“At the Trump Rally, It Was Evening Sun, Songs and Blue Sky. Then Came Bullets, Screams and Blood.” “Biden, Trump Call for Unity in Aftermath of Trump Assassination Attempt.” “Shooting at Trump Rally Comes at Volatile Time in American History.” “‘I’m Tired. I’m Done.’ Nation Faces Exhaustion and Division After Trump Assassination Attempt.” “An Assassination Attempt That Seems Likely to Tear America Further Apart.” “VP Frontrunner JD Vance Points Finger at Biden for Apparent Assassination Attempt at Trump Rally.” “Gun and Ammo Shares Jump After Trump Assassination Attempt.” “Europe Fears Trump Shooting Could Deepen America’s Political Crisis.”
“Biden is Isolated at Home as Obama, Pelosi and Other Democrats Push for Him to Reconsider 2024 Race.” “Biden Campaign Defiant as More Democrats Call on Him to Step Aside.” “Trump Basks in Total Control of GOP as Biden Campaign Hits Low.”
Friday Drudge headlines: “Biggest Outage in History.” “Microsoft Crash Wreaks Havoc.” “World Plunged Into Dark Ages.”
July 16 – Reuters (Jason Lange): “Americans fear their country is spiraling out of control following an assassination attempt on Donald Trump, with worries growing that the Nov. 5 election could spark more political violence, a Reuters/Ipsos poll… found. The two-day poll found Republican presidential candidate Trump opening a marginal lead among registered voters – 43% to 41% – over Democratic U.S. President Joe Biden… But 80% of voters – including similar shares of Democrats and Republicans – said they agreed with a statement that ‘the country is spiraling out of the control.’”
An absolutely dreadful week. Our nation is so deeply and bitterly divided. From the public mood, one would think the economy must be in depression. Yet growth continues, with the unemployment rate near 4%. The S&P500 was at record highs in Monday trading. What’s most worrying is that things will surely get worse.
Election on the Brink. Donald Trump barely escapes an assassin’s bullet. President Biden increasingly appears the stubborn old man refusing to accept reality. I feel for our President. If reports are accurate, his “seething” is understandable. He, of course, expects respect and loyalty. But President Biden gambled when he decided to seek a second term. Gambling and losing comes with a cost. As of Friday evening, betting odds have Trump the heavy favorite to win the presidency, with Vice President Harris the leading Democrat.
Markets are said to hate uncertainty, though highly speculative global markets have for a while confidently climbed the proverbial wall of worry. Still, there have been inklings of vulnerability to political risk (i.e., Mexico and France) soon to be masked by melt-up speculative dynamics. Speculative markets are notoriously short-term focused. Suddenly, however, Tuesday, November 5th, feels so much closer.
July 16 – Bloomberg (Rita Nazareth): “Stocks hit all-time highs as bets the Federal Reserve will soon start cutting rates fueled a rally in riskier corners of the market. Wall Street extended a pattern of money rotating into small caps and out of the megacap ‘safety’ since last week’s soft inflation data. Over the past four sessions, the Russell 2000 has beaten the Nasdaq 100 by almost 11 percentage points — a feat not seen since 2011.”
July 17 – Reuters (Arsheeya Bajwa): “Wall Street’s semiconductor index lost more than $500 billion in stock market value on Wednesday in its worst session since 2020 after a report said the United States was mulling tighter curbs on exports of advanced semiconductor technology to China. Remarks from Republican presidential nominee Donald Trump saying key production hub Taiwan should pay the United States for its defense deepened selling in chip stocks.”
“Market Rotation Shakes Tech Giants as Small-Caps Surge.” The bullish narrative holds that a rotation into the small caps and underperformers provides a healthy pause that refreshes for big tech, with expectations high that another stellar earnings reporting season will have the AI/technology bull back on track in no time. The bear case sees the sharp reversal in the hyper over-owned tech stocks as the start of long overdue Bubble deflation.
Nvida sank 8.8% this week, the largest decline since April. The Semiconductor (SOX) Index dropped 8.8%, the steepest decline since April. ASML sank 17.5%, Advanced Micro Devices 16.5%, Micron 14.4%, Lam Research 14.3%, and Applied Materials 13.6%. Pretty bloody for a bunch of Wall Street darlings.
The healthy rotation crowd would note this week’s 8.0% surge in the KBW Regional Bank Index, along with an 8.6% rally in the S&P 500 Homebuilding Index. The Philadelphia Oil Services Index rose 2.8%. Healthcare and consumer finance stocks posted solid gains. The “average stock” Value Line Arithmetic Index was about unchanged for the week.
To be sure, this week’s rotation caught the marketplace poorly positioned. A late-week reversal pushed the outperforming Goldman Sachs short index down 1.1% for the week. But this followed a notable 13.7% five-session spike (July 10th to 16th).
The leveraged speculating community (i.e., hedge funds, “family offices,” proprietary trading desks, derivatives dealers) provides the marginal source of marketplace liquidity. When embracing risk, the expansion of leverage creates self-reinforcing marketplace liquidity. Meanwhile, risk aversion triggers the liquidation of positions and the unwind of leverage, with corresponding liquidity destruction.
This week likely marked the onset of a period of de-risking/deleveraging. Short squeezes are typically bullish developments. Bearish positioning gets caught on the wrong side of a rising market, with urgent buying stoking market exuberance. And yet squeezes can also be indicative of poorly positioned leveraged speculators caught suddenly on the wrong side of important developments – with the levered players rushing to de-risk both short and long positions. To be sure, the entire marketplace has been overweight big tech in historical extremes.
The levered players were surely heavily long technology, while underweight (or outright short) regional banks and homebuilders (for example). It’s worth noting that the regional bank index gained 18.9% in the seven sessions ended July 17th. Heavily shorted homebuilder DR Horton jumped 13.1% this week.
From a big picture perspective, speculative market melt-ups unleash precarious dynamics. As we’ve witnessed, they have a proclivity for taking on lives of their own, using bearish developments and positioning as squeeze fuel for the next market leg higher. They gather incredible power to force everyone in. And with skeptics and nervous nellies left in the dust, melt-ups over time ensure a general disregard for risk.
Melt-ups inevitably succumb, with reversals then unmasking latent vulnerabilities. After fostering the perception of limitless liquidity, the abrupt switch to de-risking/deleveraging risks illiquidity, panic, and dislocation. And the greater the degree of blow-off excess, the higher the odds of a crash scenario. At the minimum, sinking prices spark a newfound focus on risk and bearish developments that were easily disregarded as the market marched ever higher. After letting hedges expire during the unrelenting melt-up, suddenly there’s a rush of hedging activity that places additional selling pressure on the marketplace.
July 19 – Bloomberg (Denitsa Tsekova and Isabelle Lee): “On Wall Street, big trades that have held sway for years are getting reshuffled as the monetary and political backdrop shifts. Now traders are hastily rushing to the options exchanges, paying up to protect — or juice — their portfolios after a turbulent week in the world’s largest stock market. With the election cycle kicking off in earnest, demand for portfolio insurance in the event of a market crash is surging, as so-called tail-risk contracts register their biggest rise in costs all year. A broad measure of equity volatility has also increased at the fastest weekly pace since March 2023, just as investors have been plowing record cash into exchange-traded funds tracking the S&P 500. Previously money-minting derivatives bets on tech bastions such as Nvidia Corp. are being abandoned with gusto.”
The VIX (S&P500 volatility) Index jumped 4.1 this week to 16.52, the largest weekly increase since (banking crisis) March 2023. The VIX closed Friday at the high since the April (Israel/Iran missile tit-for-tat) spurt of de-risking/deleveraging. The big tech-dominated Nasdaq100 VXN Index surged 4.25 to 21.51 – the largest weekly increase since August 2022. The VXN ended Friday also at the highest close since April.
Importantly, this week’s “risk off” was a global phenomenon. Emerging Market (EM) CDS jumped 12 to 167 bps, the largest weekly gain since the first week of the year. Brazil CDS gained 11 to 158 bps, matching the France political instability mid-June surge. Mexico CDS rose eight this week to 108 bps. The Chilean peso dropped 4.4%, the Brazilian real 3.0%, the Colombian peso 2.9%, the Mexican peso 2.4%, and the South African rand 1.7%. Local currency bond yields were up 24 bps in Brazil, 22 bps in Mexico, 13 bps in South Africa and 12 bps in Colombia. This week’s 3.2% drop in the Bloomberg Commodities Index further supports the global de-risking/deleveraging thesis.
July 19 – Bloomberg (Anya Andrianova and Vinícius Andrade): “Latin America is being replaced as the go-to trade for currency investors as politics turns double-digit gains into losing bets. After minting outsize returns in currencies like the Mexican peso and the Brazilian real for much of the past two years, investors are turning to less risky alternatives such as the Australia and New Zealand dollars for carry trades… Developments in Latin America — from Mexico’s surprise election results to Brazil’s deteriorating fiscal outlook — are part of the explanation. But traders are also fretting about volatility tied to the US presidential race.”
From the South China Morning Post: “China battens down the hatches for blustery trade winds as odds of Trump victory rise. China has made ample preparations for the tsunami of tariffs likely to reach its shores if former US president Donald Trump returns to the White House, analysts said, as its government and private sector have all but resigned themselves to a worst-case scenario. ‘Another trade war seems inevitable,’ said Chen Fengying, a researcher with the China Institutes of Contemporary International Relations…”
China sovereign CDS rose a notable 10 this week to 66 bps, the largest weekly gain since August 2023. China’s “big four” banks posted the largest weekly CDS price gains since November 2023.
Today’s backdrop differs significantly from the previous fledgling de-risking/deleveraging episodes that were relatively quickly resolved. October 2022 UK bond deleveraging was remedied by BOE intervention and Liz Truss’ resignation. Huge Fed and FHLB liquidity injections mitigated the March 2023 banking crisis. Neither Israel nor Iran sought to escalate their tit-for-tat. More recently, the French left and centrist parties successfully thwarted the far right’s power grab.
There are only 108 days until one of the most consequential elections in U.S. history – 108 days of extraordinary and unresolvable uncertainty. Policy platforms of the two parties could not be more polar opposites. “Trump Vows to End Electric Vehicle ‘Mandate’ on Day One.” “Drill baby, drill.”
Donald Trump: “We will end the ridiculous and actually incredible waste of taxpayer dollars that is fueling the inflation crisis. They’ve spent trillions of dollars on things having to do with the green new scam. It’s a scam. And that has caused tremendous inflationary pressures in addition to the cost of energy.”
July 19 – Bloomberg: “Republican presidential candidate Donald Trump vows to end support for electric vehicles and ‘bring auto jobs back to our country’ through the proper use of taxes, tariffs, and incentives, while not allowing auto manufacturing plants to be built in Mexico, China, or other countries. He pledged to redirect money from the ‘green new scam,’ referring to Biden’s policies to fund renewable energy projects, to infrastructure projects like bridges and dams.”
I believe a majority of Americans see climate change as a serious threat. Many believe the climate poses an existential threat that demands extraordinary global action. An administration hostile to renewable energy would be highly disruptive to an increasingly important segment of the economy.
Economist: “Tech Bros Love J.D. Vance. Many CEOs are Scared Stiff.” Reuters: “Trump VP pick supports Big Tech antitrust crackdown.”
July 15 – New York Times (Lisa Friedman): “Senator J.D. Vance, Republican of Ohio, is a strong supporter of the oil and gas industry, opposes solar power and electric vehicles, and has said climate change is not a threat… As Mr. Vance sought Mr. Trump’s endorsement for his bid for the Senate, his positions on climate change took a sharp turn. ‘I’m skeptical of the idea that climate change is caused purely by man,’ Mr. Vance told the American Leadership Forum… He acknowledged that the climate was changing but said that humans had no role in the changes. ‘It’s been changing, as others pointed out, it’s been changing for millennia,’ Mr. Vance said.”
The unfolding risk to big tech is substantial. Beyond antitrust, the massive energy-guzzling AI buildout is parallel to renewable energy development. Pulling the plug on renewable energy subsidies would have significant consequences.
“Solar Stocks Tumble as Clean Energy Investors Fear a Trump Win.” “Trump Storm Batters Wind and Solar Stocks.”
Excerpts from Friday’s WSJ (Andrew Restuccia) article, “How an Unrestrained Trump Would Govern in a Second Term.”
“Behind all the pageantry, the Republican convention made clear what Donald Trump’s governing style would look like in a second term: assertive, adversarial and unconstrained. If he wins the November election, Trump would return to the White House unburdened by ever having to appear on a ballot again, with more conviction about his vision for the country and more knowledge about how to execute it. The cabinet secretaries and White House aides who once beat back… his most radical ideas would be replaced by loyalists eager to push his agenda even further.”
“‘Nothing will sway us, nothing will slow us, and no one will ever stop us,’ Trump said…”
“Less of a focus for Trump and his team are the core tenets conservatives have embraced for decades: free markets, strong international engagement and reining in deficits. Trump presided over four straight years of rising annual deficits…”
“Trump’s running-mate selection of Sen. JD Vance (R., Ohio)—a younger, more intellectual avatar for the former president’s brand of economic populism and suspicion of foreign entanglements—signals his intention to supercharge, rather than modulate, his transformation of the GOP.”
“As he prepares for a second term, a handful of advisers have influenced Trump’s thinking… They want to eliminate the independence of certain federal agencies, reduce protections for civil servants and wrest control of some authority over spending from Congress—all proposals that Trump has endorsed.”
“If he’s re-elected, Trump has promised to expand on the targeted tariffs that he used throughout his four years in office. He has proposed a 10% across-the-board tariff on imported goods as a way to punish other countries and protect domestic industries. And he has promised to impose even steeper tariffs on China.”
“The former president has called for strengthening domestic manufacturing, lifting restrictions on U.S. energy production and overturning swaths of the wide-ranging climate law that Biden signed in 2022.”
July 16 – Bloomberg (Nancy Cook, Joshua Green and Mario Parker): “And while polls universally show that American voters favor Trump’s stewardship of the economy over Biden’s, it’s unclear to many exactly what they’ll get if they opt for another round with him. He waves away such concerns. ‘Trumponomics,’ he says, equates to ‘low interest rates and taxes.’ It’s ‘tremendous incentive to get things done and to bring business back to our country.’ Trump would drill more and regulate less. He’d shut the Southern border. He’d squeeze enemies and allies alike for better trade terms. He’d unleash the crypto industry and rein in reckless Big Tech companies.”
July 17 – Yahoo Finance (Jennifer Schonberger): “New comments from former President Donald Trump are turning up the political pressure on the Federal Reserve as policy makers make it clear they are getting closer to cutting interest rates. In an interview with Bloomberg…, the Republican nominee again reiterated that central bank officials should not ease monetary policy before the November election. ‘It’s something that they know they shouldn’t be doing,’ he said. But Fed officials… are suggesting that the time for cuts is in fact drawing near.”
There’s certainly plenty to keep the markets on edge. At least this week, Treasuries didn’t see a safe haven bid despite heightened market instability. Deficit reduction is not a priority, and there are certainly scenarios where inflation would be a risk under a Trump administration. Fed independence is a legitimate concern. Bonds should be nervous. Adding to the guesswork, the Democrats might actually somehow get their act together and make it a race. And a close race would come with its own serious risks. Extraordinary uncertainty beckons for de-risking/deleveraging.
For the Week:
The S&P500 dropped 2.0% (up 15.4% y-t-d), while the Dow increased 0.7% (up 6.9%). The Utilities declined 1.4% (up 11.8%). The Banks jumped 3.3% (up 17.0%), while the Broker/Dealers were little changed (up 17.1%). The Transports advanced 1.7% (down 0.7%). The S&P 400 Midcaps slipped 0.2% (up 8.4%), while the small cap Russell 2000 rose 1.7% (up 7.8%). The Nasdaq100 dropped 4.0% (up 16.0%). The Semiconductors sank 8.8% (up 26.1%). The Biotechs dipped 0.2% (up 1.7%). With bullion slipping $11, the HUI gold index declined 1.4% (up 21.9%).
Three-month Treasury bill rates ended the week at 5.19%. Two-year government yields gained six bps this week to 4.51% (up 26bps y-t-d). Five-year T-note yields rose six bps to 4.17% (up 32bps). Ten-year Treasury yields increased six bps to 4.24% (up 36bps). Long bond yields added five bps to 4.45% (up 42bps). Benchmark Fannie Mae MBS yields jumped 13 bps to 5.65% (up 38bps).
Italian yields slipped a basis point to 3.78% (up 8bps y-t-d). Greek 10-year yields dipped three bps to 3.43% (up 38bps). Spain’s 10-year yields declined one basis point to 3.25% (up 26bps). German bund yields fell three bps to 2.47% (up 44bps). French yields dipped two bps to 3.14% (up 58bps). The French to German 10-year bond spread widened about one to 67 bps. U.K. 10-year gilt yields added one basis point to 4.12% (up 59bps). U.K.’s FTSE equities index lost 1.2% (up 55% y-t-d).
Japan’s Nikkei Equities Index dropped 2.7% (up 19.7% y-t-d). Japanese 10-year “JGB” yields declined two bps to 1.04% (up 43bps y-t-d). France’s CAC40 fell 2.5% (unchanged). The German DAX equities index sank 3.1% (up 8.5%). Spain’s IBEX 35 equities index declined 1.4% (up 9.8%). Italy’s FTSE MIB index dipped 1.1% (up 12.7%). EM equities were mostly lower. Brazil’s Bovespa index lost 1.0% (down 4.9%), and Mexico’s Bolsa index dropped 2.6% (down 6.7%). South Korea’s Kospi index fell 2.2% (up 5.3%). India’s Sensex equities index was little changed (up 11.6%). China’s Shanghai Exchange Index increased 0.4% (up 0.2%). Turkey’s Borsa Istanbul National 100 index added 0.8% (up 49.3%).
Federal Reserve Credit declined $6.3 billion last week to $7.176 TN. Fed Credit was down $1.714 TN from the June 22, 2022, peak. Over the past 253 weeks, Fed Credit expanded $3.449 TN, or 93%. Fed Credit inflated $4.365 TN, or 155%, over the past 610 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $0.8bn last week to $3.311 TN. “Custody holdings” were down $120 billion y-o-y, or 3.5%.
Total money market fund assets gained $9.6 billion to a record $6.154 TN. Money funds were up $268 billion, or 8.1%, y-t-d and $679 billion, or 12.4%, y-o-y.
Total Commercial Paper rose $5.2 billion to $1.295 TN. CP was up $113bn, or 9.6%, over the past year.
Freddie Mac 30-year fixed mortgage rates sank 12 bps to an 18-week low 6.77% (up 5bps y-o-y). Fifteen-year rates dropped 12 bps to a six-month low 6.05% (down 2bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 7.21% (up 3bps).
Currency Watch:
July 16 – Reuters (Leika Kihara): “Japan stands ready to take all possible measures to counter excessively volatile currency moves, Chief Cabinet Secretary Yoshimasa Hayashi said…, keeping markets on alert over the chance of renewed intervention to prop up the yen. Bank of Japan data… suggested Tokyo may have spent 2.14 trillion yen ($13.5bn) intervening on Friday last week. Combined with the estimated amount spent on Thursday, Japan is suspected to have bought nearly 6 trillion yen via intervention last week.”
July 17 – Bloomberg (Yoshiaki Nohara, Toru Fujioka and Daisuke Sakai): “Japan’s apparent back-to-back forays in the currency market last week highlight the difficulty of timing moves to keep traders on guard without diminishing the effectiveness of intervention. Authorities had the element of surprise on Thursday with a suspected ¥3.5 trillion ($22bn) move during a period of low volatility… While that generated a quick four-yen appreciation in the currency against the dollar, the gain began to steadily fade, until a follow-up move on Friday, estimated at around ¥2.1 trillion. Yet this second apparent action nudged the currency by just one-and-a-half yen.”
For the week, the U.S. Dollar Index increased 0.3% to 104.396 (up 3.0% y-t-d). For the week on the upside, the Swiss franc increased 0.6% and the Japanese yen 0.2%. On the downside, the Brazilian real declined 3.0%, the Mexican peso 2.4%, the Norwegian krone 2.0%, the New Zealand dollar 1.8%, the South African rand 1.7%, the Swedish krona 1.6%, the Australian dollar 1.5%, the South Korean won 1.1%, the Canadian dollar 0.7%, the British pound 0.6%, the Singapore dollar 0.3%, and the euro 0.2%. The Chinese (onshore) renminbi declined 0.27% versus the dollar (down 2.34% y-t-d).
Commodities Watch:
July 16 – Financial Times (Harry Dempsey): “Gold prices surged to a record high on Tuesday as growing prospects of a series of Federal Reserve interest rate cuts this year and a second Donald Trump presidency provided a twin boost to the precious metal. Gold gained 1.7% to touch $2,465 per troy ounce, eclipsing the previous record struck in May. The latest gains come after weaker than expected US inflation data last week heightened expectations of lower Fed borrowing costs, which tend to boost non-yielding assets such as gold.”
July 18 – Reuters (Chris Taylor): “What asset class do millennials and Gen Z investors both want to own? Here is an answer you may not have guessed: Gold. Among wealthy investors under the age of 43, 45% own gold as a physical asset, and another 45% are interested in holding it, according to a recent study by Bank of America Private Bank. Those are far higher percentages than other age groups.”
The Bloomberg Commodities Index dropped 3.2% (down 1.2% y-t-d). Spot Gold slipped 0.4% to $2,411 (up 16.4%). Silver sank 5.1% to $30. (up 22.8%). WTI crude fell $2.08, or 2.5%, to $82.21 (up 12%). Gasoline slumped 2.6% (up 16%), and Natural Gas sank 8.6% to $2.128 (down 15%). Copper slumped 7.8% (up 9%). Wheat increased 0.9% (down 14%), while Corn fell 2.4% (down 17%). Bitcoin rallied $9,180, or 15.9%, to $66,990 (up 57.6%).
Election Watch:
July 14 – Wall Street Journal (Aaron Zitner and Clare Ansberry): “The sight of Donald Trump rushed from a campaign stage, his cheek brushed with blood from an assassination attempt, is the most unsettling shock in years to an American public already on edge from a series of menacing turns in politics. The facts of the attack on Trump… are unclear, and Trump indicated that he was unscathed save for a bullet that pierced the upper part of his right ear. But the gunfire aimed at a former and potentially future president has amplified the feeling many Americans have held that this year’s presidential election is careening toward an ugly finish. A nation barely removed from the violent end to the 2020 election, which included several deaths tied to the Jan. 6, 2021, Capitol riot, has since been whipsawed by a cascade of jolts to the system.”
July 15 – Wall Street Journal (David Luhnow, Bertrand Benoit and Ian Lovett): “The attempted assassination of Donald Trump, coming so soon after President Biden’s stumbles during the recent presidential debate, is reinforcing an impression outside the U.S. that the world’s pre-eminent superpower is entering an unusually turbulent and unpredictable period… The images of a bloodied Trump being rushed from the stage captured global attention, and for many painted a picture of an America increasingly at odds with itself—a country that has a strong economy but a dysfunctional and dangerously divided political landscape. In foreign capitals around the globe, the attempted killing of Trump and Biden’s repeated gaffes have changed the political and diplomatic calculus, sending many governments scrambling to prepare for a second Trump presidency…”
July 18 – CNBC (Sonia Heng and Evelyn Cheng): “If Donald Trump wins the U.S. presidential election, his plans for 60% tariffs on Chinese goods could be a ‘major downside growth risk’ to China, according to Goldman Sachs. Chances of Trump becoming the next president ticked higher after he survived an assassination attempt on Saturday and selected former critic JD Vance as his running mate… ‘Right now exports are a major bright spot in the Chinese economy, and I think the policymakers might want to be prepared,’ Hui Shan, chief China economist at Goldman Sachs told CNBC… ‘We are seeing tariff narratives, not only in the U.S., but across other major trading partners of China’s… So this is not going to be a sustainable driver of growth for China.’”
July 16 – Bloomberg: “JD Vance branded China the biggest threat to America in one of his first interviews since being named Donald Trump’s running mate, underscoring the likely hawkish stance of their administration toward Beijing if elected. The Ohio senator made the remarks in an interview with Fox News’ Sean Hannity on Monday. When asked about the war in Ukraine, Vance said Trump would negotiate with Moscow and Kyiv to ‘bring this thing to a rapid close so America can focus on the real issue, which is China.’ ‘That’s the biggest threat to our country and we are completely distracted from it,’ he said…”
July 15 – Bloomberg: “New tariffs of 60% on all Chinese exports to the US would more than halve China’s annual growth rate, according to new research from UBS Group AG, underscoring the risks for Beijing if former President Donald Trump returns to the White House. Trump was reported earlier this year to be considering a flat 60% tariff on Chinese imports. If that happened, it would cut 2.5 percentage points from China’s gross domestic product in the year that follows, according to… UBS economists… Beijing is seeking to reach about 5% growth this year after the economy expanded 5.2% in 2023.”
July 17 – Financial Times (Kate Duguid and Costas Mourselas): “The growing prospect of Donald Trump winning the US presidential election in November has helped revive a popular hedge fund bet on Treasury yields, in an echo of the so-called ‘Trump trade’ that rocked global markets after his 2016 victory. Investors have been putting on positions in anticipation that the former president’s tax-cutting and pro-trade tariff agenda could eventually lead to higher inflation and a greater supply of longer-dated government bonds.”
July 17 – Reuters (Ben Blanchard, Jeanny Kao and Faith Hung): “Taiwan should pay the U.S. for its defence as it does not give the country anything, Republican presidential candidate Donald Trump told Bloomberg Businessweek, sending shares of Taiwanese chip manufacturer lower… ‘I know the people very well, respect them greatly. They did take about 100% of our chip business. I think, Taiwan should pay us for defence,’ Trump said… ‘You know, we’re no different than an insurance company. Taiwan doesn’t give us anything.’”
Middle East War Watch:
July 17 – Reuters (Aziz Taher and Ahmad El Kerdi): “Hezbollah will hit new Israeli targets if Israel keeps targeting civilians in Lebanon, the group’s leader Sayyed Hassan Nasrallah said…, saying there had been a spike in the number of non-combatants killed in Lebanon in recent days… ‘Continuing to target civilians will push the Resistance to launch missiles at settlements that were not previously targeted,’ Nasrallah said…”
July 19 – Wall Street Journal (Michael R. Gordon and Lara Seligman): “U.S. intelligence agencies are warning that Russia might arm Houthi militants in Yemen with advanced antiship missiles in retaliation for the Biden administration’s support for Ukrainian strikes inside Russia with U.S. weapons. The new intelligence comes as the top U.S. Middle East commander recently advised in a classified letter to Defense Secretary Lloyd Austin that military operations in the region are ‘failing’ to deter Houthi attacks on shipping in the Red Sea and that a broader approach is needed, according to U.S. officials.”
Ukraine War Watch:
July 19 – CNN (Sophie Tanno and Anna Chernova): “Evan Gershkovich, the first American journalist to be arrested on espionage charges in Russia since the Cold War, has been found guilty of spying and sentenced to 16 years in prison by a Russian court, in a case that the US government, his newspaper and supporters have denounced as a sham.”
France Instability Watch:
July 15 – Reuters (Yoruk Bahceli and Dhara Ranasinghe): “Huge debt piles among the world’s biggest economies are starting to unnerve financial markets again, as elections cloud the fiscal outlook. French bonds took a beating after a surprise election and hefty spending plans caused alarm. U.S. debt dynamics are in focus ahead of a November presidential election. A debt crisis is not the base case, but investors are alert to the risk of looser purse strings sparking market stress. ‘Deficits are back in focus,’ said Guy Miller, chief market strategist at Zurich Insurance Group. ‘There needs to be more attention placed on not just the debt, but how to generate a growth dynamic – particularly in Europe,’ he added.”
July 15 – Financial Times (Victor Mallet and Paola Tamma): “France’s national auditor has sounded the alarm about ‘worrying’ budget deficits and public debt, warning the country is failing to come into line with Eurozone fiscal rules and is ‘dangerously exposed’ to any fresh economic shock. The latest statement from the Cour des comptes… is embarrassing for President Emmanuel Macron’s outgoing government… It is also directed at politicians from the far left to the far right, who are seeking power following the inconclusive snap National Assembly election and plan to impose policies that would place further strain on the public finances. French public debt has now reached €3.1tn or 110% of GDP, while the budget deficit last year was €154bn or 5.5% of GDP… France now faces an ‘excessive deficit’ procedure brought by the European Commission, charged with enforcing the EU’s limit of 3% of GDP.”
July 16 – Financial Times (Paola Tamma, Sarah White and Victor Mallet): “Paris and Brussels look set to clash over efforts to bring French spending back into line with EU rules, as political turmoil in the region’s second-largest economy risks delaying progress on cutting its ‘excessive’ budget deficits. Draft guidelines presented privately by EU officials to Paris at the end of June… show Brussels wants France to impose spending cuts of €15.4bn, or 0.6% of GDP, on average per year over the next seven years. France’s fragmented political landscape, following inconclusive parliamentary elections this month, is now complicating matters further.”
July 13 – Financial Times (Victor Mallet): “Contrary to what many French moderates would like to believe, France’s Marine Le Pen and her far-right Rassemblement National party were not crushed in the recent snap legislative elections… In France, as in much of the rest of Europe, extremists, populists and anti-immigration nationalists are stronger than at any time since the second world war. It is true that Macron’s gamble did not turn out quite as badly for him as his critics predicted. He ended up with an awkward hung parliament… and may yet manage to escape being forced into a ‘cohabitation’ with a hostile prime minister. And yes, French voters of the left and centre rejoiced on the streets when the RN… came third in the second round of the elections on July 7, behind the left’s hastily cobbled-together New Popular Front and Macron’s own centrist alliance. RN politicians… were glum… But Le Pen and the RN have momentum. ‘Our victory is only postponed,’ she said.”
July 15 – Financial Times (Adrienne Klasa): “The far-left faction of the alliance that won the most seats in France’s parliamentary elections suspended talks with its partners on Monday, plunging the left’s efforts to capitalise on its victory into disarray. The hastily formed Nouveau Front Populaire… had hoped to build on its election success by naming a prime minister and forming a government. However, disagreements within the alliance over who to put forward are now spilling into the open. The acrimony is also imperilling efforts to agree on a contender for president of the new national assembly when it sits for the first time on Thursday.”
July 15 – Financial Times (Anne-Sylvaine Chassany): “On the brink of civil war and with governments surviving less than two months, France in 1958 turned to General Charles de Gaulle to rewrite the constitution and keep an unruly parliament in check. More than six decades later, the rise of populist forces has reopened an old chapter in French history that De Gaulle’s Fifth Republic was meant to have closed: parliamentary chaos. Snap elections last Sunday have yielded the most fragmented National Assembly in the country’s postwar history, with no party or bloc gaining sufficient seats to govern alone and the far right emerging as the third-largest faction. Efforts by President Emmanuel Macron’s centrists and a rival left-wing bloc to revive a long buried tradition of parliamentary compromise have resulted in immediate bickering.”
Market Instability Watch:
July 16 – Bloomberg (Esha Dey): “The most speculative corner of the stock market is soaring at a pace not seen since the pandemic as traders race to move up their rate cut bets in a risk-on signal for the investment community. The small-capitalization Russell 2000 Index is up 10% in the past five sessions, something it hasn’t done since April 2020, while the S&P 500 Index has gained just 1.4% over that time, and the technology-heavy Nasdaq 100 Index is down 0.4%.”
July 17 – Bloomberg (Alexandra Harris): “Elevated rates in the funding market and stubbornly high balances at a key Federal Reserve facility suggest primary dealers are struggling to take down the onslaught of Treasury supply. Treasury issuance has swelled in recent years to fund government deficits and replace securities rolling off the Fed’s balance sheet as part of quantitative tightening, or QT. As a result, primary dealers have had more supply to digest, and with holdings are near all-time highs, their normal function as an intermediate in the market is constrained. As a result, the rate for overnight general collateral repurchase agreements, the benchmark for short-term financing needs, has stayed near levels typically seen at month- and quarter-end, when temporary strains in the funding market surface.”
July 16 – Wall Street Journal (Matt Wirz): “The commercial real-estate meltdown is spilling over into the bond market. Defaults are mounting in a favorite Wall Street mortgage-bond investment, setting off fresh alarms about the future of offices and malls in cities across the U.S. There are about $260 billion of the deals, known as single-asset, single-borrower bonds, held by investors such as banks, insurers, pensions and mutual funds. Landlords, often private-equity firms, used that money to purchase skyscrapers, shopping centers and other properties. Much of the debt is coming due and refinancing markets are frozen for many office and retail landlords.”
Global Credit Bubble Watch:
July 18 – Bloomberg (Ellen Schneider): “The $1.7 trillion private credit industry is set on transforming itself into the world’s new banks, and it’s putting on display an ever greater tolerance for the risks of lending to indebted companies. Lately, that’s meant coming up with ways to stabilize companies wobbling under a third year of elevated interest rates. For some borrowers, the beginning of lower Federal Reserve interest rates, widely expected to start in September, may not come soon enough. Squeezed borrowers are finding it harder to engage with public markets, and that’s left them looking for stop-gap measures from private lenders.”
July 18 – Reuters (Alden Bentley): “Foreign holdings of U.S. Treasuries rose to a record high in May, exceeding the previous record in March… Holdings of U.S. Treasuries rose to $8.129 trillion in May from a revised $8.04 trillion in April. Japan’s stash of Treasuries shrank to $1.128 trillion from $1.15 trillion in April. Japan remains the largest foreign holder of U.S. Treasury securities. China, which is No. 2, saw its holdings fall to $768 billion from $771 billion in April.”
July 16 – Bloomberg (Michael Mackenzie and Silla Brush): “The moment bond powerhouses have been waiting for is coming into view, and the payoff is record sums of client cash flowing into actively managed ETFs. With the Federal Reserve poised to cut rates as soon as September, investors poured $245 billion overall into active and index mutual funds and exchange-traded funds in the first half of the year, according to Morningstar… That’s compared to about $150 billion in the first half of 2023… Through July 12, active fixed-income ETFs have taken in a net $44 billion, about a third more than all of last year and more than three times as much as 2022…”
July 12 – Financial Times (William Cohan): “The end of some 13 years of nearly free money in financial markets has exposed excesses that seem utterly baffling in hindsight. Take… the tsunami of so-called cov-lite, or covenant-light, leveraged loans that investors flocked to with reckless abandon. At the end of 2023, the amount of these loans outstanding, which lack the typical protective covenants designed to be an early warning system for lenders, ballooned to $1.25tn… It was quite a party, especially for the issuers of the loans, who were able to borrow lots of money with minimal checks and balances. And now the lenders and investors who provided those loans are paying the price, in a phenomenon on Wall Street dubbed ‘creditor on creditor violence’. How apt. The carnage is nearly everywhere in the important leveraged loan market. Essentially, issuers of the loans with few or no covenants… have been seeking to restructure their balance sheets to stave off financial calamity and sometimes to try to extract value for the benefit of equity holders at the expense of debtholders.”
July 16 – Bloomberg (Scott Carpenter): “Yield-hungry insurance firms are adopting an unconventional strategy: they’re skipping mortgage-backed bonds and buying the underlying whole loans outright… Last year alone, insurers increased their holdings of residential mortgage loans by a whopping 45%, or about $20 billion, according to… Ellington Management Group. The loans typically don’t qualify for being bundled into bonds supported by Fannie Mae or Freddie Mac… The borrowers are usually riskier, and investors owning mortgages directly… means firms have to deal with arduous tasks often left to specialists. Not every firm has the size or sophistication to do that, which is why large alternative asset managers like Apollo Global Management Inc. and KKR & Co. are leading the shift.”
AI Bubble Watch:
July 18 – Financial Times (John Thornhill): “Some projections of the future can appear both ridiculous and reasonable at the same time. The speculative suggestion by the star tech investor James Anderson that the US chip company Nvidia might be worth $49tn in a decade is one… The scale of capex by the big US tech companies — Microsoft, Alphabet, Amazon, Apple and Meta — is staggering as they all heap their poker chips on their conviction that AI is going to transform the world. Their collective investment splurge amounts to arguably the biggest, and certainly the fastest, infrastructure rollout in history. Arete Research estimates that these companies will spend about $480bn in capex in the next two years, much of it on the 100 data centres they are currently building.”
July 17 – Financial Times (Ryan McMorrow and Tina Hu): “Chinese government officials are testing artificial intelligence companies’ large language models to ensure their systems ‘embody core socialist values’, in the latest expansion of the country’s censorship regime. The Cyberspace Administration of China (CAC), a powerful internet overseer, has forced large tech companies and AI start-ups including ByteDance, Alibaba, Moonshot and 01.AI to take part in a mandatory government review of their AI models…”
Bubble and Mania Watch:
July 14 – Financial Times (John Plender): “The rise and rise of private markets has a feeling of inexorability about it. Despite increased financing costs and an uncertain growth outlook, private market assets under management totalled $13.1tn on June 30 last year, having grown at nearly 20% a year since 2018, according to… McKinsey. While fundraising has declined from its 2021 peak, a recent survey by State Street found that a majority of institutional investors intended to increase their exposure to almost all private markets, including infrastructure, private debt, private equity and real estate. Yet the boom in private markets since the 2007-2009 financial crisis… was built on ultra-loose monetary policy. Most of the returns came not from enhancing the efficiency of portfolio companies, but from selling assets at ever-increasing market multiples and through leverage…”
July 15 – Financial Times (Robin Wigglesworth): “OK, technically, JPMorgan’s annual ETF extravaganza was actually published late last month… The headline is that the global ETF industry’s assets have grown by ca $3tn since the last report, thanks to ongoing massive inflows and rising markets… Most of all though, the report highlights how ETFs are becoming a far more diverse and complex ecosystem. That is particularly true in the US, where a 2019 ETF rule has triggered… innovation. While most money continues to flow into classic, vanilla passive funds, the proliferation of thematic ETFs, factor ETFs, multi-asset ETFs, active ETFs and derivatives-based ETFs is accelerating.”
July 15 – Reuters (Arasu Kannagi Basil and Davide Barbuscia): “Assets managed by BlackRock hit a record $10.65 trillion in the second quarter thanks to rising client asset values and as investors pumped money into the company’s exchange-traded funds, the world’s largest asset manager said… Stock markets have scaled record highs in the last few months amid rising expectations of a soft landing for the U.S. economy and an investor frenzy around artificial intelligence-linked stocks.”
July 15 – Bloomberg (Marion Halftermeyer): “Elite US universities have long been private equity trailblazers, plowing billions of dollars into the asset class. But a chorus of industry leaders has declared an end to the era of easy profit, and that’s pressuring schools to more delicately balance their spending needs as returns on the asset class dwindle. That’s according to an analysis by Markov Processes International, which studied the private equity portfolios and liquidity positions of 10 premier universities… Given endowments’ high allocations to private equity, ‘there looks to be more artful navigating ahead,’ Markov said…”
July 18 – Bloomberg (Marion Halftermeyer): “Texas’ largest public pension fund has decided to shift almost $10 billion out of private equity investments, a blow to an asset class that has faced heightened scrutiny amid dwindling returns and a slowdown in exits for portfolio companies.”
July 17 – Wall Street Journal (Neil Mehta): “High prices and limited supply are dulling foreign appetite for U.S. homes. International buyers still in the market are now paying more than ever. For the year that ended in March, foreign home buyers spent 20% more on a median home versus the period before… Foreign buyers paid a record-high median price of $475,000, exceeding domestic buyers by roughly $80,000. Canadians bought the largest share of homes among all foreign buyers at 13%. Many sought pricier homes in resort areas in states such as Florida, one reason why the median sale price was higher among foreign buyers.”
July 18 – Bloomberg (Masaki Kondo and Winnie Hsu): “Chinese investors sold a record amount of US stocks and bonds in May as diplomatic tensions remained elevated between the world’s largest economies. Funds in the Asian nation offloaded a net $42.6 billion worth of long-term securities consisting of Treasury, agency, corporate and other bonds as well as equities… Sales in the first five months of this year totaled $79.7 billion, an all-time high for the January-May period.”
Global Banking Watch:
July 14 – Financial Times (Madison Darbyshire and Stephen Gandel): “Shares in Bank OZK, a mid-sized US lender with century-old roots in rural Arkansas, plummeted 20% in May after a Citigroup analyst questioned its increasing exposure to the troubled commercial real estate sector. Two weeks later, the bank inked a deal to finance the largest real estate loan in Florida history — $668mn to finish Miami’s Waldorf Astoria, a 100-storey condominium planned as the tallest US skyscraper south of Manhattan. It came as the inventory of high-end Miami condos has risen 40% in the past year amid slowing sales and a glut of new construction. How a modest community bank that began in the Ozark Mountains… became one of the nation’s most willing sources of high-end construction finance is a story of risk-taking in markets where others were reluctant to lend.”
U.S./Russia/China/Europe Watch:
July 17 – Washington Post (Cate Cadell and Abigail Hauslohner): “China… said it has suspended arms control and nuclear nonproliferation talks with Washington, blaming the diplomatic stall on ongoing U.S. arms sales to Taiwan. The freeze comes just eight months after the two countries held their first formal dialogue on the matter in almost five years. ‘Over the past weeks and months, despite China’s firm opposition and repeated protest, the U.S. has continued to sell arms to Taiwan and done things that severely undermine China’s core interests and the mutual trust between China and the U.S.,’ said Chinese foreign ministry spokesman Lin Jian…”
July 14 – Bloomberg: “The Kremlin said it views the results of last week’s NATO summit as ‘threatening’ for Russia and signaling no grounds to start talks to end the war in Ukraine. ‘The alliance is demonstrating its determination to remain an enemy for us,’ President Vladimir Putin’s spokesman Dmitry Peskov said…”
July 19 – Bloomberg (Tony Capaccio): “The US is about to deploy a new ground-based jammer designed to blunt Chinese or Russian satellites from transmitting information about US forces during a conflict, the Space Force disclosed. The Pentagon’s space service branch tested the system for the first time earlier this year at two different locations, with control of the system at a third. The devices aren’t meant to protect US satellites from Chinese or Russian jamming but ‘to responsibly counter adversary satellite communications capabilities that enable attacks,’ the Space Force said…”
July 15 – Financial Times (Lucy Fisher): “China is among the countries that pose a ‘deadly’ threat to Britain, the peer leading the UK government’s strategic defence review has declared. Lord George Robertson, a former secretary-general of Nato and ex-Labour defence secretary, said that the new review would bring ‘fresh eyes’ to the threats and challenges facing the UK in the coming years. ‘We’re confronted by a deadly quartet of nations increasingly working together,’ he said, in a reference to China, Russia, Iran and North Korea.”
Inflation Watch:
July 15 – Reuters (Lisa Baertlein): “The cost to ship a standard 40-foot container of toys, auto parts or other goods from Shanghai to New York has jumped to nearly $10,000, fueling frustration among importers and prompting some experts to say the market is in a bubble. The Drewry World Container Index’s spot rate for such a shipment hit $9,387 on July 11. That is more than double the rate from February but still below the peak of $16,000 early in the pandemic… Industry experts attribute the bulk of the run-up in off-contract shipping prices to Yemen’s Houthi rebels’ missile and drone attacks that have forced ships to avoid the Suez Canal trade shortcut.”
July 13 – CNN (Chris Isidore): “On Sunday, the cost of a stamp is going up for the second time this year, jumping 5 cents for first class postage to 73 cents… Postage increases used to be pegged to inflation, usually going up at most once a year. But Sunday will mark the sixth increase in three years, during which first-class stamp increases rose 10 percentage points faster than overall inflation.”
July 16 – Wall Street Journal (Paul Hannon): “A fresh wave of tariffs could revive inflation and pressure central banks to keep their key interest rates high, the International Monetary Fund warned… In its latest report on the outlook for the global economy, the Fund said borrowing costs could also be pushed higher by a series of elections that may lead to a surge in already high levels of government borrowing. The Fund left its forecast for world economic growth this year unchanged at 3.2%, and raised its forecast for next year to 3.3% from 3.2%. It slightly lowered its growth forecast for the U.S. this year, and slightly raised its forecast for the eurozone.”
Biden Administration Watch:
July 19 – New York Times (Peter Baker, Michael D. Shear and Katie Rogers): “Sick with Covid and abandoned by allies, President Biden has been fuming at his Delaware beach house, increasingly resentful about what he sees as an orchestrated campaign to drive him out of the race and bitter toward some of those he once considered close… Mr. Biden has been around politics long enough to assume that the leaks appearing in the media in recent days are being coordinated to raise the pressure on him to step aside… He considers Representative Nancy Pelosi, the former House speaker, the main instigator, but is irritated at Mr. Obama as well, seeing him as a puppet master behind the scenes.”
Federal Reserve Watch:
July 15 – Financial Times (Colby Smith): “The US Federal Reserve has become more confident that inflation is moving back down to its 2% target, the central bank’s chair said… Speaking at the Economic Club of Washington, Jay Powell appeared optimistic about a drop in inflation signalled in last week’s consumer price index report, which showed price pressures were easing in the US. ‘Our test has been for quite some time that we want to have greater confidence that inflation was moving sustainably down towards our 2% target, and what increases confidence in that is more good inflation data,’ said Powell. ‘And lately, we have been getting some of that.’”
July 17 – Reuters (Rachel More): “The U.S. Federal Reserve should exercise patience with its next interest rate move to account for the chance of inflation rising again in a turbulent world, JP Morgan… CEO Jamie Dimon said… ‘Inflation is moving in the right direction. But it would be good if the Fed waited now,’ Dimon told Switzerland’s NZZ newspaper. ‘I think there are a lot of reasons why inflation could rise again in the future: increasing government spending, the re-militarization of the world, the extraordinary investments in the green economy, the restructuring of trade,’ he added.”
July 18 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Chicago President Austan Goolsbee suggested the central bank may need to lower borrowing costs soon in order to avoid a sharper deterioration in the labor market… While the Fed’s inflation fight is ongoing, multiple months of improving data have reassured him that officials are back on track to bring inflation down to their 2% goal, Goolsbee said. But he said the labor market is ‘definitely an area of concern,’ noting that keeping interest rates elevated while price pressures ease means monetary policy has ‘tightened substantially.’”
July 17 – Reuters (Howard Schneider and Michael S. Derby): “Top Federal Reserve officials said… the U.S. central bank is ‘closer’ to cutting interest rates given inflation’s improved trajectory and a labor market in better balance, remarks that set the stage for a first reduction in borrowing costs in September. Fed Governor Christopher Waller and New York Fed President John Williams both noted the shortening horizon toward looser monetary policy, with Waller highlighting it in a speech at the Kansas City Fed and Williams voicing it in a Wall Street Journal interview. Separately, Richmond Fed President Thomas Barkin said he is ‘very encouraged’ that declines in inflation had begun to broaden. ‘I’d like to see that continue,’ he told a business group…”
U.S. Economic Bubble Watch:
July 15 – Axios (Courtenay Brown): “Affluent Americans say the economy is just fine — and they’re spending like it is, too. Meanwhile, lower-income consumers are feeling the brunt of a slowdown… Deteriorating economic sentiment and activity among poorer Americans suggest the economy is at a turning point, even if it doesn’t show up in headline data, since higher-income consumers make up a disproportionate share of aggregate spending. The share of consumers surveyed by the University of Michigan who volunteered that high prices were eroding their living standards in early July matched a peak first reached two years ago when inflation was at multidecade highs.”
July 17 – Bloomberg (Mark Niquette): “US industrial production posted a solid advance for a second month in June, helped by a pickup in factory output that indicates manufacturing could be regaining some footing. The 0.6% increase in production at factories, mines and utilities followed a revised 0.9% gain a month earlier, marking the biggest two-month advance since late 2021…”
July 16 – Bloomberg (Claire Ballentine): “Car repossessions rocketed higher in the first half of the year, a sign of rising consumer distress as the US Federal Reserve weighs interest rate cuts. So far in 2024, repos are up 23% compared with the same period last year, according to… Cox Automotive. With high interest rates and inflation hitting household budgets, the spike in seizures provides a window into the average consumer’s financial health at a key time for policymakers. Repos started ticking up last year and have now surpassed pre-pandemic levels, up 14% compared to the first half of 2019.”
July 15 – Wall Street Journal (Will Parker): “Tenant evictions look stuck at elevated levels in several corners of the U.S., showing little sign of returning to what was typical before the pandemic. Eviction filings over the past year in a half-dozen cities and surrounding metropolitan areas are up 35% or more compared with pre-2020 norms, according to the Eviction Lab, a research unit at Princeton University. This includes Las Vegas, Houston, and in Phoenix, where landlords filed more than 8,000 eviction notices in January. That was the most ever in a single month… Overall, eviction notices were up 15% or more compared with the period before the pandemic for 10 of the 33 cities tracked by the Eviction Lab, which looked at filings over the past 12 months.”
July 15 – Reuters (Michael S. Derby): “Credit rejection rates were higher in June than earlier in 2024 but slightly lower than a year ago, new data from the Federal Reserve Bank of New York said… The bank said that in its June Credit Access Survey… credit rejection rates rose to 21.4% as of last month, relative to the 18.7% rejection rate seen in February. The rejection rate seen in June is just under the 21.8% rejection rate seen the same month a year ago, and flirts with levels last seen in the latter half of 2018.”
July 17 – CNBC (Diana Olick): “Mortgage rates dropped to the lowest level since March last week, sparking swift demand in refinancing. Homebuyers, however, seemed unimpressed. Applications to refinance a home loan jumped 15% last week… to the highest level since August 2022… Applications for a mortgage to purchase a home fell 3% for the week and were 14% lower than the same week one year ago.”
July 17 – Bloomberg (Vince Golle): “US mortgage rates fell last week to their lowest level since early March, a reprieve for potential homebuyers and an industry seeking a much-needed demand tailwind. The contract rate on a 30-year fixed mortgage dropped 13 bps to 6.87% in the week ended July 12… The rate on the 15-year mortgage declined to 6.49%.”
July 16 – Yahoo Finance (Dani Romero): “Homebuilders are feeling worse about the housing market as persistently high mortgage rates curtail new home sales. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index fell 1 point to 42 in July from the previous month, marking the lowest level since December. July’s reading was lower than economists’ estimates of 43…”
Fixed Income Watch:
July 16 – Bloomberg (Erin Hudson and Amanda Albright): “Municipal bond sales are surging at the fastest clip in weeks as issuers focus on the prospect of lower borrowing costs amid growing expectations that the Federal Reserve will start cutting interest rates as soon as September. US states and local governments are expected to sell $16.1 billion of debt over the next 30 days, a number that represents a fraction of what may actually come to market because deals are typically announced with less than a month’s notice.”
China Watch:
July 18 – Bloomberg: “President Xi Jinping vowed to make ‘high-quality development’ the guiding force of the world’s No. 2 economy, showing few initial signs that the top leadership is preparing to unleash major steps to boost demand or arrest the property slump. The ruling Communist Party signaled China will stay on course with Xi’s plan to use advanced manufacturing to generate growth, in a vaguely worded statement Thursday marking the close of a twice-decade conclave that’s often heralded major policy shifts.”
July 18 – Financial Times (Joe Leahy): “China’s leaders have warned of ‘risks’ in areas such as the country’s slumping property market, government debt and financial institutions at a top Communist party meeting, and called for tighter social controls to ensure stability. The party’s Central Committee gave security the same level of importance as economic growth as it warned of geopolitical risks, saying China should ‘lead global governance’ as it concluded the third plenum… ‘It is necessary to co-ordinate development and security, implement various measures to prevent and resolve risks in key areas such as real estate, local government debt and small and medium-sized financial institutions,’ policymakers wrote…”
July 14 – Wall Street Journal (Brian Spegele and Rebecca Feng): “Officials were bullish about the future of their factory town in early 2019. The economy was prospering, a new industrial district was on the way and an elevated light-rail system was taking shape… For years, Liuzhou and scores of other Chinese cities together amassed trillions of dollars in off-the-books debt for economic development projects… Today, overgrown construction sites, sparsely used highways and abandoned tourist attractions make much of that debt-fueled growth look illusory and suggests China’s future is far from assured… At the heart of the mess are the complex state-owned funding vehicles that borrowed money on behalf of local governments, in many cases pursuing development projects that generated few economic returns. The deterioration of China’s real-estate market… meant local governments could no longer rely on land sales to real-estate developers, a significant source of revenue. Economists estimate the size of such off-the-books debt is somewhere between $7 trillion and $11 trillion, about twice the size of China’s central government debt.”
July 15 – Wall Street Journal (Jason Douglas): “China’s economy slowed sharply in the second quarter, piling pressure on the country’s leaders to act more aggressively to rev up growth as they gather in Beijing to chart the course of the economy over the next half-decade. Gross domestic product expanded 4.7% in the second quarter compared with the same quarter a year earlier… The result was weaker than the 5.3% growth rate recorded in the first quarter and lower than the 5.0% figure expected… On a quarter-to-quarter basis, growth more than halved, sliding to just 0.7% versus a revised 1.5% previously. The world’s second-largest economy is losing momentum thanks to a festering property slump, tepid consumer spending and rising trade tensions with the rest of the world.”
July 16 – Bloomberg (Tania Chen, Shulun Huang and Ruth Carson): “China’s central bank is readying a bold new experiment in global monetary policy — taking a leaf out of the hedge fund playbook and arranging to short sell bonds. As President Xi Jinping and his top Party colleagues prepared for this week’s once-in-five-year Third Plenum to chart the broad economic path ahead, Governor Pan Gongsheng’s People’s Bank of China has been busy lining up ‘hundred of billions’ of government bonds it could sell to prevent a bubble forming in the nation’s $4 trillion debt market. Having long eschewed quantitative easing, the PBOC is now set to embrace the unorthodox policy of steering yields by dealing directly in the bond market…”
July 18 – Reuters (Kevin Yao): “Chinese consumer spending has failed to respond to government measures even though household deposits are slowing and banks have slashed interest rates, a sign risk-averse residents prefer to repay debt and buy wealth management products. Chinese households added 9.27 trillion yuan ($1.3 trillion) in new deposits in the first half – including 2.14 trillion in June…”
July 16 – Reuters (Liz Lee): “The jobless rate for 16 to 24 year olds in China, excluding college students, was at 13.2% for the month of June… The rate was 6.4% for 25-29 year olds, also excluding college students, and 4% for people between 30 and 59 years of age.”
Central Banking Watch:
July 18 – Bloomberg (Alexander Weber, Mark Schroers and Jana Randow): “President Christine Lagarde said the European Central Bank’s next interest-rate meeting is ‘wide open’ — hinting that another cut is possible as officials will have significantly more information on inflation by then. The question of September and what we do in September is wide open and will be determined on the basis of all the data that we will be receiving,’ Lagarde said… after the ECB kept its deposit rate at 3.75%. She said officials have been scrutinizing the three crucial elements underpinning their inflation outlook — wage growth, corporate profit margins and productivity — and will ‘have a lot more of that in the coming weeks and months.’”
Global Bubble Watch:
July 19 – Reuters (Patturaja Murugaboopathy and Gaurav Dogra): “Asia’s foreign reserves have dropped this year as central banks have intervened to support their currencies, with Japan, Indonesia and South Korea leading the declines. Foreign reserves across 12 countries, from Japan to India, fell about $50 billion to $7.5 trillion by the end of June. They had risen 2.2% in the same period last year. Foreign investor flows into Asian bonds dropped 34% in the first half of this year from a year ago…”
Europe Watch:
July 16 – Reuters (Francesco Canepa): “Euro zone households are applying for loans in growing numbers for the first time in two years as they grow more optimistic about the economy and interest rates fall, a European Central Bank survey showed… The ECB began cutting interest rates in June but borrowing costs on financial markets started falling well before then, slowly making credit more attractive. A net 16% of lenders polled in the ECB’s Bank Lending Survey (BLS) reported a surge in demand for loans from households in the three months to June, the first such increase since 2022, and respondents expect this trend to continue this quarter.”
Japan Watch:
July 18 – Reuters (Leika Kihara): “Japan’s core inflation accelerated for a second straight month in June…, extending a more than two-year run above the central bank’s 2% target and keeping alive market expectations of a near-term interest rate hike. But more than three-quarters of economists… expect the Bank of Japan (BOJ) to hold off on raising rates this month as soft consumption weighs on a fragile economy… The core consumer price index (CPI), which strips away the effect of volatile fresh food prices, rose 2.6% in June from a year earlier…”
July 18 – Reuters (Leika Kihara, Satoshi Sugiyama and Kiyoshi Takenaka): “A senior Bank of Japan official said the central bank wants to maintain an accommodative monetary environment as much as possible, Jiji news agency reported… The central bank’s next policy meeting will be a ‘very important’ one, Kazushige Kamiyama, the BOJ’s Osaka branch manager, was quoted as saying…”
Emerging Market Watch:
July 14 – Bloomberg (Matthew Burgess and Catherine Bosley): “Emerging-market bonds, which have been falling out of favor this year, are set to face another threat in coming months: the La Niña weather phenomenon that’s set to drive up inflation. Climbing food prices are likely to weigh on Latin American local-currency bonds that are already underperforming their global peers, according to Columbia Threadneedle Investments. Assets in countries such as Brazil, Argentina and Central America are especially at risk from unpredictable weather events… There’s a 65% chance La Niña will form in the next three months and persist into 2025…”
July 16 – Bloomberg (Martha Beck and Barbara Nascimento): “President Luiz Inacio Lula da Silva cast doubt on the need to meet Brazil’s fiscal targets, saying in an interview… that he is ‘not obligated to set a goal and stick to it’ if he decides he ‘has more important things to do.’ ‘It’s just a matter of vision,’ Lula said… ‘This country has no problem if it is a zero deficit, if it is a 0.1% deficit, if it is a 0.2% deficit. There is no problem for the country. What is important is that this country is growing, that the economy is growing, that employment is growing, that wages are growing.”
July 17 – Financial Times (Bryan Harris): “Brazil is preparing to hold the most expensive local elections in its history as political parties and congressional leaders cleave off growing chunks of the public budget, creating a governability crisis for President Luiz Inácio Lula da Silva. Politicians have handed themselves BR$4.9bn ($900mn) in public funds to pay for campaign activities ahead of municipal elections in October… The allocation is more than double the BR$2bn assigned to campaigning for the local races in 2020, and is equal to the total spent on presidential, gubernatorial and state assembly elections combined in 2022.”
Leveraged Speculation Watch:
July 17 – Reuters (Carolina Mandl): “Global hedge funds have been reducing their exposure to U.S. stocks for five days in a row amid a market-wide pullback in megacap tech-related stocks, Goldman Sachs said… The value of stocks hedge funds ditched over the last five trading sessions was the biggest since November 2022 and is close to a five-year record, Goldman said…”
Social, Political, Environmental, Cybersecurity Instability Watch:
July 17 – Associated Press (Jill Lawless): “Discontented, economically squeezed voters have turned against sitting governments on both right and left during many of the dozens of elections held this year, as global power blocs shift and political certainties crumble. From India to South Africa to Britain, voters dealt blows to long-governing parties. Elections to the European Parliament showed growing support for the continent’s far right, while France’s centrist president scrambled to fend off a similar surge at home. If there’s a global trend, Eurasia Group president Ian Bremmer said at a summit in Canada in June, it’s that ‘people are tired of the incumbents.’”
July 13 – Wall Street Journal (Jean Eaglesham): “The heat waves broiling tens of millions of Americans can warp roofs, shrivel crops, buckle roads and disrupt power supplies. Much of that damage is hard to quantify—and isn’t covered by insurance. Now cities, regulators and companies are sounding the alarm about the escalating costs of heat waves, which cause tens of billions of dollars in damage each year. ‘Extreme heat is not just a weather event,’ said Ricardo Lara, California’s insurance commissioner, after issuing a report this month on the economic and human toll of heat waves. ‘It’s a silent, escalating disaster wreaking havoc on… health, economy and infrastructure.’”
July 15 – Bloomberg (Eamon Farhat, Misha Savic, Fiona MacDonald and Mark Chediak): “Under the blazing Adriatic sun, life almost stopped in Montenegro’s capital Podgorica earlier this summer. Cars and buses were stuck in gridlock as traffic lights went out, the internet crashed, and security alarms blared in reaction to a sudden loss of power supply… The bad news for Martinovic and hundreds of millions of people around the world is that the risk of outages is getting worse. Hotter summers mean spikes in demand for cooling, as high temperatures cause wires to sag and risk sparking forest fires. Upgrades to power infrastructure haven’t kept pace… Millions of households in Houston suffered blackouts in the aftermath of Hurricane Beryl last week… Hitting emerging and developed economies, outages from Ecuador to India in recent weeks offer a foretaste of coming disruption. The climate crisis exposes electricity networks to flash floods ripping down transmission towers, droughts drying up hydro reservoirs and demand spikes from cooling during searing heat.”
July 13 – Wall Street Journal (Joe Pinsker): “U.S. workers paid more than $1 trillion into Social Security last year. Younger ones doubt they will get a dime when they retire. The idea of Social Security disappearing is one of the country’s longer-running neuroses and shows few signs of abating. Some 47% of U.S. nonretirees believe Social Security won’t be able to pay them benefits when they retire, according to a 2023 Gallup survey… Confidence today is lowest among those who are mid-career, ages 30 to 49.”
Geopolitical Watch:
July 17 – Reuters (Joe Cash): “China and Russia carried out live-fire naval exercises in the South China Sea this week, Russian and Chinese state media reported, with the two countries having strengthened military and trade ties in recent years following U.S. sanctions. Both countries were to deploy at least three vessels each for the three-day exercises, China’s state controlled Global Times newspaper said…”
