MARKET NEWS / CREDIT BUBBLE WEEKLY

September 8, 2023: Risk Off and Q2 ’23 Z.1

MARKET NEWS / CREDIT BUBBLE WEEKLY
September 8, 2023: Risk Off and Q2 ’23 Z.1
Doug Noland Posted on September 9, 2023

Global market “risk off” is gathering momentum. China’s currency declined another 1.06% versus the dollar this week to the weakest level since 2007. The Chilean peso dropped 5.0%, the Polish zloty 3.9%, the Mexican peso 2.9%, and the Czech koruna 1.9%. Trouble, characteristically, manifests first at the “periphery.”

Mexico’s local currency 10-year yields jumped 19 bps to 9.53%, the high since October. Yields were up 18 bps in Indonesia (6.52%), 16 bps in Brazil (11.30%), and 12 bps in South Africa (11.91%). EM dollar bonds were under heavy selling pressure. Yields jumped 24 bps in Colombia (7.79%), 20 bps in Peru (5.54%), 19 bps in Mexico (5.89%), 15 bps in Chile (5.33%), 15 bps in Russia (18.91%), and 14 bps in the Philippines (5.10%).

Global bond market liquidity appears increasingly under the grips of deleveraging.

September 7 – Dow Jones: “China’s foreign-exchange reserves dropped in August amid a weakening yuan, according to… the People’s Bank of China… Forex reserves fell $44.17 billion in August to $3.160 trillion… The result was slightly lower than the median forecast of $3.184 trillion made by economists…”

September 8 – Bloomberg: “China’s short-end government bonds are closing in on their biggest weekly drop this year, caught in a downdraft that’s swept up virtually all of the nation’s assets. The yield on one-year yuan securities has jumped 13 bps since Sept. 1, with analysts blaming the increase on dwindling liquidity and waning bets for broad-based easing. Interbank funding costs have shot up, reflecting the tightening cash conditions… Liquidity is drying up as analysts expect investors to mop up as much as $109bn of special bond issuance this month. Banks are less willing to lend to each other in September as they prepare for regulatory checks at the end of the quarter… All this is exerting upward pressure on funding costs. The overnight repo rate soared 23 bps this week to 1.90%…”

And despite mounting global stress, Treasury yields are pulled higher. Ten-year yields gained nine bps this week to 4.26%, with benchmark MBS yields rising 11 bps to 6.00%.

September 7 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of New York President John Williams said US monetary policy is ‘in a good place,’ but officials will need to parse through data to decide on how to proceed on interest rates. ‘I think we’ve gotten monetary policy in a very good place in terms of we have a restrictive stance of policy,’ Williams said… The New York Fed chief said policy is having the desired effects of bringing demand and supply more into balance and easing inflation, adding that the Fed has ‘done a lot’ by raising interest rates significantly.”

I often ponder how closely Fed officials “parse through” their Z.1 report. Friday’s release of Q2 Credit and flow data made for interesting parsing. Seasonally adjusted and annualized Credit growth of about $4.5 TN. One-year Treasury debt expansion of almost $1.7 TN. Non-Financial Debt-to-GDP exceeding previous cycle peak levels. The ratio of Total Debt Securities-to-GDP is significantly higher than prior peaks. Household holdings of Financial Assets above previous peak levels. Household Net Worth inflating $5.5 TN in three months. Household Equities holdings as a percentage of GDP higher than previous cycle peaks. Analyzing the data, I don’t see our system in a “very good place.”

Non-Financial Debt (NFD) expanded at a 6.34% rate during Q2, up from Q1’s 3.78% to the strongest pace of Credit growth since Q1 2022 (8.34%). As has become commonplace, system Credit expansion was driven by heady growth in federal borrowings. Federal Debt expanded at a 12.67% pace, the strongest growth since the crazy Q2 2020 pandemic borrowing binge (64.61% annualized). Household borrowings expanded at a 2.73% rate, up from Q1’s 2.40% – but less than half of Q2 2022’s 6.89%. Corporate borrowings slowed from Q1’s 4.95% to 2.06%, the weakest reading since the pandemic. And after back-to-back quarters of annualized double-digit growth, Financial Sector borrowings contracted at a 6.36% rate.

In seasonally-adjusted and annualized (SAAR) dollars, NFD expanded $4.445 TN during Q2, up from Q1’s $2.625 TN. For perspective, NFD expanded $2.433 TN during (pre-Covid) 2019, while averaging $2.032 TN annually during the decade 2010 through 2019. Prior to 2020’s $6.764 TN, the mortgage finance Bubble period’s $2.506 TN 2007 expansion was the all-time high. At 266%, NFD as a percentage of GDP exceeds previous peak levels 228% (Q4 2007) and 186% (Q1 2000).

Federal borrowings expanded SAAR $3.440 TN during Q2, second only to Q2 2020. Household Borrowings increased SAAR $532 billion, with Corporate borrowings up SAAR $266 billion.

In nominal dollars, system Credit expanded $795 billion during Q2 to a record $96.327 TN, with NFD expanding $1.111 TN (to $71.248 TN). Financial sector borrowings contracted $329 billion (to $20.350 TN), while Foreign borrowings were little changed. System Credit posted one-year growth of $4.193 TN, or 4.6%. Over the 14 quarters since the onset of the pandemic, System Credit has surged $21.457 TN, or 28.7%. NFD has inflated $16.722 TN, or 30.7%, since the pandemic – and has doubled (plus $35.675 TN) since 2008.

Total Mortgages expanded nominal $158 billion during the quarter, up from Q1’s $143 billion – but less than half of Q2 ‘22’s $422 billion. Total Mortgages expanded $894 billion over four quarters (4.7%), with three-year growth of $3.351 TN, or 20.3%. Home Mortgages expanded $2.263 TN over the past three years, or 19.7%. Multifamily Mortgages expanded $61.6 billion, or 11.9% annualized, during Q2, with one-year growth of $153 billion, or 7.7%. Over three years, Multifamily Mortgages expanded $420 billion, or 25.2%, with Commercial Mortgages increasing $579 billion, or 19.0%.

Bank (“Private Depository Institutions”) Assets contracted (nominal) $233 billion during Q2 to $25.865 TN, a sharp reversal from Q1’s $506 billion expansion – but a slightly smaller contraction than Q2 ‘22’s $251 billion. Reserves at the Fed declined $137 billion (to $3.047 TN) and Debt Securities holdings fell $159 billion ($6.128 TN). Treasury Securities holdings declined $59 billion (to $1.434 TN) and Agency/MBS dropped $78 billion ($3.167 TN), while Corporate Debt holdings were little changed ($968bn).

Bank Loans expanded $101 billion (2.9% annualized) during Q2 to a record $14.239 TN, up from Q1’s $86 billion, but down significantly from Q2 2022’s $549 billion. Bank Loans expanded $893 billion over the past four quarters. For perspective, Bank Loans expanded on average $363 billion annually over the 20-year period 2000 through 2019 – and $466 billion annually over the decade ended 2021. For the quarter, Mortgage Loans increased $64 billion (3.9% annualized) and Consumer Credit rose $44 billion (6.7% annualized) – with other loans (including business) posting a small contraction.

Things are a little more interesting on the liability side of the Bank balance sheet. Total Deposits contracted $77 billion during Q2, less than Q1’s $428 billion decline, Q4 ‘22’s $140 billion, Q3 ‘22’s $179 billion, and Q2 ‘22’s $257 billion. Despite five straight quarterly declines, Total Deposits were still up a whopping $4.662 TN, or 30.0%, over the past 14 quarters.

Following Q1’s gangbusters $433 billion, Broker/Dealer Assets expanded only $5 billion to a record $4.809 TN. Loans were down slightly ($5bn) to $638 billion, while Miscellaneous Assets rose somewhat ($4bn) to $1.715 TN. Broker Loans inflated $209 billion, or 48.5%, over 14 quarters. Q2’s $23 billion decline (to $1.638 TN) in “Repo” Assets reduced one-year growth to $292 billion, or 21.7%.

GSE Assets declined $131 billion during Q2 to $9.409 TN. FHLB Loans fell $187 billion during Q2 to $855 billion. Still, FHLB Loans posted one-year growth of $335 billion, or 64.3%. Over six quarters, FHLB Loans expanded $520 billion, or 155%. GSE Assets expanded $1.117 TN, or 13.5%, over six quarters, and $2.279 TN, or 32.0%, over 14 quarters.

Treasury Securities expanded $792 billion during the quarter to a record $27.748 TN, with one-year growth of $1.697 TN. Agency Securities declined $69 billion during Q2 to $11.972 TN, while increasing $777 billion over the past year. Treasury Securities inflated $9.934 TN, or 55.8%, over four years, with Agency Securities gaining $2.708 TN, or 29.2%. Combined Treasury and Agency Securities inflated a staggering $12.642 TN, or 46.7%, over 16 quarters to $39.720 TN. Combined Treasury and Agency Securities ended June at 148% of GDP, up from 92% to close 2007.

Total Debt Securities expanded $687 billion during Q2 to a record $60.296 TN, with 15-quarter growth of $13.795 TN, or 30.2%. Total Equities jumped $3.743 TN to $72.893 TN. Total (Debt and Equities) Securities surged $4.430 TN, or 14.3% annualized, to $127.985 TN, with 15-quarter growth of $31.472 TN, or 32.6%. At 482%, the ratio of Total Securities-to-GDP compares to previous cycle peaks 387% (Q3 2007) and 368% (Q1 2000).

The Household Balance Sheet remains at the epicenter of Bubble analysis. Household Assets jumped $5.664 TN, or 13.4% annualized, during Q2 to a record $174.419 TN. With Liabilities increasing $170 billion (to a record $20.138 TN), Household Net Worth inflated a notable $5.494 TN to a record $154.282 TN. It’s worth noting that Q2’s Net Worth gain is the fifth largest ever, lagging only Q1 2019 ($6.242 TN), Q2 2020 ($7.811 TN), Q4 2020 ($8.364 TN), and Q2 2021 ($6.644 TN).

The value of Household Real Estate holdings jumped $2.480 TN to a record $48.870 TN, lagging only Q1 2022’s $3.561 TN increase. It’s worth noting that the largest quarterly Real Estate gain during the mortgage finance Bubble period was Q3 2005’s $864 billion. Over the past 15 quarters, Household Real Estate holdings inflated $15.809 TN, or 47.8%.

Household holdings of Financial Assets jumped $3.084 TN, or 10.8% annualized, to $116.874 TN. Total Equities increased $3.392 TN during the quarter to $59.680 TN. Household Equities holdings as a percentage of GDP increased to 223%. This was down from Q2 2021’s 266%, but compares to previous cycle peaks 146% (Q2 2007) and 172% (Q1 2000). Treasury holdings rose another $154 billion (28.6% annualized) to a record $2.307 TN, with unprecedented one-year growth of $1.462 TN (173%). Agency Securities were little changed during Q2 at $1.259 TN, with record one-year growth of $559 billion, or 80%.

Total Household Deposits dropped $203 billion to $14.180 TN, less than Q1’s $406 billion contraction and the smallest decline in four quarters. The $1.197 TN one-year decline in Total Deposits reduced 15-quarter growth to $3.578 TN, or 33.4%. Money Fund holdings rose another $137 billion during Q2, with one-year growth of $696 billion, or 24.6%. Money Fund holdings jumped $1.374 TN, or 64%, over the past 15 quarters. This puts 15-quarter combined Deposits, Money Funds, Treasuries and Agency Securities at a staggering $5.992 TN, or 39.2%. There’s no mystery surrounding the resilience of consumer spending.

Rest of World (ROW) holdings of U.S. Assets jumped $2.154 TN (19.8% annualized) during Q2 to $45.747 TN, with one-year growth of $4.416 TN, or 10.7%. Total (Equities and Mutual Funds) Equities jumped $1.136 TN for the quarter and $1.752 TN y-o-y – to $13.708 TN. FDI rose $1.056 TN ($1.948 TN y-o-y) to $12.316 TN. Debt Securities holdings increased $114 billion during Q2 to $13.081 TN, with one-year growth of $417 billion, or 3.3%. Over the past year, Treasury holdings increased $203 billion (to $7.620 TN), Agency/MBS $113 billion ($1.317 TN), and Corporate Bonds $64 billion ($3.864 TN). Total ROW holdings inflated $12.995 TN, or 39.7%, over 13 quarters.

Rather than a “good place,” the latest Z.1 further corroborates the Bubble Thesis.

For the Week:

The S&P500 declined 1.3% (up 16.1% y-t-d), and the Dow slipped 0.7% (up 4.3%). The Utilities increased 0.8% (down 12.3%). The Banks fell 2.4% (down 20.3%), and the Broker/Dealers lost 1.8% (up 11.5%). The Transports sank 4.0% (up 13.6%). The S&P 400 Midcaps dropped 3.6% (up 5.9%), and the small cap Russell 2000 fell 3.6% (up 5.1%). The Nasdaq100 declined 1.4% (up 39.7%). The Semiconductors dropped 3.2% (up 40.8%). The Biotechs slumped 2.6% (down 1.5%). With bullion down $21, the HUI gold equities index dropped 3.0% (down 4.7%).

Three-month Treasury bill rates ended the week at 5.285%. Two-year government yields jumped 12 bps this week to 4.99% (up 56bps y-t-d). Five-year T-note yields rose 11 bps to 4.40% (up 40bps). Ten-year Treasury yields gained nine bps to 4.26% (up 39bps). Long bond yields added four bps to 4.34% (up 37bps). Benchmark Fannie Mae MBS yields jumped 11 bps to 6.00% (up 61bps).

Greek 10-year yields jumped 12 bps to 3.95% (down 62bps y-t-d). Italian yields rose 11 bps to 4.35% (down 35bps). Spain’s 10-year yields gained seven bps to 3.65% (up 13bps). German bund yields increased six bps to 2.61% (up 17bps). French yields rose seven bps to 3.14% (up 16bps). The French to German 10-year bond spread widened one to 53 bps. U.K. 10-year gilt yields were unchanged at 4.42% (up 75bps). U.K.’s FTSE equities index increased 0.2% (up 0.4% y-t-d).

Japan’s Nikkei Equities Index slipped 0.3% (up 25.0% y-t-d). Japanese 10-year “JGB” yields added two bps to 0.66% (up 23bps y-t-d). France’s CAC40 declined 0.8% (up 11.8%). The German DAX equities index dipped 0.6% (up 13.0%). Spain’s IBEX 35 equities index declined 0.9% (up 13.8%). Italy’s FTSE MIB index fell 1.5% (up 19.1%). EM equities were mostly lower. Brazil’s Bovespa index dropped 2.2% (up 5.1%), and Mexico’s Bolsa index fell 1.2% (up 8.3%). South Korea’s Kospi index slipped 0.6% (up 13.9%). India’s Sensex equities index rose 1.9% (up 9.5%). China’s Shanghai Exchange Index declined 0.5% (up 0.9%). Turkey’s Borsa Istanbul National 100 index gained 3.3% (up 51.1%). Russia’s MICEX equities index dropped 2.7% (up 45.9%).

Investment-grade bond funds posted outflows of $2.103 billion, while junk bond funds reported inflows of $252 million (from Lipper).

Federal Reserve Credit declined $22.1bn last week to $8.065 TN. Fed Credit was down $836bn from the June 22nd, 2022, peak. Over the past 208 weeks, Fed Credit expanded $4.339 TN, or 116%. Fed Credit inflated $5.254 TN, or 187%, over the past 565 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $5.2bn last week to a six-week low $3.461 TN. “Custody holdings” were up $43bn, or 1.3%, y-o-y.

Total money market fund assets surged $41.8bn to a record $5.625 TN, with a 26-week gain of $731bn (30% annualized). Total money funds were up $1.061 TN, or 23.2%, y-o-y.

Total Commercial Paper dropped $24.7bn to $1.160 TN. CP was down $38bn, or 3.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell eight bps to 7.14% (up 125bps y-o-y). Fifteen-year rates slipped three bps to 6.66% (up 150bps). Five-year hybrid ARM rates rose nine bps to 6.92% (up 228bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 12 bps to 7.67% (up 157bps) – the high back to 2008.

Currency Watch:

September 6 – Financial Times (Hudson Lockett, Kana Inagaki and Mary McDougall): “Officials in China and Japan are pushing back against the strength of the US dollar as a rally by the greenback threatens to drive both the renminbi and the yen to historic lows. The People’s Bank of China set the trading band for the Chinese currency against the dollar at an unexpectedly high level on Wednesday, in the latest sign of growing discomfort among senior leaders over the renminbi’s depreciation. Separately, Japan’s top currency diplomat issued his sharpest warning yet against the yen’s fall, to prevent selling momentum building.”

September 5 – Bloomberg (Erica Yokoyama, Emi Urabe and Yumi Teso): “The yen pulled back from a 10-month low against the dollar after Japan issued its strongest warning in weeks over sharp currency moves, raising the odds of government intervention if the slump continues. The nation’s top foreign exchange official said speculative moves could be seen in the market and warned that Tokyo was prepared to take action if needed. ‘If these moves continue, the government will deal with them appropriately without ruling out any options,’ Masato Kanda, vice finance minister for international affairs, said…”

September 7 – Bloomberg: “The onshore yuan dropped to a 16-year low against the dollar, as pessimism grew toward China’s economy and financial markets. The currency slid by about 0.2% to 7.3294 per dollar and declined by a similar magnitude in the offshore market. The weakness came even after the People’s Bank of China set its daily reference rate at a stronger-than-expected level for a 54th straight day on Thursday, the longest streak since Bloomberg started a survey of estimates for the so-called fixing in 2018.”

For the week, the U.S. Dollar Index gained 0.8% to 105.09 (up 1.5% y-t-d). For the week on the downside, the Mexican peso declined 2.9%, the South African rand 1.5%, the Australian dollar 1.2%, the Japanese yen 1.1%, the South Korean won 1.1%, the New Zealand dollar 1.0%, the British pound 1.0%, the Singapore dollar 1.0%, the Swiss franc 0.9%, the Swedish krona 0.8%, the euro 0.7%, the Brazilian real 0.7%, the Canadian dollar 0.4%, and the Norwegian krone 0.2%. The Chinese (onshore) renminbi declined 1.06% versus the dollar (down 6.06%).

Commodities Watch:

September 5 – Financial Times (Leo Lewis and David Keohane): “The retail price of gold in Japan has jumped to an all-time high as the yen extends its historic slide against the US dollar and cash-laden households rush to find a hedge against inflation. Buying of yen-denominated gold at the nation’s largest dealer has driven the price of the yellow metal above the ¥10,000 per gramme level for the first time in recent days. It was trading at ¥10,100 on Tuesday…”

The Bloomberg Commodities Index declined 0.6% (down 6.0% y-t-d). Spot Gold dipped 1.1% to $1,919 (up 5.2%). Silver sank 5.2% to $22.93 (down 4.3%). WTI crude gained $1.96, or 2.3%, to $87.51 (up 9%). Gasoline rose 2.4% (up 8%), while Natural Gas dropped 5.8% to $2.61 (down 42%). Copper lost 3.5% (down 3%). Wheat was unchanged (down 28%), while Corn increased 0.8% (down 31%). Bitcoin was little changed at $25,870 (up 56%).

Global Bank Crisis Watch:

September 7 – Yahoo Finance (David Hollerith): “FDIC Chair Martin Gruenberg said… that the US banking industry ‘continues to face significant downside risks’ from inflation and high interest rates, which could cause profitability and credit quality to weaken. The top regulator issued his warning as the FDIC released a comprehensive look at how thousands of institutions fared during the second quarter, one of the most tumultuous periods for banking since the 2008 financial crisis.”

September 5 – Reuters (Michael S. Derby): “Almost half a year after Silicon Valley Bank went belly up and nearly set off a national banking crisis, still-growing borrowing from a Federal Reserve emergency lending facility gives the appearance of lingering trouble for the financial sector. But while the ongoing demand for the Fed’s Bank Term Funding Program may result from some overhang from the initial troubles back in March, the growth in its loan output this summer more likely arises from opportunistic money management strategies some banks may be employing. Usage of the BTFP rocketed at launch, shooting from nothing at the start of March to $79 billion a month later. From early May onward, though, it has taken on another $32 billion… BTFP loans stood at $108 billion on Wednesday.”

September 3 – Yahoo Finance (David Hollerith): “Money-market fund assets reached a new all-time high this week as interest rates above 5% continue to attract investors at a time when the Federal Reserve appears determined to keep rates elevated for some time. This is not great news for banks that have been struggling to hold onto their depositors for the last year, especially since the failures of three sizable lenders in the spring. Since the beginning of January deposits at all US banks have fallen by $371 billion…, while money market funds have risen by more than $769 billion… The greatest flight risk is still from the wealthy. Deposits from wealth management and corporate accounts have both fallen nearly 13% so far this year through July…”

UK Watch:

September 6 – Bloomberg (Philip Aldrick and Tom Rees): “Bank of England governor Andrew Bailey said UK interest rates are probably ‘near the top of the cycle’ because a further ‘marked’ drop in inflation is likely this year, a sign that the central bank may bring to an end its quickest tightening cycle in three decades… ‘We’ve definitely got a substantial amount of transmission to come,’ Bailey told lawmakers… ‘It appears that there is a longer transmission, that the lags are longer. We have to factor that in our policy decision.’”

September 7 – Reuters (David Milliken): “British house prices have fallen at the fastest pace since 2009 over the past year…, mortgage lender Halifax said… Halifax said house prices were 4.6% lower last month than in August 2022, when they were close to their peak. This compared with a 2.5% annual fall in July and a median 3.45% decline forecast in a Reuters poll. Prices fell 1.9% in August alone, the biggest monthly fall since November 2022…”

September 6 – Reuters (Suban Abdulla): “British construction firms suffered a sharp drop in orders in August… The S&P Global/CIPS UK Purchasing Managers’ Index for the construction industry fell to 50.8 in August, remaining in growth territory but down from 51.7 in July… Tim Moore, Economics Director at S&P Global Market Intelligence, said the decline in recent months in residential house-building was the steepest since early 2009 excluding the COVID-19 lockdown period… Builders cited weaker economic conditions, cutbacks to new building projects and local planning delays as factors holding back house-building activity.”

Market Instability Watch:

September 5 – Financial Times (Laura Noonan): “The world’s most powerful financial watchdog has warned of ‘further challenges and shocks’ in the months ahead, as high interest rates undermine economic recoveries and threaten key sectors including real estate. In his regular update to G20 leaders ahead of their summit in New Delhi this week, Klaas Knot, chair of the Basel-based Financial Stability Board, said: ‘The global economic recovery is losing momentum and the effects of the rise in interest rates in major economies are increasingly being felt.’ ‘There will certainly be further challenges and shocks facing the global financial system in the months and years to come,’ he added.”

September 4 – Bloomberg (Yumi Teso and Hidenori Yamanaka): “The Japanese government’s auction of 10-year bonds met weak demand on Tuesday, adding to the challenges of policymakers after investors baulked at the yields on offer in sales last month. The Ministry of Finance sold 10-year notes… with a lower-than-expected cut-off price, indicating limited appetite from investors. That resulted in an average yield of 0.657%, the highest in more than nine years.”

September 6 – Financial Times (Laura Noonan and Costas Mourselas): “Financial policymakers have singled out a group of hedge funds as a potential source of market instability in an escalation of existing concerns about the impact of their bets on bonds. The Financial Stability Board, comprised of the world’s top finance ministers, central bankers and regulators, warned… some hedge funds had ‘very high levels of synthetic leverage’. Synthetic leverage refers to debt created by the use of derivatives or other complex financial instruments that frequently does not show up on balance sheets. The FSB did not name specific institutions, but referred to strategies related to recent market ructions, such as the default of Archegos Capital Management in 2021 and turmoil in the US Treasuries market this year.”

September 5 – Reuters (Richard Cowan): “Democratic leaders of the U.S. Senate… sought to gain the upper hand over House Republicans in talks over government funding as the threat of an embarrassing October government shutdown looms. A bipartisan group of senators in the Democratic-controlled chamber collaborated on President Joe Biden’s request for a stopgap spending bill to keep agencies funded until deals can be brokered on the full fiscal year that begins on Oct. 1… The Senate so far is sticking with the $1.59 trillion discretionary spending budget Biden and House Republican Speaker Kevin McCarthy had embraced, while some hardline House conservatives push for cuts below what their leader agreed to.”

September 6 – Reuters (Naomi Rovnick and Chiara Elisei): “Direct lending, a key but expensive source of credit for riskier European firms that banks often shy away from, is running out of steam, a fresh sign that aggressive interest rate rises may be starting to cause funding stress and exacerbate economic pain. Fundraising and deal-making have dropped sharply at European private debt funds… The European private credit industry, which flourished after the 2008 financial crisis as capital-constrained banks cut lending, has raised $28.02 billion of new investment so far in 2023, according to… Preqin. That represents a 34% drop on the same period last year and follows a record 2022 for capital raised by the sector.”

Bubble and Mania Watch:

September 6 – Wall Street Journal (Shane Shifflett and Konrad Putzier): “With the commercial real-estate market now in meltdown, those trillions of dollars in loans and investments are a looming threat for the banking industry—and potentially the broader economy. Banks’ exposure is even bigger than commonly reported. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses… That indirect lending—along with foreclosed properties, trading portfolios and other assets linked to commercial properties—brings banks’ total exposure to commercial real estate to $3.6 trillion… That’s equivalent to about 20% of their deposits. The volume of commercial property sales in July was down 74% from a year earlier, and sales of downtown office buildings hit the lowest level in at least two decades, according to… MSCI Real Assets. When deals begin again, they will be at far lower prices, which will shock banks, said Michael Comparato, head of commercial real estate at Benefit Street Partners… ‘It’s going to be really nasty,’ he said.”

September 6 – Financial Times (George Steer, Mary McDougall and Harriet Clarfelt): “US and European corporate bond markets have started September with a bang, as high-grade companies rush to exploit strong investor demand for debt ahead of possible interest rate rises on both sides of the Atlantic… Barclays, Nestlé and Toyota in the US and Ferrovial, Rexel and Assa Abloy in Europe were among companies issuing debt on Wednesday. That comes after around $34bn worth of investment grade debt was issued in the US on Tuesday, ranking it among the 10 strongest days in the history of the corporate bond market…”

September 6 – Bloomberg (Allison Nicole Smith): “Financial institutions, including several foreign banks, led at least 10 companies tapping the US investment-grade primary market Wednesday, one day after both volume and deal count hit yearly highs… Wednesday’s $14.4 billion deluge came after 20 borrowers sold $36 billion of fresh debt Tuesday, making it the busiest session in terms of deals and daily supply so far this year… As a result, the high-grade market has already met consensus forecasts of around $50 billion of issuance for the week. ‘We’re anticipating a very active financial calendar in September,’ said Ray Zeek, who spearheads US regional bank issuance and execution at Barclays.”

September 7 – Bloomberg (Michael Tobin and Tanaz Meghjani): “Junk borrowers are flooding US leveraged finance markets with deals to help refinance their existing debt, joining the world’s rush to raise fresh capital in September. At least 10 sub-investment-grade companies are tapping US loan markets after the Labor Day holiday, making it the busiest week since early August… Firms around the world have ramped up activity across primary markets this month before a possible increase in borrowing costs. ‘Right now, capital markets are open,’ said Frank Ossino, a portfolio manager at Newfleet Asset Management. ‘So you take capital or address your balance sheet when there is demand to do so.’”

September 6 – Yahoo Finance (Gabriella Cruz-Martinez): “Mortgage rates haven’t been this high for over two decades, but it’s far worse to be a homebuyer now than then. Buyers are still sticker-shocked by the memory of historically low rates when they could afford so much more two years ago. Those still on the hunt in today’s market are facing a major inventory shortage as many homeowners keep their properties off the market. That’s just pushed up home prices at a rapid pace. Add in high inflation and decades of stagnant wage growth, and buyers now have less purchasing power than twenty-some years ago, which has cascaded into an entrenched affordability crisis as rates rise. ‘Over time that can have a significant impact, as we’ve seen in recent decades,’ Andy Walden, vice president of enterprise research and strategy at Black Knight, told Yahoo Finance. ‘The market has become much more reliant on a low interest rate environment to support current home price levels than it has been historically.’”

Ukraine War Watch:

September 4 – Bloomberg (Selcan Hacaoglu and Megan Durisin): “President Vladimir Putin said he wouldn’t revive a UN-backed deal that had eased global food prices by allowing Ukraine to ship its grain through the Black Sea unless obstacles to Russia’s own agricultural exports are removed. Putin’s comments came after a three-hour meeting with Turkish President Recep Tayyip Erdogan in the Russian resort town of Sochi.”

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

September 6 – Bloomberg (Minxin Pei): “Chinese President Xi Jinping’s decision to skip the G-20 summit in New Delhi this weekend has been widely cast as a snub of India… In fact, by passing up an opportunity to deal with President Joe Biden directly for the first time since their meeting at the G-20 summit in Bali last November, Xi may instead be sending a message to the US. A clue to Xi’s intentions may be found in a remarkable statement about Sino-US relations issued by the Chinese Ministry of State Security… The MSS has seldom, if ever, made public pronouncements on foreign policy, which is not its purview… The MSS statement blasts US efforts to restore dialogue with China — most recently by sending Commerce Secretary Gina Raimondo to Beijing — as transparently insincere.”

September 3 – Bloomberg: “President Xi Jinping began his third term with a diplomatic blitz that bolstered his image as a global statesman. Now, he’s set to skip the world’s premier international forum of world leaders — and it’s not exactly clear why. It could be due to diplomatic sparring with India that Xi is snubbing the Group of 20 meeting in India. Or he wants to bolster the newly expanded BRICS forum. Maybe he wants to stay home to handle China’s economic troubles… Whatever the reason, his absence would mark a major shift in how Xi operates. The Chinese leader has attended every G-20 leaders’ summit since taking power in 2012, and he’s also sought to burnish his image as a peacemaker since emerging from three years of Covid isolation at last year’s meeting in Bali, Indonesia.”

September 6 – Reuters (Martin Quin Pollard, Laurie Chen and Yew Lun Tian): “For several foreign diplomats based in China, the news that President Xi Jinping will not attend the G20 summit in India this week has confirmed a worrying trend: Beijing is shutting off to the West and its allies. More than 10 envoys from these countries stationed in China detailed to Reuters the increasing difficulty they face getting access to Chinese officials and other sources of information on the world’s second-largest economy. The envoys… said this trend had become pronounced in 2023 even as China had dropped rigid pandemic controls that had stymied diplomatic activities for three years.”

September 6 – Reuters (Stanley Widianto and Kate Lamb): “Chinese Premier Li Qiang said… it is important to avoid a ‘new Cold War’ when dealing with conflicts between countries as world leaders gathered in Indonesia amid sharpening geopolitical rivalries across the Indo-Pacific region. Speaking at an annual summit involving members of the Association of Southeast Asian Nations (ASEAN) and China, Japan and South Korea, Li said countries needed to ‘appropriately handle differences and disputes’. ‘At present, it is very important to oppose taking sides, bloc confrontation and a new Cold War,’ Li told the meeting. ASEAN, which has warned of the danger of getting dragged into major powers’ disputes, is also holding wider talks with Li, U.S. Vice President Kamala Harris and leaders of partner countries including Japan, South Korea, Australia and India.”

September 7 – Reuters (Aditya Soni): “Beijing’s widening curbs on iPhone use by government staff raised concerns among U.S. lawmakers… and fanned fears that American tech companies heavily exposed to China could take a hit from rising tensions between the countries. Apple fell more than 3% and was on track for its worst two-day decline since November after news that Beijing has told employees at some central government agencies in recent weeks to stop using their Apple mobiles at work. Several Wall Street analysts said the curbs show that even a company with a good relationship with the Chinese government and a large presence in the world’s second-largest economy was not immune to rising tensions between the two nations.”

September 3 – Bloomberg (Olivia Carville): “China’s biggest banks are extending billions of dollars to Russia as sanctions pressure western lenders to exit the country… Since Moscow’s invasion of Ukraine in February 2022, western regulators have cracked down on Russia by imposing sanctions and urging banking institutions to pull back on operations in the country. Chinese lenders are now filling the gap… The four biggest banks in China have quadrupled their exposure to Russia’s banking sector since the war in Ukraine began, according to data analyzed for the FT by the Kyiv School of Economics. Bank of China Ltd., Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Agricultural Bank of China Ltd. had a combined exposure of $2.2 billion at the start of 2022. This increased to almost $10 billion in the 14 months to the end of March this year…”

September 7 – Bloomberg: “China’s imports from Russia surged by the most ever in dollar terms, bucking an overall decline in its purchases of foreign goods as trade between the neighbors booms. China bought $11.5 billion of Russian products in August after an increase of more than a quarter from July… The monthly haul was the biggest in data going back more than two decades.”

September 6 – Reuters (Hyunsu Yim): “A Chinese Communist Party and government delegation headed by Vice Premier Liu Guozhong will visit North Korea to take part in the celebration of the country’s founding day later this week… The visit comes at the invitation of the Central Committee of the ruling Workers’ Party of Korea (WPK) and the government of the Democratic People’s Republic of Korea (DPRK)…”

September 5 – Financial Times (Christian Davies and Song Jung-a): “North Korean leader Kim Jong Un inspected five big munitions factories within a single week last month, calling on engineers and officials to increase production of weapons ranging from intercontinental ballistic missile launchers and cruise missile engines to sniper and assault rifles. The tour of weapons manufacturers… included stops at factories producing rocket shells and drone engines, was part of a summer campaign to promote the ‘modernisation’ of his country’s arms industry as Pyongyang seeks to cash in on Russia’s invasion of Ukraine. Kim is expected to travel to Russia this week to meet President Vladimir Putin and discuss weapons sales…”

De-globalization and Iron Curtain Watch:

September 6 – Reuters (Stanley Widianto): “The world risks a ‘great fracture’ of its economic and financial systems, U.N. Secretary-General António Guterres said… at a summit with Southeast Asia’s ASEAN bloc, China, the United States and others in Indonesia. In a wide-ranging speech that touched on geopolitical tension, multilateral development finance and climate change, Guterres called on world leaders to find peaceful and inclusive solutions to the challenges facing the world. ‘There is a real risk of fragmentation – of a great fracture in world economic and financial systems; with diverging strategies on technology and artificial intelligence and conflicting security frameworks,’ he said.”

September 7 – Reuters (Trevor Hunnicutt and Nandita Bose): “U.S. President Joe Biden arrives at this weekend’s Group of 20 (G20) meeting in India with an offer for the ‘Global South’: whatever happens to China’s economy, the United States can help fund your development. Armed with cash for the World Bank and promises of sustained U.S. engagement, Biden hopes to persuade fast-growing economies in Africa, Latin America and Asia that there is an alternative to China’s Belt and Road project, which has funneled billions of dollars to developing countries but left many deeply in debt.”

September 7 – Bloomberg (Kari Lundgren): “Norway’s $1.4 trillion sovereign wealth fund has started winding down its office in Shanghai as Singapore takes over as its hub in Asia. The fund is initiating the process to close its representative office in the city due to ‘operational considerations,’ Norges Bank Investment Management said… The move doesn’t affect the investment strategy in China, it said. That mirrors a shift among other international investors, with banks including Goldman Sachs… and Morgan Stanley scaling back ambitious expansion plans in China amid a deteriorating geopolitical climate.”

Inflation Watch:

September 5 – Yahoo Finance (Ines Ferré): “Oil jumped to 10 month highs on Tuesday after key OPEC+ players announced supply reductions intended to keep crude prices high… Brent International closed at $90.04 per barrel for the first time since November and West Texas Intermediate futures settled at $86.69 per barrel… The market is feeling the upward pressure. Crude futures have rallied about 25% since late June…”

September 5 – Bloomberg (Chunzi Xu): “Gasoline prices are now at the highest seasonal level in more than a decade even as the Labor Day holiday marked the end of the US summer driving season, sparking fears that inflation could accelerate again… The national average for regular gasoline stands at $3.811 a gallon, topping this time last year and marking the second-highest level in records going back to 1994…”

September 6 – Bloomberg (Elizabeth Low, Yongchang Chin and Sharon Cho): “An increasingly stretched global refining system means fuel-price volatility is set to become more common, according to top oil executives. A lack of spare crude-processing capacity due to under-investment, and shutdowns happening more frequently with refiners ramping up on better margins and deferring planned work were common themes at the APPEC by S&P Global Insights conference in Singapore this week. That’s left fuels like diesel and gasoline vulnerable to sudden swings when there are unplanned outages. There have been unplanned plant shutdowns almost every week or two in Europe, Frederic Lasserre, global head of research & analysis at Gunvor Group Ltd., said… Many refiners have postponed regular maintenance, leaving them open to technical issues that lead to surprise outages, he said.”

September 6 – Wall Street Journal (Will Parker): “America’s suburbs are posting the country’s fastest-rising rents… Many white-collar workers with remote jobs moved out of city apartments for roomier accommodations during the early months of the pandemic in 2020. Now, high mortgage rates and home prices are keeping some of the same families renting for longer periods… The trend is propping up rents and fueling concerns about rental affordability in suburban areas… Rents in suburbs had climbed 26% through this past July since March 2020, 8 percentage points higher than the gain in urban cores, according to… website Apartment List.”

September 5 – Reuters (Shariq Khan): “Americans could face a sticker shock with their heating bills this winter, especially if it is a chilly one, due to unusually low U.S. stockpiles of distillate fuels following OPEC+ crude supply cuts and higher demand from Europe, analysts said. Distillate inventories, which include diesel and heating oil, were by late August about 15% below the five-year average for this time of year, according to the Energy Information Administration.”

September 5 – Bloomberg (Ilena Peng and Dayanne Sousa): “Sugar surged to the highest in 11 years after the world’s largest trader of the commodity forecast another year of shortages. Supplies will fall short of demand by 5.4 million metric tons in the coming season, the sixth year of shortages, said Mauro Virgino, trading intelligence lead at Alvean.”

September 7 – Bloomberg (Kok Leong Chan and Anuradha Raghu): “Malaysia will limit retail purchases and boost enforcement to prevent locally produced rice being sold as the more expensive imported grain, as the fallout from India’s export curbs continuing to upend the market.”

September 7 – Bloomberg (Hallie Gu): “China has asked some fertilizer producers to suspend urea exports after domestic prices jumped, a move that’s likely to restrict supplies and boost costs for farmers in key buyers such as India. Some major Chinese fertilizer makers halted signing new export deals from early this month following a government mandate…”

Biden Administration Watch:

September 6 – Reuters (Trevor Hunnicutt): “Arms negotiations between Russia and North Korea are actively advancing, a U.S. official said… and warned leader Kim Jong Un that his country would pay a price for supplying Russia with weapons to use in Ukraine. Providing weapons to Russia ‘is not going to reflect well on North Korea and they will pay a price for this in the international community,’ U.S. national security adviser Jake Sullivan told reporters… The Kremlin said earlier on Tuesday it had ‘nothing to say’ about statements by U.S. officials that Kim planned to travel to Russia this month to meet President Vladimir Putin and discuss weapons supplies to Moscow.”

September 5 – Bloomberg (Grant Smith): “Saudi Arabia and Russia prolonged their unilateral oil supply curbs by another three months, a more aggressive move than traders had been expecting as the OPEC+ members seek to support a fragile global market. The leader of the Organization of Petroleum Exporting Countries will continue its production cutback of 1 million barrels a day until December…”

Federal Reserve Watch:

September 5 – Bloomberg (Craig Torres): “Federal Reserve Governor Christopher Waller said policymakers can afford to ‘proceed carefully’ with interest-rate increases given recent data showing inflation continuing to ease. ‘There is nothing that is saying we need to do anything imminent anytime soon,’ Waller said…, signaling he supports holding rates steady at the central bank’s next meeting. ‘We can just sit there and wait for the data’… ‘The data last week clearly showed the job market is starting to soften… If we can keep inflation coming down for the next few months, on trend at like two tenths a month, we are in pretty good condition.’”

September 6 – CNBC (Jeff Cox): “Boston Federal Reserve President Susan Collins… advocated a patient approach to policymaking while saying she needs more evidence to convince her that inflation has been tamed. In remarks that aligned with sentiment from other key central bankers, Collins said the Fed may be ‘near or even at the peak’ for interest rates. However, she noted that more increases could be needed depending on how the data shakes… ‘Overall, we are well positioned to proceed cautiously in this uncertain economic environment, recognizing the risks while remaining resolute and data-dependent, with the flexibility to adjust as conditions warrant,’ Collins said…”

U.S. Bubble Watch:

September 7 – Reuters (Dan Burns): “The number of Americans seeking jobless benefits for the first time fell unexpectedly last week to the lowest level since February, pointing to a U.S. job market that remains relatively tight… Initial claims for state unemployment benefits fell 13,000 to 216,000 in the week ended Sept. 2 from a revised 229,000 in the prior week…”

September 7 – Reuters (David Shepardson): “General Motors… made a counterproposal to the union representing its U.S. hourly workers in a bid to avoid a costly strike, but United Auto Workers President Shawn Fain called the offer ‘insulting.’ The largest U.S. automaker said it offered workers a 10% wage hike and two additional 3% annual lump sum payments over four years in its offer to the union ahead of the Sept. 14 contract expiration.”

September 4 – Wall Street Journal (Stephen Wilmot): “Just when it is becoming easier to find a car, along comes another potential supply shock: a United Auto Workers strike. Labor Day this year comes at an unusually tense point in relations between U.S. vehicle assemblers and General Motors, Ford and Chrysler-owner Stellantis. The current four-year contract negotiated by the UAW union on behalf of factory employees at the Detroit Three expires on Sept. 14. The two sides seem far from agreeing on a new contract. Ford… published the terms of its offer, including a 9% wage increase over the four years. The UAW is asking for a 46% increase. Its plain-speaking president, Shaun Fain, responded… that Ford’s wage proposal ‘insults our very worth.’”

September 6 – Wall Street Journal (Justin Lahart): “The U.S. trade deficit has been narrowing, and that has been a plus for the U.S. economy. But it is still far wider than it was before the pandemic hit. Odds are that it is going to stay that way for a while. The… U.S. trade deficit was a seasonally adjusted $65 billion in July, versus $63.7 billion in June… Last year, the trade gap was a lot wider, with the deficit averaging $79.3 billion each month. But that remains a far cry from the last year before the pandemic, even after adjusting for inflation. In 2019, the deficit averaged $46.6 billion a month.”

September 6 – CNBC (Diana Olick): “After rising sharply for several weeks, mortgage interest rates pulled back slightly last week, but not enough to revive mortgage demand. Total mortgage application volume fell 2.9% last week…, according to the Mortgage Bankers Association’s seasonally adjusted index… ‘Mortgage applications declined to the lowest level since December 1996, despite a drop in mortgage rates,’ said Joel Kan, an MBA economist. ‘Rates remained more than a full percentage point higher than a year ago, despite mixed data on the health of the economy and signs of a cooling job market.’”

September 2 – Yahoo Finance (Rebecca Chen): “Homebuyers in some cities have no choice but to buy million-dollar homes as prices near all-time highs. The share of million-dollar homes is rising across the nation. Redfin found that 8.2% of houses in the US are now worth seven figures, up from 7.3% in February and just shy of the peak of 8.6% recorded in June 2022. Of the 90 million homes studied, approximately 7.46 million units were over a cool million… The percentage of homes over $1 million was 66.28% in San Jose and 52.91% in San Francisco. Los Angeles followed at 26.48%, San Diego at 23.15%, and Seattle at 18.70%.”

September 7 – CNBC (Jessica Dickler): “Many Americans are house-rich, at least on paper. Thanks to skyrocketing housing prices, homeowners are now sitting on nearly $30 trillion in home equity, according to the St. Louis Federal Reserve — just shy of the 2022 peak. That’s roughly $200,000 cash per homeowner in equity that can be tapped, which is the amount most lenders will allow you to take out while still leaving 20% equity in the home as a cushion.”

September 7 – Bloomberg: “The value of completed Chinese foreign direct investment transactions in the US was $2.49 billion last year, less than half the amount in 2021 and the smallest since 2009, according to… Rhodium Group. ‘In the past seven years, China has gone from one of the top five US investors to a second-tier player surpassed by countries such as Qatar, Spain, and Norway,’ Rhodium researchers including Thilo Hanemann wrote… China is slowly decoupling from the US, with businesses slashing investment into America to the lowest since the global financial crisis and official data showing trade dependency slumping.”

China Watch:

September 3 – Financial Times (Edward White and Sun Yu): “China’s complex economic problems, including property sector turmoil, rising local government debt and soft consumption, have sparked calls for Xi Jinping to unleash billions of dollars to shore up spending, arrest a slide into deflation and prop up a weakening currency. Yet the Chinese president has refrained from providing broad-based stimulus, the latest example of how his focus on domestic and external security is shaping his response to problems in the world’s second-biggest economy… According to experts in Chinese politics and economics as well as government advisers in Beijing, the leadership is comfortable with slower growth rates and is wary of pulling the trigger on any big changes that would add to government debt or risk instability in the financial system. ‘If you decide to dramatically spend more money on something, you have to cut back on something else . . . it is an extremely hard discussion to have given that you’re not going to cut technology investment, national defence or internal security,’ said Victor Shih, a professor… at the University of California San Diego.”

September 3 – Reuters (Joe Cash): “Chinese President Xi Jinping’s first major reform plans a decade ago were also his boldest, envisaging a transition to a Western-style free market economy driven by services and consumption by 2020. The 60-point agenda was meant to fix an obsolete growth model better suited to less developed countries – however, most of those reforms have gone nowhere leaving the economy largely reliant on older policies that have only added to China’s massive debt pile and industrial overcapacity. The failure to restructure the world’s second-largest economy has raised critical questions about what comes next for China… ‘Things always fail slowly until they suddenly break,’ said William Hurst, Chong Hua Professor of Chinese Development at University of Cambridge.”

September 5 – Bloomberg: “Chinese developer Country Garden… faces its next major test Monday when creditors finish voting on company requests to extend more bonds, just days after dodging a default with last-minute payments. Voting starts Sept. 7 and concludes Monday Sept. 11 on the builder’s proposal to extend principal payments for a group of yuan bonds by three years. The most urgent focus among them is a 1.435 billion yuan ($196.3 million) note with a put option Sept. 14 allowing investors to demand repayment… And that’s not all. The company also faces deadlines Sept. 14-19 for a combined equivalent of $31.6 million of interest on three offshore bonds and two yuan notes.”

September 7 – Reuters (Ziyi Tang and Ryan Woo): “Five of China’s major state banks said… they will start to lower interest rates on existing mortgages for first-home loans, part of a series of support measures announced by Beijing in recent weeks. Chinese regulators announced the policy last week to help homebuyers amid growing concern over the health of the world’s second-largest economy and a series of crises in the nation’s property sector.”

September 3 – Bloomberg: “Home sales in two of China’s biggest cities soared in the past two days following mortgage relaxations, an early sign that government efforts to cushion a record housing slowdown are helping. Existing-home sales for Beijing and Shanghai doubled over the weekend from the previous one, according to CGS-CIMB Securities. ‘We were surprised by the strong pick up in Beijing and Shanghai, despite the challenging economy,’ said Raymond Cheng, head of China property at CIMB. The two mega cities… benefited the most from Thursday’s announcement which lowered down-payment thresholds across the nation.”

September 4 – Bloomberg: “China’s housing crisis has engulfed the country’s private developers, producing record waves of defaults and leaving a shrinking group of survivors. Out of the nation’s top 50 private-sector developers by dollar bond issuance, 34 have already suffered delinquencies on offshore debt… The remaining 16, including Country Garden Holdings Co., face a combined $1.48 billion of onshore and offshore public bond payments for either interest or principal in September. The monthly amount is the highest until January.”

September 4 – Reuters (Ellen Zhang and Ryan Woo): “China’s services activity expanded at the slowest pace in eight months in August, a private-sector survey showed… The Caixin/S&P Global services purchasing managers’ index (PMI) dropped to 51.8 in August from 54.1 in July, the lowest reading since December when COVID-19 confined many consumers to their homes. The 50-point mark separates expansion from contraction in activity.”

September 7 – Reuters (Joe Cash): “China’s exports and imports extended declines in August as the twin pressures of sagging overseas demand and weak consumer spending at home squeezed businesses… Exports dropped 8.8% in August year-on-year, customs data showed on Thursday, beating a forecast of 9.2%… and off a 14.5% drop in July. Meanwhile, imports contracted 7.3%, slower than an expected 9.0% decline and last month’s 12.4% fall.”

September 4 – Financial Times (Harry Dempsey and Edward White): “China is building battery plants far beyond levels needed to meet domestic demand for electric cars and grid energy storage, underlining vast state subsidies and unchecked bank lending that are expected to underpin the international expansion of Chinese manufacturers. Production capacity at China’s battery factories is expected to reach 1,500 gigawatt hours this year — enough for 22mn EVs — more than twice demand levels, forecast at 636GWh, according to data from CRU Group… Battery manufacturers are following a pattern exhibited in other industries such as steel, aluminium and solar panels, industry executives warned, where Chinese companies benefit from subsidies to take a huge share of the global market and squeeze out competition internationally.”

September 5 – Reuters (Julie Zhu, Kevin Huang, Yelin Mo and Roxanne Liu): “China is set to launch a new state-backed investment fund that aims to raise about $40 billion for its semiconductor sector…, as the country ramps up efforts to catch up with the U.S. and other rivals. It is likely to be the biggest of three funds launched by the China Integrated Circuit Industry Investment Fund… Its target of 300 billion yuan ($41bn) outdoes similar funds in 2014 and 2019, which… raised 138.7 billion yuan and 200 billion yuan respectively.”

Central Banker Watch:

September 4 – Bloomberg (William Horobin and Joe Mayes): “Christine Lagarde avoided giving an indication of whether the European Central Bank will raise or hold interest rates next week as she delivered a speech in London. The president… kept up suspense around one of the most uncertain decisions in its yearlong battle against inflation… ‘Actions speak louder than words,’ Lagarde said… ‘We have increased our policy rates by a cumulative total of 425 bps in the space of 12 months — a record pace in record time. And we will achieve a timely return of inflation to our 2% medium-term target.’ ECB officials meeting Sept. 14 must assess if a recent slowdown of the economy is sufficient to warrant a first pause…”

September 7 – Reuters (Steve Scherer and David Ljunggren): “Bank of Canada Governor Tiff Macklem… said interest rates may not be high enough to bring inflation back down to target, sending a hawkish message after holding borrowing costs at a 22-year high a day earlier. On Wednesday, the Bank of Canada (BoC) kept its key rate at 5%… Inflation has remained above the bank’s 2% target for 27 months… Macklem said one possible reason for inflation staying above target was that it might be taking longer for rates to work, but the other possibility ‘is that monetary policy is not yet restrictive enough to restore price stability’. He added: ‘And unfortunately, the longer we wait, the harder it’s likely to be to reduce inflation.’”

September 4 – Bloomberg (Zoe Schneeweiss): “Bundesbank Bank President Joachim Nagel signaled he’d be in favor of raising reserve requirements after the European Central Bank stopped paying interest on them. ‘We should be open to do more,’ he said… ‘The financial system shouldn’t take for granted that this is the end of what we have to do in the Governing Council, how to really tackle this excess liquidity story.’ The ECB took banks by surprise in July with a decision to offer zero interest on money that they are required to park with it as minimum reserves, instead of the 3.25% it previously paid out.”

Global Bubble Watch:

September 2 – Financial Times (Edward White and Song Jung-a): “China’s slowing growth is sparking warnings of contagion in Asia, as waning consumer demand and slower manufacturing hit neighbouring countries with close ties to the world’s second-largest economy. A manufacturing slump in South Korea has extended to its longest in nearly half a century while other big exporters in east Asia area also being hit by slow demand. South Korea, Asia’s fourth-biggest economy, is viewed as a bellwether for the region’s technology supply chain… The country’s exports fell in July at the steepest pace in more than three years, led by smaller shipments of computer chips to China…”

September 6 – New York Times (Keith Bradsher): “At a time when many of China’s exports are faltering and its consumers are spending less at home, the country is flooding the world with cars. Overseas demand for inexpensive vehicles made in China, mostly gasoline-powered models that Chinese consumers now shun in favor of electric cars, is so great that the biggest obstacle to selling more abroad is a lack of specialized ships to carry them. Chinese automakers have leaped to dominance in Russia… The companies have also captured large shares of markets in Southeast Asia, Australia, South America and Mexico. With lingering Trump-era tariffs holding back sales to the United States, China’s automakers are preparing a big push into Europe — once they have enough ships.”

Europe Watch:

September 5 – Bloomberg (Zoe Schneeweiss): “Consumer expectations for euro-area inflation inched up in July, remaining above the European Central Bank’s 2% target as officials ponder whether to hike or hold interest rates next week. Expectations for the next 12 months failed to slow, staying at 3.4%, the ECB said… in its monthly survey. For three years ahead, they rose to 2.4% from 2.3%.”

September 6 – Dow Jones (Ed Frankl): “The German economy is expected to shrink by more than previously expected in 2023, as the country’s creaking manufacturing base feels the effects of slumping global demand and the squeeze on spending from higher interest rates… Europe’s largest economy is seen contracting 0.5% this year, more than the 0.3% in prior forecasts from June, the IfW Kiel Institute for the World Economy said… ‘The main reasons for this are weak industrial activity, the crisis in the construction sector and weak consumer spending,’ the IfW said… ‘Germany is now feeling the effects of its old industrial business model. In addition, the interest rate turnaround is weighing on the economy at home and via export markets,’ said Moritz Schularick, president of the IfW.”

September 7 – Financial Times (Martin Arnold and Laura Pitel): “A sharp decline in carmaking fuelled a downturn in German industry as production fell for the third consecutive month in July… The 0.8% month-on-month decline reported by Germany’s statistical office exceeded the 0.5% fall forecast by economists… It would have been even bigger without a rebound in energy and construction… Production in Germany’s carmaking sector fell 9%. ‘Germany’s industrial production continues its nosedive and even diehard pessimists are getting frightened,’ said Carsten Brzeski, an economist at Dutch bank ING…”

September 6 – Bloomberg (Alessandra Migliaccio and Chiara Albanese): “Giorgia Meloni’s government is confronting drastically worsening budget figures, adding pressure to her options on how to bolster finances. A much larger 2023 shortfall close to 5% of output… is inevitable given weakened economic growth and electoral promises including tax cuts, according to people familiar…”

September 5 – Financial Times (Martin Arnold): “Housing construction in the eurozone has declined at the fastest pace since the pandemic started after rising interest rates and high inflation hit building activity… Soaring borrowing costs, following an unprecedented rise in the European Central Bank’s policy rates in the past year, have suppressed demand for new mortgages, reduced house prices and combined with higher inflation to raise the cost sharply of building new homes.”

Japan Watch:

September 7 – Reuters (Leika Kihara): “Bank of Japan policymaker Junko Nakagawa… stressed the need to maintain ultra-loose monetary policy and set a high hurdle for ending negative interest rates, suggesting the bank would be in no rush to phase out its massive stimulus programme. An increasing number of Japanese companies were raising prices and wages, Nakagawa said, adding that there was a chance inflation could accelerate… But there was also a risk inflation could slow once the pass-through of higher costs moderates, she said. ‘There’s an equal degree of upside and downside risks to the inflation outlook,’ as prices are swayed by various factors such as business sentiment and the strength of consumption, Nakagawa told a news conference. As a result, it was hard to say when inflation could hit the bank’s 2% inflation target in a sustainable manner, she said.”

September 6 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Policymakers in Tokyo believe China’s deepening economic woes could hit Japan’s fragile recovery, especially if Beijing fails to shore up demand with meaningful stimulus, potentially delaying an exit from ultra-loose monetary policy. China’s downturn would leave Japan’s export-reliant economy with little external support as aggressive Federal Reserve interest rate hikes cool growth in the United States, another key driver of global activity.”

September 4 – Reuters (Satoshi Sugiyama): “Japan’s service sector activity expanded at its quickest pace in three months in August, underpinned by robust consumer spending as inbound tourism regained momentum… The relatively upbeat service sector conditions contrast with the manufacturing industry’s shrinking activity… The final au Jibun Bank Japan Services purchasing managers’ index (PMI) grew to 54.3 last month from 53.8 in July, in line with the flash reading and stayed above the 50-benchmark… for 12 consecutive months.”

EM Watch:

September 7 – Bloomberg (Netty Ismail): “Developing-nation currencies fell for a fourth day, coming within a whisker of erasing all of this year’s gains. A loss of 0.8% this week has left MSCI Inc.’s gauge of emerging-market currencies just 0.3% up in 2023.”

Leveraged Speculation Watch:

September 6 – Financial Times (Costas Mourselas and Harriet Agnew): “Investors are warning hedge funds that they will face redemptions and further pressure to cut their fees unless they can improve their performance, highlighting the strain placed on the industry by a dramatic rise in global borrowing costs. An aggressive series of interest rates increases by major central banks over the past 18 months has greatly improved the return that end investors such as pension funds can earn while taking minimal risk. Some investors now say that hedge funds need to lift their returns by a similar amount to the move in global borrowing rates… or risk heavy outflows. ‘Whether you are an institutional investor or a private bank it’s a huge deal that the risk-free rate is now 5%,’ said Paul Berriman, global head of Towers Watson Investment Management…”

Social, Political, Environmental, Cybersecurity Instability Watch:

September 5 – Associated Press (Jamey Keaten and Seth Borenstein): “Earth has sweltered through its hottest Northern Hemisphere summer ever measured, with a record warm August capping a season of brutal and deadly temperatures, according to the World Meteorological Organization. Last month was not only the hottest August scientists ever recorded by far with modern equipment, it was also the second hottest month measured, behind only July 2023… August was about 1.5 degrees Celsius warmer than pre-industrial averages. That is the threshold that the world is trying not to pass, though scientists are more concerned about rises in temperatures over decades, not merely a blip over a month’s time.”

September 5 – Reuters (Elida Moreno): “The Panama Canal’s water levels have not recovered enough as the end of the rainy season approaches and limits on daily transit and vessel draft will stay in place for the rest of the year and throughout 2024, the waterway’s authority said… The restrictions, implemented earlier this year to conserve water amid prolonged drought, triggered a backlog of ships waiting to pass the key global waterway, which handles an estimated 5% of world trade, contributing to more expensive freight costs ahead of the approaching Christmas season.”

September 6 – CNBC (Spencer Kimball): “Covid hospitalizations are increasing substantially across much of the U.S. for the first time this year, just as students are returning to school and shortly before updated shots arrive at pharmacies for a fall vaccination campaign. New hospitalizations have jumped about 16% in the U.S. over the past week, continuing an upward trend that began in late July… New hospital admissions spiked more than 30% over the past week in Arkansas, Colorado, Indiana, Kansas, Minnesota, Oklahoma, Tennessee, Utah and Wyoming… The late summer Covid spike comes after a quiet year in which hospitalizations and deaths declined week after week since January.”

Geopolitical Watch:

September 3 – Reuters (Cynthia Kim): “North Korea conducted a simulated tactical nuclear attack drill that included two long-range cruise missiles in an exercise to ‘warn enemies’ the country would be prepared in case of nuclear war… KCNA said the drill was successfully carried out on Saturday and two cruise missiles carrying mock nuclear warheads were fired towards the West Sea of the Korean peninsula and flew 930 miles at a preset altitude of 150 meters.”

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