May 5, 2023: “Extraordinarily Sound”

May 5, 2023: “Extraordinarily Sound”
Doug Noland Posted on May 5, 2023

Another humdrum week. The second largest bank failure in U.S. history – to start things off, making for three of the top four over just the past two months. Tuesday saw Treasury Secretary Yellen notify the world of a debt limit “X-date” possibly as early as June 1st. The Fed raised rates on Wednesday in the face of an unfolding banking crisis. The ECB does the same Thursday.

Friday brought yet another stronger-than-expected payrolls report, with the unemployment rate back down to the lowest level since 1969 (3.4%). As for the unruly stock market, the Regional Bank Index (KRX) dropped 2.6% Monday, sank 5.5% Tuesday, declined 0.9% Wednesday, slumped 3.5% Thursday, and then rallied 4.8% Friday. Two-year Treasury yields jumped 14 bps Monday, dropped 18 bps Tuesday, sank another 16 bps Wednesday, and finished the week with Friday’s 13 bps pop – with intraweek yields trading as high as 4.16% and as low as 3.65% (ended the week at 3.91%). The three-month/two-year Treasury yield spread inverted a further 25 bps this week to negative 132 bps (most inverted in four decades).

May 1 – Bloomberg (Jenny Surane, Hannah Levitt and Katanga Johnson): “JPMorgan… agreed to acquire First Republic Bank in a government-led deal for the failed lender, putting to rest one of the biggest troubled banks remaining after turmoil engulfed the industry in March… ‘This is getting near the end of it, and hopefully this helps stabilize everything,’ JPMorgan Chief Executive Officer Jamie Dimon said on a call with journalists Monday. Regional banks that reported first-quarter results in recent weeks ‘actually had some pretty good results,’ the CEO said. ‘The American banking system is extraordinarily sound.’”

Bank Credit default swap (CDS) prices jumped this week, with Bank of America CDS trading Thursday near the highest level (124bps) since March 2020 – ending the week up 14 to 117 bps. Bank CDS prices declined moderately Friday. Yet Wells Fargo CDS still jumped 13 for the week to 116 bps, trading Thursday to the high since March 2020. Morgan Stanley CDS jumped 14 bps this week, Goldman 10 bps, Citigroup eight bps, and JPMorgan six bps. High-yield CDS surged 26 bps this week, trading Thursday to a six-week high (516 bps).

It was an extraordinary backdrop heading into the FOMC meeting. There was a strong case for the Fed to hold off on another rate increase. The unfolding banking crisis ensures tighter Credit for an economy already downshifting. But the case for hiking rates was equally compelling. Inflation remains elevated, with recent data consistently pointing to sticky price pressures. Friday’s strong payroll data – including 253,000 jobs added and a 0.5% (4.4% y-o-y) gain in Average Hourly Earnings – confirm unrelenting labor market tightness.

Jay Powell’s much anticipated press conference was short on drama. It’s worth noting the fourth sentence from his prepared remarks: “We are committed to learning the right lessons from this episode and will work to prevent events like these from happening again.”

Hope springs eternal. The Fed is early in the learning process. Clearly, indefensible mistakes were made in bank regulation. Meanwhile, unpardonable inflation mismanagement is at risk of historic failure. As much as banking instability adds to downside economic risks, the Powell Fed today has little option other than to err on the side of ongoing measures to contain inflation. Powell has repeatedly underscored the risk of repeating past mistakes, where Fed inflation fights ended prematurely.

Bloomberg’s Mike McKee: “Markets have priced in rate cuts by the end of the year. Do you rule that out?”

Chair Powell: “We on the Committee have a view that inflation is going to come down, not so quickly, but it’ll take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won’t cut rates. If you have a different forecast – markets have been from time-to-time pricing in quite rapid reductions in inflation – we’d factor that in. But that’s not our forecast. And, of course, the history of the last two years has been very much that inflation moves down [gradually]. Particularly now, if you look at non-housing services, it really, really hasn’t moved much. And it’s quite stable. So, we think we’ll have to – demand will have to weaken a little bit and labor market conditions may have to soften a bit more to begin to see progress there. And, again, in that world, it wouldn’t be appropriate for us to cut rates.”

End-of-week market pricing had the policy rate at 4.31% for the Fed’s December 13th meeting, 75 basis points below the current Fed funds rate (5.06%). With the expected December rate sinking 16 bps this week, the divergence between Fed and market expectations only widened.

Powell and the markets are speaking over each other. Markets to Powell: “Inflation? What about the banking crisis?” I’m skeptical the rates market is keying off expectations for declining inflation. In a replay of the pre-2008 dislocation backdrop, markets instead discount probabilities of crisis dynamics forcing the Fed into a dovish pivot. For example, an assumption of a 50% probability for a crisis eruption by December, which would force the Fed to slash rates 150 bps (1.5 percentage points), gets close to current market pricing.

The bond market over the past 15 years has been conditioned to discount the possibility of aggressive rate cuts and QE-related Treasury/MBS purchases. This has played an integral role in Bubble Dynamics. The crazier things get (i.e., manic markets and bank lending excess), the greater the probability of another bout of aggressive monetary stimulus.

There has basically been continual pricing of odds that faltering Bubbles provoke another aggressive monetary policy response – with market yields consistently lower than traditional fundamentals (i.e., debt supply/demand, inflation, growth) would dictate. Importantly, this dynamic negated the role of the bond market as the key system stabilizing mechanism.The bond market loosened on crazy, when it traditionally would have tightened.

Meanwhile, stocks (and other asset markets) feast on distorted low market yields. Why worry about the downside when you know you’ll have the bond market loosening at the first hint of trouble – with the mighty Fed and GSE backstops always there as needed. And while the banking predicament darkens prospects, it has meant big liquidity injections from the FHLB and Fed.

Mohamed El-Erian worded it succinctly in his pre-meeting commentary: The Fed “should resist validating market expectations of cuts in the next few months.” And while the bond market will dismiss the Fed’s professed inflation resolve, the last thing the Federal Reserve needs right now is for the stock market speculative Bubble to inflate further. Crash risk is rising.

The ECB is still criticized for its final 25 bps hike in September 2008 (to 4.25%) – as if it made much of a difference. I doubt history will be kind to the Fed for this week’s increase. For the record, it’s important to appreciate that markets have been forcing the Fed’s hand. Market conditions have loosened meaningfully over recent months. Not only does this work to counter the Fed’s inflation fight, it significantly intensifies systemic risk. We’re early in a momentous systemic adjustment to higher rates, tighter Credit, and restrained liquidity. Speculative and over-liquefied markets increasingly risk turning this process disorderly.

May 4 – Reuters (Andrea Shalal): “The American Bankers Association on Thursday urged federal regulators to investigate a spate of significant short sales of publicly traded banking equities that it said were ‘disconnected from the underlying financial realities.’ In a letter to U.S. Securities and Exchange Commission Chair Gary Gensler, the lobby group said it had also observed ‘extensive social media engagement’ about the health of various banks that was out of step with general industry conditions.”

I’ll never forget September 19th, 2008. “Given the importance of confidence in financial markets, the SEC’s action halts short selling in 799 financial institutions.” The KBW Bank Index surged 12.6% in frantic last day of the week trading. The Broker/Dealers (XBD) spiked 16.9%. Troubled insurer AIG rose 43%, and Washington Mutual jumped 42%. JPMorgan surged 16.7%, Citigroup 24.0%, and Bank of America 22.6%. Morgan Stanley rallied 21% and Goldman Sachs 20%. The S&P500 jumped 4.0% in chaotic trading.

While there was no short selling ban (yet), Friday was quite a squeeze day. Spectacular one-day gains included PacWest’s 81.7%, Western Alliance’s 49.2%, Zions’ 19.2%, Comerica’s 16.7%, and Keycorp’s 10.1%. The Nasdaq Bank Index and KBW Bank Index both jumped 4.6%.

It’s worth noting that after the big September 19th 2008 squeeze day, both the KBW Bank and Broker/Dealer indices collapsed 40% over the following 14 trading sessions. Short sellers did not hasten the 2008 crisis, and they’re not a key issue for the unfolding crisis.

Can aggressive shorting place major downward pressure on individual stocks? Of course. Does aggressive buying – including targeting large short positions – put major upward pressure on stocks? The key issue is that over-liquefied markets turned increasingly speculative over recent years, with today’s unstable financial environment a key consequence of years of Monetary Disorder. Arguably, the 2008 ban on financial stock shorting only exacerbated market instability. It definitely compounded the challenge of managing derivative portfolios and myriad hedging strategies.

There will be all kinds of measures suggested – and some implemented – in increasingly desperate attempts to hold Bubble collapse at bay. I am again reminded of the wise words from the late German economist, Dr. Kurt Richebacher, who stated that “the only cure for a Bubble is not to let it inflate.”

Many believe the “great financial crisis” could have been averted had the Fed saved Lehman Brothers. Ben Bernanke asserts that if only the Fed had printed money and recapitalized the banking system after the 1929 stock market crash, the Great Depression would have been prevented.

But the problem is always the preceding boom. Prolonged Credit expansions create systems that depend on enormous ongoing monetary expansion. Inflated asset market Bubbles become reliant on ever increasing amounts of speculative Credit. Economic structure becomes distorted by years of inflationary effects, including a proliferation of uneconomic enterprises and unsustainable boom-time, Credit-driven demand. This maladjusted structure becomes progressively vulnerable to waning Credit and spending growth.

The Fed could have printed four or five billion to recapitalize the banks in 1930 – but the number that mattered was multiple times this amount – the tens of billions of annual total system Credit growth necessary to hold collapse at bay. The Fed could have bailed out Lehman, but the number that mattered was the $2.5 TN or so yearly Credit expansion necessary to prolong the mortgage finance Bubble. The number that matters today is probably around $3.5 TN annually. And the inescapable problem is that to continue a massive late-cycle inflation of nonproductive Credit feeding a deeply maladjusted system risks a systemic crisis of confidence – crises of confidence in the markets, in policymaking, in debt structures, and the monetary system more generally.

There is no alternative. The system faces an extremely challenging adjustment period. Today’s banking crisis is only the initial phase. There are no easy answers or painless solutions. And I’m assuming a plethora of bad ideas (i.e., short selling bans, system-wide deposit guarantees, larger lending facilities, additional QE and who knows what) will only make for a more destabilizing day of reckoning,

For the Week:

The S&P500 declined 0.8% (up 7.7% y-t-d), and the Dow fell 1.2% (up 1.6%). The Utilities were little changed (down 3.0%). The Banks sank 7.4% (down 25.4%), and the Broker/Dealers slumped 4.1% (down 3.5%). The Transports increased 0.7% (up 5.5%). The S&P 400 Midcaps fell 1.2% (up 1.3%), and the small cap Russell 2000 dipped 0.5% (down 0.1%). The Nasdaq100 was little changed (up 21.2%). The Semiconductors increased 0.4% (up 18.8%). The Biotechs rose 1.0% (up 0.5%). With bullion jumping $27, the HUI gold equities index surged 6.8% (up 21.1%).

Three-month Treasury bill rates ended the week at 5.0675%. Two-year government yields dropped nine bps this week to 3.91% (down 52bps y-t-d). Five-year T-note yields fell seven bps to 3.41% (down 59bps). Ten-year Treasury yields added a basis point to 3.44% (down 44bps). Long bond yield rose eight bps to 3.75% (down 21bps). Benchmark Fannie Mae MBS yields declined six bps to 5.08% (down 31bps).

Greek 10-year yields dropped 14 bps to 4.02% (down 55bps y-t-d). Italian yields added two bps to 4.19% (down 51bps). Spain’s 10-year yields increased two bps to 3.38% (down 14bps). German bund yields declined two bps to 2.29% (down 15bps). French yields slipped a basis point to 2.88% (down 10bps). The French to German 10-year bond spread widened one to 59 bps. U.K. 10-year gilt yields rose six bps to 3.78% (up 11bps). U.K.’s FTSE equities index fell 1.2% (up 4.4% y-t-d).

Japan’s Nikkei Equities Index rose 1.0% (up 11.7% y-t-d). Japanese 10-year “JGB” yields gained three bps to 0.42% (unchanged y-t-d). France’s CAC40 declined 0.8% (up 14.8%). The German DAX equities index added 0.2% (up 14.6%). Spain’s IBEX 35 equities index fell 1.0% (up 11.2%). Italy’s FTSE MIB index gained 1.0% (up 15.4%). EM equities were mixed. Brazil’s Bovespa index increased 0.7% (down 4.2%), while Mexico’s Bolsa index slipped 0.3% (up 13.4%). South Korea’s Kospi index was unchanged (up 11.8%). India’s Sensex equities index was little changed (up 0.4%). China’s Shanghai Exchange Index increased 0.3% (up 7.9%). Turkey’s Borsa Istanbul National 100 index dropped 4.7% (down 20.1%). Russia’s MICEX equities index fell 3.7% (up 17.8%).

Investment-grade bond funds posted inflows of $322 million, while junk bond funds reported outflows of $1.581 billion (from Lipper).

Federal Reserve Credit dropped $35.0bn last week to $8.504 TN. Fed Credit was down $397bn from the June 22nd peak. Over the past 190 weeks, Fed Credit expanded $4.777 TN, or 128%. Fed Credit inflated $5.693 Trillion, or 203%, over the past 547 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.1bn last week to $3.373 TN. “Custody holdings” were down $52.6bn, or 1.5%, y-o-y.

Total money market fund assets surged $47.2bn to a record $5.310 TN, with an eight-week gain of $416bn. Total money funds were up $798bn, or 17.7%, y-o-y.

Total Commercial Paper declined $4.2bn to $1.144 TN. CP was up $41bn, or 3.7%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 15 bps to 6.49% (up 122bps y-o-y). Fifteen-year rates rose 12 bps to 5.85% (up 133bps). Five-year hybrid ARM rates jumped 19 bps to 5.96% (up 200bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down six bps to 6.88% (up 150bps).

Currency Watch:

May 1 – Wall Street Journal (Chelsey Dulaney): “The U.S. economy no longer looks so exceptional. That is bad news for the dollar. The greenback has fallen about 8.3% from a peak in September, as tracked by the WSJ Dollar Index, and is experiencing its worst start to the year since 2018. Investors are betting the U.S. currency has further to fall as the Federal Reserve nears the end of its most aggressive program of interest-rate increases since the 1980s. Also weighing on the dollar: concerns over the banking system, a potential U.S. debt default and expectations, shared by many economists, that the U.S. will slip into recession in the coming months.”

For the week, the U.S. Dollar Index declined 0.4% to 101.21 (down 2.2% y-t-d). For the week on the upside, the Australian dollar increased 2.0%, the New Zealand dollar 1.8%, the Mexican peso 1.3%, the Canadian dollar 1.3%, the South Korean won 1.2%, the Japanese yen 1.1%, the Swedish krona 1.0%, the Norwegian krone 0.8%, the Brazilian real 0.8%, the Singapore dollar 0.7%, the British pound 0.6%, and the Swiss franc 0.4%. On the downside, the South Korean won declined 0.6%. The Chinese (onshore) renminbi increased 0.05% versus the dollar (down 0.16%).

Commodities Watch:

The Bloomberg Commodities Index declined 1.3% (down 8.7% y-t-d). Spot Gold rose 1.3% to $2,017 (up 10.6%). Silver jumped 2.4% to $25.67 (up 7.1%). WTI crude sank $5.44, or 7.1%, to $71.34 (down 11%). Gasoline slumped 7.7% (up 3%), and Natural Gas dropped 11.3% to $2.14 (down 52%). Copper slipped 0.2% (up 2%). Wheat rallied 4.2% (down 17%), and Corn recovered 2.0% (down 12%). Bitcoin was little changed this week at $29,600 (up 79%).

Global Bank Crisis Watch:

May 1 – Financial Times (Brooke Masters, Stephen Gandel, James Fontanella-Khan and James Politi and Colby Smith): “JPMorgan Chase is to acquire most of First Republic after US regulators orchestrated an overnight deal to shut the embattled California lender, wiping out its shareholders in the second-biggest bank failure in the country’s history. The Federal Deposit Insurance Corporation and California regulators, which announced the deal early on Monday morning, said they were simultaneously closing First Republic and selling off all $93.5bn of its deposits and most of its assets to JPMorgan. The Wall Street bank is paying the FDIC $10.6bn as part of the deal. JPMorgan’s chief executive Jamie Dimon defended the administration’s handling of the process, arguing that ultimately nobody had wanted to acquire First Republic as a going concern. ‘The whole world knew it was available, and no one bought it,’ he said.”

May 1 – New York Times (Maureen Farrell, Matthew Goldstein and Lauren Hirsch): “Lawmakers and regulators have spent years erecting laws and rules meant to limit the power and size of the largest U.S. banks. But those efforts were cast aside in a frantic late-night effort by government officials to contain a banking crisis by seizing and selling First Republic Bank to the country’s biggest bank, JPMorgan… At about 1 a.m. Monday, hours after the Federal Deposit Insurance Corporation had been expected to announce a buyer for the troubled regional lender, government officials informed JPMorgan executives that they had won the right to take over First Republic and the accounts of its well-heeled customers, most of them in wealthy coastal cities and suburbs.”

May 1 – Associated Press (Ken Sweet): “Regulators seized troubled First Republic Bank early Monday, making it the second-largest bank failure in U.S. history… It’s the third midsize bank to fail in less than two months. The only larger bank failure in U.S. history was Washington Mutual, which collapsed at the height of the 2008 financial crisis and was also taken over by JPMorgan in a similar government-orchestrated deal. ‘Our government invited us and others to step up, and we did,’ said Jamie Dimon, chairman and CEO of JPMorgan Chase.”

May 1 – Bloomberg (Hannah Levitt, Jenny Surane and Sonali Basak): “The seeds of First Republic Bank’s downfall were sown in the jumbo mortgages of Silicon Valley, where a unique strategy to loan wealthy individuals extraordinary sums of money blew up in spectacular fashion. In the early 1980s, First Republic Chairman Jim Herbert, then running San Francisco Bancorp, wanted to get into a new line of business. The Bay Area’s high earners were coming to him and asking for unusually large loans to buy pricey properties in the area. ‘Why don’t we do a couple of these and see how they go? Can’t bankrupt the whole bank,’ Herbert said to the firm’s president… Years later, after Herbert… founded First Republic, his new bank became known for handing out interest-only mortgages at rock-bottom rates to borrowers with high incomes and exceptional credit scores. Typically, they didn’t have to start repaying the principal for a decade. Demand for the loans surged during the pandemic as wealthy buyers sought mortgage deals that would allow them to keep the bulk of their money in higher return investments.”

May 5 – Reuters (Dan Burns): “Deposits at U.S. commercial banks fell toward the end of April to the lowest in nearly two years…, while overall credit provided by banks moved up, led by a record level of outstanding loans and leases. Deposits on a nonseasonally adjusted basis fell in the week ended April 26 to about $17.1 trillion, a drop of about $120 billion from the week earlier. That was the lowest level since June 2021, with deposits now having declined by more than $500 billion from the week before Silicon Valley Bank (SVB) collapsed in March…”

May 5 – Bloomberg (Alex Tanzi): “US bank lending increased for a fourth straight week, suggesting credit conditions remain relatively stable despite elevated concerns about regional lenders. Commercial bank lending rose $41.6 billion in the week ended April 26 after increasing $12.4 billion the prior week… The gain was fueled by the largest rise in loans from small banks since December.”May 2 – Bloomberg (Nic Querolo and Martin Z. Braun): “Silicon Valley Bank’s roughly $7 billion municipal bond portfolio could pose a challenge for BlackRock Inc. as it starts liquidating the failed bank’s securities… The lender’s muni holdings were mostly long-dated bonds with low coupons… The bonds fit solidly into a category of debt that got hammered by rising interest rates, the very phenomenon that ultimately helped spur the turmoil in the banking industry. Munis due in 22 years or longer lost 15.6% last year…”

May 3 – Financial Times (Brooke Masters): “A former regulator credited with stabilising the US banking system during the 1980s crisis has hit out at the decision to sell First Republic to JPMorgan Chase as he warned of ‘more problems’ to come for regional lenders. After… First Republic suffered a $100bn deposit run, the Federal Deposit Insurance Corporation solicited bids from multiple banks before selling most of the assets to JPMorgan, the largest bank in the US, for $10.6bn on Monday. The regulator said it had tried to minimise losses to the deposit insurance fund, which would come to $13bn under the deal. However, Bill Isaac, who chaired the FDIC during the start of the savings and loan crisis and managed the collapse of what was then the seventh-largest bank in the country, Continental Illinois, said that priority was misguided. ‘I don’t think it is right to sell a failed bank to the largest bank in the country just because it paid the highest price,’ he said. ‘You make the largest banks bigger and bigger and you have fewer choices going forward. The FDIC has fewer choices next time and consumers have fewer choices.’”

May 3 – Bloomberg (Silla Brush): “Once again, Washington is turning to its favorite Wall Street cleaning crew to pick up after the US banking industry. After almost two months of smoldering turmoil in the banking sector… BlackRock Inc. has only just begun its work. The firm’s Financial Markets Advisory unit, a sort-of financial-crisis SWAT team, has been retained to size up and sell investments related to two failed lenders, Silicon Valley Bank and Signature Bank… For FMA, the client is the Federal Deposit Insurance Corp., and the challenge is to find buyers for $114 billion of securities left to the US government by SVB and Signature, all while not further ruffling financial markets. It’s a big job – the biggest of its kind ever, in fact — and one that will entrench BlackRock, the world’s largest asset manager, even more deeply in the regulatory apparatus of Washington.”

May 1 – Associated Press (Sharon L. Lynch): “U.S. businesses might be able to secure bank deposit insurance for accounts holding more than $250,000 if Congress agrees with the Federal Deposit Insurance Corp.’s new proposal to ease the industry turmoil that has sparked three bank failures in the past two months. The FDIC recommended the change Monday, rethinking the decades-old limit and seeking more flexibility to cover higher deposits on a ‘targeted’ basis. Raising the insurance limit for business accounts that pay for company operations such as payroll would shore up accounts that pose the most risk to financial stability, the FDIC said.”

May 4 – Reuters (Lavanya Ahire): “The U.S. Federal Deposit Insurance Corporation is planning to exempt smaller lenders from kicking in extra money to replenish the government’s bedrock deposit insurance fund, and instead saddle the biggest banks with much of the bill… The FDIC is planning to release a highly anticipated proposal for refilling its deposit insurance fund as soon as next week, the report added.”

May 5 – Bloomberg (Sabrina Willmer and Austin Weinsteinanzi): “The Securities and Exchange Commission is investigating the conduct of First Republic Bank executives before the government seizure and sale of the lender to JPMorgan… The SEC is looking into whether any members of the then-executive team of First Republic improperly traded on inside information…”

May 4 – Bloomberg (Sridhar Natarajan): “Goldman Sachs Group Inc.’s role in Silicon Valley Bank’s attempt to raise funds in March is under review by US governmental agencies, which are looking into the failed transaction that helped push the US regional-banking system into turmoil… SVB offloaded a $24 billion portfolio to Goldman at a loss and sought the firm’s help in raising more than $2.2 billion to cover the shortfall… Goldman couldn’t pull off the deal and a bank run in the wake of that offering effectively doomed SVB.”

May 3 – Financial Times (Stephen Foley): “The trio of bank failures since March has cast a pall over KPMG’s lucrative business as the largest auditor of the US banking sector. Questions over the quality of its work and independence have mounted in recent days, following the release of a Federal Reserve report into the collapse of Silicon Valley Bank and the forced sale of First Republic. The Big Four accounting firm was auditor to both banks, as well as to Signature… In all three cases, KPMG gave the banks’ financial statements a clean bill of health as recently as the end of February. ‘It’s a three-fer,’ said Francine McKenna, a former KPMG consultant who now lectures at the Wharton School… ‘It’s a dubious achievement . . . and we need tough action to back up tough talk from regulators.’”

Market Instability Watch:

May 2 – Wall Street Journal (Andrew Duehren): “Treasury Secretary Janet Yellen said the U.S. government could become unable to pay all of its bills on time as soon as June 1 if Congress doesn’t first raise the debt limit. President Biden… invited the top Republicans and Democrats on Capitol Hill to meet next week to discuss raising the country’s roughly $31.4 trillion borrowing limit… The new estimate… sets a shorter timeline than forecasters had previously expected, putting the U.S. potentially just weeks away from the first default on the U.S. debt. Republicans and Democrats have been debating how to raise the debt ceiling for months, but they have so far made little progress toward reaching an agreement.”

May 4 – Reuters (Howard Schneider): “Federal Reserve Chair Jerome Powell, asked on Wednesday about what the Fed would do in the event of a U.S. debt default, repeated the mantra of Fed leaders on that issue: A default is unthinkable, the U.S. government needs to pay its bills, and there was little the central bank could do to prevent an economic meltdown if it didn’t. ‘No one should assume that the Fed can really protect the economy and the financial system and our reputation globally from the damage that such an event might inflict,’ Powell said.”

May 5 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Global equity funds suffered massive outflows in the week to May 3, hit by weak economic data and worries over a recession as investors were fretted about the likelihood of interest rates staying higher for an extended period. According to Refinitiv Lipper…, global equity funds recorded a net $16.9 billion worth of outflows in the week to May 3, marking the biggest weekly outflow since March. 29.”

May 4 – Bloomberg (Michael Mackenzie and Elizabeth Stanton): “Bond traders eyeing the deepening rout in US regional bank shares concluded Thursday that the Federal Reserve is likely to reverse this week’s quarter-point interest-rate increase by July in response to tightening credit conditions. Swap contracts linked to Fed meeting dates collapsed, with the July rate briefly falling to 4.82%, a quarter point below the 5.08% level where the effective fed funds rate is likely to settle as a result of Wednesday’s increase in the target band to 5%-5.25%.”

Bursting Bubble and Mania Watch:

May 2 – Bloomberg (Michael Tobin): “An era of higher interest rates stands to wreak havoc in portions of commercial real estate, said Josh Friedman, the co-founder and co-CEO of alternative-asset manager Canyon Partners. ‘In the beginning of any downturn, the first things that comes to light are the worst problems,’ he said… ‘There’s going to be carnage in some parts of the commercial real estate business’… The quality of the real estate assets vary, he said, and there’s been a flight to safer segments — especially with some lower quality offices ‘worth less than the ground it’s built on.’ Recent turmoil at regional banks, which offered financing to commercial real estate firms, is compounding the stress.”

May 1 – Bloomberg (Olivia Raimonde and John Gittelsohn): “The financial world is increasingly warning of the pain to come for owners of office buildings. Investment leaders from Apollo Global Management Inc.’s Marc Rowan to Cain International’s Jonathan Goldstein and Citigroup Inc. CEO Jane Fraser gathered this week… for the Milken Institute Global Conference, right as turmoil with First Republic Bank peaked with its last-minute sale to JPMorgan… Now, eyes are turning to another source of potential risk: commercial property. ‘It’s a bad day to be an office owner in San Francisco and Chicago,’ Rowan, co-founder and chief executive officer of Apollo, said… ‘We are going to see losses,’ he said…”

May 1 – Bloomberg (Dawn Lim): “Blackstone Inc.’s $70 billion real estate trust for wealthy individuals limited redemptions for a sixth straight month. Investors asked to redeem $4.5 billion in April from Blackstone Real Estate Income Trust, the same amount shareholders sought to pull in March… BREIT allowed $1.3 billion to be withdrawn, or about 29% of the amount requested.”

May 2 – New York Times (Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Michael J. de la Merced and Lauren Hirsch): “After JPMorgan Chase secured a deal to buy the embattled First Republic, the banking giant’s chief, Jamie Dimon, asserted that the market turmoil set off by Silicon Valley Bank’s collapse was at an end. ‘This part of the crisis is over,’ he told analysts… But Wall Street isn’t convinced yet, as investors worry that potential new regulations and constrained lending could endanger the fragile economy. That skepticism was readily apparent at the Milken Institute Global Conference…: ‘There’s a tendency to breathe a sigh of relief on mornings like this,’ David Hunt of PGIM, a global asset manager… ‘Actually, we are just getting started.’”

May 1 – Bloomberg (Francesca Maglione): “TCW Group President and Chief Executive Officer Katie Koch said cracks are starting to show in the private credit market and that investors should prepare for ‘major accidents’ in the red-hot sector over the next 12 to 18 months. Koch said… at the Milken Institute Global Conference… that she still thinks the asset class is ‘one of the great investment opportunities’ over the next decade, but only if investors approach it ‘in the right, conservative way.’ Koch, whose firm manages roughly $215 billion, said most private credit firms were started after the global financial crisis, in an environment of low to zero interest rates. ‘That’s a very easy backdrop to operate against,’ she said.”

May 1 – Yahoo Finance (Alexandra Garfinkle): “As the Federal Reserve’s May meeting approaches, Apollo Global Management (APO) co-founder and CEO Marc Rowan isn’t worried if the tight liquidity environment sticks around. ‘When rates are down and credit is free and liquidity is plentiful, everything moves up and to the right,’ Rowan told Yahoo Finance… ‘So public equity markets, technology, [and] growth clearly succumbed to the siren song of liquidity. People now have to figure out were they good investors or was this all market beta?’ ‘Private equity was not immune to that,’ he added. ‘While it was happening, it felt really good, and now that it’s not happening anymore, it doesn’t feel so good…We did just fine over 10 years, but this is the period of time when liquidity has been withdrawn, when we’re playing offense and lots are playing defense.’”

May 5 – Bloomberg (Chris Strohm): “The Justice Department is investigating whether Binance Holdings Ltd. was used illegally to let Russians skirt US sanctions and move money through the world’s biggest cryptocurrency exchange, according to people familiar with the matter.”

May 3 – Bloomberg (Spencer Soper): “During the pandemic, Wall Street banks and private equity firms invested billions of dollars in startups rolling up popular brands sold on Inc. The bet was that these upstarts, fueled by an online sales boom, would become the next consumer product conglomerates… Then the pandemic ended, consumers returned to the stores, and Amazon’s sales growth cratered… Now the reckoning has arrived for these so-called brand aggregators. With names like Thrasio, Razor Group and Perch, the companies aren’t widely known but over the past few years have shelled out tens of millions of dollars for tea kettles, foot massagers, peppermint-based jock-itch remedies, medicine balls, magnetic eyeglass holders, air purifiers and more. To finance the buying spree, they raised $16 billion – mostly debt – from big names like JPMorgan…, Goldman Sachs…, BlackRock Inc. and Bain Capital…”

May 3 – Financial Times (Nicholas Megaw, Madison Darbyshire and Hudson Lockett): “US investor interest in Chinese stocks has cooled significantly after hitting a record late last year, as political tensions between the two countries grow… Trading in the most liquid US-listed options that track Chinese stocks… has more than halved since hitting a record last November… Direct purchases of Chinese stocks by foreign investors have also slowed dramatically after a record-breaking start to 2023. Foreign investors bought a net $20bn Shanghai- and Shenzhen-listed shares in the first month of 2023, but have added just $6bn in the three months since.”

May 3 – Reuters (Niket Nishant and David French): “Shares of activist investor Carl Icahn’s investment firm lost nearly a fifth of their value on Wednesday, adding to a 20% decline a day earlier following short seller Hindenburg Research’s scathing attack on the company. Icahn Enterprises LP’s shares hit an intraday low of $31.78 – their lowest in more than a decade. The stock has lost nearly 35% since the release of the report. Hindenburg accused the company of over-valuing its holdings and relying on a ‘Ponzi-like’ structure to pay dividends. Icahn called the report ‘self-serving.’”

Ukraine War Watch:

May 4 – Reuters (Pavel Polityuk): “Russian drones attacked the Ukrainian capital Kyiv on Thursday evening, the fourth assault in as many days subjecting residents to spasms of gunfire and explosions, and at least one drone was shot down. City authorities had declared an alert for Kyiv and the surrounding area… Russia said on Thursday that the United States was behind a purported drone attack on the Kremlin aiming to kill President Vladimir Putin. Washington and Kyiv denied involvement.”

May 3 – Financial Times (Roman Olearchyk and Christopher Miller): “Dozens of explosions were reported in Ukraine and near Russian-occupied Crimea early on Wednesday, as both sides stepped up air attacks ahead of an expected counter-offensive by Kyiv to recapture lost territory. Much is riding on Ukraine’s long-anticipated counter-offensive more than a year into Russia’s full-scale invasion of the country. Military analysts say that it is not only important for Kyiv to win back land but also to convince its western partners of the need to send more military assistance.”

April 29 – Associated Press (David Rising): “A massive fire erupted at an oil depot in Crimea after it was hit by two of Ukraine’s drones…, the latest in a series of attacks on the annexed peninsula as Russia braces for an expected Ukrainian counteroffensive.”

May 5 – Reuters (Felix Light, Caleb Davis and Andrew Osborn): “Yevgeny Prigozhin, leader of Russia’s Wagner Group mercenary force, said in a dramatic announcement on Friday that his forces would pull out of the Ukrainian city of Bakhmut that they have been trying to capture since last summer. Prigozhin said they would withdraw on May 10 – ending their involvement in the longest and bloodiest battle of the war – because of heavy losses and inadequate ammunition supplies. He asked defence chiefs to insert regular army troops in their place.”

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

May 1 – Financial Times: “In China, foreign consultants are learning to expect a knock on the door. First, police raided the Beijing office of US due diligence group Mintz in March. Weeks later, there was a similar visit to the Shanghai premises of Bain, the blue-chip US consultancy. Police have also visited one of the China offices of expert network Capvision, according to at least four people familiar with the matter, as part of an emerging number of raids on international consultancies operating in the world’s second-largest economy.”

May 1 – Wall Street Journal (Demetri Sevastopulo): “Joe Biden said the US commitment to defend the Philippines was ‘iron clad’ days after the American ally accused Beijing of dangerously harassing a patrol ship in the South China Sea. In a joint statement after meeting his Philippine counterpart Ferdinand Marcos Jr, the US president said any attack on Philippine aircraft or ships in the South China Sea would trigger their mutual defence treaty.”

De-globalization and Iron Curtain Watch:

May 3 – Financial Times (Christian Davies and Demetri Sevastopulo): “Washington has signalled to South Korea’s leading chip companies that it will extend permission for them to send US chipmaking tools to China, a concession to an ally that is key to curbing Beijing’s access to cutting-edge semiconductors. The Biden administration in October gave Samsung Electronics and SK Hynix, two of the world’s leading producers of memory chips, a one-year reprieve from export controls designed to reduce China’s ability to develop high-end chips.”

May 5 – Reuters (Liz Lee): “Chinese Foreign Minister Qin Gang assured his Russian and Indian counterparts of deepening bilateral ties, promising that ‘coordination and cooperation’ will only grow stronger, in a show of solidarity with two of China’s biggest neighbours. Qin met in India… with other foreign ministers of the Shanghai Cooperation Organisation, a bloc of nations spanning most of Eurasia, with Beijing seeking to preserve stable relations with countries in the region as ties with the West, particularly Washington, remain tense.”

May 2 – Bloomberg (Patricia Laya and Fabiola Zerpa): “Venezuela and China are re-establishing connections after years of cooling ties, with government contacts resuming and joint projects floated in what amounts to a challenge to Washington. High-ranking officials from China, Venezuela’s biggest creditor, met with close aides to President Nicolas Maduro in Caracas as recently as last month to discuss the restructuring of the nation’s long-standing line of credit… The two sides also talked about potential areas to renew collaboration…”

Inflation Watch:

May 1 – Bloomberg (Ludovic Theunissen and Dennis Ting): “As cooling global economies and resumed exports from Ukraine curb commodity prices, get ready for extreme weather to start dictating costs — though not always in an inflationary way. Asia has been battered by heat waves and flooding, signaling difficulties ahead as climate change accelerates and forecasters warn of an impending El Nino. The weather pattern causes dryness in Southeast Asia but increases rainfall elsewhere, boosting yields of major crops. While India and Thailand are cutting sugar output forecasts, Brazil is set to harvest a record crop.”

May 5 – Bloomberg (David Welch): “Used-vehicle prices tumbled in April after making gains in the first quarter of the year — a sign rising interest rates are starting to erode sales. Manheim… said prices fell 3% last month after an 8.6% rise in the first quarter. April sales fell 8% from the previous month and by the same amount versus April of 2022…, showing softness in the market after last year’s record prices.”

Biden Administration Watch:

May 4 – Wall Street Journal (Andrew Duehren and Annie Linskey): “The Biden administration and Capitol Hill leaders are scrambling to avoid a first-ever government default that could arrive as soon as June 1, taking potential alternative strategies more seriously after months of deadlock over raising the country’s borrowing limit. Publicly, both Republicans and Democrats are still sticking to their demands as the clock ticks. GOP lawmakers are seeking to force cuts to federal spending in exchange for supporting raising the debt limit, while Democrats continue to call for a debt-limit increase without any other policy conditions. Privately, though, Biden administration officials and lawmakers have started to weigh potential alternatives to their negotiating position, including a short-term increase in the borrowing limit that would buy them time to find a compromise…”

May 4 – Associated Press (Kevin Freking): “Senate Democrats pressured Republicans on the increasingly menacing debt ceiling impasse Thursday, focusing on what they say will be painful reductions in government services if a bill the GOP recently pushed through the House becomes law. Republicans responded that they know the legal limit on government borrowing must be raised to avert a possible default. But they’re insisting it be coupled with cuts in what they consider bloated federal spending. No one expects that the House bill, which would increase the nation’s borrowing authority as well as cut spending, will reach President Joe Biden’s desk. The Democratic Senate won’t let it.”

May 2 – Politico (Burgess Everett and Caitlin Emma): “One party or the other is going to have to blink in the debt ceiling standoff. The question is when. Washington’s frozen negotiations over the imminent breach of the nation’s borrowing limit thawed for the first time in months Monday night as the four top congressional leaders agreed to meet with President Joe Biden next week. Yet after senators held their party leadership meetings with the House out of town, it quickly became clear that Congress is not at all prepared for the new early-June deadline… The House and Senate are scheduled to be in session simultaneously for just two weeks this month. And with potentially less than 30 days to get the job done, Senate Democrats are now openly discussing the prospect of bringing a clean debt ceiling increase to the floor — effectively daring the GOP to either buckle and advance the bill or filibuster it.”

May 3 – Bloomberg (Liz Capo McCormick): “The Treasury kept its sales of longer-term debt steady for the third straight time…, while unexpectedly announcing a new program to buy back older securities, starting sometime in 2024. With the budget deficit widening and the Federal Reserve steadily shrinking its holdings of Treasuries, US debt managers were widely anticipated to step up issuance of longer-term securities later in the year. The Treasury Department said… that may happen as soon as August — an earlier timeframe than many dealers thought.”

Federal Reserve Watch:

May 3 – Financial Times (Colby Smith and Kate Duguid): “The Federal Reserve raised its benchmark interest rate by a quarter of a percentage point…, its tenth consecutive increase in just over a year, but signalled it could soon pause its aggressive monetary tightening campaign. The Federal Open Market Committee’s latest increase, which had unanimous support from policymakers, brings the federal funds rate to a new target range of 5% to 5.25%, the highest level since mid-2007… The central bank scrapped guidance it provided in March, when it said ‘some additional policy firming may be appropriate’ to bring inflation under control. The FOMC… said it would take into account its rate rises so far — and the fact they would take time to feed through to the economy — when ‘determining the extent to which’ further increases ‘may be appropriate’. It also said it would be guided by future economic data.”

May 3 – Financial Times (Colby Smith): “Federal Reserve chair Jay Powell made no promise to pause a forceful campaign to rein in inflation after the US central bank lifted its benchmark interest rate above 5 per cent for the first time since 2007. But for anyone listening to his nearly hour-long press conference…, it was abundantly clear which way he was leaning. ‘He couldn’t commit to a pause, but he all but did,’ said Mark Zandi, chief economist of Moody’s Analytics.”

May 2 – Bloomberg (Abhishek Vishnoi): “The US regional banking crisis is far from over and the Federal Reserve should pause its rate hike campaign, according to former Federal Reserve Bank of Dallas President Robert Kaplan. ‘I’d prefer to do what’s called the hawkish pause, not raise but signal that we are in a tightening stance, because I actually think the banking situation may well be more serious than we currently understand,’ Kaplan, whose career has also included time as a senior executive at Goldman Sachs…, said… Kaplan went on to say that bank equities have been marked down solely because of their over-investment in US Treasuries, while the credit phase, which is ‘normally more serious,’ is yet to unfold.”

U.S. Bubble Watch:

May 5 – CNBC (Jeff Cox): “Job growth fared better than expected in April despite bank turmoil and a decelerating economy… Nonfarm payrolls increased 253,000 for the month, beating Wall Street estimates for growth of 180,000… The unemployment rate was 3.4% against an estimate for 3.6% and tied for the lowest level since 1969… Average hourly earnings, a key inflation barometer, rose 0.5% for the month, more than the 0.3% estimate and the biggest monthly gain in a year. On an annual basis, wages increased 4.4%, higher than the expectation for a 4.2% gain.”

May 3 – CNBC (Jeff Cox): “Hiring at private companies unexpectedly swelled in April, countering expectations for a cooling job market ahead, payroll processing firm ADP reported… Private payrolls rose by 296,000 for the month, above the downwardly revised 142,000 the previous month and well ahead of the… estimate for 133,000. The gain was the highest monthly increase since July 2022… The fastest job growth in April came in leisure and hospitality with a gain of 154,000, followed by education and health services (69,000), and construction (53,000). Other sectors posting solid increases included natural resources and mining, with 52,000, and trade, transportation and utilities, which added 32,000. The financial sector… lost 28,000 jobs for the month. Manufacturing also took a hit, down 38,000 jobs, as the sector has been in contraction for the past six months.”

May 4 – Associated Press (Matt Ott): “The number of Americans applying for unemployment benefits jumped last week but remain low overall… Applications for jobless claims for the week ending April 29 rose by 13,000 to 242,000 from 229,000 the previous week… The four-week moving average of claims, which flattens some of the week-to-week volatility, rose by 3,500 to 239,250. Overall, 1.81 million people were collecting unemployment benefits the week that ended April 22, about 38,0000 fewer that the previous week.”

May 2 – CNBC (Jeff Cox): “Employment openings pulled back further in March, hitting a nearly two-year low in a sign that the ultra-tight U.S. job market is loosening… The… Job Openings and Labor Turnover Survey showed that job vacancies totaled 9.59 million for the month, down from 9.97 million in February and below the FactSet estimate for 9.64 million. At the same time, layoffs and discharges jumped by 248,000 to just over 1.8 million, taking the rate as a share of the workforce up to 1.2% from 1%.”

May 3 – Bloomberg (Augusta Saraiva): “The US service sector expanded only modestly in April, restrained by the weakest pace of business activity in nearly three years. The Institute for Supply Management’s overall gauge of services edged up to 51.9 last month from 51.2 in March… A measure of prices paid held close to the lowest level since 2020. The business activity index fell 3.4 points to 52, still indicating growth but the slowest pace since May 2020… One bright spot in the services report was a pickup in a measure of new orders, which climbed nearly 4 points to 56.1…”

May 1 – Bloomberg (Augusta Saraiva): “US factory activity contracted for a sixth-straight month in April, the longest such stretch since 2009 and a sign of lingering malaise in manufacturing. The Institute for Supply Management’s gauge of factory activity rose to 47.1 from an almost three-year low of 46.3 a month earlier… A measure of prices paid for materials rebounded to the highest level since July… The employment measure rose above 50 for the first time in three months.”

May 3 – CNBC (Diana Olick): “Mortgage applications to purchase a home dropped 2% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Demand was 32% lower than the same week one year ago.”

May 5 – Bloomberg (Reade Pickert): “US consumer borrowing increased in March by more than expected on one of the largest spikes in credit-card balances on record. Total credit increased $26.5 billion, the most in four months, after a February gain of $15 billion… Revolving credit outstanding, which includes credit cards, jumped $17.6 billion, about three times the prior month’s gain and the largest in a year.”

May 4 – Bloomberg (Reade Pickert): “US worker productivity declined in the first quarter by more than forecast and labor costs accelerated, underscoring a challenging inflation fight for the Federal Reserve. Productivity, or nonfarm business employee output per hour, decreased at a 2.7% annual rate in the first quarter… That was the first drop in three quarters and compared to a 1.6% advance in the final three months of 2022. Unit labor costs, or what a business pays to produce one unit of output, increased at a 6.3% rate after rising 3.3% in the prior period.”

May 2 – Wall Street Journal (Nicole Friedman): “Home builders are enjoying stronger-than-expected business this spring, capitalizing on the recent fall in mortgage rates and the shortage of existing homes for sale. Last year’s rapid rise in mortgage rates made home purchasing far more expensive for most buyers, slowing home sales and pressuring the home-building industry. Home builders pulled back on land acquisition and new construction. Now, new single-family home sales are bouncing back with supply tight in the existing-home market. Active listings in March stood at roughly half of where they were four years earlier…”

April 30 – Wall Street Journal (Ryan Dezember and Will Parker): “The building boom has helped push unemployment to around its lowest level in more than 50 years. That is perplexing investors who want to see the Federal Reserve switch course on interest rates. Construction spending and employment have risen to new records this year, boosted by government outlays for infrastructure, a domestic manufacturing renaissance and a wave of apartment building that got off to a slow start during the pandemic when prices for building materials, such as lumber, were sky high. Construction companies with jobs ranging from airport overhauls to bathroom renovations say they have enough work booked to maintain payrolls—for years in some cases. Even home builders, who slowed down last year when rates began to rise, are ramping up into spring.”

May 3 – Reuters (Ross Kerber): “Median pay for top U.S. CEOs rose 7.7% last year to a record $22.3 million…, as big stock awards helped the group stay ahead of inflation while U.S. workers’ pay fell behind. Among those receiving big pay increases were the CEOs of Jefferies Financial Group and Prologis Inc according to the study… by research firm Equilar.”

May 4 – CNBC (Kate Rogers): “While the mood on Main Street has brightened, concerns about the economy, stubborn inflation and the banking system are weighing on small business owners, according to the latest quarterly survey from CNBC and Momentive. Small business confidence for the second quarter rose slightly to 46 from 45 in the first quarter, though that still remains below the baseline for optimism. Forty percent of owners describe their current business conditions as good, up from 34% in the first quarter and nearly half (46%) say they project revenue to increase in the next year. But just 21% say they’d describe the economy as good or excellent — less than half of those that described the economy as ‘poor’ (44%), as challenges continue with inflation and the ongoing labor crunch.”

May 4 – CNBC (Christina Cheddar Berk): “Recent events may be chipping away at confidence in the U.S. financial system, according to the findings of a Gallup survey. Nearly half of the 1,013 adults polled said they were ‘very worried’ (19%) or ‘moderately worried’ (29%) about the safety of the money they had tucked away in a bank or other financial institution… About 20% said they weren’t worried at all. Almost a third said they’re ‘not too worried.’ The level of concern expressed in the poll is similar to the findings that Gallup found shortly after the collapse of Lehman Brothers in September, 2008.”

May 3 – Bloomberg (Naureen S. Malik and Josh Saul): “Texans are expected to consume a record amount of electricity this summer, forcing the state’s power grid to rely on wind farms and solar plants for the first time to meet peak demand during the season.”

Fixed Income Watch:

May 4 – Reuters (Patturaja Murugaboopathy): “The issuance of global mortgage-backed securities (MBS) slumped to a 23-year low in the first four months of this year, highlighting the turmoil in the real estate sector as higher mortgage rates hit property sales and refinancing. According to Refinitiv data, global MBS issuance stood at $100 billion in the first four months of this year, the lowest since 2000.”

China Watch:

May 5 – Bloomberg: “Chinese President Xi Jinping pledged to further enhance the Communist Party’s control over the economy as he chaired the meeting of a top policy-making body to discuss key development strategies. The Central Financial and Economic Affairs Commission should ‘continue playing its role in setting major economic policies,’ he said… Xi, who heads the commission, vowed to strengthen and improve the party’s ‘centralized and unified leadership’ of economic work. Xi has ramped up a drive to deepen the party’s influence in all walks of life since he started a precedent-breaking third term, setting up power committees to oversee everything from financial markets to technology development.”

April 30 – Reuters (Ellen Zhang and Ryan Woo): “China’s manufacturing activity unexpectedly shrank in April…, raising pressure on policymakers seeking to boost an economy struggling for a post-COVID lift-off amid subdued global demand and persistent property weakness. The official manufacturing purchasing managers’ index (PMI) declined to 49.2 from 51.9 in March… New export orders edged down to 47.6 from 50.4 in March, the PMI showed.”

May 3 – Reuters (Ellen Zhang and Ryan Woo): “China’s factory activity unexpectedly contracted in April as orders fell and poor domestic demand dragged on the sprawling manufacturing sector, a private survey showed…, imperiling the broader economic outlook for the second quarter. The Caixin/S&P Global manufacturing purchasing managers’ index (PMI) fell to 49.5 in April from 50.0 in March.”

May 5 – Reuters (Liangping Gao and Ryan Woo): “China’s service activity grew for a fourth month in April, a private-sector survey showed…, as businesses benefitted from a return toward pre-pandemic levels of demand and output, although the momentum slowed. The Caixin/S&P Global services purchasing managers’ index (PMI) stood at 56.4 in April…, down from 57.8 the month prior.”

May 5 – Bloomberg (Xiao Zibang): “China’s weaker developers tumbled in Friday trading as exchanges issued risk warnings, including the potential for delisting. Shanghai Shimao Co., Yango Group Co. and Myhome Real Estate Development Group Co. were all down by the 5% trading limit. Sundy Land Investment Co. lost as much as 4.7%. The selling pressure on these developers, two of which are already in default, is a fresh reminder of the challenges they face in accessing funds as an unprecedented housing crisis unfolds.”

May 2 – Bloomberg (Wei Zhou): “KWG Group Holdings Ltd. securities tumbled Tuesday after the firm became the latest Chinese developer to default, even as new-home sales gain steam nationally… KWG, China’s 44th-largest builder by contracted residential sales this year, had a 9.2 billion yuan loss in 2022…”

May 1 – Reuters (James Pomfret and Angel Woo): “China is increasingly barring people from leaving the country, including foreign executives, a jarring message as the authorities say the country is open for business… Scores of Chinese and foreigners have been ensnared by exit bans, according to… the rights group Safeguard Defenders, while a Reuters analysis has found an apparent surge of court cases involving such bans in recent years, and foreign business lobbies are voicing concern about the trend… The group estimates ‘tens of thousands’ of Chinese are banned from exit at any one time.”

Central Banker Watch:

May 4 – Financial Times (Martin Arnold): “The European Central Bank raised interest rates by a quarter of a percentage point…, as its head warned that the fight against inflation was not yet won. Christine Lagarde, ECB president, signalled that the decision to increase the benchmark deposit rate to 3.25% would not be the last such move this year. ‘We have more ground to cover and we are not pausing, that is extremely clear,’ she said, while adding that borrowing costs were now in ‘restrictive territory’. Thursday’s increase, the seventh consecutive rise since mid-2022, was smaller than previous increases… But Lagarde noted that some of the ECB’s rate-setters had backed a bigger rise of half a percentage point.”

May 5 – Bloomberg (Jana Randow): “European Central Bank officials are rallying behind President Christine Lagarde’s declaration that there’s still some way to go before interest rates reach their peak… ‘Rates must be raised as long as we can be reasonably sure that price increases will be slowing steadily to close to 2% over a reasonable period of time,’ Governing Council member Madis Muller said… ‘In light of what we know now, this means that yesterday’s rate-hike decision will not be the last.’ His colleagues — Francois Villeroy de Galhau from France and Gediminas Simkus from Lithuania — offered similar views…”

May 3 – Bloomberg (Greg Ritchie and James Hirai): “Banks say the European Central Bank may need a new funding program to help lenders make large repayments on pandemic-era loans without roiling the region’s money markets. The ECB is set to call in around €500 billion ($550bn) in cheap loans made to prop up the economy during the pandemic, in the biggest such redemption. Around a third of these — originally doled out at sub-zero rates — are held by Italian banks, which Societe Generale SA strategists think don’t have sufficient excess reserves to meet the repayments. That’s leading some traders to bet the process could drive up funding costs in Italian bonds.”

May 2 – Reuters (Stella Qiu): “Australia’s central bank… stunned markets by raising its cash rate 25 bps when traders had looked for an extended pause, saying inflation was way too high and warned that even further tightening may be needed to bring it to heel. The unambiguously hawkish policy stance sent the Australian dollar soaring and bond futures tumbling as markets quickly lifted the peak for interest rates.”

Bursting Global Bubble Watch:

May 2 – Bloomberg (Swati Pandey and Haidi Lun): “China will avoid a massive stimulus injection to boost its post-pandemic economy like the one delivered after the 2008-09 global financial crisis as it has learned its lesson, said Ric Deverell at Macquarie Group Ltd. ‘China’s not going to save the world this time,” Deverell, chief economist at Macquarie, said… ‘Part of the reason they’re not going to save the world is that they overstimulated in 2010. So they recognize they made a mistake.’”

May 4 – Wall Street Journal (Joseph C. Sternberg): “Economists spent much of last year wondering why a credit crunch was slow to materialize in the U.S. as the Federal Reserve increased interest rates. Guess what, a credit crunch did happen: everywhere besides America… The last three months of 2022 witnessed a substantial contraction in credit globally, according to… the Bank for International Settlements. The data show that for all currencies, including the euro and yen, credit extended by a bank to a borrower in another country fell by $1.4 trillion in that quarter. This was primarily a dollar phenomenon. Total cross-border dollar credit (including dollar-denominated bonds and the like) extended to nonfinancial firms declined to $12.8 trillion in the fourth quarter from a peak of $13.4 trillion at the end of 2021. Developing economies have borne a big share of this slowdown, with total dollar credit falling by $256 billion to $5.2 trillion in the space of roughly six months last year.”

May 4 – Financial Times (Richard Milne): “AP Møller-Maersk warned of a ‘radically changed business environment’ as profits plunged at the world’s second-largest container shipping line and worries grew about a wave of new ships soon to add to pressure on the industry… Chief executive Vincent Clerc told the Financial Times there was a possibility that a bad situation could be made worse by the large number of ships ordered by rivals in the boom years and due to be delivered this year and into 2024.”

Europe Watch:

May 2 – Reuters (Balazs Koranyi): “Euro zone inflation accelerated last month but underlying price growth eased unexpectedly… Overall price growth in the 20 nations sharing the euro currency picked up to 7.0% in April from 6.9% a month earlier… Excluding volatile food and fuel prices, core inflation slowed to 7.3% from 7.5%…”

April 29 – Bloomberg (William Horobin): “France’s credit rating was cut by Fitch Ratings in another blow to politically embattled President Emmanuel Macron as he tries to bolster the country’s public finances with unpopular overhauls. Fitch reduced France’s credit rating to AA- from AA, with a stable outlook, bringing the euro area’s second-largest economy to the same notch as countries including Ireland and the Czech Republic. France’s projected budget deficits for this year and next year ‘are well above’ the median for countries with AA ratings, Fitch said…”

May 2 – Bloomberg (Alexander Weber): “Banks in the euro zone curbed lending more than anticipated after borrowing costs jumped and turmoil gripped the financial sector, reinforcing calls for the European Central Bank to slow the pace of its interest-rate hikes. Credit standards ‘tightened further substantially’ in the first quarter, according to the ECB’s Bank Lending Survey… ‘The tightening for loans to firms and for house purchase was stronger than banks had expected in the previous quarter and points to a persistent weakening of loan dynamics.’”

EM Crisis Watch:

May 3 – Bloomberg (Scott Squires): “Argentina’s international reserves have tumbled to their lowest since 2016 as the central bank drains its coffers to defend the increasingly beleaguered peso. The currency tumbled 13% in parallel markets last month to a record low as a historic drought sapped key crop exports, fueling a dollar shortage at the same time that inflation accelerates past 100%. As the crisis deepens, Argentina and the International Monetary Fund are discussing the possibility of bringing forward payments from the multilateral lender ahead of presidential elections in October.”

Leveraged Speculation Watch:

May 2 – Bloomberg (Sonali Basak): “Stanley Druckenmiller, the hedge fund investor and long-time deficit hawk, said the current impasse over the debt ceiling is dwarfed by the dangers of unchecked future government spending. ‘The fiscal recklessness of the last decade has been like watching a horror movie unfold,’ Druckenmiller… said… He said at the time that the economic storm spurred by reckless spending could dwarf the economic pains of 2008. The situation today ‘looks much worse than I had imagined 10 years ago,’ he said… Spending on seniors will reach 100% of federal tax revenues by 2040 based on Congressional Budget Office estimates… including interest expense. What’s more, the current $31 trillion US debt load doesn’t account for future entitlement payments. Accounting for the present value of that burden, the debt load is more like $200 trillion…”

May 3 – Bloomberg (Lydia Beyoud): “The US Securities and Exchange Commission wants to be let in on some of Wall Street’s most confidential information — and quickly. In a first, the SEC is going to require big hedge funds to share with regulators major investment losses in near real-time. The rule… marks a significant shift for an industry that tends to prize its secrecy. It also promises to add to businesses’ administrative headaches. Until now, funds have generally had to report positions in quarterly public filings. The investing public, in theory, won’t be any wiser. Only the SEC will be notified…”

Social, Political, Environmental, Cybersecurity Instability Watch:
May 5 – Bloomberg (Thomas Mulier): “The World Health Organization said that Covid-19 no longer constitutes a global health emergency, lowering its alert level three years after the novel coronavirus began killing millions as it swept across the world. The WHO said Friday it’s time to transition to long-term management of the pandemic after a panel met Thursday to discuss the recent evolution of the disease.”

May 4 – Reuters (Raphael Satter and Christopher Bing): “Hacker sabotage has disrupted several public services in Dallas, closing courts and knocking emergency services websites offline… Courts were closed Wednesday and will remain closed Thursday… Although… emergency services to residents were unaffected, the home pages of the police and fire service were unavailable as of Thursday and a police spokesperson said the city’s computer-aided dispatch system was hit.”

May 3 – Bloomberg (Alex Millson): “China and Vietnam have tumbled to join North Korea at the very bottom of the latest World Press Freedom Index, while Russia also moved lower. China now languishes in 179th place on the Reporters Without Borders (RSF) index — one spot above North Korea. It was described by RSF as the the world’s biggest jailer of journalists and press freedom advocates. Russia dropped nine points to the 164th spot, with RSF pointing to attacks on the last independent media outlets amid the Kremlin’s invasion of Ukraine.”

Geopolitical Watch:

May 3 – Reuters (Lisa Barrington): “Iran seized a second oil tanker in a week… in Gulf waters, and the U.S. State Department called for its release, in the latest escalation in a series of seizures or attacks on commercial vessels in Gulf waters since 2019. The… Panama-flagged oil tanker Niovi was seized by Iran’s Islamic Revolutionary Guard Corps Navy… while passing through the Strait of Hormuz.”

May 5 – Reuters (Arshad Mohammed, John Irish, Jonathan Landay and Parisa Hafezi): “Even as the United States and its European allies grapple with Russia’s invasion of Ukraine and rising tensions with China, the smoldering crisis over Iran’s nuclear program threatens to reignite. In a sign of European concern, Britain, France and Germany have warned Iran they would trigger a return of U.N. sanctions against Tehran if it enriched uranium to the optimal level for a nuclear weapon, three European officials said.”

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February 23, 2024: Overheated
February 16, 2024: Inflationary Biases
February 9, 2024: Deflation & Inflation
February 2, 2024: Fed Embraces “Immaculate Disinflation”
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January 19, 2024: Cold and Hot
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