May 12, 2023: China Bubble Deflation Watch

May 12, 2023: China Bubble Deflation Watch
Doug Noland Posted on May 12, 2023

Two-year Treasury yields traded at 4.06% Wednesday, just ahead of the CPI data release. Yields sank to 3.87% intraday Wednesday and were as low as 3.81% Thursday – before reversing sharply higher to close the week at 3.99%.

Wednesday’s much anticipated CPI report had something for everyone. At 4.9%, y-o-y inflation was below 5% for the first time since May 2021 – and slightly less than expected. So-called (Powell favorite) “supercore” inflation slowed to only 0.1% for the month. Yet the 0.4% monthly gain in both headline and core inflation indicates persistent inflationary pressures.

Bonds and stocks rallied immediately on the release of CPI data, with television analysts scurrying to try to explain the spirited bullish market reaction. The explanation was in market positioning, rather than in data minutia. There has been significant hedging around key economic releases, certainly including CPI and non-farm payroll reports. And with markets remaining resilient over recent months, Greed is on the side of those writing derivative “insurance” – with Fear weighing on buyers. Holders of hedges have “weak hands,” meaning they have limited tolerance for additional losses. So, the basically in line CPI report spurred an immediate unwind of hedges and squeeze dynamics in both Treasuries and stocks. Rallies, however, were relatively short-lived.

There is a decent list of things that should keep markets on edge. The so-called “X-date” is rapidly approaching, with no movement yet toward a debt ceiling compromise. U.S. sovereign CDS prices traded to 78 bps in Thursday trading, surpassing Iceland, to the high since 2009. The KBW Regional Banking Index (KRX) sank 6.2% this week, to the low since November 2020. The big banks were not spared, with the KBW Bank Index down 3.5%. Pacwest lost 21% this week, with the Bank of Hawaii down 23.2%. Comerica dropped 12.3% and Keycorp lost 8.6%. Gaining three, Bank of America’s CDS price was back above 120 bps (near the high since March 2020)

Monday’s Senior Loan Officer Survey confirmed a meaningful tightening of lending standards over recent months. Banks reporting they’ve “tightened considerably” doubled from January’s reading to 3.2%. Those that have “tightened somewhat” were down marginally to 42.9% (from 43.3%) – but up from 37.7% in October, 25.8% in July, and 6.1% last April. Perhaps the key number didn’t receive the attention it deserves. A full 54% reported “basically unchanged.” Standards have tightened and loan growth has surely slowed. Yet, if over half of the banking industry continues to operate at the recent boom level, this likely in the near-term equates to what normally would be considered solid loan growth.

With the VIX trading down to 16.5 this week, equities seem to be basking in liquidity abundance and the prospect of a dovish Fed pivot. Indicative of the extraordinary monetary backdrop, money market fund assets swelled an incredible $434 billion over the past nine weeks.

Fed governor Michelle Bowman was out Friday: “The most recent inflation and employment reports have not provided consistent evidence that inflation is on a downward path… Should inflation remain high and labor market remain tight, additional monetary policy tightening will likely be appropriate…”

Markets dismiss calls for additional rate increases, though the rates market did end the week with a 13% probability of a 25-bps hike at the FOMC’s June 14th meeting – pricing in a 5.10% implied rate. Yet markets are not backtracking whatsoever on pricing in a dovish pivot. Markets ended the week pricing a 95-bps rate reduction by the January 31, 2024 meeting (over about seven months).

It’s intriguing. Inflation proving stickier than expected had no impact on expectations for a dovish pivot. The same for persistently tight labor markets and general economic resilience. In this I see corroboration of the thesis that the rates market is pricing probabilities of some type of accident forcing the Fed’s hand. The banking crisis is a potential accident. The “X-date” fiasco could blow up. In general, speculative markets are an accident in the making. But I’ve been positing over recent years that the vulnerable Chinese Bubble was likely a factor in persistently low Treasury and global sovereign yields.

This week’s 1.4% dollar rally is worth exploring. There’s a big short on the dollar, so short covering could explain this week’s gain. China’s renminbi declined 0.71% this week to a near 2023 low versus the dollar. The Shanghai Composite dropped 1.9%. Chinese stock weakness was broad-based. Number one developer Country Garden’s bond yields surged almost nine percentage points to 49% (in Thursday trading), up from 26% to begin April – to the highest level since last November. And with confidence in China’s recovery fading, April’s putrid Credit data raised eyebrows.

Growth in China’s metric of system Credit growth, Aggregate Financing, dropped to $175 billion, down significantly from March’s $773 billion and only 61% of estimates. It was also the weakest monthly growth since last October. But with a booming Q1 (over $2 TN), year-to-date growth of $2.45 TN, or 13.7% annualized, ran 28% ahead of comparable 2022. Aggregate Financing expanded $4.81 TN, or 10.3%, over the past year, $9.167 TN, or 21.5%, over two years, $13.611 TN, or 35.7%, over three years, and a staggering $21.01 TN, or 68.4%, over five years.

April’s $103 billion growth in New Loans was down from March’s blistering $559 billion – and only about half of expectations. At $1.627 TN, y-t-d loan growth was 26% ahead of comparable 2022. New Loans expanded $3.52 TN, or 12.2%, over the past year, $6.362 TN, or 24.3%, over two years, $9.232 TN, or 39.7%, over three years, and $14.368 TN, or 79.3%, over five years.

Corporate Loan growth dropped to $98 billion from March’s $389 billion – and was the weakest expansion since October ($66.5bn). Still, record y-t-d growth of $1.571 TN ran 32% ahead of comparable 2022. Corporate Loans expanded $2.744 TN, or 14.9%, over the past year, $4.691 TN, or 28.5%, over two years, $6.310 TN, or 42.5%, over three years, and $9.340 TN, or 79.1%, over five years.

Consumer Loans contracted $35 billion in April, a turnaround from March’s $179 billion expansion (strongest since Jan. 2021). At $331 billion, y-t-d growth was double comparable 2022. Consumer Loans expanded $732 billion, or 7.1%, over the past year, $1.575 TN, or 17%, over two years, $2.879 TN, or 35%, over three years, and $4.947 TN, or 80%, over five years.

I don’t want to overstate the importance of a dramatic one-month collapse in Chinese Credit growth. Lending tends to slow the first month of new quarters, especially following huge end of quarter surges. The expansion of Aggregate Financing slowed sharply last October, July and April. Consumer Loans contracted during October and April of last year. Meanwhile, Chinese M2 Money Supply contracted $87 billion during April, the first contraction since last October (M2 contracted $48bn in July).

Weak April lending and money supply are consistent with other data pointing to a fading recovery in key segments of the Chinese economy. There was the surprising April manufacturing contraction (PMI below 50), with a significant drop in export orders. While still expanding, service sector growth slowed. The April drop in imports (7.9%) raises questions about the durability of consumer demand. And at 0.1%, April consumer inflation was also weak. Yet China’s colossal housing sector appears poised to provide the biggest disappointment.

May 11 – Bloomberg: “China’s housing market sales is regressing after a brief recovery, underscoring the challenges the world’s second-largest economy is facing. Signs of weakness are emerging after housing sales and prices recovered briefly following a historical slump of about 18 months. China’s property sector is key for the economic growth outlook this year, as it accounts for about 20% of the country’s gross domestic product after including related industries. High-frequency indicators in recent weeks show momentum in home purchases has fizzled. Property investment also continues to contract, and consumers are reluctant to take out mortgages. That’s despite Beijing rolling out a slew of measures to prop up the market… ‘After a short-lived recovery in February-March, the release of pent-up demand for home purchases has come to an end,’ said Lu Ting, Nomura Holdings Inc.’s chief China economist. ‘The property recovery this year will be only moderate.’”

Iron ore prices this week fell to a five-month low. Shanghai Steel Rebar futures prices dropped 3.3% this week, trading near the low since November. Most industrial commodities were under pressure this week. Copper dropped 4.0%, Nickel 7.4%, Tin 3.0%, Zinc 2.8%, and Aluminum 2.4%. Silver sank 6.6%. Energy prices continue to weaken. Crude’s (WTI) $1.30 decline pushed y-t-d losses to 13%.

May 11 – Bloomberg (Lorretta Chen and Ailing Tan): “China’s high-yield dollar bonds are falling in their longest losing streak this year, adding to strains in a junk debt market shaken by a property firm’s default and another’s liquidation. The securities have lost 3.6% in May, with average prices dropping to 69 cents… The notes already shed 3.8% last month, the third straight monthly decline and the worst streak since one through July 2022. Recent woes include a default on yuan borrowings by KWG Group Holdings Ltd., which develops high-rise apartments, office buildings and shopping malls. There was also a wake-up call when Jiayuan International Group Ltd…, slapped with a court-ordered liquidation, making it the first builder during the nation’s property crisis to face such a fate despite public efforts to restructure debt.”

From the above Bloomberg “China’s housing market…” article:

“Home sales were dismal over the five-day Labor Day break in May, the first long holiday since China abandoned pandemic restrictions and infection waves eased.”

“In the existing-home market — which is less distorted by seasonal factors linked to the launch of developers’ projects — sales were even worse. In the first four days in May, second-hand residence sales plunged 44% by area from a month earlier…”

“Slower property sales have led to a glut of inventory. Unsold houses have climbed 43% from a recent low in November 2021, around the time home prices began their downward spiral.”

China’s protracted apartment boom inflated into one of history’s greatest speculative Bubbles. Japan still suffers from its eighties Bubble period. China’s Bubble deflation is in the nascent stage. Keep in mind that Chinese apartment owners, speculators, bankers, regulators, and government officials have no experience with bursting real estate Bubbles. So far, the priority seems to be maintaining inflated apartment prices to hold panic at bay. This only delays the day of reckoning. If reports of tens of millions of unoccupied units are in the ballpark, clearing prices will have to be found.

May 10 – South China Morning Post (Elise Mak): “Regulators in Jiangsu province have chided two developers for their ‘bad behaviour’ after they offered discounts on new homes in excess of 25%. Housing authorities in Kunshan…, said that Kunshan Jiabao Wangshang Properties and Kunshan Changtai Properties had ‘slashed prices significantly and arbitrarily that could disturb the normal order of the real estate market and cause social instability’. Both companies were pulled up for their ‘bad behaviour’ and ordered to rectify the issue immediately… The regulators stepped in after previously capping discounts at up to 15%. ‘We hope all developers will learn a lesson and comply with the law and industry regulations seriously,’ regulators in Kunshan said…, adding that they would strengthen oversight and punish developers for resorting to ‘wrongful sales tactics’. The two developers launched campaigns to boost sales during the May Day holiday. While one of them offered buyers discounts of up to 26%, the other dangled free parking spaces.”

See “China Watch” below:

“Xi Jinping’s crackdown on perceived threats to national security is roiling the vast industry of consultants and researchers who help global investors understand China, threatening the government’s attempts to lure foreign capital into an economy showing increasing signs of strain. The latest and most prominent target is Capvision Pro Corp.”

“China’s crackdown on data access to overseas firms is adding to concerns about how Beijing controls the flow of information in the country, making it difficult for investors to assess the state of the economy.”

“China is warning domestic brokerages not to spread information that compromises national security, reinforcing a campaign that has roiled consulting firms and providers of financial data.”

Preparing for trouble, Beijing is now moving aggressively to control the information flow – about the economy, markets and finance – in the name of national security. It wreaks of growing desperation. Beijing tactics are not confidence inspiring.

The complexity of the Chinese economy and Credit system grew exponentially over this protracted Bubble period. I appreciate the conventional view that Beijing officials have everything under control. From my perspective, odds are rising for China’s Bubble deflation to spiral out of control. How long can confidence in the gargantuan Chinese banking system be sustained?

For the Week:

The S&P500 slipped 0.3% (up 7.4% y-t-d), and the Dow fell 1.1% (up 0.5%). The Utilities dipped 0.4% (down 3.3%). The Banks sank 3.5% (down 28.0%), and the Broker/Dealers declined 0.8% (down 4.2%). The Transports lost 2.4% (up 2.9%). The S&P 400 Midcaps fell 1.2% (up 0.1%), and the small cap Russell 2000 declined 1.1% (down 1.2%). The Nasdaq100 increased 0.6% (up 21.9%). The Semiconductors fell 1.2% (up 17.4%). The Biotechs were unchanged (up 0.5%). With bullion slipping $6, the HUI gold equities index dropped 4.1% (up 16.2%).

Three-month Treasury bill rates ended the week at 5.02%. Two-year government yields rose seven bps this week to 3.99% (down 44bps y-t-d). Five-year T-note yields rose four bps to 3.45% (down 56bps). Ten-year Treasury yields increased three bps to 3.46% (down 41bps). Long bond yield gained four bps to 3.79% (down 18bps). Benchmark Fannie Mae MBS yields jumped 11 bps to 5.20% (down 19bps).

Greek 10-year yields dipped two bps to 4.00% (down 57bps y-t-d). Italian yields slipped a basis point to 4.18% (down 52bps). Spain’s 10-year yields declined two bps to 3.36% (down 16bps). German bund yields slipped two bps to 2.28% (down 17bps). French yields declined two bps to 2.86% (down 12bps). The French to German 10-year bond spread was little changed at 58 bps. U.K. 10-year gilt yields were unchanged at 3.78% (up 11bps). U.K.’s FTSE equities index dipped 0.3% (up 4.1% y-t-d).

Japan’s Nikkei Equities Index increased 0.8% (up 12.6% y-t-d). Japanese 10-year “JGB” yields declined three bps to 0.39% (down 3bps y-t-d). France’s CAC40 slipped 0.2% (up 14.5%). The German DAX equities index dipped 0.3% (up 14.3%). Spain’s IBEX 35 equities index gained 0.9% (up 12.2%). Italy’s FTSE MIB index was unchanged (up 15.4%). EM equities were mixed. Brazil’s Bovespa index recovered 3.2% (down 1.2%), while Mexico’s Bolsa index was little changed (up 13.4%). South Korea’s Kospi index fell 1.0% (up 10.7%). India’s Sensex equities index rallied 1.6% (up 2.0%). China’s Shanghai Exchange Index dropped 1.9% (up 5.9%). Turkey’s Borsa Istanbul National 100 index rallied 9.0% (down 13.0%). Russia’s MICEX equities index gained 1.1% (up 19.1%).

Investment-grade bond funds posted inflows of $1.428 billion, while junk bond funds reported outflows of $1.202 billion (from Lipper).

Federal Reserve Credit declined $43.0bn last week to $8.461 TN. Fed Credit was down $440bn from the June 22nd peak. Over the past 191 weeks, Fed Credit expanded $4.734 TN, or 127%. Fed Credit inflated $5.650 TN, or 201%, over the past 548 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $8.7bn last week to a near eight-month high $3.382 TN. “Custody holdings” were down $41bn, or 1.2%, y-o-y.

Total money market fund assets rose $18.3bn to a record $5.328 TN, with a nine-week gain of $434bn. Total money funds were up $827bn, or 18.4%, y-o-y.

Total Commercial Paper added $2.4bn to $1.146 TN. CP was up $34bn, or 3.0%, over the past year.

Freddie Mac 30-year fixed mortgage rates declined six bps to 6.43% (up 113bps y-o-y). Fifteen-year rates dropped 10 bps to 5.75% (up 127bps). Five-year hybrid ARM rates sank 23 bps to 5.73% (up 175bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down a basis point to 6.87% (up 132bps).

Currency Watch:

May 11 – Reuters (Chen Aizhu): “China has dramatically increased use of the yuan to buy Russian commodities over the past year, with nearly all of its purchases of oil, coal and some metals from its neighbour now settled in the Chinese currency instead of dollars… The switch to yuan to pay for much of a roughly $88 billion commodities trade in the wake of the Ukraine war accelerates China’s efforts to internationalise its currency, at the expense of the dollar, although strict capital controls are expected to limit its global role in the near term. In March, the yuan – also known as the renminbi – became the most widely-used currency for cross-border transactions in China, overtaking the dollar for the first time…”

May 6 – Reuters (Albee Zhang and Laurie Chen): “China’s foreign exchange reserves rose more than expected in April…, as the dollar fell against other major currencies. The country’s foreign exchange reserves – the world’s largest – rose $21 billion to $3.205 trillion last month, compared to… $3.184 trillion in March.”

For the week, the U.S. Dollar Index gained 1.4% to 102.68 (down 0.8% y-t-d). For the week on the upside, the Mexican peso increased 1.0%, and the Brazilian real gained 0.6%. On the downside, the South African rand declined 4.8%, the Swedish krona 2.1%, the New Zealand dollar 1.6%, the euro 1.5%, the Australian dollar 1.5%, the British pound 1.4%, the Canadian dollar 1.3%, the Norwegian krone 1.1%, the Singapore dollar 0.9%, the South Korean won 0.9%, the Swiss franc 0.7%, and the Japanese yen 0.7%. The Chinese (onshore) renminbi declined 0.71% versus the dollar (down 0.87%).

Commodities Watch:

May 6 – Bloomberg: “China added to its gold reserves for a sixth straight month, extending a flurry of purchases as central banks around the world expand their holdings of bullion amid escalating geopolitical and economic risks. China raised its gold holdings by about 8.09 tons in April… Total stockpiles now sit at about 2,076 tons, after the nation increased reserves by about 120 tons in the five months through March. Central banks have purchased large amounts of gold in the past year to diversify assets, as well as to protect reserves from the impact of a weakening dollar and rampant inflation.”

The Bloomberg Commodities Index fell 1.7% (down 10.3% y-t-d). Spot Gold declined 0.3% to $2,011 (up 10.2%). Silver dropped 6.6% to $23.97 (up 0.1%). WTI crude lost $1.30, or 1.8%, to $70.04 (down 13%). Gasoline rallied 2.0% (down 1%), and Natural Gas recovered 6.0% to $2.27 (down 49%). Copper dropped 4.0% (down 2.2%). Wheat slumped 3.8% (down 20%), and Corn fell 1.7% (down 14%). Bitcoin sank $2,830, or 9.6%, this week to $26,760 (up 61%).

Global Bank Crisis Watch:

May 8 – Bloomberg (Jonnelle Marte): “The Federal Reserve said that banks reported tighter standards and weaker demand for loans in the first quarter, extending a trend that began before recent stresses in the banking sector emerged. The proportion of US banks tightening terms on commercial and industrial loans for medium and large businesses rose to 46%, up from 44.8% in the fourth quarter of 2022, according to a Fed survey of lending officers… The report also showed much weaker demand for credit. The share of banks reporting weaker demand for commercial and industrial loans among large and mid-size firms rose to 55.6% in the first quarter, the highest since 2009 during the global financial crisis. That proportion was 31.3% in the fourth quarter…”

May 11 – Wall Street Journal (Sam Goldfarb): “Investors are demanding higher yields to own the bonds of regional banks, threatening to further pressure lenders that are already being hit by rising deposit costs. The extra yield, or spread, on regional-bank bonds over U.S. Treasurys has risen in many cases by about 2 percentage points or more since early March…”

May 7 – Bloomberg (Tasos Vossos): “Investors are bailing on preferred shares at a historic clip because of the growing concern about the health of US regional banks. A $12.2 billion iShares exchange-traded fund tracking the wider preferred market sank 5.1% last week, marking one of the biggest selloffs since the global financial crisis. Preferreds, a kind of hybrid security, are popular with banks because they help meet capital requirements without diluting shareholders. But now, the market is being upended in a selloff fueled by regional bank failures. Issuance by banks is running at its slowest pace since 2018…”

May 11 – Reuters (Pete Schroeder): “Large U.S. lenders will bear most of the cost of replenishing a deposit insurance fund that was drained of $16 billion by the collapse of Silicon Valley Bank and two other lenders, although mid-sized banks will also be on the hook, the Federal Deposit Insurance Corporation (FDIC) said… The bank regulator will apply a ‘special assessment’ fee of 0.125% to uninsured deposits of lenders in excess of $5 billion, based on the amount of uninsured deposits a bank held at the end of 2022, the FDIC proposed at a board meeting.”

May 10 – Bloomberg (Ambereen Choudhury and Marion Halftermeyer): “UBS Group AG bankers assessing Credit Suisse Group AG’s business have flagged concerns about some portfolios of loans in high-growth Asian countries as the firm decides which assets to tag for a wind-down unit. The concerns over lending relationships across traditionally high-risk markets including Indonesia, Vietnam, Malaysia and India could lead to the assets being runoff or sold… UBS is zeroing in on past procedures and some loans effectively in distressed status, one person said.”

Debt Ceiling Watch:

May 11 – Reuters (Harry Robertson): “The cost of insuring against a U.S. default rose to its highest since early 2009 on Thursday, in the latest sign of investor nerves over the debt ceiling standoff. U.S. 5-year sovereign credit default swaps rose to 74 bps… U.S. President Joe Biden on Wednesday said a failure to quickly raise the $31.4 trillion debt ceiling could throw the economy into a recession and destroy thousands of jobs.”

May 10 – Bloomberg (Sujata Rao and Denitsa Tsekova): “The cost of insuring Treasuries against default now eclipses some emerging markets as the American government gets closer to running out of money. US credit-default swaps are more expensive than contracts on the bonds of Greece, Mexico and Brazil, which have defaulted multiple times and have credit ratings many rungs below that of the US’s AAA. Few investors doubt that America will make good on its debts. But even a technical default — one that merely delays interest and principal payments — would roil the $24 trillion Treasury market, the bedrock of the global financial system. For holders of the credit-default swaps, such a scenario would yield a lucrative return. ‘There’s something of a gambling going on in US CDS,’ said John Canavan, lead analyst at Oxford Economics.”

May 11 – Financial Times (Robin Wigglesworth): “Yesterday the SEC’s chair Gary Gensler spoke at ISDA’s annual meeting in Chicago. The main topic was the regulator’s plans to overhaul the Treasury market, but he couldn’t resist having a pop at the debt ceiling idiocy. Gensler highlighted how fears that a default could ensue were creeping into markets, and warned that if it actually happened it could be a cataclysmic event… ‘While we at the SEC have no direct role in those discussions, the outcome is directly consequential to each part of our mission: protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient markets. We’ve already seen an effect in the pricing and liquidity of short-dated Treasury bills and continue to monitor for any additional tremors. If the U.S. Treasury as an issuer were actually to default, it would have very significant, hard to predict, and likely lasting effects on investors, issuers, and markets alike. In a word, it would make the Cyclone Roller Coaster at the 1933 Chicago World’s Fair look like a kiddie ride.’”

May 9 – Reuters (David Lawder and Jahnavi Nidumolu): “Wall Street executives who have advised the U.S. Treasury’s debt operations for the past 25 years warned… they are ‘deeply concerned’ about the debt limit impasse that has markets worried about a U.S. default on payment obligations. The 18 current and former chairs and vice chairs of the Treasury Borrowing Advisory Committee (TBAC) since 1998said in a letter to Treasury Secretary Janet Yellen, ‘Any delay in making an interest or principal payment by Treasury would be an event of seismic proportions, not only for financial markets but also the real economy.’”

May 10 – Reuters (Tatiana Bautzer): “JPMorgan… CEO Jamie Dimon said the congressional standoff over the U.S. debt ceiling, and a potential U.S. default, could create a financial panic, according to an interview… ‘Panic isn’t necessarily a rational thing,’ the website quoted Dimon as saying. ‘People panic. And (when) you see people panic — that’s ’08, ’09 again, and that’s really what you want to avoid.’”

Market Instability Watch:

May 9 – Bloomberg (Eva Szalay): “Goldman Sachs is urging investors to cushion themselves from the possibility of increased volatility in the next few months as Wall Street quants dive back into US stocks. Quant investors have swooped into equities as strong first-quarter earnings and resilient growth in the US has kept a lid on volatility. The Cboe Volatility Index (ticker VIX) has been below the 20 level since late March. This has pushed the exposure of systematic investors to above neutral for the first time since December 2021, according to Deutsche Bank…”

May 9 – Bloomberg (Craig Stirling and Anna Edwards): “Investors should brace for months of market readjustments overshadowed by the threat of a new ‘financial accident,’ according to Allianz chief economist Ludovic Subran. ‘We have all the ingredients of a so-called Minsky moment,’ he told Bloomberg…, referring to economist Hyman Minsky’s description of a precipitous drop in asset prices after a build-up of debt. ‘You see that everywhere, these liquidity pools or liquidity crunches are starting to be visible.’”

Bursting Bubble and Mania Watch:

May 11 – Bloomberg (Sarah McBride, Abhinav Ramnarayan, Jill R. Shah and Agatha Cantril): “A key form of financing that startups rely on is shrinking, hurting new companies that are already starved for capital. The volume of venture debt, a type of loan that younger companies line up to help pay the bills, plunged to $3.5 billion in the US in the first quarter, according to PitchBook, the lowest level since 2017… First Citizens BancShares Inc., Silicon Valley Bank’s buyer, says its appetite for venture financing hasn’t changed… The company’s president said First Citizens is better positioned to serve venture-backed companies now. But many of the biggest lenders across the economy are less willing to take risk as economic growth slows.”

May 8 – Financial Times (Ortenca Aliaj, Antoine Gara, Harriet Agnew and Eric Platt): “Fund managers are warning of growing problems in the $5.6tn US commercial real estate industry that could prove painful for lenders already shaken by turmoil in the banking sector… ‘The private market hasn’t started to heavily mark down real estate,’ Apollo Global Management co-president Scott Kleinman told the Financial Times. ‘The equity will be first. That’s the next shoe to drop in the US. Like everything else, it has been priced so tightly and there hasn’t been a commercial real estate crisis in the US since the ‘90s.’”

May 9 – Wall Street Journal (Konrad Putzier and Will Parker): “Defaults are rising for a niche mortgage bond used primarily to fund apartment-building purchases, another sign that rising interest rates are upending the property sector. This product, known as commercial real estate collateralized loan obligations, or CLOs, are mortgages packaged into bonds that are sold to investors. These mortgages helped fuel the rise in housing costs across Sunbelt states such as Arizona, Texas and Nevada, facilitating the purchase of buildings where property owners saw opportunities to raise rents. Rental apartments accounted for two-thirds of these CLOs issued in 2021 and 81% of those issued in 2022… The mortgages associated with CLOs appeal to property owners because they can put down less equity and take on more debt than with bank mortgages. They also have shorter terms and floating interest rates that make it easier for owners to sell or refinance their buildings after a few years.”

May 11 – Financial Times (Gillian Tett): “Another week, another wave of worry about American regional banks. Thankfully, the level of panic has dropped somewhat since the Federal Deposit Insurance Corporation appears to be backstopping the system — by precedent, if not by law… However, as investors — and American politicians — uneasily watch those banks, there is another sector that also deserves our attention: life insurance…The issue at stake is captured in some charts buried in the Federal Reserve’s… financial stability report. These show that insurance groups held about $2.25tn of assets deemed to be risky and/or illiquid, including commercial real estate or corporate loans, at the end of 2021… In gross terms, that is almost double the level they held in 2008, and represents about a third of their assets.”

Ukraine War Watch:

May 11 – Bloomberg: “President Volodymyr Zelenskiy told the BBC that Ukraine needs more time to prepare for its anticipated counteroffensive against Russian occupying forces. Zelenskiy earlier said that Kyiv was conducting intensive work with partners on new defense packages and decisions are expected shortly. The UK has provided Ukraine with multiple Storm Shadow cruise missiles, with a firing range in excess of 155 miles, to use in Kyiv’s expected counteroffensive.”

May 9 – Financial Times (Polina Ivanova and Roman Olearchyk): “President Vladimir Putin has vowed to pursue his war in Ukraine, accusing western nations of seeking to dismember Russia as his forces launched more missile attacks on Kyiv. Speaking at a noticeably scaled-back military parade to celebrate the Soviet Union’s victory in the second world war, Putin claimed that ‘a real war has once again been unleashed against our motherland’. The goal of this, he said, was to ‘achieve the disintegration and destruction of our country’.”

May 9 – Reuters: “President Vladimir Putin… said a ‘real war’ was again being waged against Russia as he invoked the Soviet Union’s victory in World War Two to say the West was trying to destroy his country. In a speech on Red Square as part of Russia’s Victory Day celebrations, Putin said Russia wanted to see a peaceful future, and said the entire country was behind what Russia calls the ‘special military operation’ in Ukraine. Putin said the West had forgotten the Soviet Union’s victory over Nazi Germany in 1945.”

May 6 – Reuters (Olena Harmash and Tom Balmforth): “Ukrainian air defences shot down a Russian hypersonic missile for the first time during an attack on the capital Kyiv this week, the Air Force said…, in a potentially major setback for the Kremlin’s campaign of long-range air strikes. The Kinzhal, which means ‘dagger’ in Russian, is one of six ‘next generation’ weapons unveiled by President Vladimir Putin in 2018 when the Russian leader boasted that it cannot be shot down by any of the world’s air defence systems.”

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

May 8 – Wall Street Journal (Brian Spegele): “China’s foreign minister rebuked the American ambassador in Beijing for what he said was Washington’s support of Taiwan and indicated that his side wanted concessions from the U.S. in return for improved lines of communication sought by the White House. In a readout of their meeting… from China’s Foreign Ministry, Qin Gang described the U.S. as hypocritical for trying to bolster communication channels between the countries on one hand, while simultaneously brushing up against what China sees as its Taiwan red lines. ‘We cannot focus on communication while China is constantly being suppressed and contained,’ Mr. Qin told Ambassador Nicholas Burns. ‘You cannot say one thing and do another.’”

May 10 – Reuters (By Gabriela Baczynska): “European Union states were holding a first discussion… on proposed new sanctions over Russia’s war in Ukraine that would target Chinese and Iranian firms and allow export curbs on third countries for busting trade restrictions. Talks among the EU envoys were set to be heated, according to one diplomat, with Russia hawks upset the plan does not go far enough but others wary of damaging their international ties. Widely differing perspectives mean a quick deal is not expected, several diplomats said.”

May 10 – Wall Street Journal (Laurence Norman and Austin Ramzy): “China’s foreign minister is crisscrossing Europe this week in a bid to peel the continent away from the growing confrontation between Beijing and Washington, warning that European interests would be harmed by toeing the U.S.’s approach. A three-capital trip by Qin Gang, his first solo trip to the region since becoming China’s foreign minister, comes at a pivotal moment for China’s relationship with the bloc. European leaders have been reluctant to join Washington’s mounting confrontation with Beijing. Instead, they have emphasized diplomatic dialogue and trade while pushing back on Beijing’s increasing assertiveness on the world stage… Yet China’s more aggressive foreign policy, tighter scrutiny of foreign companies at home and political support for Russia have also caused a backlash in Europe.”

De-globalization and Iron Curtain Watch:

May 11 – Financial Times (Kana Inagaki, Henry Foy, Sam Fleming and Demetri Sevastopulo): “US Treasury secretary Janet Yellen has called for ‘co-ordinated action’ by G7 nations against Beijing’s use of economic coercion, as Washington finalises a new outbound investment-screening mechanism aimed at China… Yellen said the new US investment restrictions would be ‘narrowly scoped’ and ‘targeted at technologies where there are clear national security implications’. ‘Obviously, it would be most effective if there’s co-ordinated action by a group of like-minded countries and agreement that this is a useful approach,’ she said…, adding she would continue ‘informal’ discussions on the measures with other G7 members.”

May 9 – Wall Street Journal (Philip Wen, Vibhuti Agarwal and Greg Ip): “Western companies are desperately looking for a backup to China as the world’s factory floor, a strategy widely termed ‘China plus one.’ India is making a concerted push to be the plus one. Only India has a labor force and an internal market comparable in size to China’s; India’s population may be the world’s largest, according to the United Nations. Western governments see democratic India as a natural partner, and the Indian government has pushed to make the business environment more friendly than in the past. It scored a coup with the decision by Apple to significantly expand iPhone production in India, including expediting the manufacturing of its most advanced model.”

May 9 – Bloomberg (Arne Delfs): “China would react ‘strictly and strongly’ to any penalties imposed on its companies by the European Union for supplying Russia with so-called dual-use goods that can be used for both military and civilian purposes, according to Foreign Minister Qin Gang. The EU’s executive arm has proposed extending strict trade restrictions to several Chinese companies as it tries to crack down on firms supplying the Kremlin with banned goods and technologies that have aided its war machine in Ukraine.”

Inflation Watch:

May 10 – Associated Press (Christopher Rugaber): “Consumer prices in the United States rose again in April, and measures of underlying inflation stayed high, a sign that further declines in inflation are likely to be slow and bumpy. Prices increased 0.4% from March to April…, up sharply from a 0.1% rise from February to March. Compared with a year earlier, prices climbed 4.9%, down slightly from March’s year-over-year increase. It was the smallest annual increase in two years… Grocery prices fell for a second straight month. And the cost of many services, including airline fares and hotel rooms, plunged. Though apartment rents rose in April, they did so more slowly than in previous months.”

May 12 – Bloomberg (Reade Pickert): “US long-term inflation expectations unexpectedly accelerated in early May to a 12-year high and consumer sentiment soured, reflecting growing concerns about the economic outlook. Consumers see prices climbing at an annual rate of 3.2% over the next five to 10 years, according to the preliminary May reading from the University of Michigan. They anticipate costs rising 4.5% over the next year, compared to last month’s 4.6%… The consumer sentiment index slid to 57.7, the lowest since November and weaker than all forecasts, from 63.5 last month.”

May 6 – Financial Times (Philip Georgiadis, Patrick Mathurin and Chris Campbell): “Air fares are rising at more than twice the rate of inflation, as carriers cash in on soaring demand for travel that has defied broader economic headwinds. Average ticket prices on more than 600 of the world’s most popular routes rose at an annual rate of 27.4% in February…, marking the fifteenth consecutive month of double-digit growth, according to… aviation company Cirium.”

May 10 – Bloomberg (Prashant Gopal): “Financial pain is ratcheting up for New York-area renters. Rents for primary residences in the New York, Jersey City and Newark, New Jersey, region rose 6.1% in the 12 months through April, the biggest increase since 2005… Renters in the New York area are confronting a heated market ahead of the busiest season, often in July and August for Manhattan leases. Apartments have been flying off the market and landlords are scaling back on incentives, according to… Miller Samuel Inc. and… Douglas Elliman Real Estate.”

Biden Administration Watch:

May 10 – Reuters (Richard Cowan and David Morgan): “Detailed talks on raising the U.S. government’s $31.4 trillion debt ceiling kicked off on Wednesday with Republicans continuing to insist on spending cuts, the day after Democratic President Joe Biden and top congressional Republican Kevin McCarthy’s first meeting in three months. Time is tight to avoid a historic, economically destabilizing default on government debt, which the Treasury Department has warned could come as soon as June 1.”

May 10 – Associated Press (Zeke Miller, Seung Min Kim, Josh Boak and Lisa Mascaro): “President Joe Biden and congressional leaders confronted each other on the debt limit impasse Tuesday, ending their meeting with no breakthrough but agreeing to meet again this week to try to avert the looming risk of an unprecedented government default. Speaking at the White House, Biden described the talks as ‘productive’ even though House Speaker Kevin McCarthy said after the high-stakes Oval Office meeting that he ‘didn’t see any new movement’ toward resolving the stalemate.”

May 6 – Reuters (Nandita Bose and Trevor Hunnicutt): “President Joe Biden said… he was not yet ready to invoke the 14th Amendment to avoid the United States defaulting on its debts as early as June 1, comments which for the first time suggested he has not ruled out the option. ‘I’ve not gotten there yet,’ Biden said… Section Four of the amendment, adopted after the 1861-1865 Civil War, states that the ‘validity of the public debt of the United States … shall not be questioned.’ But the clause has been largely unaddressed by the courts. Some experts have suggested that Biden could invoke this amendment to raise the debt ceiling on his own if Congress does not act. That would almost certainly lead to prolonged legal wrangling, which could unsettle financial markets…”

May 9 – Bloomberg (Erik Wasson): “President Joe Biden and House Speaker Kevin McCarthy agree on one thing heading into a crucial Tuesday meeting: they don’t want a short-term debt-limit extension. But the two men at the center of the high-stakes talks are showing no signs of compromise on a long-term one, risking a first-ever US default as a June 1 deadline looms. ‘Why continue to kick the can down the road?’ McCarthy told reporters…, rejecting any deal that merely buys time until Sept. 30. ‘Let’s solve it now.’ White House Press Secretary Karine Jean-Pierre likewise said a short-term extension isn’t Biden’s ‘plan’…”

May 8 – Reuters (Andrea Shalal and David Lawder): “Treasury Secretary Janet Yellen said… a failure by Congress to raise the $31.4 trillion federal debt limit would cause a huge hit to the U.S. economy and weaken the dollar as the world’s reserve currency. Asked whether the U.S. Treasury could prioritize payouts to bondholders in the event of a default, Yellen told CNBC that President Joe Biden would be forced to make decisions on what to do with Treasury’s resources if the debt ceiling was not raised, but declined to discuss or rank the options.”

Federal Reserve Watch:

May 9 – Bloomberg (Gregory Korte): “Public confidence in Jerome Powell’s leadership of the Federal Reserve has dropped precipitously, according to a new survey, and is now at or below his predecessors’ as the central bank wages its war against inflation. A Gallup poll… shows 36% of US adults say they have a ‘great deal’ or a ‘fair amount’ of confidence that the Federal Reserve chairman would do or recommend the right thing for the economy. That’s lower than Janet Yellen’s 37% during her first year leading the Fed in 2014… and is the lowest level recorded since Gallup began tracking public confidence in the central banking chief in 2001. Former Chairman Ben Bernanke’s lowest point came in 2012, at 39%.”

May 8 – Financial Times (James Politi, Joshua Franklin and Brooke Masters): “The Federal Reserve has warned that the recent banking turmoil could fuel a broad credit crunch that risks slowing the US economy, while lenders told the central bank they plan to tighten lending standards due to worries about loan losses and deposit flight. Two separate publications by the Fed on Monday highlighted mounting concerns that the March collapses of Silicon Valley Bank and Signature Bank and last week’s failure of First Republic will lead to pullbacks in lending and drive down asset prices. The US central bank said in its twice-yearly financial stability report that despite ‘decisive actions’ by regulators and officials to tackle the recent regional bank crises, worries about the ‘economic outlook, credit quality, and funding liquidity’ could lead ‘banks and other financial institutions to further contract the supply of credit to the economy’.”

May 9 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of New York President John Williams said he is monitoring how strains in the banking sector affect the US economy and left the door open to leaving interest rates on hold next month. ‘I will be particularly focused on assessing the evolution of credit conditions and their effects on the outlook for growth, employment, and inflation,’ Williams said… ‘We’re going to get a lot of data between now and our June meeting.’”

May 12 – Bloomberg (Ana Monteiro and Stephanie Stoughton): “The Federal Reserve will likely need to raise interest rates further and hold them higher for some time if US price pressures don’t cool off and the jobs market shows no sign of slowing, Governor Michelle Bowman said. ‘Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate to attain a sufficiently restrictive stance of monetary policy,’ Bowman said… ‘I also expect that our policy rate will need to remain sufficiently restrictive for some time to bring inflation down and create conditions that will support a sustainably strong labor market.’”

May 10 – Associated Press (Christopher Rugaber): “Inflation remains ‘stubbornly high’ and is no longer making much progress toward the Federal Reserve’s 2% target, a top Fed official said…, hours after price data for April were released… Tom Barkin, president of the Federal Reserve Bank of Richmond, said he is also seeing some signs that banks in his region — which includes Virginia, North Carolina, South Carolina and West Virginia — are slowing their lending. It isn’t yet clear, he said, what consequences that trend might have… For now, Barkin said, inflation remains unacceptably high… ‘Just looking through all that it still paints a picture of inflation that is stubbornly high,’ he said. Core inflation has been stuck in a range of 0.3%-0.5% for months, he added, ‘where you’d really like it to be moving down and in concert with our target.’”

May 10 – Bloomberg (Bill Dudley): “The Federal Reserve has mostly done a good job of taking responsibility for its role in the US regional bank crisis. But there’s still one area where it falls short: recognizing its failure to flag the risks that rising interest rates would pose for the financial system… Yet the Fed’s evaluation should be broader. Specifically, it should explain why the central bank’s financial stability monitoring didn’t identify the danger created by its monetary policy choices, which resulted in the sharpest and largest increase in interest rates since the early 1980s. In its November 2022 Financial Stability Report, the Fed expressed concern about the funding risks of money market mutual funds, stablecoins and bond mutual funds. But it saw risks at banks as ‘low, given their large holdings of liquid assets and limited reliance on wholesale funding.’”

U.S. Bubble Watch:

May 8 – Wall Street Journal: “April is typically the best month for the federal fisc because it’s the tax payment deadline for the previous year. But this year the April budget surplus fell by $135 billion from a year earlier. Including adjustments for timing shifts in federal outlays, the decline was $274 billion, or 73% from April 2022. That portends bigger budget deficits for the rest of the fiscal year. The deficit for the first seven months is already $928 billion, or 236% higher than in 2022 with timing adjustments. Keep in mind that this is happening when the economy is still growing and the unemployment rate is still low. The big culprit is spending, which is up 12% in the first seven months or nearly $400 billion… Entitlements are up 11% and education spending owing to student-loan changes is up 56%.”

May 9 – Reuters (Lucia Mutikani): “U.S. small business confidence fell to more than a 10-year low in April on worries about the near-term economic outlook and persistent worker shortages, but there were few signs that businesses were having difficulties accessing credit. The National Federation of Independent Business (NFIB) said… its Small Business Optimism Index dropped 1.1 points to 89.0 last month, the lowest level since January 2013… The share of owners expecting better business conditions over the next six months fell two points to a net negative 49%. A net negative 19% expected higher inflation-adjusted sales, down four points from March. Thirty percent reported all their credit needs were met, up a point from the prior month… Forty-five percent of owners reported job openings that they could not fill, up 2 points from March… The share of small business owners reporting that inflation was their single most important problem dipped one point to 23%, and was 14 points lower than last July’s peak…”

May 11 – CNBC (Jeff Cox): “Wholesale prices rose less than expected in April… The producer price index, a measure of prices for final demand goods and services, increased 0.2%, against the Dow Jones estimate for 0.3% and after declining 0.4% in March. Excluding food and energy, the core PPI also rose 0.2%, in line with expectations. The core reading was the same excluding trade. On an annual basis, the headline PPI increased just 2.3%, down from 2.7% in March and the lowest reading since January 2021. Though the PPI rise was less than expected, the services index increased 0.3%, the biggest move since November 2022…”

May 10 – Wall Street Journal (Nicole Friedman): “Many Americans who want to move are trapped in their homes—locked in by low interest rates they can’t afford to give up. These ‘golden handcuffs’ are keeping the supply of homes for sale unusually low and making the market more competitive and pricey than some forecasters expected. The reluctance of homeowners to sell differentiates the current housing market from past downturns and could keep home prices from falling significantly on a national basis, economists say… As of March 31, nearly two-thirds of primary mortgages had an interest rate below 4%, according to mortgage-data firm Black Knight. About 73% of primary mortgages have fixed rates for 30 years, Black Knight data show. The average rate for a new 30-year fixed mortgage was 6.39% in the week ended May 4, according to Freddie Mac.”

May 10 – CNBC (Diana Olick): “Mortgage rates fell slightly last week after the chairman of the Federal Reserve suggested a potential end to a historic string of interest rate hikes… Applications for a mortgage to purchase a home increased 5% for the week, but were 32% lower than the same week a year ago. Rates haven’t really dropped enough to offset high home prices.”

May 11 – Bloomberg (Alexandre Tanzi): “US credit card debt declined in early 2023 at a slower pace than it typically does in the first quarter of each year, as high prices continued to put pressure on household budgets… Card balances fell by 1.5% in the first quarter from the previous three months, data released by TransUnion… show. Balances remain near a record high, and up 19% from a year earlier. The January-March period is typically one when consumers seek to rein in their borrowing after robust spending during the holiday season. In the 10 years since 2013, the average first-quarter drop in credit-card balances has been 3%… This year, the TransUnion numbers suggest Americans haven’t managed to cut back that much.”

May 9 – Reuters (Bansari Mayur Kamdar): “U.S. companies are feeling the heat of decades-high interest rates and sticky inflation, with several filing for bankruptcy protection as the era of easy money draws to a close. The tally of U.S. companies that have gone bankrupt so far in 2023 is higher than the first four months of any year since 2010, data from S&P Global Market Intelligence showed. There were 54 corporate bankruptcy petitions in April, down from 70 in March, S&P Global said. Still, the year-to-date count more than doubled to 236 from a year ago.”

May 10 – Bloomberg (Jeremy Hill and Jonathan Randles): “In October 2020, Akorn Operating Company LLC announced its emergence from Chapter 11 bankruptcy as the beginning of ‘an exciting new chapter.’ Less than three years later, the generic US drugmaker ran out of money and laid everyone off. Akorn is back in bankruptcy court — this time to be sold for parts. It’s one of 12 firms this year to seek bankruptcy protection for a second or even third time after initial attempts at court-supervised rehabilitation failed. So-called Chapter 22 filings — industry slang for repeat bankruptcies — are piling up at the fastest rate since the Great Recession, according to BankruptcyData.”

May 9 – Bloomberg (Skylar Woodhouse): “The post-pandemic reality for America’s public transportation is bleak. Work from home has solidly set in, leaving transit agencies that rely on fare-box revenue facing a fiscal cliff. As pandemic aid dwindles, the nation’s biggest transit systems face a roughly $6.6 billion shortfall through fiscal year 2026, according to a Bloomberg tally of the top eight US transportation agencies based on passenger trips. Rising labor costs and inflation are hitting as farebox revenue stagnates after ridership collapsed. Those eight agencies serve regions that combined contribute about $6 trillion annually to the national economy.”

China Watch:

May 7 – Bloomberg: “The Chinese economy’s debt ratio reached a record high in the first quarter of the year, with bank loans to companies surging as the nation reopened from Covid Zero. The macro leverage ratio — or total debt as a percentage of gross domestic product — soared to 279.7% in the first quarter… That was an increase of 7.7 percentage points from the previous quarter, the biggest jump in three years. The debt ratio held by non-financial corporates rose 5.8 percentage points. Leverage ratios for the household and government sectors were each up by around 1 percentage point. The data doesn’t include bank loans to local government financing vehicles.”

May 11 – New York Times (Keith Bradsher): “Across China, many local governments are on the brink of insolvency. Some cities have reduced pay for civil servants. Cuts to municipal health insurance have triggered street protests. Central government bailouts are a possibility to rescue cities from their deep budget problems, but China hasn’t turned to a source of revenue that would be an obvious option in other countries: property taxes. In China, where the government owns the land, localities almost never tax homeowners to support services like schools. Cities rely instead on selling long-term leases to real estate developers. Revenue from these land sales has plunged in the past year.”

May 11 – Reuters (Qiaoyi Li and Kevin Yao): “New Chinese bank loans tumbled far more sharply than expected in April, adding to worries that the economy’s post-pandemic recovery is losing steam and putting pressure on the central bank to ease policy. While some moderation in lending had been expected after a record first quarter, the weak readings came hours after data showed deflationary pressures were deepening in China, and days after news that imports had contracted sharply, suggesting domestic demand is still frail and more stimulus may be needed. Chinese banks extended 718.8 billion yuan ($103.99bn) in new yuan loans in April, less than a fifth of March’s tally and just over half of the amount expected by analysts…”

May 9 – Reuters (Joe Cash): “China’s imports contracted sharply in April, while exports rose at a slower pace, reinforcing signs of feeble domestic demand despite the lifting of COVID curbs and heaping pressure on an economy already struggling in the face of cooling global growth… Inbound shipments to the world’s second-largest economy fell 7.9% year on year in April, extending the 1.4% decline seen a month earlier, while exports grew 8.5%, easing from the 14.8% surge in March… ‘At the beginning of this year, one would assume that imports will easily surpass 2022 levels following the reopening, but that hasn’t been the case,’ said Xu Tianchen, an economist at the Economist Intelligence Unit.”

May 11 – Bloomberg: “China’s consumer prices barely grew in April, while borrowing slumped, providing further evidence the economy’s recovery is waning and fueling expectations of more central bank stimulus. Consumer inflation weakened to a two-year low of 0.1% in April…, as food and energy costs eased. The figures were partly affected by the base of comparison from last year. Producer prices fell 3.6%, largely due to lower commodity costs.”

May 10 – Bloomberg: “China picked a little-known local government official as the nation’s top regulator overseeing the $61 trillion financial sector, in a surprise move after President Xi Jinping unveiled the biggest overhaul of the nation’s bureaucracy in decades. Li Yunze, a former banker, was named party secretary of the newly formed national financial supervision and management bureau that regulates thousands of banks, insurers and trust firms… The 52-year-old is being elevated from his latest post as a vice governor of Sichuan province, where he has served since 2018… His appointment may come as a surprise to market watchers, who had expected a pick with more seniority and expertise…”

May 9 – Bloomberg: “Xi Jinping’s crackdown on perceived threats to national security is roiling the vast industry of consultants and researchers who help global investors understand China, threatening the government’s attempts to lure foreign capital into an economy showing increasing signs of strain. The latest and most prominent target is Capvision Pro Corp., a global expert network headquartered in Shanghai and New York. Chinese authorities on Tuesday accused the firm of leaking state secrets and being linked to foreign intelligence agencies. In a rare occurrence involving a foreign company, China’s state television on Monday night broadcast footage of officials raiding Capvision’s offices, questioning employees and removing equipment.”

May 9 – Bloomberg: “China’s crackdown on data access to overseas firms is adding to concerns about how Beijing controls the flow of information in the country, making it difficult for investors to assess the state of the economy. In recent weeks, domestic data company Wind Information Co. has stopped providing some information to overseas clients, US consultancy Bain & Co. was targeted by investigators and business intelligence firm Capvision raided as part of a new anti-spy campaign. The lack of access to information goes much deeper than that, though. For at least a year or more, data providers… have been restricting information like academic papers and court judgments, official biographies of politicians, and bond market transactions.”

May 11 – Bloomberg (Rebecca Choong Wilkins): “China is warning domestic brokerages not to spread information that compromises national security, reinforcing a campaign that has roiled consulting firms and providers of financial data. Analysts have to prevent leaks and the spread of false information that can have a big influence on the market, regulators said in a message to the industry after the inspections of 45 brokerages. Staff also need to confirm the legality and accuracy of anything obtained by talking to experts or through research…”

May 9 – Bloomberg (Lorretta Chen): “Chinese high-yield dollar bonds are at their lowest level of the year, as liquidity worries about property firms dash optimism about rising new-home sales. Wednesday’s declines for junk notes grew to at least 2 cents in the afternoon… Bonds issued by Hopson Development Holdings Ltd. and a unit of Seazen Holdings Co. fell as much as 6 cents… Average prices dropped for a seventh-straight session Tuesday…, putting them below 70 cents on the dollar for the first time since December. The high-yield sector is dominated by developers, which despite several months of growing home sales continues to see firms run into trouble.”

May 8 – Bloomberg: “Dalian Wanda Group Co. is in talks with major Chinese banks on a loan relief plan that may allow it to extend principal repayments for some onshore borrowings as the conglomerate faces a liquidity challenge… Under the plan, the property giant’s headquarters is seeking to refinance all onshore loans due this year without having to repay the principal, said the people… Industrial & Commercial Bank of China Ltd. is among the creditors Wanda talked with since early May…”

May 9 – Financial Times (Leslie Hook, Hudson Lockett and Cheng Leng): “Chinese iron ore prices dropped to their lowest levels in five months, as weak demand adds to evidence that the country’s economic rebound from tough coronavirus lockdowns may be faltering. After strong steel production during the first quarter, the optimism and activity that followed the end of lockdown have waned, leading to a ‘collapse’ in the steel market and raising questions about the durability of the Chinese economic recovery.”

May 9 – Financial Times (James Kynge and Andres Schipani): “The conflict in Sudan has dealt a fresh blow to China’s strategy of financial engagement with Africa, putting at further risk loans from Beijing worth at least $5bn. Sudan has been a significant recipient of Chinese financing on the African continent, where Beijing ranks as the largest bilateral lender… The power struggle between two rival generals that erupted last month has brought war to the capital Khartoum and displaced hundreds of thousands of Sudanese people. It has also been a setback for China’s strategic goals in the Horn of Africa, where Beijing has sought to bolster its influence by funding infrastructure. Sudan’s outstanding debts to China stood at $5.12bn in early 2022…”

May 10 – Reuters (Chris Prentice and Michelle Price): “A U.S. accounting watchdog found unacceptable deficiencies in audits of U.S.-listed Chinese companies performed by KPMG in China and PricewaterhouseCoopers in Hong Kong, the government agency said… The U.S. Public Company Accounting Oversight Board (PCAOB) published the findings of its inspections after gaining access to Chinese company auditors’ records for the first time last year following more than a decade of negotiations with Chinese authorities. That access kept roughly 200 China-based public companies from potentially being kicked off U.S. stock exchanges.”

Central Banker Watch:

May 11 – Reuters (David Milliken and Andy Bruce): “The Bank of England raised its key interest rate by a quarter of a percentage point to 4.5%… and Governor Andrew Bailey said the British central bank would ‘stay the course’ as it seeks to curb the fastest inflation of any major economy. The BoE is no longer predicting a recession after it made the biggest improvement to its growth projections since it first published forecasts in 1997. But it now expects inflation – which remained above 10% in March – to fall more slowly than it had hoped, mostly due to unexpectedly big and persistent rises in food prices. It also saw stronger wage growth than it previously thought.”

May 10 – Bloomberg (Alexander Weber): “The European Central Bank’s fight with inflation isn’t over and more action is still required, according to President Christine Lagarde. While inflation is well down from its double-digit peak, the outlook could face ‘significant upside risks,’ Lagarde told Japan’s Nikkei newspaper… The ECB must be particularly attentive to wage pressures, she said. ‘We have moved in a very deliberate and decisive way in order to fight inflation,’ Lagarde said. Even so, ‘we still have more ground to cover.’”

May 12 – Bloomberg (Kamil Kowalcze): “The European Central Bank may have to continue raising borrowing costs beyond the summer, according to Governing Council member Joachim Nagel… ‘There’s consensus in the Governing Council that interest-rate hikes should continue,’ he told a briefing. ‘The data don’t allow us to consider changing our view that further rate hikes will be necessary, and that also applies for beyond the summer break.’ Nagel’s remarks are his strongest signal yet that the two quarter-point rate increases that economists widely predict in June and July may not be sufficient to return inflation to 2% from more than double that at present.”

May 9 – Reuters (Balazs Koranyi): “The European Central Bank will keep raising borrowing costs until it sees core inflation decline sustainably, ECB board member Isabel Schnabel said.., adding market expectations for rate cuts were misplaced. Schnabel backed the ECB’s decision last week to slow down the pace of rate hikes but said these will continue until it sees a sustained fall in core prices… ‘Based on today’s data, there is no doubt that we have to do more to bring inflation back to our 2% target in a timely manner,’ Schnabel told an event… ‘We will raise rates decisively until it becomes clear that core inflation is also declining on a sustained basis.’ She added rates will probably stay high for long and the rate cuts expected by some market participants this year were ‘highly unlikely’.”

May 9 – Reuters (Balazs Koranyi): “The European Central Bank may need to raise interest rates for longer than currently anticipated, and September could be the earliest moment when policymakers can judge whether past rate hikes have been effective, ECB policymaker Peter Kazimir said… ‘Based on today’s data, we will have to keep raising interest rates for longer than anticipated,’ Kazimir, Slovakia’s central bank chief, said… ‘So, slowing down the pace to 25 bps is a step that will allow us to go gradually higher for longer, should that be necessary and warranted by incoming data.’”

Bursting Global Bubble Watch:

May 7 – Financial Times (Nicholas Megaw and Andrew Edgecliffe-Johnson): “US and European companies have blamed disappointing earnings on a slower than expected economic rebound in China… Cosmetics group Estée Lauder was the most high-profile example this week, suffering its sharpest one-day share price fall on record after it cut sales forecasts because of a ‘far more volatile . . . and more gradual’ recovery in Asia than it had expected. It was one of a growing number of companies from consumer-focused chains such as Starbucks to big tech groups and logistics businesses all striking notes of caution over the past two weeks. ‘The overall expectation was, following the reopening, the China market was going to bounce back,’ Qualcomm chief executive Cristiano Renno Amon told analysts… ‘We have not seen those signs yet.’”

May 10 – Bloomberg (Alice Kantor): “Global luxury home prices fell in the first quarter for the first time since the financial crisis. An index of prime prices in 46 cities declined 0.4% year-over-year, the first drop since 2009, according to… Knight Frank. That’s a sharp reversal from 10% growth seen in the fourth quarter of 2021. New Zealand’s housing market posted the biggest slump, with luxury home prices in Wellington, Auckland and Christchurch falling by double digits. Major cities including San Francisco, New York, Los Angeles, Hong Kong and Vancouver also saw prime prices drop.”

May 9 – Bloomberg (Charles Daly, Anton Wilen and Divya Balji): “One of Sweden’s biggest commercial landlords plans to halt payment of its dividend after suffering a ratings cut, in another sign the funding squeeze gripping Sweden’s leveraged property sector is worsening. SBB — as Samhallsbyggnadsbolaget i Norden AB is more commonly known — is seeking to push back its dividend payment date until “at the latest” ahead of its 2024 annual general meeting…”

May 9 – Bloomberg (Alex Longley): “Benchmark rates for oil-carrying supertankers have collapsed as OPEC+ follows through on a surprise vow to slash supply to shore up prices, reducing volumes shipped across the world’s oceans. Vessels hauling 2 million barrels of crude from the Middle East to China are earning a little over $14,000, down from more than $97,000 on March 20, according to Baltic Exchange data.”

Europe Watch:

May 11 – Financial Times (Martin Arnold): “People have become more pessimistic about inflation in the eurozone, betting that price pressures will remain strong for years to come despite them abating for much of the past six months. The European Central Bank said… its latest monthly survey of consumers showed their expectations for inflation next year and in three years had both risen in March further above the central bank’s 2% target, after four months of mostly falling readings. Those polled now expect eurozone inflation to be 5% in a year’s time, up from 4.6% in the same survey a month ago.”

May 8 – Reuters (Maria Martinez): “German industrial production fell more than expected in March, partly due to a weak performance by the automotive sector, spurring again recession fears in Europe’s largest economy. Production decreased by 3.4% on the previous month following a slightly revised increase of 2.1% in February… ‘After a buoyant performance by industrial production at the beginning of the year, there was an unexpectedly sharp decline in March,’ the economics ministry said.”

Japan Watch:

May 10 – Bloomberg (Toru Fujioka): “The Bank of Japan has adopted a new word in English to describe its stance of continuing with large-scale monetary easing, adding to the list of changes the bank has made since Governor Kazuo Ueda took the helm. At Ueda’s first policy meeting last month, board members discussed ‘patiently’ maintaining easing, according to a summary of opinions… ‘Patiently’ implies waiting for a condition to be fulfilled and contrasts with the previous wording of ‘persistently’ keeping up with easing, a word that was used up until the March meeting, when the BOJ was still led by Ueda’s predecessor Haruhiko Kuroda.”

May 9 – Reuters (Kantaro Komiya): “Japan’s consumer spending unexpectedly fell in March at the fastest rate in a year, while real wages marked a twelfth month of decline on persistent inflation, highlighting the challenges facing the economy in mounting a strong post-COVID revival… Household spending fell 1.9% in March from a year earlier… It marked the biggest decline since March 2022’s 2.3%, when Japan was still trying to curb the spread of coronavirus.”

May 8 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Japanese workers’ real wages continued to fall in March, in a weaker-than-expected result for pay that’s under close scrutiny from both the Bank of Japan and Prime Minister Fumio Kishida. Monthly real cash earnings for Japan’s workers dropped 2.9% from a year earlier, slipping for a 12th straight month… Economists had forecast a 2.4% decline.”

EM Crisis Watch:

May 8 – Financial Times (Andrew England and Adam Samson): “There was a moment when Turkey’s election debate came down to an onion and a warship. It began when Kemal Kılıçdaroğlu, the man leading the charge to break President Recep Tayyip Erdoğan’s grip over Turkish politics, sat at his kitchen table last month… and held up an onion. The point the opposition leader wanted to hammer home to voters was that runaway inflation under Erdoğan’s watch has hurt every household. The price of a kilo of onions, vital for Turkish cuisine, has increased around fivefold in the capital city of Ankara over the past 18 months. ‘The real agenda of the citizens is this. They know that when I come into power, democracy will come, money will flow, investments will flow, the currency will appreciate, prosperity will come,’ said Kılıçdaroğlu… ‘But if he [Erdoğan] stays, this onion in my hands will be 100 lira. It’s even 30 lira now.’”

May 11 – Reuters (Daren Butler): “Kemal Kilicdaroglu, the main election rival of Turkish President Tayyip Erdogan, issued a warning to Russia, accusing it of responsibility for the release of fake material on social media ahead of Sunday’s ballot. Kilicdaroglu, who has a slight lead over long-time leader Erdogan according to opinion polls, did not specify to which material he referred.”

Leveraged Speculation Watch:

May 8 – Bloomberg (Ruth Carson and Garfield Reynolds): “Hedge funds supercharged bearish Treasury bets to historic levels just days before the US banking turmoil took a turn for the worse and spurred a stampede for the world’s safest assets. Leveraged funds boosted overall shorts on US bond futures to a fresh record in the week to May 2, according to… data from the Commodity Futures Trading Commission. That’s a seventh straight week of ramped up bearish bets — the longest streak since 2017.”

Social, Political, Environmental, Cybersecurity Instability Watch:

May 11 – Bloomberg (Brian K Sullivan): “In the Pacific Northwest, heat will bake the coastlines of Washington and Oregon where temperatures could reach into the 90sF (30sC) in Tacoma and high 80s in Seattle starting Saturday. An excessive heat warning covers most of the Washington-Oregon coastline, with heat advisories pushing south into Northern California. California’s San Joaquin Valley is also under a heat advisory from Saturday to Monday. Temperatures are forecast to reach between 94F to 99F.”

May 9 – Bloomberg: “Asia’s brutally hot weather is expected to hit China this summer, threatening a new round of power shortages that last year disrupted global supply chains of everything from cars to solar panels. The electricity supply situation will be tight across the entire nation this summer, state-run China Energy News reported… Central, eastern, and southwestern provinces are likely to experience shortages during periods of peak demand, according to the institute. A heat wave is already scorching parts of Asia even before the official start of the northern hemisphere summer…”

Geopolitical Watch:

May 10 – Financial Times (Alan Beattie): “It took a murderous invasion of a neighbour by a belligerent, nuclear-armed state and a geopolitical struggle between superpowers to find the G7 a purpose in life — but it got there in the end. The club of rich democracies, which holds its leaders’ summit this month in Japan, has resembled seven countries in search of a common role ever since the global financial crisis elevated the broader G20 to prime position in economic governance. If the war in Ukraine and the US-China conflict mean the global economy is all about geopolitics now, the G7’s time has surely come. Vladimir Putin’s aggression has caused the G7 to band together with other rich democracies including the rest of the EU, Australia and so on and label themselves the ‘like-minded countries’. But their achievements so far have been impressive rather than decisive. True, they’ve co-operated on imposing trade and financial sanctions on Moscow. But with economies as big as India and China outside the circle, oil and grain smuggling and other circumventions have punched holes in the cordon.”

May 11 – Reuters (Leika Kihara and Andrea Shalal): “A standoff in Washington over raising the U.S. debt ceiling overshadowed a meeting of Group of Seven (G7) finance leaders starting on Thursday, heightening U.S. recession fears as central banks seek a soft landing for the global economy. The central bank governor of host Japan said the U.S. debt crisis may be discussed at the G7 gathering, adding the group must stand ready to respond to any market repercussions. ‘I have faith U.S. authorities will do their best to prevent it from happening,’ Kazuo Ueda told reporters… ‘The immediate fallout is something U.S. authorities would have to deal with. But (the G7 group) will likely scrutinise the situation … and respond as needed,’ he said, adding that Japanese authorities were watching developments closely.”

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