MARKET NEWS / CREDIT BUBBLE WEEKLY

May 10, 2024: Citadel Securities vs. Jane Street

MARKET NEWS / CREDIT BUBBLE WEEKLY
May 10, 2024: Citadel Securities vs. Jane Street
Doug Noland Posted on May 11, 2024

A week after Chair Powell encouraged the markets to keep running, run they did. The KBW Bank Index jumped 2.7% this week, the DJIA 2.2%, the S&P400 Midcaps 2.2%, the Semiconductors 1.9%, and the S&P500 1.9%. The Fed apparently has no issues with a conspicuous equities speculative Bubble. No problem with a highly levered “basis trade”, bubbling “private Credit”, and leveraged speculation more generally.

The VIX (equities volatility) Index ended the week at 12.55, the lowest close since January 23rd. The MOVE (bond volatility) Index traded Thursday (93.85) to the low since March. Investment-grade spreads to Treasuries traded Monday at 85 bps, the low since November 2021.

Financial conditions work with a lag. And it appears that the loose conditions transmitted from the U.S. to the world are increasingly showing up in economic data. “UK Recession Ends With Strongest Growth Since Lockdown’s End”; “Canada Added 90,000 Jobs in April, Most in 15 Months”; “Euro Zone Business Activity Grows at Fastest Pace in Almost a Year”; “Japan’s Service Activity Grows at Record Pace in April – PMI”.

Germany’s DAX equities index surged 4.3% this week (up 12.1% y-t-d), France’s CAC40 3.3% (9.0%), Italy’s MIB 3.1% (14.2%), Spain’s IBEX 2.3% (9.9%), and UK’s FTSE100 2.7% (9.1%). The Hang Seng China Financials Index jumped 6.2% (18.2%).

Gold jumped $59, or 2.6%, this week to $2,361. Silver surged 6.1%, while Platinum rose 4.4%. Palladium gained 3.8%. Copper rose 2.3%, closing Friday at a two-year high. “US Sees Tighter World Grain Supplies, Sending Prices Higher.” Wheat extended its blistering rally (up 6.6%), trading this week to a 2024 high (corn to early-January high).

Markets expect modest improvement in year-over-year inflation readings in next Wednesday’s April CPI report. Preliminary May results from the University of Michigan Consumer Confidence survey were not encouraging. Consumer Confidence dropped to a six-month low, as one-year inflation expectations rose two tenths to a six-month high of 3.5%. Expectations were at 2.9% in March.

The bond market has been performing better than I would have expected, considering the fundamental backdrop (double threat of incessant inflation and unending supply). Ten-year Treasury yields were little changed on the week. The market closed Friday pricing a 4.92% Fed funds rate for the FOMC’s December 18th meeting. This implies 41 bps of rate reduction by year end, up five bps for the week. Perhaps the negative fundamental backdrop for bonds is today superseded by speculative dynamics.

May 10 – Reuters (Jamie McGeever): “Leverage in the U.S. Treasury market is picking up again, counterintuitively feeding off a ‘higher-for-longer’ interest rate environment and building up potential trouble in the event of a price or rate shock. After gradually but steadily scaling back exposure earlier this year, asset managers and leveraged funds are now rebuilding their respective long and short positions… at a rapid clip. There is a lot of anxiety swirling around the U.S. bond market just now…, with inflation proving sticky, and the prospect of huge deficits for years to come… But the longer interest rates are kept on hold, the more attractive it is for futures market participants – asset managers are drawn in by higher yields, and higher yields make the ‘basis trade’ more appealing… Asset managers’ aggregate long position, spear-headed by mutual fund buying, has rocketed to a new record and leveraged funds’ short position is also expanding… Data for the week to April 30 show that asset managers’ aggregate long position in two-, five- and 10-year Treasury futures rose to 8.15 million contracts, worth a record $1.045 trillion. That’s up 12% on last year’s high.”

While on the subject of “basis trade” leverage…

Interviewed by Erik Schatzker at the Bloomberg Sell Side Forum, Citadel Securities CEO Peng Zhao said the firm’s booming trading business was at a “record pace.” “We had a very strong first quarter, and year-to-date we are running at a record pace.” That’s saying something for a hedge fund operation that returned $7 billion of profits to its partners last year.

Operating as the “largest liquidity provider in the Treasury market,” Citadel has been a dominant player in the highly levered Treasury “basis trade.” According to Zhao, the firm has recently expanded its powerful trading operations to investment-grade corporate debt. As such, we should now include leverage in corporate bond-land to already massive Treasury, MBS and Agency levered holdings. Leverage was likely integral in financing Q1’s record $530 billion of investment-grade bond issuance – while fueling a booming corporate debt marketplace and liquidity abundance more generally. It’s worth noting that Citadel’s main hedge fund returned 5.75% during the first quarter.

Citadel Securities has some competition. While in business now for a couple decades, Jane Street really came into its own with the Fed’s massive Q1 2020 pandemic market liquidity bailout.

From the FT’s Eric Platt: “Jane Street’s quarterly trading revenues have surged to their highest level since the start of the pandemic, as the secretive high-speed firm flourished alongside traditional Wall Street market makers. The group expects its first quarter net trading revenue will be roughly $4.4bn, more than double the level it achieved a year prior and up 35% from the end of 2023… The blockbuster figures underscore how Jane Street has quietly emerged as a trading powerhouse of global financial markets, out-earning a number of big rivals and banks.”

Jane Street is known to be a stealthy organization and must have abhorred all the attention when a couple former employees (Sam Bankman-Fried and Caroline Ellison) found themselves very publicly on the wrong side of a financial implosion – and the law. A recent debt prospectus shed a little light.

A few highlights from Robin Wigglesworth’s April 29th FT Article, “Jane Street is Big. Like, Really, Really Big.”

“Jane Street estimates that, thanks to its strong growth in equities wholesaling, it accounted for 10.4% of all North American equity trading in 2023, up from 7.6% in 2022. In other words, it is catching up on Citadel Securities, which reckons that it accounts for 23% of US equity market volume.”

“Globally, Jane Street thinks that it now accounts for over 2% of all trading in over 20 countries, and last year Jane Street also traded options with a notional value of $32tn, about 7.6% of all volume in Options Clearing Corporation contracts.”

“However, the firm’s prowess is particularly strong in ETF market-making. Last year Jane Street’s monthly ETF trading volumes averaged $527bn, or about 14% of US ETF trading volumes and 20% of European ETF volumes. Across the year that clocks in at $6.3tn. For context, that’s about five times the London Stock Exchange’s entire trading volumes in 2023.”

“It is even more important as an ‘authorised participant’ — specialised market-makers that enable the creation and redemption of ETF shares — accounting for 24% of all primary market activity in US-listed ETFs, 28% in international equity ETFs and 12% in US equity ETFs.”

“Gross revenues came at a record $21.9bn in 2023, up 34% from 2022. That’s equivalent to 1/7th of the combined equity, bond, currency and commodity trading revenues of all the major global investment banks last year.”

Occasionally, there’s an article that has me mumbling to myself: “Wow.” I would love to take a deep dive into Jane Street’s balance sheet. Total assets surged 34% last year to $140.2 billion. I’ll assume most of its levered assets are financed through the repo market.

Would love to see Citadel Securities’ balance sheet for that matter. It’s crazy to think that Citadel (23%) and Jane Street (10.4%) combine for a third of “U.S. equity volume.” Perhaps the bigger – and more systemically important – story is unfolding in fixed income. Citadel appears in a mad scramble to challenge Jane Street.

The most eye-opening sentences in the FT’s “Really Big” article: “Jane Street is particularly dominant in fixed income ETFs, accounting for 41% of all primary market activity according to its bond prospectus. The trading firm has used this as a bridgehead to break into corporate bond trading territory long dominated by banks.”

Not much concern of late for Treasury market liquidity, at least not so long as the “basis trade” Bubble continues to inflate. And no fretting an ETF liquidity accident, especially with Citadel Securities and Jane Street battling head-to-head for fixed income ETF market-making dominance.

I’ve for years warned of mounting liquidity risks, specifically in Treasuries and the ETF complex. Both benefit momentously from the moneyness attribute of perceived liquidity and safety. And especially after the Fed’s unprecedented March 2020 market liquidity bailout, faith in Treasury and ETF liquidity and market function has never been stronger.

Moral hazard is today a greater issue than ever. The likes of Citadel and Jane Street have become too big to fail – and they operate as such. And to see them (and their use of leverage) expand so aggressively corroborates the “Terminal Phase” excess and speculative “melt-up” theses.

For Fed officials to stick with “sufficiently restrictive” is bunk. The KBW Bank Index (BKX) has returned 11.9% y-t-d. A look at first quarter asset growth doesn’t square with “restrictive.” JPMorgan Total Assets ballooned $215 billion, or 22% annualized, during Q1 to $4.091 TN. Bank of America Total Assets grew $93.7 TN, or 12% annualized, to $3.274 TN. Goldman Sachs Total Assets expanded $56.8 billion, or 14% annualized, to $1.698 TN.

Perhaps the more notable growth is with the powerful non-banks, which seem to follow the trajectory of Citadel Securities and Jane Street. KKR Total Assets expanded $22.5 billion, or 28% annualized, during Q1 to $340 billion. Apollo grew $20.6 billion, or 26% annualized, to $334 billion. Intermediating “subprime” corporate debt into annuities with enticing yields is quite the booming (“private Credit”) business.

It was a fitting Friday FT headline (Brooke Masters, Harriet Agnew, Jennifer Hughes, Eric Platt, Antoine Gara and Stephen Morris): “‘There’s Money Everywhere’: Milken Conference-Goers Look for a Dealmaking Revival”: “The Hilton and other nearby hotels were heaving, with elevators packed to the gills and every table and chair claimed for rounds of speed dating with potential financial partners. But the big business was done behind closed doors in hotel suites and in the homes of local tycoons. ‘It’s like going to Las Vegas,’ the co-founder of one alternative asset manager said. ‘There’s money everywhere. Everyone is looking around, seeing who else can I talk to.’ The conference was the largest it has been since the return to in-person events after the pandemic.”

I’ve studied enough market history – including the fateful “Roaring Twenties” period – to be uncomfortable with much of what I observe these days.

For the Week:

The S&P500 gained 1.9% (up 9.5% y-t-d), and the Dow rose 2.2% (up 4.8%). The Utilities jumped another 3.8% (up 13.1%). The Banks advanced 2.7% (up 10.4%), and the Broker/Dealers added 1.1% (up 11.0%). The Transports gained 1.6% (down 1.9%). The S&P 400 Midcaps jumped 2.2% (up 7.6%), and the small cap Russell 2000 increased 1.2% (up 1.6%). The Nasdaq100 gained 1.5% (up 7.9%). The Semiconductors rallied 1.9% (up 15.1%). The Biotechs increased 0.6% (down 5.4%). With bullion jumping $59, the HUI gold index surged 4.9% (up 12.4%).

Three-month Treasury bill rates ended the week at 5.24%. Two-year government yields rose five bps this week to 4.87% (up 62bps y-t-d). Five-year T-note yields added a basis point to 4.51% (up 67bps). Ten-year Treasury yields slipped a basis point to 4.50% (up 62bps). Long bond yields declined three bps to 4.64% (up 61bps). Benchmark Fannie Mae MBS yields were unchanged at 5.93% (up 66bps).

Italian yields gained five bps to 3.86% (up 16bps y-t-d). Greek 10-year yields rose seven bps to 3.54% (up 49bps). Spain’s 10-year yields increased five bps to 3.31% (up 32bps). German bund yields added two bps to 2.52% (up 49bps). French yields gained three bps to 3.00% (up 44bps). The French to German 10-year bond spread widened one to 48 bps. U.K. 10-year gilt yields fell six bps to 4.17% (up 63bps). U.K.’s FTSE equities index surged 2.7% (up 9.1% y-t-d).

Japan’s Nikkei Equities Index was little changed (up 14.2% y-t-d). Japanese 10-year “JGB” yields added one basis point to 0.91% (up 30bps y-t-d). France’s CAC40 jumped 3.3% (up 9.0%). The German DAX equities index surged 4.3% (up 12.1%). Spain’s IBEX 35 equities index gained 2.3% (up 9.9%). Italy’s FTSE MIB index jumped 3.1% (up 14.2%). EM equities were mixed. Brazil’s Bovespa index declined 0.7% (down 4.9%), while Mexico’s Bolsa index gained 1.0% (up 0.6%). South Korea’s Kospi index rose 1.9% (up 2.7%). India’s Sensex equities index fell 1.6% (up 0.6%). China’s Shanghai Exchange Index advanced 1.6% (up 6.0%). Turkey’s Borsa Istanbul National 100 index dipped 0.6% (up 36.8%). Russia’s MICEX equities index added 0.2% (up 11.3%).

Federal Reserve Credit declined $25.2bn last week to $7.318 TN. Fed Credit was down $1.571 TN from the June 22nd, 2022, peak. Over the past 243 weeks, Fed Credit expanded $3.592 TN, or 96%. Fed Credit inflated $4.507 TN, or 160%, over the past 600 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $1.2bn last week to $3.356 TN. “Custody holdings” were down $25.6 billion y-o-y, or 0.8%.

Total money market fund assets jumped $31.1bn to $6.032 TN. Money funds were up $723 billion, or 13.6%, y-o-y.

Total Commercial Paper added $8.4bn to $1.329 TN. CP was up $183bn, or 15.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates dropped 13 bps to 7.09% (up 66bps y-o-y). Fifteen-year rates fell nine bps to 6.38% (up 63bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down five bps to 7.42% (up 55bps).

Currency Watch:

For the week, the U.S. Dollar Index increased 0.3% to 105.301 (up 3.9% y-t-d). For the week on the upside, the Mexican peso increased 1.2%, the South African rand 0.4%, the Norwegian krone 0.3%, the New Zealand dollar 0.2%, the Canadian dollar 0.1% and the euro 0.1%. On the downside, the Japanese yen declined 1.8%, the Brazilian real 1.7%, the South Korean won 0.4%, the Singapore dollar 0.4%, the Swedish krona 0.2%, the British pound 0.2%, the Swiss franc 0.1% and the Australian dollar 0.1%. The Chinese (onshore) renminbi increased 0.20% versus the dollar (down 1.76% y-t-d).

Commodities Watch:

May 7 – Bloomberg (Sybilla Gross and Jack Ryan): “China’s central bank topped up its gold reserves for an 18th straight month in April… The People’s Bank of China has long been one of the market’s largest buyers, steadily growing its bullion holdings since 2022. However, the precious metal’s record-breaking rally since mid-February… seems to have dented demand. In April, the PBOC bought 60,000 troy ounces, according to official data released Tuesday. That’s down from 160,000 ounces in March, and 390,000 ounces in February.”

May 7 – Bloomberg (Sybilla Gross): “Gold-buying by emerging-market central banks has room to run much further, aiding prices, according to Goldman Sachs…, which reiterated a forecast for bullion to hit $2,700/oz by year-end. Central-bank purchases have tripled since Russia’s invasion of Ukraine in 2022 to about 10 mln oz/quarter, with most unreported, analysts… said in a May 2 note. ‘Despite the significant increase, EM official gold holdings likely have further room to grow as their 6% average share of official reserves remains about 50% lower’ than the 12% in developed markets, they said…”

May 7 – CNBC (Lee Ying Shan): “Aside from ramen and sausages, South Korea’s convenience stores have a new popular item on the menu — gold bars. The country’s largest convenience store chain, CU, has been collaborating with the Korea Minting and Security Printing Corporation (KOMSCO) to offer customers mini gold bars — and they’re selling like hot cakes. A variety of finger-nail sized gold bars weighing between 0.1 gram and 1.87 gram have been up for sale at CU outlets since April. A 1.87 gram bar sells for 225,000 won ($165.76) and a 0.5 gram bar sells for 77,000 won. Priced at 113,000 won each, 1 gram bars were sold out within two days…”

May 7 – Wall Street Journal (Christian Moess Laursen): “A booming solar-power industry is driving a surge in the demand for silver, which is needed in large quantities to make photovoltaic panels. Silver is integral to the production of solar photovoltaic—or solar PV—panels because of its high electrical conductivity, thermal efficiency and optical reflectivity, and mining companies are aiming to boost output as prices for the precious metal have climbed to decade highs. Global investment in solar PV manufacturing more than doubled last year to around $80 billion… China more than doubled its investment in solar photovoltaic manufacturing between 2022 and 2023.”

May 8 – Reuters (Brijesh Patel): “The platinum market faces its largest supply shortfall in 10 years in 2024 as shipments from Russia return to normal from last year’s highs and industrial demand stays firm, Johnson Matthey… said in a report… The autocatalyst maker added that it expected all platinum group metals (PGM) – platinum, palladium, and rhodium – to remain in deficit in 2024. The three metals are used in autocatalysts that reduce emissions from vehicle engines, with platinum also used in other industry and for jewellery and investment. Johnson Matthey (JM) said it expected the platinum market’s deficit to increase to 598,000 ounces this year from a shortfall of 518,000 ounces in 2023.”

May 7 – Bloomberg: “Copper briefly traded through $10,000 a ton as investors raised bets on Federal Reserve rate cuts, and Goldman Sachs… warned of intensifying supply stress. Metals joined a wider rally in risk assets after soft US jobs data triggered renewed speculation that the Fed will move to lower rates this year… The prospect of Fed easing is adding to tailwinds for copper as bulls predict further gains, with the world’s mines struggling to match growing demand.”

May 9 – Bloomberg (Celia Bergin, Keira Wright and Nayla Razzouk): “Bad weather and war are threatening to keep the world’s wheat supplies under strain and reviving the specter of rising food costs. From soggy fields in western Europe to parched soil in Australia and Moscow’s invasion holding back Ukrainian supplies, farmers face setbacks. That means global stockpiles will remain the smallest in almost a decade, according to analysts surveyed ahead of the US government’s first forecast for next season.”

May 5 – Bloomberg (Megan Durisin): “Robusta coffee prices have climbed to the highest in 45 years, according to the International Coffee Organization, as a supply crunch intensifies for the variety used in espresso blends and instant drinks. The ICO’s gauge of wholesale prices rose 17% during April to the strongest since 1979…”

May 8 – Bloomberg (Ilena Peng and Dayanne Sousa): “Cocoa and coffee have become intertwined this year, with extreme weather and shortages fueling rallies of both commodities that test the limits of traders. Just like cocoa, the coffee market is facing severe shortages. And, like cocoa, coffee production is concentrated in two countries. More importantly, many major traders deal in both commodities, so soaring cocoa prices are squeezing those market players for cash and forcing them out of coffee trading.”

The Bloomberg Commodities Index gained 1.4% (up 4.2% y-t-d). Spot Gold jumped 2.6% to $2,361 (up 14.4%). Silver surged 6.1% to $28.18 (up 18.4%). WTI crude increased 15 cents, or 0.2%, to $78.26 (up 9%). Gasoline fell 2.2% (up 19%), while Natural Gas jumped 5.1% to $2.252 (down 10%). Copper rose 2.3% (up 20%). Wheat surged 6.6% (up 3.0%), and Corn gained 2.0% (down 3%). Bitcoin dropped $1,940, or 3.1%, to $60,940 (up 43%).

Middle East War Watch:

May 9 – Reuters (Nidal Al-Mughrabi, Mohammad Salem and Jarrett Renshaw): “Israeli tanks and warplanes bombarded areas of Rafah on Thursday, Palestinian residents said, after President Joe Biden said the United States would withhold weapons from Israel if its forces mount a major invasion of the southern Gaza city. A senior Israeli official said that the latest round of indirect negotiations in Cairo to halt hostilities had ended and Israel would proceed with its operation in Rafah and other parts of the Gaza Strip as planned.”

May 8 – Reuters (Nidal Al-Mughrabi, Steve Holland and Mohammad Salem): “Palestinian militant group Hamas said… it was unwilling to make more concessions to Israel in negotiations over a ceasefire for Gaza, although talks were still under way in Cairo aimed at pausing Israel’s seven-month-old offensive. Israel continued tank and aerial strikes on the southern Gaza city of Rafah on Wednesday and has threatened a major assault on it. Its forces moved in via the Rafah border crossing with Egypt on Tuesday, cutting off a vital aid route and the only exit for the evacuation of wounded patients.”

May 5 – Reuters (Ari Rabinovitch): “Prime Minister Benjamin Netanyahu hardened his rejection of Hamas demands for an end to the Gaza war in exchange for the freeing of hostages, saying on Sunday that would keep the Palestinian Islamist group in power and pose a threat to Israel… ‘But while Israel has shown willingness, Hamas remains entrenched in its extreme positions, first among them the demand to remove all our forces from the Gaza Strip, end the war, and leave Hamas in power,’ Netanyahu said. ‘Israel cannot accept that.’”

May 8 – Reuters (Laila Bassam, Dan Williams and Henriette Chacar): “Israel carried out heavy airstrikes in south Lebanon and Hezbollah said it had launched explosive drones and rockets at Israeli targets on Wednesday as Israel’s defence minister warned of a ‘hot summer’ in the border region. The Israeli attacks killed three Palestinian fighters from the Quds Brigades, the armed wing of the Islamic Jihad movement, according to the group. Hezbollah said at least one of its fighters was also killed… The conflict between Hezbollah and Israel has rumbled on since October in parallel to the Gaza war, uprooting tens of thousands of people on both sides of the frontier and fuelling concern of a bigger war between the heavily-armed adversaries.”

May 8 – Reuters (James Mackenzie): “Prime Minister Benjamin Netanyahu faces competing pressures at home and abroad when he weighs how far to push the operation to defeat Hamas in Rafah that complicates hopes of bringing Israeli hostages home. Street demonstrations against the government by families and supporters of some of the more than 130 hostages still held in Gaza have become a constant fixture, with protestors demanding a ceasefire deal with Hamas to get them back. Others are demanding the government and the Israeli Defence Forces press ahead with the Rafah operation against the remaining Hamas formations holding out…”

May 9 – Financial Times (Mehul Srivastava, Felicia Schwartz and James Politi): “Members of Benjamin Netanyahu’s government reacted with outrage at US President Joe Biden’s warning that the US will not supply weapons for a potential invasion of Rafah, as tensions between Israel and Washington escalated. On Thursday, the Israeli prime minister posted a video from Holocaust Remembrance Day… in which he said that ‘no amount of pressure… will stop Israel from defending itself’. ‘If Israel is forced to stand alone, Israel will stand alone,’ he added.”

May 6 – CNN (Michael Schwartz, Tim Lister, Kareem Khadder, Abeer Salman and Lauren Said-Moorhouse): “Israel shut down Al Jazeera’s operations in the country and seized some of its communication equipment Sunday, prompting condemnation from the United Nations and rights groups over Israeli Prime Minister Benjamin Netanyahu’s moves to restrict press freedoms.”

Ukraine War Watch:

May 8 – Associated Press (Illia Novikov): “Russian forces unleashed a nighttime barrage of more than 50 cruise missiles and explosive drones at Ukraine’s power grid Wednesday, targeting a wide area in what President Volodymyr Zelenskyy called a ‘massive’ attack on the day the country celebrates the defeat of Nazism in World War II. The bombardment blasted targets in seven Ukrainian regions, including the Kyiv area…”

May 7 – Financial Times (Isobel Koshiw and Christopher Miller): “Ukraine has said it uncovered a network of Russian agents in the country who planned to assassinate President Volodymyr Zelenskyy, including two colonels who worked for the agency in charge of his security. The Ukrainian domestic intelligence service (SBU)… said the two were tasked by Moscow with finding people in Zelenskyy’s security detail who would take the president hostage and later kill him.”

Taiwan Watch:

May 7 – Reuters (Ben Blanchard): “Taiwan’s military is prepared for any moves China may make around the time President-elect Lai Ching-te takes office later this month, the island’s deputy defence minister said… China… has a strong dislike of Lai, believing him to be a dangerous separatist, whose repeated offers of talks it has rejected… ‘Before and after May 20, our nation’s military will uphold all combat readiness requirements and pay close attention to the damaging of regional peace and stability by the other side,’ Deputy Defence Minister Po Horng-huei told reporters.”

May 8 – Reuters (Ben Blanchard and Ryan Woo): “A U.S. warship sailed through the narrow Taiwan Strait on Wednesday, less than two weeks before Taiwan’s new president takes office, prompting an angry denunciation from Beijing… U.S. warships, and occasionally U.S. Navy patrol aircraft, pass through or over the strait about once a month.”

May 8 – Bloomberg (Samson Ellis): “Taiwan’s exports to the US surged by a record last month while shipments to China fell, underscoring the accelerating decoupling of technology supply chains between the world’s two largest economies. Taiwan’s exports to the US jumped 81.6% year on year to $10.2 billion in April… It was the biggest increase on record. Meanwhile, overseas shipments to mainland China fell 1.1% to $7.5 billion.”

May 8 – Reuters (David Shepardson): “U.S. Commerce Secretary Gina Raimondo said… a Chinese invasion of Taiwan and seizure of chips producer TSMC would be ‘absolutely devastating’ to the American economy. Asked at a U.S. House hearing about the impact, Raimondo said ‘it would be absolutely devastating,’ declining to comment on how or if it will happen, adding: ‘Right now, the United States buys 92% of its leading edge chips from TSMC in Taiwan.’”

Market Instability Watch:

May 8 – Bloomberg (Tania Chen and Ruth Carson): “As the yen plumbs new lows, some investors are pondering an almost unthinkable scenario in a region busy bolstering falling exchange rates — a series of competitive devaluations that starts a new Asian currency war. Suspected intervention to drag the yen off a 34-year low against the dollar is already seen as unlikely to have a lasting effect if Japan continues alone, raising the prospect of another bout of weakness in the beleaguered currency. That could push competitive tensions with exporting neighbors South Korea and Taiwan to a peak — and heap pressure on China where chatter is already growing about the potential for a yuan devaluation. A destabilizing slump in the yen could be the trigger that forces Japan’s neighbors to take extreme action…”May 9 – Bloomberg (Masahiro Hidaka): “Meetings between Japan’s prime minister and central bank governor are fueling speculation they’re ironing out policy changes, and bond yields look headed above a key level as a result. Prime Minister Fumio Kishida and Bank of Japan Governor Kazuo Ueda met this week after getting together as recently as late-March. The unusually short interval is boosting bets that the BOJ will raise interest rates and reduce government bond buying at an early date to stem the yen’s relentless weakening.”

May 7 – Bloomberg (Erica Yokoyama and Toru Fujioka): “Bank of Japan Governor Kazuo Ueda said after meeting with Prime Minister Fumio Kishida that he’s carefully watching the impact of the weak yen on prices and he discussed recent currency moves with the premier. ‘In general on foreign exchange rates, they can potentially have a large impact on the economy and prices, so I confirmed that the Bank of Japan will closely monitor the recent yen’s weakness in conducting policy,’ Ueda said…”

May 8 – Bloomberg (David Finnerty): “Hedge funds are renewing their attack on the yen. Short-term funds have started buying one- to three-month so-called reverse knock-out call-option contracts this week, which gain in value if the dollar-yen rises. They differ from regular call options in becoming worthless if a specific level is reached, suggesting traders see officials stepping in again soon after a breach of 160 per dollar.”

May 6 – Bloomberg (Sam Potter and Lu Wang): “Two years after Wall Street’s love affair with fast-twitch stock options began, Bloomberg’s latest Markets Live Pulse survey suggests the unprecedented boom still has room to run — even as almost half of respondents fear an eventual blowup. With the notional value of zero-days-to-expiration contracts tied to the S&P 500 hitting roughly $862 billion in April, almost 90% of 300 MLIV Pulse respondents said they expect the growth to continue. The twist? They’re about evenly split on whether it will grow steadily or end in calamity.”

May 8 – Bloomberg (Alexandra Harris): “Funds are starting to shift their holdings in the $6 trillion US money market ahead of a spate of new rules that will likely boost demand for government securities at the expense of riskier assets. As of mid-April, about five of these funds — including the two largest — had announced plans to convert to government-only holdings or close altogether to avoid Securities and Exchange Commission measures that take effect later this year. Starting in October, the changes mean it’ll get more expensive to withdraw money from some funds in times of financial stress.”

Global Credit Bubble Watch:

May 9 – Bloomberg (Claire Boston, Eleanor Duncan and Michael Tobin): “In credit markets worldwide, almost anything goes. From the US to Europe to Asia, companies — some of which found themselves shut out of the new issuance market not so long ago — are seizing on strong investor demand and a lack of clarity around where funding costs are headed to issue the most debt in years. More than 40 investment-grade firms in the US have sold $53 billion of bonds this week through Wednesday, the most crowded three-day calendar since 2021, while high-yield issuers have priced nearly $11 billion…”

May 8 – Bloomberg (Ameya Karve and Divya Patil): “Asia’s high-yield dollar bond sales this year have grown annually for the first time in five years, fueled by Indian financial companies’ rush to access offshore investors. Regional sales of such corporate notes, outside of Japan, touched $5.9 billion so far this year, already surpassing $4.4 billion in all of 2023… Indian borrowers have topped the share of sales so far this year, with nearly 44% share.”

May 8 – Financial Times (Mary McDougall and Joseph Cotterill): “Bonds issued by some of the world’s poorest countries have been the best performers in sovereign debt markets this year, shrugging off the impact of high US borrowing costs, which often spook investors in riskier economies. Emerging market sovereign bonds denominated in foreign currencies — mainly the dollar — and holding a triple B ‘junk’ rating or lower have delivered a 4.9% total return for investors this year. That compares with a loss of 3.3% for an index of US Treasury bonds.”

May 8 – Bloomberg (Alice Gledhill and James Hirai): “Italians are buying fewer bonds targeted at individual savers, raising questions over the extent to which the government can rely on this funding source in future. Households placed orders of around €6.6 billion ($7.1bn) for so-called BTP Valore bonds in the first two days of a sale that ends Friday, and demand on the third day has so far amounted to about €600 million. That compares with an average of €10.3 billion in the first couple of days of the previous three offerings…”

Bubble and Mania Watch:

May 7 – Bloomberg (Alice Atkins and Katherine Doherty): “They subdued stocks, claimed a chunk of foreign exchange and muscled into the commodity market. Now high-tech trading firms like Citadel Securities LLC and Jane Street are pushing deeper than ever into fixed income. Riding a wave of digitization and a boom in ETFs, electronic market makers… are expanding their reach in government bond trading and finally gaining ground in the once-untouchable world of corporate debt. In the process they’re storming territory ruled by Wall Street’s biggest banks, throwing everything from client relationships to transaction costs into flux and scooping up staff alongside market share — even as the march of so-called electronification stirs concerns about financial stability.”

May 9 – Wall Street Journal (Charley Grant): “U.S. companies are feeling good about their prospects and spending like they mean it… Companies are stepping up repurchases of their own shares, which is giving a resurgent stock market an extra boost. S&P 500 companies that have reported first-quarter results as… have disclosed buying back $181.2 billion of their shares during the period, according to… Birinyi Associates. That is up 16% from the year-ago quarter. The pace of purchases has been brisker than usual for nine straight weeks, BofA Securities said…”

May 9 – Bloomberg (Paula Seligson and Davide Scigliuzzo): “Private credit managers are bracing for an uptick in stress across corporate America as higher interest rates for longer mean some companies will struggle with their debt loads. Wall Street heavyweights gathered in Beverly Hills this week for the annual Milken Institute Global Conference… On panels and in closed-door meetings, some expressed concern that liquidity issues for borrowers that binged on debt when rates were low are being masked by amendments to loan terms, such as maturity extensions and payment-in-kind arrangements. A spike in such amendments last year – which has kept default rates low so far – was meant to buy time for rates to fall, a prospect that’s now looking unlikely.”

May 10 – Bloomberg (Keith Naughton, Archie Hunter and Heejin Kim): “Ford Motor Co. has begun cutting orders from battery suppliers to stem growing electric-vehicle losses, according to people familiar…, as it throttles back ambitions in a rapidly decelerating market for plug-in models… As EV prices have plunged and demand has slackened, Ford’s losses per EV exceeded $100,000 in the first quarter, more than double the deficit from last year…”

May 8 – Bloomberg (Esha Dey): “A slowdown in the demand for electric cars has sparked off such a brutal price war that even industry behemoth Tesla Inc. is struggling to cope. But for the newer entrants in the race, it is fast turning out to be a battle for survival. This week’s slew of lackluster quarterly results from once promising electric-vehicle startups made clear what analysts and investors have worried about for a while now: That rapidly dropping prices on EVs will hit the smaller, unprofitable carmakers the hardest… ‘There really is no room for startups in this environment as rates are too costly to finance growth and margins are not strong enough to attract private capital,’ said Brian Mulberry, client portfolio manager at Zacks Investment Management.”

May 9 – Bloomberg (Benjamin Stupples): “Insiders at the Magnificent Seven tech companies are following Jeff Bezos and Mark Zuckerberg in realizing gains from the stocks that have largely powered the boom in US equity markets. Almost a dozen executives and directors at the firms recently boosted their share sales, earning more than $160 million since late 2023 after not cutting their stakes in as long as nine years… Take Alphabet Inc. Chief Executive Officer Sundar Pichai. He’s already sold more stock in Google’s parent company this year than in all of 2023, pocketing $30 million… And Apple Inc. Chairman Arthur Levinson filed in February to offload his biggest chunk of the iPhone-maker’s stock in more than two decades.”

May 4 – Bloomberg (Natalia Kniazhevich and Alexandra Semenova): “Strong earnings beats from Corporate America may no longer be enough to keep the stock rally going. Profit outlooks are becoming more important. With more than 400 firms in the S&P 500 Index having reported earnings this season, 79% of them have beaten profit expectations… But the median stock outperformed the index by less than 0.1% on results day — the smallest margin since late 2020. The muted reaction can be explained by one thing. Traders, unconvinced that companies can deliver going forward, are punishing stocks for weaker-than-expected guidance.”

AI Bubble Watch:

May 6 – New York Times (Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Michael J. de la Merced, Lauren Hirsch and Ephrat Livni): “The boom in artificial intelligence has minted billions in (paper) wealth for tech giants like Microsoft and Amazon. But there’s an overlooked set of winners as well: utilities and energy companies. The power demands of the huge data centers that underpin the A.I. revolution keep growing. Wall Street is taking notice — but the climate effect isn’t getting as much attention… Tech’s energy needs are coming into focus as investors get to grips with how much of an ‘energy hog’ generative A.I. is becoming. Analysts at Wells Fargo see the A.I. boom helping to push up U.S. electricity demand by as much as 20% by 2030.”

May 5 – CNBC (Spencer Kimball): “Natural gas producers are planning for a significant spike in demand over the next decade, as artificial intelligence drives a surge in electricity consumption that renewables may struggle to meet alone. After a decade of flat power growth in the U.S., electricity demand is forecast to grow as much as 20% by 2030… Power companies are moving to quickly secure energy as the rise of AI coincides with the expansion of domestic semiconductor and battery manufacturing as well as the electrification of the nation’s vehicle fleet. AI data centers alone are expected to add about 323 terawatt hours of electricity demand in the U.S. by 2030… The forecast power demand from AI alone is seven times greater than New York City’s current annual electricity consumption…”

May 7 – Bloomberg (Bastian Benrath): “Dangers to financial stability posed by the development of artificial intelligence tools are already starting to become a worry, two central bank chiefs told a conference… Asked if there’s ‘something bad that could happen that you are preparing for’ related to the technology, the policymakers from two Asian banking hubs each highlighted possible risks that they’ve identified. ‘It’s likely that there will be dominant AI firms, dominant cloud computing firms, that financial institutions are increasingly becoming reliant upon,’ said Eddie Yue, chief executive officer of the Hong Kong Monetary Authority. ‘If they have a failure, then there could be systemic risks — at least systemic operational risks.’”

May 8 – Yahoo Finance (Akiko Fujita): “US chip manufacturing capacity is projected to triple by 2032, according to a new report published by the Semiconductor Industry Association (SIA)… That increase is expected to grow the US’s share of global semiconductor production to 14% by 2032 from 10% today, marking growth in the country’s manufacturing footprint for the first time in decades, according to the SIA. ‘It’s going to take us years to climb back,’ John Neuffer, president and CEO of SIA, said… ‘But with the CHIPS Act and with all these private sector investments, we absolutely turned the corner and are heading now in the right direction.’”

Bank Watch:

May 6 – Bloomberg (Alex Tanzi): “More US banks reported stricter credit standards in the first quarter, according to the Federal Reserve. The net share of US banks that tightened standards on commercial and industrial loans for mid-sized and large businesses rose to 15.6% in the first three months of the year, from 14.5% in the fourth quarter… Lenders have generally been tightening credit standards since the second quarter of 2022, following a string of high-profile regional bank failures.”

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

May 8 – Associated Press (Jim Gomez and Aaron Favila): “U.S. and Philippine forces, backed by an Australian air force surveillance aircraft, unleashed a barrage of high-precision rockets, artillery fire and airstrikes Wednesday and sank a mock enemy ship as part of largescale war drills in and near the disputed South China Sea that have antagonized Beijing… More than 16,000 military personnel from the United States and the Philippines, along with a few hundred Australian troops and military observers from 14 countries, were participating in annual combat-readiness drills…”

May 8 – Reuters (Zeba Siddiqui): “U.S. officials confronted the Chinese government in Beijing last month about a sweeping cyber espionage campaign through which Chinese hackers have broken in to dozens of American critical infrastructure organizations, a senior U.S. cyber official said. Under the campaign named Volt Typhoon, American officials say China aims to leverage the access it has gained into U.S. organizations in the event of a war or conflict – a nod to escalating U.S.-China tensions over Taiwan.”

May 8 – Financial Times (Max Seddon): “Vladimir Putin has raised the spectre of nuclear conflagration in what he said would be a Russian response to risks posed by the west. In a speech on Red Square to mark the Soviet Union’s victory in the second world war, the Russian president hailed soldiers fighting in his invasion of Ukraine and vowed to stand firm against western attempts to contain Russia. ‘We reject any state or alliance’s exceptionalist pretences — we know what follows when these ambitions go unchecked,’ Putin said… ‘Russia will do everything not to allow a global conflict, but at the same time, we will not let anyone threaten us. Our strategic forces are always at combat readiness,’ Putin added, referring to Russia’s arsenal of nuclear weapons…”

May 6 – Reuters (Guy Faulconbridge): “Russia said… it would practise the deployment of tactical nuclear weapons as part of a military exercise after what the Moscow said were threats from France, Britain and the United States. Since Russia invaded Ukraine in 2022, Russia has repeatedly warned of rising nuclear risks… Russia says the United States and its European allies are pushing the world to the brink of confrontation between nuclear powers by supporting Ukraine with tens of billions of dollars of weapons, some of which are being used against Russian territory.”

May 7 – Reuters (Guy Faulconbridge and Mark Trevelyan): “Russian President Vladimir Putin said it was up the West to choose between confrontation and cooperation as he was sworn in for a new six-year term… ‘You, citizens of Russia, have confirmed the correctness of the country’s course. This is of great importance right now, when we are faced with serious challenges… I see in this a deep understanding of our common historical goals, a determination to adamantly defend our choice, our values, freedom and the national interests of Russia.’”

De-globalization and Iron Curtain Watch:

May 10 – Bloomberg (Josh Wingrove, Jennifer Jacobs and Eric Martin): “President Joe Biden’s administration is poised to unveil a sweeping decision on China tariffs as soon as next week, one that’s expected to target key strategic sectors with new levies while rejecting the across-the-board hikes sought by Donald Trump, people familiar… said. The decision is the culmination of a review of Section 301 tariffs first put into place under Trump starting in 2018. The US will impose new, elevated tariffs that focus on key industries including electric vehicles, batteries and solar cells. Other existing China levies are expected to largely be maintained.”

Inflation Watch:

May 10 – Associated Press (Christopher Rugaber): “U.S. consumer sentiment fell sharply in May to the lowest level in six months as Americans cited stubbornly high inflation and interest rates, as well as fears that unemployment could rise. The University of Michigan’s consumer sentiment index… dropped to 67.4 this month from a final reading of 77.2 in April. May’s reading is still about 14% higher than a year ago. Consumers’ outlook has generally been gloomy since the pandemic and particularly after inflation first spiked in 2021… The consumer sentiment survey found that Americans expect inflation will stay higher over the next year at 3.5%.”

May 6 – Reuters (Michael S. Derby): “Americans are once again bracing for another round of higher housing costs, amid rising expectations by renters that they’ll never be able to buy a house, the Federal Reserve Bank of New York said… As part of its latest Survey of Consumer Expectations, the regional Fed bank found that respondents at the start of the year saw higher near-term increases for both rent and home prices… Households also see no relief on home borrowing costs and are in fact bracing for the highest levels of mortgage rates in a survey that dates back to 2014. The New York Fed said that in February respondents predicted home prices would rise 5.1% a year from now, up from the 2.6% they predicted a year ago.”

May 6 – Bloomberg (Alex Tanzi): “US renters are more pessimistic about their ability to ever own a home and households’ expectations of home-price growth has reaccelerated after falling last year, a new Federal Reserve Bank of New York survey showed. Amid elevated prices, high mortgage rates and difficulty saving money for a down payment, only about four in 10 renters think that they will be able to buy a home… That’s the lowest level since the survey on consumers’ housing-related experiences and expectations was started a decade ago. For the first time, half of younger renters — those under age 50 — don’t think they will be able to buy a home.”

May 8 – Bloomberg (Naureen S. Malik): “Texas electricity prices soared almost 100-fold as a high number of power-plant outages raised concerns of a potential evening shortfall. Spot prices at the North Hub, which includes Dallas, jumped to more than $3,000 a megawatt-hour just before 7 p.m. local time, versus about $32 at the same time Tuesday, according to… the Electric Reliability Council of Texas.”

May 7 – Bloomberg (Alice Kantor and Cecile Vannucci): “For all the talk of a big-money exodus from New York, the city’s residents still have more wealth — in excess of $3 trillion — than those of any other metro in the world. New York has almost 350,000 millionaires, which is the most of any city and up 48% from a decade ago, according to… Henley & Partners… That means about one in every 24 of its 8.26 million residents has a seven-figure net worth, compared with about one in 36 in 2013.”

May 9 – Bloomberg (Jennifer Epstein): “Manhattan apartment rents rose last month to a new high for April, an increase that suggests another record-shattering summer to come. New leases were signed at a median of $4,250, up $9 from last April, according to appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.”

Federal Reserve Watch:

May 7 – Yahoo Finance (Jennifer Schonberger): “Minneapolis Fed president Neel Kashkari said… he believes interest rates will likely need to be held at current levels for an ‘extended period’ and didn’t rule out a hike if inflation stalls near 3%. ‘I think it’s much more likely we would just sit here for longer than we expect or the public expects right now until we see what effect our monetary policy is having,’ Kashkari said… But if the Fed were convinced that inflation was entrenched at 3% and rates needed to be raised higher, it is possible it would take such an action. ‘That’s not my most likely scenario, but I also can’t rule it out… I think the bar for us raising is quite high but it’s not infinite. There is a limit when we say, ‘OK, we need to do more.’’”

May 6 – Reuters (Michael S. Derby): “Federal Reserve Bank of New York President John Williams said… that at some undefined point the U.S. central bank will lower its interest rate target. ‘Eventually we’ll have rate cuts’ but for now monetary policy is in a ‘very good place,’ Williams said in comments made before the Milken Institute 2024 Global Conference…”

May 10 – Reuters (Ann Saphir): “Dallas Federal Reserve President Lorie Logan… said it’s not clear if monetary policy is tight enough to bring inflation down to the U.S. central bank’s 2% goal, and with price pressures still too strong, it is too soon to be cutting interest rates. There are still good reasons to think that inflation will return to 2% in the coming years… ‘There are also important upside risks to inflation that are on my mind, and I think there’s also uncertainties about how restrictive policy is and whether it’s sufficiently restrictive to keep us on this path.’”

May 8 – Reuters (Steve Matthews): “Federal Reserve Bank of Boston President Susan Collins signaled interest rates will likely need to be held at a two-decade high for longer than previously thought to damp demand and reduce price pressures. Collins… said slower economic growth will be necessary to make sure inflation remains on a sustainable path to the Fed’s 2% goal… ‘The recent upward surprises to activity and inflation suggest the likely need to keep policy at its current level until we have greater confidence that inflation is moving sustainably toward 2%,’ Collins said…”

Biden Administration Watch:

May 8 – Reuters (Alexandra Alper): “The Biden administration is poised to open up a new front in its effort to safeguard U.S. AI from China and Russia with preliminary plans to place guardrails around the most advanced AI Models, the core software of artificial intelligence systems like ChatGPT, sources said. The Commerce Department is considering a new regulatory push to restrict the export of proprietary or closed source AI models, whose software and the data it is trained on are kept under wraps, three people familiar with the matter said.”

U.S. Economic Bubble Watch:

May 7 – Bloomberg (Paulina Cachero and Paige Smith): “It’s hard enough for central bankers and Wall Street traders to make sense of the post-pandemic economy with the data available to them. At Wells Fargo & Co., senior economist Tim Quinlan is particularly spooked by the ‘phantom debt’ that he can’t see. That specter lurks behind buzzy ‘Buy Now, Pay Later’ platforms, which allow consumers to split purchases into smaller installments. The major companies that provide these so called ‘pay in four’ products, such as Affirm Holdings Inc., Klarna Bank AB and Block Inc.’s Afterpay, don’t report those loans to credit agencies. Time and again, they’ve resisted calls for greater disclosure, even as the market has grown each year since at least 2020 and is projected to reach almost $700 billion globally by 2028. That’s masking a complete picture of the financial health of American households…”

May 9 – CNBC (Jeff Cox): “Initial filings for unemployment benefits have hit their highest level since late August 2023… Jobless claims totaled a seasonally adjusted 231,000 for the week ending on May 4, up 22,000 from the previous period and higher than the… estimate for 214,000… It was the highest claims number since Aug. 26, 2023.”

May 8 – CNBC (Diana Ollick): “Mortgage rates are significantly higher than they were at the start of this year, but they pulled back slightly last week after several weeks of straight increases. That was enough to spark some new demand, especially for refinances… Applications for a mortgage to purchase a home rose 2% for the week but were still 17% lower than the same week a year earlier.”

May 9 – Reuters (Anuja Bharat Mistry): “Online retail sales in the U.S. rose about 7% from January to April this year, an Adobe Analytics report showed…, driven by strong demand for groceries and cheaper discretionary items. Consumer discretionary spending has been in focus over the past several months, as sticky inflation has forced shoppers in various categories to trade down to more affordable products. According to Adobe’s data, the share of the cheapest units sold in categories like grocery and personal care has increased during the first four months of the year, while the share of the most expensive products has come down…”

May 7 – Bloomberg (Oyin Adedoyin): “Young Americans are starting out with more credit-card debt than generations before them. That financial burden can have long-lasting effects. The rising debt load largely reflects a surge in prices for food and shelter at the start of their careers, coupled with a larger percentage of Gen Z who graduated with student loans. The average credit-card balance for 22- to 24-year-olds was $2,834 in the last quarter of 2023, compared with an average inflation-adjusted balance of $2,248 in the same period in 2013, according to… TransUnion…”

Fixed Income Watch:

May 8 – Bloomberg (Scott Carpenter): “The credit quality of smaller companies whose loans are packaged into collateralized loan obligations deteriorated through the second half of last year, the latest sign of the toll that higher interest rates are taking on a market that investors have poured money into. Between the second half of 2022 and 2023 Moody’s Ratings downgraded about one quarter of the loans bundled into securities known as middle market collateralized loan obligations…”

May 9 – Bloomberg (Joe Mysak): “States and municipalities are demonstrating an explosive demand for debt two years after the Fed first suppressed bond sales with a series of 11 interest rate increases. Nowhere is this more evident than in the number of bond sales of $1 billion or more, long a rarity in municipals. There have been 22 so far this year, putting the market on pace to smash the previous annual record of 26 set in all of 2020… Those deals account for almost one-quarter of the year’s $154 billion in long-term borrowing.”

China Watch:

May 10 – Wall Street Journal (Sherry Qin and Jiahui Huang): “Beijing’s newfound focus on a housing glut marks a sea change in how senior officials view China’s festering property crisis, setting the stage for rescue efforts that could range from unprecedented easing for home buyers to billions in state spending to buy up unsold projects. Chinese policymakers’ passing mention last week of plans to consider ‘policy to digest existing housing inventory’ has been a much-parsed phrase in recent days, with analysts stressing it marks the first time in a long-running real-estate downturn that top officials have publicly broached the subject of excess apartment supply. They said another part of the study—to ‘optimize policies on new housing supply’—suggests the government wants more public-housing options.”

May 9 – Reuters (Joe Cash): “China’s exports and imports returned to growth in April after contracting in the previous month… Shipments from China grew 1.5% year-on-year last month by value… They fell 7.5% in March, which marked the first contraction since November. Imports for April increased 8.4%, beating an expected 4.8% rise and reversing a 1.9% fall in March.”

May 7 – Bloomberg: “As China’s industrial capacity emerged as a key trade issue, a surge in Chinese bank loans to the sector has often been cited as evidence that Beijing is engaging in a renewed manufacturing push that could flood global markets with cheap goods. But an examination of those loans by researchers at Rhodium Group showed a significant amount of the money didn’t go into manufacturing at all. Instead, the credit growth was inflated by lending to local government-related entities and financial speculation, they found… The share of loans to manufacturing companies in overall new industrial credit declined to 63% in the fourth quarter from 80% in early 2020…”

May 6 – Reuters (Liangping Gao and Ryan Woo): “China’s services activity expansion slowed a touch amid rising costs, but growth in new orders accelerated and business sentiment rose solidly in a boost to hopes of a sustained economic recovery, a private sector survey showed… The Caixin/S&P Global services purchasing managers’ index (PMI) eased to 52.5 from a 52.7 in March, remaining in expansionary territory for the 16th straight month.”

May 6 – Reuters (Liangping Gao and Ryan Woo): “China’s average daily home sales during the major May Day public holiday sank 47% from a year earlier, and were down around 30% from pre-pandemic levels in 2019 for the same holiday period, according to a private survey… Home sales fell in 19 of 22 surveyed cities during the five-day May Day compared to the same period of 2023, and were down more than 60% in mega cities of Guangzhou and Shanghai, according to… the China Index Academy…”

May 6 – Financial Times (Thomas Hale, Wang Xueqiao, Andy Lin and Chan Ho-him): “With Chinese cities strewn with unfinished housing developments, it is not hard to understand the emerging desire for older homes. A series of property group defaults has meant ‘end buyers don’t trust developers any more,’ said Andrew Lawrence, Asia property analyst at TS Lombard. China is transitioning ‘from effectively a growth market in housing, which was driven by a speculative credit-fuelled boom, into a much more mature market’… Second-hand home sales surpassed those of new homes by floor space last year for the first time since private property markets emerged in the 1990s, according to… the China Real Estate Information Corporation. ‘There’s a huge amount of secondary stock out there that’s been held by investors that’s clearly coming back to the market,’ said Lawrence.”

May 8 – Bloomberg: “Chinese developer Country Garden… said it cannot meet initial deadlines for interest payments on two local bonds and that a state guarantor would step in — marking the first test of a key government program to shore up builder debt. The company’s onshore unit cannot make the coupon payments on its 3.95% note and its 3.8% bond by an initial deadline of May 9, according to filings. Both securities are guaranteed by China Bond Insurance Co., a state-owned firm at the heart of a program introduced by authorities in 2022 to help private-sector developers avoid liquidity crunches.”

May 9 – Bloomberg: “China’s efforts to revive homebuyer demand gathered steam on Thursday when two major cities scrapped all their remaining curbs on residential property purchases, a move that more local governments are expected to follow. Developer stocks surged after Hangzhou, the capital of eastern Zhejiang province, said it will remove eight-year-old restrictions on residential property purchases and no longer review the qualifications of homebuyers. Xi’an, the capital of Shaanxi province, announced similar steps hours later.”

May 10 – Reuters (Qiaoyi Li and Brenda Goh): “China’s car exports surged to a record high in April…, as domestic sales slipped 5.8% from a year earlier amid intensifying price competition and consumers’ caution about spending on big items during a shaky economic recovery. Car exports jumped 38% year-on-year to 417,000 units in April, continuing strong momentum from the previous month which posted a 39% growth in exports…”

May 6 – Bloomberg: “China tightened rules for hedge funds, raising the minimum-asset threshold of the 5.5 trillion yuan ($762bn) industry while imposing restrictions on the use of derivatives and leverage… The so-called ‘operational guidelines,’ which will take effect Aug. 1, are expected to weed out weaker and less compliant hedge fund firms.”

Central Bank Watch:

May 9 – Bloomberg (Philip Aldrick, Greg Ritchie and Tom Rees): “The Bank of England sent its clearest signal yet that it was closing in on interest rate cuts, with Governor Andrew Bailey indicating markets were underpricing the pace of easing in the months ahead. The BOE governor made his comments after the UK central bank voted 7-2 to keep the base interest rate at 5.25%…”

May 8 – Reuters (Simon Johnson): “Sweden’s central bank cut its key interest rate to 3.75% from 4.00%…, as expected, and said it was likely to cut the rate two more times in the second half of the year if inflationary pressures remain mild. After a two-year hiking cycle, central banks around the world are weighing when to start easing policy. But the timing is proving tricky as rate-setters assess geopolitical tensions and fret over getting inflation back to target levels… ‘If the outlook doesn’t change, we can cut rates a further two times during the second half of the year,’ Riksbank Governor Erik Thedeen told reporters.”

May 8 – Reuters (Miranda Murray): “There is no reason for the European Central Bank to cut interest rates too fast or too strongly, Austrian central bank Governor Robert Holzmann told Handelsblatt…, adding much depended on the U.S. Federal Reserve. ‘If the time comes in June, further steps will certainly follow,’ said Holzmann. ‘But I see absolutely no reason for us to cut key interest rates too quickly, too strongly,’ he said. ‘To a certain extent, our data and decisions are naturally influenced by the Fed. We are not working in a vacuum. With the dollar, the Fed is, figuratively speaking, the gorilla in the room.’”

May 7 – Bloomberg (Mark Schroers): “European Central Bank Governing Council member Joachim Nagel said forces including geopolitics and decarbonization could keep consumer-price growth elevated in the years ahead. ‘A range of potential factors could lead to higher inflationary pressure in the future,’ the Bundesbank president told a conference…, also citing demographic trends that may lead to ‘persistently higher wage growth.’ While saying more research is needed, Nagel doesn’t expect a return to the kind of weak inflation rates seen before the pandemic.”

May 9 – Reuters (David Ljunggren and Dale Smith): “The Canadian financial system remains resilient but the continuing adjustment to higher rates and possible shocks present key risks to stability, Bank of Canada Governor Tiff Macklem said… Interest rates are at a 23-year high and the bank said it was watching the ability of institutions and households to service their debts as well as monitoring the valuation of some assets, which appear to have become stretched.”

May 7 – Financial Times (Nic Fildes): “The Reserve Bank of Australia has raised its short-term inflation forecast and all but ruled out an interest rate cut this year, joining other central banks in warning that persistent price growth will keep rates higher for longer. Some economists had expected the RBA to begin cutting rates by the end of the year after the central bank in February noted ‘encouraging’ signs that inflation had started to ease…”

Global Watch:

May 10 – Reuters (Suban Abdulla and David Milliken): “Britain’s economy grew by the most in nearly three years in the first quarter of 2024, ending the shallow recession it entered in the second half of last year and delivering a boost to Prime Minister Rishi Sunak ahead of an election. Gross domestic product expanded by 0.6% in the three months to March…, the strongest growth since the fourth quarter of 2021 when it rose by 1.5%.”

May 6 – Financial Times (Ruchir Sharma): “At a time when two big economies, the US and India, are attracting a lot of hype for their enduring strength, it is worth looking at nations that not too long ago were billed as star performers but are now breaking down. All are among the world’s 50 largest economies and, so far this decade, have suffered both a sharp decline in real per capita income growth, and a fall in their share of global gross domestic product. Led by Canada, Chile, Germany, South Africa and Thailand, these ‘breakdown nations’ carry a lesson. Growth is hard, sustaining it even harder, so the stars of today are not necessarily the stars of tomorrow.”

Europe Watch:

May 6 – Reuters (Jonathan Cable): “Euro zone business activity expanded at its fastest pace in almost a year last month as a resurgence in the bloc’s dominant services industry more than offset a deeper downturn in manufacturing, a survey showed… HCOB’s composite Purchasing Managers’ Index (PMI) for the currency union, compiled by S&P Global and seen as a good gauge of overall economic health, bounced to 51.7 in April from March’s 50.3…”

Japan Watch:

May 8 – Reuters (Leika Kihara): “Bank of Japan Governor Kazuo Ueda said… the central bank will scrutinise the yen’s recent declines in guiding monetary policy. ‘Sharp, one-sided yen falls are negative for the economy and therefore undesirable,’ as it makes it difficult for companies to set business plans, Ueda told parliament. ‘If currency volatility affects, or risks affecting, trend inflation, the BOJ must respond with monetary policy,’ he said.”

May 8 – Wall Street Journal (Megumi Fujikawa): “Bank of Japan Gov. Kazuo Ueda said… that he is open to the idea of early interest-rate increases if inflation rises at a faster pace than the bank’s projections. ‘If the outlook for prices is revised upward or if upside risks become high, it will be appropriate for the bank to make an earlier adjustment of the policy interest rate,’ Ueda said…”

May 8 – Reuters (Leika Kihara): “Bank of Japan board members turned overwhelmingly hawkish at their April policy meeting with some seeing the chance of interest rates rising faster than anticipated, a summary of opinions at the meeting showed… Many in the nine-member board called for steady rate hikes on prospects that inflation could durably stay, or even exceed, the central bank’s 2% target…‘If underlying inflation continues to deviate upward from the baseline scenario against the backdrop of a weaker yen, it is quite possible that the pace of monetary policy normalisation will accelerate,’ one member was quoted as saying.”

May 7 – Financial Times (Toby Nangle): “The Bank of Japan has, over 14 years, acquired exchange traded funds containing stocks equivalent to about 7% of listed Japanese companies. In March, BoJ governor Kazuo Ueda called time on this aspect of the central bank’s extraordinary monetary easing programme. The bank has yet to announce what it will do with its half-a-trillion-dollar stock portfolio.”

May 8 – Bloomberg (Erica Yokoyama and Emi Urabe): “Japan’s foreign currency reserves dropped by $14 billion in April, a fall that reflects a decline in the value of foreign securities holdings rather than intervention in the market. The country’s forex reserves decreased to $1.14 trillion in April, largely on the back of drop in the holdings of foreign securities to $978 billion from $995 billion the previous month…”

May 7 – Reuters (Kaori Kaneko): “Japanese service sector activity grew at the fastest pace in eight months in April thanks to solid business and consumer spending, a private survey showed…, results that should keep the central bank on track to hike rates again this year. The final au Jibun Bank Service purchasing managers’ index (PMI) rose to 54.3 last month, the highest level since August 2023, and up slightly from 54.1 in March.”

Emerging Market Watch:

May 7 – Financial Times (Ciara Nugent): “Argentina’s central bank has put the country’s first 10,000-peso notes into circulation, in a long-awaited step to streamline the nation’s cumbersome use of large heaps of cash following the collapse of its currency. The new notes, worth $11 at the country’s official exchange rate, are five times more valuable than the previous largest note, of 2,000 pesos — which began circulating last year and remains relatively rare — and 10 times more valuable than the more common 1,000-peso note.”

May 9 – Bloomberg (Maria Eloisa Capurro and Alex Vasquez): “Mexico’s headline inflation sped up more than expected last month, likely cementing a rate hold at the central bank’s monetary policy meeting later on Thursday. Consumer prices rose 4.65% in April from a year earlier, up from 4.42% in March…”

May 8 – Bloomberg (Maria Eloisa Capurro): “Brazil’s central bank cut its interest rate by a quarter-point, slowing its easing pace in a split vote that exposed rifts between members nominated by President Luiz Inacio Lula da Silva and more hawkish directors. Policymakers… lowered the benchmark Selic to 10.5% late on Wednesday as expected…”

Leveraged Speculation Watch:

May 10 – Bloomberg (Laura Benitez and Nishant Kumar): “A high-stakes trade in the riskiest corner of a $1.3 trillion credit market is enticing some of the world’s most conservative investors, raising concerns that in their aggressive hunt for higher yields they may be discounting some pitfalls. Pension plans and insurers have been piling into funds that invest in equity tranches of collateralized loan obligations in recent months, according to several asset managers who spoke on the condition of anonymity. The inflows have helped a slew of hedge funds and other money managers… to raise at least $3.1 billion in less than a year for strategies solely dedicated to these investments.”

May 6 – Reuters (Nell Mackenzie): “Investors withdrew an estimated net $9.9 billion from hedge funds in March, up from $780 million in February and the 22nd consecutive month where industry outflows totalled more than inflows, a report from Nasdaq eVestment said… While the scale of the March outflows was not historically high, money coming in from investors remained ‘consistently low’ because of a ‘reluctance’ to make meaningful new allocations, the report said.”

Social, Political, Environmental, Cybersecurity Instability Watch:

May 7 – Financial Times (Attracta Mooney, Steven Bernard and Bryan Harris): “Extreme weather events around the world are expected to continue owing to high concentrations of greenhouse gases, scientists say, after April marked the 11th straight month at a record global average surface temperature. The temperature for the hottest April on record reached 15.03C, or 0.67C above the 1991-2020 average for the month and 1.58C above pre-industrial levels, according to the Copernicus Climate Change Service… Large swaths of Asia are grappling with heatwaves that have driven temperatures as high as 48C in east Asia, while regions around the globe from southern China to Kenya and Brazil are dealing with fatal floods.”

May 8 – Reuters (Laila Kearney): “Extreme heat and rising electricity demand are expected to drive up power prices in Texas this summer, while the rest of the U.S. power markets are broadly pricing lower… Imbalances in U.S. power supply and demand, along with extreme weather, can lead to wholesale power price spikes that can eventually be passed down to businesses and households. Spot wholesale electricity prices in the Texas power trading hub for August have consistently traded above $175 a megawatt-hour (MWh) so far this month, compared to an average of $90.18 per MWh for August last year…”

May 7 – Wall Street Journal (Richard Vanderford): “Surging insurance premiums in regions vulnerable to climate change make sense, and government efforts to hold back those increases won’t work in the long term, Chubb Chief Executive Evan Greenberg said. U.S. states themselves are driving a crisis of insurance availability by blocking insurers from pricing climate change into policies, Greenberg said… ‘Climate change is sending price signals. Society will not adjust its behavior to the change of climate just because people talk about it,’ Greenberg said. ‘We’re sending price signals very rationally. That starts driving behaviors.’”

May 7 – Bloomberg (Michael Sasso): “Score a victory for Mayberry. America’s small towns, like the iconic setting of television’s The Andy Griffith Show from the 1960s, saw more in-migration in 2023 than larger areas for the first time in decades. The remote work boom that prompted Americans to flee urban areas for mountain hamlets and seaside towns during the pandemic continued at least through last year, according to University of Virginia demographer Hamilton Lombard. An estimated 291,400 people last year migrated from other areas into America’s small towns and rural areas… That number exceeded net migration into larger areas for the first time since at least the 1970s, estimated Lombard…”

Geopolitical Watch:

May 10 – Reuters (Karen Lema): “The Philippines’ national security adviser called… for Chinese diplomats to be expelled over an alleged leak of a phone conversation with a Filipino admiral in a significant escalation of a bitter row over the South China Sea. China’s embassy in Manila had orchestrated ‘repeated acts of engaging and dissemination of disinformation, misinformation and malinformation’, with the objective of sowing discord, division and disunity, Eduardo Ano said…”

May 6 – Financial Times (Gideon Rachman): “Who is Xi Jinping’s travel agent? If you are making your first trip to Europe in nearly five years, an itinerary that reads France, Serbia, Hungary seems a little eccentric. But the three stops chosen by China’s leader make perfect sense viewed from Beijing. For strategic and economic reasons, China badly wants to disrupt the unity of both Nato and the EU. Each of the three countries that Xi is visiting is seen as a potential lever to prise open the cracks in the west. On a recent visit to Beijing, I found Chinese foreign policy experts fascinated by French talk of the need for Europe to achieve ‘strategic autonomy’ from the US… Emmanuel Macron… said that Europe must never be a ‘vassal of the United States’ — which is language also favoured by China.”

May 4 – Financial Times (Sam Jones, John Paul Rathbone and Richard Milne): “European intelligence agencies have warned their governments that Russia is plotting violent acts of sabotage across the continent as it commits to a course of permanent conflict with the west. Russia has already begun to more actively prepare covert bombings, arson attacks and damage to infrastructure on European soil, directly and via proxies, with little apparent concern about causing civilian fatalities, intelligence officials believe. While the Kremlin’s agents have a long history of such operations… evidence is mounting of a more aggressive and concerted effort, according to assessments from three different European countries shared with the Financial Times.”

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