March 3, 2023: Calm Before the Storm

March 3, 2023: Calm Before the Storm
Doug Noland Posted on March 4, 2023

Ten-year Treasury yields traded as high as 4.09% this week, the high since November 9th. Benchmark MBS yields rose to 5.67%, up 100 bps over the past month, also to the high since the ninth of November. The week ended with market expectations for peak Fed funds at 5.44% for the Fed’s September 20th meeting. This is around 40 bps higher than expectations in November. German bund yields are currently about 40 bps higher than November levels. UK 10-year yields ended the week at 3.85%, up 85 bps over the past month to the high since the October crisis period. Spanish and Portuguese bond yields this week surpassed November peaks to trade at new multiyear highs (Spain back to 2014 and Portugal to 2017).

The VIX (equities volatility) Index closed Friday down 3.2 for the week to 18.49. The VIX was at 29 on November 9th, down from the October high of almost 35. Investment-grade Credit default swap (CDS) prices dropped six this week to 71 bps (2023 low 66bps), compared to 92 bps on November 9th (September high 114bps). High-yield CDS sank 33 this week to 433 bps (2023 low 408bps). This compares to 540 bps on November 9th (September high 640bps).

Investment-grade corporate yield spreads to Treasuries closed the week 32 bps lower than November 9th at 120 bps (2023 low 115bps). JPMorgan CDS ended Friday at 65 bps, Goldman at 83 bps, and Bank of America at 69 bps, down significantly from November 9th levels of 90, 120, and 97 bps, respectively.

European high-yield (“crossover”) CDS fell 22 this week to 397 bps, down from 523 bps on November 9th (September high 695bps). Emerging Market (EM) CDS dropped 15 this week to 229 bps. This compares to 276 bps on November 9th (September high 346bps).

So, why would risk premiums and indicators remain sanguine in the face of a yield spike and hawkish reassessment of Fed rate policy? Phrased differently, what is holding back “risk off” dynamics? A Friday evening Bloomberg headline: “Blaring Bond Alarms Are Falling on Deaf Ears in the Stock Market.”

For one thing, it’s the nature of markets to tend not to get so worked up by a development the second time around. There was major concern back in November that the global yield spike could spiral out of control. The UK gilt market in late-September illuminated the risk of highly levered bond and derivatives strategies – forced deleveraging sparking panic and market meltdown. Bank of England emergency QE operations allayed fears.

Interestingly, the Dollar Index traded to 113 during the first week of November, after beginning 2022 at 96. The dollar melt-up was a major factor stoking global de-risking/deleveraging. The emerging markets, in general – and Chinese developers, in particular – had issued enormous amounts of dollar-denominated debt. A significant amount of this debt was likely purchased on leverage, so-called “carry trades.”

The surging dollar was problematic for leveraged speculation, but also for the EM central bank community. A “doom loop” dynamic had gained momentum, where surging yields (sinking bond prices) and currency weakness were inciting self-reinforcing “hot money” outflows and associated liquidity issues. To stabilize their currencies, EM central banks sold Treasuries and other developed market debt, selling that pushed global yields higher yet.

A confluence of factors supported a multi-month fading of this key global de-risking/deleveraging dynamic. The Dollar Index peaked on September 28th, not coincidently the day of the Bank of England’s dramatic market intervention. There was also a notable shift to less hawkish central bank commentary. In late October, the Bank of Canada (prematurely) signaled it was winding down its tightening cycle. Haruhiko Kuroda reassured markets – “We don’t plan to raise interest rates or head for an exit (from easy policy) any time soon,” as Japan executed massive currency support operations. And it wasn’t long before Powell and Fed officials adopted a less hawkish tone. Powell (Nov. 30th): “So, we have a risk management balance to strike, and we think that slowing down at this point is a good way to balance the risks of over tightening.” Meanwhile, Beijing hit the crisis-management panic button.

The confluence of shifts spurred short covering and a reversal of interest-rate hedges. After peaking at 4.24% on October 24th, 10-year Treasury yields were down to 3.37% by January 18th. It’s also worth noting the unusually mild European winter. The stage had been set for spiking energy prices, shortages, economic disruption, huge utility company losses, financial turmoil, and bailouts. At least for the winter, fragile European bonds and the euro dodged a bullet.

The moon and stars had aligned. A huge cross-asset short squeeze developed, fueling powerful global rallies in sovereign bonds, corporate Credit, equities and crypto. The bond market rally spawned a bullish market narrative of “immaculate disinflation”, an economic soft-landing, and a Federal Reserve that would soon pivot dovish. The big squeeze, unwind of hedges, and “risk on” speculation combined for a major loosening of financial conditions.

Such a significant loosening of financial conditions at this stage of policy tightening and market cycles unleashed strange dynamics. The more markets imagined disinflation, the greater loose financial conditions worked to sustain elevated price inflation. And while bond yields have reversed sharply higher over the past few weeks, loose financial conditions continue to buoy equities and risk markets more generally.

A couple of this week’s headlines illustrate peculiar market dynamics.

Bloomberg: “The Best Credit Had the Worst February on Record as Traders Capitulate on Rates.”

Reuters: “US Companies Rush to Issue Corporate Debt, Busiest February Ever.”

February 28 – Reuters (Matt Tracy): “U.S. companies with the highest credit ratings sold a record $144 billion of debt securities so far in February to get ahead of further potential interest rate hikes, meeting strong demand from investors… Investment-grade rated corporate bond issuance in February has been the busiest ever for the month with the tally as of Monday already some $20 billion ahead of the now second-heaviest February in 2021, said BMO Capital Markets’ fixed income strategy director Dan Krieter… February’s bonds were oversubscribed by 3.64 times on average, data from Informa Global Markets said… Analysts expect $160-165 billion of new bond supply in March.”

According to Bloomberg, January and February combined for record two-month investment-grade issuance of $294 billion. Decent March issuance would ensure near-record Q1 debt issuance, in what will likely be yet another quarter of sustained strong system Credit expansion. That economic and inflation data have recently surprised to the upside is no coincidence.

February 28 – Bloomberg (Catarina Saraiva): “Central bankers must augment what they learn from incoming data with clues gleaned from the real economy and avoid putting too much weight on financial markets, said Federal Reserve Bank of Chicago President Austan Goolsbee. In his first public speech since taking office last month, Goolsbee acknowledged it was tempting to lean on the instant reaction of investors to incoming news, because economic data arrives with a delay. ‘But it is a danger and a mistake for policymakers to rely too heavily on market reactions,’ he said… ‘Our job is ultimately judged by what happens in the real economy.’”

Markets have been resilient. They’re really complicating the Fed’s inflation fight. I can imagine many Fed officials quietly share the sentiments expressed by the Chicago Fed’s new president. The Federal Reserve needs to deemphasize its fixation on – and worries for – the financial markets. Just focus on the real economy, and the markets will sort things out.

I can’t help but see things falling into place for the “hike until something breaks” accident scenario. The big squeeze of ’23 and resulting loosening of financial conditions prolong the “Terminal Phase” of Credit Bubble excess. Risk markets are enjoying an echo Bubble, with the bulls today operating on the gratifying side of Greed and Fear. Short squeezes will continue until they quit working. Climbing the proverbial wall of worry – for a Wile E. Coyote moment.

Don’t mistake this phase of “risk on” for healthy market resilience. A dreadful “risk off” lurks on the horizon. And the reality of contemporary financial markets is one of a hopelessly destabilizing cycle of recurring “risk on”/“risk off.” Periods of de-risking/deleveraging ensure enormous amounts of derivatives hedging, shorting, and bearish derivatives speculation, positioning that promotes destabilizing squeezes. And at this stage in the cycle, “risk off” dynamics spur illiquidity and elevated risk for spiraling margin calls, runs, and panics. Central bank intervention (i.e. BOE QE or dovish pivots) then unleashes short squeezes, the unwind of hedges, and bouts of powerful speculative excess. This is no market backdrop for a reasonably smooth tightening cycle.

Speculative market “risk on” dynamics and attendant loose financial conditions today pose a serious predicament for the Fed (and global central bank community). I can imagine Austan Goolsbee will not be quick to embrace massive QE the next time de-risking/deleveraging unleashes acute market instability. And the longer “risk on” supports elevated Credit growth, economic demand, tight labor markets, and speculative excess, the more markets will bank on the “Fed put” come the next bout of market turmoil.

It doesn’t matter today. It will matter greatly at some point in the future: instability associated with a serious de-risking/deleveraging episode will require massive QE – a market bailout likely to come later, in smaller scope, and with more Fed dissension than markets have grown accustomed.

It’s an interesting setup for next week. Powell testifies Tuesday and Wednesday. ADP and JOLTS (job vacancies) employment data on Wednesday. And then the big February payrolls report on Friday. The calendar – with jobs data this month delivered on the second Friday – shortens to one week the time-span between key payrolls data and a “quadruple witch” quarterly options expiration.

Interestingly, the MOVE (bond market volatility) Index closed Friday only slightly below the elevated level from November 9th. With all the hedging that has surely taken place over recent weeks, bonds are poised for a gap move in the event of surprising payroll data. A repeat of January’s big upside surprise (517k) could see huge derivatives-related selling. On the other hand, unexpectedly weak jobs and earnings gains would likely spark a short squeeze and unwind of hedges ahead of options expiration. And I doubt it would take much of a bond rally to incite another round of squeezes in our highly speculative stock market.

I can’t shake the feeling that currency markets will play prominently in this year’s clash of “risk on” vs. “risk off”. And if there’s one key aspect of the current backdrop that supports “risk on,” I’d point to relative currency stability. Last year’s yen train-wreck, dovish ECB euro weakness, and China bust renminbi vulnerability combined to power the destabilizing dollar melt-up. After a couple months of the new year, the Dollar Index has gained about 1%. The yen has somewhat stabilized ahead of a new BOJ governor, while newfound ECB hawkishness appears poised to narrow interest-rate differentials. Meanwhile, Beijing is throwing the kitchen sink at its faltering Bubbles.

Not sure how long this semblance of stability holds. Japan – its bond market and currency – is an accident in the making. Surging inflation in Germany, France, Spain and elsewhere ensure tighter ECB policy that could bankrupt Italy. In China, perilous late-cycle non-productive Credit expansion is incompatible with currency stability, while geopolitical risks loom large. On various levels, the current “risk on” backdrop seems much the calm before the storm.

For the Week:

The S&P500 rallied 1.9% (up 5.4% y-t-d), and the Dow recovered 1.7% (up 0.7%). The Utilities slipped 0.6% (down 7.5%). The Banks added 0.3% (up 8.5%), and the Broker/Dealers rallied 1.8% (up 11.0%). The Transports surged 3.3% (up 12.9%). The S&P 400 Midcaps rose 1.8% (up 9.0%), and the small cap Russell 2000 gained 2.0% (up 9.5%). The Nasdaq100 recovered 2.7% (up 12.3%). The Semiconductors rallied 3.2% (up 19.6%). The Biotechs recovered 3.5% (up 2.4%). With bullion rallying $45, the HUI gold equities index surged 5.8% (down 1.5%).

Three-month Treasury bill rates ended the week at 4.72%. Two-year government yields rose four bps this week to a new 15-year high 4.86% (up 43bps y-t-d). Five-year T-note yields increased three bps to 4.25% (up 24bps). Ten-year Treasury yields added a basis point to a three-month high 3.95% (up 7bps). Long bond yields dropped seven bps to 3.88% (down 9bps). Benchmark Fannie Mae MBS yields were unchanged at a three-month high 5.58% (up 19bps).

Greek 10-year yields jumped nine bps to 4.46% (down 10bps y-o-y). Italian yields rose nine bps to 4.53% (down 17bps). Spain’s 10-year yields jumped 15 bps to 3.66% (up 15bps). German bund yields surged 18 bps to 2.72% (up 27bps). French yields jumped 18 bps to 3.20% (up 22bps). The French to German 10-year bond spread was unchanged at 48 bps. U.K. 10-year gilt yields surged 19 bps to 3.85% (up 18bps). U.K.’s FTSE equities index gained 0.9% (up 6.6% y-t-d).

Japan’s Nikkei Equities Index rose 1.7% (up 7.0% y-t-d). Japanese 10-year “JGB” yields were little changed at 0.50% (up 8bps y-t-d). France’s CAC40 rallied 2.2% (up 13.5%). The German DAX equities index recovered 2.4% (up 11.9%). Spain’s IBEX 35 equities index jumped 2.9% (up 15.0%). Italy’s FTSE MIB index surged 3.1% (up 17.4%). EM equities were mostly higher. Brazil’s Bovespa index declined 1.8% (down 5.3%), while Mexico’s Bolsa index jumped 2.8% (up 11.8%). South Korea’s Kospi index increased 0.3% (up 8.7%). India’s Sensex equities index gained 0.6% (down 1.7%). China’s Shanghai Exchange Index rose 1.9% (up 7.7%). Turkey’s Borsa Istanbul National 100 index jumped 3.0% (down 5.4%). Russia’s MICEX equities index gained 2.9% (up 5.5%).

Investment-grade bond funds posted outflows of $238 million, and junk bond funds reported negative flows of $2.310 billion (from Lipper).

Federal Reserve Credit declined $16.4bn last week to $8.332 TN. Fed Credit was down $568bn from the June 22nd peak. Over the past 181 weeks, Fed Credit expanded $4.606 TN, or 124%. Fed Credit inflated $5.522 Trillion, or 196%, over the past 538 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt added $0.3bn last week to $3.353 TN. “Custody holdings” were down $100bn, or 2.9%, y-o-y.

Total money market fund assets surged $73.4bn to $4.894 TN. Total money funds were up $288bn, or 6.2%, y-o-y.

Total Commercial Paper dropped $23.8bn to $1.214 TN. CP was up $187bn, or 18.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates increased eight bps to a four-month high 6.74% (up 298bps y-o-y). Fifteen-year rates gained nine bps to 5.99% (up 298bps). Five-year hybrid ARM rates jumped 14 bps to 5.97% (up 306bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 20 bps to a 17-week high 7.17% (up 308bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 0.7% to 104.52 (up 1.0% y-t-d). For the week on the upside, the Mexican peso increased 2.6%, the South African rand 1.6%, the New Zealand dollar 0.9%, the euro 0.8%, the British pound 0.8%, the Australian dollar 0.7%, the Swedish krona 0.5%, the Japanese yen 0.5%, the Swiss franc 0.5%, the Singapore dollar 0.4%, the South Korean won 0.3% and the Canadian dollar 0.1%. The Chinese (onshore) renminbi increased 0.81% versus the dollar (down 0.08% y-t-d).

Commodities Watch:

February 28 – Wall Street Journal (Megha Mandavia): “After a substantial stretch when battery makers were desperate for mineral supplies, the shoe is suddenly on the other foot. In the past few months, previously red hot cobalt and lithium prices have cooled dramatically. The chill is coming from both sides: supply and demand. Supply bottlenecks are easing while China’s demand for electric vehicles, and global demand for many consumer electronics, have ebbed as well. Cobalt has fallen out of favor the most: prices in February were down 61% from January last year… Lithium carbonate prices rose rapidly for most of last year, but the metal has seen a sharp correction of 21% since November. China’s EV subsidy cut in December is a big factor…”

The Bloomberg Commodities Index rallied 2.6% (down 4.0% y-t-d). Spot Gold recovered 2.5% to $1,856 (up 1.8%). Silver gained 2.4% to $21.26 (down 11.2%). WTI crude jumped $3.36 to $79.68 (down 1%). Gasoline jumped 16.6% (up 12%), and Natural Gas surged 18.1% to $3.01 (down 33%). Copper rallied 2.9% (up 7%). Wheat declined 1.8% (down 11%), and Corn fell 1.5% (down 6%). Bitcoin dropped $840, or 3.6%, this week to $22,330 (up 35%).

Market Instability Watch:

March 1 – Bloomberg (Katie Greifeld): “A dramatic repricing of the Federal Reserve’s interest-rate hiking path has spurred an unprecedented exodus from credit exchange-traded funds. A trio of some of the most popular corporate bond ETFs posted a combined $11.9 billion in outflows last month, led by a record $4.9 billion withdrawal from the $12.8 billion iShares iBoxx High Yield Corporate Bond ETF (ticker HYG). The $33 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the $7.4 billion SPDR Bloomberg High Yield Bond ETF (JNK) also posted their biggest monthly outflows ever…”

February 27 – Financial Times (Robin Wigglesworth): “The Bank of Japan is just unstoppable. We’ve written recently about how its bond-buying is now more than making up for the bond-selling being done by the likes of the Federal Reserve, the impact on Japan’s massive overseas savings and the new governor’s intellectual heritage. The cherry on the cake was Deutsche Bank’s titbit that the BoJ ‘may’ have bought more than 100% of some Japanese government bonds, as it buys the JGBs, lends them out again to ensure the market still has some supply, short sellers borrow it and dump them in the market, only for the BoJ to buy it once more… After buying a record ¥20tn of JBGs last month, the BoJ now owns more than 100% of all on-the-run 10-year Japanese government bonds. In fact it owns almost 140% of the most recent issue.”

Bursting Bubble and Mania Watch:

March 1 – Bloomberg (Tasos Vossos, Josyana Joshua and Finbarr Flynn): “January’s optimism about the bond market seems like a long time ago. The best corporate bonds have erased almost all of their early-year gains as stubborn inflation data lead traders to reverse course on the timing of rate cuts by central banks. Total return from that debt is now just 0.67% since the start of 2023 following the worst February on record… It’s a remarkable turnaround for high-grade bonds, after a record jump in January in the same metric.”

March 2 – Bloomberg (Ben Holland): “When borrowing costs rise, governments end up paying more interest. That fiscal blow is now landing faster than it used to. The reason: Advanced economies are in effect paying floating rates on a large chunk of their national debts — the result of more than a decade of bond purchases by their central banks. And with short-term interest rates rising rapidly, floating-rate debt has gotten expensive. That’s exacerbating budget disputes in countries including the US, where a debt-ceiling standoff looms, and the UK, which has seen interest costs climb the most in generations… ‘The underlying thing is that the state has moved some of its debt from being fixed-rate to floating-rate,’ Paul Tucker, a former deputy governor of the Bank of England, said… ‘It will be more visible, earlier, in some countries than others,” he said. “But it’s the same everywhere.’”

March 1 – Bloomberg (Natalie Wong and John Gittelsohn): “A Pacific Investment Management Co. office landlord that defaulted on $1.7 billion of mortgage notes sent shockwaves through a troubled part of the real estate market. For years, property owners have been grappling with the rise of remote work — a problem so large that one brokerage estimates roughly 330 million square feet of office space will become vacant by the end of the decade as a result. But low interest rates allowed the investors to muddle along more easily without worrying about the debt. Now, many office landlords are seeing borrowing costs skyrocket, leading owners such as Pimco’s Columbia Property Trust and Brookfield Corp. to default on mortgages. While remote work hurt the office market, rising rates could push landlords, which often use floating-rate debt, closer to a tricky edge.”

February 28 – Wall Street Journal (Peter Grant and Konrad Putzier): “In 2021, the asset-management firm known as Pimco banked on an office-market comeback. Interest rates were near historic lows, and the economy was humming. Cities were expecting a surge in newly vaccinated workers returning to the office. In September that year, Pacific Investment Management Co. said it was acquiring Columbia Property Trust Inc., which owned 19 office buildings in New York, San Francisco, Washington, D.C., and other cities. The deal valued Columbia at $3.9 billion. ‘We continue to believe that high-quality office buildings in major U.S. cities offer long-term value,’ John Murray, Pimco’s global head of private commercial real estate, said at the time. Columbia has now defaulted on more than $1.7 billion of debt backed by seven of its buildings…, which makes it one of the biggest office defaults during the pandemic period.”

March 2 – Bloomberg (Jack Sidders): “Blackstone Inc. defaulted on a €531 million ($562 million) bond backed by a portfolio of Finnish offices and stores as rising interest rates hit European property values. Blackstone, which acquired landlord Sponda Oy in 2018, sought an extension from holders of the securitized notes to dispose of assets and repay the debt… Bondholders voted against a further extension…”

March 1 – Reuters (Melissa Bland): “Blackstone Inc said… it had blocked investors from cashing out their investments at its $71 billion real estate income trust (BREIT) as the private equity firm continues to grapple with a flurry of redemption requests. BREIT said it fulfilled redemption requests of $1.4 billion in February, which represents only 35% of the approximately $3.9 billion in total withdrawal requests for the month…”

March 2 – Bloomberg (Drew Singer): “After swinging from pessimism to near euphoria earlier this year, the outlook for the US IPO market is tumbling into turmoil… ‘In December, the pessimism was off the charts,’ said Barrett Daniels, IPO services co-leader at Deloitte & Touche. ‘Fast forward to late January and it’s like the pendulum had swung and everyone’s optimistic that things are going to open up before we know it. Here we are a couple weeks after that and it’s utter confusion again.’”

February 26 – Financial Times (Antoine Gara and Sujeet Indap): “The issue pits insurers backed by large private equity firms such as Blackstone, Apollo Global and KKR — which are increasingly investing in the loans — against traditional life insurers such as MetLife and Prudential Financial, which warn of growing risks… The private equity-backed insurers are resisting a proposed 50% increase in the capital charges held against the riskiest slices of corporate loan packages that are purchased with annuity premiums. Those increases are supported by many of the largest life insurers in the US, which warn that their aggressive rivals are overloading customer portfolios with excessive risk.”

March 3 – Bloomberg (Matt Day): “ Inc. is pausing construction on its sprawling second headquarters near Washington, a decision that coincides with the company’s deepest ever job cuts and a reassessment of office needs to account for remote work.”

Crypto Bubble Collapse Watch:

March 1 – Bloomberg (Tom Schoenberg and Max Reyes): “Cryptocurrency-friendly bank Silvergate Capital Corp. is studying whether it’s still viable and reviewing its financial controls, following the collapse of Sam Bankman-Fried’s FTX. The shares plunged as much as 25%. ‘The company is currently analyzing certain regulatory and other inquiries and investigations that are pending with respect to the company,’ La Jolla, …Silvergate said in a filing…”

March 2 – Bloomberg (Max Reyes, Yueqi Yang and Matt Turner): “Silvergate Capital Corp.’s woes deepened on Thursday, a day after the bank raised questions about whether it can stay in business, with the shares plummeting to a record low and key partners cutting off ties to the crypto-friendly bank… Investors and business partners headed for the exits, with the stock slumping 58%, its biggest drop ever, to a record low. Meanwhile, Coinbase Global Inc., Galaxy Digital Holdings Ltd., Paxos Trust Co. and other crypto firms decided to stop accepting or initiating payments through Silvergate.”

March 1 – Reuters (Elizabeth Howcroft): “Binance’s stablecoin, Binance USD, has seen around $6 billion of outflows following a U.S. regulatory crackdown on the company that issues the token, according to market tracker CoinGecko. Paxos Trust Company, which issues Binance USD, said on Feb. 13 that the U.S. Securities and Exchange Commission (SEC) had told the company it should have registered the product as a security and is considering taking action against the platform. On the same day, New York’s chief financial regulator said in a consumer alert that it had ordered Paxos to stop creating the token.”

Ukraine War Watch:

February 27 – The Hill (Lauren Sforza): “Russian President Vladimir Putin said… Russian people may not survive if Western countries succeed in handing a ‘strategic defeat’ to Moscow in its war in Ukraine… ‘In today’s conditions, when all the leading NATO countries have declared their main goal as inflicting a strategic defeat on us, so that our people suffer as they say, how can we ignore their nuclear capabilities in these conditions? Putin said… Putin accused Western countries of seeking to divide Russia in order to take control of the country’s raw materials. ‘I do not even know if such an ethnic group as the Russian people will be able to survive in the form in which it exists today,’ he said.”

February 28 – Associated Press (Susie Blann): “Drones that the Kremlin said were launched by Ukraine flew deep inside Russian territory, including one that got within 60 miles of Moscow, signaling breaches in Russian defenses as President Vladimir Putin ordered stepped-up protection at the border. Officials said the drones caused no injuries and did not inflict any significant damage, but the attacks… raised questions about Russian defense capabilities more than a year after the country’s full-scale invasion of its neighbor.”

March 1 – Reuters (Trevor Hunnicutt and Michael Martina): “The United States is sounding out close allies about the possibility of imposing new sanctions on China if Beijing provides military support to Russia for its war in Ukraine, according to four U.S. officials and other sources. The consultations, which are still at a preliminary stage, are intended to drum up support from a range of countries, especially those in the wealthy Group of 7 (G7), to coordinate support for any possible restrictions. It was not clear what specific sanctions Washington will propose.”

March 2 – CNN (Simone McCarthy): “Chinese leader Xi Jinping and Belarusian counterpart Alexander Lukashenko – a close ally of Vladimir Putin – vowed to deepen defense and security ties and expressed shared views on the war in Ukraine during a Wednesday meeting in Beijing… Speaking about the war in Wednesday’s meeting, Xi called for ‘relevant countries’ to ‘stop politicizing and instrumentalizing the world economy’ and act in a way to help ‘resolve the crisis peacefully,’ in an apparent reference to the US and its allies. The joint statement underscored the alignment between Minsk and Beijing when it comes to their opposition of what they see as a Western-led global order, with their joint statement including opposition to ‘all forms of hegemonism and power politics, including the imposition of illegal unilateral sanctions and restrictive measures against other countries.’”

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

February 25 – Wall Street Journal (Austin Ramzy): “Over a year of war in Ukraine, Russia and China have grown closer. The next stage, as China seeks to cast itself as pushing for peace, will test whether Beijing is willing to put any distance between itself and Moscow. Thus far it hasn’t. Aside from statements from China’s leader Xi Jinping that nuclear war must be avoided—the sort of truism few would argue with—China has offered no criticism of Russia’s actions. Even that nudging hasn’t stopped President Vladimir Putin from nuclear gamesmanship… China on Friday released a 12-point document on Ukraine that called for a cease-fire and peace talks. The paper was brief and largely repeated earlier statements by Mr. Xi and other Chinese officials.”

February 27 – Reuters (Ben Blanchard): “China accused the United States of ‘endangering’ peace and stability in the Taiwan Strait after a U.S. military plane flew through the sensitive waterway…, with the U.S. Navy responding that it had been in international airspace. Beijing has been incensed by U.S. military missions through the narrow strait, most frequently of warships but occasionally of aircraft, saying China ‘has sovereignty, sovereign rights and jurisdiction’ over the waterway. Taiwan and the United States dispute that saying it is an international waterway.”

March 1 – Associated Press (Kevin Freking and Ellen Knickmeyer): “A special House committee dedicated to countering China began its work… with a prime-time hearing in which the panel’s chairman called on lawmakers to act with urgency and framed the competition between the U.S. and China as ‘an existential struggle over what life will look like in the 21st century.’ While some critics have expressed concern the hearings could escalate U.S.-Chinese tensions, lawmakers sought to demonstrate unity and the panel’s top Democrat made clear that he doesn’t want a ‘clash of civilizations’ but a durable peace.”

February 27 – Financial Times (Demetri Sevastopulo): “The US congressional panel created to focus on threats from Beijing plans to look at the role of private equity, venture capital and Wall Street firms in China as it prepares to launch hearings on Tuesday. Mike Gallagher, a Wisconsin lawmaker who chairs the House committee on the Chinese Communist party, said it would ‘engage with prominent CEOs and industry representatives’ to get an understanding of how companies invest and operate in China. ‘One thing I’m interested in understanding is, if you’re a major company with interests in China, like Disney or the NBA, how are you navigating the complexity?’, Gallagher told the Financial Times.”

February 26 – Financial Times (Courtney Weaver): “A senior Republican legislator has said China is considering sending 100 drones and other lethal weapons to Russia, as US officials warn Beijing could escalate its support for Moscow in the war in Ukraine. Michael McCaul, the top Republican on the House foreign affairs committee, said the US was concerned about Beijing’s willingness to strengthen its backing for Moscow…, ahead of an expected meeting between Russia’s leader Vladimir Putin and his Chinese counterpart Xi Jinping. ‘We have intelligence that’s been reported that they are contemplating sending 100 drones into Russia,’ McCaul said…, adding that Beijing was considering supplying ‘other lethal weapons’. McCaul said that a meeting between Xi and Putin, where he said the leaders would discuss weapons shipments, was ‘very disturbing’.”

De-globalization and Iron Curtain Watch:

February 26 – Financial Times (Jonathan Wheatley): “A gathering of G20 finance ministers in Bengaluru has ended in discord after Russia and China refused to endorse a statement condemning Moscow’s invasion of Ukraine and rejecting the use of nuclear weapons. The meeting broke up on Saturday without agreement on a joint communique… Instead India, which holds the G20 presidency, issued a ‘chair’s summary and outcome document’. It was backed by delegates from 17 of the group’s 20 members, which include the world’s largest advanced and developing economies; Russia and China did not endorse it. The document reiterated the position taken by G20 leaders at a summit last year…, when they deplored ‘in the strongest terms’ Russia’s war on Ukraine and demanded Russia’s ‘complete and unconditional’ withdrawal from Ukrainian territory.”

February 28 – Wall Street Journal (Chelsey Dulaney, Evan Gershkovich and Victoria Simanovskaya): “Russia’s economy, restricted from Western financial networks and the U.S. dollar, has embraced a burgeoning alternative: the Chinese yuan. Energy exporters are increasingly getting paid in yuan. Russia’s sovereign-wealth fund, a war chest to support government spending burdened by battlefield costs in Ukraine, is using the Chinese currency to store its oil riches. Russian companies have borrowed in… renminbi, and households are stashing savings in it. The Chinese currency’s rise inside Russia deepens ties between two countries that have long rivaled each other for global influence but have grown closer amid shared discontent with the West. It also serves China’s long standing but mostly frustrated campaign to make the yuan a more prominent feature of global finance and commerce.”

March 2 – Reuters (Alexandra Alper and David Shepardson): “The Biden administration… added 37 companies to a trade blacklist, including units of Chinese genetics company BGI and Chinese cloud computing firm Inspur, in a move that promises to further ratchet up tensions with Beijing. The Commerce Department… added BGI Research and BGI Tech Solutions (Hongkong), over allegations that the units pose a ‘significant risk’ to contributing to Chinese government surveillance.”

February 28 – Bloomberg (Nguyen Xuan Quynh and John Boudreau): “Apple Inc.’s Chinese suppliers are likely to move capacity out of the country far faster than many observers anticipate to pre-empt fallout from escalating Beijing-Washington tensions, according to one of the US company’s most important partners. AirPods maker GoerTek Inc. is one of the many manufacturers exploring locations beyond its native China… It’s investing an initial $280 million in a new Vietnam plant while considering an India expansion… US tech companies in particular have been pushing hard for manufacturers like GoerTek to explore alternative locations, said the executive…”

March 3 – Bloomberg (Tom Hancock): “China implied that the US is to blame for economic turmoil across developing countries, deepening a war of words over responsibility for debt pressures afflicting some of the world’s poorest nations. The ‘radical fiscal policy of a certain developed country is the main reason behind the financial difficulties of a large number of developing countries, including Pakistan,’ foreign ministry spokeswoman Mao Ning said…, without naming the US directly.”

Inflation Watch:

February 27 – Reuters (Howard Schneider): “Inflation for a broad array of services in the United States remains ‘stubbornly high,’ Federal Reserve Governor Philip Jefferson said…, though slower-growing wages might help slow prices in those parts of the economy as well. Though the Fed has seen some progress in slowing price increases for goods and expects the same to happen in housing, inflation continues for services ranging from restaurants to medical care… ‘The inflation outlook for this nonhousing category of core services partly depends on whether growth in nominal labor costs comes back down, and recent data suggest that labor compensation has indeed started to decelerate somewhat over the past year.’”

Biden Administration Watch:

March 2 – Bloomberg (Lydia Beyoud): “Gary Gensler is stepping up warnings to asset managers about their use of predictive data analytics and how they work with digital-asset firms. The head of the US Securities and Exchange Commission said… predictive data technologies may create ‘inherent conflicts’ of interest related to the duty that investment advisers have to their clients. Gensler said that he’d asked the agency’s staff to recommend how to address the issues. ‘When an adviser provides advice, in part through the use of predictive data analytics, do those algorithms optimize for the investor’s interests, and place the investor’s interests in front of the adviser’s own interests?’ he said…”

Federal Reserve Watch:

March 1 – Reuters (Melissa Bland): “Federal Reserve Chair Jerome Powell will testify on the U.S. central bank’s semiannual monetary policy report to the House Financial Services Committee on March 8 at 10 a.m. ET… Powell will testify at the Senate Banking Committee on the same topic on Tuesday.”

March 2 – Associated Press (Christopher Rugaber): “A run of strong economic data and signs that inflation remains stubbornly high could lead the Federal Reserve to raise its benchmark rate higher in the coming months than it has previously forecast, several Fed officials say. On Thursday, Christopher Waller, a member of the Fed’s influential Board of Governors, said that if the economy continued to show strength and inflation remained elevated, the central bank would have to lift its key rate above 5.4%… ‘Recent data suggest that consumer spending isn’t slowing that much, that the labor market continues to run unsustainably hot and that inflation is not coming down as fast as I had thought,’ Waller said… His suggestion was in contrast to a speech he gave in January…”

February 28 – Reuters (Siddarth S): “The U.S. Federal Reserve may hike interest rates to nearly 6%, BofA Global Research said, as strong U.S. consumer demand and a tight labor market would force the central bank to battle inflation for longer. The number is higher than a peak of 5.4% by September that traders are currently pricing in. ‘Aggregate demand needs to weaken significantly for inflation to return to the Fed’s target. Further supply-chain normalization and a slowdown in the labor market will help, but only to a degree,’ said BofA…”

U.S. Bubble Watch:

March 2 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits fell again last week, pointing to sustained labor market strength… Those worries were further heightened by another report… showing labor costs grew much faster than previously estimated in the fourth quarter. The labor market remains tight despite rising risks of a recession, contributing to keeping inflation elevated via solid wage gains… Initial claims for state unemployment benefits dropped 2,000 to a seasonally adjusted 190,000 for the week ended Feb. 25… It was the seventh straight week that claims remained below 200,000.”

March 3 – Reuters (Lucia Mutikani): “The U.S. services sector grew at a steady clip in February, with new orders and employment rising to more than one-year highs… The Institute for Supply Management (ISM) said… that its non-manufacturing PMI dipped to 55.1 from a reading of 55.2 in January… The ISM survey’s gauge of new orders received by services businesses increased to 62.6 last month, the highest level since November 2021, from 60.4 in January… A measure of prices paid by services industries for inputs fell to 65.6 from 67.8 in January… Hiring increased last month, with the survey’s measure of services industry employment rising to 54.0. That was the highest reading since December 2021 and was up from 50.0 in January.”

March 1 – Bloomberg (Reade Pickert): “A gauge of manufacturing improved for the first time in six months, though activity remained in contraction territory amid fragile demand and growing inflationary pressures. The Institute for Supply Management’s gauge of factory activity ticked up to 47.7 in February from the weakest print since May 2020… Fourteen industries reported contraction in February, led by the printing, paper and wood products industries. Four sectors expanded. ‘New order rates remain sluggish due to buyer and supplier disagreements regarding price levels and delivery lead times; the index increase suggests progress in February,’ Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee, said…”

February 27 – Reuters (Lucia Mutikani): “New orders for key U.S.-manufactured capital goods increased by the most in five months in January while shipments of those so-called core goods rebounded, suggesting that business spending on equipment picked up at the start of the first quarter. Some of the larger-than-expected rise in core capital goods orders reported… likely reflected higher prices last month. It joined solid consumer spending and robust labor market data in painting an upbeat picture of the economy.”

March 1 – Reuters (Lindsay Dunsmuir): “The average interest rate on the most popular U.S. home loan remained last week at its highest level since November… The average contract rate on a 30-year fixed-rate mortgage increased by 9 bps to 6.71% for the week ended Feb. 24, data from the Mortgage Bankers Association (MBA) showed…”

March 1 – CNBC (Diana Olick): “Mortgage rates moved higher again last week, pushing buyers back to the sidelines just as the spring housing market is supposed to be heating up. Mortgage applications to purchase a home dropped 6% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was 44% lower than the same week one year ago, and is now sitting at a 28-year low.”

March 2 – Bloomberg (Prashant Gopal): “US home prices hit a turning point last month, dropping from a year ago for the first time since 2012, according to Redfin Corp. In the four weeks through Feb. 26, the median price for a typical home was $350,246, down 0.6% from the same period a year earlier…”

February 28 – CNBC (Diana Olick): “Higher mortgage rates weighed on home price gains at the end of 2022. While prices were still higher than they were a year earlier, the rate of increase slowed quickly… Home prices in December were 5.8% higher than the previous December, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. That is down from a 7.6% annual gain in November. Prices are now 4.4% below their June peak. For all of 2022, the 5.8% price gain was the 15th best performance in the index’s 35-year history, but was well below 2021′s record-setting 18.9% gain… Cities still seeing the biggest price gains were Miami, Tampa, Florida, and Atlanta – up 15.9%, 13.9% and 10.4%, respectively.”

March 1 – Wall Street Journal (Jon Hilsenrath and Bryan Mena): “Demand for U.S. workers shows signs of slowing, a long-anticipated development that is appearing in private-sector job postings even while government reports indicate the labor market is running hot. Figures from ZipRecruiter Inc. and Recruit Holdings Co., two large online recruiting companies, show the number of job postings on their sites declined more late last year than the Labor Department report on job openings for that period indicated. The companies report available jobs fell further this year, potentially foretelling a decrease in openings in coming Labor Department reports, and a slowdown in hiring this year.”

March 1 – Bloomberg (Paige Smith and Michael Sasso): “The build-up in negative equity — or the amount that debt exceeds a vehicle’s value — is rattling consumers and raising alarms within the industry. Though it’s not unusual for drivers to carry negative equity, some dealers say more people are arriving at their lots up to $10,000 underwater, or ‘upside down,’ on their trade-ins. They’re buying at still-sky-high prices and rolling debt from one car to another and even onto a third. Loans are commonly stretching to seven years.”

February 25 – Wall Street Journal (Gina Heeb and AnnaMaria Andriotis): “American millennials in their 30s have racked up debt at a historic clip since the pandemic. Their total balances hit more than $3.8 trillion in the fourth quarter, according to the Federal Reserve Bank of New York, a 27% jump from late 2019. That is the steepest increase of any age group. It is also their fastest pace of debt accumulation over a three-year period since the 2008 financial crisis.”

March 1 – Bloomberg (Lu Wang): “In telling their stories about how the future is bright for stocks, bulls point to solid earnings to justify the optimism. But cracks are forming in that narrative — in the trajectory of profits, and just as worryingly in the makeup of the profits themselves. In a potentially ominous development, earnings across US industries have started to expand noticeably faster than cash is coming in the door. Income at S&P 500 companies, adjusted for amortization and depreciation, topped cash flows from operations by 14% in the year through September, according to… UBS Group AG that excludes the index’s financial and energy firms. In other words, for every dollar of profits, only 88 cents was matched by cash inflows, the largest discrepancy since at least 1990.”

Fixed Income Watch:

March 2 – Bloomberg (Ronan Martin): “Companies have been selling bonds at a near record pace in Europe this year and there’s no sign of that slowing anytime soon… March is normally one of the busiest months on the sales calendar as companies finish their earnings reports and seek to load up on fresh funds. With interest rates heading higher, borrowers… all dived into the market in recent weeks, pushing issuance from non-financials up more than 60% on last year to €77.5 billion ($82bn).”

February 27 – Bloomberg (Lisa Lee): “For the titans of private credit, it’s a once-in-a-generation opportunity. Wall Street’s vaunted leveraged finance desks are reeling. Billions of dollars in losses on mistimed loans have forced them to dramatically scale back lending, leaving the private equity firms that rely on them to help fund acquisitions in a bind. Enter the likes of Apollo Global Management Inc., Blackstone Inc., HPS Investment Partners and Ares Management Corp. Direct lenders, already among the largest players in leveraged buyout financing, see an extraordinary opening to grab market share — and hang onto it for the long haul.”

China Watch:

March 1 – Reuters (Joe Cash): “Plans by China’s Communist Party to revive a high-level economic watchdog after two decades signal President Xi Jinping push to increase oversight of the financial sector, analysts say, part of a wider tightening of control by Xi and the party. Xi… is planning to resurrect the Central Financial Work Commission (CFWC), which will be directly under central party leadership… The CFWC was introduced in 1998 during the tenure of Jiang Zemin, building a role for the party within the central bank and financial regulators but without influencing their business, state media reported at the time. It was disbanded in 2003.”

March 1 – Financial Times (Joe Leahy and Sun Yu in Beijing and Cheng Leng and Andy Lin): “Xi Jinping, China’s most powerful leader since Mao Zedong, is preparing to use the upcoming rubber-stamp parliamentary session to launch a ‘forceful’ overhaul of the government by appointing his most trusted acolytes to oversee the financial, technology and other sectors. The annual National People’s Congress, which kicks off on Sunday, will replace Premier Li Keqiang, the head of government, and his team of technocrats that has been credited with steering the economy through the turmoil of the past five years… Xi pledged… that the party was planning ‘far-reaching’ changes, which aside from financial sector reform would include exerting closer control over the technology and science sectors and — perhaps most ominously for business — increased party involvement in ‘non-public enterprises’.”

March 1 – Bloomberg: “China’s economy is showing signs of a stronger rebound after Covid restrictions were abandoned… The manufacturing purchasing managers’ index rose to 52.6 last month…, the highest reading since April 2012. A non-manufacturing gauge measuring activity in both the services and construction sectors improved to 56.3. Both indexes beat economists’ expectations.”

March 2 – Reuters (Ellen Zhang and Ryan Woo): “Activity in China’s services sector expanded at the fastest pace in six months in February as the removal of tough COVID-19 restrictions revived customer demand, driving a solid increase in employment… The Caixin/S&P Global services purchasing managers’ index (PMI) rose to 55.0 in February from 52.9 in January, a back-to-back monthly increase in activity after the government abruptly dismantled anti-virus measures in December.”

February 28 – Bloomberg (Fahad Abuljadayel and Paul Wallace): “The world’s biggest chemicals maker said profit margins would remain tight with the Chinese market yet to recover and the global economic downturn weakening demand for plastics and building materials. Saudi Basic Industries Corp.’s net income dropped to 290 million riyals ($78 million) in the fourth quarter, down 94% year-on-year… The ending of Covid lockdowns in China hasn’t led to a rapid rebound in consumption in the world’s second-largest economy, according to Abdulrahman Al-Fageeh, Sabic’s acting chief executive officer. ‘Things in China are still roughly the same as they were in 2021,’ he said to reporters. “So far we have not seen the high demand that was expected.”

February 27 – Bloomberg (Alice Huang and Jackie Cai): “China Evergrande Group, the developer at the epicenter of the country’s real estate crisis, has yet to reach an agreement with major creditors on a debt restructuring framework crucial to avoiding potential court-ordered asset liquidation, people familiar with the matter said… Evergrande’s debt restructuring is one of China’s largest ever and carries broader implications for the country’s nearly $60 trillion financial system.”

February 28 – Wall Street Journal (Cao Li): “New home sales at China’s largest property developers rose on a yearly basis in February after a long downturn… Monthly sales at the country’s top 100 real-estate developers increased 14.9% from February 2022 to the equivalent of $66.5 billion, according to… China Real Estate Information Corp., which tracks the industry. It was the first time that this measure of sales grew annually since the sector began slumping in July 2021, when property giant China Evergrande Group began to struggle with liquidity problems.”

February 27 – Bloomberg: “China’s lithium industry is reeling as its top production hub — responsible for around a 10th of the world’s supply — faces sweeping closures amid a government probe of environmental infringements. The crackdown in Yichun, Jiangxi province, follows a local lithium frenzy over the past year as miners raced to feed rampant demand for the battery material — and to benefit from record global prices. Now, they’re grappling with a close-up inspection by environment officials sent from Beijing.”

February 26 – Bloomberg: “China Renaissance Holdings Ltd. said Chairman Bao Fan is cooperating in an unspecified investigation by Chinese authorities, offering the first public information about the banker’s whereabouts since he disappeared just over a week ago.”

Central Banker Watch:

March 2 – Bloomberg (Alonso Soto): “European Central Bank President Christine Lagarde said interest-rate increases may need to persist beyond a planned half-point move in two weeks’ time. ‘At this point in time, it’s possible that we continue on that path,’ Lagarde told Spanish television… “By which amount in each and every meeting is impossible to say at this point.’”

March 1 – Financial Times (Martin Arnold and Guy Chazan): “The Bundesbank has suffered a €1bn hit from its substantial bond holdings and warned future losses would wipe out its remaining financial buffers as the German central bank grapples with the impact of higher interest rates. Joachim Nagel, Bundesbank president, told a press conference… that the damage was ‘ultimately the result of the extraordinarily expansive monetary policy of the past few years’. The Bundesbank has bought €1tn of mostly German government debt since 2015 as part of the European Central Bank’s bond-buying programmes, which Nagel’s predecessor Jens Weidmann repeatedly voted against.”

February 27 – Reuters (Marc Jones): “Central banks need to ‘get the job done’ when it comes to getting inflation back under control, the Bank for International Settlements has said, urging them to avoid the mistakes of the 1970’s by declaring victory too early. The BIS… said it was vital authorities didn’t repeat the stop-start cycles of the 1970s when interest rates had to be hiked to painfully high levels after attempts to lower them resulted in an inflation surge. ‘Central banks have been very, very clear that at this stage the most important aspect is to get the job done,’ the head of the BIS’ Monetary and Economic Department, Claudio Borio, said… ‘A cautious attitude designed to make sure that one is not declaring victory too early is the appropriate one’.”

March 2 – Reuters (Leika Kihara): “Former Bank of Japan (BOJ) Governor Masaaki Shirakawa called on policymakers to reconsider central banks’ monetary framework based on inflation targets, given their limits that became apparent from the recent spike in prices seen in many countries. Before the recent spike in inflation, many central banks in advanced economies were ‘overwhelmingly’ concerned about low inflation, and failed to restrain rapid price gains by judging them as transitory, Shirakawa said…”

Europe Watch:

March 1 – Bloomberg (Alexander Weber): “German inflation surprisingly accelerated in February, further complicating the European Central Bank’s task after overshoots this week in other parts of the continent. Consumer prices advanced 9.3% from a year ago, up from January’s 9.2% gain, driven by services and food costs. The move came even as Germany moved to limit household heating bills that rocketed because of Russia’s war in Ukraine… The reading for Europe’s biggest economy puts more pressure on the ECB after French inflation hit a euro-era record and Spanish price growth defied estimates to moderate.”

February 28 – Financial Times (Martin Arnold): “Inflation rebounded in France and Spain in February, sending European governments’ borrowing costs up as doubts increased over how quickly the European Central Bank will stop raising interest rates. French consumer prices rose 7.2% in the year to February, driven to the highest rate since the euro was launched in 1999 by faster increases in food and services prices. Economists… had expected French inflation to stagnate at January’s 7% level. Spanish consumer price growth in February accelerated to 6.1%, up from 5.9% in January and above… expectations for a fall to 5.5%, despite the government cutting food taxes in January.”

March 2 – Financial Times (Martin Arnold and Chris Giles): “Eurozone inflation fell less than forecast in February, the latest region to prompt expectations of further interest rate rises because of persistently rising prices. Consumer price growth dipped only slightly to 8.5% in the year to February, from 8.6% in January, the EU statistics agency said on Thursday, compared with a forecast of 8.2%. While energy price inflation slowed, price rises for services, goods and food all gained pace.

March 1 – Financial Times (Amy Kazmin and Martin Arnold): “Italy’s fiscal deficits for the past three years have widened sharply, after changes to the methods, and timing, of accounts for a generous ‘Superbonus’ tax credit scheme that revitalised the construction industry in the depths of the coronavirus pandemic. Istat, the official statistical agency… raised its 2020 fiscal deficit calculation to 9.7% of gross domestic product, up from 9.5%. It increased the 2021 fiscal deficit to 9% of GDP, up from 7.2%. The agency also said the fiscal deficit for 2022 had risen to 8% of GDP, well up from previous projections of around 5.5%.”

February 27 – Reuters (Elizabeth Piper and Sachin Ravikumar): “British Prime Minister Rishi Sunak struck a deal with the European Union on post-Brexit trade rules for Northern Ireland on Monday, saying it would pave the way for a new chapter in London’s relationship with the bloc. Standing alongside European Commission President Ursula von der Leyen…, Sunak said the two sides had agreed to remove ‘any sense of a border’ between Britain and its province – a situation that had angered politicians on both sides… The agreement marks a high-risk strategy for Sunak just four months after he took office. He is looking to secure improved relations with Brussels – and the United States – without angering the wing of his party most wedded to Brexit.”

February 27 – Reuters (Indradip Ghosh): “Home prices in Germany will fall more sharply this year and next than previously thought as higher interest rates dampen demand, according to analysts… Twin pressures from a high inflation-induced cost of living crisis alongside fast-rising interest rates have forced many Germans to forgo dreams of owning a home and instead continue in rented accommodation. Average home prices in Germany… are forecast to decline 5.8% this year and 2.5% next year, according to the Feb. 16-27 poll of 12 property experts.”

March 1 – Reuters (William Schomberg): “British house prices last month dropped by the most in more than 10 years, mortgage lender Nationwide said…, adding to signs of a slowdown in the housing market in the face of high inflation and rising borrowing costs. The 1.1% fall was the biggest year-on-year drop since November 2012…”

Japan Watch:

February 27 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Incoming Bank of Japan (BOJ) Governor Kazuo Ueda said… he had ideas on how the central bank could exit its massive stimulus, but a shift to tighter policy would only come when the country’s trend inflation heightens significantly. The central bank will reduce its bond buying and likely head toward policy normalisation when sustained achievement of its 2% inflation target comes into sight, Ueda said. With trend inflation short of the BOJ’s target, however, the central bank must maintain current ultra-easy policy for now, he added. ‘Big improvements must be made in Japan’s trend inflation for the BOJ to shift towards monetary tightening,’ Ueda said. ‘It’s not that I have no ideas on how to tweak the BOJ’s current policy. But the desirable tweak will vary depending on economic changes at the time,’ Ueda said…”

February 27 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Incoming Bank of Japan (BOJ) Deputy Governor Shinichi Uchida… brushed aside the chance of an immediate overhaul of ultra-loose monetary policy, suggesting that any review of its policy framework could take about a year. Uchida, a career central banker, said the BOJ should not modify its ultra-easy policy just to address the side-effects of prolonged stimulus such as market distortions caused by the bank’s heavy intervention to defend its yield cap.”

March 2 – Reuters (Eimi Yamamitsu): “Japan’s services sector activity grew at the fastest pace in eight months in February…, as the economic impact of the coronavirus pandemic receded globally. The final au Jibun Bank Japan Services purchasing managers’ index (PMI) rose in February to a seasonally adjusted 54.0 from January’s 52.3.”

March 1 – Reuters (Kantaro Komiya): “Japan’s factory activity shrank in February at the fastest pace in over two years, a private survey showed, highlighting companies’ struggles amid a global economic slowdown, raw material inflation and policymakers’ calls for higher wages. The final au Jibun Bank Japan Manufacturing Purchasing Managers’ Index… fell to 47.7 in February from January’s 48.9. Although higher than the flash reading, it marked the fastest decline since September 2020.”

Global Bubble Watch:

February 28 – Financial Times (Delphine Strauss): “More than 340,000 Americans will see an increase in their monthly pay cheque tomorrow after Walmart… raised its minimum hourly wage to $14. The retailer’s move will in effect set a new floor for pay in many US states. On the other side of the Atlantic, as many as half a million UK public sector workers have taken industrial action over pay and Germany’s public sector unions are also calling strikes. In Hungary and Poland, wage growth has reached double digits. Even in Japan… big employers are weighing a shake-up of seniority-based salary structures that could finally put money in workers’ pockets. Whether the world’s workers can press home their demands for better pay is the single biggest question facing central bankers around the world this year… ‘Even after energy and pandemic factors fade . . . wage inflation will be a primary driver of price inflation over the next several years,’ Philip Lane, chief economist at the European Central Bank, warned in November.”

EM Crisis Watch:

February 24 – Bloomberg (Ruchi Bhatia and Yoshiaki Nohara): “Disagreements hobbled prospects for progress on crucial debt restructuring talks held on the sidelines of the G-20 finance chiefs meeting, highlighting the risks to poorer nations that are under severe financial stress. ‘While there are still some disagreements, we now have the global sovereign debt roundtable with consideration of all public and private creditors,’ International Monetary Fund Managing Director, Kristalina Georgieva said… Even though there was a commitment to find common ground for the benefit of the affected countries, there were little signs of any tangible progress.”

March 2 – Bloomberg (Ronojoy Mazumdar and Karl Lester M. Yap): “Bondholders are bracing for a potential default by Pakistan as the beleaguered nation struggles to meet billions of dollars in debt repayments by June. The nation’s dollar bonds due next year slid to the lowest since November on Thursday as investors weighed its ability to honor $7 billion of repayments in the coming months, including a Chinese loan of $2 billion due in March… The rupee slumped 6.7% to 285.09 per dollar at close…”

February 28 – Bloomberg (Vinicius Andrade): “Brazilian corporate bonds got hammered in February after the implosion of Americanas SA, further weakening the outlook for firms already wrestling with high borrowing costs. Six of the 10 worst-performing issuers in Latin America this month are Brazilian companies… The pile of Brazil corporate debt trading at distressed levels — which yield an average of at least 10 percentage points more than US Treasuries — climbed to $11.9 billion…”

March 2 – Reuters (Jorgelina Do Rosario): “Countries in debt distress such as Zambia and Sri Lanka turning to the International Monetary Fund (IMF) for financial help are facing unprecedented delays to secure bailouts as China and Western economies clash over how to provide debt relief. IMF funding is often the sole financial lifeline available to countries in a debt crunch, and key to unlocking other financing sources, with delays putting pressure on government finances, companies and populations.”

Social, Political, Environmental, Cybersecurity Instability Watch:

March 2 – Bloomberg (William Mathis): “Global CO2 emissions rose to a record last year as the combustion of fossil fuels continued to put the world on track for a dangerous level of global warming. Data from the International Energy Agency show the biggest increase came from Asia’s emerging markets, in large part due to coal-fired power. Yet a decline in industrial production in China and Europe meant an even worse outcome was avoided.”

Leveraged Speculation Watch:

February 28 – Bloomberg (Charlotte Yang): “A selling spree of Chinese ADRs by US-based hedge funds intensified this month amid tightening financial conditions, according to Morgan Stanley… Investor sentiment toward Chinese shares has cooled in February after a sizzling three-month rally triggered by the country’s reopening. The NASDAQ Golden Dragon China Index, which measures Chinese stocks traded in the US, has fallen 15% this month after gaining over 80% since October.”

Geopolitical Watch:

February 28 – Reuters (Ben Blanchard and Yimou Lee): “Taiwan’s defence ministry said… it had spotted 19 Chinese air force planes in its air defence zone in the past 24 hours, part of what Taipei calls regular harassment by Beijing. Taiwan… has complained for the past three years or so of stepped up Chinese military activities near the island as Beijing seeks to assert its sovereignty claims. China has said its activities in the area are justified as it seeks to defend its territorial integrity and to warn the United States against ‘colluding’ with Taiwan, despite the anger this causes in Taipei.”

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