MARKET NEWS / CREDIT BUBBLE WEEKLY

March 29, 2024: On Currency Watch Following Melt-Up Q1

MARKET NEWS / CREDIT BUBBLE WEEKLY
March 29, 2024: On Currency Watch Following Melt-Up Q1
Doug Noland Posted on March 29, 2024

Another remarkable quarter. Financial conditions loosened further, building on the Fed’s Q4 dovish pivot. The spectacular risk asset melt-up was ongoing. From October 26th lows to March highs, the Semiconductors rallied 65%, the KBW Bank Index 47%, the NYSE Arca Computer Technology Index 39%, the small cap Russell 2000 31%, the Nasdaq100 30%, and the S&P500 28%. Bitcoin ended the quarter up 159% from October lows, trading at a record high on March 14th ($73,798).

For the quarter, the S&P500 returned (price and dividends) 10.55% – the “best first quarter since 2019.” Super Micro Computer led the gainers, surging 255%. Nvidia jumped 82%, Micron Technology 38%, and Meta Platforms 37%. The Semiconductor Index (SOX) returned 17.76%, the Nasdaq Composite 9.32%, and the Nasdaq100 8.72%. The NYSE Arca Oil Index returned 16.44%, the Nasdaq Insurance Index 15.39%, the NYSE Arca Computer Technology Index 15.01%, the Nasdaq Transports 11.61%, and the NYSE TMT Index 10.55%.

While 10-year Treasury yields jumped 32 bps during Q1 to 4.20%, corporate Credit notably outperformed. Investment-grade spreads to Treasuries traded down to 88 bps late in the quarter, the narrowest risk premium since November 2021 – and within seven bps of the low back to 2005. High yield spreads dropped to 2.92 percentage points, the narrowest since January 2022. Corporate debt issuance was nothing short of phenomenal.

March 28 – Bloomberg (Caleb Mutua): “The primary US investment-grade corporate bond market logged its busiest first quarter on record, super-charged by investors clamoring for high yields before the Federal Reserve starts cutting interest rates. Blue-chip firms have capitalized on robust investor demand to borrow a record $529.5 billion this year through Wednesday, far outpacing the previous high of $479 billion in the first three months of 2020… Sales hit a record in January and February and March issuance of $142.2 billion has exceeded expectations.”

Loose conditions fueled an M&A renaissance.

March 28 – Reuters (Anirban Sen and Anousha Sakoui): “Mergers and acquisitions (M&A) bounced back in the first quarter after a downbeat 2023… Total M&A volumes globally climbed 30% to about $755.1 billion, according to… Dealogic. The number of transactions worth more than $10 billion jumped to 14, compared with five during the same period last year… U.S. M&A volumes surged 59% to $431.8 billion. European deals jumped 64%, while Asia Pacific volumes slumped 40%.”

March 28 – Financial Times (Ivan Levingston): “Blockbuster deals more than doubled in the first quarter of this year, signalling a nascent recovery in the mergers and acquisitions market following a lengthy drought. The number of takeovers worth at least $10bn jumped in the first three months of 2024 compared with the same period last year, driven by large US deals in the energy, tech and financial sectors… Eleven such transactions, with a total value of $215bn, were struck during the quarter, up from five takeovers worth a combined $100bn in the first three months of 2023.”

The allure of bubbling securities markets – and the premise of “U.S. exceptionalism” – underpinned the dollar. The Dollar Index gained 3.1%. The Japanese yen declined 6.8%, the Swiss franc 6.7%, the Norwegian krone 6.0%, the Swedish krona 5.5%, and the New Zealand dollar 5.4%.

In the face of dollar strength, commodities more than held their own. Crude jumped 16%, with WTI ending the quarter ($83.17) within striking distance of two-year highs. Unleaded Gasoline futures surged 29%, while Natural Gas sank 30%.

Outside of energy, the precious metals were the stellar performer in the commodities arena. Gold surged $167, or 8.1%, to an all-time high $2,230. Silver jumped 4.9% to $24.96. WSJ: “What’s Next for Gold? Look to China for Clues.” Bloomberg: “China Splurges on Gold for a 16th Month as Price Hits Record,” and “Gold Beans All the Rage With China’s Gen Z as Deflation Bites.”

Bitcoin surged 64% during the quarter, with Ethereum gaining 53% and Binance Coin 95%. Having started trading on January 11th, the iShares Bitcoin ETF rose 52%.

Outstanding Commercial Paper expanded $80 billion, or 25% annualized, to $1.350 TN – the high back to 2009. Meanwhile, the historic inflation in money market assets was ongoing. Money Market Fund assets jumped another $154 billion, or 10% annualized, during the quarter to $6.041 TN. Money Fund Assets ballooned almost $1.5 TN over the past 18 months.

Q4 ended with the market expecting at least six 2024 rate cuts (158bps), as expectations approached seven (168bps) cuts at January 12th rate lows. But loose conditions extended the economic boom, with ongoing robust demand and tight labor markets helping solidify sticky inflation. Both January and February CPI reports posted upside inflation surprises. At quarter’s end, fading market rate expectations (67bps) had more closely aligned with the “dot plot’s” three cuts.

It’s worth noting that the Fed’s balance sheet contracted $228 billion during the quarter to $7.485 TN – back to the level from three years ago, but still about 80% larger than pre-pandemic levels.

With leveraged speculation in its heyday, we can assume the Fed’s liquidity withdrawal is a mere drop in the global liquidity bucket. A European debt market report from Reuters last week estimated that “hedge funds have been buying between 20% to more than 50% of auctions in some instances.” It’s a global phenomenon. Leveraged speculation is surely behind liquidity abundance in debt auctions across the globe. I’ll assume “basis trade” leverage continues to inflate, with “carry trade” leverage key to booming corporate debt markets from the U.S. to Europe, Asia, and EM.

In all the euphoria, it’s easy for markets to overlook fledgling late-quarter currency market instability. I don’t expect the BOJ’s timid little mini-baby step rate increase – with assurances of ongoing highly accommodative monetary policy and government bond support – to suffice.

March 27 – Bloomberg (Masaki Kondo, Erica Yokoyama and Yumi Teso): “Japan had its toughest warning yet for traders on its willingness to intervene in currency markets after the yen slid to its weakest level in about 34 years against the dollar. The nation’s currency dipped to 151.97 versus the greenback early on Wednesday in Tokyo — beyond the level at which policymakers stepped in during October 2022 — before comments from government officials on their readiness to act boosted the yen to its strongest level of the day. ‘We are watching market moves with a high sense of urgency,’ Finance Minister Shunichi Suzuki said. ‘We will take bold measures against excessive moves without ruling out any options.’”

March 29 – CNBC (Erica Yokoyama and Emi Urabe): “Japan’s top currency official said recent yen weakness is odd and out of line with current economic fundamentals, reaffirming his commitment to act if needed to prevent excessive swings in the exchange rate. ‘I strongly feel the recent sharp depreciation of the yen is unusual, given fundamentals such as the inflation trend and outlook, as well as the direction of monetary policy and yields in Japan and the US,’ said Masato Kanda, vice finance minister for international affairs… ‘Many people think the yen is now moving in the opposite direction of where it should be going.’”

Japan’s delusional officials will be tested. The world has changed. It’s now an elevated inflation, policy rates, and market yields environment. Accordingly, it is the Japanese policy rate that is today out of line with fundamentals – not yen weakness.

Deluded Beijing officials make their Japanese adversaries appear rational. The plan remains to grow the Chinese economy at an unfailing 5%, zealously push the development of Xi’s “new quality productive forces,” secure the renminbi as a dominant global currency, and cement China’s superpower economic and military status. I’ll assume colossal overinvestment in apartments will be followed by massive overcapacity in batteries, EVs, solar panels, semiconductors, artificial intelligence, quantum computing, big data, surveillance, etc.

Such lofty ambitions ensure another year of Credit growth surpassing $5 TN. Meanwhile, with the ongoing eruption of one of history’s most spectacular speculative Bubbles, lava is creeping ever closer to China’s bloated banking system. It’s all unfolding as one hell of a challenge, especially for the great Chinese meritocracy of one.

March 27 – Reuters (Joe Cash): “China’s President Xi Jinping met American business leaders at the Great Hall of the People in Beijing on Wednesday, as the government tries to woo back foreign investors and international firms seeking reassurance about the impact of new regulations. Beijing wants to boost growth of the world’s second largest economy after foreign direct investment shrank 8% in 2023…”

I daydream of touring the Forbidden City as a member of the U.S. business delegation. Over a lovely dinner of dumplings, Peking roasted duck and room-temperature Tsingtao, just soaking up the propaganda, I politely raise my hand: “Mr. Xi, we would be interested in hearing more about your devoted ‘no limits’ partnership with ‘dear friend’ Vladimir Putin.”

Xi Jinping is hell bent on achieving his objectives. It has been an incredible consolidation of power, with Xi arguably the most powerful individual alive on this planet. Yet there are financial realities. There are economic realities. There are glaring shortfalls in understanding and experience with all things Bubble-related. Xi’s astonishing powerplay does not circumvent late-cycle Credit, speculative and economic dynamics.

Perhaps more pressing, Team Xi cannot indefinitely control global currency markets. Unprecedented non-productive Credit growth, a bursting real estate Bubble, acute financial fragilities, epic financial and economic maladjustment, and waning (domestic and international) confidence are incompatible with a stable currency.

If Q1 was the quarter of market melt-ups, Q2 has potential to mark the onset of currency market instability. The Fed has certainly done its part. With predictable results, signaling rate cuts with inflation elevated and markets melting up has underpinned higher for longer and heightened the allure of U.S. assets. This has supported ongoing wide interest-rate differentials versus Japan and China (in particular) and bolstered the dollar. The currency instability demon may have been unleashed last week.

March 25 – Bloomberg: “China’s central bank reinforced its support for the under-pressure yuan by strengthening its daily reference rate for the managed currency by the most since January. The People’s Bank of China shifted its fixing by 0.1% with traders still on tenterhooks after the yuan sank to its weakest since November on Friday. The currency rose as much as 0.2% in offshore trading… The PBOC faces the difficult task of keeping its currency stable while trying to both maintain supportive monetary policy for a sputtering economy and keep a lid on capital outflows.”

Market will test the BOJ, and we can assume Japanese officials will come out guns-a-blazing. I expect this series of interventions will begin to reveal the inflation that has taken place in the amount of intervention now required to move markets (foreshadowing the inevitable return of global QE). And I would not be surprised if nascent currency turmoil has the market setting its sights on the vulnerable renminbi. We’ve already seen over the past week or so how currency pegs can quickly turn problematic. History in this regard is not comforting.

By now, the big Chinese banks must be loaded with currency derivative exposures. It’s worth noting that China’s sovereign CDS and major bank CDS were up again this week – having now risen to highs since last November. Understandably, market currency nervousness is quickly transmitted to Chinese CDS. The market wants to cling to the belief that Beijing has everything well under control. But when currency confidence starts to wane, a sliver of doubt creeps in that as goes the currency, so goes control over Credit, the banking system and economy.

March 28 – Bloomberg (David Finnerty): “Yen watchers are pointing to 152 per dollar as the next key level for the beleaguered currency. Options positions threaten to accelerate losses for the yen, should it weaken beyond that mark. On the flip side, such a move may also be the trigger for Japanese authorities to intervene to support the currency, strategists say. Hedge funds are estimated to have billions of dollars in derivatives that are currently profitable and continue to rise in value the nearer the yen gets to 152 — but evaporate if that barrier is crossed. A selloff in the yen would then be at risk of accelerating as such traders race to cover short dollar-yen positions linked to the original options.”

For posterity, former Fed Governor (and often named future Fed Chair candidate) Kevin Warsh was interviewed Monday by CNBC’s Becky Quick:

“Process matters. Institutions matter. I’m a little less impressed about the strength of the U.S. economy today. The Treasury Department, the Federal Reserve – for the best of intentions, I’m sure – are goosing this economy… Massive government deficits at times of prosperity. A Fed promising to cut rates even as asset prices are melting up – looser policy. The rest of the world, especially our allies and adversaries, look at us, and maybe they’re impressed by GDP growth. Maybe they’re impressed by the stock market. But I wouldn’t say they’re overly impressed by the U.S. economic engine. The engine seems like it’s being stimulated even at a time of full employment.”

“The first thing I’d suggest is that the 19 people around the table spend more time thinking about – and describing – what are the factors that can affect inflation. I’ll say I’m a little puzzled by what their framework really is. We were led to believe last year that inflation was really services inflation and wage inflation. The new index they trotted out showed that services ex-housing is growing above 4%, so we haven’t heard about that for a while. Listen, I am sympathetic to their challenge in trying to navigate this economy as the world is on fire. But I think pre-committing, as they do in these series of dots – each person saying how many times they’d cut three, six, nine months from now – I think it’s deeply counterproductive. Now, for financial markets, it productive. Asset prices are melting up. But they’re taking big risks with inflation. So, if you’re living off your W2 income, they’re asking for inflation to move back higher. And I think some of the data suggests it is. But, of course, if you have a large balance sheet this is all a ‘great parting’. But ultimately what happens to hard working Americans matters more.”

For the Week:

The S&P500 increased 0.4% (up 10.2% y-t-d), and the Dow gained 0.8% (up 5.6%). The Utilities jumped 2.9% (up 4.4%). The Banks surged 3.1% (up 9.2%), and the Broker/Dealers added 1.9% (up 10.1%). The Transports advanced 1.3% (up 2.0%). The S&P 400 Midcaps rose 1.8% (up 9.5%), and the small cap Russell 2000 jumped 2.5% (up 4.8%). The Nasdaq100 slipped 0.5% (up 8.5%). The Semiconductors were little changed (up 17.5%). The Biotechs increased 0.3% (down 2.5%). With bullion jumping $64, the HUI gold index surged 7.2% (up 1.6%).

Three-month Treasury bill rates ended the week at 5.2075%. Two-year government yields increased three bps this week to 4.62% (up 37bps y-t-d). Five-year T-note yields rose three bps to 4.21% (up 37bps). Ten-year Treasury yields were unchanged at 4.20% (up 32bps). Long bond yields declined three bps to 4.34% (up 32bps). Benchmark Fannie Mae MBS yields added a basis point to 5.62% (up 35bps).

Italian yields rose four bps to 3.68% (down 2bps y-t-d). Greek 10-year yields increased a basis point to 3.38% (up 32bps). Spain’s 10-year yields were unchanged at 3.16% (up 17bps). German bund yields declined two bps to 2.30% (up 27bps). French yields increased one basis point to 2.81% (up 25bps). The French to German 10-year bond spread widened three to 51 bps. U.K. 10-year gilt yields were unchanged at 3.93% (up 40bps). U.K.’s FTSE equities index increased 0.3% (up 2.8% y-t-d).

Japan’s Nikkei Equities Index declined 1.3% (up 20.6% y-t-d). Japanese 10-year “JGB” yields dipped one basis point to 0.73% (up 11bps y-t-d). France’s CAC40 gained 0.7% (up 8.8%). The German DAX equities index rose 1.6% (up 10.4%). Spain’s IBEX 35 equities index advanced 1.2% (up 9.6%). Italy’s FTSE MIB index added 1.2% (up 14.5%). EM equities were mixed. Brazil’s Bovespa index increased 0.8% (down 4.5%), and Mexico’s Bolsa index gained 1.4% (unchanged). South Korea’s Kospi index was little changed (up 3.4%). India’s Sensex equities index rose 1.1% (up 2.0%). China’s Shanghai Exchange Index slipped 0.2% (up 2.2%). Turkey’s Borsa Istanbul National 100 index added 0.3% (up 22.4%). Russia’s MICEX equities index gained 1.8% (up 7.5%).

Federal Reserve Credit declined $30.8bn last week to $7.463 TN. Fed Credit was down $1.427 TN from the June 22nd, 2022, peak. Over the past 237 weeks, Fed Credit expanded $3.736 TN, or 100%. Fed Credit inflated $4.652 TN, or 165%, over the past 594 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $8.6bn last week to an 11-month low $3.341 TN. “Custody holdings” were up $46.8 billion y-o-y, or 1.4%.

Total money market fund assets declined $5.7bn to $6.041 TN. Money funds were up $909 billion, or 17.7%, y-o-y.

Total Commercial Paper jumped another $21.2bn to a 15-year high $1.350 TN. CP was up $213bn, or 18.7%, over the past year.

Freddie Mac 30-year fixed mortgage rates declined eight bps to 6.79% (up 55bps y-o-y). Fifteen-year rates fell 10 bps to 6.11% (up 56bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 12 bps to 7.31% (up 37bps).

Currency Watch:

March 27 – Bloomberg (David Finnerty and Ruth Carson): “The imminent expiry of nearly $3 billion in dollar-yen options has traders on edge as the Japanese currency trades at levels that might trigger government intervention. The yen slid to the weakest in about 34 years Wednesday, reaching 151.97 per dollar, prompting Finance Minister Shunichi Suzuki to warn of potential ‘bold measures’ to contain further losses. That was after Japan’s top currency official, Masato Kanda, delivered his strongest intervention threat in months earlier this week. The latest developments are worrying news for traders who have sold dollar-yen options…”

March 25 – Bloomberg (Marcus Wong and Matthew Burgess): “The historic end to super-easy monetary policy in Japan and a surprise rate hike in Taiwan have strengthened the yuan’s appeal as a funding currency for the global emerging-market carry trade. Investors are reassessing their strategies after a pause in the stellar run of dollar-funded trades amid signs the Federal Reserve may not ease as aggressively as previously anticipated. Carry traders borrow in low-yielding countries to invest in higher-yielding assets, often in emerging markets. An ideal funding currency is characterized by low volatility and limited scope to strengthen.”

For the week, the U.S. Dollar Index was little changed at 104.51 (up 3.1% y-t-d). For the week on the upside, the Mexican peso increased 1.2%, the South African rand 0.8%, the Canadian dollar 0.5%, the British pound 0.2%, and the Australian dollar 0.1%. On the downside, the Swedish krona declined 0.9%, the South Korean won 0.7%, the Norwegian krone 0.7%, the Swiss franc 0.4%, the Brazilian real 0.3%, the New Zealand dollar 0.2%, the euro 0.2%, and the Singapore dollar 0.1%. The Chinese (onshore) renminbi increased 0.09% versus the dollar (down 1.69% y-t-d).

Commodities Watch:

March 25 – Bloomberg (Yongchang Chin): “Commodities will advance this year as central banks in the US and Europe move to reduce interest rates, helping to support industrial and consumer demand, according to Goldman Sachs… Raw materials may return 15% over 2024 as borrowing costs come down, manufacturing recovers, and geopolitical risks persist, analysts including Samantha Dart and Daan Struyven said…. Copper, aluminum, gold and oil products may climb, according to the bank, which also stressed the need for investors to be selective as gains wouldn’t be universal.”

The Bloomberg Commodities Index increased 0.8% (up 0.9% y-t-d). Spot Gold jumped 3.0% to $2,230 (up 8.1%). Silver advanced 1.2% to $24.96 (up 4.9%). WTI crude jumped $2.54, or 3.2%, to $83.17 (up 16%). Gasoline slipped 0.7% (up 29%), while Natural Gas rallied 6.3% to $1.76 (down 30%). Copper was unchanged (up 3%). Wheat rose 1.0% (down 11%), and Corn increased 0.6% (down 6%). Bitcoin jumped $6,348, or 10%, to $69,700 (up 64%).

Middle East War Watch:

March 28 – Financial Times (Raya Jalabi, Malaika Kanaaneh Tapper and James Shotter): “Israeli air strikes killed 16 people in Lebanon overnight and a barrage of retaliatory rocket fire by Hizbollah militants killed one person in Israel, making Wednesday the deadliest day of fighting across the Lebanese border since the Israel-Hamas war began in October. The incidents came amid an uptick in crossfire in recent days between Israel’s military and Iran-backed Hizbollah, including Israel’s deepest strikes into Lebanese territory during the current conflict… The clashes between Israel and Hizbollah, and targeted assassinations by Israel of senior figures in Hamas and Hizbollah on Lebanese soil, have fuelled concerns about a broader regional conflagration, and have led to the mass evacuation of civilians on both sides of the frontier.”

March 29 – Reuters (Laila Bassam, Maya Gebeily and Hatem Maher): “Israel carried out its deadliest strikes in months on northern Syria’s Aleppo province early on Friday and said it killed a senior Hezbollah commander in Lebanon, stepping up its campaign against Iran’s proxies in parallel with its war in Gaza. Israel has ramped up airstrikes in Syria against both the Lebanese Hezbollah militia and the Iranian Revolutionary Guard Corps (IRGC) since the Iranian-backed Palestinian faction Hamas’s attack on Israel on Oct. 7, and in recent days its pilots have resumed regular practice for ‘deep’ raids into Lebanon.”

March 25 – Reuters (Mohammed Hatem and Christine Burke): “The Yemen-based Houthi militants renewed their threats against Saudi Arabia, warning it not to support US strikes against the group. ‘We have sent a message to Saudi Arabia that it will be a target if it allows American fighter jets to use its territory or airspace in their aggression on Yemen,’ Mohammed Ali Al-Houthi, a member of the Houthis’ Supreme Political Council, said…”

Ukraine War Watch:

March 28 – Wall Street Journal (Anders Fogh Rasmussen): “Two years after Russia invaded, Ukrainian forces are outgunned. Russia has a 6-to-1 ammunition advantage along the front lines. If this persists, Vladimir Putin’s ambitions will become a reality. The imbalance in weapons supplies is a major failure of Ukraine’s allies in the West. North Korea delivered as much artillery ammunition to Russia in one month as the European Union has been able to deliver to Ukraine in one year. Russia produces three million shells a year, while the U.S. and Europe combined are able to produce only 1.2 million for Kyiv. Despite the vast economic might of the democratic world, we are being outproduced by an arsenal of autocracy in Russia, Iran and North Korea.”

March 25 – Reuters: “Rosneft’s Kuibyshev oil refinery in Russia’s city of Samara halted refining unit CDU-5, knocking out half of its capacity following a drone attack over the weekend, two industry sources told Reuters… Russian oil refining capacity that was shut down in the first quarter due to Ukrainian drone attacks on at least seven refineries amounts to about 4.6 million tons (370,500 barrels per day), or some 7% of the total, Reuters calculations show…”

Taiwan Watch:

March 29 – Reuters (Idrees Ali and Ben Blanchard): “Taiwan’s navy chief, Tang Hua, will visit the United States from next week to attend a military ceremony and discuss how to boost bilateral naval cooperation as China raises threats toward the island, six people briefed on the trip said. While Taiwan and the United States have a close relationship, it is unofficial, as Washington formally recognises China, not the democratically governed island…”

Market Instability Watch:

March 27 – Bloomberg (Alexandra Semenova): “It’s the talk of the stock market: What will be the sign that the five-month rally in US equities is coming to an end. But if you ask JPMorgan Chase Co.’s Dubravko Lakos-Bujas, investors may not see it coming when it hits. The Wall Street giant’s chief global equity strategist warned clients… they could be ‘stuck on the wrong side’ of the momentum trade when it eventually falters… He also reiterated his warning that excessive crowding in the market’s best-performing stocks raises the risk of an imminent correction. ‘It just might come one day out of the blue. This has happened in the past, we’ve had flash crashes,’ Lakos-Bujos said… ‘One big fund starts de-levering some positions, a second fund hears that and tries to re-position, the third fund basically gets caught off guard, and the next thing you know, we start having a bigger and bigger momentum unwind.’”

March 25 – Wall Street Journal (Eric Wallerstein): “The world’s largest, most-important financial market is growing by leaps and bounds. On Wall Street, that is making people nervous. Annual issuance of U.S. Treasurys has exploded, nearly doubling since the pandemic began. The government sold a record $23 trillion worth in 2023. And few think the spree is going to slow soon… When the government doesn’t take in enough from taxes to fund its spending, the Treasury Department issues bonds to fill the gap. The agency raised a net $2.4 trillion last year to finance the deficit… The Treasury market has grown more than 60% to $27 trillion since the end of 2019. It is roughly sixfold larger than before the 2008-09 financial crisis.”

March 25 – Financial Times (Claire Jones): “The US faces a Liz Truss-style market shock if the government ignores the country’s ballooning federal debt, the head of Congress’s independent fiscal watchdog has warned. Phillip Swagel, director of the Congressional Budget Office, said the mounting US fiscal burden was on an ‘unprecedented’ trajectory, risking a crisis of the kind that sparked a run on the pound and the collapse of Truss’s government in the UK in 2022. ‘The danger, of course, is what the UK faced with former prime minister Truss, where policymakers tried to take an action, and then there’s a market reaction to that action,’ Swagel said… The US was ‘not there yet’, he said, but as higher interest rates raise the cost of paying its creditors to $1tn in 2026, bond markets could ‘snap back’.”

March 25 – Wall Street Journal (Charley Grant): “The stock market is calmer than it has been in years. Some worry that a popular strategy is contributing to the tranquility. Measures of market volatility have fallen to levels last seen in 2018, while major stock indexes have climbed to repeated all-time highs. The S&P 500 is up 9.4% in 2024 and has set 20 closing records. Investors are responding. They are seeking protection from potential losses by pouring money into what are known as derivative-income, or sometimes covered-call, exchange-traded funds that sell options contracts in a bid to juice income or boost their returns… Assets in such funds topped $80 billion at the end of February…, up from about $7 billion at the end of 2020… The rise of the funds was propelled by a 2020 Securities and Exchange Commission rule that made it easier for ETFs to buy and sell options. The largest fund in the class, the JP Morgan Equity Premium Income ETF, has about $32.8 billion in assets under management…”

March 27 – Bloomberg (Masaki Kondo): “Japanese bonds suffered the heaviest selling by foreign investors in more than a year last week, as the country’s central bank raised its short-term policy rate for the first time in 17 years. Global investors unloaded ¥3.89 trillion ($25.7bn) of local debt on a net basis in the week that ended March 22, the most since January 2023…”

Global Credit Bubble Watch:

March 27 – Bloomberg (Gowri Gurumurthy): “Steady yields, tight spreads and a resilient economy have pushed issuers into the junk-bond market as March supply topped $26 billion. First quarter volume is more than $84 billion, up by more than 116% compared to a year ago. Borrowers have rushed to the market this week ahead of quarter-end, pricing more than $4.5 billion on Tuesday to take the week’s volume to more than $6 billion. Investors flocked to new issues, driving up order books.”

March 26 – Bloomberg (Ameya Karve and Harry Suhartono): “Asian investment-grade dollar bonds are gaining appeal as a defensive bet for investors including Schroder Investment Management, helping drive yield-premiums on the asset class to record lows. Spreads on the notes tightened to an unprecedented low of 86 basis points last week and are below those of US peers, Bloomberg indexes show.”

AI Bubble Watch:

March 27 – Wall Street Journal (Katherine Bindley): “The artificial-intelligence boom is sending Silicon Valley’s talent wars to new extremes. Tech companies are serving up million-dollar-a-year compensation packages, accelerated stock-vesting schedules and offers to poach entire engineering teams to draw people with expertise and experience in the kind of generative AI that is powering ChatGPT and other humanlike bots. They are competing against each other and against startups vying to be the next big thing to unseat the giants. The offers stand out even by the industry’s relatively lavish past standards of outsize pay and perks.”

Bank Watch:

March 27 – Reuters (Mehnaz Yasmin): “Ratings agency S&P Global… downgraded its outlooks for five regional U.S. banks to due to their commercial real estate (CRE) exposures, in a move likely to reignite investor concerns about the health of the sector. The ratings agency downgraded the outlook for First Commonwealth Financial, M&T Bank, Synovus Financial, Trustmark and Valley National Bancorp to ‘negative’ from ‘stable,’ it said. ‘The negative outlook revisions reflect the possibility that stress in CRE markets may hurt the asset quality and performance of the five banks, which have some of the highest exposures to CRE loans among banks we rate,’ S&P said.”

Bubble and Mania Watch:March 26 – Bloomberg (Carly Wanna): “The retail investing crowd is back in the throes of a meme stock mania as encouraging messaging from the Federal Reserve, GameStop Corp.’s expected earnings and sky-high stock prices ignite a euphoria among day traders. Individual investors’ piece of options volume has ticked higher as traders buy calls to position for continued rallies in already frothy equity indexes. They snapped up shares of Reddit Inc. after its scorching initial public offering last week while also pumping up old classics… and rocketing Bitcoin toward fresh highs. ‘A proper comparison would be the summer of 2021,’ said Vincent Deluard, StoneX’s director of global macro strategy. ‘With last week’s extremely dovish Fed meeting, we had the all-clear signal, and that was the cherry on top.’”

March 25 – Reuters (Foo Yun Chee and Bart H. Meijer): “Apple, Alphabet’s Google and Meta Platforms will be investigated for potential breaches of the EU’s new Digital Markets Act, European antitrust regulators said…, potentially leading to hefty fines for the companies. The European Union law, effective from March 7, aims to challenge the power of the tech giants by making it easier for people to move between competing online services like social media platforms, internet browsers and app stores. That should in turn open up space for smaller companies to compete.”

March 28 – CNBC (Robert Frank): “The wealth of the top 1% hit a record $44.6 trillion at the end of the fourth quarter, as an end-of-year stock rally lifted their portfolios, according to… the Federal Reserve. The total net worth of the top 1%, defined by the Fed as those with wealth over $11 million, increased by $2 trillion in the fourth quarter. All of the gains came from their stock holdings. The value of corporate equities and mutual fund shares held by the top 1% surged to $19.7 trillion from $17.65 trillion the previous quarter. While their real estate values went up slightly, the value of their privately held businesses declined, essentially canceling out all other gains outside of stocks.”

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

March 27 – Wall Street Journal (Matthew Luxmoore): “Reeling from an apparent security lapse that allowed a group of heavily-armed men to massacre dozens of concertgoers in Moscow last week, Russia has gone into overdrive advancing a narrative that pins the blame on a usual suspect: Ukraine… ‘Islamists couldn’t prepare such an action alone,’ Alexander Bortnikov, the head of Russia’s Federal Security Service, told Russian state TV. He accused Western security services of involvement and echoed earlier comments by President Vladimir Putin that the attackers planned to flee to Ukraine where ‘they were supposed to be greeted as heroes.’ This week’s cover of Russia’s biggest weekly newspaper shows portraits of Western leaders engulfed in flames. ‘We know the architects of the Crocus terrorist act. We hope they burn in hell,’ reads the banner…”

De-globalization and Iron Curtain Watch:

March 27 – Reuters (Aizhu Chen, Engen Tham, Ziyi Tang, Florence Tan, Can Sezer, Jonathan Spicer, Federico Maccioni, Nidhi Verma, Hadeel Al Sayegh and Kevin Huang): “Russian oil firms face delays of up to several months to be paid for crude and fuel as banks in China, Turkey and the United Arab Emirates (UAE) become more wary of U.S. secondary sanctions, eight sources familiar… said. Payment delays reduce revenue to the Kremlin and make them erratic, allowing Washington to achieve its dual policy sanction goals – to disrupt money going to the Kremlin to punish it for the war in Ukraine while not interrupting global energy flows.”

March 26 – Bloomberg: “Apple Inc. iPhone shipments in China fell about 33% in February from a year earlier, according to official data, extending a slump in demand for the flagship device in its most important overseas market. The government figures showed foreign brands shipped only about 2.4 million smartphones last month, which was affected by the later timing of the Lunar New Year.”

March 27 – Reuters (Joe Cash): “China’s President Xi Jinping met American business leaders at the Great Hall of the People in Beijing on Wednesday, as the government tries to woo back foreign investors and international firms seeking reassurance about the impact of new regulations. Beijing wants to boost growth of the world’s second largest economy after foreign direct investment shrank 8% in 2023… ‘China’s development has gone through all sorts of difficulties and challenges to get to where it is today,’ Xi said… ‘In the past, (China) did not collapse because of a ‘China collapse theory’ and it will also not peak now because of a ‘China peak theory,’’ he added.”

Inflation Watch:

March 29 – Yahoo Finance (Gabriella Cruz-Martinez): “Home prices are up 42% since 2020, but because both rates and borrowing costs have skyrocketed, you need to earn 80% more to comfortably afford a home in today’s market. Median incomes have risen just 23% over the past four years… In 2020, a household earning $59,000 a year could afford a typical home priced at about $240,815. At the time, that income level was less than the US median income of $66,000… Today, those shopping for a home need to earn $106,000 annually to afford a median-priced home for $342,941. That’s $47,000 more than they needed to earn in 2020 to afford a home and well above today’s average income of $81,000.”

March 26 – Bloomberg (Prashant Gopal): “Home-price growth in the US accelerated at the fastest rate since 2022, increasing pressure on buyers after the worst year for property sales in nearly three decades. Prices nationally climbed 6% in January from a year earlier, according to… S&P CoreLogic Case-Shiller. That’s bigger than the 5.6% annual gain in December… While inventory has started to rise recently, homes listed for sale remain low by historical standards and the tight supply has helped keep prices high. A measure of values in 20 cities was up 6.6% in January from a year earlier, compared with a 6.2% gain in the previous month. San Diego led those cities with an 11.2% increase, while prices in Los Angeles were up 8.6%.”

March 29 – CNBC (Jeff Cox): “Inflation rose in line with expectations in February, likely keeping the Federal Reserve on hold before it can start considering interest rate cuts… The personal consumption expenditures price index excluding food and energy increased 2.8% on a 12-month basis and was up 0.3% from a month ago… Both numbers matched the Dow Jones estimates. Including volatile food and energy costs, the headline PCE reading showed a 0.3% increase for the month and 2.5% at the 12-month rate, compared to estimates for 0.4% and 2.5%.”

March 26 – Bloomberg (Josyana Joshua): “US pump prices are likely to climb to the highest since the summer of 2022 — to $4 a gallon — as oil rises amid supply concerns, according to… AAA… Futures and pump prices have been boosted the past few weeks by the transition to summer-grade gasoline and as inventories shrink to the lowest since December. Attacks on Russian refineries have taken about 600,000 barrels a day of capacity… The hike at the pump likely will force Americans to make lifestyle changes and be a focus in November’s presidential election, said Devin Gladden, a spokesperson for AAA…”

March 23 – CNBC (Shawn Baldwin): “Car insurance is getting more expensive. The average annual premium for full coverage auto insurance in the U.S. rose to $2,543 in 2024 — up 26% from the previous year, according to Bankrate. Factors such as longer repair times and more expensive rental car costs are resulting in rising prices, according to a report by the American Property Casualty Insurance Association. Also, cars are becoming costlier to fix.”

March 26 – Bloomberg (Ben Holland): “China’s effort to boost manufacturing and shore up the economy amid a real estate slump could put ‘meaningful upward pressure’ on US inflation and push back the start of monetary easing, according to new research by the Federal Reserve Bank of New York. Credit flows to China’s factories have accelerated sharply over the past few years, as authorities seek to compensate for diminished lending to the property sector. That’s matched by a shift in… Chinese leaders as they talk up industrial policy. The new approach stands a chance of boosting China’s economic growth above the rates of the past two years… If that scenario plays out, the extra demand from Chinese manufacturers would likely push up prices for commodities and intermediate goods… That would ‘persistently tilt the balance of risks for US inflation to the upside,’ the economists wrote. ‘Such an impetus to inflation could potentially delay market expectations for policy easing.’”

March 27 – Axios (Andrew Freedman): “It may be time to add human-caused climate change to the list of factors likely to worsen inflation, a new study finds… The data suggests climate change is rippling through entire economies, instead of affecting the availability or price of particular goods… Published in the peer-reviewed journal Communications: Earth and Environment on March 21, the study shows increasing global average temperatures, more intense and frequent heat waves and other factors are already driving up the prices of food and other goods worldwide. These trends are likely to worsen through 2035, the researchers from the Potsdam Institute for Climate Impact Research and the European Central Bank concluded. The study shows that food inflation could increase by as much as 3 percentage points per year in the next decade due to ‘climateflation,’ while climate factors cause overall inflation to climb by between 0.3 percentage points per year to about 1.2 percentage points per year.”

March 26 – CNBC (Spencer Kimball and Fred Imbert): “Cocoa prices hit a record Tuesday as supply constraints fuel prices higher. Futures for May delivery were up 3.9% at $10,030 per metric ton, marking the first time the commodity breaks above the $10,000 mark. Cocoa has been on a tear this year, soaring nearly 138%.”

Federal Reserve Watch:

March 24 – Bloomberg (Rich Miller): “As inflation surged in 2022, the Federal Reserve moved to prevent a wage-hike spiral by jacking up interest rates. Now, with unemployment edging up, the central bank is signaling a willingness to cut rates to head off a job-cutting spiral – even if that means somewhat higher inflation for a while. For the first time in the current economic upswing, Fed Chair Jerome Powell used his opening statement at Wednesday’s press conference to declare that a surprise increase in unemployment could prompt the Fed to lower rates. He then repeated that message several times in response to reporters’ questions. While the Fed is waiting to be sure its inflation battle is won before cutting rates, ‘an unexpected weakening in the labor market could also warrant a policy response,’ he said…”

March 27 – Bloomberg (Craig Torres and Alexandra Harris): “Federal Reserve Governor Christopher Waller said there is no rush to lower interest rates, emphasizing that recent economic data warrants delaying or reducing the number of cuts seen this year. Waller called recent inflation figures ‘disappointing’ and said he wants to see ‘at least a couple months of better inflation data’ before cutting. He pointed to a strong economy and robust hiring as further reasons the Fed has room to wait to gain confidence that inflation is on a sustained path toward the 2% target. ‘In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data,’ Waller said…”

March 25 – Bloomberg (Craig Torres): “Federal Reserve Governor Lisa Cook said the US central bank must take a cautious approach to cutting interest rates to allow more time for inflation to slow down in some segments of the economy. Fed policymakers left rates unchanged at their meeting last week… Of the 19 Fed officials, nine saw two cuts or fewer in 2024, with two of those officials forecasting no cuts at all. ‘The risks to achieving our employment and inflation goals are moving into better balance,’ Cook said… ‘Nonetheless, fully restoring price stability may take a cautious approach to easing monetary policy over time.’”

March 25 – Bloomberg (Mark Niquette): “Federal Reserve Bank of Atlanta President Raphael Bostic reiterated his expectation for one interest-rate cut this year, adding the central bank can afford to be patient as long as the economy holds up. ‘I have an outlook for how the economy’s going to perform,’ Bostic said… ‘If it does that, then I think we can afford to be patient.’ Bostic said Friday that he now projects just one interest-rate cut this year, adding that reduction will likely happen later in the year than he previously expected.”

March 25 – Reuters (Lindsay Dunsmuir): “Chicago Federal Reserve Bank President Austan Goolsbee said… that at the Federal Reserve’s policy meeting last week he penciled in three rate cuts for this year… ‘I was at the median for this one,’ Goolsbee said… Goolsbee added that price increase readings for January and February were higher than expected with the ‘main puzzle’ still being housing inflation. ‘So we’re in an uncertain state but it doesn’t feel to me like we’ve changed fundamentally the story that we’re getting back to target,’ Goolsbee said.”

Biden Administration Watch:

March 26 – Reuters (Matt Spetalnick): “Relations between President Joe Biden and Prime Minister Benjamin Netanyahu sank to a wartime low on Monday with the U.S. allowing passage of a Gaza ceasefire resolution at the United Nations and drawing a sharp rebuke from the Israeli leader. Netanyahu abruptly scrapped a visit to Washington this week by a senior delegation to discuss Israel’s threatened offensive in the southern Gaza city of Rafah after the U.S. abstained in a Security Council vote that demanded an immediate ceasefire between Israel and Hamas and the release of all hostages held by the Palestinian militants.”

March 27 – Reuters (David Lawder): “A U.S. federal supply chain task force will meet on Wednesday to assess the Baltimore bridge collapse and port closure, U.S. Treasury Secretary Janet Yellen said, adding that the Biden administration did not want financing concerns to hold up bridge reconstruction…. Yellen… said the administration ‘will do everything as quickly as we possibly can’ to reopen the Port of Baltimore… ‘We are trying to evaluate now what the impact may be of the bridge collapse,’ Yellen said, adding that the supply chain task force… would meet to review the latest information on the Baltimore port situation.”

U.S. Economic Bubble Watch:

March 26 – Bloomberg (Brendan Murray, Augusta Saraiva and Enda Curran): “The bridge collapse Tuesday that shut the Port of Baltimore and closed a major highway will cause weeks or months of transportation disruptions in the Mid-Atlantic region and accelerate a shift of cargo to the US West Coast as importers and exporters try to avoid potential bottlenecks at trade gateways from Boston to Miami. ‘Companies have already begun shifting volumes from the East Coast to the West Coast,’ said Ryan Petersen, the founder and chief executive of Flexport… ‘Baltimore being taken offline means all the other ports on the East Coast are getting this bubble of cargo — creating congestion and delays.’”

March 26 – Wall Street Journal (Jennifer Williams): “Americans are continuing to spend, despite anxiety over the economy, making companies question their expectations of consumer spending habits during slower economic growth. Shoppers are stretched, but discretionary spending isn’t abating as quickly as some finance chiefs and economists expected… And it has CFOs across industries… working to figure out what the impact is on balance sheets. Americans—for now—remain resilient and are holding on to some nice-to-have experiences and habits, and are willing to even spend on small and large extravagances, even while grocery prices soar, pandemic-era savings dwindle and credit is more expensive. ‘This long-anticipated slowdown that economists and business leaders have been anticipating just isn’t materializing yet,’ said James Knightley, chief international economist at… ING. ‘And I think it’s a signal that consumers are wanting to maintain their lifestyles as long as they can.’”

March 28 – Associated Press (Paul Wiseman): “The U.S. economy grew at a solid 3.4% annual pace from October through December, the government said… in an upgrade from its previous estimate. The government had previously estimated that the economy expanded at a 3.2% rate last quarter. The… revised measure of the nation’s gross domestic product — the total output of goods and services — confirmed that the economy decelerated from its sizzling 4.9% rate of expansion in the July-September quarter.”

March 28 – Reuters (Dan Burns): “U.S. consumer sentiment rose unexpectedly in March to the highest in nearly three years… The University of Michigan’s benchmark Consumer Sentiment Index rose to a final reading for the month of 79.4, the highest since July 2021, from February’s 76.9… Consumer assessments of both current conditions and the economic outlook both improved from the March mid-month and February final readings. Expectations for inflation over a one-year horizon declined to 2.9% from 3.0% in February to match January’s reading…”

March 25 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes unexpectedly fell in February…, but the underlying trend remained strong amid a chronic shortage of previously owned houses on the market. The… median new house price last month was the lowest in more than 2-1/2 years, while supply was the highest since November 2022. Builders are ramping up construction… New home sales slipped 0.3% to a seasonally adjusted annual rate of 662,000 units last month… The median new house price in February was $400,500, the lowest since June 2021 and a 7.6% drop from a year ago… There were 463,000 new homes on the market at the end of February, the most since November 2022. That was up from 457,000 units in January. At February’s sales pace it would take 8.4 months to clear the supply of houses on the market… Houses under construction accounted for 58.7% of inventory. Homes yet to be built made 22.9% of supply, while completed houses accounted for 18.4%.”

March 25 – CNBC (Ana Teresa Solá): “The rate at which home prices grow is slowing down. U.S. home prices increased 0.6% from a month before in February, in line with the 0.6% average monthly gain in the roughly eight years leading up to the Covid-19 pandemic, according to… Redfin analysis. Before the pandemic, it was normal for prices to grow about half a percent every month, or to increase around 5% or 6% annually, said Daryl Fairweather, the chief economist at Redfin. ‘We’re back to that trend, despite these higher mortgage rates,’ she said.”

March 29 – Dow Jones (Greg Robb): “Deficit widens 1.5% to $91.8 billion… The U.S. trade deficit in goods widened 1.5% to $91.8 billion in February… It’s the largest deficit since last April… Exports of goods rose $4.8 billion to $175.1 billion in January. Imports rose $6.1 billion to $266.9 billion.”

March 25 – Dow Jones (Joshua Kirby): “U.S. economic growth picked up pace last month as production and demand increased, according to a monthly index… The Chicago Fed National Activity Index increased to 0.05 in February from a downwardly revised minus 0.54 in January. All four categories covered by the index improved on the month, and three made a positive contribution to the headline index.”

March 25 – Bloomberg (Christopher Condon and Sarina Yoo): “Economists are decidedly more upbeat about the US outlook than they were six months ago, seeing activity nearly on par with 2023 as strong job gains fuel consumer spending and growth without derailing the progress on inflation. Growth is projected to average 2.2% this year, more than twice as fast as anticipated in September, according to the latest Bloomberg monthly survey of economists. Odds of a recession in the next 12 months dropped to 35%, the lowest since July 2022 and down from 55% in September.”

Fixed Income Watch:

March 25 – Bloomberg (Michael Tobin and Nataly Pak): “At least six US companies are tapping the high-yield bond market Monday as the extra yield investors demand over Treasuries hovers at a two-year low… Monday’s issuance blitz saw the most transactions launch since January 2023, with high-yield spreads sitting inside of 300 bps, the lowest in roughly two years…”

March 27 – Bloomberg (Olivia Raimonde and Sri Taylor): “Junk-rated US companies have seen their interest costs rise after the Federal Reserve’s rate-hike campaign, but profits haven’t kept up, putting a squeeze on finances and underscoring a key risk for investors in high-yield debt as the trend persists. The ratio between companies’ earnings and their interest expense has fallen to the lowest level since the pandemic, signaling they have less income to service their debt. The so-called debt-service coverage ratio averaged just 3.5 times for the median company in the leveraged-loan universe at the end of September, according to Torsten Slok, chief economist at Apollo…, down from more than 5 times a year earlier.”

March 25 – Bloomberg (James Crombie): “Collateralized loan obligation sales are surging, and that spells gains ahead for the leveraged loans they repackage. This quarter’s CLO blitz has spurred strategists to boost issuance expectations for 2024. The main impediment to continued CLO market expansion is a lack of leveraged loans to repackage, and that demand/supply imbalance will keep upwards pressure on prices. Leveraged loans are already rising on strong US economic data, which will limit defaults, coupled with the view that monetary policy is probably going to stay tight for a while longer, supporting floating-rate debt. The main buyer base — CLOs — expanded 37% year-on-year, to $43 billion, according to data compiled by Bloomberg News. That prompted strategists at Citi and Barclays to raise forecasts for new US CLO volume this year…”

China Watch:

March 27 – Wall Street Journal (Edward White and Cheng Leng): “As Xi Jinping toured China’s central Hunan province last week, local officials were called forward to inform the nation’s powerful leader on their plans to accelerate the development of ‘new quality productive forces’. The slogan, rooted in 19th-century Marxist thinking, has in early 2024 become shorthand for Xi’s vision of economic growth underpinned by China’s increasingly advanced manufacturing industries. This month the phrase was used nine times in a 6,000-word essay published by state news agency Xinhua, which also elevated the importance of Xi’s economic reform programme to that of Deng Xiaoping, whom many regard as the architect of modern China. It was also listed as the government’s top economic priority for 2024 by Xi’s number two, Premier Li Qiang…”

March 28 – Bloomberg: “A line from a 172-page book citing President Xi Jinping’s comments on the nation’s monetary tools became a hot talking point among stock and bond traders Thursday. China should enrich its toolbox of monetary policies and the central bank should gradually increase the buying and selling of government bonds in its open-market operations, Xi was cited as saying in a book published this month. The snippet was taken from his speech — which was previously not fully released — during a twice-a-decade financial policy meeting in October.”

March 28 – Bloomberg: “One of China’s biggest property firms delayed its earnings report while another posted a record profit decline as the nation’s real estate crisis shows no signs of easing. Country Garden Holdings Co., once the nation’s top residential builder by sales, made a surprise announcement… that it will miss a deadline for reporting annual results… China Vanke Co., at one time the largest listed developer, said net profit tumbled 46% last year, the biggest drop since its 1991 listing.”

March 28 – Financial Times (Thomas Hale): “Vanke, one of China’s leading property developers, said it would cut its debt by $14bn after a nationwide slowdown in the sector hit its sales and saw its profits fall by almost half in 2023. The company’s net income fell 46% to Rmb12.2bn ($1.69bn) last year… In February, its sales dropped by 53% year-on-year to Rmb14bn.”

March 27 – Reuters (Xie Yu and Scott Murdoch): “Country Garden has hired Kroll to carry out a liquidation analysis ahead of a court hearing in mid-May, according to three sources, as the embattled Chinese developer pushes ahead with its offshore debt restructuring plan. China’s biggest private developer is facing a liquidation petition for non-payment of a $205 million loan… Companies that are restructuring their debt normally conduct an independent liquidation analysis to assess potential recovery rates for creditors that they can present in court, legal experts said.”

March 28 – Bloomberg: “China’s protracted property downturn is eroding the balance sheets of the nation’s largest state banks as their bad loans creep up. Bank of Communications Co. reported… that its property bad loan ratio jumped to 4.99% at the end of last year from 2.8% a year earlier… Bigger rival Industrial & Commercial Bank of China Ltd. saw its bad loans from residential mortgages rise 9.6% to 27.8 billion yuan… In the corporate loan segment, its property non-performing loan ratio was the highest among all sectors. Agricultural Bank of China Ltd. reported a 4.7% increase in soured residential mortgage loans last year, while NPL ratio for the property sector also topped other industries.”

March 28 – Bloomberg: “China’s largest state owned banks posted scant gains in earnings for last year as margins weakened. Net income at Agricultural Bank of China Ltd. grew 3.9% to 269.36 billion yuan ($37.3bn)… Bank of China Ltd. reported earnings rose 2.4% to 231.9 billion yuan. The reports followed similar results and margin contractions at peers Industrial & Commercial Bank of China Ltd. and Bank of Communications… The nation’s largest state-owned banks are struggling to maintain growth in the past year as they followed Beijing’s order to help pump up the domestic economy as well as rescue its debt-laden property developers and local governments.”

March 25 – Reuters: “Chinese regulators are pushing banks to speed up approvals of new loans to cash-starved private property developers, people with knowledge of the matter said… The effort uses the ‘whitelist’ mechanism, Beijing’s latest support measure aimed at easing the sector’s unprecedented liquidity squeeze and spurring home purchases, as new home prices fell in February for an eighth straight month. Most top domestic banks have so far shied away from significantly bolstering credit exposure to the crisis-hit sector despite repeated nudges from Beijing, dashing hopes of a revival in an industry crucial for the economy.”

March 25 – Financial Times (Edward White): “Policymakers from Brussels to Washington are fretting over the security and economic risks posed by a fast-rising wave of Chinese electric vehicle imports. But for Xi Jinping’s administration in Beijing the rapid emergence of the nation’s advanced EV industry has created a different dilemma: how to manage the terminal decline of the sector devoted to internal combustion engines?… In 2023, a record 30.1mn cars were produced, up from the prior peak of 28.9mn in 2017… However, the growth in China’s EV industry, which now accounts for more than 30% of domestic passenger vehicle sales, has masked the staggering decline in sales of non-EVs. Last year, China produced 17.7mn cars with internal combustion engines for the local market, a 37% fall from 28.3mn in 2017. The collapse of the legacy car market after decades of growth poses an existential threat to scores of foreign and state-backed carmakers operating in China. But it also presents serious long-term economic and social challenges for the country…”

Central Banker Watch:

March 27 – Wall Street Journal (Paul Hannon): “The Bank of England… warned that investors may be too complacent about the challenges facing the global economy, with the result that there is an increased risk of a ‘sharp correction’ in asset prices. In its latest, quarterly report on the threats to financial stability, the BOE highlighted problems in commercial real estate globally, China’s property sector in particular, and rising levels of government debt as potential ‘vulnerabilities’… It said despite those and other threats to stability, asset prices have risen across a range of markets and investors are demanding less compensation for the risks they face than they have previously. It noted that ‘U.S. equity risk premia remain particularly low.’”

March 26 – Reuters (William Schomberg): “Bank of England policymaker Catherine Mann… said on Tuesday she thought markets were betting on too many interest rate cuts by the British central bank. ‘I think they’re pricing in too many cuts, that would be my personal view,’ Mann told Bloomberg… ‘I think that there has been a substantial easing even since the vote last week, and I think that perhaps markets are a bit too complacent about how long they think the BoE overall, the MPC, will hold rates.’”

Europe Watch:

March 27 – Bloomberg (Leonard Kehnscherper and Abhinav Ramnarayan): “As European and British banks race to repay giant Covid-era loans, they’re having to lean ever more heavily on selling new debt to cover the cost. That flood of supply brings its own dangers. With lenders facing about €250 billion ($271bn) of repayments to the European Central Bank this week, many are turning to so-called ‘covered’ bonds — debt that’s backed by assets such as mortgages — to help fill funding gaps… Hedge funds have piled into the bonds, too, creating anxiety about banks having to depend on so-called ‘fast money’ and on the robustness of the assets securing the debt.”

Japan Watch:

March 28 – Reuters (Leika Kihara): “Japanese Prime Minister Fumio Kishida said… it was appropriate for the central bank to maintain accommodative monetary conditions. The government will continue to coordinate closely with the Bank of Japan to ensure wages continue to rise and the economy makes a complete exit from deflation, he said. ‘Japan is experiencing a historical chance to make a full exit from deflation,’ Kishida told a news conference.”

March 27 – Bloomberg (Toru Fujioka): “Bank of Japan board members discussed the need to stay cautious at a policy meeting last week, where the bank ended its massive easing program with Japan’s first interest rate increase since 2007, according to a summary of opinions from the gathering. ‘The bank would need to emphasize its cautious stance in the case of terminating the negative interest rate policy,’ one member noted, according to the summary… ‘Japan’s economy is not in a state where rapid policy interest rate hikes are necessary.’”

March 28 – Reuters (Leika Kihara and Satoshi Sugiyama): “Core inflation in Japan’s capital slowed in March and factory output unexpectedly slid in the previous month, heightening uncertainty on how soon the Bank of Japan can raise interest rates again… Core consumer price index (CPI) in Tokyo, an early indicator of nationwide figures, rose 2.4% in March from a year earlier, matching a median market forecast and slowing slightly from a 2.5% gain in February.”

March 27 – Bloomberg (Toru Fujioka): “Bank of Japan Board Member Naoki Tamura signaled his desire to gradually keep raising interest rates as the bank further pursues policy normalization after raising rates last week for the first time since 2007. ‘The handling of monetary policy is extremely important from here on for slow but steady progress in normalization to fold back the extraordinarily large-scale monetary easing,’ Tamura said…”

Social, Political, Environmental, Cybersecurity Instability Watch:

March 24 – Financial Times (Editorial Board): “Talk about unfortunate timing. At the start of last week, the head of the world’s largest oil company, Saudi Aramco, was applauded when he told the CERAWeek energy conference in Houston it was time to ‘abandon the fantasy of phasing out oil and gas’. Amin Nasser said the world needed instead to invest in fossil fuels to meet demand at a time when the clean energy transition was ‘visibly failing on most fronts’. One day later, the head of the UN’s World Meteorological Organization, Celeste Saulo, received no applause for issuing a report that showed climate records had been not just broken but smashed in 2023, the hottest year on record. More than 90% of the world’s oceans suffered heatwave conditions, glaciers lost the most ice on record and the extent of Antarctic sea ice fell to by far the lowest levels ever measured.”

March 25 – Financial Times (Lucy Fisher, Stefania Palma and Nic Fildes): “The US and UK have unveiled sweeping measures against hackers backed by China’s government, alleging they carried out extensive cyber attacks against targets across Washington and Westminster. The US Department of Justice… indicted seven Chinese nationals whom it said were members of APT31, a Wuhan-based hacking group run by China’s main spy service. The indictment alleges that the group sent more than 10,000 ‘malicious’ emails with hidden tracking links to officials across the federal government, businesses ‘of national economic importance’, including defence, and Capitol Hill.”

March 27 – Bloomberg (Olivia Raimonde and Sri Taylor): “The US should brace for an ‘explosive’ hurricane season this year, with the potential for a record-breaking number of storms sweeping in from the Atlantic Ocean, according to AccuWeather… Early warning signs are pointing to a ‘supercharged’ season, with as many as 25 named storms from June through November… That would be well above a typical year, in which the Atlantic churns out an average 14 storms… This coming season may deliver up to a dozen hurricanes, and as many as six storms could hammer the US. ‘The 2024 Atlantic hurricane season is forecast to feature well above the historical average number of tropical storms, hurricanes, major hurricanes, and direct US impacts,’ Alex DaSilva, AccuWeather’s lead hurricane forecaster, said… ‘All indications are pointing toward a very active and potentially explosive Atlantic hurricane season.’”

March 27 – Wall Street Journal (Vipal Monga): “The Canadian province of Quebec has big plans of becoming the ‘battery of the U.S. northeast’ by feeding power generated from its dams and other hydro plants to millions of people in Vermont, Massachusetts and New York state. But dry conditions that have affected energy output worldwide are forcing one of the world’s largest hydropower producers to cut exports. ‘There wasn’t enough snow or rain in the regions where we needed it,’ said Michael Sabia, chief executive of Hydro‑Québec… ‘We can’t make it rain, as much as we’d like to.’ Elsewhere, China, India and the U.S. in 2023 all recorded decreases in their hydro production for the same reason, contributing to a record global decline in hydropower generation… Many countries resorted to fossil-fuel electricity generation to make up for the hydro shortfall…”

Geopolitical Watch:

March 28 – Reuters (Neil Jerome Morales and Yew Lun Tian): “The Philippines will implement countermeasures against ‘illegal, coercive, aggressive, and dangerous attacks’ by China’s coastguard, President Ferdinand Marcos Jr. said…, upping the stakes in an escalating row in the South China Sea. The Philippines is furious over what it calls repeated hostilities by Chinese vessels around disputed features inside Manila’s 200-mile exclusive economic zone. The United States has weighed in with moral support for its former colony and military ally.”

March 25 – Reuters (Neil Jerome Morales, Karen Lema and Liz Lee): “China warned the Philippines… to behave cautiously and seek dialogue, saying their relations were at a ‘crossroads’ as new confrontations between their coastguards over maritime claims deepened tensions. It was the second such warning, opens new tab by the Chinese foreign ministry in three months as the two countries openly sparred over territorial claims in the Spratly Islands, a mostly uninhabited archipelago in the South China Sea.”

March 26 – Reuters (Hyonhee Shin): “South Korea’s foreign ministry… expressed ‘grave concerns’ over China’s recent use of water cannons against Philippine ships, saying it stokes tension in the South China Sea and undermines a maritime order.”

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