We live in interesting times. A deeply divided nation is today evenly split between jubilation and despair. The earth shakes, as the deep chasm blows wide open. Winning half: Nation Saved. Losing half: Nation Doomed. I’ll leave post-mortem analysis to the Democrats.
“America has been through a lot over the last few years — from a historic pandemic and price hikes resulting from the pandemic, to rapid change and the feeling a lot of folks have that, no matter how hard they work, treading water is the best they can do. Those conditions have created headwinds for democratic incumbents around the world, and last night showed that America is not immune.” The Obamas
Over recent years, the inflationism cancer metastasized. Donald Trump and his campaign were masterful in pinning the inflation scourge on the Biden/Harris administration. And with ongoing massive deficits, the administration and Congress deserve scorn. Of course, Washington’s profligacy has been on full display way for too long, Democrats and Republicans.
I can imagine Chair Powell chatting privately with Fed colleagues throughout the campaign: “Let’s keep our heads down. Inflation is a critical campaign issue in such a pivotal election, and we’ve thankfully remained out of the firing line. Biden and Harris are just not going to target us, while Trump will keep hammering home it’s all the administration’s fault.”
Politico’s Victoria Guida: “Some of the President-elect’s advisors have suggested that you should resign. If he asked you to leave, would you go?”
Powell: “No.”
Guida: “Can you follow up on—do you think that legally that you’re not required to leave?”
Powell: “No.”
The irony of it all. In my imaginary bizarro world, President-elect Trump would immediately invite the Fed Chair to hang out at Mar-a-Lago. Job well done.
The scars from inflation and inequality run deeper by the year. Grievance, resentment and insecurity. And while the pandemic was terribly destabilizing, it was the Fed that printed $5 TN – five times the size of the response to the 2008 collapse. Rates were pushed down to zero. Moreover, the Fed badly misjudged “transitory” and didn’t get rates back above 1% until June 2002 – with CPI (y-o-y) already above 5%. And, importantly, Fed policies accommodated reckless fiscal deficits – during the Trump and Biden administrations.
It was fitting to have an FOMC meeting the day after such a pivotal election. Seventy-five basis points in forty-eight days. The S&P500’s 4.7% weekly gain (biggest in a year) pushed y-t-d returns to 27.2%. Tesla surged 31% – with an additional $250 billion pushing market capitalization back to $1 TN.
CNBC’s Steve Liesman: “Mr. Chairman, you talked about higher rates, perhaps from an expectation of higher growth. You didn’t talk about it in terms of expectations of higher deficits. Is that something you think might be behind the recent rise in interest rates? And are rising deficits of concern to you?”
Chair Powell: “So we don’t comment on fiscal policy. And, again, I don’t have a lot more to say on what’s driving bond yields. In terms of policy changes though, let me give you a sense of how this works, in the ordinary case. Let’s say Congress is considering a rewrite of the tax laws. Doesn’t matter what’s in the content. So, we would follow that. At a certain point, we’d think we see the outline. So, we’d start to model it. And then we’d wait, and we’d wait. And at a certain point, the staff would brief the FOMC and say these are the likely effects…
So, we’d try to get smart on that. And then the law actually passes. And you’d probably run an alternative simulation before that happens, just to keep people trying to understand it. Then when it actually passes, it goes into the model, along with a million other things. We have a very large economy. Many things are affecting it, at any given time. And a law change of some kind would go in there, but it’s a process that takes some time. Clearly, the legislative process takes a lot of time. And, of course, the real question is not the effect of that law, it’s all of the policy changes that are happening. What’s the net effect and the overall effect on the economy at any given time?
So, I think that’s a process that takes a lot of time and that we go through all the time, with every administration constantly. And this will be no different. But there’s nothing to model right now. It’s such an early stage, we don’t know what the policies are. And once we know what they are, we won’t have a sense of when they’ll be implemented, or all those sorts of things. So, I think I would just say we’re not doing that now. And all that will take time. And it will be very much regular order when we do that.”
“This is not just a big win for President Trump, this is not just a big win for Republicans. This is the emergence of a new power structure in the United States,” Mohamed El-Erian, BloombergTV, November 5, 2024
Perhaps at some point later next year, the Fed will tinker with its econometric models. As for Wall Street, “new power structure” impacts are immediate. The KBW Bank Index surged 10.7% in post-election Wednesday trading. The Broker/Dealers jumped 8.2%, the Philadelphia Oil Services Index 7.8%, and the Dow Transports 5.4%. The small cap Russell 2000 rose 5.8%. Bitcoin inflated 10% to a record $75,959 (ended the week up 80% y-t-d).
Question: “And can you give us any more sense of how proactive or reactive the Fed is prepared to be to changes in economic policies with the next administration?”
Powell: “So let me say that in the near term the election will have no effect on our policy decisions. As you know, many, many things affect the economy, and anyone who writes down forecasts in their job will tell you that the economy is quite difficult to forecast, looking out past the very near term. Here, we don’t know what the timing and substance of any policy changes will be. We, therefore, don’t know what the effects on the economy would be, specifically whether and to what extent those policies would matter for the achievement of our goal variables, maximum employment, and price stability. We don’t guess, we don’t speculate, and we don’t assume.”
Well, markets assume and, especially these days, markets certainly speculate. More than ever before, markets and the Fed are poles apart. And, let there be no doubt, speculative markets have taken control and now dominate our diminished central bank. The “new power structure”: Big Money, Dark Money, and unsuspecting money. The Federal Reserve is relegated to a sideline observer to be called upon when the money interests need a liquidity backstop.
The Associated Press’ Christopher Rugaber: “You mentioned the positive economic data that we’ve seen since the September meeting, including the revisions to things like savings, higher GDP growth. We saw a stock market jump yesterday. That’s renewed some of the questions about why do many cuts at all in this—with this backdrop?”
Powell: “So you’re right. As I mentioned… the latest economic data have been strong. And that’s, of course, a great thing and highly welcome. But, of course, our mandate is for maximum employment and price stability. And we think that even with today’s cut, policy is still restrictive. We understand it’s not possible to say precisely how restrictive, but we feel that it is still restrictive.”
How can the Fed assert “restrictive” with conditions so loose? The KBW Bank Index closed the week with a 2024 return of 41.3%, lagging the Broker/Dealers’ 49.3% y-t-d return. The NYSE Financial Index has returned 27.6% and the Nasdaq Financial Index 29.4%. Such spectacular broad-based financial sector performance is evidence of a dramatic loosening of financial conditions.
Investment-grade spreads to Treasuries, a key financial conditions indicator, narrowed nine this week to 74 bps, the low all the way back to June 1998 (high-yield spreads narrow 19 to 256 bps, the low since pre-subprime eruption June 2007).
Powell: “We do take financial conditions into account if they’re persistent, and if they’re material, then we’ll certainly take them into account in our policy. But I would say we’re not at that stage right now. It’s just something that we’re watching. Again, these things don’t really have mainly to do with Fed policy, but to do with other factors in the economy.”
Powell: “It’s material changes in financial conditions that last, that are persistent, that really matter.”
Powell’s “financial conditions” references were in response to questions regarding the jump in bond yields and the implication of tightened conditions. Extraordinarily loose conditions that are persistent and certainly material – arguably momentous – somehow go undiscussed.
I would be remiss if I did not highlight that period of exceptionally loose conditions in the Summer of 1998. The KBW Bank Index reached an at the time record high of 95 on July 17, 1998 – with a y-t-d return of 25%, while the Broker/Dealer Index, also at an all-time high, enjoyed a 33% y-t-d return. Less than three months later, at intraday October 8th lows, the KBW Bank Index had collapsed 43% from highs and Broker/Dealers 56%. Loose conditions and associated extreme speculative leverage came back to bite hard with the simultaneous Russian and Long-Term Capital Management (LTCM) collapses. No exaggeration, the global financial system was at the brink (Google “Committee to Save the World”).
There will invariably be a backlash down the road, but Tuesday was a paradigm shift. A wave of deregulation, certainly within the financial sphere, equates to further loosening financial conditions. Importantly, this wave comes late in the cycle, exacerbating “terminal phase excess” and extending the late-cycle parabolic rise in systemic risk.
I actually empathize with Powell. He’s still going on about the Fed reducing rates to find some neutral rate. When asked about possible “black clouds on the horizon” he’s watching, Powell mentioned only elevated geopolitical risks. Between historic Bubbles and a feisty new administration, he’s got his hands full. And how could he not have premonitions of becoming President Trump’s scapegoat? I expect higher bond yields will provoke intense pressure on Powell to slash rates and resume QE?
Ten-year Treasury yields surged as much as 21 bps Wednesday to a five-month high of 4.48% – before reversing lower to end the week down eight bps to 4.31%. Complex paradigm shifts, such as Tuesday’s, beckon for analytical humility. With massive derivative trades struck around election day, I’ll cautiously dismiss this week’s decline in Treasury yields.
I’m assuming a clean sweep with Republicans holding the House. Team Trump will come with an ambitious agenda and an aggressive first 100-days strategy. And I expect the bond market to have issues. But with inauguration more than two months away, there’s still a window for a Treasury short squeeze and further unwind of hedges.
Lots of moving parts to Tuesday’s paradigm shift.
November 8 – Bloomberg: “China gave indebted local governments a 10 trillion yuan ($1.4 trillion) lifeline but stopped short of unleashing new stimulus, preserving room to respond to a potential trade war when Donald Trump takes office next year. Officials unveiled details of a program to refinance ‘hidden’ local debt onto public balance sheets… Funds for that program — telegraphed last month but without a price tag or timeframe — will be provided through 2028, they said, after the move was authorized by the nation’s top lawmaking body. While policymakers didn’t announce measures to directly stimulate domestic demand, Finance Minister Lan Fo’an promised ‘more forceful’ fiscal policy next year, signaling bolder steps could come after Trump’s inauguration in January.”
Analysts were disappointed Beijing didn’t come with bigger stimulus. Give them time. Seems reasonable that Beijing hopes its stock market shock therapy will kickstart general confidence. Besides, Chinese policymakers will lean heavily on bank lending for economic stimulus.
November 8 – Bloomberg: “Several major Chinese banks are exploring proposals to increase their core tier 1 capital, following Beijing’s pledge to recapitalize its biggest lenders for the first time in over a decade, Financial News reported… The move will help major banks ramp up lending to sectors including infrastructure, advanced technology and real estate, as part of efforts to revive the economy, Zeng Gang of Shanghai Institution for Finance and Development was quoted as saying. While China’s top six lenders have core tier 1 capital that significantly exceed regulatory requirements, the capital injection will help them ‘get prepared for the rainy day,’ Ye Yindan, a researcher with Bank of China, told the paper, which is overseen by China’s central bank.”
Beijing would prefer to enter trade negotiations with President Trump from a position of strength. This will require major additional stimulus.
With Tuesday’s earthquake, I see an unfolding battle of paradigm shifts. Indeed, I expect the election to only hasten the bond market’s newfound focus on debt and deficits. Peak Bubble excess today beckons for a desperately needed dose of market discipline.
Headlines for posterity: “Wall Street Bets on New Riches Ahead in Markets All-In on Trump.” “Gusher of Bonuses for Wall Street CEOs Forms After Trump Win.” “Banks Eye Trump Regulatory Reprieve, Starting With Capital Rules.” “Crypto Pins Hopes on Reshaped SEC for Deal Revival Under Trump.” “Rokos Makes Almost $1 Billion in a Day on Trump Rally.” “Trump Victory Opens Door for Historic Tariff Hikes.” “Trump Asks Robert Lighthizer to Run US Trade Policy.” “With Ready Orders and an Energy Czar, Trump Plots Pivot to Fossil Fuels.” “Crypto World Takes Victory Lap After Big Politics Bet Pays Off.” “Binance Boss Hails Crypto ‘Golden Age’ as Trump Win Fires Up Industry.” “Elon Musk’s Net Worth Tops $300 Billion in Wake of Trump Victory.” “Trump Put Musk on Phone With Zelensky During Call.” “Biden Congratulates Trump in Phone Call, Invites Him to Meeting at White House.”
For the Week:
The S&P500 jumped 4.7% (up 25.7% y-t-d), and the Dow rose 4.6% (up 16.7%). The Utilities slipped 0.6% (up 22.6%). The Banks surged 8.4% (up 37.2%), and the Broker/Dealers spiked 9.8% (up 47.7%). The Transports advanced 6.1% (up 9.2%). The S&P 400 Midcaps jumped 6.3% (up 18.5%), and the small cap Russell 2000 surged 8.6% (up 18.4%). The Nasdaq100 rose 5.4% (up 25.5%). The Semiconductors jumped 5.8% (up 26.7%). The Biotechs gained 3.2% (up 13.6%). With bullion down $52, the HUI gold index fell 1.7% (up 28.2%).
Three-month Treasury bill rates ended the week at 4.415%. Two-year government yields rose five bps to 4.25% (unchanged y-t-d). Five-year T-note yields dipped three bps to 4.19% (up 34bps). Ten-year Treasury yields fell eight bps to 4.30% (up 43bps). Long bond yields dropped 11 bps to 4.47% (up 44bps). Benchmark Fannie Mae MBS yields sank 20 bps to 5.62% (up 35bps).
Italian 10-year yields slipped three bps to 3.66% (down 4bps y-t-d). Greek 10-year yields declined five bps to 3.26% (up 21bps). Spain’s 10-year yields dipped two bps to 3.11% (up 11bps). German bund yields declined four bps to 2.37% (up 34bps). French yields fell four bps to 3.12% (up 56bps). The French to German 10-year bond spread was little changed at 75 bps. U.K. 10-year gilt yields slipped a basis point to 4.44% (up 90bps). U.K.’s FTSE equities index declined 1.3% (up 4.4% y-t-d).
Japan’s Nikkei 225 Equities Index rallied 3.8% (up 18.0% y-t-d). Japanese 10-year “JGB” yields jumped six bps to 1.01% (up 40bps y-t-d). France’s CAC40 declined 1.0% (down 2.7%). The German DAX equities index slipped 0.2% (up 14.7%). Spain’s IBEX 35 equities index dropped 2.5% (up 14.3%). Italy’s FTSE MIB index lost 2.5% (up 11.4%). EM equities were mixed. Brazil’s Bovespa index dipped 0.2% (down 4.7%), while Mexico’s Bolsa index jumped 2.4% (down 9.7%). South Korea’s Kospi increased 0.7% (down 3.5%). India’s Sensex equities index slipped 0.3% (up 10.0%). China’s Shanghai Exchange Index surged 5.5% (up 16.0%). Turkey’s Borsa Istanbul National 100 index rose 3.4% (up 23.0%).
Federal Reserve Credit declined $21.5 billion last week to $6.953 TN. Fed Credit was down $1.937 TN from the June 22, 2022, peak. Over the past 269 weeks, Fed Credit expanded $3.226 TN, or 87%. Fed Credit inflated $4.142 TN, or 147%, over the past 626 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $4.7 billion last week to $3.334 TN. “Custody holdings” were down $98 billion y-o-y, or 2.9%.
Total money market fund assets surged $79.5 billion to a record $6.585 TN. Money funds were up $451 billion over 14 weeks (27% annualized), $699 billion y-t-d (13.7% ann.), and $873 billion, or 15.3%, y-o-y.
Total Commercial Paper declined $11.5 billion to $1.171 TN. CP was down $70 billion, or 5.7%, over the past year.
Freddie Mac 30-year fixed mortgage rose another seven bps this week to a 20-week high 6.79% (down 56bps y-o-y). Fifteen-year rates added a basis point to 6.00% (down 79bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down seven bps to 7.26% (down 63bps).
Currency Watch:
November 7 – Bloomberg (Erica Yokoyama): “Japan said it stepped into the foreign exchange market twice last quarter, as speculation grows that more moves may be brewing given the recent bout of renewed yen weakness. The Ministry of Finance intervened on July 11 and 12, spending ¥3.17 trillion ($20.7bn) and ¥2.37 trillion respectively to prop up the yen…”
For the week, the U.S. Dollar Index gained 0.7% to a four-month high 104.997 (up 3.6% y-t-d). For the week on the upside, the Brazilian real increased 2.4%, the Norwegian krone 0.6%, the Mexican peso 0.5%, the Australian dollar 0.4%, the South African rand 0.3%, the Canadian dollar 0.3%, the Japanese yen 0.2%, the New Zealand dollar 0.1%, and the Singapore dollar 0.1%. On the downside, the South Korean won declined 1.2%, the euro 1.1%, and the Swiss franc 0.6%. The Chinese (onshore) renminbi declined 0.77% versus the dollar (down 1.17% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index was little changed (down 0.5% y-t-d). Spot Gold declined 1.9% to $2,685 (up 30.1%). Silver dropped 3.6% to $31.307 (up 31.6%). WTI crude increased 89 cents, or 1.3%, to $70.38 (down 2%). Gasoline rose 2.3% (down 5%), while Natural Gas was little changed at $2.669 (up 6%). Copper declined 1.5% (up 11%). Wheat increased 0.8% (down 9%), and Corn jumped 4.0% (down 9%). Bitcoin surged $7,300, or 10.5%, to $76,550 (up 80%).
Trump Administration Watch:
November 7 – CNBC (Jeff Cox): “President-elect Donald Trump likely will return to cornerstones of his previous economic platform such as tariffs, lower taxes and sanctions when he assumes office in January, his former Treasury secretary said… Steven Mnuchin… told CNBC that he sees those items as critical to the Republican’s agenda. Tax cuts are ‘a signature part of his program,’ Mnuchin said… ‘I think that should be easy to pass in Congress, particularly if the Republicans control the House as well, which it looks like it will be.’ Also on the agenda would be tariffs, which Trump implemented on multiple items during his first term and promised to do again. ‘I think that tariffs do need to be used to get counterparties back to the table, especially China, which is not living up to all of the agreements they made,’ Mnuchin said.”
November 6 – Wall Street Journal (Daniel Michaels, Jason Douglas, Kim Mackrael and Jiyoung Sohn): “Leaders of U.S. allies and adversaries… braced for quick shifts in American economic policy and the country’s approach to relations with the rest of the world as the scale of Donald Trump’s victory became clear. Trump… has pledged to increase import tariffs and cut support for allies that don’t spend adequately on defense. He has also said he would work for a rapid end to Russia’s war in Ukraine. Global heads of state and government congratulated Trump on his win, which could jolt both U.S. friends and foes. For China, Trump’s return promises to ignite a new phase in a trade war that began during his first term of office at a time when broader relations between Washington and Beijing are strained.”
November 6 – Politico (Camille Gus): “The war-gaming is over. Now a trade war is coming. Donald Trump’s victory in the U.S. presidential election will force European Union leaders to break the glass on their emergency plan to cope with a comeback by the Republican… The real estate mogul vowed on the campaign to bring back jobs to the United States and impose across-the-board tariffs of 10 to 20%. He has also threatened to slap a 60% levy on all goods coming from arch nemesis China. The EU would be ready to strike back fast and hard against any Trump tariffs, senior officials and diplomats say, in a bid to bring him to the negotiating table and hammer out a deal. But with the opening shot in the trade war yet to be fired, the EU’s first response is to appeal for friendship.”
November 6 – Reuters (Marius Zaharia): “A threat by Donald Trump… to impose 60% tariffs on U.S. imports of Chinese goods poses major growth risks for the world’s second-largest economy. Not only are the tariff rates much higher than the 7.5%-25% levied on China during his first term, the economy is also in a much more vulnerable position. This is what is different: In 2018, the property market was strong, driving about a quarter of China’s economic activity. That meant local government finances, heavily reliant on auctioning land for residential projects, were not questioned so forcefully… The property sector’s downturn has saddled local governments with unsustainable debt… China’s policy of redirecting resources from the property market to the manufacturing sector, rather than consumers, has fuelled what Western governments describe as industrial overcapacity. This has led to factory gate deflation.”
November 6 – New York Times (Patricia Cohen): “The U.S. presidential election is over. What remains is a disorienting miasma of fresh economic uncertainty. Despite reams of campaign proposals, just how President-elect Donald J. Trump’s administration will handle policy decisions that are crucial to the global economy’s path — on trade, technology, climate, industrial policy and more — is still unclear. Meanwhile, pre-election sources of instability keep spinning. War rumbles on in Ukraine. Escalating conflict in the Middle East could reignite a rise in food and energy prices. China… is trying to resuscitate its flattened economy. Many poor and middle-income countries face an unscalable wall of debt. Increasing bouts of extreme weather continue to destroy crops, wreck cities and swell the flow of migrants from economically devastated regions. And advances in artificial intelligence are poised to eliminate, create and reconfigure tens of millions of jobs.”
November 7 – Associated Press (Simina Mistreanu): “The first time China faced Donald Trump in the White House, there was a trade war, a breach of protocol involving Taiwan’s former leader, and a president-to-president bromance that turned sour. As President-elect Trump prepares to start his second term in office, China is bracing for unpredictability in its ties with the United States and renewed tensions over trade, technology and Taiwan… Tariffs like that would be a blow to China’s already unstable economy, which is suffering from high youth unemployment, a lengthy property slump and government debt. A 60% duty on Chinese imports could shave off 2.5 percentage points, or about half, of China’s projected economic growth, according to… UBS.”
November 6 – New York Times (Rob Copeland, Maureen Farrell and Lauren Hirsch): “To staff his first term as president, Donald J. Trump attracted a group of largely by-the-book aides and advisers who produced an economic record — corporate tax cuts and financial deregulation — that would have been in place in any typical Republican administration. During the campaign for Mr. Trump’s second term, however, those voices were mostly replaced by other Wall Street figures, some of whom are less orthodox in their thinking, as well as a new cohort of Silicon Valley investors jostling to upend the traditional banking system… Also out: any certainty that the incoming Trump administration’s effect on the job market, consumer prices and the international economy writ large will resemble the last term or any other administration in recent history.”
Election Watch:
November 5 – Financial Times (Sam Learner): “Democrat Kamala Harris and Republican Donald Trump have together spent $3.5bn in their race for the White House, making the 2024 presidential campaign the most expensive US general election in history. With the two candidates running neck and neck as voters headed to the polls on election day, final filings in mid-October show that the campaigns, outside groups and party committees have collectively raised almost $4.2bn.”
Middle East War Watch:
November 5 – NBC News (F. Brinley Bruton, Max Burman and Yarden Segev): “Israeli Prime Minister Benjamin Netanyahu… fired his defense minister, Yoav Gallant, a long-rumored move that was announced on Election Day in the U.S. Netanyahu and Gallant had repeatedly clashed over the conduct of the war in Gaza and Lebanon. Protests erupted in Tel Aviv and Jerusalem in response to the decision, with critics accusing Netanyahu of prioritizing his own political survival…, while families of those held hostage in Gaza expressed deep concern over the impact Gallant’s firing could have on efforts to secure the release of their loved ones.”
November 7 – Financial Times (Neri Zilber and Raya Jalabi): “Israel is drawing up plans to expand its ground offensive in southern Lebanon, the country’s top general said… Herzi Halevi, chief of staff of the Israel Defense Forces, said… Israel was ‘formulating… plans for the continuation of the fighting in Lebanon, including the expansion and deepening of the [ground] manoeuvre’. This would come alongside diplomatic efforts to end the war between Israel and the Lebanon-based Hizbollah militant group, he said. The Israeli military also announced on Thursday that it was expanding its offensive in Gaza into the northern town of Beit Lahia…”
November 2 – Financial Times (Bita Ghaffari): “Ayatollah Ali Khamenei has threatened Israel and the US with a ‘crushing response’ to last month’s air strikes against Iran and Iranian-backed militant groups in the Middle East. ‘I assure you that the Iranian nation and the country’s officials will not back down,’ the Islamic republic’s supreme leader said in a speech on Saturday on the anniversary of the US embassy seizure in 1979… ‘It is not only about revenge. It is about a rational move in compliance with religion, ethics, Islamic principles and international regulations.’ Iranian officials have stepped up their rhetoric against Israel since it launched strikes against military targets on October 26…”
November 3 – Associated Press (Jon Gambrell): “Iran’s supreme leader… threatened Israel and the U.S. with ‘a crushing response’ over attacks on Iran and its allies. Ayatollah Ali Khamenei spoke as Iranian officials are increasingly threatening to launch yet another strike against Israel after its Oct. 26 attack on the Islamic Republic that targeted military bases and other locations and killed at least five people… ‘The enemies, whether the Zionist regime or the United States of America, will definitely receive a crushing response to what they are doing to Iran and the Iranian nation and to the resistance front,’ Khamenei said…”
November 3 – Bloomberg (Alan Goldstein): “Iran is planning a counterattack on Israel involving more powerful warheads and other weapons, the Wall Street Journal reported, citing Iranian and Arab officials briefed on the plans. Iran isn’t planning to limit its response to missiles and drones… The newspaper noted it remains to be seen whether the threats are real. Iran’s Islamic Revolutionary Guard Corps said Sunday the country will ‘certainly’ launch a new attack against Israel, a day after its supreme leader vowed a harsh retaliation. ‘Details cannot be discussed, but it will certainly be carried out,’ Ali Fadavi, the IRGC’s deputy commander in chief, was cited as saying by the semi-official Iranian Students’ News Agency.”
November 3 – Wall Street Journal (Summer Said and Benoit Faucon): “Amid U.S. warnings against a counterattack on Israel, Iran is sending a defiant diplomatic message: It is planning a complex response involving even more powerful warheads and other weapons, said Iranian and Arab officials briefed on the plans. It remains to be seen whether the Iranian threats are real or just tough talk… An Egyptian official said Iran warned privately of a ‘strong and complex’ response. ‘Our military lost people, so they need to respond,’ said an Iranian official. He said Iran could use Iraqi territory for part of the operation and would likely target Israeli military facilities ‘but much more aggressively than last time.’ Iran isn’t planning to limit its response to missiles and drones… and any missiles used would have more powerful warheads, the Iranian and Arab officials said.”
Ukraine War Watch:
November 7 – Financial Times (Henry Foy and Marton Dunai): “Volodymyr Zelenskyy has said it would be ‘unacceptable’ and ‘suicidal’ for Europe to ask Ukraine to make concessions to Russia in exchange for a potential peace deal. The Ukrainian president joined some 40 European leaders on Thursday in Budapest for a summit on the latest security challenges facing the continent. The meeting was hosted by Hungary’s Prime Minister Viktor Orbán, who has broken with EU and Nato policy to push for immediate peace, something Kyiv says would amount to capitulation on Moscow’s terms. ‘Some of you present here were strongly advocating for Ukraine to make ‘concessions’,’ Zelenskyy told the gathering. ‘It’s unacceptable for Ukraine and suicidal for all of Europe.’”
November 5 – Reuters (Ron Popeski, Yuliia Dysa and Oleksandr Kozhukhar, and Jihoon Lee): “President Volodymyr Zelenskiy said… the first battles between the Ukrainian military and North Korean troops ‘open a new page in instability in the world’ after his defence minister said a ‘small engagement’ had taken place. Ukrainian Defence Minister Rustem Umerov confirmed… that the first engagement had occurred with North Korean troops… Zelenskiy, in his nightly video address, thanked those in the world who, he said, had reacted to the dispatch of North Korean troops to Russia last month ‘not just with words … but who are preparing actions to support our defence.’ ‘The first battles with North Korean soldiers open a new page of instability in the world,’ he said. He said that Ukraine, acting with the rest of the world, had to ‘do everything so that this Russian step to expand the war with real escalation fails.’”
November 3 – CNN (Kostyantyn Hak, Darya Tarasova and Sophie Tanno): “Ukraine’s army chief has warned that his forces are facing ‘one of the most powerful Russian offensives’ since the start of the war as Russia claimed it captured more settlements on the eastern frontline. Russia has steadily been making gains in the eastern Donbas region, which Russia’s President Vladimir Putin aims to capture in full. Reuters… reported that Russia has been advancing at its fastest pace in at least a year. Ukraine’s Commander-in-Chief Oleksandr Syrskyi said the situation on the front line ‘remains difficult’ and certain areas ‘require constant renewal of resources of Ukrainian units’… Kyiv’s forces, he said, are ‘holding back one of the most powerful Russian offensives since the beginning of the full-scale invasion.’”
November 7 – Associated Press (Hanna Arhirova): “Dozens of Russian drones targeted the Ukrainian capital Kyiv in a nighttime attack that lasted eight hours…, as Russia kept up its relentless pounding of Ukraine after almost 1,000 days of war. Russian forces fired lone drones and swarms of drones that entered Ukrainian airspace from various directions and at a variety of altitudes… Ukrainian air defenses ‘neutralized’ three dozen drones, but falling debris caused damage to a hospital and residential and office buildings in the capital…”
Market Instability Watch:
November 6 – Bloomberg (Leda Alvim and Giovanna Bellotti Azevedo): “Emerging markets were hit hard by the resurgence of the ‘Trump trade’ Wednesday as the dollar and US yields soared following Donald Trump’s victory in the US presidential race. Currencies in Eastern Europe led losses, sending the emerging-market currency gauge to its worst day since February 2023. The Mexican peso… edged higher in a volatile session. Earlier in the day, the currency slumped as much as 3.5%… ‘Trade tariffs and other Trump administration policies may be inflationary for the US,’ according to Tom Wilson, head of emerging-market equities at Schroder Investment Management Ltd. ‘The expected outcome would be dollar strength, higher inflation, less easing from the Fed and a higher US yield curve. All of this is broadly unhelpful for EM equity returns, pressuring currencies and limiting freedom of action for central banks.’
November 6 – Financial Times (Nicholas Megaw and Harriet Clarfelt): “US stocks and other risky assets rallied on Wednesday after Donald Trump’s decisive election victory, but bond investors highlighted why euphoria could be shortlived if the president-elect’s campaign policies drive up inflation. ‘Sugar rush is a good term for what we’ve experienced,’ said Tina Fordham, founder of advisory firm Fordham Global Foresight… While the Republican victory was good for equities, she said ‘we are not in the same economic environment that we were in 2016, and Trump’s policies are inflationary. I think it does eventually intersect with expectations about the Fed rate cutting cycle, and geopolitical risks.’”
November 8 – Bloomberg (Vassilis Karamanis): “Trading of currency options swelled to a record after Donald Trump’s victory in the US presidential election, as traders rushed to bet on further dollar gains. Over $160 billion worth of contracts exchanged hands on Wednesday, the highest daily volume in data going back to 2013… Trading of euro options was four times higher than the recent average…, while the EBS platform saw an all-time record for the Chinese renminbi. Most of the activity on over-the-counter trades was driven by new positions betting on a stronger dollar…”
November 4 – Bloomberg (Editorial Board): “This election can hardly be faulted for lack of energy or commitment: The candidates have made it a contest of competing catastrophisms, with the survival of democracy itself at stake. Fighting over these existential issues, they’ve managed to agree on only one thing — that humdrum norms of competent governance are for now beside the point. One of those norms is fiscal responsibility. Sooner or later, governments that set this concern aside come to grief regardless of their other commitments. When that happens, they take their economies down with them. The prospect is no longer unthinkable for the US. Yet it’s hard to recall an election that ignored the issue so totally or in which pandering on taxes and public spending was so unrestrained.”
November 5 – Wall Street Journal (James Hirai): “UK borrowing costs rose back to levels seen after last week’s budget announcement, in a sign of lingering investor anxiety over the government’s fiscal expansion plans and the US presidential election. The yield on 10-year gilts climbed as much as eight basis points to 4.53%, slightly surpassing last week’s peak to reach the highest in a year. Short-dated rates also rose… and demand for new bonds in an auction was the weakest in almost a year. Bond investors are concerned that Chancellor Rachel Reeves’s plans to run up borrowing to boost investments will fuel inflation, limiting the Bank of England’s ability to cut interest rates.”
November 7 – Bloomberg (Greg Ritchie and Tom Rees): “Bank of England officials said the UK bond selloff that followed last week’s budget announcement was exacerbated by investor positioning, a signal they believe the worst of the slide is over. The market was positioned for short-end rates to fall and unwound those trades after the government unveiled its fiscal plans, Governor Andrew Bailey told reporters… That dynamic is ‘probably finished now,’ he said.”
Global Credit Bubble Watch:
November 4 – Wall Street Journal (Jack Pitcher): “BlackRock’s clients are pouring money into its core stock and bond offerings. To keep the momentum going, chief Larry Fink wants to push the world’s largest asset manager into the more lucrative world of private markets. Managing more assets such as private equity, private credit, real estate and infrastructure would allow BlackRock to compete with the biggest alternative asset managers. It could also make BlackRock more valuable… Private-market funds can charge more than BlackRock gets for much of its plain-vanilla, index-based funds. And the market rewards that. Over the past one, three and five years, shares of Blackstone, Apollo and KKR have handily outperformed those of BlackRock. To change that, Fink is taking an ‘if you can’t beat ’em, join ’em’ approach, largely through acquisitions.”
AI Bubble Watch:
November 3 – Financial Times (Tabby Kinder): “Wall Street’s largest financial institutions have loaned more than $11bn to a niche group of tech companies based on their possession of the world’s hottest commodity: Nvidia’s artificial intelligence chips. Blackstone, Pimco, Carlyle and BlackRock are among those that have created a lucrative new debt market over the past year by lending to ‘neocloud’ companies, which provide cloud computing to tech groups building AI products. Neocloud groups… have acquired tens of thousands of Nvidia’s high-performance computer chips, known as GPUs, that are crucial for developing generative AI models. Those Nvidia chips are now also being used as collateral for huge loans. The frenzied dealmaking has shone a light on a rampant GPU economy in Silicon Valley that is increasingly being supported by deep-pocketed financiers in New York.”
Bubble and Mania Watch:
November 6 – Financial Times (Stephen Gandel): “The number of US borrowers in danger of defaulting a second time on commercial property loans is at the highest level in a decade, raising concerns that a bank practice known as ‘extend and pretend’ is hiding growing systemic risk. ‘They are kicking the can down the road,’ said Ivan Cilik, a principal with accounting firm Baker Tilly’s financial services group. ‘I think lenders are trying to work out the problems with these loans, but if rates don’t come down borrowers are not going to be able to make payments.’ Regulators are growing increasingly worried about the rise in loan modifications and whether they are distorting loan markets. Last month, researchers at the New York Fed published a paper warning that lenders appeared in many cases to be offering breaks to property borrowers… ‘Banks ‘extended-and-pretended’ their impaired commercial real estate mortgages in the post-pandemic period,’ the study’s others wrote, and warned the generous modifications could lead ‘to credit misallocation and a build-up of financial fragility.’”
U.S./Russia/China/Europe Watch:
November 4 – Wall Street Journal (Bojan Pancevski, Thomas Grove, Max Colchester and Daniel Michaels): “Western security officials say they believe that two incendiary devices, shipped via DHL, were part of a covert Russian operation that ultimately aimed to start fires aboard cargo or passenger aircraft flying to the U.S. and Canada, as Moscow steps up a sabotage campaign against Washington and its allies. The devices ignited at DHL logistics hubs in July, one in Leipzig, Germany, and another in Birmingham, England. The explosions set off a multinational race to find the culprits. Now investigators and spy agencies in Europe have figured out how the devices—electric massagers implanted with a magnesium-based flammable substance—were made and concluded that they were part of a wider Russian plot… Security officials say the electric massagers, sent to the U.K. from Lithuania, appear to have been a test run to figure out how to get such incendiary devices aboard planes bound for North America.”
November 5 – Wall Street Journal (Max Colchester): “Eastern European officials said Russia’s alleged plot to send incendiary devices by mail to Western countries including the U.S. marked an escalation in Moscow’s conflict with the West… Polish and other European officials said that agents suspected of working for the Russian military intelligence this summer posted a number of parcels packed with incendiary material from Lithuania to Britain, in a dry run to see if such packages could also be sent by aircraft to North America. The plot was foiled when two of those packages caught fire at DHL depots in the U.K. and Germany in July… ‘We cannot leave this unanswered, because it will only escalate and we will move to a new level of action,’ the Lithuanian president’s national security adviser, Kestutis Budrys, told a radio show… Pawel Szota, head of Poland’s foreign-intelligence agency, said: ‘Russia has started employing terrorist tactics in Europe. We could do the same thing in Russia, but we are more civilized.’”
November 4 – Wall Street Journal (Timothy W. Martin and Dasl Yoon): “Kim Jong Un tried peace talks and refrained from testing new weapons to shed North Korea’s status as a pariah state. Now he is doubling down on rogue behavior to get what he wants. By recently sending thousands of troops to the Russian front lines, Kim has opened a new chapter for his cash-strapped regime. The move thrusts the ‘Hermit Kingdom’ into global affairs in a way that it has shunned since the 1950-53 Korean War. By going all-in on Russia, Kim is forging an unproven—and even more brazen—path to achieve regime security, advance his country’s nuclear program and win economic relief. Seemingly eroded, for now, are the traditional levers of detente with South Korea, nuclear talks with the U.S. and widespread diplomatic support from Europe.”
Inflation Watch:
November 7 – Associated Press (Damian J. Troise): “While prices for most goods have been falling throughout the year, inflation for a wide range of services remains high. That has put a strain on consumers eating out, servicing their cars and paying for various kinds of insurance. Prices for services rose 3.7% in September from a year ago, according to the personal consumption expenditures price index… Prices for goods, though, have been falling, which has helped cool the overall rate of inflation nearly back to the Fed’s goal of 2%. Restaurants… are among the harder hit sectors dealing with stubborn inflation. Food services inflation rose 3.6% in September. Chains including Chipotle, McDonald’s and others say they expect inflation pressure from wages to continue.”
November 4 – CNBC (Mike Winters): “The average age of homebuyers in the U.S. has risen by six years since July 2023 — another sign that younger Americans are being priced out of the market due to escalating ownership costs. The average age of homebuyers is now 56, up from 49 in 2023, according to the National Association of Realtors… That’s a historic high, up from an average age in the low-to-mid 40s in the early 2010s. The median age of first-time buyers also rose from 35 to 38, while the share of first-timers dropped from 32% to 24% of all buyers for the year ending July 2024. That marks the lowest percentage since NAR started tracking the metric in 1981. ‘In my two decades in the mortgage business, I’ve never seen a more difficult time for millennials to purchase a home,’ says Bob Driscoll, senior vice president and director of residential lending at… Rockland Trust.”
November 4 – Bloomberg (Keith Naughton): “Car buyers across America… are dropping out of the new-car market. The pandemic supply shortages that drove sticker prices skyward are in the rearview mirror, but the cost of a new set of wheels continues to climb. The average price of a new car this year is $48,205, up 21% from five years ago, according to… Cox Automotive Inc… Sticker shock is increasingly scaring off many would-be buyers. A recent survey by automotive researcher Edmunds.com found that almost half of American car shoppers expect to pay $35,000 or less for a new car.”
November 8 – Bloomberg (Celia Bergin): “Global food prices hit the highest level in 18-months in October, with unfavorable weather raising production concerns for many commodities and threatening to keep consumer costs higher for longer. An index of food-commodity prices created by the United Nations’ Food and Agriculture Organization rose to the highest since April 2023… The gauge — that tracks grains, sugar, meat, dairy and vegetable oils costs — rose 2% in October, led by a jump in the cost of vegetable oils.”
Federal Reserve Watch:
November 7 – Associated Press (Christopher Rugaber): “The Federal Reserve cut its key interest rate Thursday by a quarter-point in response to the steady decline in the once-high inflation that had angered Americans and helped drive Donald Trump’s presidential election victory this week. The rate cut follows a larger half-point reduction in September, and it reflects the Fed’s renewed focus on supporting the job market as well as fighting inflation… Asked at a news conference how Trump’s election might affect the Fed’s policymaking, Chair Jerome Powell said that ‘in the near term, the election will have no effects on our (interest rate) decisions.’”
November 8 – Wall Street Journal (Editorial Board): “Federal Reserve Chairman Jerome Powell is sticking with his view that inflation is all but vanquished. The interest-rate cut he delivered Thursday marks a gamble that he won’t need to raise rates early in the next Trump Administration… Mr. Powell struggled Thursday to explain why a further cut is warranted when inflation remains well above the 2% target. It’s been 2.7% year-on-year for four of the past five months, according to the Fed’s preferred personal-consumption-expenditure index. The Fed is saying, ‘trust our spreadsheets.’”
November 7 – New York Times (Jeanna Smialek): “Donald J. Trump spent his first presidency attacking the Federal Reserve, pushing policymakers to cut interest rates and calling Fed officials names that ranged from ‘boneheads’ to ‘enemy.’ That rhetoric is likely to make a return to the White House with Mr. Trump. The Republican has been promising that interest rates will come down on his watch — even though rates are set by the politically independent Fed and the president has no direct control over them. The question looming over markets and the Fed itself is whether Mr. Trump will do more than just talk this time as he tries to get his way. The Fed is in the process of cutting rates, but it is unclear whether it will do so fast enough to please Mr. Trump.”
November 6 – Wall Street Journal (Nick Timiraos): “The Federal Reserve is widely expected to cut interest rates by a quarter-percentage point… The bigger question is how many more cuts officials expect will be warranted to preserve a solid job market without reversing recent declines in inflation… Here is a look at four questions officials face that illustrate why the Fed’s ability to offer meaningful interest-rate guidance could be more limited: First, does the election result lead to meaningful changes for economic demand or inflation that warrant a different policy path?… Second, have jitters about job-market deterioration been overstated?… Third, where is inflation headed?… Fourth, what is the right level for rates, anyway? Officials are trying to bring rates back to a more ‘normal’ setting after two years of rapidly increasing borrowing costs to fight inflation. But they don’t know what constitutes a normal rate.”
U.S. Economic Bubble Watch:
November 5 – Reuters (Ann Saphir): “U.S. services sector activity unexpectedly accelerated in October to a more-than two-year high, and employment strengthened… The Institute for Supply Management (ISM) said… its nonmanufacturing purchasing managers (PMI) index accelerated to 56.0 last month from 54.9 the prior month. It was the highest level since August 2022… The ISM survey’s new orders measure eased to 57.4 in October from 59.4 in September. The ISM’s prices paid measure for services inputs ticked down to 58.1 from the prior month’s eight-month high of 59.4. ISM’s measure of services employment rose to 53.0 in October, up from 48.1 in September…”
November 7 – Reuters (Lucia Mutikani): “The number of Americans filing new applications for unemployment benefits rose slightly last week, suggesting no material change in the labor market and reinforcing views that hurricanes and strikes had resulted in job growth almost stalling in October… Initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 221,000 for the week ended Nov. 2, the Labor Department said.”
November 6 – Bloomberg (Molly Smith): “US mortgage rates continued to climb, putting a further damper on refinancing and homebuying activity. The contract rate on a 30-year mortgage increased 8 bps to 6.81% in the week ended Nov. 1, the highest since July, according to Mortgage Bankers Association data… In the last five weeks, the rate has risen 67 basis points, the most in two years.”
November 6 – CNBC (Diana Olick): “Mortgage rates rose again last week, pulling demand from both the refinance and purchase markets… Applications to refinance a home loan… fell 19% for the week but were 48% higher than the same week one year ago… Applications for a mortgage to purchase a home decreased 5% for the week and were just 2% higher than the same week one year ago.”
November 7 – Bloomberg (Molly Smith): “US labor costs grew at a surprisingly strong pace in the third quarter, and was much stronger than previously thought earlier this year, which risks fanning inflationary pressures. Unit labor costs, or what a business pays employees to produce one unit of output, increased at a 1.9% annualized rate, following significant upward revisions to prior quarters… Price-adjusted hourly compensation picked up to a 3% pace in the July-to-September period, marking a seventh straight quarter where pay has outpaced inflation.”
November 7 – Bloomberg (Aashna Shah and Nic Querolo): “Americans are poised to approve at least $52 billion of state and local government borrowing measures, according to preliminary vote tallies of S&P Global Market Intelligence data… The referendums come as state and local government borrowers are approaching a record year for municipal bonds sales. Issuers have sold over $442 billion of long-term debt so far, a more than 42% increase from the same period in 2023…”
November 5 – Associated Press (David Koenig, Lindsey Wasson, Hannah Schoenbaum and Cathy Bussewitz): “Factory workers at Boeing have voted to accept a contract offer and end their strike after more than seven weeks… Boeing’s 33,000 striking machinists disbanded their picket lines late Monday after leaders of the International Association of Machinists and Aerospace Workers district in Seattle said 59% of union members who cast ballots agreed to approve the company’s fourth formal offer, which included a 38% wage increase over four years.”
November 5 – Wall Street Journal (Will Parker): “The biggest apartment construction boom in four decades flooded the market with new supply over the past two years. Apartment owners had to contend with a surge in empty units. That is starting to change. The vacancy rate… stopped rising for the first time in three years last quarter, as demand for apartments rose to its highest levels since 2021, according to CoStar. The more than 1.2 million new apartment units that were built during the past two years are filling up.”
Fixed Income Watch:
November 5 – Bloomberg (Caleb Mutua): “Some of America’s biggest businesses may lose their coveted investment-grade ratings, flooding US junk-bond markets with as much as $60 billion of debt after soaring inflation has driven up many companies’ operating costs. Barclays Plc expects between $40 billion to $60 billion worth of ‘fallen angels’ in 2025, industry parlance for companies that have lost their investment-grade ratings. It would be the highest level in nearly a decade, excluding 2020… ‘It’s kind of this slow-moving car wreck,’ said Hunter Hayes, chief investment officer at Intrepid Capital Management Inc. ‘Obviously, some of these bigger, on-the-cusp, IG names have had some issues — Boeing being the poster child. But there are a handful of them, and what’s interesting about it to us is just the size.’”
China Watch:
November 4 – Bloomberg (Josh Xiao): “China’s service activity expanded at the fastest pace since July…, a sign that consumer demand may be on the mend after Beijing moved to shore up growth with a barrage of stimulus measures. The Caixin China services purchasing managers’ index rose to 52 in October from 50.3 the previous month, the biggest jump since March last year, Caixin and S&P Global said… ‘Supply and demand continued to grow as the market improved,’ Wang Zhe, senior economist at Caixin Insight Group, said… ‘Businesses expressed confidence in macroeconomic conditions in the near term.’”
November 7 – Reuters (Joe Cash): “China’s exports grew at the fastest pace in over two years in October as factories rushed inventory to major markets in anticipation of further tariffs from the U.S. and the European Union, as the threat of a two-front trade war loomed large… Outbound shipments… grew 12.7% year-on-year last month…, blowing past a forecast 5.2% increase in a Reuters poll of economists and a 2.4% rise in September. Imports fell 2.3%, compared with expectations for a drop of 1.5%, turning negative for the first time in four months.”
November 8 – Bloomberg: “China’s central bank strengthened its commitment to supportive monetary policy and pledged to use multiple tools to ensure ample liquidity in the market, following a major fiscal package designed to reduce local debt risks. The People’s Bank of China will ‘resolutely insist on an accommodative monetary policy stance,’ according to its quarterly monetary policy report published Friday. It will use programs including the newly established ‘outright reverse repurchase agreements’ and government bond trading to keep liquidity reasonably sufficient…”
November 4 – Bloomberg: “China’s top legislative body reviewed a proposal to move some off-balance-sheet debt of local governments to their official accounts, paving the way for the first mid-year increase in the borrowing limit since 2015. The National People’s Congress Standing Committee met on Monday to discuss the plan to lift local governments’ debt ceiling to swap out their hidden debt… The move, which policymakers in Beijing had hinted at, aims to reduce the financial burden of local officials.”
November 4 – New York Times (Keith Bradsher): “Banks in China are foreclosing on a growing number of apartments after homeowners could not pay their mortgages, as the country’s housing crash threatens the financial system. The roster of homes seized and listed for auction leaped 43% last year… The legal system is struggling to keep up with evictions. In some cities, like Qingdao, foreclosed apartments are being sold at auction before the occupants have moved out. The buyers must persuade them to leave… The Chinese government is urging banks to lend more to real estate developers and other borrowers as part of its economic stimulus measures since late September. But the lenders themselves face difficulties. ‘Banks have long been the best ally and instrument of Chinese policymakers, but could soon become their largest problem,’ said Alicia García-Herrero, the chief economist for Asia at Natixis…”
November 5 – Bloomberg (Mark Cranfield): “Bond traders in China will be bracing for the risk of negative credit ratings action if more local government debt is absorbed at the sovereign level, which could drive 5-year CDS levels higher. The National People’s Congress Standing Committee held a meeting on Monday…, where it discussed a plan to lift local governments’ debt ceiling to swap out their hidden debt… Although any immediate changes to China’s credit ratings are unlikely, that won’t stop traders from re-pricing Chinese government debt to allow for the risk of a negative review.”
November 5 – Wall Street Journal (Sha Hua): “This should be a shining moment for Longi, one of the biggest makers of solar-power equipment in the world. Longi and a few other Chinese companies dominate the solar business globally. Their home nation is in the midst of an unprecedented installation boom, with more than 100 gigawatts of capacity added in the first half of this year alone. Yet in the upside-down world of the Chinese solar industry—and many other industries in the country—the boom is a bust for the companies involved… Whipsawing government policy, while helping to create a market for solar panels, has brought Zhong’s company to its knees twice… The pattern is the same: Beijing throws its support behind renewable energy, prompting local governments to pile on subsidies for new entrants in the hopes of creating a hometown champion. Capacity balloons, competition becomes cutthroat and the industry becomes unprofitable.”
Central Banker Watch:
November 6 – Bloomberg (Katia Dmitrieva and Tom Rees): “Central bankers the world over are gauging whether their worst fears over Donald Trump will come to pass following his resounding return to the US presidency. That poses two main risks: Slower economic expansion around the world and faster inflation at home that would make the Federal Reserve less willing to lower interest rates. The upshot could be a stronger dollar and reduced scope for developing nations to ease their own monetary conditions. ‘If a jurisdiction as important as the US imposes tariffs of 60% to any other important jurisdictions — let’s speak about China — I can assure you that the direct effects and the indirect effects and the deviations of commerce will be huge,’ European Central Bank Vice President Luis de Guindos said…”
November 5 – Reuters (Karin Strohecker and Sumanta Sen): “The global monetary easing cycle ground along in October, with central banks across developed and emerging economies lowering interest rates ahead of the year’s biggest geopolitical event, the U.S. election. Three of the four central banks overseeing the 10 most heavily traded currencies that held meetings in October lowered benchmarks. Central banks in New Zealand and Canada each shaved 50 bps off their interest rates while the European Central Bank delivered a 25 bps cut.”
November 7 – Bloomberg (Philip Aldrick and Andrew Atkinson): “The Bank of England cut borrowing costs for the second time this year, but stopped short of signaling faster easing, warning that last week’s budget could drive up inflation by as much as half a percentage point. The Monetary Policy Committee… voted 8-1 to lower the benchmark interest rate by a quarter point to 4.75%… ‘We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,’ Bailey said… ‘But if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here.’”
November 4 – Reuters (Stella Qiu and Wayne Cole): “Australia’s central bank held interest rates steady on Tuesday, as expected, and cautioned policy would need to stay restrictive for some time yet… Rate swaps point to a scant chance of a rate cut this year, with a first easing not fully priced in until May next year… The Reserve Bank of Australia (RBA) kept rates at a 12-year high of 4.35%. It again repeated that it was not ruling anything in or out on policy, in a crucial paragraph that is largely similar to the one in September.”
November 7 – Associated Press: “Sweden’s central bank… cut its key interest rate by half a percentage point to 2.75% in what was described as the largest reduction over a decade. Riksbanken said the cut, the fourth this year, was ‘to provide further support to the economy and help inflation stabilize at the target.’ It added that ‘if the outlook for economic activity and inflation remains the same,’ the policy rate may also be cut in December, and during the first half of 2025.”
Europe Watch:
November 7 – Associated Press (Kirsten Grieshaber): “After Germany’s government coalition collapsed in a dramatic fashion when Chancellor Olaf Scholz fired Finance Minister Christian Lindner of the pro-business Free Democrats, Scholz said he would lead the country with a minority government, despite calls from opposition leaders on Thursday for early elections. The chancellor said the minority government would be made up of his Social Democrats and the Greens until early next year… Scholz stressed again on Thursday, that he does not want to call a vote of confidence before Jan. 15.”
November 6 – Financial Times (Shotaro Tani and Alan Smith): “Europe has survived two consecutive winters since Russia invaded Ukraine and weaponised gas supplies. Yet as the region heads into the colder months, traders and analysts are concerned about the region coming out of this winter as smoothly. One fundamental problem is that the European gas market is now connected to the volatile global energy markets more than ever, as a result of its forced diversification from Russian pipeline gas to liquefied natural gas. ‘As it stands, Europe’s gas storages are full and the winter gas balance looks OK,’ one trader said. ‘But anything can happen. You just need a few supply disruptions and things could go horribly wrong.’”
Japan Watch:
November 7 – Reuters (Leika Kihara and Makiko Yamazaki): “A dollar rally triggered by Republican Donald Trump’s victory in the U.S. presidential election could heighten pressure on the Bank of Japan to raise interest rates as soon as December to prevent the yen from sliding back toward three-decade lows. Trump’s victory in the U.S. presidential election unleashed sharp dollar gains, as expectations of tax cuts and tariffs on imports drove optimism about economic growth while fueling worries about inflation. The greenback’s strength briefly pushed the yen to a three-month low of 154.71 on Thursday, well off a high of 140.62 hit in mid-September.”
November 6 – Bloomberg (Erica Yokoyama): “Japanese workers’ base salaries saw the largest increase in over three decades, supporting the Bank of Japan’s view that the economy remains on the recovery track and backing the case for a rate hike in coming months. The pace of gains in base pay quickened to 2.6% year on year in September versus a 2.4% clip in August… The advance was the strongest in over 31 years.”
November 6 – Reuters (Kiyoshi Takenaka): “Slightly more than half of Japanese firms are looking to raise wages by 3% or more for the next business year, a Reuters survey showed, but a majority of companies baulked at Prime Minister Shigeru Ishiba’s quest to hike minimum pay by over 40% in five years. The survey, conducted by Nikkei Research from Oct. 23 to Nov. 1, found 42% of the companies polled are considering wage hikes of 3% to 5% for the year starting April 2025, while 9% deemed an increase in the range of 5% to 7% possible.”
Emerging Markets Watch:
November 7 – Bloomberg (Maya Averbuch and Andrew Rosati): “Mexico’s headline inflation quickened near expectations in October while a closely-watched core measure slowed, likely keeping the central bank on track for another interest rate cut next week. Official data… showed consumer prices rose 4.76% from a year prior, just above the 4.74% median estimate…”
November 8 – Bloomberg (Andrew Rosati): “Brazil’s inflation sped through the upper limit of the central bank’s tolerance range in October, signaling Latin America’s largest economy remains hot and interest rates will climb further… Consumer prices gained 4.76% from the year prior, above the 4.74% median estimate from analysts… and the 4.5% top of the tolerance range. Monthly inflation hit 0.56%.”
November 4 – Bloomberg: “Venezuela is letting the bolivar depreciate as the government tries to quell demand for US dollars that’s been rising since July’s election, risking sparking a new bout of inflation. Officials have let the tightly managed currency slide by the most in nearly two years. It now trades for nearly 43 bolivars per dollar from about 37 at the start of October. The move is a response to the growing gap between the official and black market exchange rates.”
Leveraged Speculation Watch:
November 4 – Bloomberg (Laura Noonan): “Hedge funds’ record bet on US Treasuries is facing fresh scrutiny as the world’s most powerful financial watchdog mulls a deep dive into the money-spinning trade. After running into difficulties with a mammoth project launched last year to gather data on the sprawling shadow banking system, the Financial Stability Board is now discussing a pivot to focus on a handful of priority areas, including the so-called basis trades… The potential probe comes as wagers on one of the trades, which sees some of the world’s biggest hedge funds try to profit from the tiny price gaps between Treasuries and derivatives known as futures, hit $1.15 trillion recently. Some FSB members believe that such a targeted approach would prove more fruitful than the broad project the watchdog initially embarked on.”
Social, Political, Environmental, Cybersecurity Instability Watch:
November 7 – Bloomberg (Eva Brendel): “This year will be the hottest on record, and the first to exceed the target set at the Paris climate conference in 2015, according to a European Union data service. The temperature in 2024 will likely be more than 1.55C above the pre-industrial level, the Copernicus Climate Change Service said… The landmark Paris Agreement called for reducing carbon dioxide emissions in the hope of limiting global warming to 2C (3.6F), and ideally 1.5C, above temperatures at the outset of the Industrial Revolution.”
November 2 – Bloomberg (F.D. Flam): “When the USDA issued an announcement on Oct. 30 that the worrisome H5N1 bird flu turned up in a pig, I dropped what I was doing to read it. The situation didn’t quite match the nightmare scenario some experts described to me last spring, in which this virus starts rampaging through commercial pigs. But it’s worrisome. Spreading through big, industrial pig farms would give the virus ample opportunity to evolve into a form capable of causing a pandemic in humans. Pigs remain at the center of scientists’ nightmare scenario… Their cells share enough features with ours that flu viruses can use some of the same entry ports, known as receptors.”
November 4 – Associated Press (Mari Yamaguchi): “A remote-controlled robot has safely returned with a tiny piece of melted fuel it collected from inside one of three damaged reactors at the tsunami-hit Fukushima Daiichi nuclear power plant for the first time since the 2011 meltdown. The Tokyo Electric Power Company Holdings… said… the extendable fishing rod-like robot successfully clipped a piece of gravel of about 5 millimeters, the size of a tiny bit of granola, from the top surface of a mound of molten fuel debris that sits on the bottom of the No. 2 reactor’s primary containment vessel.”
Geopolitical Watch:
November 4 – Associated Press (Kim Tong-Hyung, Hyung-Jin Kim and Mari Yamaguchi): “North Korea fired a barrage of short-range ballistic missiles into the sea on Tuesday, its neighbors said, as it continued its weapons demonstrations hours before the U.S. presidential election. Japanese Defense Minister Gen Nakatani said at least seven North Korean missiles flew as far as 250 miles with a maximum altitude of 60 miles… ‘North Korea’s actions, including a series of repeated missile launches, threaten the peace and safety of Japan, the region and the international community,’ Nakatani said.”
November 3 – Associated Press (Hyung-Jin Kim): “The United States flew a long-range bomber in a trilateral drill with South Korea and Japan on Sunday in response to North Korea’s recent test-firing of a new intercontinental ballistic missile designed to strike the U.S. mainland, South Korea’s military said. North Korea on Thursday tested the newly developed Hwasong-19 ICBM, which flew higher and stayed in the air longer than any other missile it has fired. North Korean leader Kim Jong Un called it ‘an appropriate military action’ to cope with external security threats posed by its rivals.”
