November 3, 2023: Back to Squeezeville

November 3, 2023: Back to Squeezeville
Doug Noland Posted on November 4, 2023

An extraordinary week. How extraordinary, you ask?

Bloomberg: “Best Run for Bonds Since 2020 as Traders Bet on Fed-Hike Finale.” Ten-year Treasury yields sank 26 bps this week, the biggest weekly drop since March (-27bps). Thirty-year Treasury yields fell 25 bps, the largest decline since the first week of the year (-28bps). Benchmark MBS yields collapsed 43 bps, the largest drop since last November (64bps). Bloomberg: “Muni Rally Drives Yields Down to Biggest Weekly Drop since 2022.”

Italian 10-year yields sank 29 bps (to 4.51%), the largest decline since June (-32bps). UK 10-year gilt yields dropped 26 bps (4.29%) – the biggest fall since March. Local-currency yields were down 83 bps in Columbia, 47 bps in Hungary, 40 bps in Peru, 37 bps in Mexico, 36 bps in South Africa, 35 bps in Indonesia, 30 bps in Poland, and 27 bps in South Korea. Dollar yields collapsed 76 bps in Colombia, 60 bps in Turkey, 40 bps in Mexico, 39 bps in Brazil, 39 bps in Peru, and 37 bps in Chile.

The Chilean peso gained 6.6%, the Mexican peso 3.7%, the Colombian peso 3.3%, the South African rand 3.2%, the Peruvian sol 3.1%, the Hungarian forint 2.7%, the South Korean won 2.5%, the Czech koruna 2.5%, and the Brazilian real 2.3%. Major equities indices jumped 4.7% in Mexico, 4.3% in Brazil, 4.2% in Spain, 5.1% in Italy, and 3.7% in France.

The S&P500 jumped 5.9%, the largest weekly gain in a year. It was a huge short squeeze week. The Goldman Sachs Short Index surged 12.9%, the largest gain since the week of January 13th, 2023 (15.7%). The Regional Bank Index (KRX) jumped 10.7%, the biggest gain since the week of November 13th, 2020 (15.9%). The KBW Bank Index (BKX) rose 11.1%, the strongest advance since November 2020 (11.5%). The VIX Index declined 6.4 points to 14.91, the largest weekly drop since March.

Friday from Bloomberg Intelligence (Jackson Gutenplan and Larry R Tabb): “Options trading on the S&P 500 has surged in recent months, driven by the explosion in trading of zero-days-to-expiry options, or 0DTE, which now account for about half of the volume as traders zip in and out of contracts to capture or hedge the day’s gyrations. Average daily volume on the SPDR S&P 500 ETF Trust (SPY) and SPX Index jumped 15.1% and 14.8% from September to October, respectively. The zero-day options account for 46.7% of SPY and 49.4% of SPX trading.”

The CDS marketplace is demonstrating more than its share of wild volatility. For the week, investment-grade CDS dropped 11.8 bps (to 70bps), the largest decline since November 2020 (-12.1bps). High yield CDS collapsed 62.8 bps (to 464.4 bps), the biggest drop since May 2022 (-66bps). JPM CDS dropped 11 (to 60bps) – largest fall since April (-11.1bps), and BofA CDS fell 9.4 (to 99 bps) – biggest since May.

EM CDS sank 33 bps (to 206 bps), the largest decline in a year (-37bps). European “Crossover”/high yield CDS sank 55 bps (to 548bps), the largest drop since August (-56). European Subordinated Financial Bank CDS dropped 25 bps (to 163bps), the biggest drop since the final week of March (-34bps).

Fundamental factors behind the jubilation? The obvious candidates are the somewhat smaller-than-expected Treasury quarterly refunding. Friday’s weaker-than-expected Non-Farm Payrolls report (150k vs. 180k estimate). And, of course, the transformation of a “hawkish pause” to “dovish likely done.” By the end of the week, markets were pricing only a 5% probability of a rate hike at the December 13th FOMC meeting, down from 27% at Tuesday’s close.

November 3 – Bloomberg (Denitsa Tsekova): “Wall Street just got schooled on the dangers of market timing after a shock cross-asset rally on tentative bets that the great monetary stress of 2023 is easing at long last. Evidence that Federal Reserve Chair Jerome Powell is turning less hawkish fueled the biggest concerted melt-up since November 2022, with stocks, bonds and credit rising in tandem… How ingrained had gloom become? The run-up followed a three-month selling spree by hedge funds that was the second-biggest of the past decade, according to… Goldman Sachs… prime brokerage. Net short bets on Treasuries held by professional speculators were hovering close to the highest level on record…”

Another Everything Short Squeeze.

After receiving short shrift at the FOMC’s September meeting, “financial conditions” was back in vogue during Powell’s Wednesday press conference. There were several questions specific to financial conditions.

Powell: “So, obviously we’re monitoring, we’re attentive to the increase in longer-term yields and which have contributed to a tightening of broader financial conditions since the summer. As I mentioned, persistent changes in broader financial conditions can have implications for the path of monetary policy. In this case, the tighter financial conditions we’re seeing from higher long-term rates but also from other sources like the stronger dollar and lower equity prices could matter for future rate decisions, as long as two conditions are satisfied. The first is that the tighter conditions would need to be persistent and that is something that remains to be seen. But that’s critical, things are fluctuating back and forth, that’s not what we’re looking for. With financial conditions, we’re looking for persistent changes that are material.”

“So, I think what we can say is that financial conditions have clearly tightened, and you can see that in the rates that consumers, households and businesses are paying now, and over time that will have an effect, we just don’t know how persistent it’s going to be, and it’s tough to try to translate that in a way that I’d be comfortable communicating to how many rate hikes that is.”

November 1 – Bloomberg (Steve Matthews and Craig Torres): “Federal Reserve Chair Jerome Powell hinted the US central bank may now be finished with the most aggressive tightening cycle in four decades after it held off on raising interest rates for a second consecutive policy meeting. ‘The question we’re asking is: Should we hike more?’ Powell told reporters… ‘Slowing down is giving us, I think, a better sense of how much more we need to do, if we need to do more.’ The central bank’s… Federal Open Market Committee left its benchmark rate unchanged Wednesday in a range of 5.25% to 5.5%… Officials signaled… that a recent rise in longer-term Treasury yields reduces the impetus to hike again, though they left open the door to another increase.”

Chair Powell, and the Federal Reserve more generally, have been understandably cautious not to signal the end of tightening. They were conscious to avoid dovish signaling that would surely spur big market rallies and resulting looser conditions.

This week, Powell spoke more confidently about a tightening of market financial conditions. From 4.40% at the Fed’s September 20th meeting, 10-year yields traded to 5.00% last week. Equities have been under pressure, and most financial conditions indicators have signaled meaningful tightening since September. Moreover, there was the eruption of war in Gaza, with significantly elevated geopolitical risk.

With what has certainly been major hedging and bearish positioning in response to surging yields and geopolitical crisis (with major escalation risk), markets were locked and loaded. “Balanced Powell” leaned decisively dovish and stoked an Everything Squeeze and meaningfully looser financial conditions. Ironic. Powell’s focus on tightened conditions provoked loosening.

The big squeeze coming out of the bank bailout and the resulting loosening of financial conditions (negating Fed tightening) is the key 2023 storyline. Does this week’s squeeze have legs? If financial condition loosening persists, this should work to sustain both demand and elevated inflation. Despite all the recession talk, it’s worth remembering Q3 GDP surged to 4.9%. And while Q4 growth will slow significantly, I’m skeptical that demand has slackened sufficiently to place downward pressure on prices.

October 31 – Bloomberg (Josh Eidelson, Laura Bejder Jensen and Jo Constantz): “Workers in the US are getting record-breaking wage hikes this year thanks to strategic strikes and stunning contract wins. The result is a boost in middle-income wages and a shift in the balance of power between companies and their employees. Even before the United Auto Workers reached historic contract deals with carmakers, unions across the country had already won their members 6.6% raises on average in 2023 — the biggest bump in more than three decades… The recent victories mark a potential turning point for the country’s labor movement, which has seen union ranks and power dwindle for decades.”

The United Auto Workers successfully negotiated big pay increases, spurring quick action from non-union Toyota. More will follow. The Q3 Employment Cost Index (ECI) was reported Tuesday at a stronger-than-expected 1.1%. It’s worth noting that Q3 2021 was the first quarterly ECI above 1% since Q1 2004. And while Friday’s October job gains and Average Hourly Earnings (0.2%) were somewhat weaker-than-expected, there remain a historically elevated 9.55 million job openings.

There was confirmation this week of key market dynamics. Cross-asset markets are highly correlated – stocks, bonds, EM, and currencies. Markets remain highly correlated globally, with “risk on” or “risk off” typically a global phenomenon. Trend-following and performance-chasing dominated markets are extraordinarily speculative. “Crowded trades” are a serious issue.

November 3 – Reuters (Nell Mackenzie): “Global hedge funds using algorithms to trade stocks endured one of their worst days of the year on Thursday, a Goldman Sachs note on Friday showed, a sign that a sharp rally in shares on hopes that global rate hikes are over caught some off guard. Systematic fund managers, particularly those which had short bets on highly traded stock names, got caught trying to get out of crowded trades and found themselves stuck in losing positions, Goldman Sachs said.”

Markets function as if illiquidity is a festering issue. Derivatives-related trading appears to stress market function when algorithmic trading pushes forcefully either to the downside or the upside. The proliferation of options trading for hedging and speculating has become a major market function issue across markets.

This week, there’s evidence aplenty of financial accident risk. For one, too many in the markets are relying on derivatives to hedge market risk. This fuels market dysfunction. Hedges are put on in size, creating enormous potential selling pressure in the event of negative developments.

This week’s Israeli Gaza land invasion did not trigger rapid escalation (i.e., Hezbollah or Iran). Crude prices sank $5. The Treasury’s much anticipated quarterly refunding eased bond market concerns. Risk of Powell pressing his so-called “hawkish pause” narrative also didn’t materialize. And, on Friday, a potential negative bond market reaction to strong payroll data also didn’t happen. The Dollar Index’s slump took pressure off the vulnerable yen and renminbi, along with EM currencies generally. With short-term risks allayed on multiple fronts, hedges with short maturities swiftly became losing bets. The hasty unwind of hedges put short positions in harm’s way. And it was Back to Squeezeville.

Highly speculative markets dominated by levered trades and hedges are innately short-term focused. And we witnessed convulsions this week as near-term risks dissipated. Meanwhile, overall risk remains highly elevated. This week’s developments in Gaza only increase the likelihood of Middle East escalation over time. With the Wall Street Journal reporting that Russia (Wagner Group) plans to provide Hezbollah air-defense systems, it’s possible that Hezbollah, Iran, and other militant groups may boost defenses before escalating the conflict.

And I don’t see the bond market out of the woods. While quarterly refunding news wasn’t as dismal as feared, just give it some time. Especially if financial conditions loosen, getting from over 4% CPI to 2% will prove one tall order. Key facets of the U.S. Bubble economy remain overheated, the result of the interplay between loose financial conditions, highly speculative financial markets, and powerful inflationary impulses. Markets will (violently) ebb and flow, with a powerful propensity for squeezes. But supply and inflation issues will continue to pressure Treasury and bond markets.

I worry about this week’s conspicuous Bubble Dynamics and market dysfunction. Financial and economic systems should by now be well into major adjustments to much higher rates and market yields, worsening global fragilities, and a rapidly deteriorating geopolitical backdrop. Whether it’s inflation, bond yields, deficits, political disfunction, Chinese bubbles, our soured relationship with China, the new world order, conflicts in Ukraine and the Middle East, and the looming Taiwan issue, there is today extraordinary uncertainty that should have players reining in risk and leverage. Markets reward the opposite. It was a market week – Back to Squeezeville – that supports the peak speculative Bubble thesis.

For the Week:

The S&P500 surged 5.9% (up 13.5% y-t-d), and the Dow rose 5.1% (up 2.8%). The Utilities jumped 5.3% (down 14.1%). The Banks spike 11.1% higher (down 21.0%), and the Broker/Dealers jumped 6.2% (up 7.6%). The Transports advanced 7.1% (up 8.4%). The S&P 400 Midcaps rose 6.5% (up 2.0%), and the small cap Russell 2000 surged 7.6% (unchanged). The Nasdaq100 jumped 6.5% (up 38.0%). The Semiconductors surged 7.0% (up 36.4%). The Biotechs jumped 5.6% (down 9.1%). While bullion declined $14, the HUI gold equities index increased 0.7% (down 1.0%).

Three-month Treasury bill rates ended the week at 5.2375%. Two-year government yields dropped 16 bps this week to 4.84% (up 41bps y-t-d). Five-year T-note yields sank 26 bps to 4.50% (up 50bps). Ten-year Treasury yields fell 26 bps to 4.57% (up 70bps). Long bond yields fell 25 bps to 4.77% (up 80bps). Benchmark Fannie Mae MBS yields sank 46 bps to 6.21% (up 82bps).

Italian yields sank 29 bps to 4.51% (down 19bps). Greek 10-year yields fell 22 bps to 3.94% (down 63bps y-t-d). Spain’s 10-year yields dropped 24 bps to 3.68% (up 17bps). German bund yields declined 19 bps to 2.65% (up 20bps). French yields dropped 22 bps to 3.24% (up 26bps). The French to German 10-year bond spread narrowed three to 59 bps. U.K. 10-year gilt yields sank 26 bps to 4.29% (up 62bps). U.K.’s FTSE equities index gained 1.7% (down 0.5% y-t-d).

Japan’s Nikkei Equities Index rallied 3.1% (up 22.4% y-t-d). Japanese 10-year “JGB” yields rose five bps to 0.93% (up 62bps y-t-d). France’s CAC40 recovered 3.7% (up 8.9%). The German DAX equities index rose 3.4% (up 9.1%). Spain’s IBEX 35 equities index jumped 4.2% (up 12.9%). Italy’s FTSE MIB index surged 5.1% (up 21.0%). EM equities were strong. Brazil’s Bovespa index jumped 4.3% (up 7.7%), and Mexico’s Bolsa index surged 4.7% (up 5.8%). South Korea’s Kospi index rallied 2.8% (up 5.9%). India’s Sensex equities index increased 0.9% (up 5.8%). China’s Shanghai Exchange Index increased 0.4% (down 1.9%). Turkey’s Borsa Istanbul National 100 index was little changed (up 39.9%). Russia’s MICEX equities index slipped 0.5% (up 49.0%).

Federal Reserve Credit declined $25.3bn last week to $7.861 TN. Fed Credit was down $1.040 TN from the June 22nd, 2022, peak. Over the past 216 weeks, Fed Credit expanded $4.134 TN, or 111%. Fed Credit inflated $5.050 TN, or 180%, over the past 573 weeks.

Total money market fund assets surged $63bn to $5.695 TN, with a 34-week gain of $801bn (25% annualized). Total money funds were up $1.063 TN, or 23%, y-o-y.

Total Commercial Paper gained $7.9bn to $1.218 TN. CP was down $82bn, or 6.3%, over the past year.

Freddie Mac 30-year fixed mortgage rates declined seven bps to 7.72% (up 77bps y-o-y). Fifteen-year rates dipped five bps to 7.07% (up 78bps). Five-year hybrid ARM rates jumped 15 bps to 7.21% (up 126bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps to 7.92% (up 69bps).

Currency Watch:

For the week, the U.S. Dollar Index dropped 1.4% to 105.02 (up 1.5% y-t-d). For the week on the upside, the Mexican peso increased 3.7%, the New Zealand dollar 3.2%, the South African rand 3.2%, the Australian dollar 2.8%, the South Korean won 2.5%, the Swedish krona 2.3%, the Brazilian real 2.3%, the British pound 2.1%, the euro 1.6%, the Canadian dollar 1.6%, the Norwegian krone 1.3%, the Singapore dollar 1.1%, the Swiss franc 0.4% and the Japanese yen 0.2%. The Chinese (onshore) renminbi increased 0.58% versus the dollar (down 5.18%).

Commodities Watch:

October 31 – Bloomberg (Eddie Spence): “Central banks have loaded up on more gold than previously thought this year, offering crucial support to prices that have faced pressure from global monetary tightening. Countries expanded bullion reserves by 337 tons in the three months through September, the World Gold Council said… That follows an increase of 175 tons in the second quarter, which was bigger than the council’s previous estimate of 103 tons. Central bank purchases for the first nine months of the year now total 800 tons, driven mainly by China, Poland and Singapore, as well as unreported buying.”

October 30 – Bloomberg: “China’s appetite for gold will stay strong through the rest of 2023, the World Gold Council said… Demand for gold bars and coins in China rose 16% year-on-year in the third quarter and will ‘remain robust’ in the final three months, the council said in its latest outlook. Economic and political uncertainties, currency volatility and central-bank stockpiling have all fueled a buying binge.”

October 30 – Financial Times (Harry Dempsey): “China has spearheaded record levels of central bank purchases of gold globally in the first nine months of the year, as countries seek to hedge against inflation and reduce their reliance on the dollar. Central banks have bought 800 tonnes in the first nine months of the year, up 14% year-on-year, according to… the World Gold Council… The ‘voracious’ rate of buying has helped bullion prices defy surging bond yields and a strong dollar to trade just shy of $2,000 a troy ounce.”

October 30 – Financial Times (Susannah Savage): “Crude prices could rise to more than $150 a barrel if the conflict in the Middle East escalates, the World Bank warned…, risking a repeat of the 1970s oil price shock if key producers cut supplies. In its quarterly Commodity Markets Outlook, the multilateral lender said a prolonged Israel-Hamas conflict could drive big rises in energy and food prices in a ‘dual shock’ for commodity markets still reeling from Russia’s full-scale invasion of Ukraine. ‘The latest conflict in the Middle East comes on the heels of the biggest shock to commodity markets since the 1970s — Russia’s war with Ukraine,’ said Indermit Gill, the World Bank’s chief economist and senior vice-president for development economics.”

The Bloomberg Commodities Index slipped 0.4% (down 6.7% y-t-d). Spot Gold declined 0.7% to $1,993 (up 9.2%). Silver increased 0.4% to $23.21 (down 3.1%). WTI crude sank $5.03, or 5.9%, to $80.51 (unchanged). Gasoline dropped 4.8% (down 11%), while Natural Gas surged 11.1% to $3.52 (down 22%). Copper increased 1.0% (down 3%). Wheat slipped 0.5% (down 28%), and Corn declined 0.7% (down 30%). Bitcoin gained $870 or 2.6%, to $34,700 (up 109%).

Middle East War Watch:

November 3 – Bloomberg: “Hezbollah’s leader Hassan Nasrallah warned that ‘all possibilities’ are open as clashes intensify on Israel’s northern border, and said escalation will depend on developments in Gaza and Israel’s behavior toward Lebanon.”

November 2 – Wall Street Journal (Michael R. Gordon and Vivian Salama): “Wagner Group, the Russian paramilitary organization, plans to provide an air-defense system to Hezbollah…, U.S. officials say, citing intelligence. The Russian SA-22 system they plan to send uses antiaircraft missiles and air-defense guns to intercept aircraft… In Syria, Wagner troops have played an important role in shoring up the country’s leader, President Bashar al-Assad, an ally of Russian President Vladimir Putin. The intelligence comes amid broader concerns that Hezbollah… may open up a northern front against Israel… Wagner has personnel in Syria, where Hezbollah fighters have also been present to support Assad in his campaign against the Syrian opposition. The potential arms delivery to Hezbollah comes amid concerns about Moscow’s role in the region and Russia’s tightening relationship with Iran.”

October 31 – Reuters (Maha El Dahan): “Yemen’s Houthis have waded into the Israel-Hamas war raging more than 1,000 miles from their seat of power in Sanaa, declaring… they had fired drones and missiles at Israel in attacks that highlight the regional risks of the conflict. Part of an ‘Axis of Resistance’ backed by Iran, the Houthis have rallied behind the Palestinians since Hamas attacked Israel on Oct. 7, opening a new front for a movement that has waged war for eight years with a Saudi-led coalition in the Gulf.”

October 29 – The Hill (Nick Robertson and Sarah Polus): “Israel… said it is recalling its diplomats from Turkey after Turkish President Recep Tayyip Erdoğan spoke out against Israel during a pro-Palestinian rally. In Istanbul, Erdogan led calls for a cease-fire in front of hundreds of thousands of supporters protesting Israel’s moves in the war on northern Gaza, calling the country an ‘occupier’ in a fiery speech. ‘Israel has been openly committing war crimes for 22 days, but the Western leaders cannot even call on Israel for a cease-fire, let alone react to it,’ Erdogan told the crowd… ‘We will tell the whole world that Israel is a war criminal,’ he added. ‘We are making preparations for this. We will declare Israel a war criminal.’ Turkey does not consider Hamas a terrorist organization…”

October 29 – Reuters (Suleiman Al-Khalidi): “Staunch U.S. ally Jordan asked Washington to deploy Patriot air defence systems to bolster its border defence at a time of heightened regional tensions and conflict, the spokesperson for the country’s army said… ‘We asked the American side to help bolster our defence system with Patriot air defence missile systems,’ Brigadier General Mustafa Hiyari, Jordan’s army spokesperson, told state television… Jordan has been increasingly nervous that Israel’s relentless bombing of Gaza since a deadly assault on Israel by Hamas from the enclave on Oct. 7 could also spread into a wider conflagration, officials said.”

October 28 – Reuters (Nafisa Eltahir): “Egypt’s President Abdel Fattah al-Sisi… warned against any expansion of the conflict in Gaza, saying the region risked becoming a ‘ticking time bomb’. He also said his country’s sovereignty should be respected after drones were intercepted after entering Egyptian air space…”

October 27 – Financial Times (Demetri Sevastopulo): “Washington has called on China to use its relationship with Iran and other countries in the Middle East to urge calm and prevent the conflict from spreading as Israel expanded its ground operations in the Gaza Strip… ‘We . . . pressed China to take a more constructive approach, and that would include of course their engagements with the Iranians to urge calm,’ a senior US official said…”

Market Instability Watch:

October 31 – Financial Times (Mary McDougall): “The yen suffered its biggest daily fall against the dollar since April on Tuesday after the Bank of Japan made only modest changes to its policy of holding down government bond yields. The Japanese currency fell 1.7% against the dollar to ¥151.60… ‘The fact that the yen weakened by more than a percentage point is the market telling you that they still think the Bank of Japan is behind the curve,’ said Ella Hoxha, head of fixed income at Newton Investment Management. ‘That’s fair because inflation is much higher than their 2% target and they are the last central bank standing in terms of very loose policy.’”

October 31 – Bloomberg (Yumi Teso): “The Bank of Japan stepped into the bond market unexpectedly Wednesday to curb the pace of gains in sovereign yields, just a day after announcing it was loosening its grip on debt prices. The central bank’s unscheduled purchase operation statement came as the benchmark 10-year bond yield touched 0.97% — a fresh decade-high but still below the 1% cap it removed in favor of a more flexible policy setting.”

November 1 – Bloomberg (Ken McCallum): “The contradictions in Japan’s efforts to protect the yen while slowing the pace of rising bond yields were on clear display in currency and debt markets on Wednesday. The day began with the nation’s top currency official at the finance ministry giving one of the starkest warnings yet that authorities were ready to intervene in the foreign exchange market to stem the yen’s fall. By lunchtime the Bank of Japan was preparing to wade into the debt market to slow the speed of the 10-year bond yield’s ascent toward 1%.”

October 31 – Reuters: “Overnight borrowing costs for some Chinese financial institutions jumped to as high as 50% on Tuesday, as a month-end scramble for cash squeezed liquidity and stressed money markets. In addition to seasonal factors, the cash shortage was caused by an upcoming flood of government bond issuance, and traders also pointed to market fears of default by cash-strapped institutions. The highest overnight rate for pledged repo – a short-term financing business – hit 50% on Tuesday…, although the average rate remains modest at roughly 3.6%.”

October 30 – Bloomberg (Liz Capo McCormick): “The Federal Reserve’s policy statement is setting up to be the No. 2 event on Wednesday, with investor focus instead likely to be on the Treasury Department’s new borrowing plan, due hours ahead of the interest-rate decision… ‘Market participants are really hyper-focused on supply now, and we kind of know the Fed is on hold,’ Angelo Manolatos, a strategist at Wells Fargo Securities, said… ‘So the refunding is a bigger event than the FOMC. It also has a lot to do with the moves we’ve seen in yields since the August refunding.’”

November 1 – Bloomberg (Liz Capo McCormick): “The US Treasury increased its planned sales of longer-term securities by slightly less than most dealers expected in its quarterly debt-issuance plan, helping spur a rally in bonds amid the possibility a wave of bigger supply will soon come to an end. The Treasury said it will sell $112 billion of longer-term securities at its so-called quarterly refunding auctions next week, which span 3-, 10- and 30-year Treasuries, less than what many dealers expected. It also specified it now expects a single additional step up in quarterly issuance of longer-term debt — news that bolstered Treasury prices…”

November 2 – Bloomberg (Alexandra Harris): “The US Treasury’s ongoing barrage of bill issuance has left market participants trying to gauge when investors will lose their appetite for short-dated government debt. Buyers have easily soaked up the $1.56 trillion of Treasury bills issued this year through the end of September… But drainage of the Federal Reserve’s overnight reverse repurchase agreement facility, where usage has dropped by over $1 trillion as cash is allocated to T-bills, to the widening gap between yields and overnight index swaps — a proxy for monetary policy expectations — are already raising concerns.”

October 30 – Reuters (Paritosh Bansal): “Treasury market participants expect U.S. regulators to soon finalize a major rule aimed at reining in debt-fueled bets by hedge funds and bolstering financial stability. They worry it could also reshape the industry and create new problems. The U.S. Securities and Exchange Commission rule, which was first proposed in September last year, would force much more of the trading in the $25 trillion Treasuries market, including a market for short-term financing called repurchase agreements (repo), to central clearing. A central clearer acts as the buyer to every seller, and seller to every buyer.”

November 2 – Bloomberg (Jacqueline Poh): “Borrowers worldwide are postponing or canceling their debt financing plans at the fastest pace since March against the background of volatile market conditions. October saw at least 13 transactions shelved… The month’s tally is only five fewer than the 18 seen in March, when issuers retreated after markets were roiled by major bank failures in Europe and the US.”

October 30 – Bloomberg (Selcuk Gokoluk): “Cracks are deepening for vulnerable emerging-market companies as global borrowing rates surge to the highest levels since the financial crisis, halting refinancing opportunities for $400 billion worth of debt maturities coming due in the new year. As US Treasury yields soar to 15-year highs and borrowing costs skyrocket, companies from developing nations have managed to only rollover a tenth of what they need. What’s more, the struggle may be in its beginning stages only as refinancing challenges are likely to worsen once another $300 billion worth of corporate bonds comes due in 2025.”

Bubble and Mania Watch:

November 2 – Bloomberg (Garfield Reynolds): “The world’s 13-year experience with negative-yielding bonds is drawing to a close. The Bank of Japan’s gradual moves to tighten policy mean the pool of bonds with sub-zero yields has virtually vanished, after amounting to more than 4,000 in 2020. Only one security — a Japanese government note due in December 2024 — briefly traded at 0% on Thursday… Bloomberg’s index of negative-yielding bonds peaked at $18.4 trillion on Dec. 11, 2020. At that stage it contained more than 4,600 securities, including European, UK, Swiss and Scandinavian debt.”

October 30 – Bloomberg (Maxwell Adler and Eliyahu Kamisher): “California is poised to fall well short of its budget forecasts as the recent stock market slump erodes the state’s tax revenue. As of Oct. 25, a total of nearly $18 billion was collected so far this month — significantly lower than the $42 billion of collections that were previously projected for all of October… The shortfall comes as the state prepares to close out its seasonal autumn sale period for state-issued municipal bonds.”

October 31 – CNBC (Carlos Waters): “In the U.S., 516 publicly listed firms have filed for bankruptcy from January through September 2023. Many of these firms have survived for several years with surging debt and lagging sales. ‘The share of zombie firms has been increasing over time,’ said Bruno Albuquerque, an economist at the International Monetary Fund. ‘This has detrimental effects on healthy firms who compete in the same sector.’ Zombie firms are unprofitable businesses that stay afloat by taking on new debt. Banks lend to these weak firms in hopes that they can turn their trend of sinking sales around.”

November 2 – Bloomberg (Lisa Lee): “Private equity titans are dusting off an old gambit to cope with the rising cost of interest on their leveraged buyout loans: Don’t pay cash. Instead, they’re making payments with more debt, preserving liquidity for now with the promise of a bigger payoff later when the debts mature. Those ‘payment-in-kind’ loans don’t always come cheap — the annual interest runs as high as 16% — but lenders and borrowers are wagering that they’ll refinance when rates come down long before the due date.”

October 31 – Bloomberg (Alicia Clanton): “Private real estate fundraising plunged in the third quarter as higher interest rates cooled investor appetites for risk. Around the world, $18.2 billion was raised by 61 funds in the three months through September, a 71% decline from the second quarter, when 117 funds raised $63.4 billion, according to… Preqin… Property markets around the world are in turmoil as interest-rate hikes by central banks have increased the cost of borrowing.”

November 3 – Reuters (Luc Cohen and Jody Godoy): “FTX founder Sam Bankman-Fried was found guilty… of stealing from customers of his now-bankrupt cryptocurrency exchange in one of the biggest financial frauds on record, a verdict that cemented the 31-year-old former billionaire’s fall from grace. A 12-member jury in Manhattan federal court convicted Bankman-Fried on all seven counts he faced after a monthlong trial in which prosecutors made the case that he looted $8 billion from the exchange’s users out of sheer greed.”

November 2 – Reuters (Sinead Cruise): “The troubles faced by co-working titan WeWork are darkening the outlook for the world’s largest business hubs, where rising office vacancies are already heaping pressure on investors set to refinance big-ticket mortgages next year. Media reports… suggested the New-York listed flexible workspace provider – once privately valued at $47 billion – was weighing a petition for bankruptcy next week.”

November 3 – Reuters (Tom Sims): “Construction of one of Germany’s tallest buildings has suddenly halted midway after the developer stopped paying its builder, yet another ominous sign for the nation’s troubled property sector. Signa, the Austrian property giant and an owner of New York’s Chrysler Building, had been making steady progress this year on the planned 64-story Elbtower skyscraper in Hamburg.”

October 30 – Bloomberg (Eniola Longe): “US colleges and universities that have been boosting their allocations to private equity face increased credit risk, partly because these investments tend to be less liquid and more expensive, according to… Moody’s… Private equity holdings accounted for nearly 18% of total endowment assets as of fiscal 2022 — or 30% when venture capital investments were included… About 28% of assets were allocated to public equities. ‘While holdings of private equity have the potential to boost investment returns, they also introduce risks not associated with public securities, such as often onerous liquidity constraints,’ Moody’s… said. ‘Private equity holdings can be opaque and difficult to assess, and returns can diverge materially from public markets, potentially leading some university investment committees to underestimate the related risks or overstate expected returns.’”

Banking Crisis Watch:

October 31 – Wall Street Journal (Peter Grant): “Commercial real-estate lending is shrinking to historically low levels, threatening a rise in defaults on expiring debt and a sharp decline in new construction of warehouses, apartments and other property types. Banks, insurance companies and other commercial property lenders have been cutting back since the first half of 2022 when the Federal Reserve began increasing interest rates… But creditors have been even more reluctant to make new loans as Treasury bond yields have soared since early August… The rise in Treasury rates, however, unnerved already-skittish lenders and cast new doubt on whether a range of property types were overvalued.”

October 29 – Yahoo Finance (David Hollerith): “Office buildings in southern California. A healthcare operator in the Northeast. A bankrupt oil and gas company in the Atlanta suburbs. These were among the assets that became the source of lending problems for regional banks in the third quarter as corporate borrowers and commercial real estate began to show more signs of strain. In recent weeks many mid-sized financial institutions across the country reported that nonperforming loans, a measure that tracks borrowers that are behind on their payments, rose during the third quarter. They also disclosed mounting costs from unpaid debts written off as losses.”

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

October 29 – Bloomberg: “China and Russia publicly reinforced their bond at a military forum in Beijing… The two men used speeches critical of Washington’s policies… at the Xiangshan Forum in Beijing to show solidarity. ‘Certain countries keep stirring up trouble around the world,’ Zhang Youxia, vice chair of China’s top military body, said… ‘They deliberately create turbulence, meddle in regional affairs, interfere in other countries’ internal affairs and instigate color revolutions.’ Zhang’s comments were quickly followed by similar ones from his Russian counterpart, Sergei Shoigu… ‘The US is working tirelessly to maintain its hegemony, which will disappear soon,’ said Shoigu, who is sanctioned by the US and European Union over Russia’s invasion of Ukraine.’”

October 30 – Bloomberg: “Chinese leader Xi Jinping’s strategy for common security is pointing the ‘correct direction’ for the world, General Zhang Youxia says at Beijing Xiangshan Forum. China will deepen military cooperation with Russia, says Zhang, who sits on China’s top military body. ‘No matter who tries to split Taiwan from China in any form, the Chinese military will never allow that to happen and will never be soft on them,’ Zhang says. ‘Certain countries’ stir up trouble, instigate color revolutions, Zhang says, without mentioning US. World should be alert to risk of a new Cold War, he adds.”

October 30 – Reuters (Yew Lun Tian): “Chinese and Russian military chiefs targeted the United States for criticism at a security forum in Beijing… The Xiangshan Forum, China’s biggest annual show of military diplomacy, began on Sunday… Russian Defence Minister Sergei Shoigu warned the West that its involvement in the Ukraine war created grave danger. ‘The Western line of steady escalation of the conflict with Russia carries the threat of a direct military clash between nuclear powers, which is fraught with catastrophic consequences,’ Russia’s TASS… cited Shoigu as saying…”

November 2 – Reuters (Andrew Osborn): “President Vladimir Putin… signed a law withdrawing Russia’s ratification of the global treaty banning nuclear weapons tests, a step condemned by the organisation which promotes adherence to the landmark arms control pact. The move… is evidence of the deep chill between the United States and Russia, whose ties are at their lowest level since the 1962 Cuban missile crisis over the war in Ukraine and what Moscow casts as Washington’s attempts to stymie the emergence of a new multipolar world order.”

October 29 – Reuters: “Russia’s former President, Dmitry Medevedev, was quoted as saying… that cooperation with Europe in energy matters was frozen or pointless as European countries had fallen on hard times and had poor growth prospects. ‘Europe has castrated itself in bloody fashion and without anesthesia by walking away from energy cooperation with our country,’ Russian news agencies quoted Medvedev, now Deputy Secretary of the Security Council… ‘This cooperation is either spoiled or frozen for some time.’”

Ukraine War Watch:

November 1 – Financial Times (Roman Olearchyk): “Ukraine is rushing to bolster its energy infrastructure ahead of winter as a renewed Russian aerial campaign starts to home in on the country’s power stations, seeking to leave its people in the dark and cold. Over the summer Russia largely targeted Ukraine’s seaports and grain-exporting infrastructure. But in recent weeks missile and drone strikes have again started to focus on energy infrastructure, as they did last year when they caused blackouts for days.”

De-globalization and Iron Curtain Watch:

October 30 – Financial Times (Anastasia Stognei, Max Seddon and Courtney Weaver): “Russia has restricted western companies that sell their Russian assets from withdrawing the proceeds in dollars and euros, imposing additional de facto currency controls… The fresh restrictions underscore Moscow’s concerns about the rouble continuing to depreciate as its economy grapples with western sanctions imposed in response to Russia’s full-scale invasion of Ukraine last year.”

November 3 – Wall Street Journal (Jason Douglas and Tom Fairless): “China passed a significant milestone last fall: For the first time since its economic opening more than four decades ago, it traded more with developing countries than the U.S., Europe and Japan combined. It was one of the clearest signs yet that China and the West are going in different directions as tensions increase over trade, technology, security and other thorny issues. For decades, the U.S. and other Western countries sought to make China both a partner and a customer… Now trade and investment flows are settling into new patterns built around the two competing power centers. In this increasingly divided world economy…”

November 2 – Bloomberg (Matthew Hill): “The US is going full steam ahead in its effort to catch up with China in a part of the world that’s become central to the green transition: Africa’s ‘Copperbelt.’ Loaded with minerals critical to the production of batteries and other renewable energy components, Zambia and the Democratic Republic of Congo have become the latest venue in the struggle for advantage between Washington and Beijing. As part of its stated ambition to challenge China’s dominance, the Biden administration saw an opportunity to revitalize a century-old rail line linking key African mines to an Atlantic Ocean port. Called the Lobito corridor, the US is investing hundreds of millions of dollars on the project.”

Inflation Watch:

November 1 – Wall Street Journal (Sean McLain): “That didn’t take long. Toyota Motor is giving most of its U.S. auto-factory workers a 9% pay bump and shortening the time it takes to reach the maximum pay, a sign that gains the United Auto Workers made in Detroit are rippling through the auto industry. Toyota, whose U.S. factories aren’t unionized, will increase pay for most assembly plant workers from $31.86 an hour to $34.80 an hour…”

October 31 – CNBC (Jessica Dickler): “High inflation and higher interest rates continue to weigh on American households. As of September, 62% of adults said they are living paycheck to paycheck, according to a new LendingClub report. The figure is unchanged from last year. ‘Living paycheck to paycheck remains the main financial lifestyle among U.S. consumers,’ the report said.”

October 31 – Bloomberg (Prashant Gopal): “Home prices in the US reached a new high in August after seven straight months of gains. A national gauge of prices increased 0.9% in August from July, according to… S&P CoreLogic Case-Shiller. Cities reaching all-time highs include New York, Boston, Miami and Atlanta. Higher borrowing costs have weighed on potential buyers and limited the number of homes for sale… Tight inventory has helped push up prices. ‘The year’s increase in mortgage rates has surely suppressed housing demand, but after years of very low rates, it seems to have suppressed supply even more,’ Craig Lazzara, managing director at S&P Dow Jones Indices, said…”

October 30 – Bloomberg (Katia Dmitrieva): “Skyrocketing US childcare payments are already weighing on spending and the labor market, according to Bank of America Institute… The average household spends more than $700 a month on childcare across the country, 32% higher than 2019, and the largest increase was for those making $100,000 to $250,000 a year… That’s already hit spending: Families with childcare payments have been spending at a slower pace than the rest of households since May and are dipping into savings at a faster rate.”

November 1 – Reuters (Marcelo Teixeira): “Prices for orange juice rose… to the highest since future contracts started trading in New York in 1966 as an outlook for limited production in the United States, Brazil and Mexico boosted investors’ interest in the product.”

October 28 – Associated Press (Dee-Ann Durbin): “Spooked by the high price of Halloween candy? There’s not much relief in sight. For the second year in a row, U.S. shoppers are seeing double-digit inflation in the candy aisle. Candy and gum prices are up an average of 13% this month compared to last October…, according to Datasembly, a retail price tracker. That’s on top of a 14% increase in candy and gum prices in October 2022. ‘The price of candy has gotten to be outrageous,’ said Jessica Weathers, a small business owner in Shiloh, Illinois. ‘It doesn’t make sense to me to spend $100 on candy.’”

Biden Administration Watch:

November 2 – Financial Times (Suleiman Al-Khalidi): “Jordanian Foreign Minister Ayman Safadi will tell U.S. Secretary of State Antony Blinken in Amman on Saturday that Israel must end its war on Gaza where he said it was committing war crimes by bombing civilians and imposing a siege. In a foreign ministry statement, Safadi warned that Israel’s unreadiness to end the war was pushing the region rapidly towards a regional war that threatened world peace.”

Federal Reserve Watch:

November 1 – Bloomberg (Jonnelle Marte): “The Federal Reserve signaled that a run-up in long-term Treasury yields reduces the impetus to raise interest rates again, even as Chair Jerome Powell left the door open to another hike to tame inflation. While Powell indicated policymakers could raise rates when they meet next month, he also allowed that officials may be done with their tightening campaign. He said he wasn’t yet confident to judge whether monetary policy was restrictive enough to bring inflation back to the Fed’s 2% target. It’s fair to say that’s the question we’re asking is ‘Should we hike more?’’ Powell said…”

U.S. Bubble Watch:

November 3 – CNBC (Jeff Cox): “The U.S. economy saw job creation decelerate in October, confirming persistent expectations for a slowdown… Nonfarm payrolls increased by 150,000 for the month…, against the… consensus forecast for a rise of 170,000. The United Auto Workers strikes were primarily responsible for the gap as the impasse meant a net loss of jobs for the manufacturing industry. The unemployment rate rose to 3.9%, the highest level since January 2022, against expectations that it would hold steady at 3.8%… Average hourly earnings, a key measure for inflation, increased 0.2% for the month, less than the 0.3% forecast, while the 4.1% year-over-year gain was 0.1 percentage point above expectations.”

November 1 – Reuters (Lucia Mutikani): “U.S. job openings increased in September, pointing to persistent labor market tightness that is supporting the economy and likely to see the Federal Reserve keeping interest rates higher for a long time to cool demand. The Job Openings and Labor Turnover Survey, or JOLTS report… also showed layoffs dropping to a nine-month low. There were 1.50 job openings for every unemployed person in September, slightly up from 1.49 in August and way above the pre-pandemic ratio of 1.2… Job openings… were up 56,000 to 9.553 million on the last day of September. Data for August was revised lower to show 9.497 million job openings instead of the previously reported 9.610 million.”

October 30 – Reuters (Joseph White and David Shepardson): “United Auto Workers leaders approved a tentative deal… with Ford that includes a pay hike of at least 30% for full-time workers and could more than double pay for others, in a victory for the union’s fight to roll back 15 years of concessions… At Ford, the new deal includes $8.1 billion in manufacturing investments and could give workers up to $70,000 in extra pay over the 4-1/2-year life of the contract.”

October 30 – New York Times (Jack Ewing and Neal E. Boudette): “A six-week wave of strikes that hobbled the three largest U.S. automakers has resulted in tentative contract agreements that would give workers their biggest pay raises in decades… On Monday, General Motors and the United Automobile Workers reached a deal that mirrored agreements the union had reached in recent days with Ford Motor and Stellantis… Details of all the agreements had not yet been published, but they include a 25% pay increase over the next four and a half years and provisions to make sure the raises are not eaten up by inflation.”

October 31 – Reuters (Lucia Mutikani): “U.S. labor costs increased solidly in the third quarter amid strong wage growth while house price inflation accelerated in August, the latest signs that the Federal Reserve could keep interest rates high for some time… The Employment Cost Index (ECI)… rose 1.1% last quarter after increasing 1.0% in the April-June period… Labor costs increased 4.3% on a year-on-year basis, the smallest gain since the fourth quarter of 2021, after advancing by 4.5% in the second quarter. Growth in annual compensation is gradually slowing after peaking at 5.1% last year…”

October 31 – Reuters (Lucia Mutikani): “U.S. consumer confidence declined for a third straight month in October amid persistent worries about inflation, higher borrowing costs and the political environment… The Conference Board said its consumer confidence index fell to 102.6 this month from an upwardly revised 104.3 in September. ‘Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for grocery and gasoline prices in particular,’ said Dana Peterson, chief economist at The Conference Board. ‘Consumers also expressed concerns about the political situation and higher interest rates. Worries around war/conflicts also rose, amid the recent turmoil in the Middle East.’”

November 1 – Bloomberg (Vince Golle): “A measure of US factory activity stumbled to a three-month low as sagging orders and scant production growth undercut hopes that manufacturing is turning the corner after an extended retreat. The Institute for Supply Management’s manufacturing gauge fell 2.3 points, the biggest monthly decrease in more than a year, to 46.7… The group’s orders index dropped to a five-month low of 45.5 in October…”

November 2 – Bloomberg (Patrick Clark and Prashant Gopal): “It sometimes feels as if the US housing market is in a never-ending affordability crisis, with prices continually rising and inventory shrinking. The reasons have ranged from anemic construction to student loan debt to investors buying up starter homes. But even as the pandemic pushed values up faster than ever, cheap mortgages kept buyers in the game. Now a whole new affordability crisis is beginning. And this time, there’s no obvious way out. The Federal Reserve bank’s aggressive tightening since last year has driven the interest rate on a 30-year mortgage close to 8%, the highest point in almost a quarter century, adding some $1,100 to the monthly payment on a $400,000 loan.”

October 30 – Reuters (Amina Niasse): “U.S. vacation home sales have fallen by nearly three-quarters from their frenzied pace three years ago as an inventory shortage spawns a wrenching correction in the second-homes market… The reduction comes after a fervor of real estate investment in vacation locales during the pandemic. And as secondary home activity dwindles, some smaller housing-related businesses in leisure hot spots say they are feeling the pinch as well. The current share of secondary homes within the existing housing market has fallen to 16% as of August, from a peak of 22% in January 2022…”

October 28 – Yahoo Finance (Gabriella Cruz-Martinez): “American cardholders paid a record $130 billion in interest and fees in 2022… The study… by the Consumer Financial Protection Bureau (CFPB) was part of the government watchdog’s biennial report to Congress. The breakdown: Credit card companies charged consumers more than $105 billion in interest and some $25 billion in fees last year.”

Fixed Income Watch:

November 1 – Bloomberg (Caleb Mutua): “Blue-chip corporates are seizing one of the last windows of opportunity this year to raise fresh capital in US bond markets, resigning themselves to tougher financing conditions as the cheap-money era fades into history. Companies unleashed a wave of high-grade bond sales this week, with the $22.5 billion raised on Monday… That helped push October sales to $81.75 billion, just short of estimates of about $85 billion.”

China Watch:

October 31 – Financial Times (Cheng Leng): “China has signalled a further tightening of centralised Communist party control over its $61tn financial sector at a closely watched quinquennial policy conference that featured warnings of widespread weak governance and deep-rooted risks in the industry… The gathering, which is intended to set the agenda for financial sector reform over the next five years, emphatically backed Xi and his allies’ drive to deleverage China’s huge real estate sector, shore up the finances of indebted local governments and clamp down on speculation and corruption. ‘Finance is the blood and veins of the national economy and an important part of the country’s core competitiveness,’ state broadcaster CCTV quoted the conference report as saying… ‘We must adhere to the centralised and unified leadership of the Communist party in financial work… adhere to the fundamental purpose of finance as serving the real economy, and adhere to risk prevention and control as the eternal theme of financial work,’ it said.”

October 29 – Bloomberg: “China’s central and local governments extended their borrowing spree in October to reach a new monthly high, buoyed by Beijing’s fiscal stimulus to support the economy. The country is on track to sell 2.6 trillion yuan ($360bn) of onshore sovereign notes and local government bonds during the month, higher than any other month this year… The issuance hike mirrors the central government’s effort to accelerate spending, as the economy is saddled with weak business confidence and a deep property market slump.”

October 31 – Bloomberg: “China vowed to set up a long-term mechanism to resolve debt risks tied to local authorities and signaled willingness to expand central government borrowing as it concluded a twice-a-decade policy meeting. The two-day Central Financial Work Conference, attended by President Xi Jinping, also stressed the need to consolidate Communist Party control over the financial system and provide more funds for innovation, hi-tech manufacturing, green technology and small-to-medium sized companies. A summary of the conference… also contained a pledge to ‘optimize the debt structure of central and local governments.’”

October 31 – Bloomberg: “China’s manufacturing activity unexpectedly shrank in October, according to a private survey, signaling that the economic recovery is losing momentum and pressuring policymakers who are trying to shore up growth. The Caixin manufacturing purchasing managers’ index fell to 49.5 from 50.6 in September, missing economists’ forecast of 50.8.”

October 31 – Bloomberg: “The decline of China’s home sales slowed in October, following stepped-up efforts from Beijing to support the housing sector. The value of new home sales among the 100 biggest real estate companies fell 27.5% from a year earlier to 406.7 billion yuan ($55.6bn), narrowing from a 29.2% decline in September, according to preliminary data from China Real Estate Information Corp.”

November 2 – Bloomberg: “China’s outstanding property loans fell on a yearly basis for the first time on record, underlining stress in the sector despite official assurances of stabilizing declines. The outstanding amount of loans to the property sector fell 100 billion yuan to 53.19 trillion yuan ($7.3 trillion) at the end of September compared with the level a year earlier… That’s the first year-on-year drop in the data going back to 2005.”

October 31 – Reuters (Clare Jim, Xie Yu and Scott Murdoch): “China Evergrande is trying to stave off liquidation by revising its debt restructuring plan, but its biggest challenge will be convincing its creditors, and shareholders in two of its units, that the proposal is worth their while. A Hong Kong court on Monday gave Evergrande, the world’s most indebted property developer, a five week reprieve to come up with a deal. The company, which has more than $300 billion of liabilities, defaulted on its offshore debt in late 2021 and became the poster child of a debt crisis that has since engulfed China’s property sector.”

October 31 – Bloomberg: “Chinese stocks saw another month of foreign capital exodus as overseas funds offloaded 44.8 billion yuan ($6.1bn) worth of mainland shares in October. The month saw only three days of inflows even as authorities ramped up support, with the sovereign fund buying banking stocks and exchange-traded funds.”

October 29 – Financial Times (Sun Yu): “A record number of companies have dropped plans to list on Shanghai’s tech-focused stock market, after regulators raised the bar for initial public offerings in order to pick out domestic champions that can help Beijing’s drive towards technological self-sufficiency. Public records show 126 companies have cancelled or suspended IPO applications on Shanghai’s Star Market in 2023, more than in the previous four years combined.”

November 2 – Bloomberg: “As China prepared to cremate former Premier Li Keqiang on Thursday, skepticism among some residents of his hometown over the official account of his death showed a lack of trust in the ruling Communist Party. A number of mourners in eastern Anhui province this week expressed doubt that the former No. 2 official died of a heart attack — the reason given in a government statement… Li found himself sidelined by President Xi Jinping before exiting the Politburo Standing Committee — China’s most powerful body — a year ago despite being young enough to stay on.”

Central Banker Watch:

November 2 – Reuters (William Schomberg and Andy Bruce): “The Bank of England held interest rates at a 15-year peak… and ruled out cuts any time soon as it fights to ‘squeeze out of the system’ the highest inflation of the world’s big rich economies. Despite saying the economy was close to a recession and would have no meaningful growth in the coming years, the BoE reinforced its message that it would keep borrowing costs high. The Monetary Policy Committee (MPC) voted 6-3 to keep Bank Rate at 5.25%, repeating its September decision after 14 back-to-back increases, as expected…”

October 31 – Bloomberg (Kamil Kowalcze): “The European Central Bank will need to keep borrowing costs high for some time, according to Bundesbank President Joachim Nagel. ‘Our tight monetary policy is working, but we mustn’t let up too soon,’ the German central bank chief said… ‘Rather, the key interest rates will have to remain at a sufficiently high level for a sufficiently long time.’”

Global Bubble Watch:

October 31 – Reuters (Leika Kihara): “Asia’s manufacturers faced worsening pressure in October with factory activity in China slipping back into decline, clouding recovery prospects for the region’s major exporters already squeezed by weaker global demand and higher prices. Purchasing managers’ indexes (PMIs) for factory powerhouses China, Japan and South Korea showed activity shrinking while Vietnam and Malaysia also struggled with the broadening fallout from a Chinese slowdown.”

October 31 – Bloomberg (Ishika Mookerjee): “Global funds are offloading emerging Asia equities outside of China in droves as broader risk appetite cools amid concerns over a stronger dollar, higher borrowing costs and geopolitical tensions. Foreign investors have dumped nearly $11 billion of shares in October, taking the three-month selloff to about $27 billion…”

October 30 – Bloomberg (Christine Dobby): “With 60% of Canadian mortgages set to come up for renewal within the next three years, homeowners are facing a ‘payment shock’ unless interest rates come down in a significant way, according to Royal Bank of Canada. By 2026, when C$400 billion ($290bn) worth of mortgages are set to renew… the increase in monthly payments could be as high as 48% on a weighted average basis, RBC Capital Markets analyst Darko Mihelic, said…”

Europe Watch:

October 31 – Bloomberg (Andrew Langley): “Euro-area inflation eased to its lowest level in more than two years as the bloc’s economy shrank following an unprecedented ramp-up in interest rates. Consumer prices rose 2.9% in October — down from the previous month’s 4.3% and better than the 3.1% median estimate… In a separate release, Eurostat said third-quarter gross domestic product fell 0.1% — missing estimates for stagnation.”

Japan Watch:

October 31 – Wall Street Journal (Megumi Fujikawa): “The Bank of Japan edged closer to a new era in which it ends the unconventional monetary easing it has long pursued, although Gov. Kazuo Ueda wasn’t ready to declare the old era over yet. The central bank said Tuesday that its 1% cap on the 10-year government bond yield would now be considered a reference rather than a hard limit. It sharply raised its price forecast, saying the inflation rate would likely stay near 3% until early 2025. In 2016, the BOJ started controlling the yield on 10-year government bonds… This move, known as yield curve control, was one of many extraordinary monetary-easing measures the central bank has taken over the last quarter-century to tackle chronically flat or falling prices.”

October 31 – Bloomberg (Toru Fujioka): “The Bank of Japan is easing its control of bond yields, scaling back an expensive intervention strategy that’s increasingly tested by markets, while striving to sustain the inflation it’s worked so hard to kindle. The BOJ said it will take a more flexible approach to controlling yields on 10-year government debt, saying the 1% level was now a reference point… That marks a shift from a previous pledge of daily bond purchases at 1%… ‘Uncertainty is extremely high within both overseas and domestic economies and financial markets,’ said Governor Kazuo Ueda… ‘We decided that it’s appropriate to increase flexibility so that long-term yields can be smoothly shaped, according to different future scenarios.’”

November 2 – Reuters (Leika Kihara): “Bank of Japan Governor Kazuo Ueda will continue to dismantle the central bank’s ultra-easy monetary policy settings and look to exit the decade-long accommodative regime sometime next year, an inherently risky plan that would require skillful execution. Ultimately, however, the BOJ chief’s exit strategy will require a bit of good fortune too, especially given global uncertainties including the Middle East conflict and worries about whether the U.S. economy could achieve a soft landing as well as China’s growth trajectory. Ueda’s intentions are based on interviews with six sources familiar with the BOJ’s thinking…”

October 31 – Bloomberg (Toru Fujioka and Yoshiaki Nohara): “Bank of Japan Governor Kazuo Ueda received a timely reminder of the pitfalls he faces in trying to tiptoe toward policy normalization without disrupting markets. The yen unexpectedly weakened after the central bank loosened its grip on bond yields Tuesday, as the BOJ’s move appeared to fall short of investors’ hopes for a clearer sign of progress toward policy tightening… ‘Ueda is trying to go slowly to avoid shocking financial markets,’ said Takahide Kiuchi, economist at Nomura Research… ‘Ueda says making YCC more flexible isn’t directly linked to policy normalization, but there’s no doubt that is the direction he’s heading in and he’s right to do so.’”

November 2 – Reuters (Leika Kihara and Yoshifumi Takemoto): “Japan’s government… compiled a package of measures to cushion the economic blow from inflation that will involve spending of more than 17 trillion yen ($113bn), a move that could worsen the country’s already tattered finances. To fund part of the spending, the government will compile a supplementary budget for the current fiscal year of 13.1 trillion yen… ‘Japan’s economy is seeing a big opportunity open up to shift to a new stage for the first time in three decades,’ as it exits from a deflationary spiral, Kishida told a meeting of government and ruling party executives… ‘That’s why we need to help companies boost profitability and earn revenues to boost wages,’ he said.”

Levered Speculation Watch:

October 31 – Bloomberg (Liza Tetley and Bei Hu): “Macro trades have bounced back to become the best performing hedge fund strategy in the third quarter, turning a page on a dismal first half that saw economic uncertainty weigh on managers. Asset-weighted returns for macro funds hit 3.07% in the three months through September, according to… Citco… Still, even with the recent improvement, macro managers are down around 1.7% so far this year, Citco said, after a first half that saw funds hemorrhage value.”

October 31 – Bloomberg (Ye Xie): “Billionaire investor Stan Druckenmiller said he’s bought ‘massive’ bullish positions in two-year notes, as he’s become more worried about the economy. In recent weeks, ‘I started to get really nervous,’ Druckenmiller, founder of Duquesne Family Office, said… ‘So I bought massive leveraged positions’ in the short-term notes, he said.”

October 29 – Wall Street Journal (Gregory Zuckerman and Juliet Chung): “A researcher at Two Sigma Investments adjusted the hedge fund’s investing models without authorization, the firm has told clients, leading to losses in some funds, big gains in others and fresh regulatory scrutiny. The researcher, Jian Wu, a senior vice president at… Two Sigma, was trying to boost his compensation, Two Sigma has told clients, without identifying Wu. He made changes over the past year that resulted in a total of $620 million in unexpected gains and losses…”

Social, Political, Environmental, Cybersecurity Instability Watch:

November 1 – New York Times (Peter Eavis): “For over a century, the Panama Canal has provided a convenient way for ships to move between the Pacific and Atlantic Oceans, helping to speed up international trade. But a drought has left the canal without enough water…, forcing officials to slash the number of vessels they allow through. That has created expensive headaches for shipping companies and raised difficult questions about water use in Panama. The passage of one ship is estimated to consume as much water as half a million Panamanians use in one day. ‘This is the worst we have seen in terms of disruption,’ said Oystein Kalleklev, the chief executive of Avance Gas…”

November 2 – New York Times (Keith Bradsher and Lisa Friedman): “China is installing about as many solar panels and wind turbines as the rest of the world combined, and is on track to meet its target for clean energy six years early. It is using renewables to meet nearly all of the growth in its electricity needs. Yet there is another side to that rapid expansion..: China is also building new power plants that burn coal, the dirtiest of the fossil fuels, at a pace that dwarfs the rest of the world. China accounts for a third of the world’s energy-related greenhouse gas emissions — more than North America, Central America, South America, Europe and Africa combined.”

Geopolitical Watch:

November 1 – Bloomberg (Erik Schatzker): “If you’ve been troubled lately by a sense of foreboding, a vague but unmistakable feeling that the planet is teetering on the edge of some precipice, you’re not alone. Jamie Dimon is there with you. ‘This may be the most dangerous time the world has seen in decades,’ the chief executive officer of JPMorgan… said recently. World Bank President Ajay Banga calls it a ‘dangerous juncture’ for the global economy. Larry Fink, CEO of BlackRock Inc., envisions a future of ‘less hope and a lot more fear.’ What alarms them, and increasingly leaders everywhere in business, finance and government, can be summed up with a single word: geopolitics.”

October 30 – Financial Times (Gideon Rachman): “Historians are fascinated by the outbreak of the first world war. How could the assassination of an Austrian archduke in Sarajevo in June 1914 have led, just a few weeks later, to a conflict that dragged in every major power in Europe, and eventually the US? The question is particularly troubling because many of the leaders involved tried hard to avoid a general European war. The German and Russian emperors exchanged numerous messages trying to defuse the month-long crisis that led to conflict. But they failed. A similar danger of inadvertent escalation now hangs over the Middle East. The horrors of the Gaza conflict are so compelling that it is tempting just to concentrate on the fighting there. But western policymakers are increasingly focused on the wider region — and the danger of a general war in the Middle East that could pull in Iran, the US and even Saudi Arabia.”

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June 7, 2024: Summer of Discontent and Instability
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May 24, 2024: Speculative Bubble Hype
May 17, 2024: Zhang Zhan
May 10, 2024: Citadel Securities vs. Jane Street
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