September 22, 2023: Higher for Longer

September 22, 2023: Higher for Longer
Doug Noland Posted on September 23, 2023

Mohamed El-Erian: “I worry that the economic and policy signals coming out of this Federal Reserve press conference may come across to many as both confused and confusing. Some will deem this an inevitable consequence of this phase of the inflation and policy cycle; others will view it as further evidence of challenged Fed communication.”

Seema Shah, Chief Global Strategist, Principal Asset Management (appearing Friday on Bloomberg TV): “I think the central banks really don’t know what’s going on. They’re really confounded. We’ve heard from everyone that, actually, Powell is a little bit confused as he talked through the conference. The questions, actually, he gave very, very unclear answers. It was quite confusing.”

September 22 – Financial Times (Mohamed El-Erian): “‘I know it’s complicated.’ That was European Central Bank president Christine Lagarde’s response to a question on the policy outlook earlier this month. Lagarde isn’t the only central bank chief signalling the complex road ahead as their institutions embark on the ‘last mile’ of the battle against high inflation. At last month’s Jackson Hole conference of central bankers, Federal Reserve chair Jay Powell concluded his speech by stating that ‘we are navigating by the stars under cloudy skies’. On Wednesday, he stated six times the need to ‘proceed carefully’.”

“Anyone who isn’t confused really doesn’t understand the situation.” Edward R. Murrow

I had no major issues with Powell’s press conference. We’d prefer to see the head of the Federal Reserve, the world’s preeminent central bank, decisive and exuding confidence. Powell was instead notably humble and cautious, attributes befitting today’s extraordinary backdrop (not to mention recent Fed forecasting lapses). Significant revisions to the committee’s Survey of Economic Projections (“dot plot”) only elevated Powell’s communications challenge.

Ten-year Treasury yields jumped nine bps Wednesday to 4.41%, and then Thursday traded above 4.50% for the first time since October 2007. Benchmark MBS yields traded as high as 6.33% intraday Wednesday – matching the high back to July 2007 – before closing the week 12 bps higher at 6.17%.

Surging yields were not limited to Treasury and agency securities. Sovereign yields hit at least decade highs this week in countries including Canada, Germany, France, Spain, Sweden, Belgium, Austria, Netherlands, Australia, New Zealand, and Japan.

Markets have been in denial. Perhaps it was just seeing reality codified in the Fed’s “dot plot” that forced a reality check. Economic momentum has persisted in the face of sharply higher policy rates, tempering labor market cooling while reinforcing inflation dynamics. The bullish Goldilocks narrative of rapidly declining inflation, comfy economic deceleration, and an impending easing cycle was just too farfetched (and so previous cycle). “Higher for Longer” is real and needs to be factored into analyses and asset prices.

It’s intriguing to ponder how much the narrative has shifted in seven months. Powell referred to “financial conditions” 11 times during his February 1st press conference. Wednesday, goose eggs. There were “demand conditions,” “market conditions,” and one “tighter Credit conditions for households and businesses.” But the entire focus on financial conditions has quietly dropped out of sight – strangely MIA in a backdrop where it could shed such critical light.

Powell: “I guess it’s fair to say that the economy has been stronger than many expected, given what’s been happening with interest rates. Why is that? Many candidate explanations. Possibly a number of them make sense. One is just that household balance sheets and business balance sheets have been stronger than we had understood, and so that spending has held up and that kind of thing. We’re not sure about that.”

There’s little disagreement that the Fed waited too long to commence policy normalization. In the words of Jamie Dimon, “a day late and a dollar short.” Following an unprecedented $5 TN of monetary inflation, policy tightening faced myriad challenges. Late to the game, the FOMC moved aggressively with rate hikes. But less than a year into policy normalization, the Fed was compelled to respond aggressively to an unfolding banking crisis.

The collapse of SVB precipitated over $700 billion of combined liquidity injections from the Fed and FHLB. Importantly, this bailout unfolded quickly – before de-risking/deleveraging had mustered momentum. Essentially, another shot of liquidity was provided to a system highly over-liquefied from unprecedented pandemic monetary and fiscal stimulus. Not only was the Washington liquidity backstop (“Fed put”) further validated, but the banking bailout also demonstrated that the Fed would respond more urgently than ever to heightened systemic stress. Leveraged Speculators Emboldened.

Basically, crisis management operations usurped the tightening cycle. This was a huge gift to a marketplace absorbed by late-cycle speculative dynamics. First, Washington liquidity sparked a powerful liquidity-producing short squeeze and unwind of derivative hedges. The addition of FOMO and derivatives-related buying propelled speculative melt-up dynamics.

Importantly, market financial conditions loosened dramatically. And it should come as little surprise that surging stock prices and a strong corporate debt market recovery helped sustain household borrowing and spending, corporate hiring and investment, and general government expenditures. Moreover, the resulting A.I. mania resuscitated a deflating “tech” Bubble, unleashing a potent market and economic phenomenon.

I hold a minority opinion on this. Colossal late-cycle pandemic monetary and fiscal stimulus, along with resulting spikes in inflation and speculative excess, demanded the Fed “slam on the brakes.” Otherwise, given enough time, inflation would become deeply embedded, and highly speculative markets would succumb to only greater destabilizing excess.

CPI (y-o-y) had jumped to 4.2% by April 2021. And here we are 30 months later, with financial conditions still not sufficiently tight. There were compelling arguments for the Fed to impose a painful tightening. After all, household holdings of money-like instruments (deposits, money market funds, Treasury and Agency Securities) had inflated an incredible $4.3 TN in the pandemic’s first 10 quarters. Moreover, despite economic recovery and resurgent markets, egregious fiscal stimulus was unrelenting.

U.S. and global economies had developed powerful inflationary biases. “Deglobalization”, infrastructure spending, climate change and the energy transition, along with scores of new technologies, combined with accommodative financial markets to provide ample spending to sustain economic expansions. This locomotive required significantly less financial accommodation. The unemployment rate was down to 3.8% by February 2022, the same level reported last month. Major tightening and recessionary conditions would have been required to restore the necessary labor market slack to avoid a wage-price spiral.

Central bankers have become increasingly uncomfortable. Few have experience with wage-price spirals and “second-round” inflation effects outside of textbooks. I’ll assume they now recognize their focus on tighter bank lending was too narrow, these days better appreciating the stimulative effects from loose market financial conditions. Yet they lack a framework for incorporating market financial conditions into their analyses, forecasts, and decision-making. Their only answer is to fall back on nebulous “data dependent” and “Higher for Longer.”

But “Higher for Longer” is a big problem. It’s a problem for our federal government’s massive debt load, with ballooning debt service costs at the cusp of spiraling out of control. It’s a problem for risky corporate borrowers with a Trillion of debt to refinance over the next two years. It’s a problem for a banking system sitting on enormous underwater “held to maturity” bond portfolios, along with an equities market dominated by over-valued growth stocks. It’s a problem for millions of households who have loaded up on debt. It is a big problem for an over-indebted world.

September 19 – Reuters (Rodrigo Campos): “Global debt hit a record $307 trillion in the second quarter of the year despite rising interest rates curbing bank credit, with markets such as the United States and Japan driving the rise, the Institute of International Finance (IIF) said… The financial services trade group said… global debt in dollar terms had risen by $10 trillion in the first half of 2023 and by $100 trillion over the past decade. It said the latest increase has lifted the global debt-to-GDP ratio for a second straight quarter to 336%. Prior to 2023, the debt ratio had been declining for seven quarters.”

And, to a great extent, deleterious “Higher for Longer” effects will unfold over time. And such analysis is all fine and dandy – except that today’s highly speculative markets have a pretty short-term focus. For those interested in more immediately impactful analysis, let me propose that “Higher for Longer” is today a critical issue for fragile global markets.

“Higher for Longer” is an immediate issue for China. The renminbi is under major selling pressure, as finance flees Chinese stocks, Credit instruments, and China more generally. Beijing needs lower interest rates, rather than widening interest-rate differentials. It’s worth noting that the renminbi was down 0.32% this week and has already given back about half of the meager Beijing-induced rally (“PBOC: Says Resolutely Put an End to Speculation in FX Market”). Stakes are rising. We can assume huge positions are accumulating in currency and swaps derivatives markets, with exposures rapidly mounting at the big Chinese banks.

“Higher for Longer” is an immediate issue for the Japanese yen. The $/yen closed Friday trading at 148.37, an 11-month low for the Japanese currency. The Bank of Japan (BOJ) desperately needs to commence monetary policy normalization, yet another meeting passed without action. They needed waning global inflation to take pressure off global policy tightening and surging market yields. “Higher for Longer” only exacerbates interest-rate differentials, placing critical pressure on the yen. Meanwhile, surging global yields place additional pressure on the Japanese bond market, with yield curve control (YCC) buying equating to additional BOJ liquidity creation further pressuring the yen. The $/yen breached 150 in October for the first time since 1990. A breakout above this level risks a disorderly currency market dislocation.

Bolstered by the weak yen and renminbi, the Dollar Index closed the week at 105.583, right near a 10-month high. EM currencies were under further pressure this week, with the Hungarian forint down 1.67%, the Brazilian real 1.46%, the Colombian peso 1.37%, and the Chilean peso 0.96%. EM bonds were also under pressure. Local currency yields rose 49 bps in Colombia (11.36%), 18 bps in the Czech Republic (4.36%), 17 bps in South Africa (12.23%), 15 bps in Poland (5.76%), and 14 bps in Mexico (9.75%). There was notable pressure on dollar-denominated EM bonds. Dollar yields rose 17 bps in Ukraine (28.25%), 13 bps in Panama (6.47%), 13 bps in Russia (19.19%), 13 bps in Chile (5.52%), 11 bps in Peru (5.75%), 11 bps in Saudi Arabia (5.29%), 11 bps in Philippines (5.36%), 11 bps in Mexico (6.12%) and 10 bps in Brazil (6.64%).

“Higher for Longer” risks exacerbating the strong dollar/EM outflows/surging yields “doom loop.” The strong dollar and rising global yields are already pressuring levered EM “carry trades.” Especially in the event of disorderly declines in the renminbi and yen (likely concurrently), a destabilizing de-risking/deleveraging dynamic could quickly gather momentum.

September 22 – Bloomberg (Isabelle Lee): “A breed of quant investor that spreads bets across assets is reeling this week as the hawkish monetary era intensifies. The synchronized slide across stocks, bonds and many commodities following the Federal Reserve meeting hammered the investing approach known as risk parity. The strategy… divides a portfolio across assets based on the perceived risk of each. It tends to rely on government debt to hedge equity declines, so can suffer in a broad selloff. The cross-asset declines handed the $926 million RPAR Risk Parity ETF its worst day since December and sent the fund to its lowest in 10 months. A key gauge of the strategy suffered one of its biggest drops this year.”

Many indicators suggested fledgling de-risking/deleveraging.  It appeared that Bank CDS prices were leading the surge in risk premiums – and it was a global phenomenon.

China Development Bank CDS jumped nine to 92 bps, China Construction Bank seven to 98 bps, Bank of China seven to 97 bps, and Industrial and Commercial Bank six to 96 bps. Chinese bank CDS are quickly approaching late-August – pre-Beijing stimulus measures – spike highs. China sovereign CDS jumped 10 to 80 bps, second only this year to the 22 bps surge the week of August 18th.

European (subordinated) bank debt CDS surged 17 bps this week to an 11-week high of 161 bps, the largest weekly gain since the March banking crisis. Deutsche Bank, NatWest and UniCredit were at the top of the week’s leaderboard. But U.S. banks were not far behind. JPMorgan CDS rose three, Bank of America six, and Citigroup seven – the largest weekly increases since early May. High-yield CDS surged 21 to a one-month high 445 bps.

September 18 – Financial Times (Kate Duguid): “A build-up of leveraged bets has the potential to ‘dislocate’ trading in the $25tn US Treasuries market, the umbrella group for central banks said, the latest high-profile warning over the potential for crowded hedge fund bets to sow instability. The Bank for International Settlements issued a warning in its quarterly report… about the growth of the so-called basis trade… ‘The current build-up of leveraged short positions in US Treasury futures is a financial vulnerability worth monitoring because of the margin spirals it could potentially trigger,’ the BIS said… ‘Margin deleveraging, if disorderly, has the potential to dislocate core fixed-income markets,’ it said… As evidence of a build-up in the trade, the BIS cited data… showing a rise of short positions in Treasury futures contracts to record levels in some maturities in recent weeks. The BIS values short positions in Treasury futures at about $600bn.”

While the so-called “basis trade” is not necessarily directly vulnerable to “Higher for Longer,” a bout of global de-risking/deleveraging would put this huge speculative leverage at considerable risk. And this is where the analysis gets interesting.

Seemingly impervious to the Fed’s aggressive rate hike cycle, it’s easy these days to argue that our markets and economy are robust and inherently resilient. For most, there’s no obvious catalyst that would alter this positive backdrop. But I see a Bubble acutely vulnerable to an abrupt tightening of financial conditions – an expected consequence of a global de-risking/deleveraging episode.

Stated differently, I increasingly see the unfolding global “risk off” dynamic as a catalyst for U.S. market deleveraging. This would surprise highly speculative markets. It would also catch the Fed flat-footed. At this point, they have a well-defined plan for timely management of bank runs and banking system liquidity issues. Global de-risking/deleveraging would present a completely different dynamic – with illiquidity and dislocation erupting unpredictably across markets. And with inflation and “Higher for Longer” currently occupying their minds, I wouldn’t bet on proactive crisis management in the scope necessary to counter major speculative deleveraging.

For the Week:

The S&P500 dropped 2.9% (up 12.5% y-t-d), and the Dow fell 1.9% (up 2.5%). The Utilities lost 1.7% (down 11.4%). The Banks sank 4.6% (down 22.2%), and the Broker/Dealers slumped 3.8% (up 8.7%). The Transports fell 2.3% (up 11.9%). The S&P 400 Midcaps dropped 2.8% (up 2.7%), and the small cap Russell 2000 sank 3.8% (up 0.9%). The Nasdaq100 fell 3.3% (up 34.4%). The Semiconductors slumped 3.2% (up 32.9%). The Biotechs dropped 3.3% (down 5.1%). With bullion little changed, the HUI gold equities index fell 2.7% (down 2.9%).

Three-month Treasury bill rates ended the week at 5.3075%. Two-year government yields rose eight bps this week to 5.11% (up 68bps y-t-d). Five-year T-note yields jumped 10 bps to 4.56% (up 55bps). Ten-year Treasury yields gained 10 bps to 4.43% (up 56bps). Long bond yields jumped 11 bps to 4.53% (up 56bps). Benchmark Fannie Mae MBS yields surged 12 bps to 6.17% (up 78bps).

Greek 10-year yields rose 10 bps to 4.17% (down 39bps y-t-d). Italian yields jumped 13 bps to 4.59% (down 10bps). Spain’s 10-year yields gained seven bps to 3.82% (up 31bps). German bund yields increased six bps to 2.74% (up 30bps). French yields rose seven bps to 3.29% (up 31bps). The French to German 10-year bond spread widened one to 55 bps. U.K. 10-year gilt yields dropped 11 bps to 4.25% (up 58bps). U.K.’s FTSE equities index slipped 0.4% (up 3.1% y-t-d).

Japan’s Nikkei Equities Index dropped 3.4% (up 24.2% y-t-d). Japanese 10-year “JGB” yields added three bps to 0.75% (up 32bps y-t-d). France’s CAC40 slumped 2.6% (up 11.0%). The German DAX equities index fell 2.1% (up 11.7%). Spain’s IBEX 35 equities index declined 0.5% (up 15.5%). Italy’s FTSE MIB index fell 1.1% (up 20.5%). EM equities were mixed. Brazil’s Bovespa index dropped 2.3% (up 5.7%), while Mexico’s Bolsa index recovered 0.6% (up 6.6%). South Korea’s Kospi index sank 3.6% (up 12.2%). India’s Sensex equities index dropped 2.7% (up 8.5%). China’s Shanghai Exchange Index increased 0.5% (up 1.4%). Turkey’s Borsa Istanbul National 100 index rallied 1.0% (up 45.9%). Russia’s MICEX equities index sank 3.3% (up 41.5%).

Investment-grade bond funds posted inflows of $2.063 billion, while junk bond funds reported outflows of $416 million (from Lipper).

Federal Reserve Credit dropped $59.2bn last week to $8.003 TN. Fed Credit was down $898bn from the June 22nd, 2022, peak. Over the past 210 weeks, Fed Credit expanded $4.276 TN, or 115%. Fed Credit inflated $5.192 TN, or 185%, over the past 567 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $0.45bn last week to $3.434 TN. “Custody holdings” were up $49.6bn, or 1.5%, y-o-y.

Total money market fund assets dipped $7.0bn to $5.636 TN, with a 28-week gain of $742bn (28% annualized). Total money funds were up $1.051 TN, or 22.9%, y-o-y.

Total Commercial Paper surged $23.0bn to $1.184 TN. CP was down $44.8bn, or 3.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 7.23% (up 94bps y-o-y). Fifteen-year rates declined seven bps to 6.68% (up 124bps). Five-year hybrid ARM rates added a basis point to 7.02% (up 205bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up nine bps to 7.62% (up 107bps).

Currency Watch:

September 19 – Bloomberg: “China is witnessing the biggest flight of capital in years, creating concern for authorities as it worsens pressure on the beleaguered yuan. The currency has been hammered from all fronts as money leaves its financial markets, global companies look for China alternatives and a revival in overseas travel hits services trade. All of this is captured in the latest official data, which shows an outflow of $49 billion in the capital account last month, the largest since December 2015… The risk is that the currency weakness further saps the market’s appeal and results in an acceleration of outflows that can destabilize financial markets.”

September 21 – Reuters (Naomi Rovnick and Dhara Ranasinghe): “There’s no respite for struggling European currencies as a likely pause in central bank interest-rate rises and a weakening economic outlook puts the focus on prospective rate cuts ahead. Sterling slid to a more than six-month low against the dollar on Thursday, even after the Bank of England held rates at a 15-year high and pledged to raise borrowing costs again if it cannot tame inflation. The Swiss franc, one of this year’s best performing major currencies versus the dollar, fell almost 1% at one point after Switzerland surprised markets by pausing its rate rise cycle.”

For the week, the U.S. Dollar Index increased 0.2% to 105.58 (up 2.0% y-t-d). For the week on the upside, the South African rand increased 1.4%, the New Zealand dollar 1.0%, the Swedish krona 0.6%, the Canadian dollar 0.3%, the Norwegian krone 0.2%, and the Australian dollar 0.1%. On the downside, the Brazilian real declined 1.5%, the British pound 1.2%, the Swiss franc 1.1%, the South Korean won 0.8%, the Mexican peso 0.7%, the Japanese yen 0.4%, and the Singapore dollar 0.1%. The Chinese (onshore) renminbi declined 0.32% versus the dollar (down 5.49%).

Commodities Watch:

September 18 – Financial Times (Cheng Leng and Harry Dempsey): “China’s central bank has lifted temporary curbs on gold imports that were imposed on some lenders in a bid to defend the renminbi but caused the price of the precious metal to rise in the country. The spread between the Shanghai gold price and London hit a record $121 per troy ounce last Thursday… China in August had reduced and stopped granting quotas for international gold imports by banks to ease a rush in purchases to hedge against a weaker domestic currency.”

The Bloomberg Commodities Index declined 1.2% (down 5.8% y-t-d). Spot Gold was little changed at $1,925 (up 5.5%). Silver rose 2.3% to $23.56 (down 1.6%). WTI crude slipped 74 cents, or 0.8%, to $90.03 (up 12%). Gasoline dropped 5.4% (up 4%), and Natural Gas slipped 0.3% to $2.64 (down 41%). Copper fell 2.8% (down 3%). Wheat dropped 4.1% (down 27%), while Corn increased 0.2% (down 30%). Bitcoin declined $270, or 1.0%, to $26,560 (up 60%).

Global Bank Crisis Watch:

September 18 – Bloomberg (Alexandra Harris): “An increase in US commercial banks’ borrowings suggests they’re uncomfortable losing any more reserves as depositors seek better returns elsewhere, according to Citigroup Inc. After declines in June and July, the largest US banks increased their borrowing in August by 9%, or $70 billion, Federal Reserve data show. Concurrently, the Federal Home Loan Banks system, a general liquidity provider for banks, saw total debt outstanding rise to $1.249 trillion from $1.245 trillion in July.”

UK Watch:

September 21 – Bloomberg (Philip Aldrick): “The Bank of England halted for now the most aggressive cycle of interest-rate rises in more than three decades as concerns about inflation gave way to signs the economy is slipping into a recession. The central bank held its key rate at 5.25%, ending a series of 14 successive hikes since December 2021, when rates were just 0.1%. Five members of the Monetary Policy Committee voted to leave rates unchanged and four wanted to raise them to 5.5%. Governor Andrew Bailey, who had the casting vote, chose to hold.”

September 20 – Reuters (William Schomberg and Andy Bruce): “Britain’s high inflation rate unexpectedly slowed, raising the prospect of the Bank of England pausing its long run of interest rates hikes as soon as Thursday. The pound fell and investors saw a nearly 50-50 chance of rates staying on hold at the BoE’s September meeting after the consumer price index sank to an 18-month low of 6.7% in August. That was only a small fall from July’s 6.8% but flew in the face of forecasts by economists… for an increase.”

Market Instability Watch:

September 22 – Bloomberg (Erik Wasson and Billy House): “House Republicans are charging toward a US government shutdown in less than 10 days as party lawmakers struggle to agree on how much to cut spending and how to explain their brinkmanship to the public. The GOP’s bitter divisions have made them unable to even formulate a concrete set of demands. That foreshadows an extended standoff with the White House and the Democratic-controlled Senate as the US economy absorbs shocks from the shutdown, autoworkers strike and rising gasoline prices. And the Republican Party’s presidential front-runner and most prominent figure, Donald Trump, has further complicated the turmoil, presenting the clash as a way to halt criminal cases against himself and others who tried to overturn the 2020 election.”

September 21 – Reuters (David Morgan and Richard Cowan): “U.S. House Speaker Kevin McCarthy’s attempt to restart his stalled spending agenda failed on Thursday when Republicans for a third time blocked a procedural vote on defense spending, raising the risk of a government shutdown in just 10 days. The House of Representatives voted 216-212 against beginning debate on an $886 billion defense appropriations bill, with five hardline conservative Republicans joining Democrats to oppose the measure.”

September 19 – Bloomberg (George Lei): “There appears to be no end in sight for China’s massive capital flight, as foreigners keep bailing and locals bid up assets that are perceived to be FX hedges. The last time money left on so grand a scale was 2015-2016. Back then, it took a 10%-plus currency devaluation and massive property stimulus to turn things around. This time, with the yuan already down over 13% in less than two years, the housing market in deep trouble and mounting pressure on exports, authorities are facing a much tougher battle. The latest data from FX regulator SAFE showed $49 billion in the capital account left China last month… That takes the tally to $92.4 billion this year through August…”

September 18 – Bloomberg (Ye Xie and Carter Johnson): “For currency speculators around the world, the trade has long been a no-brainer: simply borrow yen, which costs nothing because of sub-zero interest rates in Japan, and then park the money anywhere yields are higher, earning a tidy profit from the difference. But now, a surprising low-cost alternative to the Japanese currency has started to emerge — this time from China. In the past month, Invesco, Goldman Sachs, Citigroup and TD Securities all recommended the yuan as an attractive option for funding so-called carry trades as it weakens toward historical lows.”

September 19 – Bloomberg (Liz Capo McCormick and Michael Mackenzie): “US five- and 10-year yields rose to the highest levels since 2007 after hotter-than-anticipated inflation data in Canada and rising oil prices added to global concerns about resurgent price pressures… ‘The market is finally coming to a realization, after fighting the last 18 months, that rates are indeed higher and we are not going back to a pre-pandemic type level,’ [Gregory Peters of PGIM] said…”

September 20 – Yahoo Finance (Josh Schafer): “Investors’ favorite measure of volatility has been quiet over the past month. The CBOE Volatility Index, known by its ticker as simply the VIX, has fallen for most of 2023 outside of a spike during the banking crisis in March, indicating expectations for volatility in the S&P 500 have been muted this year. Some on Wall Street believe that’s about to change. ‘We haven’t seen volatility this low since pre-pandemic period,’ Charles Schwab chief global investment strategist Jeffrey Kleintop told Yahoo… ‘So the market’s certainly pricing in clear sailing from here, and it may not be that smooth of a ride.’”

September 19 – Reuters (Tetsushi Kajimoto): “Japanese authorities are always in close communication with U.S. counterparts on currencies and share a mutual understanding that excessive volatility is undesirable, Tokyo’s top foreign exchange official said…”

September 21 – Bloomberg (Xinyi Luo): “Chinese dollar bonds logged their biggest losses in a month Thursday, part of a global selloff following the Fed’s affirmation to keep interest rates high as long as necessary to curb inflation. Investment-grade and junk notes each lost 0.26%, according to Bloomberg indexes.”

September 15 – Financial Times (Harriet Clarfelt): “Investors have poured $1tn into global money market funds in 2023, attracted by the best yields available in years and uncertainty over the outlook for the US economy. The flood of cash into money market funds over the past eight and a half months — a trend concentrated mainly in the US — puts the vehicles on course for record inflows of $1.5tn by the end of this year, according to Bank of America…”

Bubble and Mania Watch:

September 19 – New York Times (Alan Rappeport): “America’s gross national debt exceeded $33 trillion for the first time on Monday, providing a stark reminder of the country’s shaky fiscal trajectory at a moment when Washington faces the prospect of a government shutdown this month… Unless Congress can pass a dozen appropriations bills or agree to a short-term extension of federal funding at existing levels, the United States will face its first government shutdown since 2019.”

September 19 – Bloomberg (Rich Miller): “Global debt climbed by $10 trillion in the first half of 2023, resuming its upward march as a share of the world economy after falling for close to two years as inflation surged, according to the Institute of International Finance. Liabilities clocked in at record $307 trillion, up a ‘staggering’ $100 trillion over the past decade, the group representing the world’s largest international banks and financial institutions said… The US, Japan, the UK and France led the latest advance.”

September 21 – Bloomberg (Bailey Lipschultz): “Just when investors looked set to embrace newly public tech companies, the Fed’s ‘hawkish hold’ interrupted the romance. Arm Holdings Plc dipped below its IPO price in early trading, headed for a fifth straight decline that have wiped out nearly a quarter of its value from the peak. A day earlier Instacart briefly dipped below its debut price. While the shares stabilized Thursday, they sit about 28% below a high set two days ago. Klaviyo Inc. was also little changed, but well off levels hit during its debut yesterday.”

September 20 – Wall Street Journal (Ryan Dezember): “It isn’t just regular Americans who are having trouble buying houses these days. High borrowing costs and the shortage of properties for sale have slowed home buying by Wall Street’s rental giants as well, limiting their ability to grow at the same time suburban rents are climbing. The big landlords’ computers are still poring over listings, scanning for houses they can buy and turn into rentals. But financing has become expensive even for them, and competition is fierce from people willing to pay up for the few homes hitting the market. Prices have pushed past what big landlords, including AMH and Invitation Homes can pay and still meet profit targets.”

Ukraine War Watch:

September 21 – Reuters (Olena Harmash and Tom Balmforth): “Russia pounded energy facilities across Ukraine… in its biggest missile attack for weeks, firing what Ukrainian officials saw as the first salvo in a new air campaign against the national power grid. Power cuts were reported in five Ukrainian regions in the west, centre and east, reviving memories of multiple air strikes on critical infrastructure last winter that caused sweeping outages for millions during the bitter cold… ‘Winter is coming. Tonight (Russia) renews missile attacks on Ukrainian energy infrastructure,’ lawmaker Andrii Osadchuk wrote on platform X.”

September 17 – Reuters (Lidia Kelly and Maxim Rodionov): “Russia said it had thwarted a coordinated Ukrainian attack on Crimea early on Sunday, while drones also targeted Moscow, disrupting air traffic in the capital, and caused a fire at an oil depot in the southwest of the country. Ukraine in recent days has launched a series of strikes on Russian military targets in occupied Crimea, including the Russian Navy Black Sea Fleet’s facilities, seeking to undermine Moscow’s war efforts in the critical region.”

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

September 19 – Associated Press: “A senior Kremlin official… called for closer policy coordination between Moscow and Beijing to counter what he described as Western efforts to contain them as he hosted China’s top diplomat for security talks. Nikolai Patrushev, the secretary of Russia’s Security Council chaired by President Vladimir Putin, told Chinese Foreign Minister Wang Yi that Moscow ‘seeks progressive development and strengthening of the Russian-Chinese relations of comprehensive partnership and strategic cooperation.’ ‘Amid the campaign unleashed by the collective West that is aimed at the double containment of Russia and China, it’s particularly important to further deepen Russian-Chinese coordination and interaction on the inetrnational arena,’ Patrushev said.”

September 19 – Reuters (Ryan Woo): “China… urged increased cross-border connectivity with Russia and deeper mutual trade and investment cooperation, as both allies vowed ever closer economic ties despite disapproval from the West after Russian forces invaded Ukraine last year. The Russian minister of economic development held ‘in-depth’ discussions on economic cooperation with the Chinese commerce minister in Beijing on Tuesday, coinciding with a trip by China’s top diplomat, Wang Yi, to Moscow for strategic talks…”

September 19 – Bloomberg (Foster Wong): “Chinese Foreign Minister Wang Yi… told Russian Security Council Secretary Nikolai Patrushev that the two countries will work closely on strategic security cooperation, according to readout from Beijing on their meeting in Moscow. Two sides exchanged in-depth views on issues related to deepening strategic cooperation…”

September 21 – Bloomberg: “Chinese President Xi Jinping will meet his Syrian counterpart Bashar Al-Assad on the sidelines of the Asian Games this week, as the Arab leader makes his first trip to China in nearly 20 years. Xi will hold a welcome banquet for the event and conduct bilateral activities on Friday and Saturday…”

De-globalization and Iron Curtain Watch:

September 18 – Bloomberg (Shawn Donnan and Enda Curran): “One word has been popping up increasingly on earnings calls and in corporate filings of some of the world’s biggest companies. From Wall Street giants like BlackRock Inc. to consumer titans like Coca-Cola Co. and Tesla Inc. and industrial mainstays like 3M Co., S&P 500 chief executives and their lieutenants have used the word ‘geopolitics’ almost 12,000 times in 2023, or almost three times as much as they did just two years ago. It’s not just talk. Hard evidence is now emerging that all the discussions of strained international relations and more than a decade of warnings over the end of an era of globalization are finally spurring corporations to pick sides with their capital.”

September 19 – Reuters (Casey Hall): “Political tensions and a slowing economy are sapping the confidence of U.S. businesses operating in China, with the number of companies optimistic about their five-year outlook falling to a record low, a survey… showed. Even after the ending of COVID curbs…, the percentage of surveyed U.S. firms optimistic about the five-year China business outlook fell to 52%, according to the annual survey published by the American Chamber of Commerce (AmCham) in Shanghai.”

September 21 – Reuters (Vladimir Soldatkin): “Russia has temporarily banned exports of gasoline and diesel to all countries outside a circle of four ex-Soviet states with immediate effect in order to stabilise the domestic market, the government said… ‘Temporary restrictions will help saturate the fuel market, which in turn will reduce prices for consumers,’ the government said…”

September 20 – Reuters (Amy Lv and Dominique Patton): “China’s exports of germanium and gallium products in August plunged…, after Beijing implemented new export controls on the two chipmaking metals. China exported no wrought germanium products last month, compared to 8.63 metric tons in July… There were also no exports of wrought gallium products in August.”

Inflation Watch:

September 19 – Wall Street Journal (Joe Wallace and David Uberti): “An almost uninterrupted rise in oil prices has pushed benchmark Brent crude close to $100 a barrel, posing a new challenge for central banks in their battle against inflation. The rise is a victory for Saudi Arabia, which sought to bolster prices to fund a planned transformation of its oil-dependent economy. Russia… is another winner. The two countries sparked the rally early this month when they said they would restrict supplies until the end of the year. Record levels of oil demand—fueled by unexpected economic strength—have outstripped production. As a result, traders and petroleum refiners are draining oil stockpiles at a rapid clip.”

September 19 – Bloomberg (Rich Miller): “The Federal Reserve is confronting a familiar nemesis as it tries to pilot the economy into a rarely-seen soft landing: rising oil prices. Surging energy costs played a role in tipping the US into recession in the mid-1970s, as well as the early 1980s and 1990s, as they drove up inflation and robbed consumers of purchasing power. Driven by cutbacks in supply by Saudi Arabia and Russia, oil prices have surged by almost 30% since June…”

September 19 – Bloomberg (Leslie Kaufman): “Home insurance costs that have soared in much of the US may get even higher. Tens of millions of properties around the country are insured at prices that haven’t caught up with the danger of hurricanes, wildfires and floods, according to a new report from the First Street Foundation… First Street estimates that 39 million US homes are insured at artificially suppressed prices compared with the risk they actually face. Of those, nearly 6.8 million homes are covered by state-backed ‘insurer of last resort’ policies. Until now, state regulations that cap increases in insurance premiums and subsidized insurer-of-last-resort programs have hidden the magnitude of the problem…”

September 21 – Reuters (Leroy Leo and Khushi Mandowara): “U.S. employers are bracing for the largest increase in health insurance costs in a decade next year, according forecasts from healthcare consultants… Benefit consultants from Mercer, Aon and Willis Towers Watson see employer healthcare costs jumping 5.4% to 8.5% in 2024 due to medical inflation, soaring demand for costly weight-loss drugs and wider availability of high-priced gene therapies.”

September 19 – Dow Jones (Robb M. Stewart): “Canada’s annual inflation rate accelerated in August to the highest in four months… The country’s consumer price index rose 4.0% from a year earlier… The market was expecting the index to rise 3.8% for the month, after it rose to 3.3% in July… On a month-over-month basis, prices rose 0.4% in August, ahead of the consensus forecast for an increase of 0.2%. On a seasonally adjusted basis, CPI increased 0.6% from the previous month.”

September 19 – CNBC (Lee Ying Shan): “Olive oil prices spiked to fresh records as severe droughts in major producing countries crimp supplies — and drive up thefts in cooking oil. Global prices for olive oil surged to $8,900 per ton in September, driven by ‘extremely dry weather’ in the Mediterranean… Already, the average price in August was 130% higher compared to the year before, and showed ‘no sign of easing,’ USDA said. Spain, the world’s largest producer and exporter of olive oil, has been battered by an intense drought for months.”

Federal Reserve Watch:

September 21 – Bloomberg (Jonnelle Marte): “Federal Reserve Chair Jerome Powell made clear… the central bank is close to done raising interest rates, but his colleagues delivered the message that resonated: Borrowing costs must remain higher for longer amid renewed strength in the economy… In quarterly economic projections released following a two-day policy meeting, 12 of 19 Fed officials said they still expect to raise rates once more this year. The bigger takeaway for investors was the revelation that policymakers see fewer rate cuts than previously anticipated in 2024, in part due to a stronger labor market. The projections also showed they expect inflation to fall below 3% next year, and return to their 2% target by 2026. In other words, the ‘soft landing’ for the US economy that looked more remote three months ago now seems within reach.”

September 20 – New York Times (Jeanna Smialek): “Federal Reserve officials left interest rates unchanged… and released a roundly optimistic set of economic forecasts that showed inflation fading more swiftly this year even with a solidly growing economy. Altogether, the news suggested that Fed officials were beginning to see a better chance of a ‘soft landing’: a slowdown in inflation that does not require pronounced economic pain. While officials predicted that they could still make another rate increase before the end of 2023, they are treading cautiously to try to ensure that they do not overdo it and squeeze the economy more than is necessary to bring price increases back under control.”

September 15 – Reuters (Michael S. Derby): “Federal Reserve losses breached the $100 billion mark…, and they’re likely to go a lot higher before the red ink stops. The U.S. central bank is continuing to pay out more in interest costs than it takes in from the interest it earns on bonds it owns and from the services it provides to the financial sector. While there’s considerable uncertainty around how it will all play out, some observers believe Fed losses, which began a year ago, could eventually as much as double before abating.”

September 21 – Bloomberg (Jonnelle Marte): “JPMorgan… Chief Executive Officer Jamie Dimon said the Federal Reserve may have to keep increasing its benchmark interest rate in the coming months to combat persistent inflation. The central bank was ‘a day late and a dollar short’ in beginning to raise rates and the rapid increases over the last 18 months were just ‘catching up,’ Dimon said… just before the Fed published its decision…”

U.S. Bubble Watch:

September 16 – Wall Street Journal (Peter Santilli): “The United Auto Workers union’s walkout at three factories comes as American workers are striking at a pace not seen in nearly a quarter-century. Last month, large stoppages from strikes resulted in 4.1 million missed days of work… That preliminary estimate was the biggest monthly total since August 2000. The recent surge has been fueled in part by Hollywood actors who in July joined writers on strike.”

September 19 – New York Times (Noam Scheiber): “Since the start of the pandemic, labor unions have enjoyed something of a renaissance. They have made inroads into previously nonunion companies like Starbucks and Amazon, and won unusually strong contracts for hundreds of thousands of workers. Last year, public approval for unions reached its highest level since the Lyndon Johnson presidency. What unions haven’t had during that stretch is a true gut-check moment on a national scale. Strikes by railroad workers and UPS employees… were averted at the last minute… The strike by the United Automobile Workers, whose members walked off the job at three plants on Friday, is shaping up to be such a test.”

September 19 – Associated Press: “There will be no Emmy Awards tonight and there are thousands of auto workers on picket lines in Missouri, Michigan and Ohio in a seemingly rapid reemergence of organized labor this year. Unions have nowhere near the pull, or members, that they did decades ago, yet something has changed. There’s no single explanation, but the boiling point we’re seeing today comes amid soaring costs of living and a widening gap between what workers and top executives are paid. Thousands of workers who were asked to make sacrifices during the pandemic even as corporate profits soared are now asking for a bigger piece of the pie. Those demands have sparked grassroots organizing efforts across the country in the last year. And some of the nation’s largest unions have simultaneously been at the center of heated contract negotiations…”

September 20 – Reuters (Heather Timmons and David Gaffen): “When the CEO gets a 40% raise, what do the workers deserve? That question is at the heart of the United Auto Workers union’s strikes at assembly plants owned by Ford, General Motors and Chrysler parent Stellantis. UAW President Shawn Fain initially asked for a 40% increase in worker’s pay over the next four years – a figure based off an approximately 40% increase in CEO pay at the companies over the last four years at a time of stable profits for two of the three automakers. U.S. auto companies are not alone in handing out massive payouts to chief executives. CEO pay and benefits have skyrocketed in recent decades, but worker pay has not kept pace. The ratio of CEO pay to the average, non-supervisory production worker at the biggest U.S. companies has jumped from less than 40 to 1 over the last four decades to nearly 400 to 1…”

September 21 – Associated Press (Matt Ott): “U.S. applications for unemployment benefits fell to their lowest level in eight months last week as the labor market continues to show strength in the face of elevated interest rates. U.S. applications for jobless claims fell by 20,000 to 201,000 for the week ending Sept. 16… That’s the lowest figure since the last week of January… Overall, 1.66 million people were collecting unemployment benefits the week that ended Sept. 9, about 21,000 fewer than the previous week.”

September 18 – Wall Street Journal (Te-Ping Chen): “While many companies have been cutting staff and freezing new hires this year, the government is laying out the welcome mat. Public-sector jobs at the federal, state and local level have risen by 327,000 positions so far in 2023… That is approaching one-fifth of all new American jobs created in the first eight months of the year… ‘After two years of very underwhelming government hiring, it’s a necessary catch-up,’ said Julia Pollak, an economist at… ZipRecruiter. Much of the recent hiring spree has been to backfill jobs left open by millions of teachers, police officers and other public servants who quit during the pandemic.”

September 21 – Bloomberg (Alicia Clanton): “Mortgage rates in the US rose for the second week in a row. The average for a 30-year, fixed loan increased to 7.19% from 7.18% last week, Freddie Mac said… It’s the sixth straight week that the average rate has hovered above 7%.”

September 20 – CNBC (Diana Olick): “Mortgage rates rose again last week, and so did demand for refinances, which at face value doesn’t make a lot of sense. Applications to refinance a home loan jumped 13% last week compared with the previous week… Applications for a mortgage to purchase a home increased 2% for the week and were 26% lower than the same week one year ago.”

September 21 – CNBC (Diana Olick): “Sales of previously owned homes fell 0.7% in August from July to a seasonally adjusted, annualized rate of 4.04 million units, according to the National Association of Realtors. Sales were down 15.3% from August of last year… There were just 1.1 million units for sale at the end of August, down 0.9% for the month and down just more than 14% year over year. Inventory is now at a 3.3-month supply. A six-month supply is considered balanced… The median price of a home sold in August was $407,100, up 3.9% from a year ago and the highest reported price for the month of August.”

September 19 – Reuters (Lucia Mutikani): “U.S. homebuilding plunged to a more than three-year low in August…, but a jump in permits suggested new construction remained supported by a dearth of homes on the market… Housing starts tumbled 11.3% to a seasonally adjusted annual rate of 1.283 million units last month, the lowest level since June 2020… Single-family housing starts, which account for the bulk of homebuilding, dropped 4.3% to a rate of 941,000 units last month… Permits for future homebuilding jumped 6.9% to a rate of 1.543 million units, the highest since October 2022. They were boosted by a 14.8% surge in multi-family housing permits to a rate of 535,000 units. Single-family housing permits rose 2.0% to a rate of 949,000 units, the highest since May 2022.”

September 18 – Bloomberg (Augusta Saraiva): “US homebuilder sentiment fell to a five-month low in September as higher mortgage rates continued to push many prospective buyers out of the market. The National Association of Home Builders/Wells Fargo gauge declined 5 points to 45 after sliding 6 points a month earlier… ‘High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower,’ NAHB Chief Economist Robert Dietz said…”

Fixed Income Watch:

September 19 – Wall Street Journal (Sam Goldfarb): “It is one of the biggest surprises on Wall Street: the outsize performance of risky corporate loans. Since the start of last year through Monday, loans backed by companies including PetSmart and Uber Technologies in the Morningstar LSTA U.S. Leveraged Loan Index delivered a return of 9.4%, buoyed by higher interest rates and a resilient economy. Investment-grade bonds lost 13% in that time, counting price changes and interest payments, while the S&P 500 lost 3.9%.”

China Watch:

September 17 – Wall Street Journal (Stella Yifan Xie): “Starting in the 1990s Japan became synonymous with economic stagnation, as a boom gave way to lethargic growth, declining population and deflation. Many economists say China today looks similar. The reality: In many ways its problems are more intractable than Japan’s. China’s public debt levels are higher by some measures than Japan’s were and its demographics are worse. The geopolitical tensions that China is dealing with go beyond the trade frictions Japan once faced with the U.S. Another headwind: China’s government, which has been cracking down on the private sector in recent years, seems ideologically less inclined than Tokyo was then to support growth.”

September 20 – Reuters (Ellen Zhang and Liz Lee): “China will speed up the introduction of more policies to consolidate its economic recovery, state media CCTV reported…, citing a cabinet meeting chaired by Premier Li Qiang, after the economy showed tentative signs of stabilising… ‘China will accelerate the introduction of relevant policies and work implementation, as well as further consolidate the economy’s upward trend,’ CCTV said.”

September 18 – Wall Street Journal (Rebecca Feng and Cao Li): “China’s giant housing industry is lurching into a new crisis that threatens to be the country’s worst yet. Two years ago, the debt-laden developer China Evergrande Group spiraled into insolvency… Now China’s largest privately run property developer, Country Garden, is struggling to survive. Unlike Evergrande, which was brought down by its profligate habits, Country Garden’s troubles come from the retreat of investors and home buyers from the industry… As of June 30, Country Garden was involved in more than 3,000 property projects encompassing millions of homes. It carried the equivalent of $186 billion in liabilities, including homes it sold but hasn’t delivered, money owed to suppliers, bank debt and bonds. Most of those obligations come due within a year. The company reported a record first-half loss topping $7 billion… Country Garden’s contracted sales of new homes in August fell 70% from a year earlier, to the equivalent of $1.1 billion.”

September 21 – Bloomberg (Wei Zhou): “Moody’s… has put two of China’s few investment-grade developers on review for possible downgrade, the latest sign that fallout from the real estate industry’s debt crisis is spreading. China Jinmao Holdings Group Ltd. and China Vanke Co. are facing possible cuts, part of a number of ratings actions announced by Moody’s Thursday following last week’s cut of its sector view… China Jinmao Holdings Group Ltd. and China Vanke Co. are facing possible cuts, part of a number of ratings actions announced by Moody’s Thursday following last week’s cut of its sector view.”

September 20 – Wall Street Journal (Stella Yifan Xie): “The office market in the U.S. is dismal. In some ways, it is even worse in China. With the country’s economy facing its worst slowdown in years, huge amounts of office space are sitting empty in once-booming cities like Shenzhen and Wuhan, while rents are falling. Nearly 24% of the office-tower space in 18 major Chinese cities was unoccupied as of June, according to CBRE, the real-estate services firm. That is worse than the U.S., where office vacancy rates hit a 30-year-high of 18.2% in June. Unlike the U.S., however, China’s office market isn’t suffering from a significant shift toward hybrid work patterns… China is facing a more basic real-estate problem: Developers simply built too much supply…”

September 17 – Financial Times (Thomas Hale and Wang Xueqiao): “The Chinese shadow bank at the heart of concerns over missed payments to customers has lent money to several of the country’s struggling property developers… The connections between Zhongrong, a giant of China’s $3tn shadow finance industry, and property developers have fuelled fears of spillover effects from a slowdown in the real estate sector, which accounts for more than a quarter of China’s economic activity. This has added to mounting concerns about the state of China’s economy, which is struggling to recover after the Covid-19 pandemic.”

September 18 – Reuters (Ziyi Tang and Ryan Woo): “The involvement of two Chinese state-owned financial firms in Zhongrong International Trust Co’s operations and management may diffuse risk at the troubled shadow bank but does little to ease concerns about missed payments… The shadow bank, which traditionally had sizable real estate exposure, missed payments on dozens of so-called trust products since late July, roiling markets and raising fears that China’s financial system may be at risk from the property sector crisis… Zhongrong said… Friday it had signed an agreement with Citic Trust and CCB Trust – the shadow banking arms of two state-owned firms Citic Group and China Construction Bank – for so-called ‘entrusted management services’.”

September 18 – Reuters (Donny Kwok and Xie Yu): “Shares of embattled developer China Evergrande Group plunged as much as 25% on Monday after police detained some staff at its wealth management unit, suggesting a new investigation that could add to the property company’s woes. Evergrande, the world’s most indebted property developer, is at the centre of a crisis in China’s real estate sector that has seen a string of defaults since late 2021 that have rattled global markets and sparked fears of contagion.”

September 21 – Reuters: “As China’s stock market struggles to recover, regulators have started to probe some hedge funds and brokerages on quantitative trading strategies amid a growing outcry against a sector able to profit from share price falls and volatility, sources said. The China Securities Regulatory Commission (CSRC) has checked with several major brokers over the past weeks about short-selling activities and trading strategies of their quant clients – funds that trade rapidly using derivatives and data-driven computer models…”

September 19 – Bloomberg: “China’s local government financing vehicles are staging a comeback in credit markets, with a surge in yuan bond sales as Beijing intensifies efforts to defuse risks from the debt-laden group of borrowers. Domestic bond issuance by LGFVs, which are typically tasked to build infrastructure projects, reached nearly 620 billion yuan ($85bn) in August, an almost 50% jump from July and the third-highest monthly tally on record…”

September 20 – Bloomberg: “After President Xi Jinping tore up the Communist Party rulebook to promote key loyalists last year, some China watchers expected his new team to operate more smoothly in tackling China’s biggest challenges. Instead, his government looks like it’s in disarray. Xi’s mysterious purge of his foreign minister in July, followed by the reported ouster of his defense chief less than two months later, is making China appear unstable to the outside world. The Chinese leader also overhauled the generals overseeing China’s Rocket Force, which manages the nation’s nuclear arsenal… And those are just the firings that have been made public.”

September 19 – Dow Jones: “China’s eastern export hub, Wuxi, on Tuesday joined other major cities in dropping home-purchase restrictions to attract buyers… Wuxi, a populous port city in China’s affluent coastal Jiangsu province, said it would scrap curbs on home buying, in addition to implementing a broadened definition of first-time homebuyers and cuts on mortgage rates and down-payment ratios, measures that have been announced by Chinese ministries earlier this summer.”

Central Banker Watch:

September 21 – Bloomberg (Craig Stirling, Ott Ummelas and Bastian Benrath): “Central banks from Switzerland to the Nordics delivered contrasting monetary moves with a converging message of higher-for-longer interest rates and limited appetite to keep tightening. The Swiss National Bank surprised investors by avoiding a hike while refusing to rule out more action. Sweden’s Riksbank lifted borrowing costs and said that another step is possible… Its Norwegian neighbor also raised and hinted that only one more increase will be needed…”

September 21 – Reuters (Mark John): “Central banks for the world’s biggest economies have served notice that they will keep interest rates as high as needed to tame inflation, even as two years of unprecedented global policy tightening reaches a peak. The so-called ‘higher for longer’ mantra is now the official stance of the U.S. Federal Reserve, European Central Bank and the Bank of England, as well as being echoed by monetary policy-makers from Oslo to Tapei.”

September 21 – Financial Times (Martin Arnold): “The head of Germany’s central bank has warned that eurozone inflation is still falling too slowly, pushing back against investors’ hopes that the European Central Bank will stop raising interest rates. Bundesbank president Joachim Nagel said policymakers must avoid a scenario where high prices become ‘entrenched’ in the eurozone economy ‘at all costs’, adding that inflation is ‘only expected to fall gradually’ ‘Was that it for raising the key interest rates?’ said Nagel. ‘Have we reached the plateau? This cannot yet be clearly predicted. The inflation rate is still too high. And the forecasts still show only a slow decline towards the [ECB’s] target value of 2%.’”

Global Bubble Watch:

September 19 – Reuters (Enrico Dela Cruz): “Economic growth in developing Asia this year will be slightly lower than previously expected as the weakness in China’s property sector and El Niño-related risks cloud regional prospects, the Asian Development Bank (ADB) said… Updating its regional economic outlook, the ADB trimmed its 2023 growth forecast for developing Asia to 4.7%, from 4.8% projected in July. But the growth forecast for next year for the grouping, which consists of 46 economies in the Asia-Pacific and excludes Japan, Australia and New Zealand, was revised slightly upwards to 4.8% from 4.7% previously.”

September 19 – Bloomberg (Swati Pandey and Ainslie Chandler): “It’s getting harder than ever to rent a home in Australia as one of the world’s most acute real estate shortages worsens by the day. Less than 1% of the country’s rental properties are now available for occupancy, far fewer than even red-hot markets like Singapore. That’s sending rents soaring to eye-watering levels, deepening an already dire cost-of-living crunch and pushing thousands more Australians into homelessness.”

Europe Watch:

September 21 – Bloomberg (Greg Ritchie): “German bonds tumbled to send the government’s benchmark borrowing costs to the highest in over a decade, as investors bet on European interest rates remaining elevated for longer. The yield on 10-year securities jumped eight basis points to 2.78%, the highest since 2011.”

September 18 – Financial Times (Martin Arnold and Guy Chazan): “Germany’s central bank says an excessive dependence on trade with China is one of the main reasons why the country’s ‘business model is in danger’, adding that high energy prices and labour shortages are also weakening Europe’s largest economy. The Bundesbank warned… that 29% of German companies imported essential materials and parts from China, exposing their operations to ‘significant’ damage if this trade route were to be disrupted as a result of ‘increasing geopolitical tensions’. ‘The past few years have revealed the risk to economic development that comes from strong one-sided dependencies on primary products from abroad,’ the central bank said…”

Japan Watch:

September 22 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Kazuo Ueda tamped down speculation of a near-term interest rate hike after the central bank chose to stick with its ultra-easy stimulus, a decision that renewed downward pressure on the yen. The BOJ kept its negative interest rate and the parameters of its yield curve control program intact… Speaking at a press briefing after the decision, Governor Kazuo Ueda said the distance from being able to adjust the negative rate hasn’t changed much, a comment that suggests a policy pivot isn’t imminent. ‘Because we aren’t in a state where inflation accompanied by wage growth — sustainable and stable inflation — is in sight, we’re patiently continuing with monetary easing under the current framework,’ he said.”

September 18 – Bloomberg (Toru Fujioka): “Inside the walls of the Bank of Japan, there’s a sense of relief as new boss Kazuo Ueda inches toward policy normalization with the minimum of fuss — an approach that couldn’t be more different from his predecessor’s dramatic debut. Back in 2013, Haruhiko Kuroda unleashed ‘shock and awe’ policies to shake a lethargic economy out of deflation. Now, with inflation having racked up 16 months above the central bank’s 2% target, Ueda has done more than many insiders thought possible to prepare the ground for exiting the world’s boldest monetary experiment.”

September 20 – Bloomberg (Masaki Kondo and Yumi Teso): “Investors keeping an eye on Bank of Japan policy have shifted their attention to the possible end of the central bank’s negative interest rate following the loosening of guide rails around bond yields. While no changes are expected at this week’s policy meeting, swap market indicators now show stronger expectations for the near-term scrapping of the subzero rate by March than a further widening of the band around the BOJ’s 10-year yield target.”

EM Watch:

September 21 – Reuters (Natasha Turak): “Turkey’s central bank hiked its key interest rate to 30% on Thursday, a 500 bps jump from 25%, as Ankara continues to battle double-digit inflation. The Turkish lira weakened slightly to 27.06 against the dollar on the news… The central bank decision follows a series of rate hikes that have been painful for Turks, as the country aims to turn around several years of skyrocketing inflation and a dramatically weakened currency…”

September 21 – Bloomberg (Maria Eloisa Capurroarte): “Brazil’s central bank cut its benchmark interest rate by half a percentage point for the second straight time and signaled it will keep the same pace of monetary easing at least through year’s end. The bank lowered the Selic to 12.75% late on Wednesday, as expected…”

September 20 – Bloomberg (Mike Cohen): “South Africa’s public finances are in a poor state, with the government failing to meet its tax-collection targets and tighter financial conditions making it difficult to borrow more and at affordable rates, Finance Minister Enoch Godongwana warned. Short-term risks to the local and global economy identified at the time of the budget in February have materialized, Godongwana said…”

September 19 – Bloomberg (Manuela Tobias): “Argentina’s economy contracted more than expected between April and June, the worst quarter since the peak of the pandemic in early 2020, confirming the country is barreling into a deep recession. A record drought that cost $20 billion of agriculture exports and accelerated food inflation took a heavy toll on economic activity in Argentina. Overall exports during the second quarter declined 4.1% while imports rose 3.7%, weighing down growth.”

Leveraged Speculation Watch:

September 19 – Reuters (Gertrude Chavez-Dreyfuss): “Foreign holdings of U.S. Treasuries rose in July…, rising for a second straight month despite an uncertain interest rate outlook muddied by a mixed set of economic figures. Total holdings of U.S. Treasuries climbed to $7.655 trillion in July, up from $7.562 trillion in the previous month. Compared from a year earlier, overseas holdings were up 2.2%. China’s stash of Treasuries dropped to $821.8 billion, the lowest since May 2009… ‘There is a huge inflow into U.S. Treasury debt despite a lot of volatility in rates in July,’ said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities… ‘A lot of the increase in foreign holdings was from the Caymans, Luxembourg, Bermuda, which are associated with custodians. So it’s difficult to know exactly who the buyers were,’ he added.”

September 19 – Bloomberg (Lu Wang): “There’s an invisible force driving the most popular options trade of the year — one that gives Wall Street pros and day traders alike the power to turn a $1 investment into a $1,000 stock bet. Investors are wagering on the daily gyrations of American equity benchmarks by dashing in and out of trading contracts that expire within 24 hours — known by the ‘0DTE’ moniker — with less upfront capital than meets the eye… Put another way, traders are getting $1,000 of stock exposure for every dollar they spend on 0DTE. They would need to spend 10 times that to get the same equity position using derivatives with a longer lifespan…”

Social, Political, Environmental, Cybersecurity Instability Watch:

September 19 – Axios (Stef W. Kight): “Americans’ views of the U.S. political system have reached new lows, according to a survey that reveals near-record distrust of the government, disgust with both political parties and general exhaustion over all the divisiveness. Why it matters: The survey by Pew Research Center reflects the growing distaste with the nation’s politics as congressional infighting threatens a government shutdown and the 2024 presidential race appears headed toward a Biden-Trump matchup most Americans don’t want. Four times as many Americans have unfavorable views of both parties today than they did in 2002 — an all-time high, with Republicans and Democrats equally unpopular… Trust in the government is near a 70-year low, with just 16% of the public saying they trust the federal government at least most of the time.”

September 19 – Associated Press (Ken Sweet): “A growing number of Americans are finding it difficult to afford insurance on their homes, a problem only expected to worsen because insurers and lawmakers have underestimated the impact of climate change… A report from First Street Foundation… says states such as California, Florida and Louisiana, which are prone to wildfires and damaging storms and flooding, are likely to see the most dramatic increases in premiums. But the fire that destroyed the Hawaiian community of Lahaina on Aug. 8, as well as the historic flooding that happened in Vermont and Maine in July, are examples of events that could drive up insurance costs for homeowners in other states. ‘If you’re not worried, you’re not paying attention,’ said California Sen. Bill Dodd…”

September 20 – Bloomberg (Amanda Albright and Nic Querolo): “More colleges and universities in the US are headed for closures or mergers, with enrollment declining across higher-education institutions, according to Fitch Ratings Inc. A handful have already shuttered or combined with others so far this year. Alliance University in Manhattan’s financial district said it will wind down its courses as of Aug. 31 while Medaille University in Western New York held its final commencement in May.”

September 19 – Bloomberg (Michelle Ma): “Electricity demand in California is expected to jump 80% or more by 2045, requiring the state to invest $370 billion in its power grid and clean energy to meet its net zero goal, utility giant Edison International predicts.”

Geopolitical Watch:

September 21 – Reuters (Krishn Kaushik, Rupam Jain and YP Rajesh): “India… suspended new visas for Canadians and asked Ottawa to reduce its diplomatic presence in the country, sharply escalating a spat triggered by Prime Minister Justin Trudeau’s accusations linking New Delhi to a Sikh separatist’s murder. The Indian foreign ministry said Canada has not shared any specific information in connection with the allegations Trudeau made and that New Delhi was willing to look at it if provided… The unprecedented tensions flared up on Monday after Trudeau said Ottawa was investigating ‘credible allegations’ about the potential involvement of Indian government agents in the June murder of Hardeep Singh Nijjar in British Columbia.”

September 18 – Reuters (Ben Blanchard and Yimou Lee): “Taiwan’s defence ministry… urged China to stop ‘destructive, unilateral action’ after reporting a sharp rise in Chinese military activities near the island, warning such behaviour could lead to a sharp increase in tensions… The ministry said that since Sunday it had spotted 103 Chinese military aircraft over the sea, a number it called a ‘recent high’.”

September 21 – Wall Street Journal (Joyu Wang): “China has sent some of its largest swarms of jet fighters and warships into the air and waters around Taiwan this month. They have been accompanied by an unusual silence. While previous Chinese drills of similar scale were paired with waves of propaganda meant to intimidate the self-ruled island, Beijing has said next to nothing about the recent exercises. That silence is a sign that the recent activity is less about delivering a political message, Taiwanese authorities and defense analysts say, than about training. China’s military is trying to sharpen its ability to encircle Taiwan, neutralize the island’s natural advantages and block the U.S. from coming to the rescue in the event of an invasion.”

September 21 – Wall Street Journal (Alastair Gale): “Two prototype U.S. drone ships have arrived in Japan for their first deployment in the western Pacific, testing surveillance and attack capabilities that the Navy might find useful against China’s larger fleet. U.S. Navy Cmdr. Jeremiah Daley said unmanned surface vessels that operate autonomously could substitute for larger ships such as destroyers in groups hunting enemy targets. ‘For example, one destroyer and two USVs could replace three destroyers. It’s a force multiplier,’ he said.”

September 21 – Reuters (Hyonhee Shin and David Brunnstrom): “South Korean President Yoon Suk Yeol said… that if Russia helped North Korea enhance its weapons programs in return for assistance for its war in Ukraine, it would be ‘a direct provocation’ and Seoul and its allies would not stand idly by. In a speech to the annual high-level U.N. General Assembly, Yoon said such a scenario would threaten the peace and security of not only Ukraine but also South Korea. Yoon made the comments just as North Korean leader Kim Jong Un returned to Pyongyang from a week-long trip to Russia in which he and Russian President Vladimir Putin vowed to boost military cooperation.”

Stay Ahead of the Market
Receive posts right to your in box.
July 12, 2024: Houston, We Have a Bubble Problem
July 5, 2024: Nothing Matters
June 30, 2024: Just the Facts
June 21, 2024: Greatest Threat
June 14, 2024: Potential Catalyst and Q1 2024 Z.1
June 7, 2024: Summer of Discontent and Instability
May 31, 2024: Thesis Corroboration
May 24, 2024: Speculative Bubble Hype
Double your ounces without investing another dollar!