September 15, 2023: Memory Lane

September 15, 2023: Memory Lane
Doug Noland Posted on September 16, 2023

September 14 – Financial Times (Martin Arnold and Mary McDougall): “The European Central Bank has raised interest rates to an all-time high in a bid to cool consumer prices… The ECB’s knife-edge decision to lift its deposit rate for the 10th consecutive time, by 25 bps to 4%, came as officials cut their growth forecasts for the eurozone economy. The euro fell to a three-month low against the dollar… The ECB hinted that eurozone borrowing costs had peaked. It said that Thursday’s move meant ‘interest rates have reached levels that, maintained for a sufficiently long duration will make a substantial contribution to the timely return of inflation at the [2%] target.’”

Post meeting, markets see a 34% probability of one additional ECB rate hike – 21% for the October 26th meeting and 13% for the meeting on December 14th. This compares to pre-meeting 18% for October and 23% for December.

Markets dismiss Christine Lagarde’s “we can’t say that now – that we are at peak,” but are all ears for dovish commentary. ECB Vice President Luis de Guindos: “We believe that with the latest increase in the level of interest rates, if kept there for some time, may be enough for inflation to converge to the 2% target.” Estonian central bank Governor Madis Muller: “To the best of our knowledge, no further interest-rate hikes are expected in the coming months.”

The hawks pushed back in a Friday FT article: “‘I don’t agree that we are definitely done,’ said one of the [hawkish] policymakers. ‘We would need a very negative surprise [on inflation] to hike again in October, but we might in December.’ Another one said a quarter-point rise in December was ‘still possible — I’m not ruling it out’.”

With the ECB downgrading economic forecasts and generally adopting a more dovish posture, bond market reaction must be concerning. Italian 10-year yields jumped 11 bps this week to 4.46%, closing Friday at the highest yield since (pre-SVB) March 7th. Greek yields rose 12 bps to a two-month high 4.07%. Spanish 10-year yields rose 10 bps, closing the week less than two bps from a near decade-high.

Economies throughout Europe have weakened meaningfully of late. That bond yields continue their rise supports the New Paradigm thesis. Slowing economy notwithstanding, Eurozone CPI (y-o-y) has been sticky, with August’s 5.3% rate unchanged m-o-m.

Headline U.S. CPI rose 0.6% in August, the strongest one-month gain since June 2022. At 3.7%, y-o-y inflation was the highest since May. “Core” inflation rose a stronger-than-expected 0.3% for the month (strongest since May), with y-o-y “core” at 4.3%. August inflation data offered something for doves and hawks alike. Most analysts focus on what they view as encouraging underlying trends. I see “sticky.” “Auto Insurance Year-Over-Year Surge Highest Since 1976.” “UAW Workers Launch Unprecedented Strike Against All Big Three Automakers.” “Gasoline Prices Soar to US Seasonal Record on Crude’s Rally.”

September 15 – Reuters (Joseph White and David Shepardson): “The United Auto Workers union launched simultaneous strikes at three factories owned by General Motors, Ford Motor and Chrysler parent Stellantis NV on Friday, kicking off the most ambitious U.S. industrial labor action in decades. The walkouts at the Detroit Three will halt production of the Ford Bronco, Jeep Wrangler and Chevrolet Colorado pickup truck, along with other popular models, though the action was smaller than some expected. ‘For the first time in our history we will strike all three of the Big Three,’ UAW President Shawn Fain said, adding that the union will hold off more costly company-wide strikes for now, but all options are open if new contracts are not agreed.”

The WSJ went with, “China May Dodge Deflation, After All.” Reuters: “China’s Deflation Pressures Ease…” And Bloomberg: “China’s Consumer Prices Creep Out of Deflation in August.”

At 0.1% y-o-y, China’s consumer inflation data paint a picture of phenomenal price stability. August Credit data not so much. The first rule of sound inflation analysis is to diligently study underlying Credit data.

Aggregate Financing (China’s metric of system Credit) expanded a stronger-than-expected $428 billion during August, rising from July’s dismal (first month of the quarter) $73 billion. Growth was also 26% above August 2022. At $3.457 TN, year-to-date Aggregate Financing growth was 3.8% ahead of comparable 2022 and 15.2% higher than 2021 – while rising $4.519 TN, or 9.6%, over the past year to a record $50.56 TN.

Stronger-than-expected bank lending bolstered Credit growth. Bank Loans gained $186 billion, up from July’s $48 billion and the year ago $172 billion. This pushed y-t-d growth to $2.510 TN, 17.3% ahead of comparable 2022. Bank Loans expanded 11.5% over the past year, 23.7% over two years, 38.7% over three, and 76.1% over five years.

Consumer (chiefly mortgages) Loans expanded $54 billion, a reversal from July’s $28 billion contraction, but below August 2022’s $63 billion. Consumer Loans expanded 6.6% y-o-y, the weakest growth in data back to 2009. Still, Consumer Loans grew 30% over three years and 73% over five.

There’s some action in business lending. Corporate Loans expanded $130 billion in August, with y-t-d lending of $1.929 TN running 11.6% ahead of comparable 2022. Corporate Loans were up $2.540 TN, or 13.9%, over the past year, with two-year growth of 28.5%, three-year 43.1%, and five-year growth of 78.4%.

Government Bonds increased $160 billion (versus July’s $56bn and last August’s $41bn), with y-t-d growth of $680 billion. Government Bonds expanded $923 billion, or 11.5%, over the past year, with two-year growth of 31.2%, three-year 49.9%, and five-year 77.9%.

The M2 monetary aggregate expanded $209 billion last month, bouncing back strongly from July’s $261 billion contraction. At $2.812 TN, y-t-d M2 growth has been running 3.4% ahead of comparable 2022. M2 was up $3.762 TN, or 10.6%, over the past year to a record $39.359 TN. M2 inflated 24.1% over the past two years, 34.3% over three, and 60.4% over five years.

It’s also worth noting that China’s Bank Assets expanded $1.234 TN during Q2 (to $55.727 TN), putting first-half growth at $3.685 TN, or 14.2% annualized. Bank Assets expanded $5.291 TN, or 10.5%, over the past year, with two-year growth of 20.9%, three of 31.3%, five of 56.1%, and 10-year growth of 181.6%.

China today offers a rather weird case of “deflation.” It’s clearly not Credit deflation, with Bank Assets and system Credit still expanding at double-digit rates. But system stability is certainly at risk from apartment Bubble deflation.

For the most part, there were positive headlines out of China this week. More aggressive stimulus is supposedly beginning to pay dividends. “China August Industrial Output, Retail Sales Growth Beat Expectations.” “China’s Economy Shows Signs of Stabilizing…” “Recovery Set to Gain Further Momentum.” “Economic Recovery Reaches Turning Point.” Beyond the headlines, stronger Credit and M2 data support the recovery thesis.

Beijing controls the necessary levers to achieve its 5% 2023 GDP growth target. The central government will borrow and spend, the PBOC will print, and, most importantly, its massive state-directed banking system will lend Trillions. And stimulus has been ramped up over recent weeks. This week’s bump in industrial production and retail sales should come as no surprise.

But the jury is out on two elemental determinants of a sustainable recovery: housing and China’s currency. In both cases, Beijing is expending tremendous resources with ominously meager results.

Over the years, markets have become conditioned to dismiss China risks. After all, the central government controls the strings to a big, thick purse. A $3.16 TN international reserve position (down from 2014 peak $4.0 TN) provides Beijing enormous firepower to bolster its currency and thwart the type of “hot money” exodus and currency crisis that have been fixtures of EM Bubble collapses for three decades. Tight control over the central bank ensures massive fiscal stimulus as required. And, of course, a colossal state-directed banking system creates the potential for unprecedented ($10 TN?) targeted lending.

But Beijing is not today in control of China’s deflating apartment Bubble.

September 11 – Reuters (Liangping Gao, Ziyi Tang and Marius Zaharia): “New home sales in Beijing jumped last week, keeping property showrooms open late into the night to meet demand, in a sign government efforts to revive the sector are yielding some results in the Chinese capital if not elsewhere in the country. A survey by real estate research firm China Index Academy showed on Monday new homes transactions in Beijing rose 16.9% by area sold in the week of Sept. 4-10 from the previous week even as they fell 20% on average across the country.”

The above article ran under the positive headline, “China’s Easing of Property Market Curbs Gives Beijing Home Sales a Boost.” It included a bleak zinger: “Another report, by Haitong Securities, showed sales by area in China’s four largest cities were still down 45% in the first week of September from the same period last year.”

“Still down 45% in the first week of September” compared to weak year ago sales – despite lower mortgage rates and down payment requirements, along with a laundry list of stimulus measures? And the major housing markets are apparently holding up much better than lower-tier cities. At this point, it appears confidence and speculative zeal have been irreparably damaged. I would now expect accelerating apartment price deflation to spur millions of unoccupied units to the market, raising the specter of panic selling. With unsold apartment inventory surging, investment demand is disappearing. This Bubble collapse has all the makings of a debacle.

It was a big week. The U.S. CPI report and an ECB rate increase, along with a $4 TN quarterly option expiration. But the most market-impacting global development garnered little attention outside currency circles.

“We will not hesitate on taking actions when necessary to firmly correct the one-sided and pro-cyclical market moves, to resolutely address the actions which disturb market order, and to unswervingly avoid the overshooting risks in the exchange rate. Financial regulators have the ability, confidence and conditions to keep the yuan’s exchange rate basically stable.”

Bloomberg ran two headlines: “PBOC: Says Resolutely Put an End to Speculation in FX Market” and “PBOC: Resolutely Prevent ‘Over-adjustment’ Risk in FX Market.”

My take on Monday’s People’s Bank of China statement: For starters, it confirmed the seriousness of the previous week’s heightened currency market instability. Markets interpreted the PBOC’s strong language as Beijing establishing a currency red line that it was prepared to vigorously defend. Not coincidently, Bank of Japan Governor Kazuo Ueda over the weekend was quoted as saying the BOJ will likely have enough information by year-end to judge if wages will continue to rise – code words for signaling a possible move to policy normalization in a few months.

The Japanese yen (and offshore renminbi) rallied 0.85% versus the dollar Monday, with China’s renminbi gaining 0.75%. These moves triggered a general dollar reversal and an immediate easing of global “risk off” dynamics.

For the week, the Mexican peso rallied 3.0%, the Colombian peso 2.5%, the Brazilian real 2.5%, the Chilean peso 1.3%, and the Russian ruble 1.3%. Major stock indices gained 3% in Brazil, 2.8% in Japan, 2.3% in Chile, 2.1% in Taiwan and South Korea, and 1.9% in India. Stocks were up 2.3% in Italy, 2.0% in Spain, 1.9% in France, 1.7% in Australia, and 1.0% in Germany. Global risk indicators, including Credit spreads and CDS prices, leaned risk embracement. The backdrop, however, did no favors for vulnerable bond markets.

While markets assume Beijing (and to a lesser extent Tokyo) will for now guarantee that a disorderly currency doesn’t spark global de-risking/deleveraging, that it was even forced to issue such a statement signals an important new phase in Crisis Dynamics. Beijing is now throwing everything at currency support (see “Currency Watch”). It’s burning through international reserves, while the Chinese banking system is surely accumulating huge dollar short positions in cash and derivatives markets. This ensures that if panicky markets cross Beijing’s red line and things turn disorderly, instability could quickly spiral out of control.

How fitting that Friday marked the 15-year anniversary of something that simply couldn’t ever happen actually happening: The spectacular Lehman Brothers collapse. And while we’re traversing down Memory Lane, the 25-year anniversary of the Long-Term Capital Management implosion is about a week away. That time of the year.

For the Week:

The S&P500 slipped 0.2% (up 15.9% y-t-d), and the Dow added 0.1% (up 4.4%). The Utilities jumped 2.8% (down 9.8%). The Banks rallied 2.4% (down 18.4%), and the Broker/Dealers gained 1.3% (up 13.0%). The Transports increased 0.9% (up 14.5%). The S&P 400 Midcaps dipped 0.3% (up 5.6%), and the small cap Russell 2000 slipped 0.2% (up 4.9%). The Nasdaq100 declined 0.5% (up 39.0%). The Semiconductors slumped 2.5% (up 37.3%). The Biotechs declined 0.3% (down 1.9%). With bullion up $5, the HUI gold equities index rallied 4.7% (down 0.2%).

Three-month Treasury bill rates ended the week at 5.295%. Two-year government yields increased four bps this week to 5.03% (up 60bps y-t-d). Five-year T-note yields rose six bps to 4.46% (up 46bps). Ten-year Treasury yields gained seven bps to 4.33% (up 46bps). Long bond yields rose eight bps to 4.42% (up 45bps). Benchmark Fannie Mae MBS yields gained six bps to 6.05% (up 67bps).

Greek 10-year yields jumped 12 bps to 4.07% (down 49bps y-t-d). Italian yields rose 11 bps to 4.46% (down 24bps). Spain’s 10-year yields gained 10 bps to 3.76% (up 23bps). German bund yields increased six bps to 2.68% (up 23bps). French yields rose eight bps to 3.22% (up 24bps). The French to German 10-year bond spread widened two to 54 bps. U.K. 10-year gilt yields fell seven bps to 4.36% (up 69bps). U.K.’s FTSE equities index surged 3.1% (up 3.5% y-t-d).

Japan’s Nikkei Equities Index rallied 2.8% (up 28.5% y-t-d). Japanese 10-year “JGB” yields jumped six bps to 0.715% (up 29bps y-t-d). France’s CAC40 gained 1.9% (up 14.0%). The German DAX equities index added 1.0% (up 14.1%). Spain’s IBEX 35 equities index jumped 2.0% (up 16.0%). Italy’s FTSE MIB index recovered 2.3% (up 21.9%). EM equities were mixed. Brazil’s Bovespa index rallied 3.0% (up 8.2%), while Mexico’s Bolsa index fell 2.2% (up 6.0%). South Korea’s Kospi index jumped 2.1% (up 16.3%). India’s Sensex equities index rose 1.9% (up 11.5%). China’s Shanghai Exchange Index was little changed (up 0.9%). Turkey’s Borsa Istanbul National 100 index dropped 4.4% (up 44.5%). Russia’s MICEX equities index increased 0.3% (up 46.3%).

Investment-grade bond funds posted inflows of $223 million, and junk bond funds reported positive flows of $81 million (from Lipper).

Federal Reserve Credit slipped $3.1bn last week to $8.062 TN. Fed Credit was down $839bn from the June 22nd, 2022, peak. Over the past 209 weeks, Fed Credit expanded $4.336 TN, or 116%. Fed Credit inflated $5.251 TN, or 187%, over the past 566 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $4.1bn last week to $3.435 TN. “Custody holdings” were up $58bn, or 1.7%, y-o-y.

Total money market fund assets gained $17.7bn to a record $5.643 TN, with a 27-week gain of $749bn (29% annualized). Total money funds were up $1.091 TN, or 24.0%, y-o-y.

Total Commercial Paper added $1.0bn to $1.161 TN. CP was down $47bn, or 3.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 10 bps to 7.24% (up 122bps y-o-y). Fifteen-year rates gained nine bps to 6.75% (up 154bps) – the high since 2002. Five-year hybrid ARM rates rose nine bps to 7.01% (up 208bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 14 bps to 7.53% (up 135bps).

Currency Watch:

September 11 – Bloomberg (Iris Ouyang and Tania Chen): “China escalated its defense of the yuan by delivering a strong verbal warning to speculators and forceful guidance to investors with its daily reference rate… The nation’s financial regulators will take action to correct one-sided moves in the market whenever it’s needed and they are confident in keeping the yuan basically stable, the People’s Bank of China said in a statement on Monday. The PBOC warning came a few hours after policymakers set a daily fixing that was stronger-than-expected by a record margin and state-owned lenders were also seen actively selling dollars…”

September 13 – Bloomberg: “Currency traders trying to bet against the yuan are facing growing headwinds from China’s efforts to ramp up the expense of doing so in Hong Kong. The costs for banks to borrow the yuan from each other in Hong Kong surged across maturities this week, with the rate on three-month contracts extending a five-year high on Wednesday. That means it’s getting more expensive for traders to borrow the Chinese currency in the overseas market and sell it against the dollar. Beijing has ramped up its fight against yuan bears after its slump toward a record low offshore, with the People’s Bank of China delivering a strong verbal warning against speculation on Monday amid several other measures.”

September 14 – Reuters: “China’s central bank has asked some of the country’s biggest lenders to refrain from immediately squaring their foreign exchange positions in the market, and to run open positions for a while in order to alleviate downside pressure on the yuan, two sources… said. As part of this informal ‘window guidance’, banks have been asked not to square their positions in the inter-bank foreign exchange markets after any U.S. dollar sales to clients, until their spot foreign exchange position hits a certain level, the sources said.”

September 14 – Bloomberg: “China told some brokerage firms to reduce proprietary trading in the foreign-exchange market… The People’s Bank of China asked several brokers earlier this week to reduce currency proprietary desk trading, without giving specific guidance on the limit of trading volume, the people said, declining to be named discussing private matters. Some of these firms have almost halted their own trading since then, the people said.”

September 11 – Reuters: “China’s central bank is tightening its scrutiny of bulk dollar purchases by domestic firms, three sources with direct knowledge of the matter said…, at a time when the Chinese currency faces mounting depreciation pressure. Companies that need to purchase $50 million or more will now need approval from the People’s Bank of China (PBOC), which convened a meeting with some commercial banks over the weekend on the matter, the sources said.”

For the week, the U.S. Dollar Index increased 0.2% to 105.32 (up 1.8% y-t-d). For the week on the upside, the Mexican peso increased 3.0%, the Brazilian real 2.5%, the Australian dollar 0.9%, the Canadian dollar 0.9%, the South African rand 0.6%, the South Korean won 0.5%, the New Zealand dollar 0.3%, and the Singapore dollar 0.2%. On the downside, the Norwegian krone declined 0.9%, the British pound 0.7%, the Swedish krona 0.6%, the Swiss franc 0.4%, and the euro 0.4%. The Chinese (onshore) renminbi gained 0.94% versus the dollar (down 5.18%).

Commodities Watch:

September 14 – Bloomberg (Eddie Spence): “Gold in China is trading at a record premium to international prices, a sign of Beijing’s escalating battle to defend its currency. Bullion on the Shanghai Gold Exchange traded at a premium of more than $120 an ounce on Thursday… That’s the highest since the exchange was founded over two decades ago, as a weak yuan drove up prices in recent weeks.”

September 11 – Bloomberg (Sybilla Gross, Marika Katanuma and Eddie Spence): “As weakness in the yen looks set to continue into next year, prospects for gold priced in the Japanese currency have rarely looked so good. Japanese investors with exposure to yen—denominated bullion have earned themselves healthy returns so far this year, with domestic prices for the precious metal now hovering around a record high of 10,000 yen per gram — up around 18% since January. The gains are mainly being fueled by the collapse in the yen…”

September 12 – Bloomberg (Grant Smith): “Global oil markets face a supply shortfall of more than 3 million barrels a day next quarter — potentially the biggest deficit in more than a decade — as Saudi Arabia extends its production cuts. The latest data published by OPEC show why the kingdom’s supply squeeze, amid a period of record demand, has sent oil prices surging beyond $90 a barrel in London. Riyadh announced last week it will extend an extra 1 million-barrel-a-day output reduction until the end of the year, even though markets are already tightening. World oil inventories, having depleted sharply this quarter, are set for an even steeper drop…”

September 13 – Bloomberg (Grant Smith): “Oil supply cuts by Saudi Arabia and Russia will create a ‘significant supply shortfall’ and threaten a renewed surge in price volatility, the International Energy Agency warned. Global oil markets face a deficit of 1.2 million barrels a day during the second half of 2023 following last week’s announcements by the OPEC+ leaders that they’ll extend cutbacks to the end of the year… It’s smaller than projected last month, as a result of historical changes to demand estimates, but still poses risks for consumers. Even if the two producers were to relax their curbs in early 2024, oil inventories will be severely depleted, leaving prices vulnerable to shocks, the IEA said.”

September 13 – Wall Street Journal (Grep Ip): “From OPEC’s oil embargo on the U.S. in the 1970s to Russia’s cutoff of gas to Western Europe last year, unsavory regimes have weaponized their control of oil and gas to pursue strategic goals. The transition to green energy has the potential to neuter the oil and gas weapon for good. Yet we might simply be swapping one form of commodity dependence and its geopolitical baggage for another. Wind, sun and hydrogen are free. But the equipment that transforms them into energy, stores it in batteries and transmits it needs vast quantities of minerals whose supply is more concentrated than that of oil and gas. Democratic Republic of Congo has 43% of the world’s cobalt deposits, Argentina 34% of lithium, Chile 30% of copper and Indonesia 19% of nickel, according to data from S&P Global.”

The Bloomberg Commodities Index rallied 1.3% (down 4.7% y-t-d). Spot Gold increased 0.3% to $1,924 (up 5.5%). Silver gained 0.5% to $23.04 (down 3.8%). WTI crude gained $3.26, or 3.7%, to $90.77 (up 13%). Gasoline rose 2.0% (up 10%), and Natural Gas gained 1.5% to $2.64 (down 41%). Copper rallied 2.3% (unchanged). Wheat recovered 6.5% (down 24%), and Corn gained 1.7% (down 30%). Bitcoin jumped $960, or 3.7%, to $26,830 (up 61.8%).

Global Bank Crisis Watch:

September 12 – Wall Street Journal (Gina Heeb): “At midyear, Zions Bancorp reported holding $8.5 billion in brokered deposits, an obscure but costly banking industry product that is drawing attention from regulators. At this time last year, the… bank had practically none. Many industry players view brokered deposits as a double-edged sword. They can be a quick and easy way for a bank to shore up its balance sheet. The deposits are typically much more expensive because banks have to pay higher interest rates to lure in those customers, along with other fees. Regulators and bankers say they are also a type of ‘hot’ money that is prone to disappear when a bank hits a rough patch… U.S. banks collectively held more than $1.2 trillion in brokered deposits in the second quarter… The total marked an 86% increase from a year earlier.”

UK Watch:

September 13 – Reuters (Andy Bruce and David Milliken): “Britain’s economy contracted in July at an unexpectedly sharp rate after strikes in hospitals and schools as well as unusually rainy weather weighed on output… The Office for National Statistics said gross domestic product shrank 0.5% in July from June, worse than all forecasts… that had pointed to a contraction in gross domestic product (GDP) of 0.2% from June. Output had risen 0.5% in June, and the economy grew 0.2% over the three months to the end of July.”

September 12 – Bloomberg (Philip Aldrick and Tom Rees): “Britain’s red-hot labor market showed signs of cooling as unemployment hit the highest level since 2021, the number in work declined and private-sector wage growth eased. The portion of people out of work and looking for a job rose to 4.3% in the three months through July, the highest since September 2021… The report also showed average earnings excluding bonuses rose 7.8% from a year earlier, maintaining the fastest pace since the series began in 2001.”

Market Instability Watch:

September 13 – Wall Street Journal (Eric Wallerstein): “The basis trade, an innocuous-looking practice at the center of some of Wall Street’s historic blowups, is back. A popular way for hedge funds to profit from bond trading while minimizing their exposure to swings in the market, the basis trade exploits the price difference between Treasurys and Treasury futures. The resurgence is attracting fresh scrutiny from Wall Street because previous meltdowns have rattled global markets. Hedge funds buy Treasurys, then bet against Treasury futures by selling contracts promising delivery of a bond on a specific date at a preset price. Instead of betting on the direction of bond markets, the trade seeks to take advantage of small differences in the securities’ prices. The trade works because large asset managers like pension funds often prefer buying Treasury futures that require less up-front cash than actual bonds… The differences are small, so hedge funds juice returns by borrowing from big banks in the overnight funding markets—often putting little, if any, cash up front. Leverage can reach extreme levels: Hedge funds had more than $550 billion of Treasury trades at the end of last year backed by just $10 billion of their own money, Fed research found.”

September 11 – Reuters (David Morgan): “The U.S. House of Representatives returns this week for an expected political brawl over spending cuts and impeachment that could paralyze the Republican-controlled chamber, as Congress struggles to avoid a government shutdown. The House and the Democratic-controlled Senate are due to be in session for about 12 days before funding expires on Sept. 30, leaving little time to agree on a package of 12 appropriations bills that can pass each chamber and win… Joe Biden’s signature. The main bone of contention among House Republicans is a demand by roughly three-dozen members of the hardline House Freedom Caucus to cut spending for fiscal 2024 to $1.47 trillion — about $120 billion less than Biden and Republican House Speaker Kevin McCarthy agreed in May.”

September 10 – Wall Street Journal (Siobhan Hughes): “After putting Kevin McCarthy through 15 ballots to win the House speakership, a group of hard-line Republicans has wrestled with how aggressively to respond to what they call his failure to keep the promises he made. The dissidents shut down the floor in June to protest a debt-ceiling deal with President Biden. In July, the faction blocked a floor vote on one of 12 annual spending bills, complaining that GOP leaders had relied on gimmicks to reach McCarthy’s commitment to cut spending to fiscal 2022 levels. Now, with government funding expiring on Oct. 1, hard-line Republicans returning to work this week are signaling they are ready to use tougher tactics to extract concessions. The expected face-off could lead to a government shutdown this fall, or even potentially trigger a vote on keeping McCarthy as speaker. ‘Everything’s on the table…to hold the speaker accountable for what he committed to do back in January,’ said Rep. Bob Good (R., Va.)… ‘The power of the purse in the House of Representatives is the only power we have,’ said Rep. Keith Self (R., Texas)… ‘So I think momentum is building—courage is contagious.’”

September 14 – Bloomberg (Ye Xie): “The US bond market hasn’t flashed recession warnings so consistently for so long in at least six decades. On Wall Street and in Washington, optimism may be building that the Federal Reserve is poised to steer the economy toward a soft landing. But for 212 straight trading days… the Treasury market has delivered what is widely understood as a starkly different message: The economy is veering toward a contraction, since 10-year yields have held below 3-month ones. Such an inversion telegraphed the last eight recessions.”

September 12 – Bloomberg (Alexandra Harris): “A seemingly insatiable demand for cash is rippling through markets. Everyone — from moms and pops to corporate treasurers and the mega asset managers — is piling in, won over by a unique opportunity: To lock in a 5% yield, and protect themselves from uncertainty over the US economy. With rates on cash and cash-like instruments at the highest in more than two decades and offering more income than benchmark US debt or stocks, assets in money-market funds have swelled to a record. But nowhere is that appetite for liquid, high-yielding instruments more apparent than in the market for T-bills where investors have snapped up more than $1 trillion of new notes in just the last three months.”

September 14 – Financial Times (Laura Noonan): “Private equity and private debt executives are too laid back about the mounting risks in their industry, the chair of the top organisation representing securities regulators warned…, as it published new research on vulnerabilities in the $13tn market. The International Organization of Securities Commissions (Iosco) said private finance — which includes private equity, venture capital and debt funds — could be tested in ways that ‘uncover hidden risks’ over the coming years. Higher interest rates, it said, threatened defaults that could put pressure on opaque valuations in a corner of the market subject to far less regulatory scrutiny than the banking sector. ‘There is a degree of nervousness out there but also, frankly speaking, a little too much confidence that all will be fine,’ Iosco chair Jean-Paul Servais told the Financial Times…”

September 14 – Bloomberg (Isabelle Lee and Lu Wang): “This year’s hottest options trade has found its way into the $7.4 trillion ETF arena for the first time, in the latest push by the financial industry to tap booming demand for stock investments with an income stream. Defiance ETFs is launching a fund… that sells ultra short-dated options on the Nasdaq 100 as part of its strategy. The product will be the first in the market to utilize so-called zero-day-to-expiration contracts, or 0DTE, as part of its design. The fund will write puts… to generate income… ‘Everybody is looking for that free money,’ said Ayako Yoshioka, senior portfolio manager at Wealth Enhancement Group. ‘It fuels speculation.’”

Bubble and Mania Watch:

September 12 – Reuters (Lewis Krauskopf): “After big gains for the U.S. stock market this year, equity valuations could come under pressure from high interest rates, based on historical relationships, JPMorgan strategists said… The S&P 500 is up 16% so far this year, but many investors are concerned the index has become too expensive, especially as Treasury yields have climbed. According to JPMorgan equity strategists, the current real rate implies a forward price-to-earnings (P/E) ratio of around 15 times to 16 times, based on data since 1982, versus its current ratio of about 20 times.”

September 13 – Reuters (Chiara Elisei): “The number of new corporate defaults globally reached 16 in August, the highest August monthly number since 2009, S&P said…, the latest sign that corporate stress is building. While defaults tend to slow down during the summer, last month’s number was well above the 8.6 average for August seen in previous years. This brought the global corporate default tally to 107, with most of the defaults coming from Europe and the United States… Default rates are expected to hit 4.5% in the United States by June 2024 from 3.5% in July 2023, and to increase to 3.75% in Europe by June 2024 from 3.1% in July 2023, the report added.”

September 11 – Bloomberg (Hugh Son): “The auction of three-year US Treasury notes on Monday drew the highest yield since 2007, reflecting the recent bond-market selloff driven by anticipation the Federal Reserve will keep rates elevated into next year. The $44 billion sale was awarded at 4.660%, the highest for an auction of that maturity since before the financial crisis.”

Ukraine War Watch:

September 12 – Reuters (Alexander Marrow): “Russian President Vladimir Putin… praised the central bank for keeping a lid on inflation with double-digit interest rates and said there were no insurmountable challenges when it came to limiting the rouble’s volatility. Putin used his speech at Russia’s Eastern Economic Forum in Vladivostok to project a mood of financial calm, just weeks after the rouble’s slump past 100 to the dollar led to Kremlin criticism of the bank’s monetary policy and, ultimately, a 350-basis-point emergency rate hike to 12%.”

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

September 13 – Financial Times (Song Jung-a and Anastasia Stognei): “North Korean leader Kim Jong Un has offered his country’s ‘full and unconditional support’ for Russia’s war in Ukraine, which he called a ‘sacred fight’ against imperialism and the west, in a meeting with President Vladimir Putin. The leaders met at the Vostochny Cosmodrome, Russia’s most advanced space rocket launch site located in the country’s far east, with their countries facing international isolation and sanctions over Moscow’s invasion of Ukraine and Pyongyang’s nuclear and ballistic weapons programmes. ‘Russia has risen to a sacred fight to protect its sovereignty and security… against the hegemonic forces,’ Kim told Putin… ‘We will always support the decisions of President Putin and the Russian leadership… and we will be together in the fight against imperialism.’”

September 12 – Reuters (Hyunsu Yim and Soo-Hyang Choi): “North Korean leader Kim Jong Un has said his visit to Russia shows the ‘strategic importance’ of the two countries’ ties, state news agency KCNA reported on Wednesday ahead of an expected summit with President Vladimir Putin… ‘Kim Jong Un said that his visit to the Russian Federation … is a clear manifestation of the stand of the WPK and the government of the DPRK prioritising the strategic importance of DPRK-Russia relations,’ the KCNA report said.”

September 13 – Reuters (Marcus Wong): “Whatever practical cooperation emerges from this week’s summit between Russian President Vladimir Putin and North Korean leader Kim Jong Un, their deepening relationship is aimed at sending their rivals a warning, analysts said. Calling each other ‘comrade’, the men toasted their friendship… after Putin showed Kim around Russia’s most modern space launch facility and they held talks alongside their defence ministers… ‘Putin and Kim would both gain from a transactional bargain but they would also gain geopolitically by giving off the impression that their nuclear-armed countries are cooperating militarily and sending a warning about potential consequences to America’s allies and like-minded partners that support Ukraine,’ said Duyeon Kim, of the Center for a New American Security.”

September 9 – Wall Street Journal (Austin Ramzy): “In the early years of his decade in power, Chinese leader Xi Jinping was one of the world’s most traveled leaders, regularly meeting with friends and rivals, visiting economic powers and developing nations alike as he sought to expand China’s global influence. Today, Xi is more known for his absences. He didn’t travel outside China for more than two years during the pandemic. This year he has only left the country twice, and this weekend he will skip the summit of the Group of 20 advanced and developing economies in New Delhi. Xi’s absence from the G-20 breaks with a longstanding pattern of participation by Chinese presidents. It coincides with growing Chinese skepticism of established multilateral institutions that Beijing has portrayed as too beholden to the U.S. and embrace of participation in groupings in which it holds greater sway, such as the Brics bloc of emerging nations.”

September 13 – Bloomberg: “The Chinese government’s position on Apple Inc. only grew more muddled Wednesday, with Beijing both pushing back on reports about iPhone restrictions but also raising concerns about security problems with the device. ‘China has not issued laws and regulations to ban the purchase of Apple or foreign brands’ phones,’ Foreign Ministry spokeswoman Mao Ning told a regular press briefing… It marked the government’s first comments on reports that authorities are reining in employees’ use of Apple products. Mao also said that the government attaches ‘great importance’ to security and that all companies operating in China need to abide by its laws and regulations. ‘We noticed that there have been many media reports about security incidents concerning Apple phones,’ Mao said.”

September 11 – New York Times (David E. Sanger and Steven Lee Myers): “Beijing’s influence campaign using artificial intelligence is a rapid change in tactics, researchers from Microsoft and other organizations say. When wildfires swept across Maui last month with destructive fury, China’s increasingly resourceful information warriors pounced. The disaster was not natural, they said in a flurry of false posts that spread across the internet, but was the result of a secret ‘weather weapon’ being tested by the United States. To bolster the plausibility, the posts carried photographs that appeared to have been generated by artificial intelligence programs, making them among the first to use these new tools to bolster the aura of authenticity of a disinformation campaign.”

De-globalization and Iron Curtain Watch:

September 13 – Bloomberg: “President Xi Jinping said China and Venezuela agreed to enter into a strategic partnership, a sign the two nations are improving ties after years of cooling. Xi earlier met President Nicolás Maduro… for their first sitdown since 2018. China and Venezuela also agreed to deepen cooperation in various fields, state broadcaster China Central Television reported… Maduro’s visit comes amid worsening strains between Washington and Beijing and as President Joe Biden also seeks to engage Venezuela… in talks to lift sanctions in exchange for allowing fair elections next year.”

September 14 – Xinhua: “Chinese Premier Li Qiang met with Venezuelan President NicolAis Maduro Moros, who is on a state visit to China, at the Great Hall of the People… The decision of the two heads of state to elevate the China-Venezuela relationship to an all-weather strategic partnership is an important milestone in the history of bilateral relations,’ Li told Maduro. In the face of an international landscape with changes and turbulence intertwined, China and Venezuela should work together to deepen strategic coordination, appropriately respond to risks and challenges, and better achieve win-win development, Li said.”

September 13 – Reuters (Joe Cash): “U.S. and European firms are shifting investment away from China to other developing markets, a report from Rhodium Group showed, with India receiving the vast majority of this redirected foreign capital, followed by Mexico, Vietnam and Malaysia. These companies are turning their backs on the world’s second-largest economy even as its share of global growth continues to increase, highlighting how concerns over China’s business environment, economic recovery and politics weigh heavy on the minds of foreign investors. The value of announced U.S. and European greenfield investment into India shot up by some $65 billion or 400% between 2021 and 2022…, while investment into China dropped to less than $20 billion last year, from a peak of $120 billion in 2018.”

September 13 – Bloomberg (Kevin Whitelaw, Albertina Torsoli and Alberto Nardelli): “The European Union is launching an investigation into Chinese subsidies for electric vehicles in a bid to ward off a flood of cheap imports, an escalation that opens the door to retaliation which would hit the bloc’s carmakers hard. Given the size of the market and its rapid growth, potential tariffs from the probe could have a far bigger impact than any previous anti-subsidy actions against Chinese imports. Taking an unusually aggressive stance, European Commission President Ursula von der Leyen said… the global market is overrun with cheap Chinese cars and that the bloc will fight back.”

Inflation Watch:

September 14 – CNBC (Jeff Cox): “Inflation at the wholesale level rose more than expected in August… The producer price index… increased a seasonally adjusted 0.7% in August and 1.6% on a year-over-year basis… That monthly gain was above the Dow Jones estimate for a 0.4% rise and was the biggest single-month increase since June 2022. However, excluding food and energy, the PPI climbed 0.2%, in line with the estimate. On a 12-month basis, core PPI increased 2.1%, its lowest annual level since January 2021.”

September 13 – Financial Times (Bob Henderson): “Fresh signs of stubbornly high inflation in corners of the world’s largest economy are fuelling fears that the retreat in consumer price increases many economists expected later this year will be bumpier than anticipated. Data… on Wednesday showed annual inflation, as measured by the consumer price index, accelerated to 3.7% in August, following a jump in petrol prices. While ‘core’ inflation, which strips out volatile items such as food and energy, in August registered its lowest annualised level in almost two years, it too recorded a larger than expected monthly gain of 0.3%.”

September 12 – Bloomberg (Alex Tanzi): “US inflation-adjusted household income fell in 2022 by the most in over a decade, highlighting the toll of a higher cost of living and the expiration of pandemic-era programs. The median income last year was $74,580 compared with $76,330 in 2021, according to the Census Bureau’s annual reports on income, poverty and health insurance coverage. The 2.3% drop in incomes — which was the most since 2010 — marked the third-straight annual decline… Last year, American families faced the largest annual increase in the cost-of-living adjustment in over four decades.”

September 14 – Wall Street Journal (Bob Henderson): “Rising diesel prices are inflating the bills Brett McMahon is getting from the companies that truck in the plywood, rebar and other supplies his concrete-contracting business needs. Asking his clients to renegotiate contracts to ease that pain, he said, has been ‘hit or miss.’ ‘In the private construction world, you’re not going to get a terribly sympathetic ear for that,’ said McMahon, chief executive of… Miller & Long… Diesel, jet and marine fuel prices are soaring, pressuring the construction companies, transportation businesses and farmers that are the biggest users.”

September 13 – Bloomberg (Chunzi Xu): “The US trucking industry appears poised for a rebound, which threatens to tighten a diesel market already contending with some of the lowest stockpiles in more than two decades. Domestic freight demand is set to rise because retailers have whittled down most of their excess inventory, according to a J.B. Hunt Transport Services Inc. executive. Construction projects fostered by President Joe Biden’s stimulus programs also are boosting use of diesel-powered truck fleets, said Craig Fuller, CEO of data and price-reporting company FreightWaves Inc. That means diesel consumption is set to rise at a time when domestic fuel stockpiles are languishing at the second-lowest seasonal levels since 2000.”

September 14 – CNBC (Robert Frank): “Manhattan renters may have reached their ‘affordability threshold’ in August, as median rents remained at a record high… The median rent in Manhattan in August was $4,370 a month, unchanged from the record high in July, according to… Douglas Elliman and the appraisal and research firm Miller Samuel. Average rents also held their record, at $5,552 a month.”

Federal Reserve Watch:

September 13 – Reuters (Davide Barbuscia): “Researchers at the Federal Reserve have issued warnings in recent weeks about possible disruptions in U.S. Treasuries due to the return of a popular hedge fund trading strategy that exacerbated a crash in the world’s biggest bond market in 2020. Hedge funds’ short positions in some Treasuries futures – contracts for the purchase and sale of bonds for future delivery – have recently hit record highs as part of so-called basis trades, which take advantage of the premium of futures contracts over the price of the underlying bonds, analysts have said. The trades – typically the domain of macro hedge funds with relative value strategies – consist of selling a futures contract, buying Treasuries deliverable into that contract with repurchase agreement (repo) funding, and delivering them at contract expiry. In two separate notes in recent weeks, economists at the Fed have highlighted potential financial vulnerability risks related to these trades…”

U.S. Bubble Watch:

September 13 – Wall Street Journal (Alison Sider and Mark Maurer): “Energy and labor costs are cutting further into some corporate profits, in the latest sign that inflationary forces continue to course through industries, pressure executives and worry Wall Street. American Airlines on Wednesday cut its quarterly profit forecast, citing surging jet fuel costs and a new pilot contract… Package delivery giant United Parcel Service said this week it expects to book about $500 million more in contract-related costs than it expected by year-end, hitting its profit margins. In Detroit, workers are threatening a strike this week against the big three U.S. automakers. Industries from travel to manufacturing have been contending with worker shortages as the U.S. economy emerged from the Covid-19 pandemic, providing leverage that labor unions are using to negotiate higher pay and expanded benefits. In California, healthcare facilities and restaurant operators this week reached separate deals with workers that are set to raise minimum pay for employees in the state, while West Coast dockworkers this summer secured a 32% raise through 2028. The United Auto Workers is seeking a mid-30% raise over four years in its negotiations with automakers, alongside cost-of-living adjustments and a shorter workweek.”

September 13 – Reuters (David Lawder): “The U.S. government posted a rare August surplus of $89 billion due to a $319 billion reversal of costs from President Joe Biden’s student loan forgiveness plan after the Supreme Court struck down the program in June… Receipts last month totaled $283 billion, down 7% or $21 billion from a year earlier, while outlays came to $194 billion after the student loan reversal, down 63% or $329 billion. With one month to go before the fiscal 2023 year ends on Sept. 30, the government’s year-to-date deficit totaled $1.524 trillion, a 61% increase over a $946 billion budget gap for the same period of fiscal 2022… Fiscal year-to-date receipts totaled $3.972 trillion, down 10% or $434 billion from a year earlier, primarily due to lower non-withheld individual income tax receipts, higher tax refunds as the Internal Revenue Service churned through a huge backlog of unprocessed paper tax returns, and far lower Federal Reserve earnings due to higher interest rates. Year-to-date outlays totaled $5.496 trillion, up 3% or $142 billion, partly reflecting the student loan reversal. The Treasury’s net interest cost for the period hit a record $808 billion, up 19% or $130 billion from a year earlier.”

September 14 – Dow Jones (Harriet Torry): “Worker filings for unemployment benefits rose slightly last week, but remain low despite a cooling labor market. Initial claims… rose by 3,000 in the week ended Sept. 9 to a seasonally adjusted 220,000… Last week’s increase in claims followed four straight weeks of declines. Claims rose early this year as companies in the technology, finance and real-estate industries cut positions, but they remain at historically low levels despite higher interest rates.”

September 14 – Yahoo Finance (Josh Schafer): “August retail sales were stronger than the prior month as consumers spent more on gas amid a surge in oil prices. Retail sales rose 0.6% in August from the previous month, above… estimates for 0.1% growth. Sales excluding auto and gas increased 0.2%, above estimates for a 0.1% decline… Meanwhile, July’s sales were revised down to a 0.5% uptick from a previously reported 0.7% increase. Nine of the 13 categories highlighted in the release saw increases from a month ago. Sales at gasoline stations led all categories, shooting up 5.7% from July as the price for gasoline ticked higher throughout the month of August.”

September 12 – Reuters (Amina Niasse): “U.S. small business sentiment declined last month for the first time since April on continued concern over inflation and difficulty finding quality labor, a monthly survey showed… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index fell to 91.3 in August from an eight-month high of 91.9 in July… Difficulty hiring skilled workers in a tight labor market and inflation topped the list of business owners’ most pressing issues. ‘With small business owners’ views about future sales growth and business conditions discouraging, owners want to hire and make money now from strong consumer spending,’ said NFIB Chief Economist Bill Dunkelberg. ‘Inflation and the worker shortage continue to be the biggest obstacles for Main Street.’”

September 11 – CNBC (Hugh Son): “JPMorgan… CEO Jamie Dimon said… that while the U.S. economy is doing well, it would be a ‘huge mistake’ to believe that it will last for years. Healthy consumer balance sheets and rising wages are supporting the economy for now, but there are risks ahead, said Dimon… Topping his concerns include central banks reining in liquidity programs via ‘quantitative tightening,’ the Ukraine war, and governments around the world ‘spending like drunken sailors,’ the executive said. ‘To say the consumer is strong today, meaning you are going to have a booming environment for years, is a huge mistake,’ he said.”

September 13 – CNBC (Diana Olick): “Higher mortgage rates continue to take their toll on mortgage demand, especially for refinancing… Demand for refinances dropped 5% for the week and was 31% lower than the same week one year ago. The refinance share of mortgage activity decreased to 29.1% of total applications from 30.0% the previous week… Applications for mortgages to purchase a home rose 1% week to week but were 27% lower than the same week one year ago.”

September 13 – Bloomberg (Vince Golle): “The average rate on a five-year adjustable mortgage jumped last week to the highest level in at least 12 years and fixed-rate mortgages also climbed… The contract rate on an adjustable mortgage increased by more than a quarter of a percentage point to 6.59%, the highest in Mortgage Bankers Association data back to early 2011.”

September 15 – Bloomberg (Natalie Wong): “Home purchases across the US are getting canceled at the highest rate in almost a year as rising borrowing costs weigh on buyers. Nearly 60,000 deals to purchase homes fell through in August, according to… Redfin Corp. That’s equal to roughly 16% of homes that went

Fixed Income Watch:

September 11 – Financial Times (Harriet Clarfelt): “Borrowers in the $10tn US corporate bond market are shying away from longer-term debt in a bet that soaring borrowing costs are unlikely to last. Corporate bonds issued so far in 2023 have come with an average 10 years to maturity — the lowest figure in more than a decade… With investment-grade issuance hitting its highest daily level since 2020 last week, the shortened maturities underscore how companies are adapting their funding strategies to a backdrop of drastically elevated interest rates… Debt issued in the $8.6tn investment-grade bond market has had an average maturity of almost 10 and a half years so far in 2023, the lowest year-to-date number since the global financial crisis. The trend is starker for borrowers in the $1.3tn junk market, where maturities have dropped from close to seven years and seven months in 2022 to six in 2023 — the shortest average tenor in records going back to 1990.”

September 14 – Bloomberg (Hannah Benjamin-Cook): “Europe’s rejuvenated junk debt market just had a wake-up call, with the first shelved offering in almost a year. Specialist French retailer FNAC Darty SA halted a €300 million ($322 million) bond sale, saying market conditions are not attractive enough… It’s the first euro corporate junk debt sale to be pulled since House of HR in October 2022…”

September 12 – Bloomberg (Eleanor Duncan and Carmen Arroyo): “A flurry of hedge funds, direct lenders and others are expecting a revival of the $1.3 trillion collateralized loan obligation market — and they want to be ready to reap the benefits when it happens. Buzzy new names in credit like Arini, the hedge fund set up by former Credit Suisse Group AG star trader Hamza Lemssouger, and Sona Asset Management have been marketing their first European CLO deals. In the US, several new managers have sold deals recently, while private lender Antares Capital sold its first deal backed by broadly syndicated loans in August… A dearth of M&A has squeezed the supply of new loans, while a lack of demand for the liabilities has pushed US CLO issuance down about 21% year-to-date compared with the same period last year.”

China Watch:

September 10 – Wall Street Journal (Lingling Wei and Stella Yifan Xie): “Xi Jinping has placed the Communist Party—and himself—in greater command of China’s economy over the past decade. Now his centralization of power is delaying the country’s response to its worst economic slowdown in years. Officials in charge of day-to-day economic affairs have been holding increasingly urgent meetings in recent months to discuss ways to address the deteriorating outlook, people familiar… said. Yet despite advice from leading Chinese economists to take bolder action, the people said, senior Chinese officials have been unable to roll out major stimulus or make significant policy changes because they don’t have sufficient authority to do so, with economic decision-making increasingly controlled by Xi himself. The top leader has shown few signs of worry over the outlook despite the gathering gloom and hasn’t seemed interested in backing more stimulus…”

September 14 – Bloomberg: “China’s central bank cut the amount of cash lenders must hold in reserve for the second time this year, a move that will help banks support government spending to stimulate the slowing economy. The People’s Bank of China lowered the reserve requirement ratio for most banks by 25 bps… The weighted average RRR for banks will be 7.4% after the reduction. The cut… aims to boost banks’ lending capacity and ‘facilitate fiscal stimulus,’ especially local government bond issuance, said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.”

September 14 – Bloomberg: “China’s central bank ramped up efforts to accelerate an economic recovery, releasing more cash into markets… The People’s Bank of China added a net 191 billion yuan ($26.3bn) into the financial system via a one-year policy loan Friday, a day after announcing another cut to lenders’ reserve requirements, a move that could free up as much as 500 billion yuan by some estimates. It also injected 34 billion yuan via a 14-day money-market loan.”

September 14 – Reuters (Albee Zhang, Ellen Zhang and Joe Cash): “China’s industrial output grew 4.5% in August from a year earlier, accelerating from the 3.7% pace seen in July… The data… beat expectations for a 3.9% increase…, and marked the quickest rate since April. Retail sales… also grew at a faster 4.6% pace in August aided by the summer travel season, and was the quickest growth since May. That compared with a 2.5% increase in July, and an expected 3% increase.”

September 8 – Bloomberg (Kevin Yao): “China’s deflationary pressures eased slightly in August as consumer prices rose and producer price declines moderated… The consumer price index rose 0.1% last month from a year earlier… The increase followed July’s drop of 0.3% — the first decline in more than two years. Core inflation, which strips out volatile food and energy costs, climbed 0.8%. Producer prices fell 3%, easing from a decrease of 4.4% in July.”

September 14 – Reuters (Liangping Gao and Ryan Woo): “A slump in China’s property sector worsened in August, with deepening falls in new home prices, property investment and sales, despite a recent flurry of support measures, adding pressure to the world’s second-largest economy. New home prices fell at the fastest pace in 10 months in August, down 0.3% month-on-month after a 0.2% decline in July… Prices were down 0.1% from a year earlier, after a 0.1% decline in July.”

September 12 – Bloomberg: “A spurt of home sales in China’s biggest cities is losing momentum less than two weeks after authorities loosened mortgage restrictions, raising doubts over whether the steps are enough to revive the market before a crucial busy season. While a dearth of official statistics makes it difficult to gain a comprehensive view, checks by industry watchers suggest that the rebound is fading in tier-1 cities. Even in Beijing, which reacted the most to the stimulus, sales of existing homes plunged 35% to about 1,700 units last weekend from 2,600 in the weekend immediately after the easing, according to estimates by Centaline Group analyst Zhang Dawei… New homes sold by developers in the capital city showed a similar trend.”

September 12 – Bloomberg: “For decades, China’s biggest cities have been home to one of the world’s greatest economic success stories: a nearly unbroken rise in living standards that lifted millions into the middle class. That trend is now coming to a halt, creating an under-the-radar threat to President Xi Jinping’s campaign to revive growth. Hiring salaries in Shanghai and Beijing dropped by 9% and 6% respectively in the second quarter from a year ago, Zhaopin Ltd. Data… show. It’s the biggest slump since at least 2015 and a stark contrast with government figures indicating wages rose nationwide. For many white-collar workers, the blow has been compounded by companies quietly slashing benefits including travel and meal allowances. Prestigious sectors like finance — where senior bankers report compensation cuts of as much as 40% — and technology are suffering. But even the typically stable government jobs that employ vast swathes of China’s middle class are not immune.”

September 15 – Bloomberg (Andrew Monahan): “Chinese state-linked developer Sino-Ocean Group Holding Ltd. has suspended payment on all its offshore borrowings, citing tight liquidity, as the nation’s property debt crisis deepens. The country’s 25th-largest builder ‘is fully committed to formulating a viable holistic restructuring of its offshore debts,’ Sino-Ocean said…”

September 13 – Financial Times (Sun Yu): “A flagship Beijing lending programme to revive the country’s debt-stricken property market has done barely any business almost a year after its launch…, highlighting the difficulty for policymakers seeking to boost confidence in the world’s second-largest economy. The People’s Bank of China in November announced a Rmb200bn ($27bn) facility to provide interest-free loans to six state-owned commercial banks to finance thousands of stalled property projects across the country. But almost a year after the programme was launched, less than 1% of the funds have been disbursed to banks, which were supposed to match the PBoC loans with their own lending but have been unwilling to issue further debt to the ailing sector…”

September 12 – Bloomberg (Michael Msika): “Concern over China’s sputtering economy has created a ‘dramatic shift’ in investors’ equity allocation — a rush toward the US and an exodus from emerging markets, Bank of America’s latest global fund manager survey showed. BofA said the ‘avoid China’ theme has become one of the biggest convictions among the surveyed investors with $616 billion in assets under management. A net zero percent of the lot expect stronger economic growth for the country in the near future, a massive reversal from 78% in February this year, and the lowest since the lockdown lows of last year.”

September 11 – Bloomberg: “Leveraged China equity positions saw their biggest daily increase in over three years on Monday as new rules took effect that lower the deposit ratio for high-risk trades including short sales. The increase pushed the total outstanding amount of margin debt to 1.5 trillion yuan ($205bn).”

September 11 – New York Times (Li Yuan): “In the 1980s, people in China could land themselves in trouble with the government for their fashion choices. Flared pants and bluejeans were considered ‘weird attire.’ Some government buildings barred men with long hair and women wearing makeup and jewelry. Patrols organized by factories and schools cut flared pants and long hair with scissors. It was the early days of China’s era of reform and opening up… Now the government is proposing amendments to a law that could result in detention and fines for ‘wearing clothing or bearing symbols in public that are detrimental to the spirit of the Chinese people and hurt the feelings of Chinese people.’”

Central Banker Watch:

September 15 – Financial Times (Martin Arnold, Henry Foy and Giuliana Ricozzi): “Several of the European Central Bank’s more hawkish rate-setters believe interest rates could rise again in December if wages keep increasing rapidly and inflation proves stickier than hoped. Investors widely expect the ECB’s rate rise on Thursday, which saw the deposit rate hit 4%, to be its last. But three people involved in the monetary policy meeting told the Financial Times that, if eurozone inflation were higher than forecast, the door was still open to raising rates again when the central bank updates its projections in December.”

September 15 – Bloomberg (Maria Tadeo and William Horobin): “French Finance Minister Bruno Le Maire urged the European Central Bank not to raise interest rates again, joining a cohort of politicians reacting to Thursday’s hike in borrowing costs. ‘We are on the right track to reduce inflation,’ Le Maire told Bloomberg… ‘Enough is enough!’”

Global Bubble Watch:

September 13 – Reuters (David Lawder): “The International Monetary Fund… said that the global debt as a share of economic output fell significantly in 2022 for the second year in a row, but the decline may be ending as a post-COVID growth surge fades. The IMF said in an update to its Global Debt Database that the world’s total debt to-GDP ratio fell last year to 238% from 248% in 2021 and 258% in 2020. But the decline for the past two years, driven by strong growth and stronger-than-expected inflation, has recouped only about two thirds of the COVID-induced spike in global debt. The ratio remains well above the 2019 level of 238% of GDP. China has played a central role in increasing global debt in recent decades…, and its debt burden has defied the moderating trend, growing to 272% of GDP in 2022 from 265% in 2021. Those levels are similar to the United States, which saw its total debt-to-GDP ratio fall to 274% in 2022 from 284% in 2021…”

September 11 – Financial Times (Edward White, Song Jung-a, Leo Lewis and Andy Lin): “China is set to become the world’s biggest car exporter this year, overtaking Japan. The watershed moment will mark the end of decades of dominance by European, American, Japanese and South Korean groups. Yet driving China’s global ascendancy are deep structural problems in the domestic auto industry, which threaten to upend car markets across the world. A stark mismatch between production at Chinese factories and local demand has been caused, in part, by industry executives mis-forecasting three key trends: the rapid decline of internal combustion engine car sales, the explosion in popularity of electric vehicles and the declining need for privately owned vehicles as shared mobility booms among an increasingly urbanised Chinese population. The result has been ‘massive overcapacity’ in the number of vehicles produced in factories across the country, said Bill Russo, former head of Chrysler in China and founder of advisory firm Automobility. ‘We have an overhang of 25mn units not being used,’ he said.”

September 12 – Bloomberg (Laura Dhillon Kane): “Most Canadians are prepared to see home values fall… Some 70% of respondents said they would be happy (40%) or somewhat happy (30%) to see home prices go down, says the poll conducted by Nanos Research… When asked about solutions to the high cost of shelter, Canadians’ preferred option is to build more homes, faster — including government-subsidized ones. But 12% said the best answer is to curb immigration. ‘The survey suggests that Canadians believe that real estate is overpriced and a majority would not have an issue if housing prices went down,’ said chief pollster Nik Nanos.”

Europe Watch:

September 12 – Financial Times (Martin Arnold): “Cancelled building projects and financial distress among landlords and builders in Germany have hit their highest levels since reunification three decades ago… Hit by rising interest rates, soaring costs and weaker demand, 20.7% of construction companies said they had been forced to scrap a project in August, up from 18.9% in the previous month, according to a survey… by researchers at the Ifo Institute… ‘The probability increases month by month that more and more firms will go out of business,’ said Klaus Wohlrabe, head of surveys at Ifo…, warning that almost 12% of residential construction companies were reporting financing difficulties — the highest level since its survey started 32 years ago.”

Japan Watch:

September 15 – Bloomberg (Toru Fujioka and Sumio Ito): “Bank of Japan officials see a discrepancy between what Governor Kazuo Ueda said in a recent interview and how traders interpreted the remarks, according to people familiar… Most of what Ueda said in the Yomiuri newspaper interview published Saturday was consistent with his routine remarks of late. Taken in total, his comments indicate little change in the view among officials that they’ll need to weigh both upside and downside risks in deciding whether to adjust policies, the people said.”

September 12 – Bloomberg (Toru Fujioka and Cynthia Li): “Bank of Japan watchers moved forward their forecasts for an end to negative interest rates after Governor Kazuo Ueda touched on that possibility in an interview published over the weekend. All 46 economists surveyed by Bloomberg over the past week said the BOJ will stand pat on policy at next week’s board meeting, with half expecting authorities to abandon the subzero rate by the end of June. Last month, 31% predicted a rate hike within that time frame.”

EM Watch:

September 12 – Bloomberg (Srinivasan Sivabalan): “Currency traders are revolting against dovishness in emerging-market central banks, as the prospects of a soft landing in the US raise the stakes for countries considering interest-rate cuts. A resurgent US dollar — up more than 4% in the past two months — has weakened the appeal of investing in emerging markets, and especially in countries where central banks are beginning to easing monetary policy.”

September 15 – Reuters (Elena Fabrichnaya and Alexander Marrow): “Russia’s central bank raised its key interest rate by 100 bps to 13% on Friday, jacking up the cost of borrowing for the third meeting in succession in response to a weak rouble and other persistent inflationary pressures. A month ago, responding to the rouble tumbling past 100 to the dollar and a public call from the Kremlin for tighter monetary policy, the bank had hiked rates by 350 bps to 12% at an emergency meeting.”

September 13 – Reuters (David Lawder): “Argentina’s annual inflation rate shot up to 124.4% in August and hit its highest level since 1991, stoking a painful cost-of-living crisis in the South American country. The soaring prices, which rose more than expected, are forcing hard-hit shoppers to run a daily gauntlet to find deals and cheaper options as price hikes leave big differences from one shop to the next… The August monthly inflation reading of 12.4% – a figure that would be eye-watering even as an annual figure in most countries worldwide – is pushing poverty levels past 40% and stoking anger at the traditional political elite ahead of October elections.”

September 13 – Bloomberg (Marcus Wong): “The highest rice prices in 15 years are threatening to worsen inflation in the Philippines and pummel the nation’s local bonds that are already underperforming regional peers this quarter… A Bloomberg index of Philippine bonds handed dollar-based investors a loss of 2.3% this quarter, the worst returns in Southeast Asia.”

Leveraged Speculation Watch:

September 11 – Bloomberg (Katherine Burton and Hema Parmar): “Some of the largest multi-strategy hedge funds are lagging this year, as they struggle to keep up with other firms and their own past performance. The anemic returns for 2023 follow years of investors flocking to multi-manager, multi-strategy firms including Millennium Management, Balyasny Asset Management, ExodusPoint Capital Management and Schonfeld Strategic Advisors, looking for consistent returns regardless of market conditions. But so far this year, their performance has trailed other types of funds, even after these managers posted strong August returns.”

September 12 – Reuters (Tatiana Bautzer): “Wealthy families loaded up on bonds and private equity investments in the first half of the year while slashing their stock exposure, according to… Citigroup’s private bank. More than half of the 268 family offices polled, accounting for a combined net worth of $565 billion, increased their allocations in fixed income, while 38% boosted their private equity holdings. By contrast, 38% reduced their allocation in stocks.”

Social, Political, Environmental, Cybersecurity Instability Watch:

September 11 – Associated Press (Seth Borenstein): “The deadly firestorm in Hawaii and Hurricane Idalia’s watery storm surge helped push the United States to a record for the number of weather disasters that cost $1 billion or more. And there’s still four months to go on what’s looking more like a calendar of calamities. The National Oceanic and Atmospheric Administration announced… there have been 23 weather extreme events in America that cost at least $1 billion this year through August, eclipsing the year-long record total of 22 set in 2020. So far this year’s disasters have cost more than $57.6 billion and claimed at least 253 lives. And NOAA’s count doesn’t yet include Tropical Storm Hilary’s damages in hitting California and a deep drought that has struck the South and Midwest because those costs are still to be totaled…”

September 10 – Bloomberg (Serene Cheong, Sharon Cho and Yongchang Chin): “Searing temperatures from Texas to Tokyo over the summer are the latest reminder of a growing headache for the energy system, as extreme heat becomes a threat to fuel supply. In addition to causing spikes in electricity demand as people fire up air conditioners, the scorching temperatures have led to a spate of disruptions at oil refineries. That’s helped keep US gasoline prices elevated and saw diesel cost increases easily outpace those for crude. This summer was particularly grueling… The searing heat led to refiners cut oil processing by at least 2% globally over those two months, according to Macquarie Group.”

September 14 – Reuters (Brijesh Patel, Seher Dareen and Rahul Paswan): “There is a more than 95% chance that the El Niño weather pattern will continue through the Northern Hemisphere winter from January – March 2024, a U.S. government forecaster said…, bringing more extreme conditions. ‘In August, sea surface temperatures were above average across the equatorial Pacific ocean, with strengthening in the central and east-central Pacific,’ the Climate Prediction Center (CPC) said… ‘As El Nino strengthens to strong status, there is a good likelihood it will have an impact on the upcoming growing season for the southern hemisphere crop production areas,’ said Chris Hyde, a meteorologist at space-tech company Maxar.”

September 12 – Bloomberg (Jim Wyss and Ruth Liao): “The operator of the Panama Canal said there’s no immediate prospect of relief from the drought that’s reduced water levels and snarled shipping and global supply chains. Panama Canal Administrator Ricaurte Vásquez Morales said… abnormally high ocean temperatures, an unpredictable rainy season and the persistence of the El Niño weather phenomenon mean officials will have to continue restricting vessel traffic into 2024. It means the long waits bedeviling the canal are likely to continue through the months leading up to both Christmas and Chinese New Year, when it’s normally busiest.”

September 12 – Reuters (Ayman Werfali and Ahmed Elumami): “Thousands of people were killed and at least 10,000 were missing in Libya in floods caused by a huge Mediterranean storm that burst dams, swept away buildings and wiped out as much as a quarter of the eastern coastal city of Derna… Storm Daniel barrelled across the Mediterranean into a country divided and crumbling after more than a decade of conflict.”

Geopolitical Watch:

September 9 – Reuters (Nandita Bose, Sarita Chaganti Singh and Katya Golubkova): “The Group of 20 adopted a consensus declaration at a summit on Saturday that avoided condemning Russia for the war in Ukraine but called on all states not to use force to grab territory. Indian Prime Minister Narendra Modi announced that the Leaders’ Declaration had been adopted on the first day of the weekend G20 summit in New Delhi. ‘On the back of the hard work of all the teams, we have received consensus on the G20 Leaders Summit Declaration. I announce the adoption of this declaration,’ Modi told the leaders…”

September 9 – Reuters (Kevin Yao): “India has been trying to take advantage of its role as the host of the G20 Summit to promote its own agenda and harm China’s interests, a Chinese think tank affiliated with the country’s top spy agency said on Saturday. The harsh criticism by the China Institute of Contemporary International Relations, which is under the Ministry of State Security, comes as G20 leaders began their annual two-day summit, in India’s capital New Delhi…”

September 11 – Financial Times (Kathrin Hille): “China’s navy has launched its largest-ever manoeuvres with an aircraft carrier in the western Pacific…, as Beijing flexes its military muscle to push back against the US and its allies. The Shandong, the People’s Liberation Army Navy’s second aircraft carrier, was on course… to converge with more than 20 other Chinese warships in waters between Taiwan, the Philippines and the US Pacific territory of Guam… ‘This is by far the largest number of ships we have seen training with any Chinese carrier so far,’ said Su Tzu-yun, an analyst at the Institute for National Defense and Security Research… ‘They are expressing their displeasure with the various military exercises that have been under way in their periphery.’”

September 10 – Financial Times (Alice Hancock): “Nato is preparing its biggest live joint command exercise since the cold war next year, assembling more than 40,000 troops to practise how the alliance would attempt to repel Russian aggression against one of its members. The Steadfast Defender exercise comes as part of Nato’s rapid push to transform from crisis response to a war-fighting alliance, prompted by the invasion of Ukraine. It will start in spring next year and is expected to involve between 500 and 700 air combat missions, more than 50 ships, and about 41,000 troops… It is designed to model potential manoeuvres against an enemy modelled on a coalition led by Russia, named Occasus for the purposes of the drill.”

September 13 – Financial Times (Editorial Board): “Not so long ago, Russia’s Vladimir Putin sat at the table with G7 leaders. That he is now rolling out the red carpet for North Korea’s dictator Kim Jong Un is a sign of how far he has driven his country into isolation and, no doubt, of its need to top up arms supplies for its disastrous war in Ukraine. Kim has seized the opportunity to lessen his own isolation. The emerging relationship between the two is an ominous development for the US and western allies, for Ukraine, and for stability in Asia.”

September 12 – Financial Times (Andy Bounds): “Geopolitical tensions are changing trade flows as countries switch supply chains to allies rather than the most efficient exporter, the World Trade Organization has said. The value of traded goods and services continues to rise, but it is growing faster within allied blocs than as a whole, the… organisation said in its annual world trade report, warning this would lead to higher costs and more conflict. ‘The post-1945 international economic order was built on the idea that interdependence among nations through increased trade and economic ties would foster peace and shared prosperity,’ WTO director-general Ngozi Okonjo-Iweala said in the report…”

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