week ended Feb. 24… Economists… had estimated new claims would rise to 210,000. Key details: The number of Americans already collecting jobless benefits in the week ended Feb. 17 rose by 45,000 to 1.91 million.”

February 28 – Bloomberg (Vince Golle): “A gauge of US applications for home purchases dropped for a fifth week, approaching the lowest level since 1995 as mortgage rates held above 7%. At 127.6, the gauge is the weakest since October when it slid to levels not seen in nearly three decades…”

February 27 – CNN (Anna Bahney): “US home prices hit an all-time high in December… Prices were up 0.2% from the month before, seasonally adjusted data from the S&P CoreLogic Case-Shiller US National Home Price Index showed. That continues a streak of seven consecutive record highs in 2023. Compared to a year ago, the national composite index was also up, with prices 5.5% higher from December 2022. That was an increase from the 5% annual gain in November. Prices in half of the 20 metro markets beat prior records, including Las Vegas, which was the fastest rising market in December…”

February 26 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes rose less than expected in January amid a sharp decline in the South region, but demand for new construction remains underpinned by a persistent shortage of previously owned homes. New home sales increased 1.5% to a seasonally adjusted annual rate of 661,000 units last month… ‘The new side of the housing market continues to greatly outperform when measured against the market for existing homes,’ said Daniel Vielhaber, an economist at Nationwide. ‘As the existing home inventory shortage persists, buyers continue to be pushed into the market for new homes.’”

February 29 – Bloomberg (Michael Sasso): “Pending US sales of previously-owned homes unexpectedly declined in January by the most in five months as elevated mortgage rates kept a lid on housing demand. A gauge of contract signings from the National Association of Realtors decreased 4.9% to 74.3, after surging to an eight-month high in December.”

February 29 – Bloomberg (Claire Ballentine): “Americans are having a harder time getting approved for auto loans… With borrowers struggling to make their monthly car payments, banks are responding by tightening credit standards. That’s freezing out buyers with lower credit scores who can’t afford a large down payment, while Americans with healthy finances are having more trouble than usual securing loans. Access to auto credit is the lowest since August 2020, with the approval rate for loans down 1.6 percentage points year-over-year, according to Cox Automotive.”

February 26 – Bloomberg (Sujata Rao-Coverley and Bailey Lipschultz): “For the better part of a decade, Bryan Riggsbee did what countless other finance chiefs, both in the US and beyond, had done when their companies needed money — he borrowed it. Late last year, the chief financial officer at Myriad Genetics Inc. took a different tack, one the DNA-testing company hadn’t seriously considered in over 16 years — selling shares. For CFOs everywhere, what used to be a no-brainer — issuing debt — has turned into a much more calculated decision, after central banks cranked up interest rates to levels not seen in decades. And with share prices near all-time highs, it’s starting to make more sense for companies around the world…”

China Watch:

February 26 – Bloomberg (John Cheng): “China’s state-backed funds have poured more than 410 billion yuan ($57bn) into onshore shares this year in a bid to prop up the market, according to estimates by UBS Group AG… The Swiss bank based its calculations on ‘excess’ transactions of 54 Chinese exchange-traded funds. More than 75% of the inflows went into products tracking the benchmark CSI 300 Index while another 13% flowed to those mirroring the CSI 500 Index… State funds have been key to stabilizing the latest stock rout…”

February 29 – Bloomberg: “China’s home sales slump dragged on in February, even as regulators stepped up efforts to salvage the beleaguered property market. The value of new home sales from the 100 biggest real estate companies slid 60% from a year earlier to 185.9 billion yuan ($25.8bn), following a 34.2% decline in January, according to… China Real Estate Information Corp. February’s sales were down 20.9% from the previous month. The decline in February is partly due to a seasonal sales drought during the Chinese new year festival, CRIC said.”

February 27 – Bloomberg (Lorretta Chen): “A winding-up petition against defaulted developer Country Garden Holdings Co. is highlighting the risks posed by secretive private loans on distressed Chinese property firms. The builder, which is at the epicenter of China’s property debt crisis, is facing a petition filed by Ever Credit Ltd. after it failed to repay a term loan facility of about HK$1.6 billion ($204 million), plus accrued interest. The borrowing represents a fraction of Country Garden’s outstanding offshore bonds which total about $10 billion…”

March 1 – Bloomberg (Iris Ouyang): “Funding costs are sliding across Chinese markets as Beijing attempts to revive consumer and business spending to stave off deflation pressures. Yields on benchmark government bonds have dropped to the lowest since 2002, while policy-sensitive short-term interest rate swaps are close to levels last seen during the pandemic in 2020. With a lack of confidence spurring consumers and corporates to hoard cash, it’s raising concerns among some analysts that monetary policy will fail to stimulate the economy — potentially the first signs of a liquidity trap… ‘Real economic activity is increasingly not responsive to monetary injection,’ said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. ‘All we can say is that the risk of liquidity trap is looming. As prices fall, households and corporates would choose to delay spending and save.’”

February 27 – Bloomberg: “Her annual bonus was slashed by 60% and her salary was frozen. Family expenses are on the rise with two kids in school. After a rough 2023, it didn’t take long for Gracie, who works at an investment bank in Shenzhen, to come up with her resolution for the Year of the Dragon: landing a job just across the border in higher-paying Hong Kong. ‘I feel lost and I don’t see many ways out,’ she said… Vilified by Beijing as ‘hedonists’ over their lavish lifestyles, finance workers like Gracie are rethinking their careers. President Xi Jinping’s call for ‘common prosperity’ has hit salaries hard and triggered belt-tightening… More broadly, indications are growing that Xi is shifting away from four decades of market-oriented reforms and financial innovation. The most powerful Chinese leader since Mao Zedong has emphasized the Communist Party’s ‘centralized and unified leadership’ of the sector and pledged to build ‘a modern financial system with Chinese characteristics’ that’s completely different from the West.”

February 25 – Bloomberg: “Chinese hedge funds were looking forward to a holiday break from the market turmoil when trouble started brewing last month. One manager had his short-selling orders abruptly rejected by brokers. Another was cut off from the stock market completely. Regulators turned up on trading floors at multiple funds to monitor transactions in person. As one fund put it, three sessions of chaotic trading ‘felt like a whole year to us.’ The scenes, extraordinary even by the standards of a market that has long operated under the Communist Party’s shadow, played out in recent weeks in a clampdown that’s rewriting the rules of computer-driven trading in China. The country’s once-booming quant industry has become the latest casualty of Beijing’s campaign to stop a $4 trillion selloff in stocks.”

February 28 – Bloomberg: “Chinese regulators are taking steps to gradually shrink the size of a popular quantitative trading strategy that contributed to turmoil in the nation’s stock market this month, according to people familiar with the matter. Some quantitative funds that manage ‘Direct Market Access’ products for external clients were told to stop accepting new inflows and phase out their existing products, which typically use swap contracts and are often highly leveraged… The guidance curbs a popular trade that enabled quant funds to boost returns in 2023 but was blamed for exacerbating a stock-market selloff this year.”

‘February 28 – Bloomberg: “China banned a top-performing quant fund from the stock-index futures market and vowed tighter oversight of high-speed trading, expanding a crackdown on computer-driven investment strategies that some have blamed for exacerbating market turmoil. The China Financial Futures Exchange recently banned Shanghai Weiwan Fund Management from opening stock index futures positions for 12 months, while confiscating 8.9 million yuan ($1.2 million) in illegal gains…”

February 27 – Bloomberg (Dorothy Ma): “The latest default by a major Chinese developer poses a fresh test of a vague credit protection mechanism widely used on offshore debt… China South City Holdings Ltd. joined the country’s record wave of developer debt failures earlier this month after missing an installment payment stipulated by the revised terms of a dollar bond. The focus is now on the note’s so-called keepwell provision that says the builder’s state-owned shareholder would keep the issuer’s liquidity sufficient to meet payment obligations. The keepwell deeds are essentially a gentleman’s agreement from a bond seller’s parent company or major shareholder to maintain the issuer’s solvency, while stopping short of guaranteeing payment.”

February 27 – Bloomberg (Pearl Liu): “China Vanke Co., the nation’s second-largest developer by sales, fell in the bond market Tuesday after a report that it was in talks to extend due dates coming up on some non-standard debt. The builder’s longer-dated dollar notes slid by the most in more than a month after credit information provider Reorg reported… Vanke is negotiating with certain lenders, mostly insurance firms, to extend near maturities of the debt. The company management went to Beijing recently to seek help faciliting the talks from regulators…”

February 29 – Bloomberg: “An unusual bond issue by a local government financing vehicle in China’s Guizhou province to pay for another regional LGFV peer’s debt is a ‘step backward’ for the country’s municipal financing reform and may introduce systemic risk, S&P Global Ratings says. The move could be ‘one that exacerbates moral hazard by adding yet another safety net when troubles arise for incautious borrowers,’ the ratings firm’s analysts… report. ‘If the policy is used by entities to expand borrowing, it could increase the total debt of China LGFVs.’”

February 27 – Bloomberg (Phila Siu): “China’s housing ministry has told local governments to ‘scientifically’ draft housing development plans for 2024 and 2025, based on population changes to prevent property fluctuations in the market, China Central Television reports.”

February 27 – Bloomberg: “The ex-wife of China Evergrande Group’s founder Hui Ka Yan filed a lawsuit against his second son over HK$1 billion ($128 million) in loan payments, the latest twist in the slow unraveling of the property giant. The lawsuit was filed in Hong Kong by Ding Yumei, who was listed as the spouse of Hui until August. She claims that the defendant Peter Xu failed to make payments for loans borrowed in June 2020…”

Global Bubble Watch:

February 28 – Bloomberg (Craig Stirling, Alessandra Migliaccio and Yujing Liu): “Global finance chiefs are poised to march out of their Group of 20 meeting with a sense of collective reticence to talk about just how much they’re borrowing. In the same week that S&P Global Ratings predicted sovereign debt issuance will balloon this year about $11.5 trillion, more than 50% above its pre-pandemic level, ministers and finance chiefs in Sao Paulo seem far keener to talk up the world economy’s outlook. That’s underscored by their draft communique… While applauding the increased likelihood of a ‘soft landing’ and the prospect of ‘faster-than-expected disinflation,’ it has the fewest mentions of ‘debt’ and associated words in years.”

February 27 – Reuters (Marie Mannes, Greta Rosen Fondahn and John O’Donnell): “Two of Sweden’s largest property companies… announced multibillion-crown writedowns in their 2023 results, as they grappled with a European property rout that both voiced hope could soon be over. For years, property in Europe and particularly Germany and Sweden boomed as interest rates fell, turbocharging demand. A sharp rise in rates has now pricked this bubble. SBB, Sweden’s largest commercial landlord, wrote down the value of its property by more than 13 billion Swedish crowns ($1.3bn), slashing its portfolio – including through sales – to 73 billion crowns from 135 billion.”

Central Banker Watch:

February 27 – Bloomberg (Philip Aldrick): “The Bank of England may sell all the UK government bonds bought under quantitative easing to better prepare for a future crisis, a move that would put it at odds with the US Federal Reserve. BOE Deputy Governor Dave Ramsden, who oversees financial markets, said officials may continue running down the QE portfolio… even after hitting the ‘preferred minimum range of reserves’… ‘The Monetary Policy Committee could unwind the APF fully, if it judged necessary for policy reasons, and the level of the PMRR should not affect this judgment,’ Ramsden said. ‘Our approach differs from other central banks, notably the Federal Reserve, which aims to maintain its QE portfolio at a level that will back an ‘ample’ level of reserves.’”

February 26 – Financial Times (Laura Noonan): “Bank of England deputy governor Sarah Breeden has called for more research into non-bank lenders to stave off a ‘credit crunch’ that could be triggered by a retreat of hedge funds, pension funds, insurers and asset managers. ‘A shift in the willingness of market-based finance to lend to corporates, particularly those perhaps that are highly leveraged, would have significant implications for the real economy — a credit crunch sourced in market based finance rather than bank lending,’ Breeden said…”

February 29 – Bloomberg (Mark Schroers): “European Central Bank Governing Council member Robert Holzmann said he doesn’t see any significant talks on lowering borrowing costs before the policy meeting in June… ‘My conjecture is to say we won’t move before June in any case, but also not before the Fed,’ he said…”

February 27 – Bloomberg (Tracy Withers): “New Zealand’s central bank kept interest rates unchanged and softened its threat of a hike amid signs inflation pressures are waning… The Reserve Bank’s Monetary Policy Committee held the Official Cash Rate at 5.5%… The bank’s new forecasts show less chance of a rate increase this year but no reductions until 2025. ‘Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced,’ the RBNZ said. Still, ‘the OCR needs to remain at a restrictive level for a sustained period of time’ to ensure inflation returns to target, it said.”

February 29 – Reuters (Wayne Cole and Lucy Craymer): “Interest rates in New Zealand need to stay restrictive for some time to ensure inflation expectations become fully anchored again, a top central banker said…, while emphasising they were not in a ‘mindset’ to consider cutting… Reserve Bank of New Zealand Deputy Governor Christian Hawkesby said inflation was on the path toward the centre of its 1% to 3% target band, but the central bank had to stay the course to be sure. ‘We need to have confidence that inflation expectations and core inflation are all anchored back to that 2%… We actually need to have a period of time where the economy’s running below potential.’”

Europe Watch:

March 1 – Bloomberg (Mark Schroers): “Euro-zone inflation eased less than anticipated in February — supporting European Central Bank officials who don’t want to rush into lowering interest rates. Consumer prices rose 2.6% from a year ago in February… That’s above the 2.5% median estimate in a Bloomberg survey of economists. Core inflation, excluding volatile components such as food and energy, also moderated less than envisaged, to 3.1%.”

February 28 – Bloomberg (Zoe Schneeweiss): “Euro-area economic confidence unexpectedly deteriorated in February, a setback to the region’s recovery hopes. A sentiment indicator published on Wednesday by the European Commission fell to 95.4, the weakest in three months and lower than predicted by any economist in a Bloomberg survey.”

February 26 – Reuters (Philip Blenkinsop, David Latona and Anna Wlodarczak-semczuk): “Farmers on Monday blocked a border crossing between Poland and Germany, threw bottles at police in Brussels and gathered in Madrid to demand action on cheap supermarket prices and what they say is unfair competition from abroad. Agricultural ministers from across the European Union pledged to do more to cut red tape and help farmers as they convened in Brussels to discuss the crisis in the sector after weeks of angry protests.”

Japan Watch:

February 26 – Bloomberg (Yoshiaki Nohara, Toru Fujioka and Hidenori Yamanaka): “Japan’s benchmark inflation topped estimates in January, supporting the case for the central bank to scrap its negative interest rate in the coming months. Bond yields jumped after consumer prices excluding fresh food rose 2% from a year ago… The two-year note yield climbed to the highest level since 2011 after the data… exceeded a consensus estimate of 1.9%.”

February 29 – Reuters (Leika Kihara): “Bank of Japan Governor Kazuo Ueda said it was too early to conclude that inflation was close to sustainably meeting the central bank’s 2% inflation target and stressed the need to scrutinise more data on the wage outlook. ‘I don’t think we are there yet,’ Ueda told a news conference…”

February 29 – Bloomberg (Erica Yokoyama): “Bank of Japan Governor Kazuo Ueda is keeping his options open for the timing of a widely expected interest rate hike, a position that may fuel further market volatility as investors and economists speculate over a March or April move. ‘We are not yet in a position to foresee the achievement of a sustainable and stable inflation target,’ Ueda said… ‘We will continue to seek confirmation whether the virtuous cycle between wages and price began to turn.’”

February 28 – Bloomberg (Toru Fujioka): “Bank of Japan Board Member Hajime Takata sent a strong signal that the case for ending the negative interest rate policy is gaining momentum, comments that pushed the yen and government bond yields higher. ‘There are uncertainties for Japan’s economy but my view is that the price target is finally coming into sight,’ Takata said… Japan is ‘at a juncture for a shift in the entrenched belief that wages and inflation won’t rise,’ he said.”

February 25 – Reuters (Tetsushi Kajimoto): “Japan’s business-to-business service prices rose 2.1% year-on-year in January, slowing from a 2.4% annual gain in December… The Bank of Japan is closely watching service price movements to see whether inflationary pressure is broadening in the economy to warrant phasing out its massive stimulus.”

Emerging Market Watch:

February 26 – Bloomberg (Srinivasan Sivabalan): “Emerging-market governments are selling new dollar bonds at the fastest pace in more than two decades, with borrowers stretching all the way from investment-grade Chile to high-yielding Benin. Sovereign issuance has reached $57.73 billion so far this year, compared with $56.08 billion in the same period of 2023… Sales are now at the highest since 2002.”

Social, Political, Environmental, Cybersecurity Instability Watch:

March 1 – CNN (Zoe Sottile, Dalia Faheid, Camila Bernal, Zoe Todd and Christal Hayes): “The wildfire in Texas has already killed two people, demolished hundreds of structures and obliterated thousands of cattle as it became the biggest blaze in the state’s history. And now, weather conditions threaten to make things even worse… So far, the Smokehouse Creek Fire has spread across more than 1 million acres and has become the biggest Texas wildfire on record. The deadly inferno has also destroyed 31,500 acres in Oklahoma. It is only 15% contained. And the fire is just one of five blazes currently scorching the Texas panhandle.”

February 27 – New York Times (David Gelles): “From his office at the University of Miami, Brian McNoldy, an expert in hurricane formation, is tracking the latest temperature data from the North Atlantic with a mixture of concern and bewilderment. For the past year, oceans around the world have been substantially warmer than usual. Last month was the hottest January on record in the world’s oceans, and temperatures have continued to rise since then. The heat wave has been especially pronounced in the North Atlantic. ‘The North Atlantic has been record-breakingly warm for almost a year now,’ McNoldy said. ‘It’s just astonishing. Like, it doesn’t seem real.’ Across the unusually warm Atlantic, in Cambridge, England, Rob Larter, a marine scientist… is equally perplexed. ‘It’s quite scary, partly because I’m not hearing any scientists that have a convincing explanation of why it is we’ve got such a departure… We’re used to having a fairly good handle on things. But the impression at the moment is that things have gone further and faster than we expected. That’s an uncomfortable place as a scientist to be.’”

February 24 – Financial Times (Cristina Criddle and Kenza Bryan): “The world’s biggest technology companies have substantially increased their use of water to cool down data centres, sparking concerns over the environmental impact of the generative artificial intelligence boom. Microsoft, Google and Meta have raised their water consumption over recent years, with millions of users hooked on their online services. Academics suggest that AI demand would drive up water withdrawal… to between 4.2bn and 6.6bn cubic meters by 2027, or about half the amount consumed by the UK each year. Researchers from the University of California, Riverside, wrote in a paper… that it was a ‘critical time to uncover and address AI models’ secret water footprint amid the increasingly severe freshwater scarcity crisis, worsened extended droughts and quickly ageing public water infrastructure’.”

March 1 – Reuters (Susanna Twidale): “Global energy-related emissions of carbon dioxide (CO2) hit a record high last year, driven partly by increased fossil fuel use in countries where droughts hampered hydropower production, International Energy Agency (IEA) said… Steep cuts in CO2 emissions, mainly from burning fossil fuels, will be needed in the coming years if targets to limit a global rise in temperatures and prevent runaway climate change are to be met, scientists have said.”

February 28 – Bloomberg: “China burned record amounts of coal, oil and natural gas last year after ending Covid-era restrictions, even as the country accelerated its energy transition push. Coal consumption rose another 5.6% from the prior year’s record, according to… the National Bureau of Statistics. Oil and gas use returned to growth after a rare decline during lockdown-plagued 2022.”

Leveraged Speculation Watch:

February 29 – Reuters (Summer Zhen): “Only 62 new hedge funds launched in Asia last year, the lowest number since 2009 and just 15 were China-focused funds, …Preqin said. But Japan-focused funds more than doubled to 19. The figures underscore the shift away from China as the world’s second-largest economy struggles amid a property sector crisis and trade tensions with the United States. Liquidations outpaced launches in 2023 with 74 funds closing shop and nearly half of those were China-focused funds…”

Geopolitical Watch:

February 27 – Wall Street Journal (Timothy W. Martin and Dasl Yoon): “In March 2022, North Korean leader Kim Jong Un walked out of a massive hangar wearing a bomber jacket and dark sunglasses. He pointed to the sky and launched his biggest missile yet. ‘This miraculous victory is a priceless victory,’ Kim said. It was classic North Korean theater. But behind it were developments that together have made Kim’s regime a genuinely more capable and more threatening antagonist. Its ability to unleash some form of nuclear attack on the world has never looked so credible, so prone to misperception and so resistant to dissuasion. Kim has developed new weapons in the past five years designed for regional warfare and seen Russian soldiers recently use some of them in fighting with Ukraine.”

February 27 – Reuters (Neil Jerome Morales and Karen Lema): “Philippine President Ferdinand Marcos Jr. … said the Chinese navy’s presence in the South China Sea is ‘worrisome’ but will not deter his country from defending its maritime territory and protecting its fishermen. The Philippine Coast Guard (PCG) spotted the presence of Chinese navy vessels during a patrol mission by a vessel of the Bureau of Fisheries and Aquatic Resources (BFAR) at the hotly contested Scarborough Shoal in the South China Sea last week.”

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