August 5 – Associated Press (Martin Crutsinger): “The U.S. trade deficit increased to a record $75.7 billion in June as a rebounding American economy sent demand for imports surging. The… deficit rose 6.7% from a revised May deficit of $71 billion. The June deficit set a record, topping the old mark of $75 billion set in March... In June, exports edged up a modest 0.5% to $207.7 billion while imports surged 2.1% to $283.4 billion. The politically sensitive goods deficit with China rose to $27.8 billion in June, up 5.8% from the May level. So far this year, the goods deficit with China, the largest that the United States runs with any country, totals $158.5 billion, an increase of 19.2% compared to the same period in 2020.”
Traditionally, Trade and Current Account deficits provided important indications of excessively loose monetary policy. These days, no one – including the Fed – couldn't care less. Our Credit system and economy flood the world with dollar balances conveniently recycled back into U.S. securities markets. Instead of waning confidence in the world’s reserve currency, there is jubilation for liquidity abundance the world over. For now.
August 4 – Bloomberg (Reade Pickert): “U.S. service providers expanded in July at the fastest pace in records dating back to 1997 as measures of business activity, new orders and employment all improved. The Institute for Supply Management’s services index jumped to 64.1 last month from 60.1 in June, topping all estimates… ‘Materials shortages, inflation and logistics continue to negatively impact the continuity of supply,’ Anthony Nieves, chair of the ISM’s Services Business Survey Committee, said… Prices paid by service providers jumped to 82.3 last month, the highest level since September 2005. Meantime, delivery times lengthened, with a gauge of supplier deliveries rising to its second-highest reading on record.”
August 3 – Bloomberg (Alex Tanzi and Katia Dmitrieva): “U.S. household debt rose at the fastest pace since 2013 in the second quarter, driven by a mortgage boom as Americans took advantage of low borrowing costs and sought more space to work from home. Household liabilities climbed $313 billion to $14.96 trillion as of the end of June, a 2.1% rise from three months earlier, the Federal Reserve Bank of New York said… Most of the increase came in mortgage balances. With the average 30-year rate declining in the period, millions of Americans with good credit took the opportunity to refinance and cut their monthly payments.”
August 6 – Bloomberg (Reade Pickert): “U.S. consumer borrowing surged in June by the most on record, reflecting large increases in credit-card balances and non-revolving loans. Total credit jumped $37.7 billion from the prior month after an upwardly revised $36.7 billion gain in May, Federal Reserve figures showed... On an annualized basis, borrowing increased 10.6%.”
Recall that CPI jumped 0.9% in June, with a y-o-y gain of 5.4%. Producer Prices surged 1.0%, as y-o-y inflation rose to 7.3%. The most recent data showed the national FHFA House Price Index up 18.0% y-o-y, with the S&P CoreLogic Index rising 16.99%.
Federal Reserve Credit has inflated $4.462 TN, or 120%, over the past 99 weeks. During this period, M2 “money supply” ballooned $5.450 TN, or 36%, to $20.4 TN. Of course, such unparalleled monetary inflation has consequences, immediate as well as longer-term. To believe the Fed can simply accommodate the financial markets with the most gradual and transparent “taper” and everything will magically normalize is more than wishful thinking.
Wall Street won’t admit it. The Fed clearly has its heels dug in. Risks are escalating for the overheated U.S. economy. Chair Powell and the FOMC have come under mounting pressure from Republican fiscal conservatives. And there was this week an astute letter from influential moderate Democrat Senator Joe Manchin:
“With the recession over and our strong economic recovery well underway, I am increasingly alarmed that the Fed continues to inject record amounts of stimulus into our economy by continuing an emergency level of quantitative easing (QE) with asset purchases of $120 billion per month of Treasury securities and mortgage backed securities. The Fed has sustained $120 billion per month in asset purchases since June 2020, despite increasing vaccination rates to combat the virus and additional fiscal stimulus from Congress in the ARP. The record amount of stimulus in the economy has led to the most inflation momentum in 30 years, and our economy has not even fully reopened yet. I am deeply concerned that the continuing stimulus put forth by the Fed, and proposal for additional fiscal stimulus, will lead to our economy overheating and to unavoidable inflation taxes that hard working Americans cannot afford.
Simply put, our monetary and fiscal stimulus response met the moment of crisis when our economy suffered the medical equivalent of a heart attack. But, now it’s time to ensure we don’t over prescribe the patient by further stimulating an already strong recovery and therefore risk our ability to respond to future crises we are sure to face. I urge you and the other members of the Federal Open Market Committee to immediately reassess our nation’s stance of monetary policy and begin to taper your emergency stimulus response. While I appreciate your commitment to maximum employment and stable prices, it is imperative we begin to understand that long term policy responses tailored for an economic depression, like the Great Depression and Great Recession of 2008, may not be what is required for today’s economy and could result in higher than desired inflation if not removed in time.”
My own view holds that QE should be employed only in dire emergencies. To safeguard system stability, when used it must be limited in scope and duration. There’s a strong case that QE thwarted financial collapse in 2008, although I believe $1 TN was excessive. It was critical for the Fed to have followed through with their 2011 “exit strategy” policy normalization. Reinstating QE in 2012 in a non-crisis environment – where the Fed’s balance sheet doubled the 2011 level to $4.5 TN – was foolhardy inflationism that opened the monetary inflation floodgates. Restarting QE again in September 2019 in the face of increasingly manic securities markets and multi-decade low unemployment – was reckless.
It’s difficult to comprehend the $4.0 TN QE pandemic response. The Fed confronted a faltering Bubble of its own making. There’s a case for limited QE liquidity injections to accommodate a de-risking/deleveraging crisis dynamic. The Federal Reserve instead employed massive open-ended QE, first to thwart deleveraging and then to stoke Bubble excess. Never should the Fed and global central banks have allowed markets to believe QE was readily available to circumvent market adjustments and corrections. Prolonged QE has fomented market dysfunction and deep structural maladjustment.
July 31 – Bloomberg (Sam Potter and Elaine Chen): “Record inflows. Record fund launches. Record assets. If active money management is in decline, someone forgot to tell the ETF industry. Amped up by a meme-crazed market and emboldened by the success of Cathie Wood’s Ark Investment Management, stock pickers are storming the $6.6 trillion U.S. exchange-traded fund universe like never before -- adding a new twist in the 50-year invasion from passive investing. Passive funds still dominate the industry, but actively managed products have cut into that lead, scooping up three-times their share of the unprecedented $500 billion plowed into ETFs in 2021… New active funds are arriving at double the rate of passive rivals, and the cohort has boosted its market share by a third in a year.”
August 5 – Financial Times (Robin Wigglesworth, Kate Duguid, Colby Smith and Joe Rennison): “Hedge funds that exploit bond market dislocations, such as those blamed for exacerbating the US Treasury ructions of March 2020, have swelled to more than $1tn of assets for the first time. The strategy, known as ‘fixed income relative-value arbitrage’, — which typically involves using big dollops of leverage to profit from small but persistent anomalies — attracted another $5.5bn of investor money in the second quarter, according to HFR. That, coupled with buoyant markets, lifted total assets under management above the $1tn milestone.”
Manic securities market excess is conspicuous – equities, corporate Credit, ETFs, cryptocurrencies, “meme stocks,” IPOs, M&A, structured finance, etc. The precarious nature of housing market inflation and excess is similarly obvious. How it somehow became reasonable to stick with $120 billion monthly QE in the face of such momentous asset market inflation and speculation is difficult to understand.
The Fed dismisses Bubble and inflation risks. One has only to look at charts of the Fed’s balance sheet, system Credit growth, M2, and Treasury debt to appreciate that we’ve transitioned into uncharted waters with regard to monetary inflation. And it is not credible to simply assert that the associated jump in inflation will be transitory. Inflation psychology has evolved quickly – in commodities pricing, labor markets, and corporate pricing of goods and services.
The Fed is delusional if it actually believes it has anchored inflationary expectations. The University of Michigan’s survey of one-year inflation expectations jumped to 4.7% in July, the high since 2008. And with the economy overheated, we should assume onerous fallout from another year of zero rates along with an additional Trillion of QE. There is no precedent for such massive monetary stimulus in these circumstances.
Ten-year Treasury yields jumped seven bps Friday to 1.30%, a rather dramatic reversal from Wednesday’s intraday 1.13% low. Treasury bonds have been pulled lower over recent months by Chinese Credit deterioration and myriad global Bubble fragilities. There’s always an Ebb and Flow associated with financial instability, and this week there was a Beijing-directed hiatus in the evolving Credit crisis. With a relatively tranquil week for China (and Asia & EM), Treasuries turned more attentive to U.S. overheating.
The Shanghai Composite rallied 1.8%, and the growth-oriented ChiNext Index recovered 1.5%. An index of high-yield Chinese bonds saw yields drop a modest 41 bps to 12.38% - though yields remain 269 bps higher over three weeks. Huarong CDS dropped 140 bps to 1,088, but there was little relief from elevated CDS prices for the other “AMCs” and developers. Meanwhile, crisis dynamics for behemoth developer Evergrande attained crucial momentum.
August 6 – Bloomberg: “China Evergrande Group bonds dropped to record lows after reports that creditor lawsuits against the world’s most indebted developer will be consolidated, a step that has preceded several high-profile defaults by Chinese borrowers. Cases related to Evergrande and its affiliates will be centralized in a Guangzhou court, Caixin reported… Speculation about the move triggered a slump in the developer’s bonds late Thursday, with losses deepening after the city of Beijing tightened property curbs and S&P Global Ratings cut its assessment of Evergrande for the second time in as many weeks. ‘Evergrande’s liquidity position is eroding more quickly and by more than we previously expected,’ S&P analysts led by Matthew Chow wrote… ‘The company’s nonpayment risk is escalating, not only for the substantial public bond maturities in 2022 but also for its bank and trust loans and other debt liabilities over the next 12 months.’”
Evergrande yields (8¾ ’25) traded to almost 40% in Friday trading, as the market prepares for imminent default. The company’s woes pulled down developer bond prices, reversing part of what had been a decent rally earlier in the week.
Between Beijing’s recent bareknuckle reform measures and acute Credit market stress (Huarong, Evergrande, developers, high-yield, etc.), investor/speculator confidence has been shaken. For the most part, markets still view Beijing as having things under control. But there are widening fissures in market confidence.
A Friday Financial Times opinion piece (Simon Edelsten) pondered perhaps the crucial question confronting global markets: “What happens when investors lose faith in Beijing? It could take China years to win back confidence after recent state intervention in tech.” The article’s conclusion: “It has taken China decades to stimulate homegrown entrepreneurship. Undermining the most successful businesses so publicly will have a rapid and lasting impact across the economy. Nearly two decades ago, when I first visited China, the government was keen to demonstrate its care for shareholders and their rights. It is deeply troubling if that policy is being abandoned. As the Asian crisis demonstrated, it takes years to win back investors’ confidence.”
Chinese Credit instability Ebbed somewhat this week. I have my doubts “the fix is in.” Beijing still commands formidable market power. Yet I expect they’ll intervene only when they feel it’s necessary to restore stability. Unlike the Fed, they are not content to fan speculative excess. Especially if Evergrande collapses, I would expect the Flow of Credit instability to gain velocity. Moreover, expect each round of Ebb and Flow to beget ascending levels of systemic stress. And if the marketplace is beginning to lose faith in the almighty Beijing meritocracy, I see the “small” banking and local government finance sectors susceptible to “risk off” contagion.
Meanwhile, more record highs this week for the S&P500 and major equities indices. Yet there remains an underlying instability that indicates heightened vulnerability. Commodity markets were notably unstable this week, with major declines in crude, copper and the precious metals. While the VIX closed the week at about 16, it again traded above 20 earlier in the week (Tuesday). And, importantly, volatility has increased for a vulnerable bond market. Corporate bond fund flows have slowed markedly, with outflows this week. “Investors” should enjoy the summer doldrums while they last.
For the Week:
The S&P500 gained 0.9% (up 18.1% y-t-d), and the Dow increased 0.8% (up 15.0%). The Utilities rose 2.2% (up 7.3%). The Banks surged 4.3% (up 30.1%), and the Broker/Dealers jumped 4.4% (up 27.9%). The Transports added 0.3% (up 16.0%). The S&P 400 Midcaps increased 0.5% (up 17.8%), and the small cap Russell 2000 rose 1.0% (up 13.8%). The Nasdaq100 advanced 1.0% (up 17.2%). The Semiconductors gained 1.7% (up 22.1%). The Biotechs rallied 3.6% (up 3.8%). With bullion down $51, the HUI gold index sank 5.1% (down 13.3%).
Three-month Treasury bill rates ended the week at 0.0425%. Two-year government yields gained two bps to 0.21% (up 9bps y-t-d). Five-year T-note yields rose eight bps to 0.77% (up 41bps). Ten-year Treasury yields jumped eight bps to 1.30% (up 38bps). Long bond yields increased five bps to 1.95% (up 30bps). Benchmark Fannie Mae MBS yields surged 10 bps to 1.78% (up 44bps).
Greek 10-year yields fell five bps to 0.6% (down 7bps y-t-d). Ten-year Portuguese yields declined four bps to 0.13% (up 10bps). Italian 10-year yields fell five bps to 0.57% (up 2bps). Spain's 10-year yields slipped three bps to 0.24% (up 19bps). German bund yields added a basis point to negative 0.46% (up 11bps). French yields dipped a basis point to negative 0.12% (up 2bps). The French to German 10-year bond spread narrowed two to 34 bps. U.K. 10-year gilt yields rose five bps to 0.61% (up 41bps). U.K.'s FTSE equities index gained 1.3% (up 10.3% y-t-d).
Japan's Nikkei Equities Index rallied 2.0% (up 1.4% y-t-d). Japanese 10-year "JGB" yields declined a basis point to 0.02% (down 1 basis point y-t-d). France's CAC40 jumped 3.1% (up 22.8%). The German DAX equities index rallied 1.4% (up 14.9%). Spain's IBEX 35 equities index advanced 2.3% (up 10.0%). Italy's FTSE MIB index jumped 2.5% (up 16.9%). EM equities rallied. Brazil's Bovespa index gained 0.8% (up 3.2%), and Mexico's Bolsa added 0.5% (up 16.0%). South Korea's Kospi index recovered 2.1% (up 13.8%). India's Sensex equities index jumped 3.2% (up 13.7%). China's Shanghai Exchange rallied 1.8% (down 0.4%). Turkey's Borsa Istanbul National 100 index surged 3.0% (down 2.8%). Russia's MICEX equities index gained 0.9% (up 15.7%).
Investment-grade bond funds saw outflows of $364 million, and junk bond funds posted negative flows of $1.155 billion (from Lipper).
Federal Reserve Credit last week declined $10.8bn to $8.189 TN. Over the past 99 weeks, Fed Credit expanded $4.462 TN, or 120%. Fed Credit inflated $5.378 Trillion, or 191%, over the past 456 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $6.6bn to a six-month low $3.508 TN. "Custody holdings" were up $99bn, or 2.9%, y-o-y.
Total money market fund assets were little changed at $4.501 TN. Total money funds declined $75bn y-o-y, or 1.6%.
Total Commercial Paper slipped $1.4bn to $1.138 TN. CP was up $119bn, or 11.7%, year-over-year.
Freddie Mac 30-year fixed mortgage rates fell three bps to a five-month low 2.77% (down 11bps y-o-y). Fifteen-year rates were unchanged at 2.10% (down 34bps). Five-year hybrid ARM rates dropped five bps to 2.40% (down 50bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down five bps to 2.97% (down 15bps).
Currency Watch:
For the week, the U.S. Dollar Index gained 0.7% to 92.80 (up 3.2% y-t-d). For the week on the upside, the South Korean won increased 0.7%, the New Zealand dollar 0.5% and the Australian dollar 0.2%. On the downside, the Swiss franc declined 1.0%, the euro 0.9%, the Mexican peso 0.9%, the Swedish krona 0.9%, the Norwegian krone 0.8%, the Canadian dollar 0.6%, the Japanese yen 0.5%, the Brazilian real 0.4%, the the British pound 0.2% and the South African rand 0.2%. The Chinese renminbi declined 0.33% versus the dollar (up 0.68% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index fell 1.7% (up 21.3% y-t-d). Spot Gold dropped 2.8% to $1,763 (down 7.1%). Silver slumped 4.6% to $24.33 (down 7.8%). WTI crude sank $5.67 to $68.28 (up 41%). Gasoline fell 3.3% (up 60%), while Natural Gas jumped 5.8% (up 63%). Copper dropped 3.0% (up 24%). Wheat gained 2.2% (up 12%). Corn roses 2.1% (up 15%). Bitcoin jumped $2,321 this week to $43,905 (up 51%).
Coronavirus Watch:
August 5 – Reuters (Roshan Abraham and Maria Caspani): “The United States hit a six-month high for new COVID cases with over 100,000 infections reported on Wednesday…, as the Delta variant ravages areas where people did not get vaccinated.”
August 2 – Reuters (Deena Beasley): “With a new wave of COVID-19 infections fueled by the Delta variant striking countries worldwide, disease experts are scrambling to learn whether the latest version of coronavirus is making people - mainly the unvaccinated - sicker than before. The U.S. Centers for Disease Control and Prevention warned that Delta, first identified in India and now dominant worldwide, is ‘likely more severe’ than earlier versions of the virus… The agency cited research in Canada, Singapore and Scotland showing that people infected with the Delta variant were more likely to be hospitalized than patients earlier in the pandemic.”
August 4 – Bloomberg: “Global coronavirus cases topped 200 million, another grim milestone in the 18-month pandemic that has killed more than 4.2 million people. Israel, one of the world’s most vaccinated nations, called on employers to switch to work-at-home and warned that it may have to impose new lockdowns. The World Health Organization called for a moratorium on booster shots to enable poorer countries to catch up in vaccination rates.”
August 5 – Bloomberg: “China imposed new restrictions on travel in a bid to slow a delta-driven outbreak that’s grown to more than 500 cases scattered across half the country, as the government stuck to an aggressive containment playbook rather than rely on its high vaccination rate. Public transport and taxi services were curtailed in 144 of the worst-hit areas nationwide… Hong Kong re-imposed quarantine on travelers from the mainland, though an exception remained for the southern Guangdong province which neighbors the financial city. Officials reported 94 new local infections on Thursday…”
Market Mania Watch:
August 3 – Bloomberg (Vildana Hajric): “In a market that hasn’t had a 5% drop in nine months, where records are falling every fourth day and where corporate earnings just doubled, it has occasionally seemed like the good news will never end. That’s how investors are starting to behave, and it’s bothering researchers. Rather than temper expectations after a rousing rally, bulls are getting more bullish. Almost two-thirds of clients in a JPMorgan… survey said they plan to add to stock holdings in the coming weeks.”
August 3 – Bloomberg (Harriet Habergham): “Never mind banker burnout, return-to-office headaches, and new pandemic waves. A simple reality stands out for the biggest global investment banks: they’re minting money like never before. As the dust settles over earnings season, a total profit of more than $170 billion from a dozen of the biggest firms in the past four quarters shows how far the industry has come from the frazzled early stages of the pandemic. JPMorgan… is the standout, earning the equivalent of $131 million a day.”
August 2 – Financial Times (Joe Rennison): “A better than expected US earnings season has prompted a flurry of ‘buy’ recommendations on stocks, with analysts now as upbeat as they have been in almost two decades. Data from Morgan Stanley show the percentage of buy ratings has hit its highest point in 18 years… But the slowing pace of economic growth should spark caution from analysts as they look towards the end of the year and into 2022, according to David Lebovitz, markets strategist at JPMorgan.”
August 3 – Wall Street Journal (Doyinsola Oladipo and David Brunnstrom): “Many investment executives who back special-purpose acquisition companies are scoring big paydays as more deals get completed. Some of their clients are missing out. The divergence results from the varying methods SPAC creators use to share the lucrative incentives known as the ‘sponsor promote.’ It typically consists of deeply discounted shares and other securities executives receive for risking capital to set up the SPAC and vet a company to take public. The promote typically allows creators to make tens of millions of dollars on paper on average—sometimes several times their initial investment—even if that company’s shares fall.”
Market Instability Watch:
August 5 – Financial Times (Tommy Stubbington): “The value of the world’s stock of negative-yielding debt has ballooned to more than $16.5tn, the highest in six months… Government bond yields have tumbled in recent weeks as some traders have piled in, a move that has blindsided many investors who expected an economic rebound from the pandemic along with rising inflation to lift long-term borrowing costs.”
August 6 – Bloomberg (Paula Seligson and Jeremy Hill): “Strong corporate earnings have sent stocks on something of a tear in recent weeks. But credit markets are painting a more nuanced picture amid growing concerns of a coronavirus resurgence. Less than a month removed from the tightest spreads of the post-financial crisis era, risk premiums for speculative-grade debt are climbing once again. Bonds of companies hurt most by shutdowns have sold off… The amount of distressed debt has even started to creep up, though defaults remain far below levels seen earlier in the pandemic.”
August 2 – CNBC (Thomas Franck): “The Treasury Department will begin conducting emergency cash-conservation steps on Monday to avoid busting the federal borrowing limit after a two-year suspension of the debt ceiling expired at the end of July. Economists say those so-called extraordinary measures will allow Treasury to pay off the government’s bills without floating new debt for two to three months. After that, Congress will need to either raise or suspend the borrowing limit or risk the U.S. defaulting on its obligations. The limit, a facet of American politics for over a century, prevents the Treasury from issuing new bonds to fund government activities once a certain debt level is reached. That level reached $22 trillion in August 2019 and was suspended until Saturday.”
Inflation Watch:
August 2 – Financial Times (James Politi and Aime Williams): “For small business owners in Glenside in the northern suburbs of Philadelphia, rising prices have become a common gripe. ‘It’s really affecting my bottom line,’ says Alisa Kleckner, who sells masks and costumes… for theatre productions. ‘The cost of raw goods has gone up, the cost of transportation has gone up, and also the entertainment industry is suffering,’ she says. Joe Sparacio, who runs the Crate and Press Juice Bar, is worried about the possible hit to come. ‘The cost of all our produce went up,’ he says, ‘strawberries, blackberries, almond milk. Chicken went up threefold. For now it’s not a problem because the customers are paying more, but if that stops then it’ll be a big problem.’ The inflationary spike running through the country has injected a lot of uncertainty into the local economy, admits Napoleon Nelson, a Democratic state representative... ‘It’s more than the usual gas prices,’ he says. ‘We’re not sure how long this will last. It’s a struggle.’”
August 2 – Reuters (Jonathan Cable and Leika Kihara): “Factories across the world are suffering from supply bottlenecks which sent prices skyrocketing in July, while a new wave of coronavirus infections in Asia demonstrated the fragile nature of the global recovery. Business surveys on Monday highlighted the divergence in the global economy on the pace of recovery from the pandemic, which led the International Monetary Fund to downgrade this year's growth forecast for emerging Asia. Although manufacturers largely remained open throughout lockdowns, the loosening of some restrictions designed to limit infections has driven a flurry of demand - but factories are suffering from staff shortages and supply chain problems.”
August 2 – Bloomberg (Joe Deaux): “For consumers and economists hoping commodities inflation will soon subside, the aluminum market delivered some discouraging news… The world’s second-largest brewer, Heineken NV, said the rising costs of freight and the metal used in beer cans will have a ‘material effect’ on profit next year. Reynolds Consumer Products Inc., the maker of the iconic Reynolds Wrap, said it’s facing costs of about $400 million this year driven in large part by aluminum and resin. The announcements come on the heels of a more than 30% gain in benchmark aluminum prices so far this year…”
August 6 – Reuters (Francesco Canepa and Mark John): “The bosses of top multinationals are fretting about rising inflation but the very people responsible for keeping price growth in check - central bankers - seem unfazed. Even as policymakers at the U.S. Federal Reserve, European Central Bank and elsewhere diverge on how quickly to wind down massive pandemic stimulus programmes, they agree on one thing: the recent surge in inflation is not a major concern. Yet the latest set of corporate earnings calls are replete with mentions of the word ‘inflation’, with the tally up 1,000% on the year for S&P 500 U.S.-listed companies and 400% in Europe for Stoxx 600 companies, according to Bank of America research.”
August 5 – Reuters (Roslan Khasawneh and Muyu Xu): “Container shipping rates from China to the United States have scaled fresh highs above $20,000 per 40-foot box as rising retailer orders ahead of the peak U.S. shopping season add strain to global supply chains. The acceleration in Delta-variant COVID-19 outbreaks in several counties has slowed global container turnaround rates. Typhoons off China’s busy southern coast in late July and this week have also contributed to the crisis gripping the world’s most important method for moving everything from gym equipment and furniture to car parts and electronics. ‘These factors have turned global container shipping into a highly disrupted, under-supplied seller’s market, in which shipping companies can charge four to ten times the normal price to move cargoes,’ Philip Damas, Managing Director at maritime consultancy firm Drewry, said.”
August 4 – CNBC (Evelyn Cheng): “Chinese companies wanting to go global are running into shipping problems. Access to cheap manufacturing at home gave Chinese businesses an advantage overseas. But it’s turning into a disadvantage now, as the pandemic and trade tensions disrupt international supply channels. Many goods can’t be shipped out, said Fang Xueyu, vice president of international marketing and general manager for Asia-Pacific at Chinese home appliance company Hisense. The cost of shipping containers has climbed five-fold from about $3,000 to as much as $15,000 each…”
Biden Administration Watch:
August 3 – New York Times (Makini Brice and David Morgan): “The U.S. Senate made gradual progress on Tuesday on a $1 trillion infrastructure investment bill to upgrade roads, bridges, mass transit and broadband services as the Democratic and Republican leaders squabbled over debate on amendments. The legislation… marked a rare bipartisan effort in a Senate that is split 50-50 between the two parties. Two days into the debate, Senate Majority Leader Chuck Schumer and Republican Leader Mitch McConnell clashed over the pace of progress on the bill, which appeared headed toward passage but which is still is open to amendments.”
August 2 – Bloomberg (Steven T. Dennis and Saleha Mohsin): “President Joe Biden has a tough decision in choosing the next Federal Reserve chair: Play it safe by giving Jerome Powell a second term or take a chance on a liberal like Lael Brainard, who would please progressives in Congress yet potentially agitate Wall Street. Either path offers speed bumps for the White House. Powell would likely sail to Senate confirmation, giving the Biden administration a significant bipartisan win. Financial markets would likely remain calm, but Biden would likely disappoint some progressive Democrats he needs for other issues.”
August 5 – Wall Street Journal (Dave Michaels and Alexander Osipovich): “Securities and Exchange Commission Chairman Gary Gensler this week declared war on what he called the Wild West of crypto trading, promising a vigorous attack on fraud and misconduct. But progress is likely to be more piecemeal and incremental than wholesale and sudden. Mr. Gensler outlined his desire to regulate digital assets such as bitcoin and other crypto products to the same extent as stocks, bonds and commodity-related trading instruments. He told the Aspen Security Forum… his priorities include newer innovations such as stablecoins and decentralized finance, products that are beginning to draw more mainstream investors. The impulse to regulate these markets is growing more evident around the globe.”
August 3 – Reuters (Katanga Johnson): “The chair of the U.S. Securities and Exchange Commission (SEC)… called on Congress to give the agency more authority to better police cryptocurrency trading, lending and platforms, a ‘Wild West’ he said is riddled with fraud and investor risk. Gary Gensler said the crypto market involves many tokens which may be unregistered securities and leaves prices open to manipulation and millions of investors vulnerable to risks. ‘This asset class is rife with fraud, scams and abuse in certain applications,’ Gensler told a global conference. ‘We need additional congressional authorities to prevent transactions, products and platforms from falling between regulatory cracks.’”
Federal Reserve Watch:
August 5 – Bloomberg (Craig Torres and Laura Davison): “Senator Joe Manchin, the West Virginia Democrat, urged Federal Reserve Chair Jerome Powell to start pulling back on its $120 billion in monthly bond purchases aimed at providing stimulus to the economy by lowering borrowing costs. ‘I am deeply concerned that the continuing stimulus put forth by the Fed, and proposal for additional fiscal stimulus, will lead to our economy overheating and to unavoidable inflation taxes that hard working Americans cannot afford,’ Manchin wrote in a letter made… ‘I urge you and the other members of the Federal Open Market Committee to immediately reassess our nation’s stance of monetary policy and begin to taper your emergency stimulus response,’ he wrote.”
August 4 – Bloomberg (Reade Pickert): “Senator Elizabeth Warren praised Federal Reserve Governor Lael Brainard… for her approach to financial regulation while criticizing Chairman Jerome Powell as too protective of big financial institutions. ‘My concern is that over and over he has weakened the regulation here,” she said of Powell… ‘We need someone who understands and uses the monetary policy tools and the regulatory tools to keep our economy safe. Let’s not forget what happened in 2008…’ While stopping shy of endorsing Brainard for the top job, she touted her many dissents to Fed moves to loosen regulations.”
August 5 – Reuters (Pete Schroeder and Howard Schneider): “The looming exit of the Federal Reserve's top regulatory official will give Democrats an opportunity to reverse the central bank's Wall Street-friendly course without ditching Chair Jerome Powell when his term expires next year. Randal Quarles, who was appointed to the Fed board by former Republican President Donald Trump, will end his term as vice chair for supervision - a powerful role overseeing the country’s largest lenders - in October. Powell… ends his term in February and the White House has not said if it plans to renominate him. The question of what to do with the supervision post plays directly into the dilemma - and politics - that President Joe Biden faces as he decides whether to reshape the Fed for years to come.”
August 4 – Reuters (Lindsay Dunsmuir and Ann Saphir): “Federal Reserve Vice Chair Richard Clarida, a key architect of the U.S. central bank’s new policy strategy, said… an interest rate hike was likely in 2023 given the surprising pace of the economic recovery from the coronavirus pandemic. He was joined by two other policymakers in signaling a desire to move soon to start reducing the Fed’s massive bond-buying program as well, though one of them - Dallas Fed President Robert Kaplan - was clear he viewed an earlier taper of the central bank’s $120 billion in monthly asset purchases to be a precursor not of faster rate hikes but of a more “patient approach” to raising borrowing costs.”
August 3 – Reuters (Howard Schneider): “The coronavirus pandemic may have pushed the United States into a volatile era of stronger growth and better productivity, but higher interest rates and faster inflation as well, St. Louis Federal Reserve president James Bullard said, elaborating on why he thinks the U.S. central bank should end its crisis-era policies. Bullard, who five years ago said he viewed the United States as mired in an epoch of low growth, low productivity and low inflation, said he is beginning to think a new ‘regime’ may have arrived where the Fed will have to cope with faster change and more frequent shocks.”
August 5 – Reuters (Jonnelle Marte): “The U.S. economic recovery is progressing rapidly, the labor market is improving and it may be possible for the Federal Reserve to start withdrawing its accommodative monetary policy sooner than some expect, Fed Governor Christopher Waller said… ‘My outlook is very much that the economy is going to recover,’ Waller said… ‘We will be able to pull back on accommodative monetary policy potentially sooner than others think.’”
August 2 – Bloomberg (Steve Matthews): “Federal Reserve Governor Christopher Waller said that if the next two monthly U.S. employment reports show continued gains, he could back an announcement soon on scaling back the central bank’s bond purchases. ‘I think you could be ready to do an announcement by September,’ Waller said… ‘That depends on what the next two jobs reports do. If they come in as strong as the last one, then I think you have made the progress you need. If they don’t, then I think you are probably going to have to push things back a couple of months.’”
July 31 – Bloomberg (Rich Miller): “The U.S. jobs market still has some ways to go before it improves enough to satisfy the Federal Reserve’s criteria for beginning to reduce its asset purchases, Governor Lael Brainard said… Brainard also suggested that the recent surge in inflation is likely to prove temporary and said that she saw both upside and downside risks to the economy, the latter from the spread of the Delta variant of Covid-19.”
August 3 – Reuters (Ann Saphir): “Despite complaints from U.S. employers that workers are hard to find, there are almost 10 million people who are unemployed and more sitting on the sidelines of the labor market, said San Francisco Federal Reserve President Mary Daly, who expects many or most of them to return to work as the economy recovers. ‘Myriad factors are tempering labor supply at the moment - the need to care for children, fears of COVID, generous unemployment benefits,’ Daly said… ‘But there is no reason to expect those to be permanent or even highly persistent features of the labor market.’”
U.S. Bubble Watch:
August 3 – Financial Times (Colby Smith): “Americans increased their mortgage borrowings in the second quarter of the year, adding fuel to a housing boom that has seen US prices surge at a record pace. Data from the New York branch of the Federal Reserve showed that mortgage originations reached $1.2tn in the three months to the end of June, exceeding volumes seen in the previous three quarters and well above the $752bn level reached in the final quarter of 2019. Taken together, mortgage originations over the four quarters to June 30 — which include refinancing — amounted to nearly $4.6tn, a historic high. That helped to push mortgage balances to more than $10tn — after a $282bn increase over the preceding three months — meaning about 44% of the outstanding mortgage balance was originated in the past year.”
August 6 – Bloomberg (Olivia Rockeman): “The U.S. labor market charged ahead in July with the biggest increase in employment in nearly a year, highlighting optimism about the economy’s prospects even as coronavirus concerns resurface. Payrolls climbed by 943,000 last month after upwardly revised increases the prior two months… The unemployment rate dropped to a pandemic low of 5.4%, while earnings and hours worked remained elevated.”
July 31 – Bloomberg (Vince Golle and Reade Pickert): “Producers couldn’t keep up with supercharged consumer demand in the U.S. last quarter, and it’s unclear when supply constraints will ease. Materials shortages and shipping delays led to outsized drawdowns in inventories as companies scrambled to meet one of the strongest paces of consumer spending since the 1950s and robust growth in business purchases of equipment… The value of inventories shrank an annualized $166 billion last quarter, the second-worst decline in nearly 12 years. Looking ahead, it’s hard to tell when supply chains may return to some normalcy, as firms race to restock and try to get ahead of any further materials price hike and shortages. ‘Given they are global in nature, many of the supply chain and logistics bottlenecks could be more persistent than many have been assuming, and we anticipate them weighing on current quarter growth in consumer spending,’ Richard Moody, chief economist at Regions Financial… said…”
August 3 – Financial Times (Lauren Fedor and Colby Smith): “A decade ago, the average house in Ohio’s leafy state capital Columbus would sit on the market for almost 100 days before being sold. Today, a similar property sells in just 10 days. ‘It has never been like this,’ said Michael Jones, a real estate agent at Coldwell Banker Realty with more than 20 years’ experience in central Ohio. ‘It’s unprecedented.’ US policymakers are becoming increasingly concerned about the rising price of housing for both homeowners and renters, as the broadest global house price boom for at least two decades drives up living costs. ‘Today, it is harder to find an affordable home in America than at any point since the 2008 financial crisis,’ Marcia Fudge, US housing and urban development secretary, said… Nationally, house prices in May were 16.6% higher than the year before, according to the latest S&P CoreLogic Case-Shiller index update — the biggest jump in more than 30 years of data…”
August 2 – Reuters (Lindsay Dunsmuir): “Loan officers at U.S. banks reported easing standards and terms on business loans in the second quarter as the economy revved up on the back of wider reopenings and rising coronavirus vaccination rates. The officers also said in the Federal Reserve survey… that there was greater demand for business loans from firms of all sizes. ‘Major net shares of banks ... cited a more favorable or less uncertain economic outlook, more aggressive competition from other banks on nonbank lenders, and improvements in industry-specific problems as important reasons,’ the U.S. central bank said…”
August 3 – Reuters (Lucia Mutikani): “New orders for U.S.-made goods increased more than expected in June, while business spending on equipment was solid, pointing to sustained strength in manufacturing even as spending is shifting away from goods to services… Factory orders rose 1.5% in June after advancing 2.3% in May. Economists polled by Reuters had forecast factory orders increasing 1.0%. Orders soared 18.4% on a year-on-year basis.”
Fixed-Income Bubble Watch:
August 2 – Financial Times (Joe Rennison): “Investors are pushing back at the riskiest US loans, demanding better terms in a sign that fund managers are becoming more picky in a deluge of deals. Most deals are still sailing through the market with rampant demand, while companies refinance old loans at rock-bottom interest rates and private equity groups load up on cheap debt to fund acquisitions. But the average price of new loans in July dipped to 99.22 cents on the dollar from 99.33 cents in June… The forward loan calendar… rose to over $50bn this month for the first time since January 2020.”
August 4 – Bloomberg (Davide Scigliuzzo): “Surging investor demand for leveraged loans is fueling a dramatic weakening in creditor protections, with borrowers gaining more leeway to incur additional debt and issue dividend payouts, according to Moody’s… Junk-rated companies are taking advantage of record-low rates to reprice loans at more favorable terms, extend maturities and push safeguards meant to protect investors ‘to the brink,’ analysts at the credit-rating firm wrote in a… report that examined term sheets for over 200 new loans.”
August 3 – Wall Street Journal (Sebastian Pellejero): “Sales of securities backed by riskier commercial real-estate loans have surged to a record, highlighting investors’ demand for higher-yielding debt and expectations for a recovery in business properties. Commercial real-estate collateralized loan obligations are created by private real-estate investors. In these deals, lenders sell debt and equity to make short-term loans to borrowers that renovate business properties, particularly multifamily housing… Bridge loans are typically made to properties in flux, such as empty or outdated apartment buildings, and the renovations they finance can fail to pay off as quickly as expected, leading to delayed repayments and defaults. As a result, CRE CLOs offer relatively high payouts at a time many investors continue to expect commercial properties to rebound further from the pandemic.”
August 5 – Bloomberg (Patrick Clark): “Investors spent $53 billion on multifamily real estate during in the three months ending in June, the most ever for the second quarter, according to… Real Capital Analytics. The spree extended a busy year for apartment investors that has included purchases by Blackstone Group Inc. and Starwood Capital Group. It was also fueled by real estate money moving to housing from offices, hotels and malls, which have fared poorly in the pandemic. The influx of money has pushed prices higher and forced private equity firms to behave like the aggressive homebuyers in the frenzied housing market.”
China Watch:
August 2 – Bloomberg: “China Evergrande Group’s woes deepened as an advertiser sought legal action for payments and its credit rating was cut again by Moody’s… In the latest move by a creditor to protect its assets, Leo Group Co. said it filed a lawsuit against Evergrande’s Hengda Real Estate unit to pay for advertisements. It’s asking a Shenzhen court to freeze some of the unit’s assets, including bank accounts… Meanwhile Moody’s lowered the credit grade on China’s most indebted developer by two notches to Caa1 with a negative outlook. Evergrande’s refinancing risk is ‘heightened’ over the coming 12 to 18 months given its weakened funding access and liquidity position…”
August 3 – Bloomberg (Alice Huang and Emma Dong): “China’s top politicians defined China Evergrande Group’s financial problems as ‘liquidity stress’ and not an insolvency, REDD reported… Vice Premier Liu He arrived at this conclusion at a cabinet meeting last week: REDD.”
August 6 – Bloomberg: “Four months after China Huarong Asset Management Co. shocked bondholders by failing to announce its 2020 results, the bad-debt manager may finally be on the cusp of unveiling its financial statements. There is pressure for the state-owned company to act this month. Its offshore unit China Huarong International Holdings Ltd. has until late August to release its figures in order to avoid a technical default, according to S&P Global Ratings. At stake is whether the company is able to survive on its own or whether it will require debt restructuring or recapitalization. So far, Huarong and the central government have provided few clues about the company’s financial health or its future. Such uncertainty has weighed on the company’s bonds and challenged long-held notions that the Communist Party will always step in to save state-owned firms perceived too big to fail.”
August 2 – Bloomberg (Julia Fioretti): “China Huarong Asset Management Co., the country’s bad-debt manager that has roiled markets with doubts about its future, will exit one unit and restructure another to focus on its core businesses as it seeks to shore up its finances. Huarong plans a public transfer of its 70% equity in Huarong Consumer Finance to external parties… The state-owned company also intends to negotiate with the main institutional creditors of Huarong Trust’s outstanding debt to complete a ‘debt-to-equity swap and equity transfer,’ it said… The embattled conglomerate has been looking to sell nearly all of its units outside of distressed debt as part of a government-approved downsizing plan to bolster its finances…”
August 2 – Bloomberg (Ailing Tan): “Chinese firms have already defaulted on more bonds than any prior full year as policy makers are increasingly comfortable that missed payments by some won’t cause systemic problems. Just seven months into 2021, borrowers have missed payments on $30.2 billion of local and overseas notes… The figure for all of last year was a record $29.9 billion.”
August 1 – Bloomberg: “China’s top leaders signaled more targeted support for the economy as they look to cushion growth in the face of resurgent pandemic risks, fueling a rally in bonds. The much-watched Politburo meeting Friday indicated authorities will likely take more steps to help struggling small businesses, boost fiscal spending and possibly reduce the reserve requirement ratio for banks again, according to… Citigroup Inc., UBS AG and Oversea-Chinese Banking Corp. ‘The policy efforts to support the economy will likely step up,’ Citigroup’s economists led by Liu Li-Gang said… ‘In particular, we see more targeted measures underway to help small and medium-sized enterprises, as indicated by the mid-year Politburo meeting.’”
August 5 – Wall Street Journal (Jing Yang, Keith Zhai and Quentin Webb): “In recent months, China has blown up what would have been the world’s largest initial public offering, launched probes into some of its biggest technology companies, and wiped out more than $1 trillion in market value while investors scramble for cover. There are many signs it isn’t over yet. Investors, analysts and company executives believe the government is just getting started in its push to realign the relationship between private business and the state, with a goal of ensuring companies do more to serve the Communist Party’s economic, social and national-security concerns. The government’s far-reaching ambitions under Xi Jinping promise serious and often unpredictable implications for business, these people say—and keeping foreign investors happy isn’t a priority.”
July 31 – Reuters (Liangping Gao and Ryan Woo): “China's growth in new home prices slowed in July for the first time in five months, with smaller cities especially weighed down by higher mortgage rates, price caps on resale homes and other steps to cool speculation, a private-sector survey showed… New home prices in 100 cities rose 0.35% in July from a month earlier, versus 0.36% growth in June, according to data from China Index Academy, one of the country's largest independent real estate research firms.”
August 4 – Reuters (Stella Qiu and Ryan Woo): “Growth in China's services sector accelerated in July…, although the spread of the COVID-19 Delta variant across the country threatens to undercut the recovery in the world's second-biggest economy. The Caixin/Markit services Purchasing Managers' Index (PMI)rose to 54.9 in July, the highest since May and up from 50.3 the previous month.”
August 1 – Reuters (Gabriel Crossley): “China’s factory activity growth slipped sharply in July as demand contracted for the first time in over a year in part on high product prices, a business survey showed…, underscoring challenges facing the world’s manufacturing hub. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 50.3 last month from 51.3 the month before, the lowest level since April 2020.”
August 3 – Reuters (Brenda Goh and Samuel Shen): “China's Tencent Holdings Ltd said… it would further curb minors' access to its flagship video game, hours after its shares were battered by a state media article that described online games as ‘spiritual opium’. Economic Information Daily cited Tencent's ‘Honor of Kings’ in an article in which it said minors were addicted to online games and called for more curbs on the industry. The outlet is affiliated with China's biggest state-run news agency, Xinhua.”
Central Bank Watch:
August 5 – Bloomberg (David Goodman, Lizzy Burden and Marc Daniel Davies): “The Bank of England signaled that its concerns over inflation are strong enough to warrant the withdrawal of some support to the U.K. economy over the next three years. Policy makers led by Governor Andrew Bailey said they now expect annual price growth to peak higher than expected around 4%. While most of the increase may prove temporary, meeting the central bank’s 2% target in the medium term will require ‘some modest tightening,’ they said. The shift from a previous pledge to keep policy loose puts the BOE firmly among global central banks that are worried more about inflationary pressures driven by consumer demand as well as supply bottlenecks.”
August 5 – Bloomberg (Maria Eloisa Capurro and Maria Elena Vizcaino): “Brazil’s real led gains among emerging market currencies after the central bank delivered its most aggressive interest rate increase in nearly two decades and promised to bring back a restrictive monetary policy to tame above-target inflation. The bank… lifted the benchmark Selic by a full percentage point to 5.25%... Policy makers said they foresee another hike of the same magnitude next month, with the key rate eventually surpassing a neutral level that economists estimate at 6% to 7%.”
July 31 – Financial Times (Max Seddon): “Russia’s central bank governor has warned that inflation is set to be a long- term phenomenon in her country, signalling that the bank is likely to continue with its tough monetary policy stance. Elvira Nabiullina told the Financial Times… public fears over soaring prices lay behind the central bank’s concerns. Sharp rises in food prices had ‘de-anchored’ ordinary Russians’ inflation expectations, she said… Inflation expectations carry the risk of encouraging the public to stock up on goods in an effort to beat inflation but thereby actually driving up prices. They also run the risk of stoking wage rise demands and pre-emptive price rises by businesses.”
August 5 – Bloomberg (Krystof Chamonikolas and Peter Laca): “The Czech Republic raised borrowing costs and said it would push on with one of Europe’s most aggressive monetary-tightening campaigns to keep inflation under control even as some pandemic risks remain. The central bank lifted its key rate by a quarter point to 0.75% on Thursday, as expected.”
Global Bubble Watch:
August 3 – Financial Times (Claire Jones): “China is the world’s biggest lender to governments. And that’s not just because of its gigantic stockpile of US Treasuries. For much of the past decade Beijing has sought to plug massive infrastructure funding gaps across multiple continents through its Belt and Road Initiative. The overarching aim, other than to bolster global influence, is to upgrade transport links on the old silk road routes which enabled trade between the Far East and what lay to the west of it. While Beijing has recently reined in spending, between 2008 and 2019 the China Development Bank and the Export-Import Bank of China lent $462bn. For context, that’s just short of the $467bn loaned by the World Bank over the same timeframe…”
July 31 – Financial Times (John Plender): “A curious feature of the aftermath of the 2008-9 financial crisis is that there has been no backlash against international finance to compare with the retreat from globalised production. Still more curious is that global capital seems so unbothered by the Biden administration following Donald Trump in seeking to decouple economically from China. This makes the wholesale dumping of Chinese bonds and equities by developed world fund managers earlier last week… a striking about turn. Doubly so, given the sheer momentum of record inflows into China. The stock of inward foreign direct investment in China has risen from $587bn in 2010 to $1.9tn in 2020. While global foreign direct investment fell last year by 35% to $1tn, inflows into China rose from $141bn to $149bn, no doubt partly reflecting perceptions of a very rapid recovery from Covid-19.”
August 3 – Bloomberg (Harry Suhartono): “The selloff of lowly rated corporate dollar debt on the back of investor concerns about a spillover of China’s property debt problems has added to the distress for Indonesian developers, which have been struggling to cope with the economic fallout in the world’s biggest virus hotspot. Nine of the biggest decliners in Southeast Asia’s corporate dollar bonds in July, all are non-investment grade securities, are either from Indonesian companies or issuers with substantial exposure to its economy…”
EM Watch:
August 2 – Reuters (David Lawder and Michael Nienaber): “The International Monetary Fund said… its board of governors approved a $650 billion allocation of IMF Special Drawing Rights and said its largest-ever distribution of monetary reserves would become effective Aug. 23. IMF member countries will receive SDRs -- the fund’s unit of exchange backed by dollars, euros, yen, sterling and yuan -- in proportion with their existing quota shareholdings in the fund. Monday’s approval by all 190 IMF member states was long expected. ‘The SDR allocation will benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy,’ IMF Managing Director Kristalina Georgieva said…”
August 4 – Bloomberg (Vinicius Andrade and Cristiane Lucchesi): “With less than half of 2021 left to go, Brazil’s IPO market has already clocked a record year. The combination of historically low interest rates in Brazil, an economic rebound for Latin America’s top economy from the Covid hit and a booming local money management industry has paved the way for a sharp increase in initial public offerings. Forty-two listings from Brazilian companies have raised more than 57 billion reais ($11bn) so far in 2021… That tally beats the previous full-year record of 53.6 billion reais in 2007, when 60 firms went public.”
Japan Watch:
August 3 – Reuters (Daniel Leussink): “Japan’s services sector activity shrank at a faster pace in July to contract for the 18th consecutive month as curbs rolled out to combat a resurgence in coronavirus infections dealt a blow to business activity and confidence. Activity and new business inflows contracted at a faster pace as the spread of the coronavirus undermined the world’s third-largest economy’s recovery prospects by hurting both confidence and sales.”
Social, Political, Environmental, Cybersecurity Instability Watch:
August 5 – Reuters (Fred Greaves): “A rapidly spreading wildfire burned homes and forced thousands to evacuate in two heavily wooded counties northeast of Sacramento in Northern California on Wednesday, generating a towering plume of smoke visible from at least 70 miles (110 km) away. The so-called River Fire scorched 1,400 acres in Placer and Nevada counties, with 1,000 acres burnt within the first two hours…”
August 3 – Associated Press: “California’s largest wildfire exploded again after burning for nearly three weeks in remote mountains and officials warned Tuesday that hot, dry weather would increase the risk of new fires across much of the state. Firefighters saved homes Monday in the small northern California community of Greenville near the Plumas National Forest as strong winds stoked the Dixie Fire, which grew to over 395 square across Plumas and Butte counties.”
Leveraged Speculation Watch:
August 4 – Bloomberg (Nishant Kumar and Sridhar Natarajan): “Hedge fund Alphadyne Asset Management is one of the biggest casualties from a short squeeze in the global bond market, with its $12 billion macro trading strategy snared in a series of bad bets on rising interest rates. The investment firm is staring down losses of about $1.5 billion after its hedge funds plunged through July… Its flagship Alphadyne International Fund lost about 10%. It also manages a leveraged version with about the same amount of assets. Alphadyne’s losses… are particularly surprising because its strategy has never had a down year since it started up in 2006.”
August 3 – Bloomberg (Melissa Karsh and Bei Hu): “Goldman Sachs Group Inc.’s hedge fund clients focused on Chinese stocks recorded their second-worst monthly loss ever in July… Fundamental long-short managers targeting the market lost an estimated 5.6% on average during the month, sinking to a 1.1% decline this year… The monthly drop was the second only to March 2020…”
August 3 – Financial Times (Ortenca Aliaj, Eric Platt, Tabby Kinder and Leo Lewis): “Employees of Archegos Capital Management face losses of about half a billion dollars after the value of a deferred pay plan set up by the firm crashed along with its other investments. The family office run by Bill Hwang is yet to release money it owes to former employees, who saw the value of their deferred bonuses soar to about $500m before Archegos collapsed in March…”
Geopolitical Watch:
August 5 – Financial Times (Kathrin Hille): “One of Joe Biden’s most urgent missions on taking office was to rescue nuclear arms control. Two weeks after his inauguration, the US president extended the New Start Treaty with Russia, a cornerstone of arms control that a fractious relationship had left at risk of expiring. But the Biden administration has now been forced to confront another nuclear challenge: China. Since June, experts have discovered more than 200 missile silos under construction in the country’s remote western deserts. ‘For a very, very long time, we talked about China as a future problem. Now, China is clearly a nuclear problem,’ said David Santoro, president of… think-tank Pacific Forum and a co-organiser of semi-official US-China nuclear dialogue for 15 years until 2019.”
August 5 – CNN (Jennifer Hansler): “The Biden administration has informed Congress of a proposed $750 million weapons sale to Taiwan in a move likely to further inflame tensions with Beijing. The administration gave notice about the intended sale on Wednesday…The deal includes 40 M109A6 Medium Self-Propelled Howitzer Systems and related equipment. ‘If concluded, this proposed sale will contribute to the modernization of Taiwan's howitzer fleet, strengthening its self-defense capabilities to meet current and future threats,’ the spokesperson said.”
August 3 – Reuters (Doyinsola Oladipo and David Brunnstrom): “U.S. Secretary of State Antony Blinken announced… the launch of a ‘strategic dialogue’ with Indonesia, and Washington said the two countries committed to working together on issues that include defending freedom of navigation in the South China Sea… Blinken and Indonesian Foreign Minster Retno Marsudi also committed to work together against COVID-19 and the climate crisis and to boost bilateral trade and economic ties…”
August 5 – Associated Press (Laurie Kellman): “Israel’s defense minister warned… his country is prepared to strike Iran, issuing the threat against the Islamic Republic after a fatal drone strike on a oil tanker at sea that his nation blamed on Tehran. The comments by Benny Gantz come as Israel lobbies countries for action at the United Nations over last week’s attack on the oil tanker Mercer Street that killed two people. The tanker, struck off Oman in the Arabian Sea, is managed by a firm owned by an Israeli billionaire.”
August 5 – Reuters (Parisa Hafezi): “Hardline Iranian President Ebrahim Raisi took the oath of office before parliament…, with the Islamic Republic's clerical rulers facing growing crises at home and abroad. The mid-ranking Shi'ite cleric formally started his four-year term on Tuesday when supreme leader Ayatollah Ali Khamenei endorsed his victory in the June election, when most prominent rivals were barred from standing. With Raisi's presidency, all branches of power in Iran will be controlled by anti-Western hardliners loyal to Khamenei.”
August 2 – Reuters (Parisa Hafezi): “Iran will respond promptly to any threat against its security, the foreign ministry said on Monday, after the United States, Israel and Britain blamed Tehran for an attack on an Israeli-managed tanker off the coast of Oman. Tehran has denied any involvement in the suspected drone attack on Thursday in which two crew members - a Briton and a Romanian - were killed.”
The S&P500 gained 0.9% (up 18.1% y-t-d), and the Dow increased 0.8% (up 15.0%). The Utilities rose 2.2% (up 7.3%). The Banks surged 4.3% (up 30.1%), and the Broker/Dealers jumped 4.4% (up 27.9%). The Transports added 0.3% (up 16.0%). The S&P 400 Midcaps increased 0.5% (up 17.8%), and the small cap Russell 2000 rose 1.0% (up 13.8%). The Nasdaq100 advanced 1.0% (up 17.2%). The Semiconductors gained 1.7% (up 22.1%). The Biotechs rallied 3.6% (up 3.8%). With bullion down $51, the HUI gold index sank 5.1% (down 13.3%).
Three-month Treasury bill rates ended the week at 0.0425%. Two-year government yields gained two bps to 0.21% (up 9bps y-t-d). Five-year T-note yields rose eight bps to 0.77% (up 41bps). Ten-year Treasury yields jumped eight bps to 1.30% (up 38bps). Long bond yields increased five bps to 1.95% (up 30bps). Benchmark Fannie Mae MBS yields surged 10 bps to 1.78% (up 44bps).
Greek 10-year yields fell five bps to 0.6% (down 7bps y-t-d). Ten-year Portuguese yields declined four bps to 0.13% (up 10bps). Italian 10-year yields fell five bps to 0.57% (up 2bps). Spain's 10-year yields slipped three bps to 0.24% (up 19bps). German bund yields added a basis point to negative 0.46% (up 11bps). French yields dipped a basis point to negative 0.12% (up 2bps). The French to German 10-year bond spread narrowed two to 34 bps. U.K. 10-year gilt yields rose five bps to 0.61% (up 41bps). U.K.'s FTSE equities index gained 1.3% (up 10.3% y-t-d).
Japan's Nikkei Equities Index rallied 2.0% (up 1.4% y-t-d). Japanese 10-year "JGB" yields declined a basis point to 0.02% (down 1 basis point y-t-d). France's CAC40 jumped 3.1% (up 22.8%). The German DAX equities index rallied 1.4% (up 14.9%). Spain's IBEX 35 equities index advanced 2.3% (up 10.0%). Italy's FTSE MIB index jumped 2.5% (up 16.9%). EM equities rallied. Brazil's Bovespa index gained 0.8% (up 3.2%), and Mexico's Bolsa added 0.5% (up 16.0%). South Korea's Kospi index recovered 2.1% (up 13.8%). India's Sensex equities index jumped 3.2% (up 13.7%). China's Shanghai Exchange rallied 1.8% (down 0.4%). Turkey's Borsa Istanbul National 100 index surged 3.0% (down 2.8%). Russia's MICEX equities index gained 0.9% (up 15.7%).
Investment-grade bond funds saw outflows of $364 million, and junk bond funds posted negative flows of $1.155 billion (from Lipper).
Federal Reserve Credit last week declined $10.8bn to $8.189 TN. Over the past 99 weeks, Fed Credit expanded $4.462 TN, or 120%. Fed Credit inflated $5.378 Trillion, or 191%, over the past 456 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $6.6bn to a six-month low $3.508 TN. "Custody holdings" were up $99bn, or 2.9%, y-o-y.
Total money market fund assets were little changed at $4.501 TN. Total money funds declined $75bn y-o-y, or 1.6%.
Total Commercial Paper slipped $1.4bn to $1.138 TN. CP was up $119bn, or 11.7%, year-over-year.
Freddie Mac 30-year fixed mortgage rates fell three bps to a five-month low 2.77% (down 11bps y-o-y). Fifteen-year rates were unchanged at 2.10% (down 34bps). Five-year hybrid ARM rates dropped five bps to 2.40% (down 50bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down five bps to 2.97% (down 15bps).
Currency Watch:
For the week, the U.S. Dollar Index gained 0.7% to 92.80 (up 3.2% y-t-d). For the week on the upside, the South Korean won increased 0.7%, the New Zealand dollar 0.5% and the Australian dollar 0.2%. On the downside, the Swiss franc declined 1.0%, the euro 0.9%, the Mexican peso 0.9%, the Swedish krona 0.9%, the Norwegian krone 0.8%, the Canadian dollar 0.6%, the Japanese yen 0.5%, the Brazilian real 0.4%, the the British pound 0.2% and the South African rand 0.2%. The Chinese renminbi declined 0.33% versus the dollar (up 0.68% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index fell 1.7% (up 21.3% y-t-d). Spot Gold dropped 2.8% to $1,763 (down 7.1%). Silver slumped 4.6% to $24.33 (down 7.8%). WTI crude sank $5.67 to $68.28 (up 41%). Gasoline fell 3.3% (up 60%), while Natural Gas jumped 5.8% (up 63%). Copper dropped 3.0% (up 24%). Wheat gained 2.2% (up 12%). Corn roses 2.1% (up 15%). Bitcoin jumped $2,321 this week to $43,905 (up 51%).
Coronavirus Watch:
August 5 – Reuters (Roshan Abraham and Maria Caspani): “The United States hit a six-month high for new COVID cases with over 100,000 infections reported on Wednesday…, as the Delta variant ravages areas where people did not get vaccinated.”
August 2 – Reuters (Deena Beasley): “With a new wave of COVID-19 infections fueled by the Delta variant striking countries worldwide, disease experts are scrambling to learn whether the latest version of coronavirus is making people - mainly the unvaccinated - sicker than before. The U.S. Centers for Disease Control and Prevention warned that Delta, first identified in India and now dominant worldwide, is ‘likely more severe’ than earlier versions of the virus… The agency cited research in Canada, Singapore and Scotland showing that people infected with the Delta variant were more likely to be hospitalized than patients earlier in the pandemic.”
August 4 – Bloomberg: “Global coronavirus cases topped 200 million, another grim milestone in the 18-month pandemic that has killed more than 4.2 million people. Israel, one of the world’s most vaccinated nations, called on employers to switch to work-at-home and warned that it may have to impose new lockdowns. The World Health Organization called for a moratorium on booster shots to enable poorer countries to catch up in vaccination rates.”
August 5 – Bloomberg: “China imposed new restrictions on travel in a bid to slow a delta-driven outbreak that’s grown to more than 500 cases scattered across half the country, as the government stuck to an aggressive containment playbook rather than rely on its high vaccination rate. Public transport and taxi services were curtailed in 144 of the worst-hit areas nationwide… Hong Kong re-imposed quarantine on travelers from the mainland, though an exception remained for the southern Guangdong province which neighbors the financial city. Officials reported 94 new local infections on Thursday…”
Market Mania Watch:
August 3 – Bloomberg (Vildana Hajric): “In a market that hasn’t had a 5% drop in nine months, where records are falling every fourth day and where corporate earnings just doubled, it has occasionally seemed like the good news will never end. That’s how investors are starting to behave, and it’s bothering researchers. Rather than temper expectations after a rousing rally, bulls are getting more bullish. Almost two-thirds of clients in a JPMorgan… survey said they plan to add to stock holdings in the coming weeks.”
August 3 – Bloomberg (Harriet Habergham): “Never mind banker burnout, return-to-office headaches, and new pandemic waves. A simple reality stands out for the biggest global investment banks: they’re minting money like never before. As the dust settles over earnings season, a total profit of more than $170 billion from a dozen of the biggest firms in the past four quarters shows how far the industry has come from the frazzled early stages of the pandemic. JPMorgan… is the standout, earning the equivalent of $131 million a day.”
August 2 – Financial Times (Joe Rennison): “A better than expected US earnings season has prompted a flurry of ‘buy’ recommendations on stocks, with analysts now as upbeat as they have been in almost two decades. Data from Morgan Stanley show the percentage of buy ratings has hit its highest point in 18 years… But the slowing pace of economic growth should spark caution from analysts as they look towards the end of the year and into 2022, according to David Lebovitz, markets strategist at JPMorgan.”
August 3 – Wall Street Journal (Doyinsola Oladipo and David Brunnstrom): “Many investment executives who back special-purpose acquisition companies are scoring big paydays as more deals get completed. Some of their clients are missing out. The divergence results from the varying methods SPAC creators use to share the lucrative incentives known as the ‘sponsor promote.’ It typically consists of deeply discounted shares and other securities executives receive for risking capital to set up the SPAC and vet a company to take public. The promote typically allows creators to make tens of millions of dollars on paper on average—sometimes several times their initial investment—even if that company’s shares fall.”
Market Instability Watch:
August 5 – Financial Times (Tommy Stubbington): “The value of the world’s stock of negative-yielding debt has ballooned to more than $16.5tn, the highest in six months… Government bond yields have tumbled in recent weeks as some traders have piled in, a move that has blindsided many investors who expected an economic rebound from the pandemic along with rising inflation to lift long-term borrowing costs.”
August 6 – Bloomberg (Paula Seligson and Jeremy Hill): “Strong corporate earnings have sent stocks on something of a tear in recent weeks. But credit markets are painting a more nuanced picture amid growing concerns of a coronavirus resurgence. Less than a month removed from the tightest spreads of the post-financial crisis era, risk premiums for speculative-grade debt are climbing once again. Bonds of companies hurt most by shutdowns have sold off… The amount of distressed debt has even started to creep up, though defaults remain far below levels seen earlier in the pandemic.”
August 2 – CNBC (Thomas Franck): “The Treasury Department will begin conducting emergency cash-conservation steps on Monday to avoid busting the federal borrowing limit after a two-year suspension of the debt ceiling expired at the end of July. Economists say those so-called extraordinary measures will allow Treasury to pay off the government’s bills without floating new debt for two to three months. After that, Congress will need to either raise or suspend the borrowing limit or risk the U.S. defaulting on its obligations. The limit, a facet of American politics for over a century, prevents the Treasury from issuing new bonds to fund government activities once a certain debt level is reached. That level reached $22 trillion in August 2019 and was suspended until Saturday.”
Inflation Watch:
August 2 – Financial Times (James Politi and Aime Williams): “For small business owners in Glenside in the northern suburbs of Philadelphia, rising prices have become a common gripe. ‘It’s really affecting my bottom line,’ says Alisa Kleckner, who sells masks and costumes… for theatre productions. ‘The cost of raw goods has gone up, the cost of transportation has gone up, and also the entertainment industry is suffering,’ she says. Joe Sparacio, who runs the Crate and Press Juice Bar, is worried about the possible hit to come. ‘The cost of all our produce went up,’ he says, ‘strawberries, blackberries, almond milk. Chicken went up threefold. For now it’s not a problem because the customers are paying more, but if that stops then it’ll be a big problem.’ The inflationary spike running through the country has injected a lot of uncertainty into the local economy, admits Napoleon Nelson, a Democratic state representative... ‘It’s more than the usual gas prices,’ he says. ‘We’re not sure how long this will last. It’s a struggle.’”
August 2 – Reuters (Jonathan Cable and Leika Kihara): “Factories across the world are suffering from supply bottlenecks which sent prices skyrocketing in July, while a new wave of coronavirus infections in Asia demonstrated the fragile nature of the global recovery. Business surveys on Monday highlighted the divergence in the global economy on the pace of recovery from the pandemic, which led the International Monetary Fund to downgrade this year's growth forecast for emerging Asia. Although manufacturers largely remained open throughout lockdowns, the loosening of some restrictions designed to limit infections has driven a flurry of demand - but factories are suffering from staff shortages and supply chain problems.”
August 2 – Bloomberg (Joe Deaux): “For consumers and economists hoping commodities inflation will soon subside, the aluminum market delivered some discouraging news… The world’s second-largest brewer, Heineken NV, said the rising costs of freight and the metal used in beer cans will have a ‘material effect’ on profit next year. Reynolds Consumer Products Inc., the maker of the iconic Reynolds Wrap, said it’s facing costs of about $400 million this year driven in large part by aluminum and resin. The announcements come on the heels of a more than 30% gain in benchmark aluminum prices so far this year…”
August 6 – Reuters (Francesco Canepa and Mark John): “The bosses of top multinationals are fretting about rising inflation but the very people responsible for keeping price growth in check - central bankers - seem unfazed. Even as policymakers at the U.S. Federal Reserve, European Central Bank and elsewhere diverge on how quickly to wind down massive pandemic stimulus programmes, they agree on one thing: the recent surge in inflation is not a major concern. Yet the latest set of corporate earnings calls are replete with mentions of the word ‘inflation’, with the tally up 1,000% on the year for S&P 500 U.S.-listed companies and 400% in Europe for Stoxx 600 companies, according to Bank of America research.”
August 5 – Reuters (Roslan Khasawneh and Muyu Xu): “Container shipping rates from China to the United States have scaled fresh highs above $20,000 per 40-foot box as rising retailer orders ahead of the peak U.S. shopping season add strain to global supply chains. The acceleration in Delta-variant COVID-19 outbreaks in several counties has slowed global container turnaround rates. Typhoons off China’s busy southern coast in late July and this week have also contributed to the crisis gripping the world’s most important method for moving everything from gym equipment and furniture to car parts and electronics. ‘These factors have turned global container shipping into a highly disrupted, under-supplied seller’s market, in which shipping companies can charge four to ten times the normal price to move cargoes,’ Philip Damas, Managing Director at maritime consultancy firm Drewry, said.”
August 4 – CNBC (Evelyn Cheng): “Chinese companies wanting to go global are running into shipping problems. Access to cheap manufacturing at home gave Chinese businesses an advantage overseas. But it’s turning into a disadvantage now, as the pandemic and trade tensions disrupt international supply channels. Many goods can’t be shipped out, said Fang Xueyu, vice president of international marketing and general manager for Asia-Pacific at Chinese home appliance company Hisense. The cost of shipping containers has climbed five-fold from about $3,000 to as much as $15,000 each…”
Biden Administration Watch:
August 3 – New York Times (Makini Brice and David Morgan): “The U.S. Senate made gradual progress on Tuesday on a $1 trillion infrastructure investment bill to upgrade roads, bridges, mass transit and broadband services as the Democratic and Republican leaders squabbled over debate on amendments. The legislation… marked a rare bipartisan effort in a Senate that is split 50-50 between the two parties. Two days into the debate, Senate Majority Leader Chuck Schumer and Republican Leader Mitch McConnell clashed over the pace of progress on the bill, which appeared headed toward passage but which is still is open to amendments.”
August 2 – Bloomberg (Steven T. Dennis and Saleha Mohsin): “President Joe Biden has a tough decision in choosing the next Federal Reserve chair: Play it safe by giving Jerome Powell a second term or take a chance on a liberal like Lael Brainard, who would please progressives in Congress yet potentially agitate Wall Street. Either path offers speed bumps for the White House. Powell would likely sail to Senate confirmation, giving the Biden administration a significant bipartisan win. Financial markets would likely remain calm, but Biden would likely disappoint some progressive Democrats he needs for other issues.”
August 5 – Wall Street Journal (Dave Michaels and Alexander Osipovich): “Securities and Exchange Commission Chairman Gary Gensler this week declared war on what he called the Wild West of crypto trading, promising a vigorous attack on fraud and misconduct. But progress is likely to be more piecemeal and incremental than wholesale and sudden. Mr. Gensler outlined his desire to regulate digital assets such as bitcoin and other crypto products to the same extent as stocks, bonds and commodity-related trading instruments. He told the Aspen Security Forum… his priorities include newer innovations such as stablecoins and decentralized finance, products that are beginning to draw more mainstream investors. The impulse to regulate these markets is growing more evident around the globe.”
August 3 – Reuters (Katanga Johnson): “The chair of the U.S. Securities and Exchange Commission (SEC)… called on Congress to give the agency more authority to better police cryptocurrency trading, lending and platforms, a ‘Wild West’ he said is riddled with fraud and investor risk. Gary Gensler said the crypto market involves many tokens which may be unregistered securities and leaves prices open to manipulation and millions of investors vulnerable to risks. ‘This asset class is rife with fraud, scams and abuse in certain applications,’ Gensler told a global conference. ‘We need additional congressional authorities to prevent transactions, products and platforms from falling between regulatory cracks.’”
Federal Reserve Watch:
August 5 – Bloomberg (Craig Torres and Laura Davison): “Senator Joe Manchin, the West Virginia Democrat, urged Federal Reserve Chair Jerome Powell to start pulling back on its $120 billion in monthly bond purchases aimed at providing stimulus to the economy by lowering borrowing costs. ‘I am deeply concerned that the continuing stimulus put forth by the Fed, and proposal for additional fiscal stimulus, will lead to our economy overheating and to unavoidable inflation taxes that hard working Americans cannot afford,’ Manchin wrote in a letter made… ‘I urge you and the other members of the Federal Open Market Committee to immediately reassess our nation’s stance of monetary policy and begin to taper your emergency stimulus response,’ he wrote.”
August 4 – Bloomberg (Reade Pickert): “Senator Elizabeth Warren praised Federal Reserve Governor Lael Brainard… for her approach to financial regulation while criticizing Chairman Jerome Powell as too protective of big financial institutions. ‘My concern is that over and over he has weakened the regulation here,” she said of Powell… ‘We need someone who understands and uses the monetary policy tools and the regulatory tools to keep our economy safe. Let’s not forget what happened in 2008…’ While stopping shy of endorsing Brainard for the top job, she touted her many dissents to Fed moves to loosen regulations.”
August 5 – Reuters (Pete Schroeder and Howard Schneider): “The looming exit of the Federal Reserve's top regulatory official will give Democrats an opportunity to reverse the central bank's Wall Street-friendly course without ditching Chair Jerome Powell when his term expires next year. Randal Quarles, who was appointed to the Fed board by former Republican President Donald Trump, will end his term as vice chair for supervision - a powerful role overseeing the country’s largest lenders - in October. Powell… ends his term in February and the White House has not said if it plans to renominate him. The question of what to do with the supervision post plays directly into the dilemma - and politics - that President Joe Biden faces as he decides whether to reshape the Fed for years to come.”
August 4 – Reuters (Lindsay Dunsmuir and Ann Saphir): “Federal Reserve Vice Chair Richard Clarida, a key architect of the U.S. central bank’s new policy strategy, said… an interest rate hike was likely in 2023 given the surprising pace of the economic recovery from the coronavirus pandemic. He was joined by two other policymakers in signaling a desire to move soon to start reducing the Fed’s massive bond-buying program as well, though one of them - Dallas Fed President Robert Kaplan - was clear he viewed an earlier taper of the central bank’s $120 billion in monthly asset purchases to be a precursor not of faster rate hikes but of a more “patient approach” to raising borrowing costs.”
August 3 – Reuters (Howard Schneider): “The coronavirus pandemic may have pushed the United States into a volatile era of stronger growth and better productivity, but higher interest rates and faster inflation as well, St. Louis Federal Reserve president James Bullard said, elaborating on why he thinks the U.S. central bank should end its crisis-era policies. Bullard, who five years ago said he viewed the United States as mired in an epoch of low growth, low productivity and low inflation, said he is beginning to think a new ‘regime’ may have arrived where the Fed will have to cope with faster change and more frequent shocks.”
August 5 – Reuters (Jonnelle Marte): “The U.S. economic recovery is progressing rapidly, the labor market is improving and it may be possible for the Federal Reserve to start withdrawing its accommodative monetary policy sooner than some expect, Fed Governor Christopher Waller said… ‘My outlook is very much that the economy is going to recover,’ Waller said… ‘We will be able to pull back on accommodative monetary policy potentially sooner than others think.’”
August 2 – Bloomberg (Steve Matthews): “Federal Reserve Governor Christopher Waller said that if the next two monthly U.S. employment reports show continued gains, he could back an announcement soon on scaling back the central bank’s bond purchases. ‘I think you could be ready to do an announcement by September,’ Waller said… ‘That depends on what the next two jobs reports do. If they come in as strong as the last one, then I think you have made the progress you need. If they don’t, then I think you are probably going to have to push things back a couple of months.’”
July 31 – Bloomberg (Rich Miller): “The U.S. jobs market still has some ways to go before it improves enough to satisfy the Federal Reserve’s criteria for beginning to reduce its asset purchases, Governor Lael Brainard said… Brainard also suggested that the recent surge in inflation is likely to prove temporary and said that she saw both upside and downside risks to the economy, the latter from the spread of the Delta variant of Covid-19.”
August 3 – Reuters (Ann Saphir): “Despite complaints from U.S. employers that workers are hard to find, there are almost 10 million people who are unemployed and more sitting on the sidelines of the labor market, said San Francisco Federal Reserve President Mary Daly, who expects many or most of them to return to work as the economy recovers. ‘Myriad factors are tempering labor supply at the moment - the need to care for children, fears of COVID, generous unemployment benefits,’ Daly said… ‘But there is no reason to expect those to be permanent or even highly persistent features of the labor market.’”
U.S. Bubble Watch:
August 3 – Financial Times (Colby Smith): “Americans increased their mortgage borrowings in the second quarter of the year, adding fuel to a housing boom that has seen US prices surge at a record pace. Data from the New York branch of the Federal Reserve showed that mortgage originations reached $1.2tn in the three months to the end of June, exceeding volumes seen in the previous three quarters and well above the $752bn level reached in the final quarter of 2019. Taken together, mortgage originations over the four quarters to June 30 — which include refinancing — amounted to nearly $4.6tn, a historic high. That helped to push mortgage balances to more than $10tn — after a $282bn increase over the preceding three months — meaning about 44% of the outstanding mortgage balance was originated in the past year.”
August 6 – Bloomberg (Olivia Rockeman): “The U.S. labor market charged ahead in July with the biggest increase in employment in nearly a year, highlighting optimism about the economy’s prospects even as coronavirus concerns resurface. Payrolls climbed by 943,000 last month after upwardly revised increases the prior two months… The unemployment rate dropped to a pandemic low of 5.4%, while earnings and hours worked remained elevated.”
July 31 – Bloomberg (Vince Golle and Reade Pickert): “Producers couldn’t keep up with supercharged consumer demand in the U.S. last quarter, and it’s unclear when supply constraints will ease. Materials shortages and shipping delays led to outsized drawdowns in inventories as companies scrambled to meet one of the strongest paces of consumer spending since the 1950s and robust growth in business purchases of equipment… The value of inventories shrank an annualized $166 billion last quarter, the second-worst decline in nearly 12 years. Looking ahead, it’s hard to tell when supply chains may return to some normalcy, as firms race to restock and try to get ahead of any further materials price hike and shortages. ‘Given they are global in nature, many of the supply chain and logistics bottlenecks could be more persistent than many have been assuming, and we anticipate them weighing on current quarter growth in consumer spending,’ Richard Moody, chief economist at Regions Financial… said…”
August 3 – Financial Times (Lauren Fedor and Colby Smith): “A decade ago, the average house in Ohio’s leafy state capital Columbus would sit on the market for almost 100 days before being sold. Today, a similar property sells in just 10 days. ‘It has never been like this,’ said Michael Jones, a real estate agent at Coldwell Banker Realty with more than 20 years’ experience in central Ohio. ‘It’s unprecedented.’ US policymakers are becoming increasingly concerned about the rising price of housing for both homeowners and renters, as the broadest global house price boom for at least two decades drives up living costs. ‘Today, it is harder to find an affordable home in America than at any point since the 2008 financial crisis,’ Marcia Fudge, US housing and urban development secretary, said… Nationally, house prices in May were 16.6% higher than the year before, according to the latest S&P CoreLogic Case-Shiller index update — the biggest jump in more than 30 years of data…”
August 2 – Reuters (Lindsay Dunsmuir): “Loan officers at U.S. banks reported easing standards and terms on business loans in the second quarter as the economy revved up on the back of wider reopenings and rising coronavirus vaccination rates. The officers also said in the Federal Reserve survey… that there was greater demand for business loans from firms of all sizes. ‘Major net shares of banks ... cited a more favorable or less uncertain economic outlook, more aggressive competition from other banks on nonbank lenders, and improvements in industry-specific problems as important reasons,’ the U.S. central bank said…”
August 3 – Reuters (Lucia Mutikani): “New orders for U.S.-made goods increased more than expected in June, while business spending on equipment was solid, pointing to sustained strength in manufacturing even as spending is shifting away from goods to services… Factory orders rose 1.5% in June after advancing 2.3% in May. Economists polled by Reuters had forecast factory orders increasing 1.0%. Orders soared 18.4% on a year-on-year basis.”
Fixed-Income Bubble Watch:
August 2 – Financial Times (Joe Rennison): “Investors are pushing back at the riskiest US loans, demanding better terms in a sign that fund managers are becoming more picky in a deluge of deals. Most deals are still sailing through the market with rampant demand, while companies refinance old loans at rock-bottom interest rates and private equity groups load up on cheap debt to fund acquisitions. But the average price of new loans in July dipped to 99.22 cents on the dollar from 99.33 cents in June… The forward loan calendar… rose to over $50bn this month for the first time since January 2020.”
August 4 – Bloomberg (Davide Scigliuzzo): “Surging investor demand for leveraged loans is fueling a dramatic weakening in creditor protections, with borrowers gaining more leeway to incur additional debt and issue dividend payouts, according to Moody’s… Junk-rated companies are taking advantage of record-low rates to reprice loans at more favorable terms, extend maturities and push safeguards meant to protect investors ‘to the brink,’ analysts at the credit-rating firm wrote in a… report that examined term sheets for over 200 new loans.”
August 3 – Wall Street Journal (Sebastian Pellejero): “Sales of securities backed by riskier commercial real-estate loans have surged to a record, highlighting investors’ demand for higher-yielding debt and expectations for a recovery in business properties. Commercial real-estate collateralized loan obligations are created by private real-estate investors. In these deals, lenders sell debt and equity to make short-term loans to borrowers that renovate business properties, particularly multifamily housing… Bridge loans are typically made to properties in flux, such as empty or outdated apartment buildings, and the renovations they finance can fail to pay off as quickly as expected, leading to delayed repayments and defaults. As a result, CRE CLOs offer relatively high payouts at a time many investors continue to expect commercial properties to rebound further from the pandemic.”
August 5 – Bloomberg (Patrick Clark): “Investors spent $53 billion on multifamily real estate during in the three months ending in June, the most ever for the second quarter, according to… Real Capital Analytics. The spree extended a busy year for apartment investors that has included purchases by Blackstone Group Inc. and Starwood Capital Group. It was also fueled by real estate money moving to housing from offices, hotels and malls, which have fared poorly in the pandemic. The influx of money has pushed prices higher and forced private equity firms to behave like the aggressive homebuyers in the frenzied housing market.”
China Watch:
August 2 – Bloomberg: “China Evergrande Group’s woes deepened as an advertiser sought legal action for payments and its credit rating was cut again by Moody’s… In the latest move by a creditor to protect its assets, Leo Group Co. said it filed a lawsuit against Evergrande’s Hengda Real Estate unit to pay for advertisements. It’s asking a Shenzhen court to freeze some of the unit’s assets, including bank accounts… Meanwhile Moody’s lowered the credit grade on China’s most indebted developer by two notches to Caa1 with a negative outlook. Evergrande’s refinancing risk is ‘heightened’ over the coming 12 to 18 months given its weakened funding access and liquidity position…”
August 3 – Bloomberg (Alice Huang and Emma Dong): “China’s top politicians defined China Evergrande Group’s financial problems as ‘liquidity stress’ and not an insolvency, REDD reported… Vice Premier Liu He arrived at this conclusion at a cabinet meeting last week: REDD.”
August 6 – Bloomberg: “Four months after China Huarong Asset Management Co. shocked bondholders by failing to announce its 2020 results, the bad-debt manager may finally be on the cusp of unveiling its financial statements. There is pressure for the state-owned company to act this month. Its offshore unit China Huarong International Holdings Ltd. has until late August to release its figures in order to avoid a technical default, according to S&P Global Ratings. At stake is whether the company is able to survive on its own or whether it will require debt restructuring or recapitalization. So far, Huarong and the central government have provided few clues about the company’s financial health or its future. Such uncertainty has weighed on the company’s bonds and challenged long-held notions that the Communist Party will always step in to save state-owned firms perceived too big to fail.”
August 2 – Bloomberg (Julia Fioretti): “China Huarong Asset Management Co., the country’s bad-debt manager that has roiled markets with doubts about its future, will exit one unit and restructure another to focus on its core businesses as it seeks to shore up its finances. Huarong plans a public transfer of its 70% equity in Huarong Consumer Finance to external parties… The state-owned company also intends to negotiate with the main institutional creditors of Huarong Trust’s outstanding debt to complete a ‘debt-to-equity swap and equity transfer,’ it said… The embattled conglomerate has been looking to sell nearly all of its units outside of distressed debt as part of a government-approved downsizing plan to bolster its finances…”
August 2 – Bloomberg (Ailing Tan): “Chinese firms have already defaulted on more bonds than any prior full year as policy makers are increasingly comfortable that missed payments by some won’t cause systemic problems. Just seven months into 2021, borrowers have missed payments on $30.2 billion of local and overseas notes… The figure for all of last year was a record $29.9 billion.”
August 1 – Bloomberg: “China’s top leaders signaled more targeted support for the economy as they look to cushion growth in the face of resurgent pandemic risks, fueling a rally in bonds. The much-watched Politburo meeting Friday indicated authorities will likely take more steps to help struggling small businesses, boost fiscal spending and possibly reduce the reserve requirement ratio for banks again, according to… Citigroup Inc., UBS AG and Oversea-Chinese Banking Corp. ‘The policy efforts to support the economy will likely step up,’ Citigroup’s economists led by Liu Li-Gang said… ‘In particular, we see more targeted measures underway to help small and medium-sized enterprises, as indicated by the mid-year Politburo meeting.’”
August 5 – Wall Street Journal (Jing Yang, Keith Zhai and Quentin Webb): “In recent months, China has blown up what would have been the world’s largest initial public offering, launched probes into some of its biggest technology companies, and wiped out more than $1 trillion in market value while investors scramble for cover. There are many signs it isn’t over yet. Investors, analysts and company executives believe the government is just getting started in its push to realign the relationship between private business and the state, with a goal of ensuring companies do more to serve the Communist Party’s economic, social and national-security concerns. The government’s far-reaching ambitions under Xi Jinping promise serious and often unpredictable implications for business, these people say—and keeping foreign investors happy isn’t a priority.”
July 31 – Reuters (Liangping Gao and Ryan Woo): “China's growth in new home prices slowed in July for the first time in five months, with smaller cities especially weighed down by higher mortgage rates, price caps on resale homes and other steps to cool speculation, a private-sector survey showed… New home prices in 100 cities rose 0.35% in July from a month earlier, versus 0.36% growth in June, according to data from China Index Academy, one of the country's largest independent real estate research firms.”
August 4 – Reuters (Stella Qiu and Ryan Woo): “Growth in China's services sector accelerated in July…, although the spread of the COVID-19 Delta variant across the country threatens to undercut the recovery in the world's second-biggest economy. The Caixin/Markit services Purchasing Managers' Index (PMI)rose to 54.9 in July, the highest since May and up from 50.3 the previous month.”
August 1 – Reuters (Gabriel Crossley): “China’s factory activity growth slipped sharply in July as demand contracted for the first time in over a year in part on high product prices, a business survey showed…, underscoring challenges facing the world’s manufacturing hub. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 50.3 last month from 51.3 the month before, the lowest level since April 2020.”
August 3 – Reuters (Brenda Goh and Samuel Shen): “China's Tencent Holdings Ltd said… it would further curb minors' access to its flagship video game, hours after its shares were battered by a state media article that described online games as ‘spiritual opium’. Economic Information Daily cited Tencent's ‘Honor of Kings’ in an article in which it said minors were addicted to online games and called for more curbs on the industry. The outlet is affiliated with China's biggest state-run news agency, Xinhua.”
Central Bank Watch:
August 5 – Bloomberg (David Goodman, Lizzy Burden and Marc Daniel Davies): “The Bank of England signaled that its concerns over inflation are strong enough to warrant the withdrawal of some support to the U.K. economy over the next three years. Policy makers led by Governor Andrew Bailey said they now expect annual price growth to peak higher than expected around 4%. While most of the increase may prove temporary, meeting the central bank’s 2% target in the medium term will require ‘some modest tightening,’ they said. The shift from a previous pledge to keep policy loose puts the BOE firmly among global central banks that are worried more about inflationary pressures driven by consumer demand as well as supply bottlenecks.”
August 5 – Bloomberg (Maria Eloisa Capurro and Maria Elena Vizcaino): “Brazil’s real led gains among emerging market currencies after the central bank delivered its most aggressive interest rate increase in nearly two decades and promised to bring back a restrictive monetary policy to tame above-target inflation. The bank… lifted the benchmark Selic by a full percentage point to 5.25%... Policy makers said they foresee another hike of the same magnitude next month, with the key rate eventually surpassing a neutral level that economists estimate at 6% to 7%.”
July 31 – Financial Times (Max Seddon): “Russia’s central bank governor has warned that inflation is set to be a long- term phenomenon in her country, signalling that the bank is likely to continue with its tough monetary policy stance. Elvira Nabiullina told the Financial Times… public fears over soaring prices lay behind the central bank’s concerns. Sharp rises in food prices had ‘de-anchored’ ordinary Russians’ inflation expectations, she said… Inflation expectations carry the risk of encouraging the public to stock up on goods in an effort to beat inflation but thereby actually driving up prices. They also run the risk of stoking wage rise demands and pre-emptive price rises by businesses.”
August 5 – Bloomberg (Krystof Chamonikolas and Peter Laca): “The Czech Republic raised borrowing costs and said it would push on with one of Europe’s most aggressive monetary-tightening campaigns to keep inflation under control even as some pandemic risks remain. The central bank lifted its key rate by a quarter point to 0.75% on Thursday, as expected.”
Global Bubble Watch:
August 3 – Financial Times (Claire Jones): “China is the world’s biggest lender to governments. And that’s not just because of its gigantic stockpile of US Treasuries. For much of the past decade Beijing has sought to plug massive infrastructure funding gaps across multiple continents through its Belt and Road Initiative. The overarching aim, other than to bolster global influence, is to upgrade transport links on the old silk road routes which enabled trade between the Far East and what lay to the west of it. While Beijing has recently reined in spending, between 2008 and 2019 the China Development Bank and the Export-Import Bank of China lent $462bn. For context, that’s just short of the $467bn loaned by the World Bank over the same timeframe…”
July 31 – Financial Times (John Plender): “A curious feature of the aftermath of the 2008-9 financial crisis is that there has been no backlash against international finance to compare with the retreat from globalised production. Still more curious is that global capital seems so unbothered by the Biden administration following Donald Trump in seeking to decouple economically from China. This makes the wholesale dumping of Chinese bonds and equities by developed world fund managers earlier last week… a striking about turn. Doubly so, given the sheer momentum of record inflows into China. The stock of inward foreign direct investment in China has risen from $587bn in 2010 to $1.9tn in 2020. While global foreign direct investment fell last year by 35% to $1tn, inflows into China rose from $141bn to $149bn, no doubt partly reflecting perceptions of a very rapid recovery from Covid-19.”
August 3 – Bloomberg (Harry Suhartono): “The selloff of lowly rated corporate dollar debt on the back of investor concerns about a spillover of China’s property debt problems has added to the distress for Indonesian developers, which have been struggling to cope with the economic fallout in the world’s biggest virus hotspot. Nine of the biggest decliners in Southeast Asia’s corporate dollar bonds in July, all are non-investment grade securities, are either from Indonesian companies or issuers with substantial exposure to its economy…”
EM Watch:
August 2 – Reuters (David Lawder and Michael Nienaber): “The International Monetary Fund said… its board of governors approved a $650 billion allocation of IMF Special Drawing Rights and said its largest-ever distribution of monetary reserves would become effective Aug. 23. IMF member countries will receive SDRs -- the fund’s unit of exchange backed by dollars, euros, yen, sterling and yuan -- in proportion with their existing quota shareholdings in the fund. Monday’s approval by all 190 IMF member states was long expected. ‘The SDR allocation will benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy,’ IMF Managing Director Kristalina Georgieva said…”
August 4 – Bloomberg (Vinicius Andrade and Cristiane Lucchesi): “With less than half of 2021 left to go, Brazil’s IPO market has already clocked a record year. The combination of historically low interest rates in Brazil, an economic rebound for Latin America’s top economy from the Covid hit and a booming local money management industry has paved the way for a sharp increase in initial public offerings. Forty-two listings from Brazilian companies have raised more than 57 billion reais ($11bn) so far in 2021… That tally beats the previous full-year record of 53.6 billion reais in 2007, when 60 firms went public.”
Japan Watch:
August 3 – Reuters (Daniel Leussink): “Japan’s services sector activity shrank at a faster pace in July to contract for the 18th consecutive month as curbs rolled out to combat a resurgence in coronavirus infections dealt a blow to business activity and confidence. Activity and new business inflows contracted at a faster pace as the spread of the coronavirus undermined the world’s third-largest economy’s recovery prospects by hurting both confidence and sales.”
Social, Political, Environmental, Cybersecurity Instability Watch:
August 5 – Reuters (Fred Greaves): “A rapidly spreading wildfire burned homes and forced thousands to evacuate in two heavily wooded counties northeast of Sacramento in Northern California on Wednesday, generating a towering plume of smoke visible from at least 70 miles (110 km) away. The so-called River Fire scorched 1,400 acres in Placer and Nevada counties, with 1,000 acres burnt within the first two hours…”
August 3 – Associated Press: “California’s largest wildfire exploded again after burning for nearly three weeks in remote mountains and officials warned Tuesday that hot, dry weather would increase the risk of new fires across much of the state. Firefighters saved homes Monday in the small northern California community of Greenville near the Plumas National Forest as strong winds stoked the Dixie Fire, which grew to over 395 square across Plumas and Butte counties.”
Leveraged Speculation Watch:
August 4 – Bloomberg (Nishant Kumar and Sridhar Natarajan): “Hedge fund Alphadyne Asset Management is one of the biggest casualties from a short squeeze in the global bond market, with its $12 billion macro trading strategy snared in a series of bad bets on rising interest rates. The investment firm is staring down losses of about $1.5 billion after its hedge funds plunged through July… Its flagship Alphadyne International Fund lost about 10%. It also manages a leveraged version with about the same amount of assets. Alphadyne’s losses… are particularly surprising because its strategy has never had a down year since it started up in 2006.”
August 3 – Bloomberg (Melissa Karsh and Bei Hu): “Goldman Sachs Group Inc.’s hedge fund clients focused on Chinese stocks recorded their second-worst monthly loss ever in July… Fundamental long-short managers targeting the market lost an estimated 5.6% on average during the month, sinking to a 1.1% decline this year… The monthly drop was the second only to March 2020…”
August 3 – Financial Times (Ortenca Aliaj, Eric Platt, Tabby Kinder and Leo Lewis): “Employees of Archegos Capital Management face losses of about half a billion dollars after the value of a deferred pay plan set up by the firm crashed along with its other investments. The family office run by Bill Hwang is yet to release money it owes to former employees, who saw the value of their deferred bonuses soar to about $500m before Archegos collapsed in March…”
Geopolitical Watch:
August 5 – Financial Times (Kathrin Hille): “One of Joe Biden’s most urgent missions on taking office was to rescue nuclear arms control. Two weeks after his inauguration, the US president extended the New Start Treaty with Russia, a cornerstone of arms control that a fractious relationship had left at risk of expiring. But the Biden administration has now been forced to confront another nuclear challenge: China. Since June, experts have discovered more than 200 missile silos under construction in the country’s remote western deserts. ‘For a very, very long time, we talked about China as a future problem. Now, China is clearly a nuclear problem,’ said David Santoro, president of… think-tank Pacific Forum and a co-organiser of semi-official US-China nuclear dialogue for 15 years until 2019.”
August 5 – CNN (Jennifer Hansler): “The Biden administration has informed Congress of a proposed $750 million weapons sale to Taiwan in a move likely to further inflame tensions with Beijing. The administration gave notice about the intended sale on Wednesday…The deal includes 40 M109A6 Medium Self-Propelled Howitzer Systems and related equipment. ‘If concluded, this proposed sale will contribute to the modernization of Taiwan's howitzer fleet, strengthening its self-defense capabilities to meet current and future threats,’ the spokesperson said.”
August 3 – Reuters (Doyinsola Oladipo and David Brunnstrom): “U.S. Secretary of State Antony Blinken announced… the launch of a ‘strategic dialogue’ with Indonesia, and Washington said the two countries committed to working together on issues that include defending freedom of navigation in the South China Sea… Blinken and Indonesian Foreign Minster Retno Marsudi also committed to work together against COVID-19 and the climate crisis and to boost bilateral trade and economic ties…”
August 5 – Associated Press (Laurie Kellman): “Israel’s defense minister warned… his country is prepared to strike Iran, issuing the threat against the Islamic Republic after a fatal drone strike on a oil tanker at sea that his nation blamed on Tehran. The comments by Benny Gantz come as Israel lobbies countries for action at the United Nations over last week’s attack on the oil tanker Mercer Street that killed two people. The tanker, struck off Oman in the Arabian Sea, is managed by a firm owned by an Israeli billionaire.”
August 5 – Reuters (Parisa Hafezi): “Hardline Iranian President Ebrahim Raisi took the oath of office before parliament…, with the Islamic Republic's clerical rulers facing growing crises at home and abroad. The mid-ranking Shi'ite cleric formally started his four-year term on Tuesday when supreme leader Ayatollah Ali Khamenei endorsed his victory in the June election, when most prominent rivals were barred from standing. With Raisi's presidency, all branches of power in Iran will be controlled by anti-Western hardliners loyal to Khamenei.”
August 2 – Reuters (Parisa Hafezi): “Iran will respond promptly to any threat against its security, the foreign ministry said on Monday, after the United States, Israel and Britain blamed Tehran for an attack on an Israeli-managed tanker off the coast of Oman. Tehran has denied any involvement in the suspected drone attack on Thursday in which two crew members - a Briton and a Romanian - were killed.”