Tesla’s market capitalization surpassed $1.1 TN this week, the first junk-rated company with a trillion-dollar valuation. Now the richest individual in the world, Elon Musk’s wealth this week reached a staggering $300 billion. The S&P500, Dow, Nasdaq100, and Nasdaq Composite ended the week at all-time highs. Microsoft retook the top spot as the world’s most valuable company.
October 29 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “U.S. equity funds attracted large inflows in the week to Oct. 27… According to Lipper data, U.S. equities funds attracted investments worth a net $12.99 billion, which were the largest since the week to Aug. 18.”
Plenty to divert attention away from critical global market developments. Ominous Bond Market Convulsions.
October 28 – Reuters (Wayne Cole): “Australia’s central bank on Friday lost all control of the yield target key to its stimulus policy as bonds suffered their biggest shellacking in decades and markets howled for rate hikes as soon as April. An already torrid week for debt got even worse when the Reserve Bank of Australia (RBA) again declined to defend its 0.1% target for the key April 2024 bond, even though its yield was all the way up at 0.58%. Scenting capitulation, speculators sent the yield sky-rocketing to 0.75% while yields on three-year bonds recorded their biggest monthly increase since 1994. All eyes were now on the RBA’s policy meeting on Nov. 2 where investors were wagering it would call time on yield curve control (YCC) and its guidance of no rate rises until 2024.”
October 29 – Financial Times (Hudson Lockett and Tabby Kinder): “The Reserve Bank of Australia declined to defend its bond-yield target, a pillar of its quantitative easing programme, unleashing what one trader described as ‘carnage’ in the country’s sovereign bond market. The yield on the government bond maturing in April 2024 jumped as high as 0.8% on Friday in a dramatic rise that began after a round of stronger than expected inflation data released on Wednesday. The bank had said as recently as October 5 that it was targeting a 0.1% yield on the security. This week’s sharp rise in yield… signalled to many traders and investors that the RBA was abandoning its so-called yield curve control…”
The Australian bond market this week provided further evidence of an unfolding disorderly global bond market (and yield curve!) adjustment process, as raging global inflation forces central banks to retreat from ultra-loose and intrusive monetary policies. Australian two-year yields surged 33 bps Thursday and another 24 bps Friday, with an extraordinary 66 bps spike for the week to 0.775% – the high since January 2020. After trading as low at 0.53% in August, five-year yields jumped 38 bps this week to 1.57%, the high since March 2019. Ten-year Australian yields surged 29 bps this week to 2.09% – the high since March 2019. As noted above: “carnage.”
October 27 – Financial Times (Matthew Rocco, Kate Duguid and Tommy Stubbington): “The Bank of Canada surprised investors by abruptly ending its bond-buying programme on Wednesday and pulling forward its expected timeline for interest rate rises, triggering a heavy sell-off in Canadian government debt. The announcement puts the BoC at the head of a growing number of central banks that have responded to surging inflation by signalling a shift towards tighter monetary policy… The main forces pushing up prices — higher energy prices and pandemic-related supply bottlenecks — now appear to be stronger and more persistent than expected,’ the bank said… ‘Higher-than-expected inflation prints and the expected rise in prices from consumers and businesses has put the fear of God into them,’ said Karl Schamotta, chief market strategist at Cambridge Global Payments. ‘I don’t think anyone was expecting this.’”
Canadian two-year yields jumped 22 bps this week to 1.09%, the high since March 2020. Two-year yields were at 0.40% on September 14th. Five-year yields jumped 17 bps this week to 1.51% – having gained 68 bps in just seven weeks to the high back to January 2020. Ten-year yields were up seven bps to 1.72%, the high since May 2019.
October 29 – Financial Times (Tommy Stubbington and Kate Duguid): “A violent shake-up in bond markets has intensified as fund managers are wrongfooted by a global drop in short-term debt, say analysts and investors. Stubbornly high inflation around the world and a hawkish response by some central banks have fuelled a rapid rise in short-dated government bond yields. At the same time, concerns about growth prospects in the coming years have kept a lid on long-term bond yields, resulting in a dramatic ‘flattening’ of yield curves. Short-term bond markets have ‘experienced unprecedented volatility’ this week, said George Saravelos, Deutsche Bank’s global head of currency research. He said a sell-off in Australia’s market was the most severe since 1996, while Canada had been hit with its worst decline since 2009. Saravelos said the moves have been exacerbated by investors being forced to abandon soured bets as markets move against them. ‘What is happening now runs beyond macro,’ he said… ‘This is the closest we can get to a distressed market.’”
FT (Hudson Lockett and Tabby Kinder): “‘The RBA [Reserve Bank of Australia] simply doesn’t show up to defend their yield target, the bonds are slaughtered,’ one fixed income trader said, also describing the latest moves for Australian, New Zealand and Canadian bond yields as ‘massive carnage’.”
New Zealand two-year yields jumped 28 bps this week (84bps in four weeks!) to a four-year high 2.06%. Five-year yields rose 25 bps – 54 bps in two weeks – to 2.36%, the high since April 2018. Ten-year yields rose 14 bps to 2.64%, the high back to November 2018 (up 50bps in four weeks).
October 28 – Financial Times (Martin Arnold and Tommy Stubbington): “Christine Lagarde rebuffed investor expectations that the European Central Bank could raise rates next year to quell fast-rising prices, even as she acknowledged that its latest governing council meeting was dominated by a discussion of ‘inflation, inflation, inflation’. The ECB president said the council had done ‘a lot of soul-searching’ to test its assumption that inflation would fade next year, and its analysis did ‘not support’ market expectations for a rate rise before the end of 2022. Nevertheless, even as Lagarde spoke…, investors ramped up their bets of an ECB rate rise. Markets are currently pricing in a 0.1 percentage point rise by September next year. ‘The view in the market is that central banks are behind the curve,’ said ING rates strategist Antoine Bouvet. ‘The ECB is no exception.’”
“Yield curve control” blew up in the Reserve Bank of Australia’s face. Perhaps not as explosive, but Christine Lagarde’s effort to talk down European yields and rate expectations elicited a rather thunderous backfire. Italian 10-year yields jumped 23 bps Thursday and Friday to 1.17%, the high since July 2020. After rising six bps Thursday, Greek 10-year yields surged 25 bps during Friday’s session to 1.31%, the high back to June 2020. Portuguese yields jumped 10 bps Friday to 0.52% (high since May), and Spanish yields rose nine bps Friday to 0.61% (near high from June 2020).
Meanwhile, EM bond market carnage continues. Brazilian 10-year yields traded Thursday to a near five-year high 12.43% (ended the week at 12.20%). Brazil dollar 10-year yields rose nine bps this week to 4.82% (high since July 2020). South African yields rose 28 bps to an 18-month high 10.18%. Russian yields surged 37 bps to 8.22% – up 73 bps in two weeks to the high back to March 2020.
EM currencies remain under pressure. The South African rand dropped another 2.7% this week, with the Mexican peso down 1.9%. Eastern Europe’s bonds and currencies weakened further. The Polish zloty declined 1.0%, the Russian ruble 0.9%, the Romanian leu 0.8%, the Bulgarian lev 0.7% and the Czech koruna 0.7%.
October 29 – Bloomberg (Hema Parmar and Nishant Kumar): “A rapid convergence in key global bond yields is behind losses for some of the biggest macro hedge funds. Chris Rokos’s hedge fund has sunk 11% in October, in part because of wagers that the difference between short- and long-term U.K. and U.S. government bond yields would widen, according to people familiar with the matter. Instead, they’ve tightened. The market’s shift to expecting Bank of England rate hikes sooner caused most of the harm at Rokos Capital Management… The fund, down 20% for the year, is on track to post its worst annual loss ever. The firm isn’t alone as traders bet central banks will curtail stimulus measures much faster than had been expected, roiling so-called steepener trades.”
Speculative yield curve trades are blowing up around the world, inflicting painful losses upon a segment of the leveraged speculating community. The UK’s two-year to 10-year spread dropped 32 bps this week to 44 bps. In Canada, this spread declined 12 bps to 51 bps – with a three-week drop of 25 bps. In chaotic Wednesday trading, Canada’s 2yr-10yr spread sank 18 bps to 44 bps (narrowest since January). The 2yr-10yr spread dropped 31 bps in Australia to 93 bps. In the U.S., it fell 12 bps to 105 bps.
October 28 – Reuters (Karen Pierog and Gertrude Chavez-Dreyfuss): “Investors are gauging what a furious flattening of the U.S. yield curve suggests about expectations for growth and how aggressively the Federal Reserve may tighten monetary policy in the face of surging inflation. Yields on 20-year Treasuries rose above those on 30-year bonds several times on Thursday, a move analysts pinned on technical factors, including higher demand for much more liquid 30-year bonds as well as expectations of a more hawkish Fed.”
October 28 – Reuters (Clare Jim and Andrew Galbraith): “Chinese developers took a drubbing on Thursday, with shares and bonds falling, creditors seizing assets and rating agencies distributing more downgrades, ahead of a final debt payment deadline for China Evergrande Group on Friday. Shares of Kaisa Group were hardest-hit… after rating agency downgrades that highlighted the company’s limited access to funding and significant U.S. dollar debt obligations.”
It’s also worth adding that global bank stocks were under pressure this week. The Hang Seng China Financials Index sank 3.2%, with Japan’s TOPIX Bank Index falling 3.3%. Even high-flying U.S. financial stocks lost a little altitude, with the KBW Bank Index falling 2.8%. But for the most part, U.S. equities completely disregarded U.S. and global bond market spasms. Persistent squeeze dynamics and the unwind of hedges – not to mention strong fund inflows – sustained momentum for the week.
Every cycle is different – each with its individual nuance. There are, however, recurring speculative dynamics. For me, the current backdrop is increasingly reminiscent of the summer of 1998. At July 20th, 1998 highs, the S&P500 enjoyed a y-t-d return of 23%. Financial stocks were outperforming, with the Broker/Dealer index up 31%. I was convinced Russia was on the cusp of financial crisis. How could markets disregard the risks associated with such a major development? The answer in the summer of 1998 was a rather simple mantra: “The West will never allow Russia to collapse.”
I knew the hedge fund community had huge levered positions in Russia’s debt. I was also focused on a big increase in derivatives activity to hedge against declines in the ruble and Russian bonds. It was clear to me that Russia was in trouble, and if their markets faltered there was a high probability of illiquidity, dislocation, and a financial collapse that would rock the leveraged speculating community and global markets.
In the six weeks between July 20th highs and September 1st lows, the S&P500 sank 21%. And between July highs and October lows, the Broker/Dealer index collapsed 56%. I was familiar with Long-term Capital Management going into the crisis. I was as shocked as anyone to learn of their egregious leveraging and $1 TN notional value derivatives portfolio. It’s not an exaggeration to say the global financial system was pushed to the brink. The Fed orchestrated a bailout, there was the so-called “Committee to Save the World” – Greenspan, Rubin and Summers – along with rate cuts – that reversed crisis dynamics and unleashed the 1999 mania.
Today’s risks so greatly dwarf 1998 that they’re hardly comparable. In key respects, China’s bubble is without precedent. Its global financial and economic impact today rivals, if not exceeds, the U.S. The amount of global leveraged speculation today makes ‘98 excess seem trivial. And while I presume there are no global funds as recklessly positioned as LTCM, there are reasons to fear that scores of funds have pushed the risk and leverage envelope. A seasoned hedge fund operator ran Archegos with more than 10 to 1 leverage in concentrated stock holdings. We also witnessed in March 2020 the chaos unleashed when de-risking/deleveraging gained momentum. Now global “carry trades” and yield curve bets have started blowing up.
There’s another big difference between now and 1998: open-ended QE, and now unshakable confidence that central banks will do “whatever it takes” to sustain the boom. 1998’s “the West will never allow a Russia collapse” has evolved to today’s “Beijing and global central bankers have everything under control.” And such market perceptions are fundamental to the type of egregious speculative leverage and excess that ensure future crises. And, clearly, the world has never witnessed the scope of excess that has accumulated over the past decade – and especially over the last 19 months.
The shifting winds of global liquidity are palpable. Chinese contagion has ratcheted up general risk aversion. De-risking/deleveraging dynamics have gained important momentum in the emerging markets. And this week there were forced unwinds of levered yield curve trades. Global liquidity has begun to wane, and financial conditions have started tightening, which is now impacting the more vulnerable markets and economies. Ominously, talk returned this week of liquidity concerns in sovereign debt markets, including Treasuries.
Meanwhile, inflation has become a pressing issue around the globe, unsettling central bankers and bond markets alike. This comes with major policy and market ramifications. Chinese contagion has already manifested into weakening EM currency markets, compounding inflation risk in key EM economies. There is now heightened pressure on central banks – EM in particular – to raise rates to bolster sinking currencies and counter mounting inflationary pressures.
The world today confronts a unique confluence of synchronized fragile bubbles and surging inflation. And, importantly, the worsening inflationary backdrop is reducing central bank flexibility to use monetary stimulus in response to market instability. This is poised to become a key issue, with major ramifications for vulnerable market bubbles.
For some time now, markets have assumed that central bank liquidity would put a floor under market prices, while ensuring rapid market recovery in the event of a bout of instability. But central banks pushed things much too far. Especially after the pandemic response, unprecedented monetary stimulus further inflated historic bubbles, stoking the most powerful inflationary dynamics in decades.
This creates a critical dilemma: When bubbles falter, central bankers will confront dislocated markets demanding Trillions of additional liquidity, in a backdrop of already powerful inflationary pressures. This is poised to be a real nightmare for central bankers that supposedly have everything under control.
Next week will be the Fed’s turn to operate in the new environment. The FOMC will be pondering whether leaning “dovish” or “hawkish” would be best received by an unsettled bond market. From Friday’s WSJ: “Consumer prices rose at the fastest pace in 30 years in September while workers saw their biggest compensation boosts in at least 20 years…” With inflation raging and the Fed so far “behind the curve,” expect the bond market to lose patience with the idea of waiting months to get rate “normalization” started. But then there’s the faltering Chinese Bubble, along with global de-risking/deleveraging gaining momentum.
Today’s unparalleled degree of uncertainty is anathema to leveraged speculation. There was evidence this week that central banks are Losing Control, a precarious dynamic that will spur a ratcheting down of risk throughout the global leveraged speculating community.
For the Week:
The S&P500 rose 1.3% (up 22.6% y-t-d), and the Dow added 0.4% (up 17.0%). The Utilities slipped 0.3% (up 7.1%). The Banks dropped 2.8% (up 41.6%), and the Broker/Dealers fell 2.1% (up 30.2%). The Transports gained 0.9% (up 27.2%). The S&P 400 Midcaps were little changed (up 21.1%), while the small cap Russell 2000 increased 0.3% (up 16.3%). The Nasdaq100 advanced 3.2% (up 23.0%). The Semiconductors rose 2.4% (up 23.5%). The Biotechs gained 1.1% (down 1.1%). With bullion down $9, the HUI gold index sank 4.2% (down 16.9%).
Three-month Treasury bill rates ended the week at 0.0475%. Two-year government yields rose four bps to 0.50% (up 38bps y-t-d). Five-year T-note yields dipped one basis point to 1.19% (up 82bps). Ten-year Treasury yields fell eight bps to 1.56% (up 64bps). Long bond yields sank 14 bps to 1.93% (up 29bps). Benchmark Fannie Mae MBS yields dropped 11 bps to 2.00% (up 66bps).
Greek 10-year yields surged 29 bps to 1.31% (up 69bps y-t-d). Ten-year Portuguese yields gained 11 bps to 0.52% (up 49bps). Italian 10-year yields jumped 17 bps to 1.17% (up 63bps). Spain’s 10-year yields rose eight bps to 0.61% (up 56bps). German bund yields were unchanged at negative 0.11% (up 46bps). French yields increased four bps to 0.27% (up 61bps). The French to German 10-year bond spread widened four to 38 bps. U.K. 10-year gilt yields dropped 11 bps to 1.03% (up 84bps). U.K.’s FTSE equities index added 0.5% (up 12.0% y-t-d).
Japan’s Nikkei Equities Index increased 0.3% (up 5.3% y-t-d). Japanese 10-year “JGB” yields were little changed at 0.10% (up 8bps y-t-d). France’s CAC40 rose 1.4% (up 23.0%). The German DAX equities index gained 0.9% (up 14.4%). Spain’s IBEX 35 equities index rallied 1.7% (up 12.2%). Italy’s FTSE MIB index rose 1.1% (up 20.9%). EM equities were mostly lower. Brazil’s Bovespa index dropped 2.6% (down 13.0%), and Mexico’s Bolsa fell 1.1% (up 16.4%). South Korea’s Kospi index declined 1.2% (up 3.4%). India’s Sensex equities index sank 2.5% (up 24.2%). China’s Shanghai Exchange fell 1.0% (up 2.1%). Turkey’s Borsa Istanbul National 100 index jumped 2.8% (up 3.1%). Russia’s MICEX equities index slumped 1.1% (up 26.2%).
Investment-grade bond funds saw outflows of $1.11 billion, while junk bond funds posted positive flows of $1.187 billion (from Lipper).
Federal Reserve Credit last week expanded $21bn to a record $8.538 TN. Over the past 111 weeks, Fed Credit expanded $4.812 TN, or 129%. Fed Credit inflated $5.728 Trillion, or 204%, over the past 468 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $5.3bn to $3.487 TN. “Custody holdings” were up $92bn, or 2.7%, y-o-y.
Total money market fund assets jumped $41.2bn to $4.559 TN. Total money funds increased $211bn y-o-y, or 4.8%.
Total Commercial Paper declined $10.1bn to $1.180 TN. CP was up $206bn, or 21.2%, year-over-year.
Freddie Mac 30-year fixed mortgage rates rose another five bps to a six-month high 3.14% (up 33bps y-o-y). Fifteen-year rates gained four bps to 2.37% (up 5bps). Five-year hybrid ARM rates added two bps to 2.56% (down 32bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down five bps to 3.13% (up 10bps).
For the week, the U.S. Dollar Index gained 0.5% to 94.13 (up 4.7% y-t-d). For the week on the upside, the South Korean won increased 0.7%, the Australian dollar 0.7%, the Brazilian real 0.2% and the New Zealand dollar 0.2%. For the week on the downside, the South African rand declined 2.7%, the Mexican peso 1.9%, the Norwegian krone 1.0%, the euro 0.7%, the British pound 0.5%, the Japanese yen 0.4%, the Swedish krona 0.2%, and the Canadian dollar 0.2%. The Chinese renminbi declined 0.32% versus the dollar (up 1.90% y-t-d).
October 26 – Bloomberg (Marcy Nicholson and Jen Skerritt): “High lumber prices are back… Prices are climbing amid tight supplies and a pickup in homebuilding. Western Canada is seeing reduced output and the U.S. south is grappling with labor shortages. The U.S. is also expected to double duties on a common Canadian wood next month, adding to costs. The rise signals that homebuyers will face elevated prices for longer. On Tuesday, lumber futures were trading around $735.70 per 1,000 board feet in Chicago, more than double the pre-pandemic five-year average around $356.”
The Bloomberg Commodities Index slipped 0.4% (up 32.4% y-t-d). Spot Gold declined $9 to $1,783 (down 6.1%). Silver fell 1.7% to $23.90 (down 9.5%). WTI crude slipped 19 cents to $83.57 (up 72%). Gasoline dropped 4.5% (up 68%), while Natural Gas rallied 2.8% (up 114%). Copper dropped 2.9% (up 24%). Wheat rose 2.2% (up 21%), and Corn surged 5.6% (up 17%). Bitcoin gained $1,790, or 3.0%, this week to $62,411 (up 115%).
October 25 – Associated Press (Lindsay Whitehurst): “Tumbling COVID-19 case counts have some schools around the U.S. considering relaxing their mask rules, but deaths nationally have been ticking up over the past few weeks, some rural hospitals are showing signs of strain, and cold weather is setting in. The number of new cases nationally has been plummeting since the delta surge peaked in mid-September. The U.S. is averaging about 73,000 new cases per day, dramatically lower than the 173,000 recorded on Sept. 13. And the number of Americans in the hospital with COVID-19 has plummeted by about half to around 47,000 since early September.”
October 26 – CNBC (Emily DeCiccio): “The author of a new study discussed the damaging impacts for ‘long Covid’ patients… ‘Our work and the work of others has shown that this affects people’s abilities to make plans, synthesize information, and do their daily activities of work,’ said David Putrino, the Director of Rehabilitation Innovation at Mount Sinai Hospital… ‘They suffer from a lot of memory loss and inability to form new memories, as well as difficulty with speaking. This is a very debilitating condition with serious cognitive conditions.’ In Putrino’s study researchers examined how long Covid can affect people’s ability to work, and they found nearly half of all ‘long-haulers’ surveyed said they were not able to return to full employment.”
Market Mania Watch:
October 26 – Bloomberg (Lu Wang): “There were plenty of reasons for Tesla Inc. to rally Monday. Everything from Hertz Global Holdings Inc.’s blockbuster order to buying by passive funds and a squeeze on short sellers. But other forces were at play in goosing the gain: options traders who piled on bullish bets, and market makers who were forced to purchase shares to hedge their positions as the stock surged. In other words, the tail wagging the dog. It’s a narrative that’s come up repeatedly in explaining mysterious moves, such as the big-tech rally in the summer of 2020 and this year’s mid-month market swoons. More than 2.4 million bullish contracts on Tesla changed hands Monday.”
October 25 – Bloomberg (Caleb Mutua): “If you were wondering which junk-rated company would be the first to reach a trillion-dollar market capitalization, your wait is over. It’s Tesla Inc.”
October 24 – Financial Times (Robin Wigglesworth): “The frenzied boom in private markets is one of the biggest trends in the global money management industry. It will leave many investors bitterly disappointed and could ultimately cause wider, long-term economic problems. The party in this opaque corner of the financial system — which includes unlisted and untraded assets like venture capital, real estate, private equity, infrastructure and direct lending — is hard to miss. As Apollo’s Marc Rowan gushed at the firm’s investor day…: ‘This is just an amazing time for our business.’ To underscore the point, Blackstone is now reportedly seeking to raise as much as $30bn for its next flagship buyout fund. Can anything quell spirits? It seems not. In a recent report examining how long the ‘golden age of private markets’ can last, Morgan Stanley analysts argued that concerns that less accommodative central banks will curtail the private capital party next year are ‘overdone’. They forecast that the $8tn industry will grow by double digits annually for at least the next five years.”
Market Instability Watch:
October 29 – Financial Times (Tommy Stubbington and Kate Duguid): “A violent shake-up in bond markets has intensified as fund managers are wrongfooted by a global drop in short-term debt, say analysts and investors. Stubbornly high inflation around the world and a hawkish response by some central banks have fuelled a rapid rise in short-dated government bond yields. At the same time, concerns about growth prospects in the coming years have kept a lid on long-term bond yields, resulting in a dramatic ‘flattening’ of yield curves. Short-term bond markets have ‘experienced unprecedented volatility’ this week, said George Saravelos, Deutsche Bank’s global head of currency research. He said a sell-off in Australia’s market was the most severe since 1996, while Canada had been hit with its worst decline since 2009.”
October 29 – Bloomberg (James Hirai and Alexander Weber): “Markets aren’t buying Christine Lagarde’s efforts to push back against increasingly aggressive bets by traders that the European Central Bank will raise interest rates next year. On Thursday, Lagarde failed to shift market pricing for 20 bps of ECB hikes in December 2022 when she said that view isn’t supported by the ECB’s analysis. Less than 24 hours later, traders went even further, bringing forward that timing by two months. Markets are ‘calling Lagarde’s bluff,’ was how Valentin Marinov, head of G10 currency research at Credit Agricole, bluntly put it.”
October 28 – Reuters (Gertrude Chavez-dreyfuss): “Investors in U.S. interest rate options are paying for trades that benefit from a much earlier-than-expected monetary tightening by the Federal Reserve to fight off stubbornly high inflation, including multiple hikes from next year until 2023. Those bets have pushed volatility higher on U.S. swaptions, or options on interest rate swaps which give the buyer the right to enter a swap contract in the future at a pre-agreed price… The one-year forward rate on U.S. two-year swaps, that part of the curve most sensitive to rate hike expectations, on Thursday was implying a rate of 1.27% by October 2022, compared with the spot rate of 0.639%.”
October 25 – Reuters (Jason Xue and Andrew Galbraith): “Corporate China’s hedging activities spiked to a new high, according to consultancy data, as the cost of raw materials soared and as China’s financial regulators urged local businesses to cope with higher market volatility. The number of China-listed non-financial companies using hedging tools such as futures and options to limit market risks rose to 793 at the end of the third quarter, up 51.6% from one year ago… Still, they account for just 18% of China’s nearly 4,500 publicly traded companies. In the United States, roughly 80% of companies on the benchmark S&P 500 stock index regularly engage in hedging activities.”
October 29 – Bloomberg (Reade Pickert): “U.S. employment costs rose at the fastest pace on record in the third quarter as companies across a variety of sectors raised wages against a backdrop of labor shortages. The employment cost index, a broad gauge of wages and benefits, rose 1.3% from the prior quarter… The gauge increased 3.7% from a year earlier. Compensation gains were broad-based across sectors, underscoring how a tight labor market has put pressure on many different types of firms to raise wages. Wages and salaries for civilian workers also rose at a record pace, surging 1.5% in the quarter.”
October 25 – CNN (Anneken Tappe): “America’s worker shortage is alive and well, much to the misfortune of US companies that need staff to keep up with demand. The National Association of Business Economics (NABE) found that nearly half — 47% — of respondents to its Business Conditions Survey reported a shortage of skilled workers… That’s up from 32% reporting shortages in the second quarter of the year, which already was too high for comfort… Labor shortages are now a hallmark of the recovering pandemic economy, most prevalently in the goods-producing sector, according to the NABE survey. Companies have a hard time attracting the workers they need to feed increased demand from consumers, while the risk of infections remains. Some people are also waiting for the right opportunity to come along before they return to the labor force, quit in order to take better positions or are kept home due to family and care responsibilities.”
October 25 – New York Times (Kim Severson): “Thanksgiving 2021 could be the most expensive meal in the history of the holiday. Caroline Hoffman is already stashing canned pumpkin… when she finds some for under a dollar. She recently spent almost $2 more for the vanilla she’ll need to bake pumpkin bread and other desserts… Matthew McClure paid 20% more this month than he did last year for the 25 pasture-raised turkeys he plans to roast at the Hive, the Bentonville, Ark., restaurant where he is the executive chef. And Norman Brown, director of sweet-potato sales for Wada Farms in Raleigh, N.C., is paying truckers nearly twice as much as usual to haul the crop to other parts of the country. ‘I never seen anything like it, and I’ve been running sweet potatoes for 38 or 39 years,’ Mr. Brown said. ‘I don’t know what the answer is, but in the end it’s all going to get passed on to the consumer.’ Nearly every component of the traditional American Thanksgiving dinner, from the disposable aluminum turkey roasting pan to the coffee and pie, will cost more this year…”
October 25 – Wall Street Journal (Ryan Dezember): “Propane prices haven’t been so high heading into winter in a decade, which is bad news for the millions of rural Americans who rely on the fuel to stay warm. At $1.41 a gallon at the Mont Belvieu trading hub in Texas, on-the-spot prices are about triple those of the past two Octobers. Of the two main U.S. propane futures contracts, one hit a high earlier this month and the other doesn’t have far to climb to eclipse the record it set during the blizzard of 2014. The average residential price tracked by the U.S. Energy Information Administration has jumped by 50% from a year ago, to $2.69 a gallon. All manner of heating fuels are heading into winter at their highest prices in years and could climb more if the weather is cold. But propane is expected to take the biggest bite out of household budgets.”
October 25 – Wall Street Journal (Jinjoo Lee): “High natural-gas prices today mean your electricity and heating bills will likely be expensive this winter. Next year, it could mean you will end up paying more to eat and to fill up your car. In Europe, where natural gas is almost six times as expensive as it was a year earlier, fertilizer companies—including Norwegian company Yara, as well as BASF and Borealis—have announced curtailments as a result of expensive gas. Fertilizer production in the region has dropped as much as 40%… Natural gas can account for up to 85% of the production cost of ammonia, a key ingredient for many fertilizers…”
October 26 – New York Times (Matt Phillips): “Almost everyone — buyers of used cars, renters, homeowners with big heating bills and stock market investors — has been fretting about rising prices lately. But despite some of the fastest price increases in decades, investors in the Treasury bond market who are keenly attuned to inflation have been steadfast in their belief that it was a temporary phenomenon. That’s now changing. A key measure of the bond market’s expectations for inflation over the next five years — known as a break even — rose to a new high Friday, briefly topping 3%. That meant investors expected inflation to average about 3% a year for the next five years, far higher than any time in the decade before the pandemic hit. Measures of inflation expectations over longer periods, such as over the next 10 years, also rose to multiyear highs.”
October 24 – Wall Street Journal (Sharon Terlep): “Some of the world’s biggest companies are betting consumers will keep paying more for products from coffee to toilet paper. Corporate giants including Procter & Gamble Co., Nestlé SA and Verizon Communications Inc. say they plan to continue raising prices or pushing customers to buy more expensive products into 2022 to offset fast-growing costs amid a global supply-chain crisis. Gillette razors, Nestlé coffee and Chipotle burritos are among the products that could get more expensive in coming months. Price increases so far have paid off for makers of household staples as shoppers, particularly in the U.S. and Western Europe, have remained loyal to big-name brands.”
October 23 – Financial Times (Andrew Edgecliffe-Johnson, Matthew Rocco, Obey Manayiti and Claire Bushey): “Shortages throughout the supply chains on which corporate America depends are translating into widespread inflationary pressure, a string of US companies revealed this week, disrupting their operations and forcing them to raise prices for their customers. Whirlpool… blamed ‘inefficiencies across the supply chain’ for ‘pretty brutal’ increases in prices for steel, resin and other materials, saying these would add almost $1bn to the appliance manufacturer’s costs this year. ‘On any given day, something is out of stock in the store,’ said Vivek Sankaran, chief executive of Albertsons, likening the grocery chain’s efforts to respond to successive challenges to a game of Whac-A-Mole.”
October 24 – Bloomberg (Jen Skerritt and Kim Chipman): “Pasta is poised to become the latest staple consumers are forced to pay more for after drought scorched North American production of durum wheat, the high-protein grain that’s milled into semolina flour for spaghetti. Output of durum in Canada, a top exporter, shrunk by nearly half this year and the U.S. harvest is the smallest in 60 years. Durum prices in the western Canadian province of Alberta have risen more than 60% since August and are currently trading near the highest since at least 2015…”
Biden Administration Watch:
October 26 – CNBC (Christina Wilkie and Thomas Franck): “New details of a Democratic plan to enact a 15% minimum corporate tax on declared income of large corporations were released… by three senators, Elizabeth Warren, D-Mass., Angus King, I-Maine, and Senate Finance Committee Chair Ron Wyden, D-Ore. The senators will propose the tax be included as a source of revenue to help fund the massive ‘Build Back Better’ bill that Democrats are currently negotiating.”
October 25 – Bloomberg (Laura Davison): “President Joe Biden will likely be unable to keep one of his key campaign promises — to roll back his predecessor’s historically unpopular 2017 tax cuts — because of unyielding resistance among even some in his own party to raise taxes. While Biden won applause on the campaign trail for pledging to repeal President Donald Trump’s tax overhaul on ‘day one,’ as president he has run into the same political reality faced by Barack Obama, who kept the vast majority of George W. Bush’s tax reductions: raising taxes is a hard lift in Congress.”
October 27 – Reuters (Richard Cowan and David Morgan): “Senior Democrats in the U.S. Congress were at odds on Wednesday over a proposal to tax billionaires’ assets to help pay for President Joe Biden’s social and climate-change agenda, leaving it unclear if the idea had enough support to become law. The Senate’s top tax writer, Finance Committee Chairman Ron Wyden, unveiled the idea early on Wednesday, but by afternoon his House of Representatives counterpart, Ways and Means Committee Chairman Richard Neal, said the idea appeared to be too complex to succeed.”
October 26 – New York Times (Jim Tankersley): “At least once a week, a team of President Biden’s top advisers meet on Zoom to address the nation’s supply chain crisis. They discuss ways to relieve backlogs at America’s ports, ramp up semiconductor production for struggling automakers and swell the ranks of truck drivers. The conversations are aimed at one goal: taming accelerating price increases that are hurting the economic recovery, unsettling American consumers and denting Mr. Biden’s popularity. An inflation surge is presenting a fresh challenge for Mr. Biden, who for months insisted that rising prices were a temporary hangover from the pandemic recession and would quickly recede. Instead, the president and his aides are now bracing for high inflation to persist into next year, with Americans continuing to see faster — and sustained — increases in prices for food, gasoline and other consumer goods than at any point this century.”
October 26 – Reuters (Trevor Hunnicutt and Jeff Mason): “President Joe Biden, hoping to signal U.S. re-engagement with allies after four years of Donald Trump’s ‘America First’ policies, heads to a meeting of G20 leaders in Europe this week to discuss energy prices, the Iranian nuclear program and supply chain issues, U.S. national security adviser Jake Sullivan said… Biden will also seek to cement progress on a global minimum tax during his trip, Sullivan told reporters.”
October 24 – Bloomberg (Linus Chua): “Treasury Secretary Janet Yellen said she expects price increases to remain high through the first half of 2022, but rejected criticism that the U.S. risks losing control of inflation… ‘I don’t think we’re about to lose control of inflation,’ Yellen said, pushing back on criticism by former Treasury Secretary Lawrence Summers this month. ‘Americans haven’t seen inflation like we have experienced recently in a long time. But as we get back to normal, expect that to end.’”
October 29 – CNBC (Jeff Cox): “Treasury Secretary Janet Yellen asserted… the administration’s infrastructure spending proposal will lower inflation by reducing costs vital to households… Yellen renewed her push for White House spending plans that are unpopular with several factions of Congress and have yet to be approved. ‘I don’t think that these investments will drive up inflation at all,’ she told CNBC’s Sara Eisen…”
October 27 – Bloomberg (Ben Bartenstein, Yousef Gamal El-Din and Ben Stupples): “Former U.S. Treasury Secretary Steven Mnuchin said he was opposed to the introduction of new taxes and warned about the potential knock-on effects of a proposed levy on the super-wealthy that’s being touted by Joe Biden’s Democrats… ‘I’m generally in favor of simplifying the tax system and making sure the appropriate taxes are collected,’ Mnuchin said… ‘But when you talk about targeting one segment of the population in a very specific way, I worry about the unintended consequences.’”
Federal Reserve Watch:
October 25 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are set to wind down their $120 billion-a-month bond-purchase program in November, but questions over how soon inflation pressures will fade are creating more uneasiness inside the central bank. Fed Chairman Jerome Powell and senior officials have played down worries this year that a surge in prices during the uneven pandemic recovery would lead to permanently higher inflation… In recent weeks, officials have said they still think the most likely outcome is for inflation to come down on its own as supply-chain kinks resolve. Recent public remarks, however, show they are holding to that view with somewhat less conviction than before.”
October 27 – Bloomberg (Steven T. Dennis and Megan Howard): “Senate Banking Committee Chair Sherrod Brown said that he expects President Joe Biden will release a combination of nominations to the board of the Federal Reserve at the time he unveils his decision on the central bank chair, which may or may not be Jerome Powell.”
October 28 – Wall Street Journal (Nick Timiraos): “When Federal Reserve Chairman Jerome Powell steps to the microphone at a news conference next week, he may be unable to answer one of investors’ most pressing questions: Will he return for a second four-year term in February? Uncertainty over whom President Biden will name to lead the Fed next year hangs over the central bank’s looming policy decisions on what to do if the recent rise in inflation turns out to be more persistent than anticipated.”
October 27 – The Hill (Sylvan Lane): “The Federal Reserve is attempting to tamp down two significant challenges to its credibility as both its handling of inflation and internal ethics face growing scrutiny. The central bank is quickly moving to address a scandal involving stock trades made by its top officials. And price increases are running higher and longer than many Fed officials expected, boosting pressure on the bank to slam the brakes on the recovery from the COVID-19 pandemic and back down from a new, more tolerant approach to inflation. Both could have deep implications for the Fed as a whole, as well as for Fed Chairman Jerome Powell’s future at the institution.”
October 27 – Reuters (Howard Schneider): “Federal Reserve officials face a ticking clock in their ability to ignore high inflation and are now navigating between their own senses of patience and risk, and a U.S. economy stymied by tangled supply chains, slow hiring and strong consumer demand. The combination of supply bottlenecks and a surge in household incomes fueled by pandemic-related government aid pushed the personal consumption expenditures price index, a key measure of inflation, to a 30-year high on a year-on-year basis in August… ‘We seem at an inflection point and the question is whether some of the old problems are coming back to haunt us,’ said Peter Ireland, an economics professor at Boston College.”
October 25 – Bloomberg (Rich Miller): “Former Federal Reserve Chairman Alan Greenspan said he sees a sustained threat of markedly higher inflation. While some of the forces pushing up prices are likely to prove transitory, rising government debt and other underlying pressures could keep inflation elevated on a longer-term basis, he said. ‘The tendency toward inflation remains, unfortunately, well above the average of about 2% over the past two decades,’ he wrote…”
U.S. Bubble Watch:
October 22 – Associated Press (Martin Crutsinger): “The U.S. budget deficit totaled $2.77 trillion for 2021, the second highest on record but an improvement from the all-time high of $3.13 trillion reached in 2020… Before the deficit ballooned during two years of a global pandemic, the biggest deficit had been a shortfall of $1.4 trillion in 2009. At that time, the U.S. was spending heavily to lift the country out of a severe recession following the 2008 financial crisis. As a percentage of the overall economy, as measured by the gross domestic product, the 2021 deficit represents 12.4% of GDP, down from the 2020 deficit, which was 15% of GDP.”
October 27 – Reuters (Lucia Mutikani): “The U.S. trade deficit in goods surged in September as exports tumbled, suggesting trade probably weighed on economic growth again in the third quarter. The goods trade deficit increased 9.2% to $96.3 billion… Goods exports dropped 4.7%, while imports gained 0.5%.”
October 26 – Yahoo Finance (Dani Romero): “The great global supply chain crisis of 2021 — which has ensnared groceries, holiday shopping and everything in between — has bottlenecked West Coast ports, and drawn the involvement of the White House to address it. As the disruption reaches a boiling point and adds to rising price pressures, longshoremen, union representatives and truck drivers have pointed fingers over which party is best positioned to alleviate some of the strains… According to Goldman Sachs, over 30 million tons of cargo await delivery ahead of the Thanksgiving to Christmas rush. Essential workers are still scarce but U.S. consumers are still in a buying mood, meaning the congestion is not expected to wind down until the second half of 2022.”
October 28 – Wall Street Journal (Tim Higgins): “Apple Inc. and Amazon.com Inc. reported quarterly results that showed how supply-chain problems and tight labor markets are tripping up even some of the biggest business winners of the pandemic era. Apple… warned that supply-chain disruptions are hindering iPhone and other product manufacturing and would bring increased challenges during the important holiday-shopping quarter. Amazon posted lower-than-expected third-quarter sales as labor and supply-chain challenges pushed costs up $2 billion and have made it harder to meet demand. The company has had to reroute products and has seen inconsistent staffing in some areas”
October 28 – CNBC (Jeff Cox): “The U.S. economy grew at a 2% rate in the third quarter, its slowest gain of the pandemic-era recovery, as supply chain issues and a marked deceleration in consumer spending stunted the expansion… Gross domestic product… grew at a 2.0% annualized pace in the third quarter… Economists… had been looking for a 2.8% reading. That marked the slowest GDP gain since the 31.2% plunge in the second quarter of 2020…”
October 26 – Wall Street Journal (Xavier Fontdegloria): “Consumer confidence in the U.S. increased in October following three months of declines as concerns over the spread of the Covid-19 Delta variant faded amid falling case counts. The consumer confidence index increased to 113.8 in October from a revised 109.8 in September, according to… The Conference Board… The indicator came in above the 108.0 forecast from economists… Short-term inflation concerns rose to a 13-year high, but the impact on confidence was muted, Ms. Franco said.”
October 26 – CNBC (Diana Olick): “There are signs that price growth could be cooling off in the otherwise red-hot housing market. Prices rose 19.8% year over year in August, which was the same as the previous month, according to the S&P CoreLogic Case-Shiller Indices. That is the first time the annual gain hasn’t increased since early 2020. The 10-city composite annual increase was 18.6%, down from 19.2% in July. The 20-city composite rose 19.7% year over year, down from 20% in the previous month. Prices in all cities covered are at an all-time high… Phoenix led the way with a 33.3% year-over-year price increase, followed by San Diego with a 26.2% rise and Tampa with a 25.9% increase.”
October 26 – Reuters: “Sales of new U.S. single-family homes surged to a six-month high in September, but higher house price are making homeownership less affordable for some first-time buyers. New home sales jumped 14.0% to a seasonally adjusted annual rate of 800,000 units last month… August’s sales pace was revised down to 702,000 units from the previously reported 740,000 units… The median new house price accelerated 18.7% in September to $408,800 from a year ago. Sales continued to be concentrated in the $200,000-$749,000 price range. Sales in the under-$200,000 price bracket, the sought-after segment of the market, accounted for only 2% of transactions. About 74% of homes sold last month were either under construction or yet to be built.”
October 27 – CNBC (Diana Olick): “Mortgage rates have been on a tear this month, rising yet again last week to the highest level in eight months, according to the Mortgage Bankers Association… As a result, refinance demand fell 2% week to week… Volume was 26% lower than the same week one year ago. Mortgage applications to purchase a home increased 4% for the week but were 9% lower than the same week one year ago.”
October 25 – Reuters (Noel Randewich): “The surge in Tesla Inc’s stock market value beyond $1 trillion on Monday is a double bonanza for Chief Executive Elon Musk, the electric car maker’s largest shareholder. The stock rallied 12.7% on news that Tesla landed its biggest-ever order from rental car company Hertz. With Tesla’s stock at a record high close of $1,024.86, Musk’s 23% stake in the newly minted trillion-dollar company is now worth about $230 billion…”
October 26 – Wall Street Journal (Peter Grant): “Investors purchased a record amount of commercial real estate in the third quarter, defying warnings that the Covid-19 pandemic would erode these property values… Instead, purchases of apartment buildings, life-science labs and industrial properties, which serve as e-commerce distribution centers, rocketed commercial sales to more than $193 billion in the quarter. That is up 19% compared with the same three months in 2019… and the biggest quarter for commercial property sales ever, according to… Real Capital Analytics. Sales activity for the first nine months of this year totaled $462.1 billion, up 10% from the same nine-month period in 2019 and the highest ever for the first three quarters of any year…”
October 28 – Wall Street Journal (E.B. Solomont): “Fashion mogul Serge Azria has sold an oceanfront estate in Malibu, Calif., for $177 million. The deal sets a record in the state of California, and it is the second-highest priced home sold in the U.S., following billionaire Ken Griffin’s roughly $238 million purchase of a New York City penthouse in 2019. Previously, the highest-priced deal in California was set by Amazon founder Jeff Bezos, who purchased the Warner Estate from media mogul David Geffen for $165 million last year… Located in the Paradise Cove section of Malibu, the property spans about 7 acres… Mr. Azria and his wife, Florence Azria, bought it for $41 million in 2013…”
October 29 – Bloomberg: “China Oceanwide Holdings Co.’s real estate troubles are mounting in the U.S., with credit holders taking control of a stalled skyscraper development in San Francisco. Overseas credit holders of Oceanwide’s two offshore units have taken over their entire holdings in the project… The two notes, in dollars and worth a combined HK$2.6 billion ($334 million), have matured.”
Fixed-Income Bubble Watch:
October 25 – Financial Times (Joe Rennison): “A generation of new arrivals to the US junk bond market have propelled it to a record size, with debut issuers borrowing cash cheaply from investors eager for yield. A record 149 companies, including cryptocurrency exchange Coinbase and medical supplies manufacturer Medline, have joined the high-yield bond market this year… The companies have extended a trend set in motion by central bankers’ historic response to the onset of the coronavirus pandemic, when they lowered interest rates and began injecting liquidity into financial markets to ward off a more severe downturn… The deluge of issuance has increased the face value of outstanding debt in the high-yield bond market above $1.5tn for the first time… A total of 26 new corporate issuers came to market in September, a record equalled just once before…”
October 26 – Wall Street Journal (Ben Eisen): “U.S. banks are overrun with cash. So they are loading up on debt. The six largest U.S. lenders have issued some $314 billion of bonds so far this year, already the most for any year since 2008, according to Dealogic. Since banks reported their third-quarter financial results earlier this month, Goldman Sachs… Morgan Stanley and Bank of America Corp. have all come out with multibillion-dollar bond sales. In April, Bank of America and JPMorgan… completed the largest-ever bank debt sales.”
October 27 – Bloomberg (Danielle Moran): “Municipal bonds are headed for a rare three-month slide, joining a broad slump in the U.S. debt market, amid signs that the insatiable demand that’s buoyed tax-exempt securities this year may be waning.”
October 28 – Financial Times (Robin Harding): “When Chinese policymakers think about the economy, one of their main goals is to avoid what happened to Japan in 1990, when the excesses from years of rapid growth culminated in the collapse of a spectacular asset price bubble. Japanese officials who were active in that era tell tales of visits from their Chinese counterparts throughout the 2000s and 2010s, eager to learn the secrets of what went wrong and how they might avoid a similar fate. China itself has enjoyed an enormous housing boom in recent decades: prices per square meter have quadrupled or more, even as the construction of hundreds of millions of dwellings turned it into a nation of homeowners.”
October 25 – Bloomberg (Ye Xie): “In 2016, an unnamed ‘authoritative person’ gained international prominence by laying out the long-term economic thinking of China’s top leaders, saying in state media that the government should prioritize cutting leveraging instead of juicing up GDP growth. The person, widely believed to be President Xi’s right-hand man — China’s Vice Premier Liu He and his team – has stayed relatively quiet since then. But in a lengthy interview with Xinhua over the weekend, the ‘authoritative person’ resurfaced. Along with ‘authoritative’ government bodies, the mysterious person projected confidence in the economy, despite growing pessimism among economists. If there’s still any expectation of large-scale policy easing, this mysterious person made it clear that’s probably unlikely.”
October 29 – Bloomberg (Tania Chen): “China is pushing almost a trillion yuan ($156bn) of funds into the banking system in just two weeks, reinforcing a signal that it will use short-term liquidity to sustain growth rather than ease monetary policy. In a pattern seen also in September, the People’s Bank of China has been injecting huge amounts of cash through open-market operations to cope with month-end needs — this time, it’s for corporate tax payments and local debt issuances. The rush of short-term liquidity comes as policymakers in China seek to sustain economic growth without stoking rising inflation.”
October 26 – Bloomberg (Chester Yung): “China’s overnight borrowing costs declined as the central bank continued to add cash to a banking system strained by tax payments, local-government debt issuance and fading monetary easing hopes. The overnight interbank repo rate fell seven bps to 1.54%, the lowest since Sept. 29 and near a nine-month low. The People’s Bank of China injected a net 190 billion yuan ($30 billion) into the financial system via seven-day reverse repurchase agreements for a second straight day Tuesday, which was the biggest single-day addition since January.”
October 26 – Bloomberg: “China’s economy is showing signs of a further slowdown with car and housing sales dropping again this month even as exports continue their strong performance and the government seeks to allay concerns over growth. That’s the outlook from Bloomberg’s aggregate index of eight early indicators for October… Real-estate sales dropped again, as buyers hold back due to concerns about which companies will survive the current debt crisis facing China Evergrande Group and other developers. Car sales also fell in the first three weeks of the month, continuing the slump of the past five months.”
October 28 – Wall Street Journal (Frances Yoon): “Junk-bond issuance by China’s riskier companies has nearly ground to a halt, creating more challenges for the country’s real-estate developers that need to roll over more than $40 billion in dollar debt by the end of next year. Sales of new junk bonds in dollars by Chinese borrowers this month have fallen by about 90% from their five-year average to $352 million… With investors rattled by China Evergrande Group’s difficulties and a string of defaults by smaller property developers, Chinese junk bonds in dollars were yielding about 21.6% as of Wednesday…”
October 25 – Bloomberg (Alice Huang and Olivia Tam): “Chinese real estate firms long prospered by selling a lot of dollar-denominated debt. This year hasn’t been as kind: Their dollar bonds have lost about one-third of their value amid concerns about a liquidity crisis at one of the biggest: China Evergrande Group. Worries about possible spillover or contagion have extended to other distressed developers and rippled across markets… Developers had $207 billion in dollar-denominated bonds outstanding, accounting for about one-quarter of the total from China… The country’s biggest such borrower by amount outstanding is Evergrande at $19.2 billion. Most dollar debt sold by Chinese builders is considered high yield or junk rated, meaning it’s below investment grade.”
October 27 – Bloomberg: “China has urged companies to make payments on their offshore bonds, and asked China Evergrande Group’s billionaire founder Hui Ka Yan to tap his personal wealth to help solve the company’s deepening debt crisis… Hui — who has collected more than $7 billion in dividends from the company over the last 12 years — is facing pressure to dig into own resources to ease the credit crunch at the embattled developer. His associate also pledged a house in Hong Kong as collateral for a loan.”
October 28 – Bloomberg (Richard Frost): “Kaisa Group Holdings Ltd. shares plunged a record 18% in Hong Kong after two credit assessors downgraded the… developer and said it may struggle to refinance dollar debt. The company’s 6.5% bond due Dec. 7 fell 5.9 cents to 52.1 cents on the dollar, poised for a record low, amid a broad selloff in debt issued by Chinese developers. The firm is the latest to come under pressure as a spike in borrowing costs crushes property firms with the worst balance sheets.”
October 25 – Financial Times (William Langley and Thomas Hale): “Modern Land has become the latest Chinese developer to miss a payment on a dollar bond in a sign of continuing turmoil in the country’s property sector despite Evergrande, its most indebted group, narrowly avoiding a potential default last week… The company blamed the missed payment on ‘unexpected liquidity issues arising from the adverse impact of a number of factors including the macroeconomic environment, the real estate industry environment and the Covid-19 pandemic’.”
October 29 – Bloomberg (Ameya Karve): “China’s junk dollar bonds had their steepest two-month decline in a decade as stress builds in the battered real estate sector and defaults mount to a record. Average prices of the notes plunged more than 13 cents on the dollar in September-October, the worst two-month decline since the period ended September 2011…”
October 27 – Bloomberg (Kevin Kingsbury): “S&P says about one-third of China’s rated developers could see liquidity ‘acutely strained’ in a worst-case scenario of residential sales being 20% below the ratings firm’s base forecast. Current ‘contagion-tinged downturn is unusually intense,’ write analysts including Matthew Chow… Predicts sales will fall 10% next year versus 2021, and drop a further 5%-10% y/y in 2023…”
October 28 – Bloomberg: “Chinese banks have started to ease credit controls on homebuyers and developers in response to government instructions amid worries about an economic slowdown. Banks in some areas have accelerated issuing home loans and lowered mortgage rates, while the credit environment for property developers is also improving, the official Securities Times said… At a meeting last week…, the People’s Bank of China urged banks to ‘steadily carry out property lending business and maintain the stable and orderly delivery of real estate credit,’ according to a statement…”
October 27 – Bloomberg: “Vegetable prices have soared in China in recent weeks, costing more than meat in some cases, and creating another headache for consumers already hit by power shortages and strict virus curbs. Wholesale vegetable prices surged 28% in the four weeks through Oct. 22, and is now at the highest level since February… Heavy rainfall in major growing regions this year damaged crops and soaring coal prices has also made greenhouse farming more expensive. Cauliflower and broccoli costs about 50% more, while spinach surged 157% in the four-week period.”
October 24 – Bloomberg (Nasreen Seria): “China’s economy will probably expand 5.2% next year, down from a previous projection of 5.6%, as the government sticks to its long-term policy objectives, such as reducing property debt, Goldman Sachs… said. Weaker GDP growth and faster inflation in the third quarter were policy-driven and likely temporary, with Goldman expecting a sequential pickup in growth in the fourth quarter… On a year-on-year basis, growth is set to slow to 3.1% this quarter, they said.”
October 26 – Bloomberg: “The economic gap between China’s less-developed western region and the wealthier eastern parts of the nation widened in the third quarter as Beijing’s crackdown on property and local government debt weighed on growth. Fixed-asset investment in Guizhou, Qinghai, Shaanxi, Ningxia contracted in the first nine months of this year, contributing to weaker growth in those provinces than the national pace of 9.8% in the same period.”
October 26 – Bloomberg: “The city of Shanghai launched a trial to eliminate all so-called hidden government debt, becoming the second Chinese region to start a program to clean up off-balance sheet risk. The trial was in response to the central government’s strategy to prevent and resolve financial risks related to local government hidden debt, the Shanghai city government said… The announcement came two weeks after Guangdong province, the manufacturing powerhouse in southern China, announced a similar trial, suggesting local governments are getting more serious about tackling off-balance sheet debt.”
October 28 – Bloomberg: “China’s largest cross-border brokers plummeted in U.S. premarket trading after a central bank official questioned the legitimacy of their operations amid Beijing’s continuing crackdown on private enterprise. These online brokers are engaged in ‘illegal financial activities’ because they have no ‘driving licenses’ to operate in China, Sun Tianqi, a senior People’s Bank of China official wrote…”
October 29 – Bloomberg: “Investors in China are faced with the highest number of stocks falling on their first trading day in over nine years this week, shaking a long-held faith in fat gains on debuts as regulators step up reforms of initial public offerings.”
Central Banker Watch:
October 28 – Bloomberg (Carolynn Look): “The European Central Bank renewed its pledge to conduct emergency bond-buying at a ‘moderately’ slower pace, holding its nerve even as surging inflation prompts investors to advance unwelcome bets for interest-rate increases. Hours after Spanish data showed the biggest price gains in three decades, the Governing Council… maintained prior language heralding plans to reduce monthly purchases from the roughly 75 billion euros ($86.9 billion) deployed from March through September. They also promised to keep the 1.85 trillion-euro program, known as PEPP, running until March 2022 or later if needed.”
October 26 – Bloomberg (Shelly Hagan): “The Bank of Canada will continue pulling back its support for the economy at a policy decision this week, paving the way for the start of interest rate increases next year amid inflation worries. Governor Tiff Macklem is expected to reduce weekly government bond purchases by one half on Wednesday to C$1 billion ($809 million). That will mark the fourth time over the past 12 months the central bank has rolled back a program that has poured hundreds of billions into the financial system since the start of the Covid-19 pandemic.”
October 26 – Reuters (William Schomberg): “The British public’s expectations for inflation over the next year jumped to the highest since 2008 this month, bank Citi said…, something the Bank of England will note as it meets to decide whether to raise interest rates next week. Expectations for inflation over the next 12 months rose to 4.4% in October from 4.1% in September, Citi said, based on its monthly survey…”
Global Bubble Watch:
October 29 – Wall Street Journal (Stephanie Yang and Jiyoung Sohn): “Almost a year into a global chip shortage, the problems are increasing for many customers as delays get even longer and sales are lost. Manuel Schoenfeld placed an order in May for transmission chips for the utility-monitoring devices made by his… company PowerX. He was told the chips would arrive by summer, then fall, then winter and now doesn’t expect to get them until May 2022. ‘This is far from over,’ Mr. Schoenfeld said. The global semiconductor shortage is worsening, with wait times lengthening, buyers hoarding products and the potential end looking less likely to materialize by next year. Demand didn’t moderate as expected. Supply routes got clogged. Unpredictable production hiccups slammed factories already running at full capacity.”
October 25 – Financial Times (Darren Dodd): “‘Sand in the wheels of the economy is holding back the recovery’ was how today’s closely watched Ifo survey characterised a six-month low in German business confidence. Sentiment fell in every sector except for construction as supply bottlenecks hit manufacturing capacity and also dragged down confidence in retail… Jeremy Nixon, boss of Ocean Network Express, which carries more than 6% of global container freight, was the latest to voice the effect of the supply chain squeeze on international trade. Nixon warned that the crisis could last at least another year unless governments boosted investment in ports, railways, warehousing and road systems.”
October 26 – Bloomberg (Anthony Di Paola, Nicholas Comfort and Will Louch): “Blackstone Inc. co-founder Stephen Schwarzman said the world is facing energy shortages so severe they could cause social unrest. ‘We’re going to end up with a real shortage of energy,’ he said… ‘And when you have a shortage it’s just going to cost more and it’s probably going to cost a lot more. And when that happens you’re going to get very unhappy people around the world, in the emerging markets in particular.’ His comments were echoed by Larry Fink, who said there’s a high probability of oil soon reaching $100 a barrel…”
October 27 – Reuters (Marcela Ayres): “Brazil’s central bank… raised interest rates by 150 bps and signaled another such hike this year, stepping up the world’s most aggressive tightening cycle after the government moved to loosen its constitutional spending limit… A weaker currency, severe drought and rising fuel prices helped to push consumer prices 10.3% higher in the 12 months through September.”
October 29 – Bloomberg (Julia Leite, Vinícius Andrade and Maria Elena Vizcaino): “Brazil’s stocks, bonds and currency are posting some of the worst returns in the world this month amid deteriorating public finances, a worsening growth outlook and political turmoil. The Ibovespa stock benchmark is on track for a fourth straight month of losses, its worst run since 2014. The real has weakened 3.5%, the biggest drop in emerging markets after the Turkish lira, and local bonds have also sold off. Traders have plenty to worry about. The government’s push for extended welfare payments has put the spending cap rule, a safeguard of fiscal stability, under threat, prompting resignations in the government’s economic team. Soaring consumer prices and the prospect of a wider fiscal deficit led the central bank to raise interest rates at the fastest pace in nearly two decades this week…”
October 28 – Bloomberg (Maria Eloisa Capurro and Maria Elena Vizcaino): “The Brazilian real fell more than any other currency in the world after the central bank’s biggest interest-rate hike in nearly two decades proved to be too dovish for markets. The real weakened 1.3% to 5.6102 per dollar… as traders digested the bank’s decision to lift the Selic by 150 bps to 7.75%…”
October 26 – Reuters (Ana Mano): “Brazil’s IPCA-15 consumer price index rose 1.20% in the month to mid-October driven by higher fuel and electricity prices, government statistics agency IBGE said… The result for mid-October was the highest for the month since 1995…”
October 29 – Reuters (Dave Graham): “Mexico’s economy shrank 0.2% in the third quarter from the previous three-month period, the first quarterly decline since recovery from the pandemic began… Service sector activity in the country was roiled during the summer from a resurgence in the coronavirus pandemic, while global supply chain disruptions have weighed on a recovery in manufacturing, notably in key sectors like carmaking.”
October 24 – Financial Times (Ruchir Sharma): “From the start of the pandemic, many emerging nations watched the US and other large developed countries ‘go big’ on economic stimulus, and wished they could afford to follow. It turns out they were lucky if they couldn’t and wise if they chose not to. Emerging markets that stimulated most aggressively got no pay-off in a faster recovery, owing in part to the downsides of overindulging. The big spenders tended to suffer higher inflation, higher interest rates and currency depreciation, at least partly cancelling out the sugar high of stimulus. Scanning data on the top emerging and developed markets for a statistical link between the scale of their 2020 stimulus programmes and the strength of the ensuing recovery, I found none.”
October 29 – Bloomberg (Alexander Weber and James Hirai): “Euro-area inflation accelerated more than expected to breach 4% for only the second time ever, adding to the European Central Bank’s challenge in battling increasingly aggressive market bets for interest-rate hikes. Consumer prices rose 4.1% in October, compared with the median of economist estimates at 3.7%… A measure stripping out volatile components such as food and energy climbed to 2.1%, a rate not seen in nearly two decades.”
October 28 – Bloomberg (Carolynn Look): “Germany’s inflation surge intensified in October, driven by persistent increases in oil and gas and a global squeeze on supplies. Consumer prices were up 4.6% from a year earlier, more than economists expected. Energy was 18.6% more expensive, the country’s statistics office said…”
October 28 – Reuters (Michael Nienaber): “German consumers face a rise in prices for goods across the board as more and more companies in Europe’s largest economy pass on higher production costs, driven by widespread supply shortages and a spike in energy prices. While the development is helping firms to improve corporate margins after the coronavirus shock, consumers are feeling the pinch of higher prices, which could hurt household spending and ultimately domestic demand if wage growth is not keeping up.”
October 29 – Reuters (Balazs Koranyi and Philip Blenkinsop): “The euro zone economy continued to boom over the summer as activity rebounded after coronavirus lockdowns but inflation is also blowing past expectations, leaving the European Central Bank with a growing policy headache. Growth has soared as consumers return to stores and venues but many businesses have been unable to keep up with demand, putting further pressure on prices already being driven higher by the rising cost of commodities. The economy of the 19 countries sharing the euro expanded by a quicker-than-forecast 2.2% in the third quarter, its fastest pace in a year…”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 25 – Reuters (Emma Farge and Gerry Mey): “Greenhouse gas concentrations hit a record last year and the world is ‘way off track’ in capping rising temperatures, the United Nations said… in a stark illustration of the tasks facing UN climate talks in Scotland. A report by the U.N. World Meteorological Organization (WMO) showed carbon dioxide levels surged to 413.2 parts per million in 2020, rising more than the average rate over the last decade despite a temporary dip in emissions during COVID-19 lockdowns. WMO Secretary-General Petteri Taalas said the current rate of increase in heat-trapping gases would result in temperature rises ‘far in excess’ of the 2015 Paris Agreement target of 1.5 degrees Celsius above the pre-industrial average this century. ‘We are way off track,’ he said.”
October 29 – Associated Press (Seth Borenstein and Frank Jordans): “More than one world leader says humanity’s future, even survival, hangs in the balance when international officials meet in Scotland to try to accelerate efforts to curb climate change. Temperatures, tempers and hyperbole have all ratcheted up ahead of the U.N. summit. And the risk of failure looms large for all participants at the 26th U.N. Climate Change Conference, known as COP26, which begins Sunday and runs until Nov. 12. Six years ago, nearly 200 countries agreed to individual plans to fight global warming in the historic 2015 Paris climate agreement. Now leaders will converge in Glasgow for two weeks starting Sunday to take the next step dictated by that pact: Do more and do it faster.”
October 26 – CNBC (Jessica Dickler): “College enrollment was supposed to bounce back this fall. Instead, more students opted out. Nationwide, fewer students went back to school again this year, dragging undergraduate enrollment down another 3.2% from last year, according to… the National Student Clearinghouse Research Center… There were roughly 17.5 million students enrolled as of the last tally. Combined with last autumn’s declines, the number of undergraduate students in college is now down 6.5% compared to two years ago — the largest two-year enrollment drop in the last 50 years…”
October 27 – Wall Street Journal (Sha Hua and Phred Dvorak): “China, the world’s largest greenhouse-gas polluter, is heading to Glasgow climate talks next week with a bold agenda: For the first time, it promises to take major steps to wean itself off fossil fuels, committing to net-zero emissions before 2060. But in the coming decade, the country says, its carbon emissions will continue to rise, peaking sometime before 2030. China’s climate pledges are bumping up against realities on the ground… Earlier this year, Beijing pushed a range of measures to discourage the use of coal and control emissions. In late August, China’s top climate and energy official, Vice Premier Han Zheng, convened an online meeting of provincial leaders in Beijing, where he admonished them to ‘resolutely curb the blind development’ of high-emissions projects like coal plants. A month later, amid escalating coal shortages and power outages, Mr. Han told leaders of state-owned energy companies that although those curbs were still important, the priority was to get coal-power generators cranking again.”
October 24 – Bloomberg: “A weather phenomenon that typically delivers harsher winters is on the way and expected to add to Asia’s energy crisis. The La Nina pattern, which forms when equatorial trade winds strengthen to bring colder, deep water up from the bottom of the sea, has emerged in the Pacific. That typically spells below-normal temperatures in the northern hemisphere and has prompted regional weather agencies to issue warnings about a frigid winter.”
Leveraged Speculation Watch:
October 27 – Bloomberg (Nishant Kumar): “Billionaire Chris Rokos’s hedge fund is heading for its worst year of losses ever. His macro money pool, which had $14.5 billion in assets at the start of the year, declined by about 11% this month…The hit extends losses for the year to 20%… Rokos, one of the most famous macro traders in the world, has hit a rough patch after a record year for his hedge fund in 2020 when he made 44%. By comparison, his macro-trading peers were up 6.3% through September.”
October 26 – Bloomberg (Edward Bolingbroke): “Hedge funds are piling back into a trade involving U.S. Treasury futures as surging expectations for Federal Reserve rate increases create dislocations in the market, particularly for two-year notes. The Treasury basis trade involves pairing a position in futures with an opposite position in the underlying note or bond, and futures positioning data from the Commodity Futures Trading Commission suggest it’s having a moment. The trade makes sense because the increasing threat of Fed rate hikes last week caused a surge in two-year yields that disrupted the cash-futures relationship.”
October 26 – Wall Street Journal (Joyu Wang and Alastair Gale): “The concern that China might try to seize Taiwan is preoccupying American military planners and administration officials. Few of them think Taiwan’s military could hold the line. Soldiers, strategists and government officials in Taiwan and the U.S. say the island’s military is riven with internal problems, many of which have built up over years of calm and economic prosperity and now are eating away at Taiwan’s ability to deter China. Among the most pressing concerns are poor preparation and low morale among the roughly 80,000 Taiwanese who are conscripted each year and the nearly 2.2 million reservists.”
October 27 – Bloomberg (Peter Martin): “The U.S.’s top uniformed military officer called China’s suspected test of a hypersonic weapons system a ‘very concerning’ development in the escalating competition between Washington and Beijing. ‘What we saw was a very significant event of a test of a hypersonic weapon system. And it is very concerning,’ General Mark Milley, chairman of the Joint Chiefs of Staff, said… ‘I don’t know if it’s quite a Sputnik moment, but I think it’s very close to that. It has all of our attention.’”
October 29 – Reuters (Yimou Lee): “The top U.S. representative in Taiwan, Sandra Oudkirk, said… the United States is committed to helping Taiwan defend itself amid heightened tensions between Taipei and Beijing. Speaking to reporters…, she described U.S. relations with Taiwan as ‘rock-solid’. ‘The United States has a commitment to help Taiwan provide for its self-defence,’ said Oudkirk, who heads the American Institute in Taiwan, the de facto U.S. embassy… Her remarks come as tension between Taiwan and China, which has not ruled out taking the democratically ruled island by force, has escalated in recent weeks.”
October 26 – Bloomberg: “China condemned the U.S.’s latest overture toward Taiwan, warning that ties between the two countries faced ‘huge risks’ just weeks after Presidents Joe Biden and Xi Jinping agreed to hold a video summit. U.S. Secretary of State Antony Blinken’s call for greater participation by Taiwan in UN organizations violated the ‘one China’ understanding between Beijing and Washington, Foreign Ministry spokesman Zhao Lijian told a regular news briefing…. ‘If the U.S. continues to play the Taiwan card, it will surely bring game-changing and huge risks to China-U.S. relations,’ Zhao said. Earlier, the Taiwan Affairs Office in Beijing had urged Taipei to ‘abandon the illusion of relying on the U.S. for independence,’ saying the island had ‘no right’ to join the UN a half century after its government was booted out.”
October 27 – CNN (Will Ripley, Eric Cheung and Ben Westcott): “The leader of Taiwan, the island thrust into the center of rising tensions between the United States and China, said the threat from Beijing is growing ‘every day,’ as for the first time she confirmed the presence of American troops on Taiwanese soil… President Tsai Ing-wen said Taiwan… was a ‘beacon’ of democracy that needed to be defended to uphold faith worldwide in democratic values. ‘Here is this island of 23 million people trying hard every day to protect ourselves and protect our democracy and making sure that our people have the kind of freedom they deserve,’ she said. ‘If we fail, then that means people that believe in these values would doubt whether these are values that they (should) be fighting for.’”
October 29 – Reuters (Sarah Wu): “Taiwan Foreign Minister Joseph Wu urged ‘freedom-loving countries’ on Friday to work together against China, during a rare trip to Europe that is taking place amid heightened tensions between Taipei and Beijing.”
October 27 – Reuters (Ain Bandial, Seri Begawan and Tom Allard): “President Joe Biden told Southeast Asian nations… the United States would stand with them in defending freedom of the seas and democracy and called China’s actions towards Taiwan ‘coercive’ and a threat to peace and stability. Speaking at a virtual East Asia Summit attended by Chinese Premier Li Keqiang, Biden said Washington would start talks with partners in the Indo-Pacific about developing a regional economic framework… Southeast Asia has become a strategic battleground between the United States and China, which controls most of the South China Sea, and Beijing has turned up military and political pressure on fiercely democratic Taiwan, a self-ruled island Beijing considers its own. Biden reiterated that the United States had a ‘rock-solid’ commitment to Taiwan. ‘We are deeply concerned by China’s coercive … actions,’ Biden said, charging that they ‘threaten regional peace and stability.’”
October 27 – Bloomberg (Dina Khrennikova, Ilya Arkhipov and Elena Mazneva): “President Vladimir Putin ordered Gazprom PJSC to start refilling its European gas-storage facilities next month, sending prices lower as long-awaited additional Russian supplies could soon be on the way… The move will ‘create a more favorable situation on the European energy market,’ the Russian president said… Gazprom has so far pumped very small amounts of gas into its European storage facilities and the order could help boost supplies in the continent.”