May 31, 2024: Thesis Corroboration

May 31, 2024: Thesis Corroboration
Doug Noland Posted on June 1, 2024

It was an eventful week worthy of some dissection. Markets for the most part corroborated the “higher for longer” and rising global yields thesis. Ample volatility supports the heightened currency instability thesis, with the yen, renminbi, and EM currencies all in the crosshairs this week.

The equities speculative melt-up appears increasingly vulnerable. After closing the previous week at 11.93, the VIX (equities volatility) Index approached 15 (one-month high) during both Thursday and Friday sessions. Late-cycle blow-offs feed off bearish positioning, ensuring there’s always a thin line between a downside reversal and (yet) another rejuvenating short squeeze. The ridiculously over-loved tech sector is indicating vulnerability. But in the spirit of markets inflicting the most pain on the largest number of people, perhaps Mr. Market will deviously spark a destabilizing rotation before succumbing to a long-overdue selloff.

Tuesday’s two- and five-year and Wednesday’s 7-year auctions were all met with tepid demand. From Bloomberg (Will Hoffman and Ira Jersey): “The final auction cycle of May marks one of the worst coupon auction cycles in recent memory. All three issues tailed market expectations, with a cumulative tail of 3.6 bps surpassed only by February 2021 and September 2023’s 2-, 5-, and 7-year auction cycle.”

Two-year yields traded as high as 5.00% Wednesday, with 10-year yields at 4.63%. Markets made it through Friday’s monthly PCE release without a negative inflation surprise. Still, Tuesday’s bearish trading action appeared important. Endless supply coupled with elevated inflation risk weighs on market sentiment – at home and abroad.

Italian yields traded to 4.02% in late Wednesday trading, up a notable 20 bps from Monday’s lows. For the week, Italian yields jumped nine bps, the largest increase since the global “risk off” week of April 19th – with yields near highs back to December. Greek yields rose eight bps to the highest close since November 28th. UK yields jumped 12 bps in Wednesday trading, to the high (4.40%) since November 13th. Rising 10 bps, German (2.70%) and French (3.17%) 10-year yields both traded to highs back to November.

Wednesday was also a rough day for EM currencies. The Chilean peso dropped 1.6%, the Hungarian forint 1.5%, the Polish zloty 1.1%, the Mexican peso 1.1%, and the Russian ruble 1.1%.

The Nasdaq100 declined 0.7% Wednesday in bearish trading action, as the Semiconductors slumped 1.9% (losses included Advanced Micro Devices 3.8%, Microchip Technologies 3.3%, and Intel 3.0%).

May 30 – Bloomberg (Gowri Gurumurthy): “US junk bonds had their worst day since late April in both return and yield terms on Wednesday, as a continuing Treasuries selloff due to weak government auctions pressured equities. BB yields rose 8 bps to a four-week high of 6.78% while losing 0.26%. CCC yields approached 12.5% after jumping 16 bps, the most in two weeks.”

Wednesday was also notable for Japanese 10-year (JGB) yields jumping 5.5 bps to 1.08% – and then trading up to 1.10% in early Thursday trading – the high back to July 2011. The yen declined Wednesday to 157.71 to the dollar, the weakest reading since the May 1st intervention.

May 31 – Financial Times (Kana Inagaki): “Japan spent a record ¥9.8tn ($62bn) from late April to May to boost the yen, but the currency has resumed its slide towards 34-year lows even as expectations build for interest rate rises, highlighting the struggle Tokyo faces to stabilise its exchange rate. With currency interventions having only a fleeting effect on the yen, analysts say the Bank of Japan faces a ‘huge dilemma’ as it comes under pressure to raise rates at a faster pace when the economy remains weak due to sluggish consumption.”

The yen has ominously little to show for the month’s chunky $62 billion worth of Japanese currency intervention. For now, Japan has ample international reserves to continue its market battling. I’ll assume things only get more challenging for the Ministry of Finance, with the next market test requiring even chunkier responses.

On multiple levels, Thursday was “interesting”. For starters, it was a big squeeze day, with the Goldman Sachs most short index surging 5.9%. The small cap Russell 2000 (RTY) gained 1%, while the Nasdaq100 (NDX) was down 1.1%. It was the largest daily NDX/RTY performance divergence since the April 19th tech selloff. Thursday’s market dynamics offered a timely reminder of how quickly speculative dynamics could turn against popular hedge fund strategies (i.e., long/short).

May 30 – Associated Press (Michael R. Sisak, Jennifer Peltz, Eric Tucker, Michelle L. Price and Jill Colvin): “Donald Trump became the first former American president to be convicted of felony crimes Thursday, as a New York jury found him guilty of all 34 charges in a scheme to illegally influence the 2016 election through a hush money payment to a porn actor who said the two had sex. Trump sat stone-faced while the verdict was read as cheering from the street below could be heard in the hallway on the courthouse’s 15th floor where the decision was revealed after more than nine hours of deliberations.”

Friday volatility was notable. The Nasdaq100 was down 1.9% at intraday Friday lows – only to rally 1.9% in afternoon trading to end the session unchanged. The S&P500 opened 0.4% higher, then retreated 1.2% to intraday lows – only to rally 1.7% (almost 1% in the day’s final 20 minutes) to close the session 0.8% higher. The Banks rallied 1.6% off lows to finish the session up 1.8%. The Utilities rallied 2.4% to end Friday trading 2.6% higher.

The Nasdaq100 dropped 1.4% this week. Microsoft fell 3.5%, Applied Materials 2.6%, Amazon 2.4%, Meta Platforms 2.4%, and Micron 3.5%. The Nvidia melt-up was resilient through Thursday morning, with the stock trading to an all-time high $1,158 ($2.85 TN market cap). But from Thursday’s intraday high to Friday’s trading low, the stock retreated a quick $88, or 7% – only to rally $26 to end the week 3.0% higher.

It didn’t take long for Chinese stock market enthusiasm to dissipate. The CSI300’s 0.6% weekly decline pushed the index back to lows since April. The growth oriented ChiNext Index closed out May with a 2.9% loss, giving back all the early-month advance.

May 28 – Bloomberg: “China’s onshore yuan dropped to the weakest level since November as signs mount that policymakers are slowly letting the currency decline against a resilient dollar. The yuan fell to as low as 7.2487 per dollar as the People’s Bank of China gradually cut its daily reference rate for the managed currency to a level unseen in four months… The PBOC has been facing a constant battle to find the optimal pace of yuan weakness that’s conducive for growth, without triggering market panic or capital outflows. For most of the year, the central bank has kept the currency steady but pressures have been building due to worsening capital outflows and lackluster domestic growth.”

Analysts have been encouraged that Beijing finally recognized the serious risks associated with China’s apartment Bubble collapse. It’s not an unreasonable market assumption that the colossal scope of the real estate debacle will require massive ongoing stimulus measures.

May 21 – Financial Times (Thomas Hale and Joe Leahy): “With the announcement of a Rmb300bn ($41bn) fund to support government purchases of unsold housing, the Chinese government last week appeared to finally unleash major firepower to tackle a three-year slowdown in the country’s real estate market. But while the new measures may mark a turning point in a crisis that has weighed heavily on China’s economy, analysts and economists said the hundreds of billions of renminbi was nowhere near enough. ‘This is a drop in the ocean given the scale of unsold stock,’ said Harry Murphy Cruise, an economist at Moody’s Analytics…”

A “drop in the ocean” indeed, though markets assume Beijing is prepared to open the floodgates as needed. The currency creates a predicament. Xi’s global ambitions require a “powerful currency.” But a monumental reflation would push an already fragile renminbi off the ledge. I suppose Beijing will attempt to thread the needle: major but contained Credit-induced reflation, while orchestrating a measured currency devaluation. I just believe the scope of the collapsing real estate Bubble is beyond manageable.

May 30 – Bloomberg: “Chinese policymakers have identified reducing a glut of housing inventory as the key to ending the nation’s unprecedented property slump. It’s easy to see why. The country has the equivalent of 60 million unsold apartments, which will take more than four years to sell without government aid, according to Bloomberg Economics. The oversupply is dragging down prices at the fastest rate in a decade, giving people less reason to buy a home… Even in China’s four tier-1 cities, where the market is relatively resilient, it will take an estimated 27 months to sell the supply of new homes as of April, according to China Real Estate Information Corp.”

The above Bloomberg article was published with a chart of “Months to Sell New Home Inventory:” Beijing 48.9 months, Wuhan 42, Fuzhou 41.1, Shenzhen 36.2, Nanjing 33.1, Changchun 31.7, Qingdao 31.3 months…

Yan Yuejin, director of E-house China Research & Development Institute, was quoted: “There is a fundamental change in homebuyers’ confidence over the biggest cities in the long term. While low-tier cities have higher outstanding housing stock, the major inventory issue lies in bigger ones.”

“As of April, about 80% of China’s cities had an inventory absorption pace that was worse than a ‘warning line’ of 18 months…”

“Residences completed by developers but unsold expanded to 391 million square meters nationwide as of April, the highest since 2017… Including properties that are almost finished and approved for presale, the stock is much larger at about 1.8 billion square meters, JPMorgan… estimates.”

“China’s support package announced on May 17 is estimated to translate into 500 billion yuan of credit to help government-backed firms buy housing stock from developers… Reducing the inventory to a more optimal level through government-backed acquisitions would require 5 trillion yuan, according to JPMorgan analyst Karl Chan.”

May 17 – Wall Street Journal (Jacky Wong): “There are enough unsold homes in China to house every family in California and New York combined… Goldman Sachs estimates that there was around $4 trillion of residential inventory on a cost basis at the end of last year, including land and projects under construction. Around 45% of that are homes that are either completed or ready for presales. The bank said the property developers need approximately $400 to $600 billion of funding to go back to normal operations.”

I’ve been chronicling the great Chinese apartment Bubble for years now. It has followed the typical pattern. The Bubble inflates for so many years that Bubble Analysis is completely discredited. At the height of exuberance, the doomsayers and their bearish analysis were viewed as nothing more than ridiculous extremism. And I’m increasingly confident that the bursting China Bubble will follow the typical course I’ve witnessed in three decades of analyzing Bubbles: things will prove worse than even the most bearish analysis.

Most research and articles highlight the massive developer inventory of new and under construction apartment units. The above Financial Times article touched upon what will be a decisive issue:

“And Goldman Sachs estimated that, in addition to the unsold housing stock, there were 90mn-100mn units of ‘shadow supply’ in China that were often bought as investment properties and had not been lived in.”

The pieces are all there for a problematic global de-risking/deleveraging episode. Do things come together in the Autumn, as they often do? Or will crisis dynamics catch everyone by surprise this summer?

We’ll closely monitor the “periphery,” where there was some action this week. The EM ETF (EEM) dropped 2.9%, the largest weekly loss since last August. This pushed the two-week downdraft to 4.6%. I’ve already mentioned weakness in Italian, Greek and European bonds. Japanese yields are on the move, while yen and renminbi stability seem to hang by a thread. It’s difficult to see instability held in check through such a long, hot, and blustery summer.

For the Week:

The S&P500 declined 0.5% (up 10.6% y-t-d), and the Dow fell 1.0% (up 2.6%). The Utilities rallied 1.9% (up 15.2%). The Banks were little changed (up 9.3%), while the Broker/Dealers declined 0.8% (up 12.8%). The Transports advanced 1.0% (down 4.2%). The S&P 400 Midcaps added 0.2% (up 7.2%), while the small cap Russell 2000 was unchanged (up 2.1%). The Nasdaq100 fell 1.4% (up 10.2%). The Semiconductors dropped 1.9% (up 22.7%). The Biotechs lost 1.5% (down 5.3%). While bullion slipped $7, the HUI gold index gained 1.1% (up 14.8%).

Three-month Treasury bill rates ended the week at 5.245%. Two-year government yields declined seven bps this week to 4.87% (up 62bps y-t-d). Five-year T-note yields slipped two bps to 4.51% (up 66bps). Ten-year Treasury yields increased three bps to 4.50% (up 62bps). Long bond yields rose eight bps to 4.65% (up 62bps). Benchmark Fannie Mae MBS yields added four bps to 5.94% (up 67bps).

Italian yields jumped nine bps to 3.98% (up 28bps y-t-d). Greek 10-year yields rose eight bps to 3.67% (up 62bps). Spain’s 10-year yields gained five bps to 3.39% (up 40bps). German bund yields jumped eight bps to 2.66% (up 64bps). French yields rose eight bps to 3.14% (up 58bps). The French to German 10-year bond spread was unchanged at 48 bps. U.K. 10-year gilt yields gained six bps to 4.32% (up 78bps). U.K.’s FTSE equities index slipped 0.5% (up 7.0% y-t-d).

Japan’s Nikkei Equities Index declined 0.4% (up 15.0% y-t-d). Japanese 10-year “JGB” yields jumped seven bps to 1.07% (up 46bps y-t-d). France’s CAC40 fell 1.3% (up 6.0%). The German DAX equities index declined 1.0% (up 10.4%). Spain’s IBEX 35 equities index added 0.7% (up 12.1%). Italy’s FTSE MIB index was little changed (up 13.6%). EM equities were mostly lower. Brazil’s Bovespa index dropped 1.8% (down 9.0%), and Mexico’s Bolsa index slipped 0.4% (down 3.8%). South Korea’s Kospi index fell 1.9% (down 0.7%). India’s Sensex equities index dropped 1.9% (up 2.4%). China’s Shanghai Exchange Index was little changed (up 3.8%). Turkey’s Borsa Istanbul National 100 index slumped 2.6% (up 39.2%). Russia’s MICEX equities index sank 5.3% (up 3.8%).

Federal Reserve Credit declined $5.1bn last week to $7.260 TN. Fed Credit was down $1.629 TN from the June 22, 2022, peak. Over the past 246 weeks, Fed Credit expanded $3.534 TN, or 95%. Fed Credit inflated $4.450 TN, or 158%, over the past 603 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $2.0bn last week to a 14-month low $3.322 TN. “Custody holdings” were down $87.9 billion y-o-y, or 2.6%.

Total money market fund assets increased $3.8bn to $6.069 TN. Money funds were up $681bn, or 12.6%, y-o-y.

Total Commercial Paper added $1.1bn to $1.280 TN. CP was up $168bn, or 15.1%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped nine bps to 7.03% (up 10bps y-o-y). Fifteen-year rates rose 12 bps to 6.36% (up 5bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up one basis point to 7.41% (up 46bps).

Currency Watch:

May 29 – Financial Times (Cheng Leng): “Market pressure is growing on the People’s Bank of China to allow the renminbi to weaken, as traders bet that the yawning gap with US borrowing costs will lead more investors to sell out of the Chinese currency. China’s central bank has maintained a strong yuan policy so far this year, keeping its daily fixing… within an unusually narrow range of 7.09 to 7.11 against the US dollar. But the currency has recently traded as much as 2% below the fixing rate — the maximum variation the central bank has said it will allow — for the first time in eight years, indicating mounting selling pressure.”

May 30 – Bloomberg: “Some of China’s regional authorities are guiding firms to slow purchases of foreign currencies in a sign the nation is taking further measures to discourage capital outflows amid yuan weakness. Regional regulators have been verbally guiding a number of companies in coastal provinces to delay or cut bulk buying of foreign exchange, especially the US dollar… Companies diluted FX purchases in recent weeks after the regulatory requests, which have been issued since at least last month and kept off written records…”

For the week, the U.S. Dollar Index was little changed at 104.671 (up 3.3% y-t-d). For the week on the upside, the Swiss franc increased 1.4%, the Swedish krona 1.40%, the Norwegian krone 0.8%, the Australian dollar 0.4%, the New Zealand dollar 0.4%, and the Canadian dollar 0.3%. On the downside, the South African rand declined 2.0%, the Mexican peso 1.9%, the Brazilian real 1.5%, the South Korean won 1.1%, the Japanese yen 0.2%, and the Singapore dollar 0.1%. The Chinese (onshore) renminbi increased 0.02% versus the dollar (down 1.96% y-t-d).

Commodities Watch:

May 29 – Newsweek (Micah McCartney): “China’s rapid accumulation of commodities has drawn global attention and led some analysts to speculate President Xi Jinping’s country is girding itself for war over Taiwan. ‘Xi seems to have studied the sanctions playbook the West used against Russia over Ukraine and subsequently initiated long-lead protective measures to batten down the hatches of China’s economy to resist similar pressure,’ former Office of Naval Intelligence head Michael Studeman wrote… Among the resources being stockpiled is gold. Prices of the precious metal hit record highs in recent months as China’s central bank diversified its holdings and consumers turned to the safe haven amid a flagging stock market and the country’s strict capital controls.”

May 29 – Bloomberg: “Chinese silver imports could surge in coming weeks, as traders take advantage of a jump in demand that’s taken prices well above the international market. Silver’s in a sweet spot because of its dual uses as an industrial metal and a financial asset. It’s an important material in solar panels, which China continues to build in vast quantities, and it’s also a cheaper alternative to gold, which is setting its own records on price led by Chinese demand. Although silver prices rose to an 11-year high last week, the arbitrage window — or the spread between Chinese and world prices — has widened even further.”

The Bloomberg Commodities Index retreated 1.9% (up 4.4% y-t-d). Spot Gold dipped 0.3% to $2,327 (up 12.8%). Silver added 0.5% to $30.408 (up 27.8%). WTI crude dipped 73 cents, or 0.9%, to $76.99 (up 7.5%). Gasoline fell 2.3% (up 15%), while Natural Gas rose 2.7% to $2.587 (up 3%). Copper dropped 3.2% (up 18%). Wheat fell 2.7% (up 8%), and Corn slumped 4.0% (down 5%). Bitcoin declined $1,100, or 1.6%, to $67,430 (up 58.6%).

Middle East War Watch:

May 28 – Associated Press (Jim Gambrell): “Missile attacks twice damaged a Marshall Islands-flagged, Greek-owned ship Tuesday in the Red Sea off the coast of Yemen, with a private security firm saying radio traffic suggested the vessel took on water after being struck. No group claimed responsibility, but suspicion fell on Yemen’s Houthi rebels…”

May 27 – Bloomberg (Jonathan Tirone): “Iran increased its stockpile of near bomb-grade uranium, a move that could flame tensions across the wider Middle East as Tehran prepares to hold presidential elections next month. It’s the first nuclear-safeguards assessment since Iran’s president and foreign minister died in a helicopter crash just days after top officials from the United Nations’ atomic watchdog traveled to the country to secure greater cooperation in their monitoring efforts. International Atomic Energy Agency inspectors verified on Monday that Iran’s stockpile of highly enriched uranium rose 17% over the last three months…”

Ukraine War Watch:

May 29 – Reuters (Vladimir Soldatkin and Guy Faulconbridge): “Russian President Vladimir Putin warned the West… that NATO members in Europe were playing with fire by proposing to let Ukraine use Western weapons to strike deep inside Russia, which he said could trigger a global conflict. More than two years into the deadliest land war in Europe since World War Two, Putin has increasingly spoken of the risk of a much broader global conflict as the West grapples with what to do about the advance of Russian troops in Ukraine. NATO Secretary General Jens Stoltenberg told The Economist that alliance members should let Ukraine strike deep into Russia with Western weapons… ‘Constant escalation can lead to serious consequences,’ Putin told reporters… ‘If these serious consequences occur in Europe, how will the United States behave, bearing in mind our parity in the field of strategic weapons?’”

May 28 – Reuters (Andrew Gray and Diana Mandiá): “European Union defence ministers on Tuesday debated the idea of training Ukrainian forces inside the country but did not reach a common position on the sensitive issue, EU foreign policy chief Josep Borrell said. The 27-nation bloc already has a training mission for Ukrainian troops but the training takes place in EU countries. In February, France said the West should not rule out deploying troops to Ukraine, even as the war with Russia rages, and suggested training could be one possible role for them.”

May 25 – Financial Times (Paola Tamma and Claire Jones): “G7 finance ministers have backed the idea of issuing a loan to Ukraine, secured by profits on frozen Russian assets, in an effort to secure financing for Kyiv beyond 2024. Ministers’ discussions were based on a US proposal that circulated ahead of the gathering in Stresa, Italy, to issue a loan of about $50bn to be repaid with profits from around €190bn Russian central bank assets. The Russian assets are stuck in Belgian central securities depository Euroclear.”

Taiwan Watch:

May 27 – Financial Times (Kathrin Hille): “Taiwan’s new president Lai Ching-te asked visiting US lawmakers to support more legislative action to help strengthen his country’s defences, underscoring his focus on closer alignment with Washington. His request follows two days of Chinese military exercises around Taiwan… Calling them ‘important Taiwan-friendly forces’, Lai said: ‘With your support, I hope that the US Congress through legislative action will continue to assist Taiwan in strengthening its self-defence capabilities, thereby advancing bilateral exchanges and co-operation.’”

May 25 – Bloomberg (Chris Anstey): “Taiwan inaugurated a new president on May 20. His name is Lai Ching-te, and he quickly got a taste of how challenging his next four years will be… But any view of China’s display of military aggression as business as usual carries grave peril. Instead, it may very well be a dress rehearsal. ‘This is almost certainly an intentional blockade simulation,’ says Jennifer Welch, chief geoeconomics analyst at Bloomberg Economics. ‘A real blockade that cut Taiwan off from the world would choke off a significant portion of global semiconductor supplies—costing the world economy about $5 trillion,’ she and her colleague Gerard DiPippo estimate.”

May 27 – Reuters (Ben Blanchard): “A senior U.S. lawmaker visiting Taipei said… that weapons Taiwan had ordered are finally on their way, and that China’s ‘intimidating’ war games last week underscored the need to boost the island’s deterrence abilities… Taiwan has for the last two years complained of delays to deliveries of U.S. weapons, such as Stinger anti-aircraft missiles… Michael McCaul, the Republican chairman of the House Foreign Affairs Committee, who promised those weapons would be delivered when he visited Taiwan last year, said the Chinese military’s ‘armada’ last week had sent a very strong message to the United States.”

May 29 – Axios (Rebecca Falconer): “The second U.S. congressional delegation to visit Taiwan this week arrived on the self-governing island Wednesday for a meeting with Taiwan’s new President Lai Ching-te.Why it matters: The show of support from the delegation, headed by Sens. Dan Sullivan (R-Alaska) and Tammy Duckworth (D-Ill.), comes despite complaints from Chinese officials about the earlier visit that Rep. Michael McCaul (R-Tex.) led days after China’s military held drills around the island it claims is part of its territory to protest Lai’s inauguration.”

May 25 – Reuters (Brendan O’Brien): “The U.S. State Department said… the United States was ‘deeply concerned’ over China’s military drills in the Taiwan Strait and around Taiwan, and strongly urged it to act with restraint. ‘Using a normal, routine, and democratic transition as an excuse for military provocations risks escalation and erodes longstanding norms that for decades have maintained peace and stability across the Taiwan Strait,’ the State Department said…”

May 26 – Wall Street Journal (Niharika Mandhana): “The U.S. and Philippine marines arrived in waves on this little island nearly 100 miles from the southern tip of Taiwan. A platoon clutching automatic rifles and machine guns sprang from Black Hawks and took up positions around the airfield. In a whirl of hot air and dust, Chinook helicopters lowered dozens more men. They unloaded fuel cans, sacks of ready-to-eat meals and cases of medical supplies, small drones and satellite-communications gear… If their ride had continued north, they would reach Taiwan in less than an hour. This was a military exercise, the guns had no ammunition and the Javelin missile launcher had no missiles. But the marines were preparing for a real-world conflict…”

Market Instability Watch:

May 26 – Bloomberg (Jan-Patrick Barnert): “Volatility is getting crushed. Everywhere. One risk event after another, from inflation data to Nvidia Corp. earnings, gets cleared with barely a ripple to slow the market’s grind higher. And with option selling in full demand, volatility is going nowhere but lower this month. The VIX Index sank early Thursday to the lowest in almost five years before bouncing back a bit. At 11.5, it was a few points shy of the record lows from 2017, which marked the least volatile stock market in modern history. Three-month S&P 500 implied volatility ended the week at the lowest since October 2018. Stocks are not alone: Oil, bonds, credit and even FX measures of volatility are all grinding lower. OPEC+ supply cuts have stabilized the oil market in a range.”

May 29 – Reuters (Nessa Anwar): “The Bank of Japan may raise interest rates if sharp falls in the yen boost inflation or the public’s perception of future prices move more than expected, board member Seiji Adachi said… While short-term currency moves alone would not trigger a policy shift, the central bank could raise interest rates if excessive yen falls persist and have a big impact on inflation expectations, Adachi said… ‘We must by all means avoid raising interest rates prematurely. But by focusing too much on downside risks, we could see inflation accelerate in a way that forces us to tighten monetary policy sharply later on,’ Adachi said.”

May 27 – Bloomberg (David Finnerty and Ruth Carson): “Rising interest rates in Japan will do little to rescue the beleaguered yen as long as there’s demand for one of the most lucrative bets in foreign exchange, traders say. The yen remains one of the hottest macro assets to sell as part of so-called carry trades — a strategy that involves borrowing Japan’s currency for almost nothing, to buy dollars and earn more than 5%. The weakening yen and strengthening greenback are increasing the attractiveness of the carry trade, by boosting its total return over the last year to 18%. That’s setting up a potentially tense showdown with Japanese authorities who appear bent on stymieing the yen’s seemingly excessive weakness.”

May 29 – Reuters (Harry Robertson): “Global bond markets face the biggest amount of net sovereign issuance so far this year in June, just as economic data throws rate cuts into doubt, testing investors’ so-far strong appetite for the debt. Net government bond supply is likely to rise to $340 billion for the United States, euro zone countries and Britain, according to… BNP Paribas, as redemptions fall and central banks continue to slash their holdings of the paper.”

May 25 – Financial Times (Harriet Clarfelt): “A rising share of the $8.9tn high-grade US corporate bond market is at risk of being slashed to junk status, with rating agencies’ expectations of downgrades exceeding upgrades for the first time since the end of 2021. The proportion of the lowest-quality investment-grade bonds that rating agencies have on so-called ‘negative watch’ or ‘negative outlook’… stood at 5.7% this week, according to… BofA Securities… That is almost double the level of 2.9% at the start of this year. In contrast, the percentage of these bonds on ‘positive watch’ — meaning they are more likely to be upgraded — stood at 5.3%, down from 7.9% in early January.”

May 29 – Bloomberg (Edward Bolingbroke): “Options traders are piling into bets that the Federal Reserve will keep rates higher for longer as they grow increasingly more hawkish than their counterparts in the swaps market. It’s a wager that began attracting attention in March, when a slew of surprisingly strong readouts on growth and inflation hit. But the bet’s grown substantially since then, reinforced by data earlier this week showing US consumer confidence unexpectedly rose in May. It’s the latest indication that the options market expects the US central bank to stay the course — or even raise rates over the next year.”

Global Credit Bubble Watch:

May 29 – CNBC (Nessa Anwar): “The world is mired in $315 trillion of debt, according to… the Institute of International Finance. This global debt wave has been the biggest, fastest and most wide-ranging rise in debt since World War II, coinciding with the Covid-19 pandemic. ‘This increase marks the second consecutive quarterly rise and was primarily driven by emerging markets, where debt surged to an unprecedented high of over $105 trillion—$55 trillion more than a decade ago,’ the IIF said in its quarterly Global Debt Monitor report… Around two-thirds of the $315 trillion owed originates from mature economies, with Japan and the United States contributing the most to that debt pile.”

May 28 – Bloomberg (Hannah Benjamin-Cook and Ronan Martin): “European bond issuance this year has topped the €1 trillion ($1.1 trillion) mark more than a week before the previous record. Issuance in the region’s publicly-syndicated debt market reached the milestone on Wednesday… It beats a record set on June 9, 2020, when governments and companies were beefing up their balance sheets in the early months of the pandemic. Just under half of the debt sold this year has come from supranationals, sovereigns and agencies making the most of buoyant investor demand for their debt.”

May 28 – Bloomberg (Aashna Shah and Amanda Albright): “US states and local governments, undeterred by high interest rates, have propelled the municipal bond market to the busiest start to a year since at least 2013. Muni-bond sales have hit $183 billion so far in 2024, up 37% year-over-year… The haul so far this year is about $50 billion higher than the same period in 2023, the figures show.”

May 329 – Bloomberg (Sridhar Natarajan): “Goldman Sachs… has put together $21 billion for private credit wagers, its biggest war chest yet for Wall Street’s buzziest asset class. The firm just closed the latest iteration of its direct-lending fund, drumming up firepower that includes fresh capital, borrowed funds and co-investments. That along with separately managed accounts will be put to use making more directly negotiated senior loans.”

May 29 – Bloomberg (Hannah Levitt): “Jamie Dimon said he expects problems to emerge in private credit and warned that ‘there could be hell to pay,’ particularly as retail clients gain access to the booming asset class… ‘I’ve seen a couple of these deals that were rated by a ratings agency, and I have to confess it shocked me what they got rated,’ Dimon said… ‘It reminds me a little bit of mortgages.’”

May 25 – Bloomberg (Eleanor Duncan and Immanual John Milton): “Returns on the riskiest portion of collateralized loan obligations are booming, reaching about 20% annualized on both sides of the Atlantic as loan performance improves, debt spreads tighten and payouts grow.”

Bubble and Mania Watch:

May 30 – Bloomberg (James Crombie): “US companies with about $200 billion of debt — roughly 10% of the high-yield bond market — probably won’t survive the current period of elevated interest rates unscathed, according to Bank of America Corp. ‘At the bottom decile, we are looking at issuers that are in most likelihood not going to be able to come out of this high-rate episode without doing something to their balance sheet,’ said Oleg Melentyev, head of US high-yield strategy at Bank of America… That riskiest part of the credit market includes about 90 companies, he said. ‘Half of that segment is free-cash-flow negative unless the [Federal Reserve] cuts interest rates soon and deep — which is a pretty weak assumption… Debt to enterprise value is 85% for that segment, so essentially there is no equity value left.’”

May 31 – Bloomberg (Elena Popina): “Buoyed by a record announcement from Apple Inc., Corporate America disclosed plans to repurchase $201 billion of its own stock in May, the most ever for the month, according to data compiled by Birinyi Associates. The total represents an increase of more than 41% from the same time a year ago and amounts to the fifth most on record for any month…”

May 28 – Financial Times (Brooke Masters): “Private equity is under pressure. Higher interest rates and a still sluggish new listings markets have made it harder to sell holdings and return cash to investors. That in turn has made it more difficult to raise new funds because pension funds, endowments and family offices have less money to allocate and a growing array of other options. One way to tell that the squeeze is starting to bite is the recent announcement by Blackstone, the biggest and best-known PE firm, that it has launched a ‘shared ownership initiative’ to give workers at its portfolio companies an equity stake. The programme will start at Copeland, which Blackstone bought for $14bn last year.”

May 28 – Bloomberg (Katie Greifeld and Sidhartha Shukla): “BlackRock Inc.’s iShares Bitcoin Trust has become the world’s largest fund for the original cryptocurrency, amassing almost $20 billion in total assets since listing in the US at the start of the year. The exchange-traded fund held $19.68 billion of the token Tuesday, dethroning the $19.65 billion Grayscale Bitcoin Trust, data compiled by Bloomberg show. The third largest is the $11.1 billion offering from Fidelity Investments.”

May 28 – Financial Times (Camilla Hodgson and Yasemin Craggs Mersinoglu): “Leading online food delivery groups in Europe and the US have racked up more than $20bn in combined operating losses since they went public, after a fierce battle for market share. Shares in Deliveroo, Just Eat Takeaway, Delivery Hero and DoorDash — the four largest standalone, publicly listed food-delivery businesses in the US and Europe — are all trading well below their pandemic-era peaks, as investors scrutinise their business models.”

May 31 – Wall Street Journal (Heather Gillers): “Government pension plans are getting hit by the commercial real-estate meltdown and many fear the bleeding is far from over. Canada’s national pension plan said in May that it is selling stakes in Manhattan and San Francisco office towers for $225 million less than it paid for them. In April, California’s government worker pension fund said it had unloaded a Sacramento property it had been trying to develop for almost two decades. In March, consultants warned California’s teacher pension that office holdings would continue to drag down returns, even after a 9% real estate loss in 2023. The moves offer a new glimpse into the widespread and slow-moving commercial real-estate slump.”

May 29 – Bloomberg (Carly Wanna and Natalia Kniazhevich): “There’s a frenzy-like quality to the rally on Wall Street right now that has many drawing comparisons to the stocks-only-go-up mania of the early days of the pandemic. All major gauges are at or near record highs, fifty-seven stocks in the Nasdaq Composite Index have gained more than 150% already this year, and meme stocks are suddenly, and seemingly randomly, popping once again.”

AI Bubble Watch:

May 27 – Axios (Mike Allen and Jim VandeHei): “Top AI executives tell us they’re racing to overcome old-fashioned shortages — electricity, computing power, chips, data and engineering talent — to keep improving and deploying their world-changing technology… This scarcity crisis is among the top threats to America building out AI at scale, and maintaining its edge over China on the large-language models that power AI tools. It takes an insane amount of data, then awesome programming intelligence… to create human-like AI. But that’s just table stakes. It then takes an insane amount of compute power to will their data and work into existence — then a mind-blowing amount of actual energy to make it all happen. We’re short on all of it. Mark Zuckerberg, Meta’s founder and CEO, said… the equivalent output of one nuclear power plant can be needed to train a single AI model.”

May 30 – Financial Times (Amanda Chu): “The staggering electricity demand needed to power next-generation technology is forcing the US to rely on yesterday’s fuel source: coal. Retirement dates for the country’s ageing fleet of coal-fired power plants are being pushed back as concerns over grid reliability and expectations of soaring electricity demand force operators to keep capacity online. The shift in phasing out these facilities underscores a growing dilemma facing the Biden administration as the US race to lead in artificial intelligence and manufacturing drives an unprecedented growth in power demand that clashes with its decarbonisation targets. The International Energy Agency estimates the AI application ChatGPT uses nearly 10 times as much electricity as Google Search.”

May 27 – Financial Times (Ryan McMorrow in Beijing and Cheng Leng): “China has concluded its largest funding round to date in support of its embattled semiconductor industry, with the so-called Big Fund raising Rmb344bn ($47bn) to aid President Xi Jinping’s self-sufficiency drive in the face of US efforts to restrict the country’s access to the latest technology. The third round of the fund, officially called the National Integrated Circuit Industry Investment Fund Phase III, is China’s largest pool of capital to be targeted at seeding companies and technologies to overcome what Beijing refers to as ‘chokepoints’ for its chip industry… It comes amid an escalating tech race with the west and echoes efforts in Washington and European capitals to build up their own domestic semiconductor industries.”

May 28 – Bloomberg (Vlad Savov): “Runaway confidence in artificial intelligence risks repeating the mistakes of the crypto hype bubble of only two years ago, economics professor and Nobel laureate Paul Romer warned. ‘Right now, there’s way too much confidence about the future trajectory of AI,’ Romer told Bloomberg TV… ‘When people project this forward, I think they’re at risk of making a very serious mistake.’

Global Banking Watch:

May 29 – Bloomberg (Katanga Johnson): “US banks’ paper losses from two key types of securities they hold deepened last quarter due to further stresses in the housing market, according to the Federal Deposit Insurance Corp. The FDIC said… unrealized losses across the sector on available-for-sale and held-to-maturity securities increased by $39 billion to $517 billion in the first three months of 2024. It’s the ninth straight quarter of ‘unusually high unrealized losses’ since the Federal Reserve began raising interest rates, the regulator said.”

May 29 – Bloomberg (Todd Gillespie): “Large US banks may be more exposed to commercial property than regulators appreciate because of credit lines and term loans they provide to real estate investment trusts, according to a new study. Big banks’ exposure to CRE lending grows by about 40% when that indirect lending to REITs is added, wrote researchers including Viral Acharya, a professor of economics at New York University. That’s largely been missed in the debate about the risks the troubled industry poses to lenders, they argue.”

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

May 28 – Financial Times (Leila Abboud, Sam Jones and Ben Hall): “Emmanuel Macron has called for Ukraine to be allowed to use western weapons against military sites in Russia, becoming the most senior Nato leader to ask for targeting restrictions set by Kyiv’s backers to be lifted. The French president said at a joint press conference with German chancellor Olaf Scholz… that Ukraine should be allowed to defend its territory from Russian attack… ‘How can we explain to Ukraine that they need to protect their cities… but that they don’t have the right to attack where the missiles are coming from? It’s as if we were telling them we’re giving you arms but you cannot use them to defend yourself,’ said Macron.”

May 25 – New York Times (Alan Rappeport): “Top finance officials from the world’s advanced economies moved toward an agreement on Saturday over how to use Russia’s frozen central bank assets to aid Ukraine and warned against China’s dumping of cheap exports into their markets, aiming to marshal their economic might to tackle twin crises. The embrace of more ambitious sanctions and protectionism came as finance ministers from the Group of 7 nations gathered for three days of meetings… The proposals under consideration could deepen the divide between the alliance of wealthy Western economies and Russia, China and their allies, worsening a global fragmentation that has worried economists. Efforts by the Group of 7 to influence the two powerful adversaries have had limited success in recent years, but rich countries are making a renewed push to test the limits of their combined economic power.”

May 30 – Financial Times (Max Seddon and Christopher Miller): “The US will urge Ukraine’s allies and western businesses to choke off supplies for Russia’s defence industry through China, a vital route to sustain President Vladimir Putin’s war machine. In a speech to German business leaders…, US deputy Treasury secretary Wally Adeyemo will urge western companies to stop Russia importing critical components from or via China. The US has threatened secondary sanctions against Chinese companies found to have supplied Russia’s defence industry. According to excerpts…, Adeyemo will say the US and Europe ‘must make the choice stark for China: Chinese firms can either do business in our economies or they can equip Russia’s war machine with dual-use goods. They cannot do both.’”

May 28 – Bloomberg (Megan Howard): “A majority of European business leaders said the continent’s relationship with China will likely deteriorate over the next few years as challenges with trade and the geopolitical climate drive tensions. About 54% of executives expect Europe-China relations will become worse over the next three years while only 7% believe there will be an improvement, according to a survey conducted by the European Round Table for Industry and Conference Board.”

De-globalization and Iron Curtain Watch:

May 27 – Wall Street Journal (Dasl Yoon, Brian Spegele and Chieko Tsuneoka): “China sought to drive a wedge on trade between the U.S. and its Asian allies, using a rare exchange with the leaders of Japan and South Korea to champion a multipolar world without economic discrimination. Chinese Premier Li Qiang, on a two-day visit to Seoul, touted the merits of harmonizing economic ties between the three Asian countries… Chinese leader Xi Jinping carried a similar message on his recent trip to Europe. ‘We should resolve suspicions and misunderstandings through honest dialogue, uphold bilateral relations with a spirit of strategic autonomy, promote a multipolar world and oppose bloc confrontation and factionalism,’ Li said…”

May 29 – Financial Times (Thomas Hale, Chan Ho-him and Joe Leahy): “More US law firms are closing their offices in Shanghai as a dearth of financial activity and depressed business sentiment force them to reassess their mainland China presence. In recent months, US firms Sidley Austin, Perkins Coie, Latham & Watkins and Orrick have all closed or said they will close their Shanghai offices, adding to the departure of Weil and Akin Gump from Beijing.”

Inflation Watch:

May 29 – New York Times (Jeanna Smialek): “Holly Meyer Lucas estimates that as many as 30 of the 100 houses her real estate team sold in and around Jupiter, Fla., last year were put on the market because their owners could no longer keep up with skyrocketing home insurance. ‘It is the housing crisis that nobody is talking about,’ Ms. Meyer Lucas said… Jumping insurance rates are acute in coastal Florida, with its exposure to big risks like hurricanes and coastal erosion, but they are also a nationwide phenomenon. Last year, premium rates for owner-occupied housing were up 11.3% on average nationally, based on data from S&P Global Market Intelligence… The Consumer Price Index… uses only renter’s insurance when it calculates housing insurance costs. Structure insurance is excluded.”

May 31 – CNBC (Jeff Cox): “Inflation rose about as expected in April… The personal consumption expenditures price index excluding food and energy costs increased just 0.2% for the period, in line with the Dow Jones estimate… On an annual basis, core PCE was up 2.8%, or 0.1 percentage point higher than the estimate. Including the volatile food and energy category, PCE inflation was at 2.7% on an annual basis and 0.3% from a month ago.”

May 29 – Bloomberg (Brendan Murray): “Companies transporting goods from Asia face costs of as much $10,000 for an urgent full-size shipping container over the next month — about double current spot rates… Marseille, France-based CMA CGM SA, the world’s No. 3 carrier, already announced a $7,000 rate for a 40-foot container for the second half of June for goods shipped to northern Europe from Asia. That’s up from the current charge of about $5,000. For the first half of June, rates range from $6,000 to $6,500, with premium service offered at $7,500 to $10,000.”

May 28 – Financial Times (Susannah Savage): “Orange juice prices have soared to record highs, driven by bad weather and disease in Brazil… Orange juice futures… have been on a tear since the end of 2022 when a hurricane, then a cold snap, devastated acres of orange groves in Florida, the main growing region in the US… But the rally has accelerated sharply this month as the prospect of a dismal harvest in Brazil has panicked the market. Concentrated orange juice futures… hit $4.92 a pound on Tuesday, almost double the price a year ago.”

Federal Reserve Watch:

May 30 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of New York President John Williams said he expects inflation to continue falling in the second half of this year, adding that elevated borrowing costs are restraining the economy. Williams said that while inflation is still too high, Fed policy is well positioned and the imbalances between supply and demand are easing. ‘With the economy coming into better balance over time and the disinflation taking place in other economies reducing global inflationary pressures, I expect inflation to resume moderating in the second half of this year,’ Williams said…”

May 30 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Dallas President Lorie Logan said high interest rates may not be restraining the economy as much as policymakers anticipate, emphasizing it’s important for officials to keep options open for future adjustments. It could be that ‘policy is just not as restrictive as we think that it might be,’ Logan said… Logan also said the so-called neutral interest rate — the level of rates that neither stimulates nor weighs on the economy — has probably risen, adding to a broader debate on the topic.”

May 28 – Bloomberg (Catarina Saraiva and Tom Rees): “Federal Reserve Bank of Minneapolis President Neel Kashkari said the US central bank’s policy stance is restrictive, but policymakers haven’t entirely ruled out additional interest-rate increases. ‘I don’t think anybody has totally taken rate increases off the table,’ Kashkari said… ‘I think the odds of us raising rates are quite low, but I don’t want to take anything off the table.’”

May 27 – Reuters (Dan Burns): “Federal Reserve Governor Michelle Bowman… said she would have supported either waiting to start slowing the run-off in the U.S. central bank’s balance sheet or a more moderate tapering process than announced earlier this month. Bowman… said she believes commercial bank reserve levels at the Fed remain abundant, giving officials more time to proceed with the $95 billion-a-month run-off target that has been in place since mid-2022. ‘While it is important to slow the pace of balance sheet runoff as reserves approach ample levels, in my view we are not yet at that point,’ she said, especially with still-sizable take-up at the Fed’s overnight reverse repo facility, or ON-RRP.”

May 29 – Bloomberg (Jennifer Schonberger): “The Federal Reserve Bank of Cleveland named former Goldman Sachs executive Beth Hammack as its next president, adding a longtime Wall Street figure to the powerful central bank committee that decides the direction of interest rates. The 52-year-old Hammack will replace current president Loretta Mester, who is set to retire June 30 in accordance with the Fed’s mandatory age and length-of-service policies.”

Biden Administration Watch:

May 30 – Politico (Erin Banco, Alexander Ward and Lara Seligman): “The Biden administration has quietly given Ukraine permission to strike inside Russia — solely near the area of Kharkiv — using U.S.-provided weapons, three U.S. officials and two other people familiar… with the move… said…, a major reversal that will help Ukraine to better defend its second-largest city. ‘The president recently directed his team to ensure that Ukraine is able to use U.S. weapons for counter-fire purposes in Kharkiv so Ukraine can hit back at Russian forces hitting them or preparing to hit them,’ one of the U.S. officials said, adding that the policy of not allowing long-range strikes inside Russia ‘has not changed.’”

May 29 – Wall Street Journal (Alan Cullison and Michael R. Gordon): “U.S. Secretary of State Antony Blinken signaled on Wednesday that the U.S. is weighing the idea of allowing Kyiv to strike Russian territory with American-provided weapons in light of the evolving battlefield situation in Ukraine. It was the first time that a top Biden administration official has publicly indicated that the U.S. is considering the policy shift… Blinken’s remarks follow statements from a string of European officials who said they favor allowing Ukraine to use Western-supplied weapons against targets on Russian territory that Moscow has been using as a staging ground for its invasion. Jens Stoltenberg, secretary general of the North Atlantic Treaty Organization, said earlier this week that the ‘time has come to consider whether it will be right to lift some of the restrictions’ on Ukraine.”

May 25 – Bloomberg (Viktoria Dendrinou and Christopher Condon): “Treasury Secretary Janet Yellen said the outlook for higher interest rates over the long haul makes it tougher to contain US borrowing needs, heightening the importance of boosting revenue in negotiations with Republican lawmakers. ‘We’ve raised the interest-rate forecast,’ Yellen noted… ‘That does make a difference. It makes it somewhat more challenging to keep deficits and interest expense under control.’”

U.S. Economic Bubble Watch:

May 29 – Reuters (Lindsay Dunsmuir): “U.S. economic activity continued to expand from early April through mid-May but firms grew more downbeat about the future amid weakening consumer demand while inflation continued to increase at a modest pace, a U.S. Federal Reserve survey showed… The U.S. central bank’s latest temperature check on the health of the economy also showed that the jobs market continues to gradually cool back down toward more normalized levels… ‘National economic activity continued to expand…however, conditions varied across industries and districts,’ the Fed said in its survey… ‘Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risk.’”

May 30 – Associated Press (Matt Ott): “The number of Americans applying for unemployment benefits ticked up last week, but layoffs remain historically low in the face of lingering inflation and high interest rates. Jobless claims for the week ending May 25 rose by 3,000 to 219,000, up from 216,000 the week before…”

May 28 – CNBC (Ana Teresa Solá): “As buy now, pay later programs become more common, some shoppers are using this payment structure to make ends meet. Americans owe $17.5 trillion across credit cards, mortgages, auto loans and other forms of debt, according to the Federal Reserve Bank of New York. About $1.12 trillion of that is on credit cards. Buy now, pay later, or BNPL, loans often don’t appear on a credit report, serving as a kind of ‘phantom debt’ that’s not reflected in those tallies. Such short-term financing plans are the second-most used form of credit payment among consumers in the U.S., according to… NerdWallet. Credit cards are the most commonly used form of credit, with 66% of respondents using them in the past 12 months. Meanwhile, 25% said they had used BNPL services in the last 12 months.”

May 30 – Wall Street Journal (Telis Demos): “The drip of consumer lending data continues to paint a fairly consistent picture: The rising delinquency trend for debts such as auto, card and home loans seems to be slowing down. Delinquencies, or loan payments that are at least 30 days past due, really started to climb in 2023, and in some categories moved above where they were just before the Covid-19 pandemic… Right now, though, those delinquencies are steadily falling. The latest monthly data from CreditGauge showed the percentage of overall outstanding balances of consumer debt—encompassing auto, card, home and personal loans—that was 30 to 59 days past due fell to 0.86% in April, down from the recent peak of 1.04% in February.”

May 29 – CNBC (Diana Olick): “After a brief pullback during much of May, mortgage rates began rising again last week… Applications for a mortgage to purchase a home fell 1% for the week and were 10% lower than the same week one year ago. ‘There continues to be limited levels of existing homes for sale and many buyers are struggling to find listings in their price range that meet their needs,’ Kan added.”

May 28 – Bloomberg (Prashant Gopal): “Home-price growth in 20 major US cities picked up pace in March, pressuring buyers as the key selling season kicks into gear. Prices in a measure of 20 cities increased 7.4% from a year earlier, larger than the 7.3% annual gain in February, an S&P CoreLogic Case-Shiller index shows… San Diego posted the biggest annual gain among the 20 cities, followed by New York and Cleveland. Price growth in the 20 cities has outpaced gains nationally, which were up 6.5% in March…”

May 29 – Bloomberg (Alexandre Tanzi): “A small but mostly affluent group of Americans are about to see their mortgage payments skyrocket. They are the more than 1.7 million owners of homes bought since 2019 with an adjustable-rate mortgage. These loans — averaging about $1 million to finance more expensive properties — are set at a rate lower than the prevailing 30-year for the first few years, then adjust once or twice a year based on current borrowing costs.”

Fixed Income Watch:

May 30 – Bloomberg (Immanual John Milton, Charles Williams and Carmen Arroyo): “Subway, the restaurant chain with the most locations in the US, has sold $3.35 billion of asset-backed bonds to help fund its buyout by Roark Capital Group, in what is the largest securitization of its kind on record… Investors placed $19 billion of orders for the $3.35 billion of bonds for sale, signaling demand outstripped supply…”

China Watch:

May 30 – Bloomberg: “China’s central bank said President Xi Jinping’s idea of a ‘powerful currency’ is one that is stable and easy to use, as it pledged to play a key role in developing a competitive financial system and supporting the top leader’s strategy. A strong currency should have a stable value domestically, and maintain an exchange rate that’s ‘basically stable’ and at a ‘reasonable, equilibrium level’ externally, Tao Ling, Deputy Governor of the People’s Bank of China, said…”

May 26 – Bloomberg: “China’s issuance of local government bonds in May reached the most in seven months, a sign that authorities are ramping up fiscal stimulus to support the economy. The tally for the month so far stands at 790 billion yuan ($109bn)… May’s figure has been boosted by 391 billion yuan in sales planned for this week… The pick up in local debt issuance, on top of the ultra-long special government bond sale, shows Beijing’s determination to add fuel to the economy.”

May 29 – Bloomberg: “China’s local government special bond issuance more than tripled in May compared to a month earlier, providing room for infrastructure investment growth to accelerate, Securities Daily said… Issuance has reached 299b yuan this month, compared with 88b yuan for all of April. Funds raised from the bonds this year are mainly for investment in facilities for cities and industrial parks, transportation-related infrastructure and public services…”

May 30 – Bloomberg: “Chinese policymakers have identified reducing a glut of housing inventory as the key to ending the nation’s unprecedented property slump. It’s easy to see why. The country has the equivalent of 60 million unsold apartments, which will take more than four years to sell without government aid, according to Bloomberg Economics. The oversupply is dragging down prices at the fastest rate in a decade, giving people less reason to buy a home. The situation is worst in the capital city.”

May 28 – Bloomberg: “China’s biggest cities including Shanghai, Shenzhen and Guangzhou eased requirements for home downpayments and mortgages, following through on the central government’s aid for the embattled property sector. Shanghai and Shenzhen reduced downpayment requirements by 10 percentage points to a minimum of 20% for first-time buyers and 30% for second-home purchasers… The floor for mortgage rates was also lowered.”

May 27 – Reuters (Ziyi Tang and Ryan Woo): “China’s latest steps to revive its struggling property market could pose risks to banks operating in lower-tier cities, S&P Global said… The measures announced earlier this month such as cutting down payment requirements and removing the floor for mortgage rates are expected to temporarily increase property demand, but the increased leverage could also cause an uptick in mortgage defaults, according to a S&P Global report. Property prices in smaller tier-three cities are expected to decline about 14% through the 2024-2025 period, the report said. This could potentially push some homebuyers into negative equity situations…”

May 30 – Bloomberg: “China Vanke Co., the Chinese state-backed developer that’s become the latest flashpoint in the nation’s property crisis, is in advanced talks with major banks for a loan of about 50 billion yuan ($6.9bn), people familiar… said. If signed, it would be the largest loan in Asia Pacific, excluding Japan, since Taiwan-based National Housing and Urban Regeneration Center’s $14 billion deal in 2022…”

May 28 – Bloomberg: “China’s banks have approved over 900 billion yuan of loans for property developers under a ‘white list’ program promoted by regulators, but the actual amount that has been extended is smaller than that… Banks need to keep their non-performing loan ratio under control and are wary of extending more property loans when the market is still slumping, the report cites several bank officials as saying…”

May 29 – Reuters (Joe Cash): “China’s economy is set to grow 5% this year, after a ‘strong’ first quarter, the International Monetary Fund said…, upgrading its earlier forecast of 4.6% expansion… The global lender’s new projections come as Beijing steps up efforts to shore up an uneven recovery in the world’s second-biggest economy… The IMF said it had revised up both its 2024 and 2025 GDP targets by 0.4 percentage points but warned that growth in China would slow to 3.3% by 2029 due to an ageing population and slower expansion in productivity. It now expects China’s economy to grow 5% in 2024 and to slow to 4.5% in 2025.”

May 30 – Reuters (Jessie Pang and James Pomfret): “Fourteen Hong Kong pro-democracy activists were found guilty and two were acquitted on Thursday in a landmark subversion trial that critics say could deal another blow to the city’s rule of law and its reputation as a global financial hub. The verdicts in Hong Kong’s biggest trial against the democratic opposition come more than three years after police arrested 47 democrats in dawn raids at homes across the city. They were charged with conspiracy to commit subversion under a national security law imposed by China… ‘Today’s verdict will only further tarnish Hong Kong’s international reputation. It sends a message that Hong Kongers can no longer safely and meaningfully participate in peaceful political debate,’ Britain’s Minister for the Indo-Pacific Anne Marie Trevelyan said.”

Central Bank Watch:

May 28 – Financial Times (Martin Arnold): “Central banks need to reconsider whether bond purchases are the best way to stimulate growth when interest rates are low, especially after recent asset purchases left them nursing heavy losses, a senior European monetary policymaker has said. Isabel Schnabel, who oversees bond-buying at the European Central Bank, said in a speech… that central banks ‘need to carefully assess whether the benefits of asset purchases outweigh the costs’. Schnabel said central banks’ asset purchases — also known as quantitative easing — had ‘played an important role in stabilising markets at times of stress’. But she added their effectiveness in stimulating demand depends on the economic conditions at the time of the purchases and ‘can come with costs that might be higher than those of other policy instruments’.”

May 27 – Reuters (Leigh Thomas): “The European Central Bank has plenty of room for rate cuts and current market expectations for easing over the long-run are reasonable, ECB policymaker Francois Villeroy de Galhau said… After a first rate cute next month that Villeroy described as a ‘done deal’, debate among ECB policymakers remains open about how fast and far to keep easing after that. Villeroy, who is also the governor of the French central bank, has repeatedly made the case for the ECB adopting an approach of ‘maximum optionality’ after June.”

Global Bubble Watch:

May 28 – Bloomberg (Swati Pandey): “Australia’s inflation came in faster than expected in April, suggesting price pressures remain stubbornly strong and bolstering the case for the Reserve Bank to keep interest rates at a 12-year high next month. The monthly consumer price indicator climbed 3.6% from a year earlier, exceeding economists’ estimate of 3.4%… The core measure… held at 4.1%. OIS traders modestly boosted the chance for an RBA rate increase this year — seeing a 27% chance for a hike in September…”

Europe Watch:

May 30 – Wall Street Journal (Ed Frankl): “The eurozone’s unemployment rate fell to a record low in April, a sign that the jobs market is stronger than the European Central Bank had anticipated as it prepares to cut its key rate next week. The unemployment rate across the 20-nation bloc ticked down to 6.4% from the 6.5% where it had been since November last year… The number of unemployed workers fell by around 100,000 from March, Eurostat said.”

May 29 – Reuters (Rachel More): “German inflation rose slightly more than forecast to 2.8% in May, although economists said an increase had been expected and should not alarm European Central Bank policymakers ahead of their interest rate decision next week.”

May 27 – Bloomberg (Alexander Weber and Mark Schroers): “Germany’s business outlook rose for a fourth month as confidence builds that the country’s economic rebound will strengthen over the rest of the year. An expectations gauge by the Ifo institute rose to 90.4 from a revised 89.7 the previous month — less than economists had estimated in a Bloomberg survey. A measure of current conditions fell… ‘It’s not yet a full recovery,’ Ifo President Clemens Fuest told Bloomberg… ‘The German economy is improving, but slowly,’ he said…”

Japan Watch:

May 26 – Reuters (Makiko Yamazaki and Satoshi Sugiyama): “The Bank of Japan (BOJ) will proceed cautiously with inflation-targeting frameworks, Governor Kazuo Ueda said…, noting that some challenges are ‘uniquely difficult’ for Japan after years of ultra-easy monetary policy… Ueda said Japan has ‘made progress in moving away from zero and lifting inflation expectations.’ To achieve 2% inflation in a sustainable and stable manner, the BOJ ‘will proceed cautiously, as do other central banks with inflation-targeting frameworks,’ he said.”

May 26 – Wall Street Journal (Megumi Fujikawa): “Japan is likely close to completely overcoming its decades-long deflation, according to Bank of Japan Deputy Gov. Shinichi Uchida. ‘While we still have a big challenge to anchor the inflation expectations to 2%, the end of our battle is in sight,’ Uchida said in a speech… ‘The labor market structure appears to have changed after the pandemic, and wages are likely to continue increasing,’ he added.”

May 27 – Reuters (Tetsushi Kajimoto): “Japanese corporate services prices in April rose at their fastest pace since early 2015…, boosted by labour costs in the services sector in a positive signal for policymakers looking for wages-led cycle of demand growth. The Corporate Services Price Index (CSPI) rose 2.8% year-on-year in April, following a 2.4% increase in the previous month. For the month, the service prices rose 0.7% from March, slowing from the prior month’s 0.9%.”

May 27 – Reuters (Makiko Yamazaki): “Japan’s net external assets rose to a record 471.3 trillion yen ($3 trillion) in 2023, increasing for a sixth straight year, as a weak yen and overseas corporate acquisitions boosted the value of its foreign assets, the Ministry of Finance said… As a result, Japan retained its position as the world’s top creditor, followed by Germany with 454.8 trillion of net external assets and China with 412.7 trillion yen as of the end of 2023… Gross external assets stood at 1,488 trillion yen and external debt came to 1,017 trillion yen.”

Emerging Market Watch:

May 30 – Reuters (Diego Oré and Carlos Carrillo): “As Mexicans head to the polls on Sunday to elect their next president and thousands of state and local posts, much of the country is suffering historic drought, intense heat, and occasional power blackouts. Water shortages may not be a new phenomenon in the Latin American country, especially in the populous capital Mexico City, but some voters are blaming the ruling MORENA party for the crisis and analysts say it could prove an important factor in the upcoming election, particularly in some closer-fought local races.”

May 30 – Reuters (Rodrigo Campos): “Foreigners pulled money out of their emerging market portfolios in April on concerns of a tighter monetary policy path in the U.S., with outflows from stocks in India and Indonesia leading the way… The Institute of International Finance data showed net non-resident portfolio flows for April came in at -$0.7 billion, the first monthly outflow since October. The figure compares with net inflows of $30.2 billion in March and a $16.3 billion inflow in April 2023…”

May 30 – Bloomberg (Rajesh Kumar Singh): “India’s peak electricity demand set a new record as surging temperatures add to what’s already the fastest growth in consumption in any major economy. The nation reported maximum demand of 246 gigawatts on May 29… That tops a previous high of 243.3 gigawatts reached last September. Some power shortfalls have been reported across the country during evening periods — when solar generation isn’t available — though day-time demand has so far been met…”

Leveraged Speculation Watch:

May 28 – Bloomberg: “China’s quantitative hedge funds saw their assets drop last quarter for the first time since late 2022, after the nation’s stock-market meltdown hit performance and eroded investor confidence in their algorithm-driven trading strategies. Quants’ combined assets under management fell to 1.57 trillion yuan ($217bn) as of March 31, down 4% from the end of last year, according to estimates by Citic Securities Co. That was the first decline since the third quarter of 2022…”

Social, Political, Environmental, Cybersecurity Instability Watch:

May 30 – Bloomberg: “Around the world, people are already living through the havoc brought on by global temperatures that are breaking records. It’s about to get a lot worse. Odds are growing that 2024 will become the hottest year in history as the Northern Hemisphere barrels into summer. Prices for some of the world’s most vital commodities — natural gas, power and staple crops like wheat and soy — are climbing. The world of shipping, already thrown into chaos from the Red Sea to the Panama Canal, is likely to be rocked again by parched waterways. And the potential for destructive wildfires is increasing. The outlook is a bleak reminder of how wild weather driven by climate change is worsening inflation, elevating the cost of energy, food and fuel. Frequent natural disasters are also heightening the risk of devastating damages and insurance costs while making it harder to predict market moves.”

May 28 – Bloomberg (Michael Hirtzer): “Deadly bird flu was detected in an egg-laying chicken flock in Iowa, affecting 4.2 million birds in the biggest US outbreak since 2022. The detection is the first since December in Iowa, which is the top US egg producer with nearly 12% of the country’s layer hens, according to US Department of Agriculture data. The findings come as the virus has been infecting dairy cows across the US.”

Geopolitical Watch:

May 29 – Reuters (Parisa Hafezi): “Iran fires the starting gun this week on an election to replace President Ebrahim Raisi, whose death in a helicopter crash could complicate efforts by the authorities to manage… the succession to the supreme leader. Once seen as a possible successor to Ayatollah Ali Khamenei, Iran’s ageing ultimate decision-maker, Raisi’s sudden death has triggered a race among hardliners to influence the selection of Iran’s next leader. Khamenei, 85, seeks a fiercely loyal president in the June 28 election… ‘The next president is likely to be a hardliner unwaveringly loyal to Khamenei with a background in the Revolutionary Guards. Someone with an unblemished background and devoid of political rivalries,’ said Tehran-based analyst Saeed Leylaz.”

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June 14, 2024: Potential Catalyst and Q1 2024 Z.1
June 7, 2024: Summer of Discontent and Instability
May 31, 2024: Thesis Corroboration
May 24, 2024: Speculative Bubble Hype
May 17, 2024: Zhang Zhan
May 10, 2024: Citadel Securities vs. Jane Street
May 3, 2024: Instability
April 26, 2026: Opposite Day
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