September 16, 2022: Deflation and Policy Mistakes

September 16, 2022: Deflation and Policy Mistakes
Doug Noland Posted on September 16, 2022

Hotter-than-expected August CPI and quarterly options/derivatives expiration made for a toxic mix. “Core” CPI was reported up 0.6% for the month (7% annualized!), double estimates. With the peak inflation narrative having received the blessing of the markets, sinking gas prices, a negative headline print, and rapidly declining y-o-y CPI were the bullish focus heading into the report. The reality was persistent and broadening pricing pressures – goods and services.

Two-year Treasury yields surged 17 bps on CPI Tuesday – and rose 31 bps for the week to the high (3.87%) since October 2007. Market expectations for the Fed funds rate at the December 14th FOMC meeting spiked 31 bps this week to 4.19%. Benchmark MBS yields jumped 26 bps to 5.07% – the high since November 2008.

While relatively contained in the face of Tuesday’s equities downdraft, general “Risk Off” dynamics gained momentum through the week. U.S. High yield CDS surged 57 bps, trading intraday Friday (545 bps) back to highs since mid-July. Yet high yield CDS only reversed the previous week’s 58 bps drop. Investment-grade CDS jumped eight to 89 bps, reversing the majority of the previous week’s 11 bps decline. Bank CDS prices were up strongly, but also in most cases only reversing the previous week’s move. The VIX (equities volatility) Index traded to 28.5 in Friday trading (high since July 13th), before ending the week up 3.5 points at 26.3. Not that big of a deal.

For the most part, global “Risk Off” was not overly vigorous. European CDS rose less than the previous week’s decline. German and French equities indices were down more than 2%, but most European equities declines were unremarkable. EM CDS surged 25 bps, just reversing the previous week’s drop. EM currencies and bonds were under moderate pressure. Yields were up 30 bps in Brazil, 24 bps in Thailand, 24 bps in Mexico, 22 bps in Poland and 21 bps in Turkey. The most notable yield surges were in dollar-denominated EM debt. Dollar yields were up 65 bps in Turkey, 39 bps in Peru, 33 bps in Panama, 30 bps in Chile, 26 bps in Mexico, 24 bps in the Philippines and 22 bps in Brazil.

The Shanghai Composite sank 4.2%, with the growth-oriented ChiNext Index falling 7.1%. China sovereign CDS jumped seven to 75 bps, reversing the previous week’s decline. Chinese bank CDS were little changed, while developer bonds were mixed.

Disappointing CPI data pushed at least a couple analysts to forecast a 100 bps rate hike in next Wednesday’s FOMC meeting. As of Friday’s close, rates markets were pricing in an 80 bps increase.

September 14 – CNBC (Yun Li): “Cathie Wood, Wall Street’s most vocal proponent of deflation, is getting a few high-profile supporters even as price pressures continued to surprise to the upside. Jeffrey Gundlach and Elon Musk recently joined Wood’s camp in calling for a decline for prices, expressing worries that the Federal Reserve might go too far. The so-called bond king warned of deflation risk on Tuesday, urging investors to buy long-term Treasurys. Meanwhile, the Tesla CEO called falling commodity prices ‘neither subtle nor secret’ and tweeted to his 100 million followers that ‘a major Fed rate hike risks deflation.’ ‘We are getting some loud voices now accompanying us on this deflation risk,’ Wood said…”

Jeffrey Gundlach – September 13, 2022: “In spite of the fact that the narrative today is exactly the opposite, the deflation risk is much higher today than it’s been for the past two years. I’m not talking about next month. I’m talking about sometime later next year, certainly in 2023.”

September 12 – Fortune (Prarthana Prakash): “What a difference five months can make. In April, Elon Musk told analysts that he believed inflation was worse than was being reported at the time and would likely continue through 2022. Now he’s singing (or tweeting) a different tune. The Tesla CEO is now worried that a major interest rate hike by the Federal Reserve could kick off deflation. ‘A major Fed rate hike risks deflation,’ Musk tweeted…”

I recall the vociferous deflation talk following the 1987 stock market crash. In 1990, after the crash of the late-eighties “decade of greed” Bubble, deflation fears became only more entrenched. Championing new reflationary doctrine after the bursting of the “tech” Bubble, Bernanke invoked lessons from the deflationary spiral and Great Depression. Deflation risks were priority one following the mortgage finance Bubble implosion.

It seems that the “Inflation vs. Deflation” debate also dates back decades. I’ve long argued that most inflation v. deflation discussion is too simplistic. There are various key price levels in a system that don’t necessarily move in concert. Understandably, Cathie Wood and other Wall Street operators are deeply concerned about sinking stock prices – or, more broadly, asset price deflation. They’re worried about an unfolding “policy mistake,” while myriad mistakes unfolded over the past three decades.

It should be noted that collapsing asset prices are an inevitable facet of speculative Bubbles. I have consistently argued over the years that the greatest systemic risk was not deflation, but instead Credit and speculative Bubbles. It has been nothing short of a monumental misdiagnosis of the problem and administration of precisely the wrong medicine. Accommodating historic Credit and speculative excess in the name of fighting supposedly insufficient inflation – and even deflation – has been an epic failure of runaway Bubbles.

The Federal Reserve and the global central bank community today confront the nightmare confluence: myriad faltering speculative Bubbles concurrent with multi-decade-high consumer and producer price inflation. Moreover, consumer price inflation has accelerated even after months of speculative Bubble deflation. The Fed’s hope for transitory price inflation proved wishful thinking. What’s more, Fed expectations for tightening market financial conditions to presage a return to 2% inflation have been deeply flawed analysis.

Last week’s CBB highlighted ongoing robust Credit growth, as evidenced in Fed Z.1 data. Bank lending, in particular, is booming, while government deficit spending is unrelenting. The economy is demonstrating powerful and pervasive inflationary biases. This being the case, a major slowing of Credit growth is now necessary to tame runaway inflation.

The U.S. is certainly not alone in suffering the ill-effects of years of monetary inflation.

China’s Aggregate Financing (AF) expanded $348 billion last month, up strongly from July’s $108 billion, and almost 20% above expectations. Yet AF was still 19% below August 2021. After eight months, y-t-d AF growth of $3.467 TN is running 10.7% ahead of 2021 – while only 8% below 2020’s historic Credit onslaught and fully one-third higher than pre-Covid 2019.

Bank Loan growth of $179 billion almost doubled July’s production, but was still about 15% below estimates. Y-t-d growth of $2.236 TN was almost 4% above comparable 2021, with one-year growth of $2.935 TN, or 10.9%.

Corporate Bank Loans bounced back strongly, from a weak July ($41bn) to $125 billion, 26% ahead of August 2021. At $1.796 TN, y-t-d growth was 32% ahead of comparable 2021 – and even 30% ahead of 2020 (74% above 2019). One-year growth ticked up slightly to $2.157 TN, or 12.8%, with two-year growth of 25.6% and five-year growth of 72.5%.

While somewhat recovering from a dismal July ($17bn), Consumer (chiefly mortgage) Loans increased only $66 billion, 20% below August 2021. This put y-t-d growth at $395 billion, 50% below comparable 2021 growth and 44% below pre-Covid 2019. One-year Loan growth of 7.4% was the weakest in decades.

Government Bonds expanded $44 billion, down from July’s $57 billion and August 2021’s $140 billion. Yet y-t-d growth of $768 billion was 48% ahead of 2021, and only 6% below comparable 2020 (48% ahead of 2019).

Analysts were generally unimpressed. Bloomberg sources have suggested that some loan growth is due to banks lending to other banks, often simply to meet lending quotas. There was also a $70 billion increase in shadow banking last month, according to Bloomberg “the biggest increase since March 2017.”

The bottom line: Aggregate Financing inflated a massive $4.825 TN, or 10.5%, over the past year to $48 TN. Over 30 months, AF surged $12.094 TN, or 72%, in one of history’s most spectacular Credit expansions. Private sector Credit, especially Consumer, has slowed markedly, while government and banking sectors rapidly inflate. Ominously, the gap between Credit and economic growth has only widened further this year.

Credit must slow in China, the U.S. and globally – and many will wail “deflation” and “policy mistake.” I also believe a comprehensive reexamination of contemporary central banking doctrine is long overdue. I was thinking this week of prescient insight offered some 17 years ago by German economist (former Bundesbank and ECB Chief Economist) Otmar Issing.

Dr. Otmar Issing (from his 2005 paper “Monetary Policy and Asset Prices – Crisis: Time to Ponder on Traditional Wisdom”): “We have learned on many occasions that excess liquidity can show up in excessive asset valuations and not only in consumer price inflation. Sooner or later, then, unsustainable asset price trajectories may translate into sizeable risks to price stability — in either direction — and often much further down the road as the long-run fallout of the Japanese bubble of the late 1980s has shown.”

“To my mind the risks associated with asset price inflation and subsequent deflation are an important additional reason for paying close attention to money and credit, over and above the regular and well-established link between money and consumer prices.”

“Thus, a monetary policy strategy that monitors closely monetary and credit developments as potential driving forces for consumer price inflation in the medium and long run has an important positive side effect: it may contribute at the same time also to limiting the emergence of unsustainable developments in asset valuations. In other words: as long as money and credit remain broadly well-behaved the scope for financing unsustainable runs in asset prices should remain limited.”

“The tendency of modern textbooks on monetary theory and policy to relegate money and related concepts to inconsequential footnotes can be no comfort. What is the role of liquidity, financial frictions and the flow of funds for the real economy and the relation of money vis-à-vis a broader range of asset classes?”

The Fed faces another important meeting next week. The FOMC is, of course, poised to push ahead with its aggressive tightening cycle. Meanwhile, global crisis dynamics fester. I appreciate that our central bank is resolved to get inflation under control. Unfortunately, each week seems to confirm “hike until something breaks.” A 100 bps hike would be a first since Volcker was resolved to aggressively tighten until money supply growth slowed markedly. At least he had a sound analytical framework for attacking the inflation problem.

Without at least some focus on money and Credit, the Fed has been flying blind. I’m anxiously waiting for Powell’s press conference. It would no doubt be a cold day in hell – the Chair mentioning Credit growth. A couple timely headlines from the week: FT: “Fed’s Faster ‘Quantitative Tightening’ Adds to Strain on Bond Market.” NYT: “Fed’s Exit Puts World’s Biggest Bond Market on Shakier Ground.” While the focus has been on rates policy, I expect liquidity issues to increasingly pressure the Fed to provide the market with some QT relief.

For the Week:

The S&P500 dropped 4.8% (down 18.7% y-t-d), and the Dow fell 4.1% (down 15.2%). The Utilities slumped 3.9% (up 2.6%). The Banks fell 3.8% (down 19.8%), and the Broker/Dealers lost 3.6% (down 9.9%). The Transports sank 8.8% (down 22.2%). The S&P 400 Midcaps dropped 4.7% (down 16.2%), and the small cap Russell 2000 fell 4.5% (down 19.9%). The Nasdaq100 sank 5.8% (down 27.3%). The Semiconductors stumbled 5.8% (down 35.0%). The Biotechs fell 4.4% (down 13.9%). With bullion sinking $42, the HUI gold equities index lost 4.1% (down 26.3%).

Three-month Treasury bill rates ended the week at 3.0275%. Two-year government yields surged 31 bps to 3.87% (up 314bps y-t-d). Five-year T-note yields jumped 20 bps to 3.63% (up 237bps). Ten-year Treasury yields rose 14 bps to 3.45% (up 194bps). Long bond yields gained seven bps to 3.52% (up 161bps). Benchmark Fannie Mae MBS yields surged 26 bps to 5.07% (up 300bps).

Greek 10-year yields were unchanged at 4.26% (up 295bps). Spain’s 10-year yields rose five bps to 2.91% (up 235bps). German bund yields gained six bps to 1.76% (up 193bps). French yields increased four bps to 2.31% (up 211bps). The French to German 10-year bond spread narrowed two to 55 bps. U.K. 10-year gilt yields added four bps to 3.14% (up 217bps). U.K.’s FTSE equities index fell 1.6% (down 2.0% y-t-d).

Japan’s Nikkei Equities Index fell 2.3% (down 4.3% y-t-d). Japanese 10-year “JGB” yields were up slightly to 0.26% (up 19bps y-t-d). France’s CAC40 lost 2.2% (down 15.0%). The German DAX equities index dropped 2.7% (down 19.8%). Spain’s IBEX 35 equities index slipped 0.6% (down 8.4%). Italy’s FTSE MIB index was little changed (down 19.1%). EM equities were mostly lower. Brazil’s Bovespa index dropped 2.7% (up 4.3%), and Mexico’s Bolsa index dipper 0.6% (down 12.2%). South Korea’s Kospi index was little changed (down 20.0%). India’s Sensex equities index declined 1.6% (up 1.0%). China’s Shanghai Exchange Index sank 4.2% (down 14.1%). Turkey’s Borsa Istanbul National 100 index dropped 4.1% (up 81.8%). Russia’s MICEX equities index increased 0.4% (down 35.7%).

Investment-grade bond funds posted outflows of $758 million, while junk bond funds reported inflows of $734 million (from Lipper).

Federal Reserve Credit was little changed last week at $8.789 TN. Fed Credit is down $101bn from the June 22nd peak. Over the past 157 weeks, Fed Credit expanded $5.062 TN, or 136%. Fed Credit inflated $5.978 Trillion, or 213%, over the past 514 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $11.2bn to a five-week low $3.377 TN. “Custody holdings” were down $94bn, or 2.7%, y-o-y.

Total money market fund assets declined $12.4bn to a 10-week low $4.552 TN. Total money funds were up $87bn, or 2.0%, y-o-y.

Total Commercial Paper jumped $9.7bn to $1.208 TN. CP was up $26bn, or 2.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 13 bps to 6.02% (up 316bps y-o-y) – the high since November 2008. Fifteen-year rates gained five bps to a 13-year high 5.21% (up 309bps). Five-year hybrid ARM rates surged 29 bps to 4.93% (up 242bps) – the high since July 2009. Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up eight bps to 6.18% (up 315bps) – the high since January 2010.

Currency Watch:

September 11 – Financial Times (Hudson Lockett): “The renminbi is on course for its largest annual fall on record against the dollar despite Beijing taking its strongest steps to stem the currency’s decline… The sharp weakening of the renminbi comes at a pivotal moment for China’s Communist party, which is gearing up for a leadership summit in October where President Xi Jinping is expected to secure an unprecedented third term in office. The drop of 8.7% against the greenback this year to Rmb6.96 puts the renminbi on track for its biggest annual fall since China abandoned its longstanding currency peg and moved to a managed floating exchange rate in 2005.”

September 14 – Bloomberg: “As Xi Jinping and Vladimir Putin prepare for a likely meeting this week to cement China-Russia relations, one area where stronger economic ties are already being seen is on the currency front. China’s yuan is proving to be a useful release valve for Russian companies hemmed in by sanctions that prevent them trading in dollars. Russian businesses are using yuan to settle more of their trade and are boosting borrowing in the Chinese currency. Moscow is also increasing holdings of yuan in its foreign-exchange reserves.”

September 11 – Financial Times: “As if the energy crisis and the highest inflation rates in four decades were not disruptive enough, the global economy is also being rattled by big realignments in exchange rates. After two decades of being stronger than the dollar, the euro is now at parity with the greenback. Last week, sterling fell to its lowest level against the dollar since 1985 — and many analysts expect it to fall further. The yen, meanwhile, has continued its precipitous slide against the dollar, and is set for its worst year on record.”

For the week, the U.S. Dollar Index added 0.7% to 109.76 (up 14.7% y-t-d). For the week on the downside, the Norwegian krone declined 2.6%, the New Zealand dollar 2.0%, the Brazilian real 2.0%, the Australian dollar 1.8%, the Canadian dollar 1.8%, the South African rand 1.7%, the British pound 1.5%, the Swedish krona 1.1%, the Mexican peso 0.7%, the South Korean won 0.6%, the Singapore dollar 0.5%, the Swiss franc 0.4%, the Japanese yen 0.3% and the euro 0.3%. The Chinese (onshore) renminbi declined 0.87% versus the dollar (down 9.03% y-t-d).

Commodities Watch:

September 13 – Bloomberg (Alex Longley and Yongchang Chin): “Commodity markets are struggling to shake their months-long liquidity crisis that’s brought an era of erratic swings in the value of the world’s raw materials. The giant price fluctuations that followed Russia’s invasion of Ukraine roiled markets for everything from natural gas to crude oil and metals. Trading activity in most raw material markets has sunk to low levels. Open interest in oil last week hit the lowest since 2015, while natural gas, sugar and aluminum futures holdings all remain at or near the lowest levels in years. In out-of-control power and gas markets, spiking prices are limiting the number of contracts traders can hold because of surging collateral requirements. In oil, macro investors have pulled bets on raw materials as an inflation hedge after central banks began hiking rates. All the while, some traders have turned their backs on the London Metal Exchange after the crisis in nickel trading earlier this year.”

September 16 – Bloomberg (Archie Hunter, Alfred Cang and Jack Farchy): “JPMorgan… and ICBC Standard Bank Plc are cutting back on financing to China’s troubled metals trade, adding pressure to a sector already hit hard by a struggling economy. At least three Chinese metal trading companies have had credit lines frozen or reduced by either of the banks in recent weeks, according to people familiar with the matter. The lenders have pulled back after a liquidity crisis emerged at top copper trader Maike Metals International…”

September 12 – Reuters (Arathy Somasekhar): “U.S. emergency crude oil stocks fell 8.4 million barrels last week to 434.1 million barrels, their lowest since October 1984, according to U.S. Department of Energy (DOE) data… The release from the Strategic Petroleum Reserve (SPR) in the week ended Sept. 9 was the steepest draw since May. It comprised of about 6.3 million barrels of sweet crude and around 2 million barrels of sour crude.”

The Bloomberg Commodities Index declined 1.5% (up 17.7% y-t-d). Spot Gold fell 2.4% to $1,675 (down 8.4%). Silver rallied 3.9% to $19.59 (down 16.0%). WTI crude declined $1.68 to $85.11 (up 13%). Gasoline slipped 0.7% (up 8%), and Natural Gas dropped 2.9% to $7.76 (up 108%). Copper declined 1.4% (down 21%). Wheat dipped 1.0% (up 12%), and Corn declined 1.1% (up 14%). Bitcoin sank $1,555, or 7.3%, this week to $19.750 (down 57%).

Market Instability Watch:

September 13 – Financial Times (Ethan Wu and Kate Duguid): “The Federal Reserve’s more rapid exit from crisis-era policies is set to place the $24tn US government bond market under extra strain, heightening concerns about the bedrock of the global financial system. The ease with which traders can get deals done in the Treasury market has declined to the lowest levels since the early days of the pandemic in March 2020, according to a Bloomberg index. Gaps between prices where traders buy and sell have yawned wider and huge moves in price, on a scale unthinkable even a year ago, have become commonplace. The Fed is this month accelerating the pace of winding down the nearly $9tn balance sheet it built up for more than a decade in an effort to cushion the economy from shocks. It aims to shrink the total by $95bn a month — double the August pace.”

September 13 – Bloomberg (Chikako Mogi): “Japan’s benchmark government bond yield rose to the upper end of the trading range tolerated by its central bank, as debt markets worldwide came under pressure on expectations for continued monetary tightening. The 10-year yield rose to 0.25% for the first time since June 17, when hedge funds were launching attacks on the bond, betting the Bank of Japan would have to tweak its easy policy amid a global upward trend in yields. There are signs of similar wagers creeping back… Earlier, the BOJ boosted bond purchases, saying it would buy 550 billion yen ($3.8 billion) of five-to-10 year debt at its regular operations, up from 500 billion yen scheduled. It carried out a similar operation last week.”

September 11 – New York Times (Joe Rennison): “Traders are worried about the world’s largest and most important government bond market, as the Federal Reserve quickens the pace at which it removes one of its primary pandemic supports. When the global economy crashed in March 2020 and markets went into free fall, the U.S. Treasury market — the $25 trillion bedrock of the global financial system — broke down. Sellers struggled to find buyers, and prices whipsawed higher and lower. The Fed stepped in, devoting trillions of dollars to steadying the market. The importance of the Treasury market is hard to overstate. It is the main source of funding for the U.S. government and underpins borrowing costs around the globe, for a huge variety of assets… The proper functioning of this market is paramount. That’s why even small wobbles in this market can generate huge worries. At its worst, a Treasury trading breakdown could cause the value of the dollar, stocks and other bonds to tumble.”

September 15 – Financial Times (Kate Duguid and Stefania Palma): “Wall Street’s top regulator has advanced new rules to push more Treasury bond deals by high-speed traders and hedge funds through clearing houses, in one of its most assertive attempts to shore up the $24tn market. Clearing houses stand between trading counterparties and require insurance, or margin payments, to prevent a default from cascading through the market. Requiring their broader use is an attempt to add safeguards to cash and repo markets, which trade billions of dollars a day to set the price of US government debt but have been tested repeatedly over the past decade.”

September 14 – Bloomberg (Lu Wang): “Another wrinkle in a chaotic stock market where everything from the frenetic activity of quant traders to an ever-hawkish Federal Reserve is making investing harder than usual: A looming $3.2 trillion options expiry played a notable role in the Tuesday selloff. As a hotter-than-expected inflation reading rocked Wall Street, a slew of bearish options that had become worthless during last week’s rally jumped back in the money, forcing market makers to sell underlying stocks to hedge their positions… After the S&P 500 fell below 4,000 — an area that harbors one of the highest open interest to roll out – selling intensified, according to Steve Sosnick, chief strategist at Interactive Brokers LLC. ‘Once we broke through there, all hell broke loose,’ Sosnick said… ‘I have not been one of those to make too much hay about these expirations but lately they really have become significant.’”

September 14 – Bloomberg (Sam Potter): “In Tuesday’s tumultuous trading session was a pattern market watchers have seen time and again this year: A bad day for stocks gets worse, right around the close. Suspicion is growing that a breed of complex but increasingly popular ETF may be helping fuel the trend. With the main equity gauges all down heavily on the day, leveraged exchange-traded funds — which use options to amplify returns, usually of major indexes — added around $15.5 billion of selling pressure to the rout, according to estimates from Nomura Holdings Inc. It’s likely a big reason why stocks took another dip in the last 30 minutes to close out a particular brutal trading session.”

Bursting Bubble and Mania Watch:

September 11 – Bloomberg (Enda Curran and Ainsley Thomson): “Around the world, soaring borrowing costs are squeezing homebuyers and property owners alike. From Sydney to Stockholm to Seattle, buyers are pulling back as central banks raise interest rates at the fastest pace in decades, sending house prices falling. Meanwhile, millions of people who borrowed cheaply to purchase homes during the pandemic boom face higher payments as loans reset. The rapid cooldown in real estate — a leading source of household wealth — threatens to worsen a global economic downturn. While the slump so far isn’t near the levels of the 2008 financial crisis, how the decline plays out is a key variable for central bankers who want to tamp down inflation without hurting consumer confidence and triggering a deep recession. Already, frothy markets such as Australia and Canada are facing double-digit house-price declines, and economists believe the worldwide downswing is only getting started.”

September 13 – Bloomberg (Muyao Shen and David Pan): “Bitcoin tumbled more than 10%, the biggest decline since cryptocurrencies plunged in June, as the broad-based selloff in financial markets spilled over into the digital-asset sector. Ether fell almost 9% to $1,571 even as its underlying Ethereum network is poised for a long-anticipated energy-saving software upgrade. Tether, the largest so-called stablecoin, is the most traded token on Tuesday as investors seek shelter from the sector’s volatility. Other stablecoins such as Binance USD and USD Coin also saw a jump in volume.”

September 15 – Dow Jones (Ben Eisen ): “Mortgage rates topped 6% this week, their highest level since 2008… The average rate on a 30-year fixed mortgage climbed to 6.02% this week, up from 5.89% last week and 2.86% a year ago… The last time rates were this high was in the heart of the financial crisis almost 14 years ago, when the U.S. was deep in recession.”

September 12 – Wall Street Journal (Caitlin Ostroff and Vicky Ge Huang): “Last year was harvest time for crypto miners. Now, they’re getting hit on all sides. Crypto prices are plunging. Miners’ electricity bills are surging. Practically no one wants to buy their equipment. It is a sharp turnaround from 2021, when crypto prices were soaring and many mining firms went on a mostly debt-funded buying spree of mining machines. But this year, crypto prices have been dropping and major crypto projects and companies have been wiped out. That has reduced the profits that miners can make from harvesting digital coins—and from selling their equipment in a pinch. Meanwhile, prices for electricity—needed to keep the miners’ powerful computers running—are soaring.”

September 16 – Bloomberg (Christopher Palmeri): “If you work in film and TV, the bad news is arriving almost daily. Warner Bros. Discovery Inc. said this week it’s sacking 100 TV ad salespeople, Paramount Global acknowledged it may stop offering Showtime as a standalone streaming service, and Netflix Inc., an industry gravy train for the last decade, announced yet-another round of layoffs. A multiyear boom in film and TV production, driven by media companies racing to sign up subscribers for their new streaming services, has come to a painful halt, giving way to firings, introspection and handwringing. While much of the country only worries about a recession, major media companies are cutting jobs or consolidating.”

September 12 – Wall Street Journal (Akane Otani): “Stocks are riding a tentative recovery, with the S&P 500 up 1.1% on Monday, but whether they can keep their momentum hinges in part on how earnings season plays out next month. Analysts have cut their estimates for third-quarter earnings growth by 5.5 percentage points since June 30, according to John Butters, senior earnings analyst at FactSet. That is more than usual and marks the biggest cut since the second quarter of 2020… Companies also have been looking increasingly pessimistic lately. A total of 240 companies in the S&P 500 mentioned recession on their postearnings conference calls for the last quarter, the most ever in FactSet’s data going back to 2010.”

September 13 – Bloomberg (Jenny Surane): “Citigroup Inc. Chief Financial Officer Mark Mason warned trading revenue in the third quarter will likely drop as a slowdown in its business dedicated to securitized products crimps fixed-income trading revenue. Overall markets revenue is likely to drop by a percentage in the mid-to-high single digits compared to a year ago… The firm’s securitized products trading desks are countering the ‘good performance’ Citigroup has seen in foreign exchange and rates products, he said. Investment banking revenue is likely to plummet 50%, in line with the broader slowdown hitting Wall Street, Mason said. That mirrors comments from JPMorgan…”

Ukraine War Watch:

September 12 – Washington Post (Shane Harris, Ellen Nakashima): “A Ukrainian counteroffensive that has sent Russian forces into a hasty retreat could mark a turning point in the war and raise pressure on Moscow to call up additional forces if it hopes to prevent further Ukrainian advances, U.S. and Western officials said… Whether the gains are permanent depends on Russia’s next moves… In mere days, Ukrainian military forces have retaken nearly all of the Kharkiv region that Russian forces occupied since the opening of the war. The rapidity of the pullback appears to have stunned Russian military troops and commanders, officials said. ‘The Russians are in trouble,’ one U.S. official said bluntly. ‘The question will be how the Russians will react, but their weaknesses have been exposed and they don’t have great manpower reserves or equipment reserves.’”

September 13 – CNN (Brad Lendon): “For Russia, the numbers are catastrophic. From Wednesday to Sunday, Vladimir Putin’s military forces saw at least 338 pieces of important military hardware – from fighter jets to tanks to trucks – destroyed, damaged or captured, according to… the open source intelligence website Oryx, as Ukraine’s forces have bolted through Russian-held territory in an offensive that has stunned the Russians in its speed and breadth. Ukraine’s top military commander claimed on Sunday that more than 3,000 square kilometers (1,158 square miles) of territory had been retaken by his country’s forces since the beginning of September.”

September 16 – Bloomberg: “Russian President Vladimir Putin threatened to step up attacks on Ukraine’s civilian infrastructure, vowing to continue his invasion after his forces suffered some of their worst reverses in the seven-month-old campaign. In his first public comments on the issue since Ukraine said it retook as much as a tenth of the territory Russia had seized, Putin was dismissive of the counteroffensive. ‘We’ll see how it goes,’ he said… ‘Just recently the Russian armed forces hit some sensitive targets. Let’s consider that warning strikes,’ Putin told Russian media reporters…”

September 11 – Associated Press (Karl Ritter): “Europe’s largest nuclear plant has been reconnected to Ukraine’s electricity grid, allowing engineers to shut down its last operational reactor in an attempt to avoid a radiation disaster as fighting rages in the area. The six-reactor Zaporizhzhia Nuclear Power Plant lost its outside source of power a week ago after all its power lines were disconnected because of shelling. It was operating in ‘island mode’ for several days, generating electricity for crucial cooling systems from its only remaining operational reactor.”

U.S./Russia/China Watch:

September 15 – Bloomberg (Foster Wong): “China is ready to work with Russia in extending strong support to each other on issues concerning their respective core interests, President Xi Jinping told Russian President Vladimir Putin during their bilateral meeting… Xi says China is also willing to deepen pragmatic cooperation in areas including trade, agriculture and connectivity. Xi also added China and Russia should expand cooperation, safeguard security and interests of the region. And preserve the common interests of developing countries and emerging market countries. Xi praised Russia’s adherence to the ‘one-China principle’ and reiterated Taiwan is a part of China and stressed no country has the right to be a judge on the Taiwan issue.”

September 15 – Washington Examiner (Mike Brest): “Russian President Vladimir Putin and Chinese leader Xi Jinping met in Uzbekistan where they reaffirmed their commitment to strengthening their relationship and putting their mark on the ‘global scale’… ‘In the face of the colossal changes of our time on a global scale, unprecedented in recent history, we are ready to team up with our Russian colleagues to set an example of a responsible world power and to play a leading role in putting a rapidly changing world on the track of sustainable and positive development,’ Xi told Putin… The Chinese leader addressed Putin as his ‘dear and long-time friend,’ and noted that, ‘under conditions of a global pandemic we continue to maintain effective strategic contacts…”

September 13 – New York Times (Keith Bradsher, Anton Troianovski and Jane Perlez): “The summit this week between President Vladimir V. Putin of Russia and Xi Jinping of China is a show of force by two autocratic leaders united against what they consider American hegemony. It is also a moment of mutual weakness as Russia suffers losses in Ukraine and China endures an economic slowdown. They come to the meeting… with their own agendas and their own challenges that will test an important relationship both have described as a friendship with ‘no limits.’ Moscow needs Beijing. Russia’s recent routs on the battlefields of Ukraine, coupled with the broad damage inflicted by Western sanctions, have made Chinese support all the more important… Beijing, though, remains cautious. It wants to project strength in the increasingly acrimonious competition with the United States and can’t afford for its main partner in an authoritarian alliance to face a humiliating defeat.”

Economic War/Iron Curtain Watch:

September 15 – Bloomberg (Eyk Henning, Vanessa Dezem, Dinesh Nair and Todd Gillespie): “Germany is in advanced talks to take over Uniper SE and two other large gas importers in a historic step to avoid a collapse of its energy market, according to people familiar… State ownership of Uniper, VNG AG and Securing Energy for Europe GmbH, formerly Gazprom Germania GmbH, is the main solution under discussion, the people said.”

September 14 – Reuters (Ben Blanchard, Yimou Lee, John O’Donnell, Alexandra Alper and Trevor Hunnicutt): “The United States is considering options for a sanctions package against China to deter it from invading Taiwan, with the European Union coming under diplomatic pressure from Taipei to do the same, according to sources familiar with the discussions. The sources said the deliberations in Washington and Taipei’s separate lobbying of EU envoys were both at an early stage – a response to fears of a Chinese invasion that have grown as military tensions escalate in the Taiwan Strait. In both cases, the idea is to take sanctions beyond measures already taken in the West to restrict some trade and investment with China in sensitive technologies like computer chips and telecoms equipment.”

September 16 – Bloomberg (Selcan Hacaoglu and Firat Kozok): “Turkey’s President Recep Tayyip Erdogan is seeking even closer financial ties with Russia as he attempts to stabilize a troubled economy ahead of next year’s elections, according to Turkish officials. Among his goals are price discounts and lira payments for energy imports, said several Turkish officials who asked not to be identified discussing sensitive information. Turkey’s natural gas bill is set to exceed $50 billion this year and Russia is its biggest energy supplier.”

Inflation Watch:

September 14 – Associated Press (Christopher Rugaber): “U.S. inflation is showing signs of entering a more stubborn phase that will likely require drastic action by the Federal Reserve, a shift that has panicked financial markets and heightens the risks of a recession. Some of the longtime drivers of higher inflation — spiking gas prices, supply chain snarls, soaring used-car prices — are fading. Yet underlying measures of inflation are actually worsening. The ongoing evolution of the forces behind an inflation rate that’s near a four-decade high has made it harder for the Fed to wrestle it under control. Prices are no longer rising because a few categories have skyrocketed in cost. Instead, inflation has now spread more widely through the economy, fueled by a strong job market that is boosting paychecks, forcing companies to raise prices to cover higher labor costs and giving more consumers the wherewithal to spend.”

September 14 – Associated Press (Christopher Rugaber): “Inflation at the wholesale level jumped 8.7% in August from a year earlier, a slowdown from July yet still a painfully high level that suggests prices will keep spiking for months to come… On a month-to-month basis, the producer price index — which measures inflation before it reaches consumers — declined 0.1% from July to August, the second straight monthly decline. Yet the better readings mostly reflect plunging gas prices and don’t necessarily point to a broader slowdown in inflation. A measure that excludes the volatile food and energy categories — so-called core prices — rose 0.4% from July to August and 7.3% in August compared with a year ago.”

September 14 – CNN (Danielle Wiener-Bronner): “Inflation may be slowing, but food prices are still through the roof. Food costs spiked 11.4% over the past year, the largest annual increase since May 1979… Americans browsing the supermarket aisle will notice most food items are far more expensive than they were a year ago. Egg prices soared 39.8%, while flour got 23.3% more expensive. Milk rose 17% and the price of bread jumped 16.2%. Meat and poultry also grew costlier. Chicken prices jumped 16.6%, while meats rose 6.7% and pork increased 6.8%. Fruits and vegetables together are up 9.4%. Overall, grocery prices jumped 13.5% and restaurant menu prices increased 8%… The seasonally adjusted prices of most grocery items ticked up from July to August, but there were some standouts. Margarine spiked the most, up 7.3%. Eggs were 2.9% more expensive and sugar was 2.4% higher, while flour and bread edged up 2.2%. Canned fruit prices rose 3.4% while fresh vegetables got 1.2% pricier. Hot dog prices jumped 4.9%, while ham was up 1.3% and turkey rose 2.2%.”

September 13 – Wall Street Journal (Naureen S. Malik): “August electricity bills for US consumers jumped the most since 1981, gaining 15.8% from the same period a year ago, according to the US Bureau of Labor Statistics. Natural gas bills, which crept back up last month after dipping in July, surged 33% from the same month last year… Broader energy costs slipped for a second consecutive month because of lower gasoline and fuel oil prices. Even with that drop, total energy costs were still about 24% above August 2021 levels. Electricity costs are relentlessly climbing because prices for the two biggest power-plant fuels — natural gas and coal — have surged in the last year as the US economy rebounds from the pandemic and as Russia’s war in Ukraine triggers an energy crisis in Europe. Another factor is the hot and humid summer across most of the lower 48 states drove households and businesses to crank up air conditioners.”

September 13 – Wall Street Journal (Collin Eaton and Jennifer Hiller): “U.S. consumers are getting a reprieve from high gasoline prices, but a jump in electricity and natural-gas costs are increasing their energy bills as winter approaches. Gasoline prices have dropped about 26% since June, helping to bring the U.S. consumer-price index for energy in August down 5% from July, a second consecutive monthly decline… But other energy costs are rising, offsetting relief at the pump. The index for electricity in August climbed 15.8% over the same month a year ago, the biggest such 12-month increase since 1981…”

September 13 – Bloomberg (Matthew Boesler): “US rental inflation accelerated in August as shelter costs rose 0.7%, marking the biggest monthly increase since 1991 and keeping overall inflation elevated… Analysts say rents have more room to run in the months ahead as more leases expire and incorporate higher market prices. Rental prices surged last year, and although inflation in new leases has since moderated, long-term tenants still haven’t experienced the biggest hikes in asking prices. As leases continue to turn over through the remainder of the year, the Labor Department measure will face more upward pressure. The August increase brought shelter inflation over the last 12 months to 6.3%, the highest over any such stretch since 1986.”

September 16 – Wall Street Journal (Kris Maher): “More workers across a range of industries are going on strike, seeking pay raises to catch up to inflation while the tight labor market has taken away some of the risk of walking off the job. In the past few weeks, thousands of teachers in Ohio and Washington, nursing-home workers in Pennsylvania and mental-health therapists in California have walked picket lines after contract negotiations broke down over wages and other issues. Other workers have held daylong walkouts as they try to unionize coffee shops, distribution centers and other workplaces. There were 180 strikes involving roughly 78,000 workers in the first six months of this year, up from 102 involving 26,500 workers in the same period a year earlier, according to… the Cornell University School of Industrial and Labor Relations.”

September 13 – Bloomberg (Martine Paris and Michael Hirtzer): “Six months after Russia’s invasion of Ukraine sent wheat prices to a record, the cost for flour and prepared flour mixes is surging by the most ever, putting increasing pressure on already elevated inflation… Aside from just flour, spikes in bakery products like bread, muffins, cupcakes and cookies are also at historical highs. That’s exacerbating the pain for American consumers, who have been squeezed by soaring housing and medical costs, and could dampen demand for discretionary categories like holiday shopping.”

September 11 – Wall Street Journal (Jaewon Kang and Jesse Newman): “High temperatures in the Western U.S. are hitting the produce industry, damaging crops, shrinking shipments and leaving fewer leafy greens and fruits on supermarket shelves. A California grower said some of his lettuce leaves are turning brown and melting in the fields because of crop diseases intensified by the high temperatures. In Pennsylvania, a retailer said its stores went a week without having strawberries to sell. A New York distributor has substituted honeydew melons for watermelons, which have become scarce. Supermarkets say they are giving less shelf space to products with weather-induced discolorations, bruises or burns.”

September 13 – Bloomberg (Michael Sasso and Alex Tanzi): “Inflation soared to 13% in Phoenix last month, a record for any US city in data going back 20 years and more than twice as high as San Francisco. Other cities across the South and Southwest saw double-digit increases in consumer prices, with the Atlanta metropolitan area posting annual inflation of 11.7% and Miami reaching 10.7%…”

September 12 – Reuters (Dan Burns): “U.S. consumers’ inflation expectations slid further in August as gasoline prices extended their steep decline from June’s record high, a development likely to be welcomed by Federal Reserve policymakers weighing how big an interest rate hike to deliver next week. Consumers in August saw inflation at 5.75% over the next 12 months, down from 6.2% in July and the lowest rate since October 2021, the New York Fed’s monthly consumer expectations survey showed…”

September 16 – Bloomberg (Annie Lee): “The surge in prices of lithium, the key battery material used to power electric cars, is seemingly unstoppable. Lithium carbonate hit a fresh record of 500,500 yuan ($71,315) a ton in China Friday, according to data from Asian Metal Inc. Prices more than tripled in the past year, inflating the cost of batteries used in electric vehicles, with recent gains driven by strong demand and disruptions at a domestic producing hub.”

Biden Administration Watch:

September 15 – Reuters (Trevor Hunnicutt and Steve Holland): “Major U.S. railroads and unions secured a tentative deal on Thursday after 20 hours of intense talks brokered by President Joe Biden’s administration to avert a rail shutdown that could have hit food and fuel supplies across the country and beyond. Biden called the deal a ‘big win for America’ and for tens of thousands of rail workers. Thanking business and labor, the Democratic president promised more worker-company agreements in the future.”

September 12 – Reuters (Karen Freifeld and Alexandra Alper): “The Biden administration plans next month to broaden curbs on U.S shipments to China of semiconductors used for artificial intelligence and chipmaking tools, several people familiar with the matter said. The Commerce Department intends to publish new regulations based on restrictions communicated in letters earlier this year to three U.S. companies — KLA Corp, Lam Research Corp and Applied Materials…”

September 13 – Reuters (Dan Burns): “The U.S. government posted a $220 billion budget deficit for August, up 29% from the $171 billion gap reported in the same month last year, as spending on health services, education and interest on the public debt outstripped a double-digit increase in revenues… The Treasury said that receipts in August grew by $35 billion, or 13%, from a year earlier to $304 billion, with a $25 billion, or 11%, increase in individual income tax withholdings accounting for most of the gain. But outlays climbed by $84 billion, or 19%, to $523 billion, leading to only the second year-over-year increase in the federal deficit so far in fiscal 2022…”

Federal Reserve Watch:

September 13 – Financial Times (Colby Smith): “Economists and investors are braced for aggressive Federal Reserve interest rate increases to continue beyond September after an unexpected jump in monthly inflation reignited fears over the US central bank’s grip on persistent price pressures. US consumer price growth accelerated once again in August, defying expectations for a 0.1% monthly decline, as a steep slide in energy prices failed to offset rising costs elsewhere. Meanwhile, ‘core’ inflation, which strips out volatile items such as energy and food, registered an alarming 0.6% increase for the month. ‘To call this a disappointment would be an understatement,’ said David Rosenberg, chief economist and president of Rosenberg Research. ‘All we’re left with is the view that the [Federal Open Market Committee] hawks so far continue to have the story right and they are in charge.’”

U.S. Bubble Watch:

September 15 – Bloomberg (Augusta Saraiva): “Applications for US unemployment insurance fell for a fifth straight week, suggesting demand for workers remains healthy despite an uncertain economic outlook. Initial unemployment claims decreased by 5,000 to 213,000 in the week ended Sept. 10… The median estimate… called for 227,000 new applications. The four-week moving average, which smooths out volatility from week to week, dropped to 224,000 — the lowest since June.”

September 15 – Bloomberg (Reade Pickert): “US retail sales unexpectedly rose in August after declining a month earlier, as consumer demand for goods broadly held up but showed signs of moderating amid historic inflation. The value of overall retail purchases increased 0.3% last month after a downwardly revised 0.4% drop in July… Excluding gasoline, retail sales were up 0.8%… Eight of 13 retail categories grew last month, according to the report, including a surge in sales at auto dealers. Purchases at furniture stores, health and personal care stores and nonstore retailers declined.”

September 13 – Reuters (Lucia Mutikani): “U.S. small-business confidence improved in August as worries about inflation subsided and demand for workers remained strong despite the uncertainty shrouding the economy, a survey showed… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index increased 1.9 points to 91.8 this month, reversing some of the deterioration suffered in the first half of the year. Twenty-nine percent of owners reported that inflation was their single most important problem in operating their business, down 8 points from July’s reading, which was the highest share since the fourth quarter of 1979.”

September 14 – CNBC (Diana Olick): “Mortgage demand appears to have nowhere to go but down, as interest rates go up… Mortgage applications to purchase a home squeezed out a gain of 0.2% from the previous week, but were 29% lower than the same week one year ago.”

September 14 – Yahoo Finance (Ben Werschkul): “After 9 months of economic uncertainty, CEO optimism continues to fall. The latest quarterly survey of America’s top business leaders from the Business Roundtable… finds pessimism growing among America’s C-suite as businesses mull what could be coming in the next six months for the U.S. economy. ‘Global economic uncertainty continues to temper CEO sentiment for domestic plans and expectations’ General Motors (GM) CEO Mary Barra, the Business Roundtable Chair, said…, adding ‘We must remain steadfast in putting in place the building blocks for future economic growth.’”

September 13 – Wall Street Journal (Paul Overberg and John McCormick): “Americans as a whole have experienced two years in a row of flat or declining household income…, reflecting the pandemic’s lingering economic pain as inflation is also taking the largest bite out of pocketbooks in four decades. In its annual assessment of the nation’s financial well-being, the Census Bureau said median household income of about $70,800 in 2021 wasn’t different in a statistically significant way from the inflation-adjusted 2020 estimate of about $71,200.”

September 15 – Associated Press (Ken Sweet): “Americans have grown fond of ‘buy now, pay later’ services, but the ‘pay later’ part is becoming increasingly difficult for some borrowers. Buy now, pay later loans allow users to pay for items such new sneakers, electronics, or luxury goods in installments. Companies such as Affirm, Afterpay, Klarna and PayPal have built popular financial products around these short-term loans, particularly for younger borrowers, who are fearful of never-ending credit card debt. Now, as the industry racks up customers, delinquencies are climbing. Inflation is squeezing consumers, making it tougher to pay off debts. Some borrowers don’t budget properly, particularly if they are persuaded to take out multiple loans, while others may have been credit risks to begin with.”

September 12 – CNBC (Hugh Son): “The weakest American borrowers are starting to miss payments and default on their loans, and that is showing up at a surprising place: Goldman Sachs. While competitors like Bank of America enjoy repayment rates at or near record levels, Goldman’s loss rate on credit card loans hit 2.93% in the second quarter. That’s the worst among big U.S. card issuers and ‘well above subprime lenders,’ according to… JPMorgan. The profile of Goldman’s card customers actually resembles that of issuers known for their subprime offerings. More than a quarter of Goldman’s card loans have gone to customers with FICO scores below 660… Goldman’s credit card business, anchored by the Apple Card since 2019, has arguably been the company’s biggest success yet in terms of gaining retail lending scale. It’s the largest contributor to the division’s 14 million customers and $16 billion in loan balances, a figure that Goldman said would nearly double to $30 billion by 2024.”

September 13 – Wall Street Journal (David Benoit): “Deposits at U.S. banks fell by a record $370 billion in the second quarter, the first decline since 2018. Deposits fell to $19.563 trillion as of June 30, down from $19.932 trillion in March… The outflow in the quarter isn’t a problem for banks, which are sitting on more deposits than they want. Deposits in the banking system usually stay relatively stable, but swelled by some $5 trillion in the past two years due to pandemic stimulus. Now, a series of Federal Reserve rate increases is taking some of that money out of the system, in part by decreasing demand for loans and increasing demand for government bonds.”

Fixed Income Watch:

September 12 – Bloomberg (Nic Querolo): “Municipal-bond investors are dumping holdings at an unprecedented rate as the worst slump in decades for US state and city debt rattles this traditionally staid asset class. The tally of outflows this year from muni-focused bond funds and exchange-traded funds has reached $84 billion, on track for the largest annual net redemption since at least 1992, according to Refinitiv Lipper… Such a cash exodus is a hallmark of poor performance periods for the muni market, which is dominated by individual investors who tend to get spooked by negative returns.”

September 16 – Dow Jones (Matt Wirz): “The credit ratings of investments in collateralized loan obligations has hit a record low by one measure, flashing a warning sign in the roughly $850 billion CLO market. Corporate loans rated single-B-minus by S&P Global Ratings now make up nearly 30% of CLO holdings, the highest level since the 2008 credit crisis… If ratings of even a fraction of those loans fall one more notch to triple-C, they risk triggering credit rating limits on CLOs and dragging down prices of CLO securities. CLOs are the largest buyers in the roughly $1.5 trillion market for leveraged loans issued by companies with below-investment-grade credit ratings.”

China Watch:

September 15 – Bloomberg: “China’s central bank drained liquidity from the banking system for a second straight month while leaving rates unchanged as it sought to ease pressure on the yuan from a widening policy divergence with the Federal Reserve… PBOC caution on easing comes amid heightened concerns over capital outflows after US inflation data renewed bets for a large Fed hike this month. It also follows data that showed a slow recovery in China’s credit growth last month, which may have reduced the urgency for back-to-back rate cut while the impact of other measures to support the economy take effect.”

September 11 – MarketWatch (Chris Matthews): “As governments in the U.S. and Europe mishandled one calamity after another — from the 2008 financial crisis to botched efforts to contain COVID-19 — even champions of liberal democracy looked on with envy as China’s policy makers navigated the same troubled waters with apparent ease. But the cracks of China’s governing model are beginning to show as its real estate sector deals with the ramifications of a bust in the property market and as its zero-Covid policy falters in the face of fast-spreading new variants. ‘There has been a certain sort of envy in the West of what appeared to be the extraordinary competence of China’s policy makers, but at the moment the emperor has no clothes,’ said Jeremy Mark, a senior fellow at the Atlantic Council and an expert on Asian economies.”

September 14 – Reuters (Kevin Yao): “China’s ruling Communist Party sets the stage next month for the biggest overhaul of its economic leadership in a decade, with a generation of reform-minded policymakers expected to step down amid worsening growth prospects. Beijing’s once-in-five years reshuffle begins at the party congress that starts Oct. 16, where President Xi Jinping is poised to break with precedent and secure a third leadership term. While top government officials remain in posts until the annual parliament meeting, usually in March, expected the party conclave will offer clues on who is in line for top posts and identify who succeeds Li Keqiang, who steps down in March after two terms as premier, a position tasked with managing the world’s No.2 economy. Li is widely perceived to have seen his role diminished under Xi but has nonetheless been a source of comfort to investors who view him as a moderate voice amid Xi’s shift towards state-driven economic management.”

September 16 – Bloomberg: “China’s broad fiscal deficit widened to a fresh record in the first eight months of the year as land sales continued to drop while efforts to contain Covid outbreaks added to the spending burden. The deficit in the budgets for all levels of government was 6 trillion yuan ($857bn)… That is a new high for any comparable period and compares with a shortfall of 1.1 trillion yuan in January-August last year and a gap of 4 trillion yuan at the same point in 2020.”

September 15 – Reuters (Kevin Yao and Ellen Zhang): “China’s economy showed surprising resilience in August, with faster-than-expected growth in factory output and retail sales shoring up a fragile recovery, but a deepening property slump weighed on the outlook… Industrial output grew 4.2% in August from a year earlier, the fastest pace since March… Retail sales rose 5.4% from a year ago, the quickest in six months and also beating forecasts for 3.5% growth and the 2.7% gain in July. ‘This is due to a lower base for comparison – the Delta wave was weighing on economic activity in August 2021,’ said Julian Evans-Pritchard, a China economist at Capital Economics.”

September 14 – Reuters (Ellen Zhang and Ryan Woo): “China’s exporters – the last reliable pillar of the world’s second-largest economy as it struggled with the pandemic, weak consumption and a property crisis – are warning of hard times ahead as softer overseas markets force them to shed workers, shift to lower-value goods and even rent out their factories. Alarm bells sounded for China’s $18 trillion economy when trade data last week showed export growth well short of expectations and slowing for the first time in four months.”

September 15 – Bloomberg: “China’s home prices slid at a faster pace in August, marking a 12th month of declines, underscoring how a revival of the country’s real estate market could take much longer despite a flurry of government support policies. New-home prices in 70 cities, excluding state-subsidized housing, dropped 0.29% last month from July, when they fell 0.11%… From a year earlier, prices dropped 2.1%, the most in seven years. China’s $2.4 trillion new-home market is showing little signs of recovery, adding to the drag on growth in the world’s second-largest economy. Other figures released Friday showed residential sales tumbled about 30% in the first eight months of the year and property investment shrank more than 7%.”

September 15 – Reuters (Liangping Gao and Ryan Woo): “Woes in China’s property market worsened in August, with official data showing home prices, sales and investment all falling in August… New home prices resumed their month-on-month decline in August, down 0.3%…, dragged down by weak demand in smaller cities amid persistently slow deliveries by heavily-indebted developers… More significantly, prices extended their year-on-year contraction for the fourth month in August, with prices last month falling 1.3%, the fastest annual pace in seven years, and suggesting longer-term homebuyer aversion… Property sales by floor area dropped 22.58% year-on-year… Investment dropped 13.8% year-on-year in August after slumping 12.3% in July. It shed 7.4% in the January-August period.”

September 12 – Bloomberg: “China’s Premier Li Keqiang called for more policies to drive up consumption in the economy as latest figures show a further plunge in travel and spending over a three-day public holiday amid tight Covid controls. Tourism revenue declined 22.8% to 28.7 billion yuan ($4.1bn) over the Mid-Autumn Festival from a year ago. Compared with pre-pandemic levels in 2019, revenue was down 39.4%, worse than last year’s 21.4% drop… The number of trips fell 16.7% to 73.4 million from the same period last year.”

September 14 – Financial Times (Cheng Leng and Edward White): “Fosun International shares have lost nearly one-fifth of their value this month since the announcement of the divestment of a core unit, putting the nearly $40bn of debt amassed by Chinese billionaire Guo Guangchang under increased scrutiny. Fosun International’s Hong Kong-listed shares closed at their lowest point since December 2012… after losing 18% since September 2… The Shanghai-based tycoon had made aggressive acquisitions to build an expansive business empire that includes English football club Wolverhampton Wanderers, Portugal’s biggest bank Millennium BCP and French resort group Club Med. But Fosun has been subject to increasing scrutiny from rating agencies and investors over its debt in the past several months.”

September 15 – Financial Times (Sun Yu and Tom Mitchell): “China’s local government financing vehicles are rushing to buy vast quantities of land with borrowed funds, bailing out cities and provinces struggling for cash after an exodus of debt-stricken private sector developers. The spending spree was unleashed in the run-up to President Xi Jinping’s expected appointment to an unprecedented third term next month and highlights efforts to boost the pandemic-hit economy, which grew just 0.4% year-on-year in the second quarter. Local governments have traditionally relied on LGFVs to support growth by spearheading infrastructure investment. Now the financing vehicles are being called upon to prop up the real estate sector, which accounts for about one-third of total economic output.”

September 14 – Bloomberg: “Investors are stepping up scrutiny of Fosun group, one of China’s largest private-sector conglomerates, as it faces as much as about $8 billion in bond repayments through 2023 following signs of distress in credit markets. Some of Fosun’s dollar bonds were on pace for record lows Wednesday, falling as much as 6 cents after day-earlier declines that were the biggest since a rout in June… Shares of Fosun International Ltd., the group’s most-important arm, dropped to a decade low… The moves have raised concerns about how Fosun will balance liquidity needs. Cash holdings at Fosun International were 117.7 billion yuan ($16.9bn) as of June 30 while total liabilities were 651 billion yuan, 40% of which was interest-bearing borrowings. Some offshore bonds guaranteed by the firm have dropped below 45 cents on the dollar, well into what’s considered distressed territory.”

September 14 – Bloomberg: “Six months after China’s government set ambitious economic targets for the year, growth has slowed so sharply that several major banks don’t even think 3% is achievable anymore. Growth projections have come down steadily since March, when the official target of around 5.5% was first disclosed. The consensus in a Bloomberg survey is for the economy to expand 3.5% this year, which would be the second-weakest annual reading in more than four decades. Forecasters at Morgan Stanley and Barclays Plc are among those predicting even slower growth as risks mount into year-end.”

September 15 – Bloomberg (Lorretta Chen): “Chinese companies are curbing their dollar borrowings at a record pace this year, stung by a property debt crisis on top of rising rates that have dragged down corporate financing in the currency nearly everywhere. The amount of dollar bonds issued and loans taken out by Chinese corporates has slumped 46% to $101 billion… That compares with a 25% drop so far in 2022 among firms in the Asia Pacific region excluding China and a 30% decline in issuance of US currency notes by all companies globally.”

September 13 – Bloomberg: “Cheap hydropower lured energy-intensive aluminum producers to China’s Yunnan province, but more frequent droughts due to climate change are upending what seemed like a win-win. Around 80% of the southwestern province’s electricity comes from hydropower. That’s attracted producers of the metal that takes so much power to produce it’s been described as congealed electricity. Yunnan now accounts for around 13% of Chinese aluminum output. The province’s reservoirs are running dry this year amid a historic drought that also hit neighboring Sichuan. Authorities in Yunnan have ordered smelters to lower production by 10%…”

Central Banker Watch:

September 16 – Bloomberg (William Horobin and Carolynn Look): “The European Central Bank ‘absolutely’ wants to avoid high inflation leading to excessive upward pressure on wages, and its recent interest-rate hikes should signal its determination to meet its price target, President Christine Lagarde said… ‘We have more supply shock than demand shock, but we have both, so we’re obliged to act taking account of this complicated mix of supply and demand… So what we have to do as the central bank is we have to be focused on our price-stability target, which we’ve set at 2% over the medium-term… So we have to use all the monetary policy tools available to us to reach this target.’”

September 12 – Bloomberg (Alonso Soto): “The European Central Bank’s jumbo increase in interest rates last week was designed to keep inflation expectations anchored, according to Vice President Luis de Guindos. The three-quarter-point move marked an unprecedented monetary-tightening step by the ECB, which has been accused of acting too sluggishly to counter record euro-zone price gains. In announcing the decision, policy makers also said they wanted to ‘dampen demand’ — despite Europe’s energy crisis tipping it toward a recession. ‘For a central bank its credibility is fundamental,’ Guindos… ‘If citizens and businesses stop believing that the central bank is going to be able to reduce inflation within a year and a half or two years, then the situation becomes very complicated because second-round effects appear immediately.’”

September 15 – Bloomberg (Carolynn Look): “European Central Bank Vice President Luis de Guindos urged ‘determined action’ to combat record inflation, maintaining officials’ calls for further increases in interest rates after last week’s historic hike… ‘It is true that we are not in a classic demand-driven overheating episode, and that energy remains the dominant driver of rising inflation… But at the current low level of interest rates, monetary policy is still accommodative, thus supporting demand and ultimately also contributing to price pressures… Determined action is essential to keep inflation expectations anchored, which in itself contributes to delivering price stability and avoids second-round effects in inflation,” he said…”

September 14 – Bloomberg (Carolynn Look): “The European Central Bank’s unusually large interest-rate hike last week was ‘appropriate,’ Chief Economist Philip Lane said, while signaling that future steps are likely to get smaller. With euro-area inflation rates far too high, a ‘major step’ was needed to accelerate the shift away from highly accommodative borrowing costs, Lane said… ‘We expect that this transition will require us to continue to raise interest rates over the next several meetings,’ Lane said. ‘The appropriate size of an individual increment will be larger, the wider the gap to the terminal rate and the more skewed the risks to the inflation target.’”

Global Bubble and Instability Watch:

September 15 – Reuters (Andrea Shalal): “World Bank Chief Economist Indermit Gill… said he was concerned about ‘generalized stagflation,’ a period of low growth and high inflation, in the global economy, noting the bank had pared back forecasts for three-fourths of all countries… ‘Six months ago we were really concerned about a slowing recovery and very high prices of some commodities, and now I think we are much more concerned about a generalized stagflation, which brings back really bad memories of the mid-1970s and the lost decades,’ he said. Gill said the current world was more polarized, a growing number of middle-income countries were running into trouble, and many countries were saddled with high debts.”

September 12 – Reuters (Dale Smith): “The ratio of Canadian household debt-to-income widened to a record 181.7% in the second quarter from an downwardly revised 179.3% in the first quarter, Statistics Canada said… National net worth rose by 0.2% in the second quarter to C$17.65 trillion ($13.58 trillion), while national net worth increased to C$455,401 on a per capita basis.”

Europe Watch:

September 14 – Reuters (Kate Abnett and Tom Käckenhoff): “The European Union’s executive outlined plans… to raise more than $140 billion from energy firms to help shield households and businesses from soaring prices that threaten economic recession and insolvencies. European gas and power prices have rocketed this year as Russia cut fuel exports to retaliate for Western sanctions over its invasion of Ukraine, leaving many struggling to pay bills and utilities grappling with a liquidity crunch.”

September 15 – Bloomberg: “The threat of energy rationing in Europe is still real as the German regulator warned that there will likely be gas shortages this winter. The impact of the crisis is reverberating through the economy and markets. The German government is ready to take a stake in troubled gas supplier VNG AG, after Uniper SE said this week that a nationalization of the company was under consideration. Warning signs are piling up elsewhere too, with Electricite de France SA saying the crisis could last beyond this winter.”

September 14 – Financial Times (Ben Werschkul): “Industrial groups in the euro area suffered their biggest monthly fall in production for more than two years in July… Factory output in the 19 countries that share the euro dropped 2.3% in July from the previous month, its biggest fall since April 2020… Economists expect the higher cost of power to continue to hit manufacturing, and consumer spending, in the coming months. ‘Further contractions in industry are on the horizon,’ said Rory Fennessy, an economist at Oxford Economics, adding that companies would be ‘forced to cut back production even if hard rationing is to be avoided’.”

September 13 – Bloomberg (Carolynn Look): “Investor confidence in Germany’s economy, already beneath its pandemic low, deteriorated further as fears grow that a winter energy squeeze will trigger a recession. The ZEW institute’s gauge of expectations fell to -61.9 in September from -55.3 the previous month, worse than economists’ estimates. An index of current conditions also plunged. ‘The prospect of energy shortages in winter has made expectations even more negative for large parts of the German industry,’ ZEW President Achim Wambach said… ‘In addition, growth in China is assessed less favorably. The latest statistical figures already show a decline in incoming orders, production, and exports.’”

September 12 – Bloomberg (Kamil Kowalcze): “German Deputy Finance Minister Florian Toncar warned that the country faces a growing threat of rising consumer prices and low growth rates. ‘We are experiencing supply-chain problems, production bottlenecks and price increases the likes of which we haven’t seen in decades,’ Toncar told VersicherungswirtschaftHEUTE… ‘Growth forecasts have been revised noticeably downward in recent months, while inflation forecasts have been revised ever upward… In this environment, there is an increasing risk of stagflation.’”

September 13 – Bloomberg (Lyubov Pronina and Petra Sorge): “The Belgian brewer of Delirium Tremens beer is facing a real risk of halting production for the first time in more than a century as Europe’s energy crisis creates unexpected ripple effects across the region. From German tomatoes to Swedish bread, Russia’s squeeze on gas supplies is starting to hit sectors well beyond utilities and energy-intensive industries. The spillover on food and drink supplies will likely intensify as temperatures drop and households require heating, forcing businesses and consumers into tough decisions. Brewery Huyghe, located in the Belgian village of Melle, considered shutting production because of a 13-fold surge in the price of liquid carbon-dioxide, which it uses to make beers bubbly.”

EM Crisis Watch:

September 12 – Bloomberg (Subhadip Sircar): “Emerging Asian central banks have seen a sharp depletion in their foreign-exchange reserves, stoking concerns it may crimp market interventions to curb currency losses in the face of the mighty dollar. A closely-watched measure of reserves cover — the number of months of imports a country can finance with its foreign-exchange holdings — has dropped to about seven for EM Asia ex-China, the lowest since the global financial crisis in 2008, according to Standard Chartered Plc. It was about 10 months at the beginning of the year and as high as 16 in August 2020, pointing to an erosion of developing nation firepower to defend currencies. ‘The deterioration indicates that central bank intervention to support local currencies might be much more limited going forward,’ Divya Devesh, head of Asean and South Asia FX research at Standard Chartered in Singapore said… ‘Overall, we expect central banks’ FX policy to turn less supportive.’”

September 13 – Bloomberg (Ruth Carson and Hooyeon Kim): “Policy makers in Asia pushed back against a surging dollar, seeking to stem losses as their currencies teetered on the brink of key levels that may trigger more selling. Officials in Japan and South Korea ramped up the rhetoric, while China’s central bank set the daily reference rate on the yuan at the strongest bias on record after stronger-than-expected US inflation data fueled dollar gains. Authorities in Asia are squaring off with traders who bet that regional currencies will continue to slide as more aggressive Federal Reserve tightening to tackle inflation boosts the dollar. But a depleting stock of foreign reserves may limit the ability of central banks to fight against a surging greenback.”

September 12 – Bloomberg (Ruchi Bhatia): “India’s retail inflation rose more-than-estimated in August, driven by high food and fuel costs, posing a fresh challenge to the central bank’s efforts to cool prices. Consumer prices rose 7% last month from a year earlier… That’s faster than an estimate of a 6.90% gain in a Bloomberg survey of economists and compares with a 6.71% reading in July.”

September 15 – Bloomberg (Patrick Gillespie): “Argentina’s central bank raised its benchmark interest rate Thursday in a bid to prop up its currency and curb inflation nearing 100%. The central bank boosted its benchmark Leliq rate by 5.5 percentage points to 75%… The move comes a day after data showed consumer prices jumped nearly 79% a year in August, the fastest pace in 30 years. It was the bank’s ninth rate hike this year.”

September 14 – Bloomberg (Patrick Gillespie): “Argentine annual inflation surged to 78.5% in August, almost certainly cementing another central bank interest rate hike as early as this week… Consumer prices rose 7% from a month earlier. Clothing prices rose 109% from a year earlier, while food costs increased by 80%.”

Japan Watch:

September 12 – Reuters (Leika Kihara): “Japan’s wholesale prices rose 9.0% in August from the previous year, matching the annual pace of growth in July…, signalling that persistently high raw material costs continued to squeeze corporate margins. The rise in the corporate goods price index (CGPI)…, was largely in line with a median market forecast for a 8.9% increase… The index, at 115.1, extended a record high for the fifth straight month in a sign Japan continues to feel the impact of rising global raw material prices.”

September 11 – Reuters (Leika Kihara): “Japan’s government must take steps as needed to counter excessive declines in the yen, a senior government official said…, as the currency slides to its weakest level against the dollar in 24 years. The comments from Seiji Kihara, the deputy chief cabinet secretary of Prime Minister Fumio Kishida’s government, are the latest to highlight authorities’ deep concern about the yen’s slide.”

Social, Political, Environmental, Cybersecurity Instability Watch:

September 10 – Wall Street Journal (Anna Hirtenstein and Katherine Blunt): “Record drought across the globe this year dried up rivers and reservoirs and sapped the world’s largest source of renewable electricity: hydropower. The dip in electricity generated by the flow of water across dams in China, Europe and the U.S. stifled power production. In some places, it has caused factories and smelters to shut down for weeks on end. California’s energy grid faced its biggest blackout risk since 2020 this week because of record demand and lack of electricity supply, including from water-starved hydropower stations. As governments push a transition away from fossil fuels and climate change upends the reliability of nature-driven energy sources, the drought has also raised questions about how hydropower fits into the energy mix.”

September 11 – Reuters (Denis Balibouse): “A rocky Alpine path between two glaciers in Switzerland is emerging for what the local ski resort says is the first time in at least 2,000 years after the hottest European summer on record. The ski resort of Glacier 3000 in western Switzerland said this year’s ice melt was around three times the 10-year average, meaning bare rock can now be seen between the Scex Rouge and the Zanfleuron glaciers at an altitude of 2,800 metres and the pass will be completely exposed by the end of this month.”

Levered Speculation Watch:

September 14 – Bloomberg (Lydia Beyoud and Liz Capo McCormick): “Hedge funds would have to start centrally clearing many of their transactions in US Treasuries under a new regulatory plan designed to protect against a market meltdown. The Securities and Exchange Commission on Wednesday voted unanimously in favor of proceeding with a plan to give clearinghouses — which sit between buyers and sellers and ultimately backstop the transactions — a much bigger footprint in the $24 trillion dollar market for American government bonds. The draft regulations would make trading safer and limit the chance of any single firm harming the broader financial system, according to the SEC. If finalized, the regulations would represent a significant overhaul for the market and are likely to draw pushback from parts of Wall Street.”

September 15 – Reuters (Nell Mackenzie): “Hedge funds trading Eastern European stocks and bonds are seeing their worst performance in eight years…, the BarclayHedge Eastern European index shows. The index, which tracks the performance of hedge funds trading stocks and bonds in the region, has dropped by 22.65% from the start of 2022 to the end of August…”

Geopolitical Watch:

September 15 – Reuters (Max Hunder): “Supporting Ukraine comes at a high cost, but freedom is ‘priceless,’ European Commission chief Ursula von der Leyen told Reuters… Speaking in Kyiv, Von der Leyen reiterated that the bloc would be unwavering in its backing of Ukraine, as cracks start to appear among member states in how to further punish Russia for the invasion of its neighbour.”

September 15 – Reuters (John Chalmers and Ben Blanchard): “Members of the European Parliament backed a resolution… that condemned China’s live-fire military exercises in the Taiwan Strait and called for closer ties between the European Union and Taipei. The EU assembly said… the resolution, backed in a vote by 424 lawmakers with 14 against and 46 abstentions, also demanded that Beijing refrain from measures that could destabilise the Taiwan Strait and regional security.”

September 12 – Reuters (Ron Popeski, Chris Reese and Sam Holmes): “Clashes erupted between Azerbaijani and Armenian troops, Russian news agencies reported…, in a resumption of decades-old hostilities linked to the disputed territory of Nagorno-Karabakh. Azerbaijan, which re-established full control over the territory in a six-week conflict in 2020, acknowledged casualties among its forces. Armenia made no mention of losses, but said clashes persisted overnight.”

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