Moreover, there were only a couple weeks until quarter-end for a Q2 that had been nicely rewarding for various reflation trades, including commodities and cyclical stocks (i.e. materials, industrials, precious metals). Toss into the mix that there had been a bout of risk hedging in May, followed by an unwind of hedges and the reemergence of short squeeze dynamics. There were scores of stocks and instruments up on air, vulnerable to sharp reversals.
And if there wasn’t enough market unease after the Fed’s somewhat surprising meeting outcome, St. Louis Fed president Bullard had to rattle the cages expiration morning with hawkish commentary.
Let’s take a glance at the equities market week, then circle back to the Fed. For one, the week offered hints of how swiftly bull market returns can go up in flames. The Banks came into the week with a y-t-d return of 33.5%. This week’s 7.8% drop abruptly slashed y-t-d returns by about a third to 23.1%. Broker/Dealer 2021 returns dropped from 26.5% to 21.2% in five sessions. The Midcap Index saw its y-t-d return drop from 19.9% to 13.9%, and small cap Russell 2000 returns fell from 18.7% to 13.8%.
By S&P sector, the Materials Index sank 6.3% this week, Energy 5.2% and Industrials 3.8%. The NYSE Arca Gold BUGS Index sank 11.8%, and the Philadelphia Oil Services Index fell 6.3%.
Those betting on a steeper yield curve – a seemingly attractive bet in the current backdrop of mounting inflationary pressures and a Fed hopelessly “behind the curve” - took one right on the chin. The spread between two and 30-year Treasury yields closed Tuesday's (pre-meeting) session at 202 bps. In a mad scramble to unwind “curve steepeners,” this spread had contracted 26 bps to 176 bps by Friday’s close. The five to 30-year spread sank from 140 to 113 bps.
The dollar shorts were similarly bloodied. The Dollar Index jumped 1.8% to a two-month high, with technical analysts shouting, “double bottom!” Most hot EM currencies reversed sharply lower, with surging EM bond yields inflicting some “carry trade” pain. The high-flying commodities market was pummeled. Lumber collapsed 15.2% - and is now down almost 50% from May 10th highs (up only 3% y-t-d). Dr. Copper was slammed 8.2%, with Zinc down 7.3%, Nickel 5.9% and Tin 5.4%. Silver was whacked 7.6%, with Platinum down 9.3%, Palladium 10.9%, and Gold 6.0%. The soft commodities were not spared. Soybeans were down 7.5%, Sugar 6.3%, Corn 7.1%, and Wheat 2.9%.
It’s being called a “hawkish tilt.” In the post-meeting policy statement, the most significant change was replacing “running” with “having run” in describing inflation persistently below target. Markets, though, had their attention elsewhere: the shifting FOMC “dot plot”.
As a group, individual forecasts on average now signal an expectation to raise rates twice by the end of 2023, versus previous forecasts for increases likely not to commence until 2024. This shift caught most analysts by surprise. Expectations had been that members would continue to low-ball their rate forecasts, at least until the FOMC had communicated a tapering strategy. Powell suggested taking the dot plot “with a grain of salt.” Salty markets weren’t buying it.
Expectations are now for a taper announcement in September, with the first installment of reduced asset purchases commencing late this year. The Fed’s median GDP forecast rose to 7% for the year. The Unemployment Rate is expected to fall to 3.8%. Core CPI will temporarily rise to 3.0% this year, before (conveniently) returning to just above its 2.0% target level for the following two years. In a rather dramatic pivot, the Fed now sees a hot economy.
The Fed “blinked,” suggested Cornerstone Macro’s Roberto Perli. I also concur with another analyst’s comment, “The Fed took a step in the direction of reality.” In a sign of just how low the bar has dropped, the headline from the Financial Times editorial board’s praise piece read, “The Federal Reserve Deftly Changes Tack.” The U.S. economy is booming, inflationary pressures are mounting, and labor markets are rapidly tightening. It was past time for our central bank to blink.
It was certainly a rather pronounced change in tone from Powell: “If you look at the labor market and you look at the demand for workers and the level of job creation and think ahead, I think it’s clear, and I am confident, that we are on a path to a very strong labor market, a labor market that shows low unemployment, high participation, rising wages for people across the spectrum. And as you look through the current time frame and think one and two years out, we’re going to be looking at a very, very strong labor market.”
While it was an initial step toward reality, it’s destined to be a treacherous journey. “I think we learned during the course of the last very long expansion, the longest in our history, that labor supply during a long expansion can exceed expectations, can move above its estimated trend. And I have no reason to think that won’t happen again.”
It’s worth remembering that we’re now 92 weeks (and $4.23 TN!) into the latest bout of QE, liquidity injections that commenced in the pre-pandemic backdrop of near record stock prices and a multi-decade low unemployment rate. Throw unfathomable quantities of liquidity at a system already showing strong inflationary biases in stocks and labor, and one should be prepared for a mania and anomalous wage inflation. Powell: “We’re all going to be informed by what we saw in the last cycle, which was labor supply outperforming expectations over a long period of time.” And I’d like to inform Chair Powell that the Fed will be “fighting the last war.”
Powell somewhat came clean on extraordinarily uncertain economic, inflation and policy backdrops. “I think we have to be humble about our ability to understand the data. It’s not a time to try to reach hard conclusions about the labor market, about inflation, about the path of policy.” “The problem now is that demand is very, very strong. Incomes are high. People have money on their—in the bank accounts. Demand for goods is extremely high and it hasn’t come down. We’re seeing the service sector reopening, and so you’re seeing prices are moving back up off their lows there.”
Understandably, markets studied the dots and Powell and concluded a period of policy clarity has been supplanted by significant uncertainty. It was as if Powell intimated his Heels had been Dislodged, and he could no longer guarantee there’d be no surprises. And then Bullard beams onto CNBC Friday morning to proclaim surprises start right now - with him. “I put us starting in late 2022,” the St. Louis Fed President stated in reference to the “lift off” rate increase. Markets came into Wednesday’s session thinking, believing, hoping for 2024.
The world changed this week: Markets can no longer fixate singularly on the salve of massive Federal Reserve stimulus. There are major developments in China, for example, that have been easily disregarded in the halcyon environment of $120 billion monthly QE and luminous Fed policy clarity.
Suddenly, it will matter that Beijing is determined to slow system Credit growth, putting China’s Bubbles in serious jeopardy. Chinese Credit stress matters. It matters that some of the major apartment developers are facing liquidity challenges. Huarong and the other huge asset managers matter. The possibility that Beijing may allow a major financial institution to fail matters tremendously.
Ten-year Treasury yields slipped a basis point this week, not necessarily the reaction one would expect from a “hawkish” Fed pivot. Last month’s 5% y-o-y CPI gain was the strongest since June ‘08. There are parallels to that pivotal bubble year. Recall that crude and commodities went on a speculative moonshot – bolstered by a late-cycle confluence of strong global demand and Fed stimulus measures. After peaking at 5.30% in June ‘07, 10-year yields were down to 4% by June ‘08. There was this extraordinary dynamic: Year-over-year CPI rose from 2% in August ‘07 to a cycle peak 5.6% about a year later – yet yields sank more than 100 bps.
Why were Treasuries in ‘08 dismissive of the inflationary backdrop? Bond market focus was elsewhere - on the faltering credit bubble. Treasuries sensed that an unfolding crisis would see the Fed deploy extreme stimulus.
So why did 10-year yields end the week at 1.44% in the face of powerful inflationary pressures, historic Treasury issuance and a less dovish Fed? Once again, the bond market is focused on bubble dynamics and the certainty of even greater future stimulus.
June 10 – Reuters (Lusha Zhang and Kevin Yao): “China’s new bank loans unexpectedly rose in May from the previous month but broader credit growth continued to slow, as the central bank seeks to contain rising debt in the world’s second-largest economy… Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, slowed to 11% in May, the weakest pace since February 2020, and compared with 11.7% in April. Analysts attributed to the weaker TSF growth to slowing issuance of corporate and government bonds, and a contraction in shadow credit, which could hamper economic growth in the future. ‘The slowdown in credit growth is happening even faster than we had been anticipating a couple of months ago,’ Julian Evans-Pritchard at Capital Economics said…”
June 16 – Bloomberg (Sofia Horta e Costa): “China is resorting to increasingly forceful measures to contain risks to the financial system, in moves that threaten to undermine President Xi Jinping’s pledge to give markets greater freedom. Authorities have in recent weeks ordered state firms to curb their overseas commodities exposure, forced domestic banks to hold more foreign currencies, considered a cap on thermal coal prices, censored searches for crypto exchanges and effectively banned brokers from publishing bullish equity-index targets. A new rule will bar cash management products from holding riskier securities and limit their use of leverage. On Thursday, an official said China plans to sell metals from state reserves. While the measures fall short of direct intervention, they risk reinforcing the notion of moral hazard.”
June 18 – Bloomberg: “Chinese property developers are poised for their worst week since January, on concerns that more bad news could follow the central bank’s announcement last week that wealth-management products have been banned from investing in junk bonds, according to brokerage Zhongtai International. A Bloomberg equity gauge tracking the property sector falls as much as 5.7% this week, and is set for its worst performance since the week of January 29.”
The bottom line: global Bubbles are fragile and increasingly vulnerable. In particular, China is a Credit accident in the making. And Fed policy certainty has been the glue holding things together – keeping the mania raging, keeping the leveraged players playing, keeping all the options and derivatives speculators betting on the long side, and keeping the weak dollar supportive of levered “carry trades” the world over.
Ten-year Treasury yields below 1.50% are sending a signal: there are Bubble fragilities that will impede any effort of policy normalization. QE is here to stay. And after a week of big commodity price drops, it will be easy for some to now dismiss inflation risk – or even assert yields indicate prospective deflation. And while bursting Bubbles would surely exert disparate disinflationary pressures, thinking one step ahead I ponder the consequences of the Fed’s policy response to the next crisis. I actually doubt it will be that far out into the future. And there are decent odds Trillions of additional liquidity will hit an economy already demonstrating powerful inflationary dynamics.
For the Week:
The S&P500 fell 1.9% (up 10.9% y-t-d), and the Dow dropped 3.4% (up 8.8%). The Utilities lost 3.1% (up 0.9%). The Banks sank 7.8% (up 21.7%), and the Broker/Dealers dropped 4.2% (up 20.5%). The Transports sank 4.6% (up 16.9%). The S&P 400 Midcaps dropped 4.1% (up 13.2%), and the small cap Russell 2000 fell 4.2% (up 13.2%). The Nasdaq100 added 0.4% (up 9.0%). The Semiconductors fell 1.8% (up 12.8%). The Biotechs declined 1.2% (up 3.0%). With bullion down $113, the HUI gold index sank 11.8% (down 9.5%).
Three-month Treasury bill rates ended the week at 0.0275%. Two-year government yields jumped 11bps to 0.255% (up 13bps y-t-d). Five-year T-note yields rose 14 bps to 0.88% (up 51bps). Ten-year Treasury yields slipped a basis point to 1.44% (up 52bps). Long bond yields sank 13 bps to 2.02% (up 37bps). Benchmark Fannie Mae MBS yields rose eight bps to 1.88% (up 53bps).
Greek 10-year yields rose eight bps to 0.81% (up 19bps y-t-d). Ten-year Portuguese yields gained eight bps to 0.43% (up 40bps). Italian 10-year yields jumped 13 bps to 0.87% (up 33bps). Spain's 10-year yields rose 10 bps to 0.46% (up 41bps). German bund yields gained seven bps to negative 0.20% (up 37bps). French yields increased six bps to 0.16% (up 50bps). The French to German 10-year bond spread narrowed one to 36 bps. U.K. 10-year gilt yields increased four bps to 0.75% (up 56bps). U.K.'s FTSE equities index fell 1.6% (up 8.6% y-t-d).
Japan's Nikkei Equities Index was little changed (up 5.5% y-t-d). Japanese 10-year "JGB" yields added two bps to 0.06% (up 4bps y-t-d). France's CAC40 dipped 0.5% (up 18.3%). The German DAX equities index lost 1.6% (up 12.6%). Spain's IBEX 35 equities index dropped 1.9% (up 11.9%). Italy's FTSE MIB index fell 1.9% (up 13.4%). EM equities were under pressure. Brazil's Bovespa index dipped 0.8% (up 7.9%), and Mexico's Bolsa lost 1.9% (up 14.2%). South Korea's Kospi index added 0.6% (up 13.7%). India's Sensex equities index slipped 0.2% (up 9.6%). China's Shanghai Exchange dropped 1.8% (up 1.5%). Turkey's Borsa Istanbul National 100 index sank 4.8% (down 5.8%). Russia's MICEX equities index declined 1.0% (up 15.6%).
Investment-grade bond funds saw inflows of $3.994 billion, while junk bond funds posted outflows of $2.230 billion (from Lipper).
Federal Reserve Credit last week surged $59.3bn to a record $7.965 TN. Over the past 92 weeks, Fed Credit expanded $4.238 TN, or 114%. Fed Credit inflated $5.154 Trillion, or 183%, over the past 449 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $9.2bn to $3.538 TN. "Custody holdings" were up $119bn, or 3.5%, y-o-y.
Total money market fund assets fell $27bn to $4.578 TN. Total money funds declined $106bn y-o-y, or 2.3%.
Total Commercial Paper added $4.8bn to $1.181 TN. CP was up $170bn, or 16.8%, year-over-year.
Freddie Mac 30-year fixed mortgage rates declined three bps to 2.93% (down 20bps y-o-y). Fifteen-year rates added a basis point to 2.24% (down 34bps). Five-year hybrid ARM rates slipped three bps to 2.52% (down 57bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up ten bps to 3.19% (down 30bps).
Currency Watch:
For the week, the U.S. Dollar Index jumped 1.8% to 92.23 (up 2.6% y-t-d). For the week on the upside, the Brazilian real increased 0.6%. On the downside, the South African rand declined 4.4%, the Norwegian krone 3.8%, the Mexican peso 3.8%, the Swedish krona 3.4%, the Australian dollar 3.0%, the New Zealand dollar 2.7%, the Swiss franc 2.5%, the Canadian dollar 2.5%, the British pound 2.1%, the euro 2.0%, the South Korean won 1.9%, the Singapore dollar 1.4%, and the Japanese yen 0.5%. The Chinese renminbi declined 0.84% versus the dollar this week (up 1.15% y-t-d).
Commodities Watch:
June 16 – Bloomberg: “China has stepped up its campaign to rein in commodity prices and reduce speculation in a bid to ease the threat to its pandemic rebound from soaring raw material costs. State-owned enterprises were ordered to control risks and limit their exposure to overseas commodities markets by the State-owned Assets Supervision and Administration Commission… In a second development, the National Food and Strategic Reserves Administration will soon release state stockpiles of metals including copper, aluminum and zinc…”
June 15 – Wall Street Journal (Ryan Dezember): “Lumber prices are falling back to Earth. Futures for July delivery ended Tuesday at $1,009.90 per thousand board feet, down 41% from the record of $1,711.20 reached in early May. Futures have declined 14 of the past 16 trading days. Cash lumber prices are also crashing.”
The Bloomberg Commodities Index dropped 4.3% (up 16.5% y-t-d). Spot Gold fell 6.0% to $1,764 (down 7.1%). Silver sank 7.6% to $25.79 (down 2.3%). WTI crude added 73 cents to $71.64 (up 48%). Gasoline declined 0.8% (up 54%), and Natural Gas dropped 2.5% (up 27%). Copper sank 8.2% (up 18%). Wheat fell 2.9% (up 4%). Corn lost 7.1% (up 17%). Bitcoin dropped $1,738, or 4.7%, this week to $35,544 (up 22%).
Coronavirus Watch:
June 17 – CNBC (Holly Ellyatt): “The Covid-19 delta variant originally discovered in India is now spreading around the world, becoming the dominant strain in some countries, such as the U.K., and likely to become so in others, like the U.S… The World Health Organization said the variant had been detected in more than 80 countries and it continues to mutate as it spreads. The variant now makes up 10% of all new cases in the United States, up from 6% last week. Studies have shown the variant is even more transmissible than other variants. Scientists have warned that the data suggests the delta variant is around 60% more transmissible than the “alpha” variant… and is more likely to lead to hospitalizations…”
Market Mania Watch:
June 15 – Reuters (Anirban Sen and Krystal Hu): “With more than six months until the year ends, U.S. initial public offerings have already totaled $171 billion, eclipsing the 2020 record of $168 billion, according… Dealogic. Driving the IPO rush are sky-high corporate valuations in the stock market, inflated by the Federal Reserve's low-interest rates and monetary stimulus in the wake of the COVID-19 pandemic. This has fueled a wave of speculative frenzy that benefit not just traditional companies going public, but also special purpose acquisition companies (SPACs) formed strictly to raise money through IPOs. The IPO gold rush is set to reach new heights in the second half of 2021, as a number of high-profile startups… prepare to launch multi-billion dollar share sales.”
June 14 – Financial Times (Chris Flood): “Assets in BlackRock’s exchange traded fund business raced beyond the $3tn milestone for the first time in May as the ETF industry’s global assets surged to an all-time high above $9tn. BlackRock predicted last week that the exchange traded fund industry’s assets would reach $15tn as early as the end of 2025, helped by increasing demand for environmentally friendly strategies and more usage by debt investors.”
June 14 – Bloomberg (Alex Wittenberg): “U.S. junk-bond yields fell to a record low Monday as an accelerating economic recovery and the Federal Reserve’s low interest rate policy lead investors to double down on risk. Speculative-grade corporate bond yields dropped four bps to close at 3.84%, breaching the previous low set in May, according to Bloomberg Barclays index data. Investors have made a beeline to new bond offerings this year while low funding costs and a rally in oil prices have also encouraged companies to seek debt financing. Junk-rated borrowers of all stripes sold a record amount of notes in May, and even first-time issuers have met highly receptive buyers…”
June 15 – CNBC (Jeff Cox): “Inflation is likely temporary, and trades built around it being longer term are now the most overdone in the market, according to Bank of America’s June Global Fund Manager Survey. The closely watched gauge of professional investors indicates that Wall Street is in line with the Federal Reserve’s view that recent price pressures will lighten up as the year goes on and eventually recede to normal levels.”
June 15 – CNBC (MacKenzie Sigalos): “China has long been home to more than half the world’s bitcoin miners, but now, Beijing wants them out ASAP. In May, the government called for a severe crackdown on bitcoin mining and trading, setting off what’s being dubbed in crypto circles as ‘the great mining migration.’ This exodus is underway now, and it could be a game changer for Texas… Despite a lack of reserves that caused dayslong blackouts last winter, Texas often has some of the world’s lowest energy prices…”
Market Instability Watch:
June 17 – Reuters (Saqib Iqbal Ahmed and Saikat Chatterjee): “A hawkish shift from the Federal Reserve has woken up a slumbering dollar, sending the U.S. currency to its highest level in months and stoking expectations that an unwind of bearish positions could fuel more gains. The dollar was on track for its biggest two-day percentage increase against a basket of major currencies in 15 months… Betting against the dollar has been a popular trade for months, as the Fed’s insistence that it would maintain its ultra-dovish stance despite rising inflation drove the currency to a near 3-year low earlier this year. The slightly hawkish shift in Wednesday’s statement appears to be changing that calculus…”
June 14 – Financial Times (Aziza Kasumov): “Amateur traders are on the hunt for further opportunities to bulldoze over funds betting against their favoured stocks… But for those retail traders, repeating the victory of January’s GameStop saga… may be tricky. In part this is because funds have reeled in their negative bets, as the US economic reopening and persistent monetary stimulus from the Federal Reserve continue to fuel a broad market rally… From the start of the year to the middle of May, the average percentage of S&P 500 companies’ shares that were shorted… has dropped from 2.45% to 2.21%, according to… S&P Global Market Intelligence.”
June 17 – Wall Street Journal (Michael S. Derby): “A day after the Federal Reserve boosted the return on a key part of its interest rate control tool kit, a record $756 billion flowed into the central bank’s reverse repo facility on Thursday. The reverse repo facility takes in cash primarily from money-market funds, as well as government-sponsored companies and banks. Until Wednesday, this facility offered a return of zero percent to eligible users, which the Fed moved up to 0.05%, while at the same time lifting another rate, called the interest on excess reserves rate, to 0.15% from 0.10%.”
Inflation Watch:
June 16 – CNBC (Alicia Adamczyk): “The typical U.S. home price hit $287,148 in May 2020, a 13.2% increase from May 2020, according to… Zillow. That’s a record rise since the company started collecting the housing price data in 1996. The cities experiencing the biggest price hikes include Austin, Texas, which saw a 30.5% increase over 2020; Phoenix, which was up 23.5%; and Salt Lake City, with prices climbing 20.6% in the same time frame. Collectively, typical prices grew 10% or more in 46 of the U.S.’s 50 largest metros. House buyers can expect prices to keep climbing in the year to come: Zillow economists are forecasting increases of 14.9% by May 2022.”
June 15 – CNBC (Jeff Cox): “Producer prices rose at their fastest annual clip in nearly 11 years in May as inflation continued to build in the U.S. economy… The 6.6% surge was the biggest 12-month rise in the final demand index since the Bureau of Labor Statistics began tracking the data in November 2010. On a monthly basis, the producer price index for final demand rose 0.8%, ahead of the Dow Jones estimate of 0.5%.”
June 14 – Bloomberg (Matthew Boesler and Alex Tanzi): “U.S. consumers’ expectations for inflation over the medium term rose to an eight-year high in May, according to a Federal Reserve Bank of New York survey. The median survey respondent anticipated an inflation rate of 3.6% in three years, up from 3.1% in April… The reading marked the highest level since August 2013, while short-term expectations, over one year, reached a record.”
June 16 – CNBC (Lorie Konish): “Rising consumer costs have helped push the latest estimate for next year’s Social Security cost-of-living adjustment to 5.3%. Whether that will actually be the bump retirees see to their monthly checks in 2022 depends a lot on the economy, including whether the Federal Reserve decides to raise interest rates. The 5.3% estimate was calculated by The Senior Citizens League… based on Consumer Price Index data from the Bureau of Labor Statistics through May. If that amount were to go through, it would be the highest annual adjustment since 2009, when benefits saw a 5.8% boost. In 2021, Social Security beneficiaries received a 1.3% increase to their monthly checks.”
June 15 – Bloomberg (Michael Hirtzer and Dominic Carey): “Chicken-sandwich fever means poultry is pacing U.S. food inflation in the meat case. U.S. producer prices for processed poultry jumped to an all-time high in May, climbing 2.1% in the eighth straight monthly increase, U.S. government data showed... Gains in poultry outpaced the 0.8% increase in the broader producer price index.”
June 14 – CNBC (Hugh Son): “Jamie Dimon believes cash is king – at least for the time being. JPMorgan Chase has been ‘effectively stockpiling’ cash rather than using it to buy Treasuries or other investments because of the possibility higher inflation will force the Federal Reserve to boost interest rates, Dimon said… ‘We have a lot of cash and capability and we’re going to be very patient, because I think you have a very good chance inflation will be more than transitory,’ said Dimon, longtime JPMorgan CEO. ‘If you look at our balance sheet, we have $500 billion in cash, we’ve actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates,’ Dimon said. ‘I do expect to see higher rates and more inflation, and we’re prepared for that.’”
Biden Administration Watch:
June 15 – Associated Press (Lisa Mascaro and Kevin Freking): “Patience running thin, Democratic leaders are laying the groundwork for a go-it-alone approach on President Joe Biden’s big jobs and families infrastructure plans even as the White House continues negotiating with Republicans on a much more scaled-back $1 trillion proposal. A top White House adviser assured House Democrats during a closed-door session… there would be a fresh assessment by next week on where talks stand with the Republicans. But Senate Majority Leader Chuck Schumer announced he is moving ahead, huddling privately Wednesday with the Senate Budget Committee to prepare for July votes on a majority-rules approach as wary Democrats prepare to lift Biden’s $1.7 billion American Jobs Plan and $1.8 billion American Families Plan to passage.”
June 17 – Wall Street Journal (Andrew Duehren and Kristina Peterson): “A growing bipartisan group of lawmakers and the White House haggled over how to finance a roughly $1 trillion infrastructure proposal, awaiting feedback from President Biden as Democrats began discussions on a separate economic package that could cost up to $6 trillion. Since negotiations between Mr. Biden and a group of Senate Republicans collapsed last week, an alternative set of Republican and Democratic senators have held talks on a infrastructure plan that would spend $973 billion over five years… Initially a group of five Democrats and five Republicans, the group expanded to include 11 Republicans and 10 members of the Democratic caucus…”
Federal Reserve Watch:
June 16 – Bloomberg (Craig Torres): “Federal Reserve officials have said for months that price increases are temporary. On Wednesday, they weren’t so sure. ‘Is there a risk that inflation will be higher than we think? Yes,’ Chair Jerome Powell told a press conference. He spoke after financial markets were taken by surprise when policy makers signaled they expect to make not one, but two, hikes to interest rates in 2023 from near zero now. The Fed has been in a tug-and-pull with investors and critics over whether recent spikes in prices as the economy reopens from the pandemic will be transitory, as officials have argued, or prove more lasting. ‘There is a lot of uncertainty,’ Powell said. Indeed, Fed policy makers moved up their forecasts for inflation over the next three years…”
June 16 – New York Times (Jeanna Smialek): “Federal Reserve officials signaled… they expected to raise interest rates from rock bottom sooner than they had previously forecast and that they were taking baby steps toward reducing their vast bond purchases — tweaks that, together, demonstrated their increasing confidence that the economy would rebound robustly from the pandemic. Fed policymakers expect to make two interest rate increases by the end of 2023, the central bank’s updated summary of economic projections showed... Previously, more than half of officials had anticipated that rates would stay near zero, where they have been since March 2020, into at least 2024. Officials now see rates rising to 0.6% by the end of 2023, up from 0.1%. The Fed chair, Jerome H. Powell, played down the significance of those tentative rate forecasts during a postmeeting news conference, emphasizing that borrowing costs would remain low for a long time.”
June 16 – Bloomberg (Alexandra Harris): “The Federal Reserve… tweaked the rates on some of the tools used to help control the benchmark even as it left unchanged the overall target range for the fed funds rate. The upward shift to the so-called administered rates comes amid the growing dollar glut in short-term funding markets that’s outstripping the supply of investable securities and weighing down front-end rates, despite the steadiness of the Fed’s key benchmark at 0.06%. Fed officials decided to raise the rate on its overnight reverse repurchase-agreement facility by 5 bps to 0.05%... Policy makers also boosted the interest paid on excess reserves by 5 bps to 0.15%, but left the main monetary policy goal unchanged at 0% to 0.25%. At present, there’s $521 billion in cash squirreled away at the overnight RRP facility.”
June 18 – Dow Jones (Michael S. Derby): “The Federal Reserve Bank of St. Louis President James Bullard said the economy is seeing more inflation than he and his colleagues had expected, and noted that while there is substantial uncertainty about the outlook, it could lead to a rate increase next year… ‘The inflationary impulse, I think, is more intense than we were expecting,’ Mr. Bullard said. ‘You could see even some upside risks to the inflation forecast, but that's okay’ given that the central bank had hoped to get inflation back up over 2% for a time to make up for extended periods of falling short of that goal, he said. At the Fed meeting, officials projected 3.4% inflation this year, up from the 2.4% forecast made in March. Mr. Bullard also noted that Chairman Jerome Powell opened the door… to a central bank debate on paring back on bond-buying stimulus efforts.”
June 18 – Bloomberg (Matthew Boesler): “It may be appropriate for the Federal Reserve to begin raising interest rates next year given a forecast for inflation above the U.S. central bank’s 2% target, St. Louis Fed President James Bullard said. ‘I put us starting in late 2022,’ Bullard said… ‘But you do have to have the idea that these are related to what the forecast is. So, my forecast said 3% inflation in 2021 -- core PCE inflation -- and 2.5% core PCE inflation in 2022,’ he said. ‘If that’s what you think is going to happen, then by the time you get to the end of 2022, you’d already have two years of 2.5-3% inflation.’”
U.S. Bubble Watch:
June 16 – Reuters (Jonnelle Marte): “Service sector businesses in the New York region continued to stage a comeback in early June, when business activity grew at a record fast pace, according to a survey released… by the Federal Reserve Bank of New York. The business activity index increased by four points to 43.2, according to the survey of business leaders for service sector firms in New York, northern New Jersey, and southwestern Connecticut.”
June 17 – Wall Street Journal (Xavier Fontdegloria): “Manufacturing activity in the Philadelphia area continued to expand at a robust pace in June, data… the Federal Reserve Bank of Philadelphia showed. The index for current general activity decreased to 30.7 in June from 31.5 in May… The prices paid diffusion index rose for the second consecutive month, gaining about 4 points to 80.7, its highest reading since June 1979. The prices received index rose for the fourth consecutive month, moving up about 9 points to 49.7, its highest reading since October 1980, the report said.”
June 17 – Associated Press (Paul Wiseman): “The number of Americans applying for unemployment benefits rose last week for the first time since April despite widespread evidence that the economy and the job market are rebounding steadily from the pandemic recession… Jobless claims rose 37,000 from the week before to 412,000. As the job market has strengthened, the number of weekly applications for unemployment aid has fallen for most of the year.”
June 16 – Reuters (Evan Sully): “U.S. applications for home mortgages rose last week following three consecutive weeks of declines as purchase activity rebounded despite a limited supply of houses for sale… The purchase index increased 1.6% from a week earlier… ‘Purchase applications were still down 17% from a year ago, which was when the mortgage market started seeing large post-shutdown increases in activity.’”
June 13 – Wall Street Journal (Lauren Weber): “More U.S. workers are quitting their jobs than at any time in at least two decades, signaling optimism among many professionals while also adding to the struggle companies face trying to keep up with the economic recovery. The wave of resignations marks a sharp turn from the darkest days of the pandemic… In April, the share of U.S. workers leaving jobs was 2.7%, according to the Labor Department, a jump from 1.6% a year earlier to the highest level since at least 2000. The shift by workers into new jobs and careers is prompting employers to raise wages and offer promotions to keep hold of talent.”
June 16 – Reuters (Lucia Mutikani): “U.S. homebuilding rebounded less than expected in May as very expensive lumber and shortages of other materials continued to constrain builders’ ability to take advantage of an acute shortage of houses on the market. The report… also showed permits for future home construction falling to a seven-month low. Housing completions also declined while the number of homes authorized for construction but not yet started rose to the highest level since 1999, indicating supply will likely remain tight for a while and boost house price inflation. ‘Shortages of materials and labor have builders struggling to increase production of new homes, though the demand remains strong,’ said Robert Frick, corporate economist at Navy Federal Credit Union... ‘Potential home buyers should expect tight inventories and rising prices for both new and existing homes for the foreseeable future.’”
June 15 – CNBC (Diana Olick): “Even as the coronavirus pandemic ebbs and Americans get back to work and play, they still want more space at home. But with home prices hitting record highs, demand for single-family rental homes is soaring – and so are the rents. Single-family rents were up 5.3% year over year in April, rising from a 2.4% increase in April 2020, according to CoreLogic. That is the largest gain in nearly 15 years. Rents for single-family detached homes (not townhomes), were up an even stronger 7.9% compared with a year ago…”
June 15 – Reuters (Lucia Mutikani): “U.S. retail sales dropped more than expected in May, with spending rotating back to services from goods as vaccinations allow Americans to travel and engage in other activities that had been restricted by the COVID-19 pandemic. Despite last month's decline…, the trend in retail sales remains strong. Sales in April were revised sharply up and are well above their pre-pandemic level, keeping intact expectations of double-digit growth in both consumer spending and the economy this quarter.”
June 16 – Reuters (Noel Randewich): “Fannie Mae… cut its forecast for home sales in the second and third quarters of 2021, blaming a lack of listings and a slowing pace of new construction. The No. 1 U.S. mortgage financing agency said in a press release that its Economic and Strategic Research Group sees home sales at 6.6 million and 6.5 million in the second and third quarters, respectively. That is down from its previous forecast of 6.9 million and 6.7 million home sales respectively in the periods. Supply-side factors are limiting construction and mortgage origination, Fannie Mae said.”
June 16 – Wall Street Journal (Nicole Friedman): “Construction of new housing in the past 20 years fell 5.5 million units short of long-term historical levels, according to a new National Association of Realtors report, which is calling for a ‘once-in-a-generation’ policy response. The industry lobbying group said it hopes the report…, persuades lawmakers to include housing investments in any infrastructure package. U.S. builders added 1.225 million new housing units, on average, each year from 2001 to 2020… That figure is down from an annual average of 1.5 million new units from 1968 to 2000.”
June 15 – Reuters (John Kemp): “U.S. employees are feeling confident enough to push for better pay and conditions, despite the high level of unemployment after the pandemic, a sign the balance of power is shifting in the job market. The result should be a strong and sustained expansion in consumer spending and business activity over the next year, which will be welcomed by policymakers at the central bank and in the White House. However, it will also fuel faster inflation and probably force the Federal Reserve to scale back its bond buying programme and raise interest rates earlier than top policymakers have indicated so far.”
June 13 – Wall Street Journal (Austen Hufford): “In the latest sign of the U.S. economy’s post-pandemic disarray, even companies that have built domestic supply chains are running up against extreme shortages of goods and labor. Furniture chain Room & Board Inc. procures more than 90% of its products inside the U.S… —a contrast to many of its competitors, whose supply chains stretch back to factories in China. But amid sky-high consumer demand and shortages of labor and many materials, some Room & Board customers are waiting months for sofas and dressers. About half the items it sells are in stock right now, down from 90% normally.”
Fixed-Income Bubble Watch:
June 14 – Wall Street Journal (Sam Goldfarb): “Before the pandemic, U.S. companies were borrowing heavily at low interest rates. When Covid-19 lockdowns triggered a recession, they didn’t pull back. They borrowed even more and soon paid even less. After a brief spike, interest rates on corporate debt plummeted to their lowest level on record, bringing a surge in new bonds. Nonfinancial companies issued $1.7 trillion of bonds in the U.S. last year, nearly $600 billion more than the previous high, according to Dealogic. By the end of March, their total debt stood at $11.2 trillion… That torrent of inexpensive money has benefited all types of businesses. It helped cruise operators, airlines and movie theaters weather the pandemic by replacing some lost revenue with cash raised from bond sales. It allowed thriving businesses to stock up on cash and to save money by refinancing older debt. And it permitted companies that were struggling before the pandemic to ease the threat of bankruptcy by issuing new long-term debt.”
June 18 – Financial Times (Joe Rennison in London and Eric Platt): “The premium between corporate debt and US Treasuries has dropped to its lowest level in more than a decade in a sign that investors are growing confident recent rises in inflation will not hinder the economic recovery. The collapse in the difference between investment yields — known as the spread — means buyers are demanding a much lower premium than previously for owning corporate debt, which is more risky than super-safe US Treasuries. The spreads between US Treasury and corporate bond yields have tightened markedly this year, as investors gained confidence and clamoured to own even marginally higher yielding assets in a low return world.”
China Watch:
June 15 – Bloomberg: “China Evergrande Group fell after Caixin’s WeNews reported that a local government discussed paring the property giant’s stake in a regional lender and a new policy could curb a key source of financing for developers. Authorities in the northeastern Liaoning province held discussions with Evergrande to inject state capital into Shengjing Bank Co. to dilute Evergrande’s stake… Evergrande is the biggest shareholder of the bank headquartered in Liaoning.”
June 16 – Financial Times (Edward White and Thomas Hale): “Shares in the main unit of Suning have been suspended as financial woes at the Chinese retailer and owner of football club Inter Milan’s escalate, underscoring pressures in the country’s credit markets. The halt in the group’s… stock on Wednesday came after a Beijing court this week ordered a freeze on more than a quarter of founder Zhang Jindong’s shares in Suning’s retail arm… Suning is one of a clutch of Chinese conglomerates including property group Evergrande and distressed debt investor Huarong that are being closely watched by investors. Some are concerned over risks potentially spreading through the financial sector.”
June 14 – Bloomberg (Finbarr Flynn): “The size and type of defaults that have occurred in China in recent times indicate that the notion of ‘too big to fail’ may no longer apply to the nation’s borrowers, according to Goldman Sachs… There has been a noticeable up-tick in defaults by Chinese state-owned enterprises since late 2019 and some of the borrowers that have failed to repay debt recently… have had large amounts of outstanding bonds, analysts including Kenneth Ho wrote… ‘Even for large corporates or for state-related entities, policy makers are much less willing to extend support,’ Goldman Sachs analysts wrote. ‘Policy makers are now less likely to conduct full bailouts than compared with the past.’”
June 16 – Bloomberg: “China’s crackdown on shadow banking is taking aim at more than $1 trillion of opaque investments sold by banks as low risk and high yield, even while funds were channeled to riskier borrowers such as developers. Banks and wealth mangers can no longer use money invested in so-called cash management products to buy long-term debt or bonds rated below AA+… An estimated 2.5 trillion yuan ($390.5bn) of the products are currently invested in assets that will soon become non-compliant, and need to be swapped for lower-yielding, high quality investments by the end of next year.”
Global Bubble Watch:
June 17 – Bloomberg: “The global shipping industry, already exhausted by pandemic shocks that are adding to inflation pressures and delivery delays, faces the biggest test of its stamina yet. When one of China’s busiest ports announced it wouldn’t accept new export containers in late-May because of a Covid-19 outbreak, it was supposed to be up and running again in a few days. But as the partial shutdown drags on, it’s further snarling trade routes and lifting record freight prices even higher. Yantian Port now says it will be back to normal by the end of June, but just as it took several weeks for ship schedules and supply chains to recover from the vessel blocking the Suez Canal in March, it may take months for the cargo backlog in southern China to clear while the fallout ripples to ports worldwide.”
June 15 – Bloomberg (Enda Curran): “Real estate prices around the world are flashing the kind of bubble warnings that haven’t been seen since the run up to the 2008 financial crisis, according to Bloomberg Economics. New Zealand, Canada and Sweden rank as the world’s frothiest housing markets, based on the key indicators used in the Bloomberg Economics dashboard. The U.K. and the U.S. are also near the top of the risk rankings. ‘A cocktail of ingredients is sending house prices to unprecedented levels worldwide,’ economist Niraj Shah wrote… ‘Record low interest rates, unparalleled fiscal stimulus, lockdown savings ready to be used as deposits, limited housing stock, and expectations of a robust recovery in the global economy are all contributing.’”
Central Banker Watch:
June 17 – Financial Times (Martin Arnold): “European central bankers are meeting in Frankfurt on Friday to debate issues ranging from changing the European Central Bank’s inflation target to making monetary policy greener, in an attempt to recalibrate eurozone policymaking for the years to come. The three-day retreat on the hills overlooking Germany’s financial centre… will test consensus over areas that will form the backbone of a strategy review ECB chief Christine Lagarde plans to outline in September. The meeting is ‘crucial for achieving the maximum possible consensus on a number of open issues’, said Yannis Stournaras, governor of Greece’s central bank and ECB council member. ‘By the end of the summer we will have agreed on a new strategy.’”
June 14 – Bloomberg (Carolynn Look): “European Central Bank tensions over how and when to discuss ending its emergency bond-buying program are starting to bubble over into the public domain. Little more than an hour after President Christine Lagarde said in an interview that it is ‘far too early’ to debate when to end the stimulus, Austrian central-bank Governor Robert Holzmann said the program will end in March unless there is another severe wave of coronavirus infections. The bond-buying program ‘was established and voted for to end by March 2022, and for the time being, if nothing changes in the sense that there is no fourth or fifth confinement, it will end,’ he told Bloomberg Television.”
June 14 – Reuters (Swati Pandey): “Australia’s central bank signaled… its willingness to extend its bond purchase programme next month and laid out various options for the plan with the aim of meeting its goals of boosting employment and inflation. Minutes of the Reserve Bank of Australia's (RBA) June policy meeting showed members discussed tapering and even ceasing its massive quantitative easing campaign when the current A$100 billion ($77bn) round expires in September.”
Europe Watch:
June 18 – Bloomberg (Yoshiaki Nohara and Yuko Takeo): “Italian Prime Minister Mario Draghi made a bold call for more economic stimulus in European countries to help bring growth back to pre-pandemic levels. ‘Protracted uncertainty means that the case for monetary and fiscal expansion remains compelling,’ the former European Central Bank chief said… ‘We will not reach this objective without additional effort. So we must act on it promptly and effectively.’ That call for all-in stimulus from an ex-central banker known for expansive policy easing may unsettle countries such as Germany…”
June 17 – Bloomberg (Reto Gregori and Arne Delfs): “Armin Laschet, the front-runner to succeed Angela Merkel as German chancellor, called for the reinstatement of European Union budget rules after the coronavirus pandemic subsides. ‘When this crisis is over, when its effects on the global economy are over, German as well as European politics will have to return to the stability politics as it is defined in the Maastricht treaty,” Laschet said…”
EM Watch:
June 16 – Wall Street Journal (Caitlin Ostroff): “Early tightening of the Federal Reserve’s policy could ripple across emerging markets that are dependent on the U.S. dollar. Prime among them is Turkey. The Turkish lira has come under pressure in recent weeks as investors try to assess whether the country’s central bank will heed the demands of its president to cut interest rates. But a rate cut could drag the lira down further at the same time that the country’s high inflation rate is already diminishing the currency’s buying power. Turkey’s economy is among the most vulnerable to signs the Fed is going to raise rates since a stronger dollar makes it harder for Turkey to pay its foreign-currency debts.”
June 14 – Bloomberg (Tuhin Kar and Bloomberg Automation): “India's consumer prices rose more than economists expected in May. Consumer prices rose 6.3% y/y (estimate +5.38%) in May…”
Japan Watch:
June 15 – Reuters (Tetsushi Kajimoto and Daniel Leussink): “Japan’s exports rose at the fastest pace since 1980 in May and a key gauge of capital spending grew… The jump in exports largely reflected a rebound in shipments from last year’s pandemic-driven plunge, but was a welcome sign as the economy struggles to rebound from the first quarter's doldrums amid a prolonged coronavirus state of emergency.”
June 13 – Wall Street Journal (Phred Dvorak): “Japan built the world’s third-largest economy on an industrial base powered by imported oil, gas and coal. Now, it is planning to shift a big chunk of that power to hydrogen, in one of the world’s biggest bets on an energy source long dismissed as too costly and inefficient to be realistic. The change is a vital piece of the country’s plan to eliminate carbon emissions in 30 years. If it succeeds, it could also lay the groundwork for a global supply chain that would finally let hydrogen come into its own as an energy source and further sideline oil and coal—similar to the way the country pioneered liquefied natural gas in the 1970s, some experts say.”
June 17 – Bloomberg (Yoshiaki Nohara and Yuko Takeo): “Japan’s inflation edged into positive territory for the first time in 14 months as rising commodity costs fed higher gasoline prices at the pump… Consumer prices excluding fresh food ticked up 0.1% compared with a year earlier…”
Leveraged Speculation Watch:
June 12 – New York Times (Jesse Drucker and Danny Hakim): “There were two weeks left in the Trump administration when the Treasury Department handed down a set of rules governing an obscure corner of the tax code. Overseen by a senior Treasury official whose previous job involved helping the wealthy avoid taxes, the new regulations represented a major victory for private equity firms. They ensured that executives in the $4.5 trillion industry… could avoid paying hundreds of millions in taxes… The Trump administration’s farewell gift to the buyout industry was part of a pattern that has spanned Republican and Democratic presidencies and Congresses: Private equity has conquered the American tax system.”
Social, Political, Environmental, Cybersecurity Instability Watch:
June 18 – Wall Street Journal (Katherine Blunt and Jim Carlton): “States across the West are at risk of electricity shortages this summer as a crippling drought reduces the amount of water available to generate hydroelectric power. Some of the region’s largest reservoirs are at historically low levels after a dry winter and spring reduced the amount of snowpack and precipitation feeding rivers and streams. The conditions are especially dire in drought-stricken California, where officials say the reservoir system has seen an unprecedented loss of runoff this spring—800,000 acre-feet, or enough to supply more than a million households for a year.”
June 16 – CNBC (Emma Newburger): “An extreme heat wave gripping the western United States will intensify and spread this week, creating dangerous conditions amid the worst drought in the last two decades and raising concerns about severe wildfires and electrical grid failures. More than 40 million people in the country are forecast to experience triple-digit temperatures this week, and roughly 200 million people are projected to see temperatures over 90 degrees Fahrenheit. More than three-fourths of the West is in severe drought… Temperatures in some areas could surpass 120 degrees, and excessive-heat warnings are in place for several states. Nevada and Arizona are forecast to see record temperatures of 125 and 128 degrees, respectively.”
June 16 – Bloomberg (Dan Murtaugh, Josh Saul and Naureen Malik): “California is at risk of blackouts as a sprawling heat wave smothers the western U.S. Cities across China’s industrial heartland are rationing electricity. European power prices are far higher than usual for this time of year. Droughts are drying up reservoirs from Brazil to Taiwan. Welcome to the future of rising temperatures and the escalating fight just to keep lights on. Mix extreme heat and longer droughts, surging post-pandemic power demand, rising fossil fuel prices and a bumpy transition into renewables, and the result is a severe global power crunch. For millions of households and businesses around the world it could be a long, hot summer of higher bills, periodic rationing and, in the worst case, blackouts. Higher energy costs will also add to the inflationary pressures coursing through the global economy. The extreme weather -- even before the onset of hurricane and typhoon seasons -- highlights the real world impact of climate change.”
June 17 – Bloomberg (David R. Baker, Mark Chediak and Will Wade): “California is getting an early taste of the summer that state officials have been dreading all year. A heat wave spanning much of the western U.S. has brought triple-digit temperatures to parts of the state, sending power demand soaring and threatening blackouts once again. Trees, grass and brush left parched by a nearly rain-free winter are catching flame. The drought stretching from West Texas to the California coast and north to the Canadian border is already putting power grids to the test as hydro generation dries up just as homes blast their air conditioners.”
June 17 – CNN (Rachel Ramirez, Pedram Javaheri and Drew Kann): “The United States' largest reservoir is draining rapidly. Plagued by extreme, climate change-fueled drought and increasing demand for water, Lake Mead… registered its lowest level on record since the reservoir was filled in the 1930s. Lake Mead, a Colorado River reservoir just east of Las Vegas on the Nevada-Arizona border, is poised to become the focal point of one of the country's most significant climate crises: water shortages in the West. Millions of people will be affected in the coming years and decades by the Colorado River shortage alone, researchers say… It's not a threat on the horizon; new projections show the first-ever water shortage along the Colorado River is all but certain to be declared later this year.”
June 15 – Bloomberg (Brian Eckhouse): “The catastrophic drought that’s gripping the U.S. West is claiming a new victim: the hydropower dams that much of the region depends on for electricity supplies. Low water levels in key reservoirs mean that hydropower supplies are declining. One of the hardest hit areas is California, where output has tumbled to the lowest in more than five years. Nationally, the U.S. Energy Information Administration predicts electricity generation from conventional hydro sources will drop about 11% this year from 2020. That’s at a time when electric grids across the West are already forecast to be stretched this summer as heat waves send power demand surging. With less hydropower, the challenge of meeting peak demand may get even tougher, especially in California.”
June 12 – Financial Times (Steven Bernard and Christian Shepherd): “Trillions of dollars of economic activity along China’s east coast, including $974bn in Shanghai alone, are exposed to oceans rising as a result of climate change this century, according to Financial Times analysis… When fine-grained gross domestic product and population data is mapped against projections of rising oceans for the year 2100, it shows that some of China’s most important commercial hubs could suffer from higher tides and annual flooding…”
Geopolitical Watch:
June 14 – Reuters (Sabine Siebold, Steve Holland and Robin Emmott): “NATO leaders warned… China presents ‘systemic challenges,’ taking a forceful stance towards Beijing in a communique at Joe Biden’s first summit with an alliance that Donald Trump openly disparaged. The new U.S. president has urged his fellow NATO leaders to stand up to China's authoritarianism and growing military might, a change of focus for an alliance created to defend Europe from the Soviet Union during the Cold War. The language in the summit's final communique, which will set the path for alliance policy, came a day after the Group of Seven (G7) rich nations issued a statement on human rights in China and Taiwan that Beijing said slandered its reputation. ‘China's stated ambitions and assertive behaviour present systemic challenges to the rules-based international order and to areas relevant to alliance security,’ NATO leaders said in the communique.”
June 15 – Financial Times (Michael Peel in Brussels and Lauren Fedor): “Nato leaders have warned that China poses ‘systemic challenges’ to the rules-based international order in a sign of growing western unease over Beijing’s military ambitions. Members of the transatlantic alliance convening in Brussels… cited disinformation, Chinese military co-operation with Russia and the rapid expansion of Beijing’s nuclear arsenal as part of the threat… The strength of the statement showed how far relations between the west and Beijing have deteriorated in the 18 months since Nato countries last met. Then, the transatlantic alliance had issued a cautious statement about the ‘opportunities and challenges’ presented by China.”
June 15 – Reuters (Tetsushi Kajimoto and Daniel Leussink): “China does not tolerate foreign forces intervening in Taiwan issues and has to make strong responses to such acts of ‘collusion’, the government said… after the island reported the largest incursion to date of Chinese aircraft. Twenty-eight Chinese air force aircraft, including fighters and nuclear-capable bombers, entered Taiwan’s air defence identification zone (ADIZ)… The incident came after the Group of Seven leaders issued a joint statement… scolding China for a series of issues and underscored the importance of peace and stability across the Taiwan Strait, comments China condemned as ‘slander’. Asked at a news conference whether the military activity was related to the G7 statement, Ma Xiaoguang, spokesman for China's Taiwan Affairs Office, said it was Taiwan's government that was to blame for tensions.”
June 14 – Bloomberg: “China lashed out at the U.S., calling the country ‘very ill indeed,’ after President Joe Biden secured support from European allies to present a more united front against Beijing. Foreign Ministry spokesman Zhao Lijian criticized Biden’s efforts during summits of the Group of Seven and North Atlantic Treaty Organization in recent days. The response was the latest sign of Beijing’s frustration with Washington, amid tensions over everything from trade and security to human rights and the pandemic. ‘The U.S. is ill and very ill indeed,’ Zhao told reporters… ‘The G-7 had better take its pulse and come up with a prescription.’”
June 14 – Reuters (Ben Blanchard): “Taiwan will be a ‘force for good’ and continue to seek even greater international support, the presidential office said, after the Chinese-claimed island won unprecedented backing from the Group of Seven of major democracies. The G7 leaders… scolded China over human rights in Xinjiang, called for Hong Kong to keep a high degree of autonomy and underscored the importance of peace and stability across the Taiwan Strait. Taiwan presidential office spokesman Xavier Chang said this was the first time the G7 leaders' communique has stressed the importance of peace and stability in the strait and first time since its founding there was ‘content friendly to Taiwan’, expressing deep thanks for the support. Taiwan and G7 member countries share basic values such as democracy, freedom, and human rights, he added.”
June 14 – Reuters (Ben Blanchard): “A U.S. aircraft carrier group led by the USS Ronald Reagan has entered the South China Sea as part of a routine mission, the U.S. Navy said…, at a time of rising tensions between Washington and Beijing, which claims most the disputed waterway. China frequently objects to U.S. military missions in the South China Sea saying they do not help promote peace or stability, and the announcement follows China blasting the Group of Seven nations for a statement scolding Beijing over a range of issues.”
June 17 – Reuters (Trevor Hunnicutt and Simon Lewis): “President Joe Biden on his first foreign foray sought to cast Russia not as a direct competitor to the United States but as a bit player in a world where Washington is increasingly pre-occupied by China. Aides said Biden wanted to send a message that Putin was isolating himself on the international stage with his actions, ranging from election interference and cyber-attacks against Western nations to his treatment of domestic critics. But Biden could struggle in a parallel attempt to stop the rot in U.S.-Russia relations and deter the threat of nuclear conflict while also talking down Russia, some observers said. ‘The administration wants to de-escalate tensions. It's not clear to me that Putin does,’ said Tim Morrison, a national security adviser during the Trump administration. ‘The only cards he has to play are those of the disruptor.’”
June 15 – Wall Street Journal (Chun Han Wong and Keith Zhai): “Modern lore has it that Mao Zedong’s eldest son, who was killed in a United Nations airstrike during the Korean War, had given away his position by firing up a stove to make egg fried rice. That story didn’t sit right with the Chinese Academy of History, launched two years ago by Chinese leader Xi Jinping to counter negative views of the ruling Communist Party’s past. In November, on the 70th anniversary of Mao Anying’s death, the academy served up another version. Citing what it said were declassified telegrams and eyewitness accounts, the academy said in a social-media post that Mao was killed after enemy forces detected radio transmissions from his commander’s headquarters. ‘These rumormongers have tied up Mao Anying with egg fried rice, gravely dwarfing the heroic image of Mao Anying’s brave sacrifice,’ said the post, which has attracted about 1.9 million views. ‘Their hearts are vicious.’”
June 13 – Bloomberg (Selcan Hacaoglu): “Turkey signed a new $3.6 billion swap agreement with China, increasing the limit on their existing currency arrangement to $6 billion, Turkish President Recep Tayyip Erdogan said… The arrangement with one of Turkey’s biggest trading partners will allow the country to boost trade in local currency and avoid using dollars, supporting the central bank’s reserves.”
The S&P500 fell 1.9% (up 10.9% y-t-d), and the Dow dropped 3.4% (up 8.8%). The Utilities lost 3.1% (up 0.9%). The Banks sank 7.8% (up 21.7%), and the Broker/Dealers dropped 4.2% (up 20.5%). The Transports sank 4.6% (up 16.9%). The S&P 400 Midcaps dropped 4.1% (up 13.2%), and the small cap Russell 2000 fell 4.2% (up 13.2%). The Nasdaq100 added 0.4% (up 9.0%). The Semiconductors fell 1.8% (up 12.8%). The Biotechs declined 1.2% (up 3.0%). With bullion down $113, the HUI gold index sank 11.8% (down 9.5%).
Three-month Treasury bill rates ended the week at 0.0275%. Two-year government yields jumped 11bps to 0.255% (up 13bps y-t-d). Five-year T-note yields rose 14 bps to 0.88% (up 51bps). Ten-year Treasury yields slipped a basis point to 1.44% (up 52bps). Long bond yields sank 13 bps to 2.02% (up 37bps). Benchmark Fannie Mae MBS yields rose eight bps to 1.88% (up 53bps).
Greek 10-year yields rose eight bps to 0.81% (up 19bps y-t-d). Ten-year Portuguese yields gained eight bps to 0.43% (up 40bps). Italian 10-year yields jumped 13 bps to 0.87% (up 33bps). Spain's 10-year yields rose 10 bps to 0.46% (up 41bps). German bund yields gained seven bps to negative 0.20% (up 37bps). French yields increased six bps to 0.16% (up 50bps). The French to German 10-year bond spread narrowed one to 36 bps. U.K. 10-year gilt yields increased four bps to 0.75% (up 56bps). U.K.'s FTSE equities index fell 1.6% (up 8.6% y-t-d).
Japan's Nikkei Equities Index was little changed (up 5.5% y-t-d). Japanese 10-year "JGB" yields added two bps to 0.06% (up 4bps y-t-d). France's CAC40 dipped 0.5% (up 18.3%). The German DAX equities index lost 1.6% (up 12.6%). Spain's IBEX 35 equities index dropped 1.9% (up 11.9%). Italy's FTSE MIB index fell 1.9% (up 13.4%). EM equities were under pressure. Brazil's Bovespa index dipped 0.8% (up 7.9%), and Mexico's Bolsa lost 1.9% (up 14.2%). South Korea's Kospi index added 0.6% (up 13.7%). India's Sensex equities index slipped 0.2% (up 9.6%). China's Shanghai Exchange dropped 1.8% (up 1.5%). Turkey's Borsa Istanbul National 100 index sank 4.8% (down 5.8%). Russia's MICEX equities index declined 1.0% (up 15.6%).
Investment-grade bond funds saw inflows of $3.994 billion, while junk bond funds posted outflows of $2.230 billion (from Lipper).
Federal Reserve Credit last week surged $59.3bn to a record $7.965 TN. Over the past 92 weeks, Fed Credit expanded $4.238 TN, or 114%. Fed Credit inflated $5.154 Trillion, or 183%, over the past 449 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $9.2bn to $3.538 TN. "Custody holdings" were up $119bn, or 3.5%, y-o-y.
Total money market fund assets fell $27bn to $4.578 TN. Total money funds declined $106bn y-o-y, or 2.3%.
Total Commercial Paper added $4.8bn to $1.181 TN. CP was up $170bn, or 16.8%, year-over-year.
Freddie Mac 30-year fixed mortgage rates declined three bps to 2.93% (down 20bps y-o-y). Fifteen-year rates added a basis point to 2.24% (down 34bps). Five-year hybrid ARM rates slipped three bps to 2.52% (down 57bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up ten bps to 3.19% (down 30bps).
Currency Watch:
For the week, the U.S. Dollar Index jumped 1.8% to 92.23 (up 2.6% y-t-d). For the week on the upside, the Brazilian real increased 0.6%. On the downside, the South African rand declined 4.4%, the Norwegian krone 3.8%, the Mexican peso 3.8%, the Swedish krona 3.4%, the Australian dollar 3.0%, the New Zealand dollar 2.7%, the Swiss franc 2.5%, the Canadian dollar 2.5%, the British pound 2.1%, the euro 2.0%, the South Korean won 1.9%, the Singapore dollar 1.4%, and the Japanese yen 0.5%. The Chinese renminbi declined 0.84% versus the dollar this week (up 1.15% y-t-d).
Commodities Watch:
June 16 – Bloomberg: “China has stepped up its campaign to rein in commodity prices and reduce speculation in a bid to ease the threat to its pandemic rebound from soaring raw material costs. State-owned enterprises were ordered to control risks and limit their exposure to overseas commodities markets by the State-owned Assets Supervision and Administration Commission… In a second development, the National Food and Strategic Reserves Administration will soon release state stockpiles of metals including copper, aluminum and zinc…”
June 15 – Wall Street Journal (Ryan Dezember): “Lumber prices are falling back to Earth. Futures for July delivery ended Tuesday at $1,009.90 per thousand board feet, down 41% from the record of $1,711.20 reached in early May. Futures have declined 14 of the past 16 trading days. Cash lumber prices are also crashing.”
The Bloomberg Commodities Index dropped 4.3% (up 16.5% y-t-d). Spot Gold fell 6.0% to $1,764 (down 7.1%). Silver sank 7.6% to $25.79 (down 2.3%). WTI crude added 73 cents to $71.64 (up 48%). Gasoline declined 0.8% (up 54%), and Natural Gas dropped 2.5% (up 27%). Copper sank 8.2% (up 18%). Wheat fell 2.9% (up 4%). Corn lost 7.1% (up 17%). Bitcoin dropped $1,738, or 4.7%, this week to $35,544 (up 22%).
Coronavirus Watch:
June 17 – CNBC (Holly Ellyatt): “The Covid-19 delta variant originally discovered in India is now spreading around the world, becoming the dominant strain in some countries, such as the U.K., and likely to become so in others, like the U.S… The World Health Organization said the variant had been detected in more than 80 countries and it continues to mutate as it spreads. The variant now makes up 10% of all new cases in the United States, up from 6% last week. Studies have shown the variant is even more transmissible than other variants. Scientists have warned that the data suggests the delta variant is around 60% more transmissible than the “alpha” variant… and is more likely to lead to hospitalizations…”
Market Mania Watch:
June 15 – Reuters (Anirban Sen and Krystal Hu): “With more than six months until the year ends, U.S. initial public offerings have already totaled $171 billion, eclipsing the 2020 record of $168 billion, according… Dealogic. Driving the IPO rush are sky-high corporate valuations in the stock market, inflated by the Federal Reserve's low-interest rates and monetary stimulus in the wake of the COVID-19 pandemic. This has fueled a wave of speculative frenzy that benefit not just traditional companies going public, but also special purpose acquisition companies (SPACs) formed strictly to raise money through IPOs. The IPO gold rush is set to reach new heights in the second half of 2021, as a number of high-profile startups… prepare to launch multi-billion dollar share sales.”
June 14 – Financial Times (Chris Flood): “Assets in BlackRock’s exchange traded fund business raced beyond the $3tn milestone for the first time in May as the ETF industry’s global assets surged to an all-time high above $9tn. BlackRock predicted last week that the exchange traded fund industry’s assets would reach $15tn as early as the end of 2025, helped by increasing demand for environmentally friendly strategies and more usage by debt investors.”
June 14 – Bloomberg (Alex Wittenberg): “U.S. junk-bond yields fell to a record low Monday as an accelerating economic recovery and the Federal Reserve’s low interest rate policy lead investors to double down on risk. Speculative-grade corporate bond yields dropped four bps to close at 3.84%, breaching the previous low set in May, according to Bloomberg Barclays index data. Investors have made a beeline to new bond offerings this year while low funding costs and a rally in oil prices have also encouraged companies to seek debt financing. Junk-rated borrowers of all stripes sold a record amount of notes in May, and even first-time issuers have met highly receptive buyers…”
June 15 – CNBC (Jeff Cox): “Inflation is likely temporary, and trades built around it being longer term are now the most overdone in the market, according to Bank of America’s June Global Fund Manager Survey. The closely watched gauge of professional investors indicates that Wall Street is in line with the Federal Reserve’s view that recent price pressures will lighten up as the year goes on and eventually recede to normal levels.”
June 15 – CNBC (MacKenzie Sigalos): “China has long been home to more than half the world’s bitcoin miners, but now, Beijing wants them out ASAP. In May, the government called for a severe crackdown on bitcoin mining and trading, setting off what’s being dubbed in crypto circles as ‘the great mining migration.’ This exodus is underway now, and it could be a game changer for Texas… Despite a lack of reserves that caused dayslong blackouts last winter, Texas often has some of the world’s lowest energy prices…”
Market Instability Watch:
June 17 – Reuters (Saqib Iqbal Ahmed and Saikat Chatterjee): “A hawkish shift from the Federal Reserve has woken up a slumbering dollar, sending the U.S. currency to its highest level in months and stoking expectations that an unwind of bearish positions could fuel more gains. The dollar was on track for its biggest two-day percentage increase against a basket of major currencies in 15 months… Betting against the dollar has been a popular trade for months, as the Fed’s insistence that it would maintain its ultra-dovish stance despite rising inflation drove the currency to a near 3-year low earlier this year. The slightly hawkish shift in Wednesday’s statement appears to be changing that calculus…”
June 14 – Financial Times (Aziza Kasumov): “Amateur traders are on the hunt for further opportunities to bulldoze over funds betting against their favoured stocks… But for those retail traders, repeating the victory of January’s GameStop saga… may be tricky. In part this is because funds have reeled in their negative bets, as the US economic reopening and persistent monetary stimulus from the Federal Reserve continue to fuel a broad market rally… From the start of the year to the middle of May, the average percentage of S&P 500 companies’ shares that were shorted… has dropped from 2.45% to 2.21%, according to… S&P Global Market Intelligence.”
June 17 – Wall Street Journal (Michael S. Derby): “A day after the Federal Reserve boosted the return on a key part of its interest rate control tool kit, a record $756 billion flowed into the central bank’s reverse repo facility on Thursday. The reverse repo facility takes in cash primarily from money-market funds, as well as government-sponsored companies and banks. Until Wednesday, this facility offered a return of zero percent to eligible users, which the Fed moved up to 0.05%, while at the same time lifting another rate, called the interest on excess reserves rate, to 0.15% from 0.10%.”
Inflation Watch:
June 16 – CNBC (Alicia Adamczyk): “The typical U.S. home price hit $287,148 in May 2020, a 13.2% increase from May 2020, according to… Zillow. That’s a record rise since the company started collecting the housing price data in 1996. The cities experiencing the biggest price hikes include Austin, Texas, which saw a 30.5% increase over 2020; Phoenix, which was up 23.5%; and Salt Lake City, with prices climbing 20.6% in the same time frame. Collectively, typical prices grew 10% or more in 46 of the U.S.’s 50 largest metros. House buyers can expect prices to keep climbing in the year to come: Zillow economists are forecasting increases of 14.9% by May 2022.”
June 15 – CNBC (Jeff Cox): “Producer prices rose at their fastest annual clip in nearly 11 years in May as inflation continued to build in the U.S. economy… The 6.6% surge was the biggest 12-month rise in the final demand index since the Bureau of Labor Statistics began tracking the data in November 2010. On a monthly basis, the producer price index for final demand rose 0.8%, ahead of the Dow Jones estimate of 0.5%.”
June 14 – Bloomberg (Matthew Boesler and Alex Tanzi): “U.S. consumers’ expectations for inflation over the medium term rose to an eight-year high in May, according to a Federal Reserve Bank of New York survey. The median survey respondent anticipated an inflation rate of 3.6% in three years, up from 3.1% in April… The reading marked the highest level since August 2013, while short-term expectations, over one year, reached a record.”
June 16 – CNBC (Lorie Konish): “Rising consumer costs have helped push the latest estimate for next year’s Social Security cost-of-living adjustment to 5.3%. Whether that will actually be the bump retirees see to their monthly checks in 2022 depends a lot on the economy, including whether the Federal Reserve decides to raise interest rates. The 5.3% estimate was calculated by The Senior Citizens League… based on Consumer Price Index data from the Bureau of Labor Statistics through May. If that amount were to go through, it would be the highest annual adjustment since 2009, when benefits saw a 5.8% boost. In 2021, Social Security beneficiaries received a 1.3% increase to their monthly checks.”
June 15 – Bloomberg (Michael Hirtzer and Dominic Carey): “Chicken-sandwich fever means poultry is pacing U.S. food inflation in the meat case. U.S. producer prices for processed poultry jumped to an all-time high in May, climbing 2.1% in the eighth straight monthly increase, U.S. government data showed... Gains in poultry outpaced the 0.8% increase in the broader producer price index.”
June 14 – CNBC (Hugh Son): “Jamie Dimon believes cash is king – at least for the time being. JPMorgan Chase has been ‘effectively stockpiling’ cash rather than using it to buy Treasuries or other investments because of the possibility higher inflation will force the Federal Reserve to boost interest rates, Dimon said… ‘We have a lot of cash and capability and we’re going to be very patient, because I think you have a very good chance inflation will be more than transitory,’ said Dimon, longtime JPMorgan CEO. ‘If you look at our balance sheet, we have $500 billion in cash, we’ve actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates,’ Dimon said. ‘I do expect to see higher rates and more inflation, and we’re prepared for that.’”
Biden Administration Watch:
June 15 – Associated Press (Lisa Mascaro and Kevin Freking): “Patience running thin, Democratic leaders are laying the groundwork for a go-it-alone approach on President Joe Biden’s big jobs and families infrastructure plans even as the White House continues negotiating with Republicans on a much more scaled-back $1 trillion proposal. A top White House adviser assured House Democrats during a closed-door session… there would be a fresh assessment by next week on where talks stand with the Republicans. But Senate Majority Leader Chuck Schumer announced he is moving ahead, huddling privately Wednesday with the Senate Budget Committee to prepare for July votes on a majority-rules approach as wary Democrats prepare to lift Biden’s $1.7 billion American Jobs Plan and $1.8 billion American Families Plan to passage.”
June 17 – Wall Street Journal (Andrew Duehren and Kristina Peterson): “A growing bipartisan group of lawmakers and the White House haggled over how to finance a roughly $1 trillion infrastructure proposal, awaiting feedback from President Biden as Democrats began discussions on a separate economic package that could cost up to $6 trillion. Since negotiations between Mr. Biden and a group of Senate Republicans collapsed last week, an alternative set of Republican and Democratic senators have held talks on a infrastructure plan that would spend $973 billion over five years… Initially a group of five Democrats and five Republicans, the group expanded to include 11 Republicans and 10 members of the Democratic caucus…”
Federal Reserve Watch:
June 16 – Bloomberg (Craig Torres): “Federal Reserve officials have said for months that price increases are temporary. On Wednesday, they weren’t so sure. ‘Is there a risk that inflation will be higher than we think? Yes,’ Chair Jerome Powell told a press conference. He spoke after financial markets were taken by surprise when policy makers signaled they expect to make not one, but two, hikes to interest rates in 2023 from near zero now. The Fed has been in a tug-and-pull with investors and critics over whether recent spikes in prices as the economy reopens from the pandemic will be transitory, as officials have argued, or prove more lasting. ‘There is a lot of uncertainty,’ Powell said. Indeed, Fed policy makers moved up their forecasts for inflation over the next three years…”
June 16 – New York Times (Jeanna Smialek): “Federal Reserve officials signaled… they expected to raise interest rates from rock bottom sooner than they had previously forecast and that they were taking baby steps toward reducing their vast bond purchases — tweaks that, together, demonstrated their increasing confidence that the economy would rebound robustly from the pandemic. Fed policymakers expect to make two interest rate increases by the end of 2023, the central bank’s updated summary of economic projections showed... Previously, more than half of officials had anticipated that rates would stay near zero, where they have been since March 2020, into at least 2024. Officials now see rates rising to 0.6% by the end of 2023, up from 0.1%. The Fed chair, Jerome H. Powell, played down the significance of those tentative rate forecasts during a postmeeting news conference, emphasizing that borrowing costs would remain low for a long time.”
June 16 – Bloomberg (Alexandra Harris): “The Federal Reserve… tweaked the rates on some of the tools used to help control the benchmark even as it left unchanged the overall target range for the fed funds rate. The upward shift to the so-called administered rates comes amid the growing dollar glut in short-term funding markets that’s outstripping the supply of investable securities and weighing down front-end rates, despite the steadiness of the Fed’s key benchmark at 0.06%. Fed officials decided to raise the rate on its overnight reverse repurchase-agreement facility by 5 bps to 0.05%... Policy makers also boosted the interest paid on excess reserves by 5 bps to 0.15%, but left the main monetary policy goal unchanged at 0% to 0.25%. At present, there’s $521 billion in cash squirreled away at the overnight RRP facility.”
June 18 – Dow Jones (Michael S. Derby): “The Federal Reserve Bank of St. Louis President James Bullard said the economy is seeing more inflation than he and his colleagues had expected, and noted that while there is substantial uncertainty about the outlook, it could lead to a rate increase next year… ‘The inflationary impulse, I think, is more intense than we were expecting,’ Mr. Bullard said. ‘You could see even some upside risks to the inflation forecast, but that's okay’ given that the central bank had hoped to get inflation back up over 2% for a time to make up for extended periods of falling short of that goal, he said. At the Fed meeting, officials projected 3.4% inflation this year, up from the 2.4% forecast made in March. Mr. Bullard also noted that Chairman Jerome Powell opened the door… to a central bank debate on paring back on bond-buying stimulus efforts.”
June 18 – Bloomberg (Matthew Boesler): “It may be appropriate for the Federal Reserve to begin raising interest rates next year given a forecast for inflation above the U.S. central bank’s 2% target, St. Louis Fed President James Bullard said. ‘I put us starting in late 2022,’ Bullard said… ‘But you do have to have the idea that these are related to what the forecast is. So, my forecast said 3% inflation in 2021 -- core PCE inflation -- and 2.5% core PCE inflation in 2022,’ he said. ‘If that’s what you think is going to happen, then by the time you get to the end of 2022, you’d already have two years of 2.5-3% inflation.’”
U.S. Bubble Watch:
June 16 – Reuters (Jonnelle Marte): “Service sector businesses in the New York region continued to stage a comeback in early June, when business activity grew at a record fast pace, according to a survey released… by the Federal Reserve Bank of New York. The business activity index increased by four points to 43.2, according to the survey of business leaders for service sector firms in New York, northern New Jersey, and southwestern Connecticut.”
June 17 – Wall Street Journal (Xavier Fontdegloria): “Manufacturing activity in the Philadelphia area continued to expand at a robust pace in June, data… the Federal Reserve Bank of Philadelphia showed. The index for current general activity decreased to 30.7 in June from 31.5 in May… The prices paid diffusion index rose for the second consecutive month, gaining about 4 points to 80.7, its highest reading since June 1979. The prices received index rose for the fourth consecutive month, moving up about 9 points to 49.7, its highest reading since October 1980, the report said.”
June 17 – Associated Press (Paul Wiseman): “The number of Americans applying for unemployment benefits rose last week for the first time since April despite widespread evidence that the economy and the job market are rebounding steadily from the pandemic recession… Jobless claims rose 37,000 from the week before to 412,000. As the job market has strengthened, the number of weekly applications for unemployment aid has fallen for most of the year.”
June 16 – Reuters (Evan Sully): “U.S. applications for home mortgages rose last week following three consecutive weeks of declines as purchase activity rebounded despite a limited supply of houses for sale… The purchase index increased 1.6% from a week earlier… ‘Purchase applications were still down 17% from a year ago, which was when the mortgage market started seeing large post-shutdown increases in activity.’”
June 13 – Wall Street Journal (Lauren Weber): “More U.S. workers are quitting their jobs than at any time in at least two decades, signaling optimism among many professionals while also adding to the struggle companies face trying to keep up with the economic recovery. The wave of resignations marks a sharp turn from the darkest days of the pandemic… In April, the share of U.S. workers leaving jobs was 2.7%, according to the Labor Department, a jump from 1.6% a year earlier to the highest level since at least 2000. The shift by workers into new jobs and careers is prompting employers to raise wages and offer promotions to keep hold of talent.”
June 16 – Reuters (Lucia Mutikani): “U.S. homebuilding rebounded less than expected in May as very expensive lumber and shortages of other materials continued to constrain builders’ ability to take advantage of an acute shortage of houses on the market. The report… also showed permits for future home construction falling to a seven-month low. Housing completions also declined while the number of homes authorized for construction but not yet started rose to the highest level since 1999, indicating supply will likely remain tight for a while and boost house price inflation. ‘Shortages of materials and labor have builders struggling to increase production of new homes, though the demand remains strong,’ said Robert Frick, corporate economist at Navy Federal Credit Union... ‘Potential home buyers should expect tight inventories and rising prices for both new and existing homes for the foreseeable future.’”
June 15 – CNBC (Diana Olick): “Even as the coronavirus pandemic ebbs and Americans get back to work and play, they still want more space at home. But with home prices hitting record highs, demand for single-family rental homes is soaring – and so are the rents. Single-family rents were up 5.3% year over year in April, rising from a 2.4% increase in April 2020, according to CoreLogic. That is the largest gain in nearly 15 years. Rents for single-family detached homes (not townhomes), were up an even stronger 7.9% compared with a year ago…”
June 15 – Reuters (Lucia Mutikani): “U.S. retail sales dropped more than expected in May, with spending rotating back to services from goods as vaccinations allow Americans to travel and engage in other activities that had been restricted by the COVID-19 pandemic. Despite last month's decline…, the trend in retail sales remains strong. Sales in April were revised sharply up and are well above their pre-pandemic level, keeping intact expectations of double-digit growth in both consumer spending and the economy this quarter.”
June 16 – Reuters (Noel Randewich): “Fannie Mae… cut its forecast for home sales in the second and third quarters of 2021, blaming a lack of listings and a slowing pace of new construction. The No. 1 U.S. mortgage financing agency said in a press release that its Economic and Strategic Research Group sees home sales at 6.6 million and 6.5 million in the second and third quarters, respectively. That is down from its previous forecast of 6.9 million and 6.7 million home sales respectively in the periods. Supply-side factors are limiting construction and mortgage origination, Fannie Mae said.”
June 16 – Wall Street Journal (Nicole Friedman): “Construction of new housing in the past 20 years fell 5.5 million units short of long-term historical levels, according to a new National Association of Realtors report, which is calling for a ‘once-in-a-generation’ policy response. The industry lobbying group said it hopes the report…, persuades lawmakers to include housing investments in any infrastructure package. U.S. builders added 1.225 million new housing units, on average, each year from 2001 to 2020… That figure is down from an annual average of 1.5 million new units from 1968 to 2000.”
June 15 – Reuters (John Kemp): “U.S. employees are feeling confident enough to push for better pay and conditions, despite the high level of unemployment after the pandemic, a sign the balance of power is shifting in the job market. The result should be a strong and sustained expansion in consumer spending and business activity over the next year, which will be welcomed by policymakers at the central bank and in the White House. However, it will also fuel faster inflation and probably force the Federal Reserve to scale back its bond buying programme and raise interest rates earlier than top policymakers have indicated so far.”
June 13 – Wall Street Journal (Austen Hufford): “In the latest sign of the U.S. economy’s post-pandemic disarray, even companies that have built domestic supply chains are running up against extreme shortages of goods and labor. Furniture chain Room & Board Inc. procures more than 90% of its products inside the U.S… —a contrast to many of its competitors, whose supply chains stretch back to factories in China. But amid sky-high consumer demand and shortages of labor and many materials, some Room & Board customers are waiting months for sofas and dressers. About half the items it sells are in stock right now, down from 90% normally.”
Fixed-Income Bubble Watch:
June 14 – Wall Street Journal (Sam Goldfarb): “Before the pandemic, U.S. companies were borrowing heavily at low interest rates. When Covid-19 lockdowns triggered a recession, they didn’t pull back. They borrowed even more and soon paid even less. After a brief spike, interest rates on corporate debt plummeted to their lowest level on record, bringing a surge in new bonds. Nonfinancial companies issued $1.7 trillion of bonds in the U.S. last year, nearly $600 billion more than the previous high, according to Dealogic. By the end of March, their total debt stood at $11.2 trillion… That torrent of inexpensive money has benefited all types of businesses. It helped cruise operators, airlines and movie theaters weather the pandemic by replacing some lost revenue with cash raised from bond sales. It allowed thriving businesses to stock up on cash and to save money by refinancing older debt. And it permitted companies that were struggling before the pandemic to ease the threat of bankruptcy by issuing new long-term debt.”
June 18 – Financial Times (Joe Rennison in London and Eric Platt): “The premium between corporate debt and US Treasuries has dropped to its lowest level in more than a decade in a sign that investors are growing confident recent rises in inflation will not hinder the economic recovery. The collapse in the difference between investment yields — known as the spread — means buyers are demanding a much lower premium than previously for owning corporate debt, which is more risky than super-safe US Treasuries. The spreads between US Treasury and corporate bond yields have tightened markedly this year, as investors gained confidence and clamoured to own even marginally higher yielding assets in a low return world.”
China Watch:
June 15 – Bloomberg: “China Evergrande Group fell after Caixin’s WeNews reported that a local government discussed paring the property giant’s stake in a regional lender and a new policy could curb a key source of financing for developers. Authorities in the northeastern Liaoning province held discussions with Evergrande to inject state capital into Shengjing Bank Co. to dilute Evergrande’s stake… Evergrande is the biggest shareholder of the bank headquartered in Liaoning.”
June 16 – Financial Times (Edward White and Thomas Hale): “Shares in the main unit of Suning have been suspended as financial woes at the Chinese retailer and owner of football club Inter Milan’s escalate, underscoring pressures in the country’s credit markets. The halt in the group’s… stock on Wednesday came after a Beijing court this week ordered a freeze on more than a quarter of founder Zhang Jindong’s shares in Suning’s retail arm… Suning is one of a clutch of Chinese conglomerates including property group Evergrande and distressed debt investor Huarong that are being closely watched by investors. Some are concerned over risks potentially spreading through the financial sector.”
June 14 – Bloomberg (Finbarr Flynn): “The size and type of defaults that have occurred in China in recent times indicate that the notion of ‘too big to fail’ may no longer apply to the nation’s borrowers, according to Goldman Sachs… There has been a noticeable up-tick in defaults by Chinese state-owned enterprises since late 2019 and some of the borrowers that have failed to repay debt recently… have had large amounts of outstanding bonds, analysts including Kenneth Ho wrote… ‘Even for large corporates or for state-related entities, policy makers are much less willing to extend support,’ Goldman Sachs analysts wrote. ‘Policy makers are now less likely to conduct full bailouts than compared with the past.’”
June 16 – Bloomberg: “China’s crackdown on shadow banking is taking aim at more than $1 trillion of opaque investments sold by banks as low risk and high yield, even while funds were channeled to riskier borrowers such as developers. Banks and wealth mangers can no longer use money invested in so-called cash management products to buy long-term debt or bonds rated below AA+… An estimated 2.5 trillion yuan ($390.5bn) of the products are currently invested in assets that will soon become non-compliant, and need to be swapped for lower-yielding, high quality investments by the end of next year.”
Global Bubble Watch:
June 17 – Bloomberg: “The global shipping industry, already exhausted by pandemic shocks that are adding to inflation pressures and delivery delays, faces the biggest test of its stamina yet. When one of China’s busiest ports announced it wouldn’t accept new export containers in late-May because of a Covid-19 outbreak, it was supposed to be up and running again in a few days. But as the partial shutdown drags on, it’s further snarling trade routes and lifting record freight prices even higher. Yantian Port now says it will be back to normal by the end of June, but just as it took several weeks for ship schedules and supply chains to recover from the vessel blocking the Suez Canal in March, it may take months for the cargo backlog in southern China to clear while the fallout ripples to ports worldwide.”
June 15 – Bloomberg (Enda Curran): “Real estate prices around the world are flashing the kind of bubble warnings that haven’t been seen since the run up to the 2008 financial crisis, according to Bloomberg Economics. New Zealand, Canada and Sweden rank as the world’s frothiest housing markets, based on the key indicators used in the Bloomberg Economics dashboard. The U.K. and the U.S. are also near the top of the risk rankings. ‘A cocktail of ingredients is sending house prices to unprecedented levels worldwide,’ economist Niraj Shah wrote… ‘Record low interest rates, unparalleled fiscal stimulus, lockdown savings ready to be used as deposits, limited housing stock, and expectations of a robust recovery in the global economy are all contributing.’”
Central Banker Watch:
June 17 – Financial Times (Martin Arnold): “European central bankers are meeting in Frankfurt on Friday to debate issues ranging from changing the European Central Bank’s inflation target to making monetary policy greener, in an attempt to recalibrate eurozone policymaking for the years to come. The three-day retreat on the hills overlooking Germany’s financial centre… will test consensus over areas that will form the backbone of a strategy review ECB chief Christine Lagarde plans to outline in September. The meeting is ‘crucial for achieving the maximum possible consensus on a number of open issues’, said Yannis Stournaras, governor of Greece’s central bank and ECB council member. ‘By the end of the summer we will have agreed on a new strategy.’”
June 14 – Bloomberg (Carolynn Look): “European Central Bank tensions over how and when to discuss ending its emergency bond-buying program are starting to bubble over into the public domain. Little more than an hour after President Christine Lagarde said in an interview that it is ‘far too early’ to debate when to end the stimulus, Austrian central-bank Governor Robert Holzmann said the program will end in March unless there is another severe wave of coronavirus infections. The bond-buying program ‘was established and voted for to end by March 2022, and for the time being, if nothing changes in the sense that there is no fourth or fifth confinement, it will end,’ he told Bloomberg Television.”
June 14 – Reuters (Swati Pandey): “Australia’s central bank signaled… its willingness to extend its bond purchase programme next month and laid out various options for the plan with the aim of meeting its goals of boosting employment and inflation. Minutes of the Reserve Bank of Australia's (RBA) June policy meeting showed members discussed tapering and even ceasing its massive quantitative easing campaign when the current A$100 billion ($77bn) round expires in September.”
Europe Watch:
June 18 – Bloomberg (Yoshiaki Nohara and Yuko Takeo): “Italian Prime Minister Mario Draghi made a bold call for more economic stimulus in European countries to help bring growth back to pre-pandemic levels. ‘Protracted uncertainty means that the case for monetary and fiscal expansion remains compelling,’ the former European Central Bank chief said… ‘We will not reach this objective without additional effort. So we must act on it promptly and effectively.’ That call for all-in stimulus from an ex-central banker known for expansive policy easing may unsettle countries such as Germany…”
June 17 – Bloomberg (Reto Gregori and Arne Delfs): “Armin Laschet, the front-runner to succeed Angela Merkel as German chancellor, called for the reinstatement of European Union budget rules after the coronavirus pandemic subsides. ‘When this crisis is over, when its effects on the global economy are over, German as well as European politics will have to return to the stability politics as it is defined in the Maastricht treaty,” Laschet said…”
EM Watch:
June 16 – Wall Street Journal (Caitlin Ostroff): “Early tightening of the Federal Reserve’s policy could ripple across emerging markets that are dependent on the U.S. dollar. Prime among them is Turkey. The Turkish lira has come under pressure in recent weeks as investors try to assess whether the country’s central bank will heed the demands of its president to cut interest rates. But a rate cut could drag the lira down further at the same time that the country’s high inflation rate is already diminishing the currency’s buying power. Turkey’s economy is among the most vulnerable to signs the Fed is going to raise rates since a stronger dollar makes it harder for Turkey to pay its foreign-currency debts.”
June 14 – Bloomberg (Tuhin Kar and Bloomberg Automation): “India's consumer prices rose more than economists expected in May. Consumer prices rose 6.3% y/y (estimate +5.38%) in May…”
Japan Watch:
June 15 – Reuters (Tetsushi Kajimoto and Daniel Leussink): “Japan’s exports rose at the fastest pace since 1980 in May and a key gauge of capital spending grew… The jump in exports largely reflected a rebound in shipments from last year’s pandemic-driven plunge, but was a welcome sign as the economy struggles to rebound from the first quarter's doldrums amid a prolonged coronavirus state of emergency.”
June 13 – Wall Street Journal (Phred Dvorak): “Japan built the world’s third-largest economy on an industrial base powered by imported oil, gas and coal. Now, it is planning to shift a big chunk of that power to hydrogen, in one of the world’s biggest bets on an energy source long dismissed as too costly and inefficient to be realistic. The change is a vital piece of the country’s plan to eliminate carbon emissions in 30 years. If it succeeds, it could also lay the groundwork for a global supply chain that would finally let hydrogen come into its own as an energy source and further sideline oil and coal—similar to the way the country pioneered liquefied natural gas in the 1970s, some experts say.”
June 17 – Bloomberg (Yoshiaki Nohara and Yuko Takeo): “Japan’s inflation edged into positive territory for the first time in 14 months as rising commodity costs fed higher gasoline prices at the pump… Consumer prices excluding fresh food ticked up 0.1% compared with a year earlier…”
Leveraged Speculation Watch:
June 12 – New York Times (Jesse Drucker and Danny Hakim): “There were two weeks left in the Trump administration when the Treasury Department handed down a set of rules governing an obscure corner of the tax code. Overseen by a senior Treasury official whose previous job involved helping the wealthy avoid taxes, the new regulations represented a major victory for private equity firms. They ensured that executives in the $4.5 trillion industry… could avoid paying hundreds of millions in taxes… The Trump administration’s farewell gift to the buyout industry was part of a pattern that has spanned Republican and Democratic presidencies and Congresses: Private equity has conquered the American tax system.”
Social, Political, Environmental, Cybersecurity Instability Watch:
June 18 – Wall Street Journal (Katherine Blunt and Jim Carlton): “States across the West are at risk of electricity shortages this summer as a crippling drought reduces the amount of water available to generate hydroelectric power. Some of the region’s largest reservoirs are at historically low levels after a dry winter and spring reduced the amount of snowpack and precipitation feeding rivers and streams. The conditions are especially dire in drought-stricken California, where officials say the reservoir system has seen an unprecedented loss of runoff this spring—800,000 acre-feet, or enough to supply more than a million households for a year.”
June 16 – CNBC (Emma Newburger): “An extreme heat wave gripping the western United States will intensify and spread this week, creating dangerous conditions amid the worst drought in the last two decades and raising concerns about severe wildfires and electrical grid failures. More than 40 million people in the country are forecast to experience triple-digit temperatures this week, and roughly 200 million people are projected to see temperatures over 90 degrees Fahrenheit. More than three-fourths of the West is in severe drought… Temperatures in some areas could surpass 120 degrees, and excessive-heat warnings are in place for several states. Nevada and Arizona are forecast to see record temperatures of 125 and 128 degrees, respectively.”
June 16 – Bloomberg (Dan Murtaugh, Josh Saul and Naureen Malik): “California is at risk of blackouts as a sprawling heat wave smothers the western U.S. Cities across China’s industrial heartland are rationing electricity. European power prices are far higher than usual for this time of year. Droughts are drying up reservoirs from Brazil to Taiwan. Welcome to the future of rising temperatures and the escalating fight just to keep lights on. Mix extreme heat and longer droughts, surging post-pandemic power demand, rising fossil fuel prices and a bumpy transition into renewables, and the result is a severe global power crunch. For millions of households and businesses around the world it could be a long, hot summer of higher bills, periodic rationing and, in the worst case, blackouts. Higher energy costs will also add to the inflationary pressures coursing through the global economy. The extreme weather -- even before the onset of hurricane and typhoon seasons -- highlights the real world impact of climate change.”
June 17 – Bloomberg (David R. Baker, Mark Chediak and Will Wade): “California is getting an early taste of the summer that state officials have been dreading all year. A heat wave spanning much of the western U.S. has brought triple-digit temperatures to parts of the state, sending power demand soaring and threatening blackouts once again. Trees, grass and brush left parched by a nearly rain-free winter are catching flame. The drought stretching from West Texas to the California coast and north to the Canadian border is already putting power grids to the test as hydro generation dries up just as homes blast their air conditioners.”
June 17 – CNN (Rachel Ramirez, Pedram Javaheri and Drew Kann): “The United States' largest reservoir is draining rapidly. Plagued by extreme, climate change-fueled drought and increasing demand for water, Lake Mead… registered its lowest level on record since the reservoir was filled in the 1930s. Lake Mead, a Colorado River reservoir just east of Las Vegas on the Nevada-Arizona border, is poised to become the focal point of one of the country's most significant climate crises: water shortages in the West. Millions of people will be affected in the coming years and decades by the Colorado River shortage alone, researchers say… It's not a threat on the horizon; new projections show the first-ever water shortage along the Colorado River is all but certain to be declared later this year.”
June 15 – Bloomberg (Brian Eckhouse): “The catastrophic drought that’s gripping the U.S. West is claiming a new victim: the hydropower dams that much of the region depends on for electricity supplies. Low water levels in key reservoirs mean that hydropower supplies are declining. One of the hardest hit areas is California, where output has tumbled to the lowest in more than five years. Nationally, the U.S. Energy Information Administration predicts electricity generation from conventional hydro sources will drop about 11% this year from 2020. That’s at a time when electric grids across the West are already forecast to be stretched this summer as heat waves send power demand surging. With less hydropower, the challenge of meeting peak demand may get even tougher, especially in California.”
June 12 – Financial Times (Steven Bernard and Christian Shepherd): “Trillions of dollars of economic activity along China’s east coast, including $974bn in Shanghai alone, are exposed to oceans rising as a result of climate change this century, according to Financial Times analysis… When fine-grained gross domestic product and population data is mapped against projections of rising oceans for the year 2100, it shows that some of China’s most important commercial hubs could suffer from higher tides and annual flooding…”
Geopolitical Watch:
June 14 – Reuters (Sabine Siebold, Steve Holland and Robin Emmott): “NATO leaders warned… China presents ‘systemic challenges,’ taking a forceful stance towards Beijing in a communique at Joe Biden’s first summit with an alliance that Donald Trump openly disparaged. The new U.S. president has urged his fellow NATO leaders to stand up to China's authoritarianism and growing military might, a change of focus for an alliance created to defend Europe from the Soviet Union during the Cold War. The language in the summit's final communique, which will set the path for alliance policy, came a day after the Group of Seven (G7) rich nations issued a statement on human rights in China and Taiwan that Beijing said slandered its reputation. ‘China's stated ambitions and assertive behaviour present systemic challenges to the rules-based international order and to areas relevant to alliance security,’ NATO leaders said in the communique.”
June 15 – Financial Times (Michael Peel in Brussels and Lauren Fedor): “Nato leaders have warned that China poses ‘systemic challenges’ to the rules-based international order in a sign of growing western unease over Beijing’s military ambitions. Members of the transatlantic alliance convening in Brussels… cited disinformation, Chinese military co-operation with Russia and the rapid expansion of Beijing’s nuclear arsenal as part of the threat… The strength of the statement showed how far relations between the west and Beijing have deteriorated in the 18 months since Nato countries last met. Then, the transatlantic alliance had issued a cautious statement about the ‘opportunities and challenges’ presented by China.”
June 15 – Reuters (Tetsushi Kajimoto and Daniel Leussink): “China does not tolerate foreign forces intervening in Taiwan issues and has to make strong responses to such acts of ‘collusion’, the government said… after the island reported the largest incursion to date of Chinese aircraft. Twenty-eight Chinese air force aircraft, including fighters and nuclear-capable bombers, entered Taiwan’s air defence identification zone (ADIZ)… The incident came after the Group of Seven leaders issued a joint statement… scolding China for a series of issues and underscored the importance of peace and stability across the Taiwan Strait, comments China condemned as ‘slander’. Asked at a news conference whether the military activity was related to the G7 statement, Ma Xiaoguang, spokesman for China's Taiwan Affairs Office, said it was Taiwan's government that was to blame for tensions.”
June 14 – Bloomberg: “China lashed out at the U.S., calling the country ‘very ill indeed,’ after President Joe Biden secured support from European allies to present a more united front against Beijing. Foreign Ministry spokesman Zhao Lijian criticized Biden’s efforts during summits of the Group of Seven and North Atlantic Treaty Organization in recent days. The response was the latest sign of Beijing’s frustration with Washington, amid tensions over everything from trade and security to human rights and the pandemic. ‘The U.S. is ill and very ill indeed,’ Zhao told reporters… ‘The G-7 had better take its pulse and come up with a prescription.’”
June 14 – Reuters (Ben Blanchard): “Taiwan will be a ‘force for good’ and continue to seek even greater international support, the presidential office said, after the Chinese-claimed island won unprecedented backing from the Group of Seven of major democracies. The G7 leaders… scolded China over human rights in Xinjiang, called for Hong Kong to keep a high degree of autonomy and underscored the importance of peace and stability across the Taiwan Strait. Taiwan presidential office spokesman Xavier Chang said this was the first time the G7 leaders' communique has stressed the importance of peace and stability in the strait and first time since its founding there was ‘content friendly to Taiwan’, expressing deep thanks for the support. Taiwan and G7 member countries share basic values such as democracy, freedom, and human rights, he added.”
June 14 – Reuters (Ben Blanchard): “A U.S. aircraft carrier group led by the USS Ronald Reagan has entered the South China Sea as part of a routine mission, the U.S. Navy said…, at a time of rising tensions between Washington and Beijing, which claims most the disputed waterway. China frequently objects to U.S. military missions in the South China Sea saying they do not help promote peace or stability, and the announcement follows China blasting the Group of Seven nations for a statement scolding Beijing over a range of issues.”
June 17 – Reuters (Trevor Hunnicutt and Simon Lewis): “President Joe Biden on his first foreign foray sought to cast Russia not as a direct competitor to the United States but as a bit player in a world where Washington is increasingly pre-occupied by China. Aides said Biden wanted to send a message that Putin was isolating himself on the international stage with his actions, ranging from election interference and cyber-attacks against Western nations to his treatment of domestic critics. But Biden could struggle in a parallel attempt to stop the rot in U.S.-Russia relations and deter the threat of nuclear conflict while also talking down Russia, some observers said. ‘The administration wants to de-escalate tensions. It's not clear to me that Putin does,’ said Tim Morrison, a national security adviser during the Trump administration. ‘The only cards he has to play are those of the disruptor.’”
June 15 – Wall Street Journal (Chun Han Wong and Keith Zhai): “Modern lore has it that Mao Zedong’s eldest son, who was killed in a United Nations airstrike during the Korean War, had given away his position by firing up a stove to make egg fried rice. That story didn’t sit right with the Chinese Academy of History, launched two years ago by Chinese leader Xi Jinping to counter negative views of the ruling Communist Party’s past. In November, on the 70th anniversary of Mao Anying’s death, the academy served up another version. Citing what it said were declassified telegrams and eyewitness accounts, the academy said in a social-media post that Mao was killed after enemy forces detected radio transmissions from his commander’s headquarters. ‘These rumormongers have tied up Mao Anying with egg fried rice, gravely dwarfing the heroic image of Mao Anying’s brave sacrifice,’ said the post, which has attracted about 1.9 million views. ‘Their hearts are vicious.’”
June 13 – Bloomberg (Selcan Hacaoglu): “Turkey signed a new $3.6 billion swap agreement with China, increasing the limit on their existing currency arrangement to $6 billion, Turkish President Recep Tayyip Erdogan said… The arrangement with one of Turkey’s biggest trading partners will allow the country to boost trade in local currency and avoid using dollars, supporting the central bank’s reserves.”
