Larry Summers: “I was glad to see him moving towards beginning tapering this fall. I still think he’s operating within the same paradigm that he’s been operating in – which… I don’t think is quite right. He made a whole set of arguments on the serene side with respect to inflation. And obviously, he may turn out to be correct in those arguments – and there are a lot of people who agree with him. But I was struck, for example, that he didn’t say anything about the housing sector. That’s the largest part of the consumer price indices. I saw a statistic… that said, on average, when a tenant moves into a rented residence, they’re paying 17% more than the old tenant. That suggests a lot of rental price inflation. If you look at owner-occupied houses, the prices are taking off. None of that has been reflected yet in our price indices. And yet, on any commonsense definition, that’s surely inflation. And, so, my guess is you’ll start to see the housing component of inflation show up as rising pretty rapidly. Or if you don’t, it will reflect defects in the way we create the price indices.
The Chairman mentioned, rightly, that we’ve got record levels of job openings, and workers are turning over very fast. Workers are quitting their jobs. I’d have thought that all of that would be a signal that in a labor shortage economy, you’d be starting to see much more rapid wage increases than you’d seen historically, but that that was a process that would take a certain amount of time. He was more serene about all of that. He was referencing that we had had 4% unemployment before covid without rapidly accelerating inflation. He was right about that, of course. But I see that we’re having far more structural change in the economy, as businesses rethink their business models – when people aren’t going to be coming into the office, as people rethink their lives after a year without commuting – as the whole structure of the economy changes. And I think with all that structural change, you’re likely to see some substantial increase in the level of unemployment that the economy can sustain without excessive inflation.
So, there're no certainties, but I think the inflation risks are graver than those that the Chairman recognized. I think that the toxic side effects of QE are rather greater than the Chairman recognized. So, in the range of places where this speech seemed likely to come down, I think it came down in a relatively good place from my point of view – pointing towards a taper this year. But in terms of the issues I’ve been concerned about for quite some time - that we’re kind of making a bit of a paradigm error, I didn’t expect that the speech was going to represent a deviation from the paradigm, and I don’t think it did…”
“If you think it’s a good idea in order to stimulate the economy – I think the risks are more on the overheating side – but if one thought that it was a good idea to stimulate the economy by printing interest-bearing money, the question would be what you should spend the money on. Out of all the things you could spend the money on, the thing that it seems to me that would help the wealthy most and do the least to promote demand, is buying up financial assets. And that’s what QE is. I’d rather see us – to the extent we want to do this – use fiscal policy. Again, I don’t see the problem now as stimulating the economy. I see the risk is overheating the economy. But if we want to provide stimulus, I don’t think QE is the right way to do it.”
One cannot overstate the critical role played by central banking, especially now that their policies so dictate market excess. History informs us that sound “money” is fundamental to stable economic development. Moreover, monetary stability is elemental to social and political stability. Because we entrust such momentous responsibility to a small group of unelected central bankers, we should at least expect they maintain a cautious approach to monetary management. Their decisions can cause great harm, so they should act accordingly. That they can today be so dismissive of inflation and Bubble risks is deeply troubling.
We’re now into a third decade of experimental central banking, of which I have chronicled the past two. The experiment has failed. Monetary disorder has spiraled completely out of control. I am reminded of the “rules vs. discretion” policy debate that dates back to the Currency School vs. Banking School clashes from nineteenth century England. It was recognized generations ago that the risk inherent in discretionary central banking was that one mistake would invariably lead to a series of Bigger Mistakes.
I appreciate Larry Summers’ insight, and he’s clearly more diplomatic than I ever could be. This is an unmitigated fiasco. Federal Reserve credit has now inflated $4.154 TN over the past 77 weeks – and is up $4.597 TN – or 123% – in 102 weeks. Let’s not forget the current QE program began months before the onset of the pandemic. After beginning 2008 at $850 billion, Federal Reserve assets have inflated almost 10-fold to $8.33 TN. Inflationary pressures are the strongest in years, asset markets are conspicuously manic, and much of the labor market faces the tightest conditions in decades. And after doubling its balance sheet in less than two years, the Fed is poised to add another Trillion over the coming year. Why? Are the risks not obvious?
August 23 – Bloomberg: “China’s central bank chief vowed to stabilize the supply of credit and boost the amount of money supporting smaller businesses and the real economy, after both credit and economic growth slowed in July. The People’s Bank of China will keep monetary policy stable with a good cross-cyclical design and will support high-quality economic expansion with ‘appropriate money growth,’ according to a statement…”
August 24 – Bloomberg: “Promoting the common prosperity will be the focus point of PBOC’s financial work, the Chinese central bank says…, after a meeting on Friday chaired by its party chief Guo Shuqing. PBOC calls for strengthening financial infrastructure in rural areas to promote common prosperity among farmers. PBOC reiterates not to flood economy with liquidity, will use various monetary policy tools to keep liquidity at reasonably ample level.”
August 26 – Bloomberg: “China’s central bank signaled it may reduce the reserve requirement ratio for banks to spur rural finance, a targeted move that would help cushion the economy as it slows. The People’s Bank of China said it will use monetary policy tools including the reserve ratio, and relending and rediscounting measures for rural development…”
Beijing followed up last week’s Huarong recapitalization with a string of dovish pronouncements from the People’s Bank of China (PBOC). Huarong CDS sank 105 bps this week to a four-month low 453 bps, with an eight-session decline of 380 bps. Fellow “asset management company” (AMC) China Orient CDS dropped 46 bps to a four-month low 156 bps – down 70 bps in eight sessions. And AMC China Cinda CDS fell 47 bps this week (63bps in eight sessions), also to a four-month low.
August 23 – Bloomberg (Rebecca Choong Wilkins): “China Huarong Asset Management Co.’s credit rating was cut by Moody’s… to Baa2 from Baa1, and the borrower remains on watch for a potential further downgrade. The ratings firm cited the deterioration of the asset manager’s capital and profitability, after Huarong forecast a 2020 loss of nearly $16 billion last week. While a capital injection by a group of state-owned enterprises indicates Huarong’s systemic importance, the plan’s exact impact remains unclear, Moody’s analysts wrote…”
The AMCs pose a major dilemma for Chinese leadership. Belatedly, Beijing recognizes the need for some market discipline. But China’s now massive $12 TN credit market essentially trades with the perception of implicit central government backing. A Beijing move to counter moral hazard with even a modicum of market discipline risks a bursting bubble.
Chinese officials moved to buy some time by orchestrating a Huarong recapitalization, a move surely in response to rapidly escalating credit instability. And then Monday, the People’s Bank of China announced they would be “promoting the common prosperity.” Chinese and global markets surged on hopes for further Beijing stimulus measures.
The Shanghai Composite rallied 2.8% this week, with the tech-heavy ChiNext recovering 2.0%. Hong Kong’s Hang Seng Index rose 2.3%. Taiwan’s TAIEX Index surged 5.3%. South Korea’s Kospi recovered 2.4%, and Japan’s Nikkei was up 2.3%. Major indices rallied 4.8% in Malaysia, 3.7% in Thailand, and 2.3% in the Philippines.
Chinese Credit instability was at the cusp of spiraling out of control. A crisis of confidence in “AMC” debt would likely push the system over the edge. As Moody’s pointed out with its Huarong downgrade, the recapitalization plan’s “exact impact remains unclear.” But it does in the near-term likely take a potential highly-destabilizing catalyst off the table. That coupled with the typical PBOC emollient was enough to spur a market rally. Greed and Fear. “Oh no, Beijing is no longer willing to underpin the markets, and this could really start to unwind!” to “Of course they have everything under control - buy the dip and squeeze the shorts!”
It’s easy at this point to dismiss the role China developments are playing in U.S. markets. Isn’t it all about the Fed? But in a world of highly correlated markets, it’s worth noting the performance of riskier U.S. stocks at the “Periphery.” Last week, when the Shanghai Composite dropped 2.5%, the small cap Russell 2000 also fell 2.5%. This week, the Shanghai Composite rallied 2.8%. The Russell 2000 surged 5.1%. U.S. high-yield spreads (to Treasuries) and CDS have also turned more closely correlated to Chinese Credit developments. The Bloomberg Commodities Index rallied 5.7% this week (boosted by hurricane Ida), after sinking 4.2% the previous week. Global bonds and currencies also whipsawed. I struggle to believe this is all a coincidence.
While Beijing did buy some time with the Haurong bailout, Chinese Credit is not out of the woods.
August 26 – Wall Street Journal (Xie Yu): “Cash-strapped developer China Evergrande Group said its flagship property business incurred a rare loss in the first half of 2021, after slashing prices of many apartments to boost sales. The… property unit’s loss, equivalent to around $618 million, was its first since at least 2009… Evergrande, China’s largest developer by contracted sales, warned in a regulatory filing that its reported net profit for the six months to June 30 would be substantially lower than a year ago… Since the early months of the coronavirus pandemic last year, Evergrande has discounted sale prices of some of its apartments by as much 25% to lure buyers…”
Evergrande has over $300 billion of debt. It’s bond (4-yr) yields traded to almost 45% in Friday trading. The “AMC” catalyst may have been pushed somewhat out into the future. Meanwhile, Evergrande and the faltering apartment Bubble remain a clear and present danger.
August 25 – Bloomberg: “Beijing’s unprecedented determination to curb the property sector could be China’s ‘Volcker Moment’ as it will cause a ‘significant’ slowdown in economic growth, according to Nomura... Unlike in previous economic down cycles, Chinese authorities look set to tighten property sector policy and tame prices this time, in order to reduce wealth inequality and boost the falling birthrate, economists led by Lu Ting wrote... Policy makers will be willing to sacrifice near-term economic growth to tame house prices and divert financial resources out of the property sector, which accounts for a quarter of China’s gross domestic product, they wrote.”
They won’t admit as much, but Beijing is determined to finally bring its unwieldy Bubbles under control. The PBOC and “national team” will be employed to try to keep things orderly. I don’t expect this to go smoothly. It’s fascinating to watch Beijing and the Fed attempt to manage their respective historic Bubbles. At least Chinese officials recognize they have a major problem.
We’re now into a third decade of experimental central banking, of which I have chronicled the past two. The experiment has failed. Monetary disorder has spiraled completely out of control. I am reminded of the “rules vs. discretion” policy debate that dates back to the Currency School vs. Banking School clashes from nineteenth century England. It was recognized generations ago that the risk inherent in discretionary central banking was that one mistake would invariably lead to a series of Bigger Mistakes.
I appreciate Larry Summers’ insight, and he’s clearly more diplomatic than I ever could be. This is an unmitigated fiasco. Federal Reserve credit has now inflated $4.154 TN over the past 77 weeks – and is up $4.597 TN – or 123% – in 102 weeks. Let’s not forget the current QE program began months before the onset of the pandemic. After beginning 2008 at $850 billion, Federal Reserve assets have inflated almost 10-fold to $8.33 TN. Inflationary pressures are the strongest in years, asset markets are conspicuously manic, and much of the labor market faces the tightest conditions in decades. And after doubling its balance sheet in less than two years, the Fed is poised to add another Trillion over the coming year. Why? Are the risks not obvious?
August 23 – Bloomberg: “China’s central bank chief vowed to stabilize the supply of credit and boost the amount of money supporting smaller businesses and the real economy, after both credit and economic growth slowed in July. The People’s Bank of China will keep monetary policy stable with a good cross-cyclical design and will support high-quality economic expansion with ‘appropriate money growth,’ according to a statement…”
August 24 – Bloomberg: “Promoting the common prosperity will be the focus point of PBOC’s financial work, the Chinese central bank says…, after a meeting on Friday chaired by its party chief Guo Shuqing. PBOC calls for strengthening financial infrastructure in rural areas to promote common prosperity among farmers. PBOC reiterates not to flood economy with liquidity, will use various monetary policy tools to keep liquidity at reasonably ample level.”
August 26 – Bloomberg: “China’s central bank signaled it may reduce the reserve requirement ratio for banks to spur rural finance, a targeted move that would help cushion the economy as it slows. The People’s Bank of China said it will use monetary policy tools including the reserve ratio, and relending and rediscounting measures for rural development…”
Beijing followed up last week’s Huarong recapitalization with a string of dovish pronouncements from the People’s Bank of China (PBOC). Huarong CDS sank 105 bps this week to a four-month low 453 bps, with an eight-session decline of 380 bps. Fellow “asset management company” (AMC) China Orient CDS dropped 46 bps to a four-month low 156 bps – down 70 bps in eight sessions. And AMC China Cinda CDS fell 47 bps this week (63bps in eight sessions), also to a four-month low.
August 23 – Bloomberg (Rebecca Choong Wilkins): “China Huarong Asset Management Co.’s credit rating was cut by Moody’s… to Baa2 from Baa1, and the borrower remains on watch for a potential further downgrade. The ratings firm cited the deterioration of the asset manager’s capital and profitability, after Huarong forecast a 2020 loss of nearly $16 billion last week. While a capital injection by a group of state-owned enterprises indicates Huarong’s systemic importance, the plan’s exact impact remains unclear, Moody’s analysts wrote…”
The AMCs pose a major dilemma for Chinese leadership. Belatedly, Beijing recognizes the need for some market discipline. But China’s now massive $12 TN credit market essentially trades with the perception of implicit central government backing. A Beijing move to counter moral hazard with even a modicum of market discipline risks a bursting bubble.
Chinese officials moved to buy some time by orchestrating a Huarong recapitalization, a move surely in response to rapidly escalating credit instability. And then Monday, the People’s Bank of China announced they would be “promoting the common prosperity.” Chinese and global markets surged on hopes for further Beijing stimulus measures.
The Shanghai Composite rallied 2.8% this week, with the tech-heavy ChiNext recovering 2.0%. Hong Kong’s Hang Seng Index rose 2.3%. Taiwan’s TAIEX Index surged 5.3%. South Korea’s Kospi recovered 2.4%, and Japan’s Nikkei was up 2.3%. Major indices rallied 4.8% in Malaysia, 3.7% in Thailand, and 2.3% in the Philippines.
Chinese Credit instability was at the cusp of spiraling out of control. A crisis of confidence in “AMC” debt would likely push the system over the edge. As Moody’s pointed out with its Huarong downgrade, the recapitalization plan’s “exact impact remains unclear.” But it does in the near-term likely take a potential highly-destabilizing catalyst off the table. That coupled with the typical PBOC emollient was enough to spur a market rally. Greed and Fear. “Oh no, Beijing is no longer willing to underpin the markets, and this could really start to unwind!” to “Of course they have everything under control - buy the dip and squeeze the shorts!”
It’s easy at this point to dismiss the role China developments are playing in U.S. markets. Isn’t it all about the Fed? But in a world of highly correlated markets, it’s worth noting the performance of riskier U.S. stocks at the “Periphery.” Last week, when the Shanghai Composite dropped 2.5%, the small cap Russell 2000 also fell 2.5%. This week, the Shanghai Composite rallied 2.8%. The Russell 2000 surged 5.1%. U.S. high-yield spreads (to Treasuries) and CDS have also turned more closely correlated to Chinese Credit developments. The Bloomberg Commodities Index rallied 5.7% this week (boosted by hurricane Ida), after sinking 4.2% the previous week. Global bonds and currencies also whipsawed. I struggle to believe this is all a coincidence.
While Beijing did buy some time with the Haurong bailout, Chinese Credit is not out of the woods.
August 26 – Wall Street Journal (Xie Yu): “Cash-strapped developer China Evergrande Group said its flagship property business incurred a rare loss in the first half of 2021, after slashing prices of many apartments to boost sales. The… property unit’s loss, equivalent to around $618 million, was its first since at least 2009… Evergrande, China’s largest developer by contracted sales, warned in a regulatory filing that its reported net profit for the six months to June 30 would be substantially lower than a year ago… Since the early months of the coronavirus pandemic last year, Evergrande has discounted sale prices of some of its apartments by as much 25% to lure buyers…”
Evergrande has over $300 billion of debt. It’s bond (4-yr) yields traded to almost 45% in Friday trading. The “AMC” catalyst may have been pushed somewhat out into the future. Meanwhile, Evergrande and the faltering apartment Bubble remain a clear and present danger.
August 25 – Bloomberg: “Beijing’s unprecedented determination to curb the property sector could be China’s ‘Volcker Moment’ as it will cause a ‘significant’ slowdown in economic growth, according to Nomura... Unlike in previous economic down cycles, Chinese authorities look set to tighten property sector policy and tame prices this time, in order to reduce wealth inequality and boost the falling birthrate, economists led by Lu Ting wrote... Policy makers will be willing to sacrifice near-term economic growth to tame house prices and divert financial resources out of the property sector, which accounts for a quarter of China’s gross domestic product, they wrote.”
They won’t admit as much, but Beijing is determined to finally bring its unwieldy Bubbles under control. The PBOC and “national team” will be employed to try to keep things orderly. I don’t expect this to go smoothly. It’s fascinating to watch Beijing and the Fed attempt to manage their respective historic Bubbles. At least Chinese officials recognize they have a major problem.
For the Week:
The S&P500 rallied 1.5% to a new record high (up 20.1% y-t-d), and the Dow gained 1.0% (up 15.8%). The Utilities dropped 2.3% (up 8.7%). The Banks surged 5.2% (up 34.5%), and the Broker/Dealers rose 4.5% (up 30.2%). The Transports jumped 2.4% (up 19.2%). The S&P 400 Midcaps gained 3.4% (up 20.0%), and the small cap Russell 2000 surged 5.1% (up 15.3%). The Nasdaq100 advanced 2.3% (up 19.7%). The Semiconductors jumped 5.5% (up 22.9%). The Biotechs rose 2.9% (up 3.5%). With bullion recovering $36, the HUI gold index rallied 6.0% (down 15.1%).
Three-month Treasury bill rates ended the week at 0.045%. Two-year government yields slipped a basis point to 0.22% (up 10bps y-t-d). Five-year T-note yields gained two bps to 0.80% (up 44bps). Ten-year Treasury yields rose five bps to 1.31% (up 39bps). Long bond yields jumped five bps to 1.92% (up 27bps). Benchmark Fannie Mae MBS yields dipped one basis point to 1.77% (up 43bps).
Greek 10-year yields jumped 13 bps to 0.69% (up 7bps y-t-d). Ten-year Portuguese yields rose seven bps to 0.17% (up 14bps). Italian 10-year yields jumped nine bps to 0.63% (up 9bps). Spain's 10-year yields rose eight bps to 0.29% (up 25bps). German bund yields gained seven bps to negative 0.42% (up 15bps). French yields rose eight bps to negative 0.07% (up 27bps). The French to German 10-year bond spread widened one to 35 bps. U.K. 10-year gilt yields gained five bps to 0.58% (up 38bps). U.K.'s FTSE equities index increased 0.8% (up 10.6% y-t-d).
Japan's Nikkei Equities Index rallied 2.3% (up 0.7% y-t-d). Japanese 10-year "JGB" yields rose two bps to 0.03% (up 1 bp y-t-d). France's CAC40 gained 0.8% (up 20.4%). The German DAX equities index added 0.3% (up 15.5%). Spain's IBEX 35 equities index was little changed (up 10.5%). Italy's FTSE MIB index increased 0.3% (up 17.0%). EM equities were higher. Brazil's Bovespa index recovered 2.2% (up 1.4%), and Mexico's Bolsa rose 2.0% (up 19.0%). South Korea's Kospi index jumped 2.4% (up 9.1%). India's Sensex equities index gained 1.4% (up 17.5%). China's Shanghai Exchange rallied 2.8% (up 1.4%). Turkey's Borsa Istanbul National 100 index rose 0.9% (down 1.3%). Russia's MICEX equities index recovered 1.4% (up 18.2%).
Investment-grade bond funds saw inflows of $3.362 billion, and junk bond funds posted positive flows of $532 million (from Lipper).
Federal Reserve Credit last week rose $25.8bn to a record $8.323 TN. Over the past 102 weeks, Fed Credit expanded $4.597 TN, or 123%. Fed Credit inflated $5.513 Trillion, or 196%, over the past 459 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week slipped $0.6bn to $3.502 TN. "Custody holdings" were up $88.3bn, or 2.6%, y-o-y.
Total money market fund assets increased $4.3bn to $4.527 TN. Total money funds declined $13bn y-o-y, or 0.3%.
Total Commercial Paper rose $11.3bn to $1.150 TN. CP was up $138bn, or 13.6%, year-over-year.
Freddie Mac 30-year fixed mortgage rates added a basis point to 2.87% (down 4bps y-o-y). Fifteen-year rates slipped two bps to 2.14% (down 32bps). Five-year hybrid ARM rates declined one basis point to 2.42% (down 49bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up five bps to 3.08% (down 3bps).
Currency Watch:
August 24 – Bloomberg: “One of the dullest currencies in the world is gaining attention due to China’s regulatory crackdown and bets on higher U.S. rates. The Hong Kong dollar has fallen 0.2% in August, poised for its biggest monthly loss since March… The currency is now around 150 pips short of the midpoint of its 7.75 to 7.85 trading band against the dollar. A sustained breach of the 7.8 level could accelerate further declines…”
For the week, the U.S. Dollar Index declined 0.9% to 92.69 (up 3.1% y-t-d). For the week on the upside, the South African rand increased 3.9%, the Norwegian krone 3.6%, the Brazilian real 3.4%, the New Zealand dollar 2.6%, the Australian dollar 2.5%, the Swedish krona 1.9%, the Canadian dollar 1.6%, the Singapore dollar 1.2%, the British pound 1.0%, the South Korean won 0.9%, the euro 0.8%, the Mexican peso 0.8%, and the Swiss franc 0.6%. The Chinese renminbi gained 0.46% versus the dollar (up 0.85% y-t-d).
Commodities Watch:
August 26 – Bloomberg (Eddie Spence): “Many gold investors might be fretting over the prospect of the Federal Reserve curbing monetary stimulus, but Germans are still loading up. Demand for physical bullion in Germany, traditionally the biggest coin and bar buyer in Europe, was the highest since at least 2009 in the first half… While purchases in other Western markets have also been strong, Germans in particular are pouring into the metal as a hedge against rising inflation… ‘We have a long history of inflation fear in our DNA. Now the inflation risk is picking up,’ said Raphael Scherer, a managing director at metals dealer Philoro Edelmetalle GmbH, whose gold sales are up 25% on what was already a strong 2020. ‘The outlook for precious metals is very positive.’”
August 23 – Wall Street Journal (Rhiannon Hoyle): “One of this year’s hottest commodities is flaming out. The price of iron ore has fallen roughly 40% since mid-July on concerns about demand from China, which makes more than half of the world’s steel. The downturn has dealt a blow to producing countries, notably Australia and Brazil, that are battling to protect fragile economic recoveries from outbreaks of the highly contagious Delta variant of the coronavirus.”
The Bloomberg Commodities Index surged 5.7% (up 23.4% y-t-d). Spot Gold rallied $36 to $1,818 (down 4.3%). Silver jumped 4.3% to $24.03 (down 9.0%). WTI crude recovered $6.60 to $68.74 (up 42%). Gasoline surged 12.4% (up 61%), and Natural Gas 13.9% (up 73%). Copper rose 5.1% (up 23%). Wheat increased 0.6% (up 14%). Corn advanced 3.1% (up 14%). Bitcoin dipped $309 this week to $48,939 (up 68%).
Coronavirus Watch:
August 25 – Wall Street Journal (Talal Ansari): “U.S. Covid-19 hospitalizations have surpassed 100,000 for the first time since January, nearly doubling since the start of August. While the figure remains below the country’s winter peak, hospitals in some parts of the U.S. are straining under the load, and officials in states including Georgia, Kentucky, Tennessee and Idaho have requested extra personnel and resources. The number of patients in hospital beds with confirmed and suspected Covid-19 cases hit 100,517 on Tuesday… That is up from 53,529 on Aug. 1.”
August 25 – CNBC (Berkeley Lovelace Jr. and Nate Rattner): “Children are now being hospitalized in record numbers across the United States, and doctors are warning that it could get worse as schools begin to reopen and the swift-moving coronavirus delta variant drives cases higher. New Covid hospital admissions for kids have reached their highest levels since the U.S. started tracking pediatric cases about a year ago, peaking at an average of 303 new admissions per day… Kids still account for a very small number of hospitalizations, doctors note, making up roughly 1.8% of all Covid hospitalizations in the U.S.”
August 26 – Associated Press (Sudhin Thanawala and Jay Reeves): “Kentucky and Texas joined a growing list of states that are seeing record numbers of hospitalized COVID-19 patients in a surge that is overwhelming doctors and nurses and afflicting more children. Intensive care units around the nation are packed with patients extremely ill with the coronavirus — even in places where hospitalizations have not yet reached earlier peaks… Texas and Kentucky on Wednesday reported more COVID-19 patients in their hospitals than at any other time since the pandemic began, 14,255 and 2,074, respectively… At least six other states — Arkansas, Florida, Louisiana, Hawaii, Mississippi and Oregon — have already broken their hospitalization records.”
August 25 – Reuters (William Schomberg and Ludwig Burger): “Protection against COVID-19 offered by two doses of the Pfizer/BioNTech and the Oxford/AstraZeneca vaccines begins to fade within six months…, according to researchers in Britain. After five to six months, the effectiveness of the Pfizer jab at preventing COVID-19 infection in the month after the second dose fell from 88% to 74%, an analysis of data collected in Britain's ZOE COVID study showed. For the AstraZeneca vaccine, effectiveness fell from 77% to 67% after four to five months.”
August 25 – Reuters (Julie Steenhuysen): “Some 25% of SARS-CoV-2 infections among Los Angeles County residents occurred in fully vaccinated residents from May through July 25, a period that includes the impact of the highly transmissible Delta variant… The data, published in the U.S. Centers for Disease Control and Prevention's weekly report on death and disease, shows an increase in so-called ‘breakthrough’ infections among fully vaccinated individuals… According to the study, 3.2% of fully vaccinated individuals who were infected with the virus were hospitalized, just 0.5% were admitted to an intensive care unit and 0.2% were placed on a ventilator.”
Market Mania Watch:
August 25 – Wall Street Journal (Gunjan Banerji): “U.S. companies are rushing to cash in on soaring stock prices. It isn’t just the white-hot market for initial public offerings. Companies are returning to the public markets to issue shares and raise cash from investors at the same time that existing shareholders are tapping the public market to unload their stockholdings at a record clip. Companies including Zoom Video Communications Inc. and Norwegian Cruise Line Holdings Ltd. have sold billions of dollars of shares this year… There have been 556 follow-on offerings, or stock sales by companies or existing shareholders, among U.S. companies this year, the most since 1996, according to Dealogic... They have raised a total of $133 billion. Behind the boom in share issuance? An ascendant stock market.”
August 23 – CNBC (MacKenzie Sigalos): “Clip art of a rock just sold for 400 ether, or about $1.3 million, late Monday afternoon. The transaction marks the latest sale of EtherRock, a brand of crypto collectible that’s been around since 2017 – making it one of the oldest non-fungible tokens (NFTs) on the block. EtherRock is, as the name implies, a JPEG of a cartoon rock, built and sold on the ethereum blockchain. There are only 100 out there, and that scarcity is part of what’s driving up its value. So, what are these rock pics good for? According to the EtherRock website, ‘These virtual rocks serve NO PURPOSE beyond being able to be brought and sold, and giving you a strong sense of pride in being an owner of 1 of the only 100 rocks in the game :)’”
August 25 – Reuters (Elizabeth Howcroft): “Non-fungible token (NFT) sales surged in August, according to the largest platform for the burgeoning digital asset class, as speculators bet growing interest across the art, sport and media worlds will keep prices rising. The niche crypto asset, which is a blockchain-based record of ownership of a digital item such as an image or a video, exploded in popularity in early 2021, leaving many confused as to why so much money was being spent on items which do not physically exist… Sales volumes recorded on the largest NFT trading platform, OpenSea, have hit $1.9 billion so far this month, more than ten times March's $148 million. In January 2021, the monthly volume recorded on the platform was just over $8 million.”
Market Instability Watch:
August 23 – Financial Times (Kate Duguid): “Trading conditions in the $22tn US government bond market, a bedrock of the global financial system, have deteriorated as traders brace themselves for a key speech this week from Federal Reserve chief Jay Powell. Liquidity, or the ease with which traders can buy and sell bonds, has worsened as a series of jerky price movements and uncertainty over Fed policy have kept investors from making big bets. Thin trading volumes, with many market participants out of the office in August, have exacerbated the problem.”
August 25 – Bloomberg (Wes Goodman): “China’s extraordinary griping over U.S. inflation may spell higher yields ahead if overseas investors are starting to sour on U.S. debt. The U.S. faces the ‘most severe’ inflation risks of any major economy because of the large deviation between the growth in the money supply and GDP, the People’s Bank of China said recently in its quarterly monetary policy report. ‘A large amount of currency will inevitably lead to inflation.’ That’s from a nation that owns over $1t of the U.S. debt.”
August 23 – Bloomberg (Alexandra Harris): “The Federal Reserve’s floor for overnight funding markets is proving to be no match for the deluge of cash. Money-market securities ranging from Treasury bills to repurchase agreements continue to trade below 0.05% -- the offering rate on the overnight reverse repo facility, which is supposed to act like a floor for the front end. The Fed at its June meeting had raised the rate by five basis points to help support the smooth functioning of short-term funding markets. Still, usage of the tool climbed to a record $1.136 trillion on Monday, eclipsing the previous high of $1.116 trillion on Aug. 18.”
Inflation Watch:
August 23 – CNBC (Amelia Lucas): “You’ve seen headlines for pay hikes at McDonald’s, Chipotle and other restaurants. Now it’s showing up in the data. Wages for hourly limited-service restaurant workers climbed 10% in the second quarter compared with a year ago, according to a new report from industry tracker Black Box Intelligence and Snagajob. It’s the largest quarterly jump in years. For comparison, hourly limited-service employees saw their wages rise just 4.1% in the first quarter compared with a year prior.”
August 22 – Wall Street Journal (Jaewon Kang): “Grocery-store chains are still battling supply challenges that some executives said are as bad as what they saw in spring 2020, when hoarding left holes in stocks of some staples. Industry executives say new problems are arising weekly, driven by shortages of labor and raw materials. Groceries including frozen waffles and beverages remain scarce as some food companies anticipate disruptions lasting into 2022. A wider range of products is running short and logistical challenges are compounding for many retailers. Donny Rouse, chief executive of… Rouses Markets, said he is struggling to fill shelves as his company runs low on everything from pet food to canned goods. The chain of more than 60 supermarkets is sometimes receiving as little as 40% of what it orders, prompting Mr. Rouse and his staff to try to secure products earlier and more often.”
August 26 – Wall Street Journal (Yang Jie, Stephanie Yang and Yoko Kubota): “The world’s largest contract chip maker is raising prices by as much as 20%, according to people familiar with the matter, a move that could result in consumers paying more for electronics. Taiwan Semiconductor Manufacturing Co. plans to increase the prices of its most advanced chips by roughly 10%, while less advanced chips used by customers like auto makers will cost about 20% more... The higher prices will generally take effect late this year or next year… Apple Inc. is one of TSMC’s largest customers and its iPhones use advanced microprocessors made in TSMC foundries.”
August 23 – Bloomberg (Damian Shepherd and Alex Longley): “For a glimpse at how fast demand for commodities has rebounded in the wake of the coronavirus, look no further than the market for shipping them. Monday marked the 10th consecutive increase for the Baltic Dry Index, a benchmark measure of commodity hauling costs that has surged to an 11-year high. ‘Earlier in the year, people thought this was a short-term spike in the market, but now people see it as more structural and longer term,’ said Jan Rindbo, the chief executive officer of D/S Norden A/S, a 150-year-old Danish operator of more than 500 vessels… The Baltic Dry hit 4,147 points on Monday, the highest since May 2010.”
August 25 – Bloomberg (Elizabeth Elkin): “Fertilizer is seeing fierce demand and constraints on supplies at the same time, making it the latest market with prices touching near-decade highs. Farmers are throwing more fertilizer onto their fields in pursuit of bigger corn, soy and wheat yields, because those crops have become so valuable. As a result, global fertilizer costs are at the highest since 2012. It may be at the point where U.S. farmers have to curb their purchases, according to a Rabobank report. Besides demand, a number of other factors are helping to drive up prices for the crop fertility chemicals. There are elevated freight rates, increased tariffs, bigger energy costs and supply constraints for nitrogen, potash and phosphate.”
Biden Administration Watch:
August 25 – Associated Press (Lisa Mascaro and Kevin Freking): “Striking a deal with moderates, House Democratic leaders have muscled President Joe Biden’s multitrillion-dollar budget blueprint over a key hurdle, ending a risky standoff and putting the party’s domestic infrastructure agenda back on track. The 220-212 vote Tuesday was a first move toward drafting Biden’s $3.5 trillion rebuilding plan this fall, and the narrow outcome, in the face of unanimous Republican opposition, signaled the power a few voices have to alter the debate and the challenges ahead still threatening to upend the president’s agenda.”
Federal Reserve Watch:
August 24 – Bloomberg (Lisa Abramowicz): “Federal Reserve officials often decry the unprecedented disparity between the wealthy and poor. But they usually avoid mentioning the direct role they have played in widening these financial disparities over the past few decades. Expect this week’s Jackson Hole symposium to be a prime example of this dual reality, especially because its stated topic is ‘Macroeconomic Policy in an Uneven Economy.’ The goal sounds good and noble, and without a doubt Fed officials are arguably talking more than ever before about inequalities of all kinds in the U.S. economy. But the problem is, the longer they continue ultra-easy monetary conditions, the more the richest families benefit disproportionately. And without different fiscal policies from Washington, the poorest families largely miss out directly.”
August 26 – Bloomberg (Steve Matthews and Catarina Saraiva): “Three of the Federal Reserve’s leading hawks, on the eve of the central bank’s annual Jackson Hole symposium, urged that policy makers move quickly to slow asset purchases despite the risk from the spreading delta variant. Federal Reserve Bank of Dallas President Robert Kaplan said he favors an announcement at the central bank’s September meeting to begin tapering bond buying and implementing it in October or shortly after. St. Louis’s James Bullard called for a start in the fall -- finishing by the end of the first quarter in 2022, while Kansas City Fed’s Esther George urged an early move begin this year… ‘I think it’s important to get started and the conditions of pace, timing of when we end, I’m open minded to listening to the debates around that,’ George said… ‘But I am less interested in deferring that decision.”
August 26 – Reuters (Ann Saphir): “Dallas Federal Reserve President Robert Kaplan suggested… that he continues to expect the Fed to start raising interest rates next year, after what he hopes to be an eight-month-long process of phasing out its monthly asset purchases, starting in October. ‘I don’t see anything that is likely to change my submission materially,’ he told Yahoo Finance, referring to the economic projections he and other Fed policymakers submit each quarter, most recently in June when he penciled in an expectation for a 2022 start to Fed interest rate hikes.”
August 23 – New York Times (Neil Irwin): “There is a big idea in economic policy that has become ascendant in recent years: Great things can be achieved for American workers if the economy is allowed to run hot. The notion of creating a ‘high-pressure’ economy is that government should be willing to risk a bit of inflation in the near term to achieve conditions that will over the long run lift people out of poverty, prevent the scars of recessions from becoming permanent, and make the nation’s economic potential stronger. This idea has origins in a 1973 paper by Arthur M. Okun, and was largely confined to think tank conferences in the 2010s. Now, it is the intellectual underpinning of American economic policy, embraced at the highest levels by the Biden administration and the Federal Reserve.”
August 21 – Bloomberg (Saleha Mohsin and Jennifer Jacobs): “U.S. Treasury Secretary Janet Yellen has told senior White House advisers that she supports reappointing Jerome Powell as Federal Reserve chair, according to people familiar…, a move that greatly increases his chance for a second term. President Joe Biden hasn’t made a decision yet and is likely to make his choice around Labor Day… Keeping someone viewed by Wall Street as a trusted policy maker in charge of the world’s most powerful central bank would send a signal of continuity as the economy recovers from the pandemic.”
U.S. Bubble Watch:
August 23 – Reuters (Dan Burns): “U.S. business activity growth slowed for a third straight month in August as capacity constraints, supply shortages and the rapidly spreading Delta variant of the coronavirus weaken the momentum of the rebound from last year's pandemic-induced recession… Shortages of raw materials and labor now appear to be holding back output as well as fanning inflation, according to the IHS Markit data. New order growth was the weakest so far this year, while employment grew at the slowest rate in more than a year. ‘Not only have supply chain delays hit a new survey record high, but the August survey saw increasing frustrations in relation to hiring,’ said Chris Williamson, chief business economist at IHS Markit. ‘Jobs growth waned to the lowest since July of last year as companies either failed to find suitable staff or existing workers switched jobs.’”
August 23 – Dow Jones (Xavier Fontdegloria): “Economic activity in the U.S. showed signs of slowing down in August, particularly in the services sector, amid the recent increase in Covid-19 cases due to the spread of the Delta variant. The flash reading for the U.S. Composite Output Index decreased to 55.4 in August from 59.9 in July, data from IHS Markit showed…, an eight-month low. The indicator suggests that the U.S. private sector activity is still expanding, but to a lesser degree than in previous months…”
August 23 – CNBC (Diana Olick): “Sales of existing homes in July rose 2% from June to a seasonally adjusted, annualized rate of 5.99 million units… These sales figures are based on closings, so they reflect contracts signed in May and June. Sales were 1.5% higher than July 2020. That is the second straight month of gains after a pullback in the spring. Sales are likely improving due to rising supply. The inventory of homes at the end of July stood at 1.32 million, down 12% from a year ago, but that is a smaller annual decline than in recent months. At the current sales pace, that represents a 2.6-month supply… The median price of an existing home sold in July was $359,900. That is a 17.8% increase compared with July 2020.”
August 24 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes increased in July after three straight monthly declines, but housing market momentum is slowing as surging housing prices amid tight supply sideline some first-time buyers from the market… New home sales rose 1.0% to a seasonally adjusted annual rate of 708,000 units last month. June's sales pace was revised up to 701,000 units from the previously reported 676,000 units… Sales dropped 27.2% on a year-on-year basis in July. The median new house price soared 18.4% from a year earlier to a record $390,500 in July.”
August 27 – Reuters (Lucia Mutikani): “U.S. consumer spending slowed in July as shortages of motor vehicles tempered a rise in outlays on in-person services… Consumer spending… increased 0.3% last month… Data for June was revised up to show spending advancing 1.1% instead of 1.0% as previously reported… The government reported… consumer spending grew at a robust 11.9% annualized rate in the second quarter… The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, gained 0.3% in July after advancing 0.5% in June. In the 12 months through July, the so-called core PCE price index rose 3.6% after a similar increase in June.”
August 26 – Reuters (Kannaki Deka and Nathan Gomes): “U.S. auto retail sales are expected to fall in August, as the global semiconductor shortage coupled with the fast spreading Delta variant of the coronavirus squeezed inventory at dealerships, consultants J.D. Power and LMC Automotive said. Retail sales of new vehicles are expected to fall 14.3% to 987,100 in August from a year earlier…”
August 25 – Reuters (Lucia Mutikani): “New orders for key U.S.-made capital goods were unexpectedly flat in July amid supply constraints and a shift in demand to services, suggesting that business spending on equipment could slow in the second half after robust growth over the past year. Still, business investment in equipment remains strong… Orders are 18% above their pre-pandemic levels. Investment in equipment is expected to help offset cooling consumer spending and keep the economy on a solid growth path this quarter.”
August 25 – Bloomberg (Katia Dmitrieva, Amanda Albright and Reade Pickert): “In Albuquerque, New Mexico, landing a job with the police force or fire department may get you a sign-on bonus of $15,000, close to what some Wall Street bankers might expect. Despite such incentives, about 1 in 10 local government jobs remains unfilled. Wait times on the city’s non-emergency police line are upwards of 45 minutes and several bus routes are cut each week. Thousands of cities, towns and states across the U.S. are facing the most acute labor shortage in recent memory.”
August 22 – Associated Press (Amy Beth Hanson and Lindsay Whitehurst): “A Montana school district is dangling $4,000 bonuses and inviting people to test drive big yellow school buses in hopes of enticing them to take a job that schools are struggling to fill as kids return to in-person classes. A Delaware school district offered to pay parents $700 to take care of their own transportation, and a Pittsburgh district delayed the start of classes and said hundreds more children would have to walk to school. Schools across the U.S. are offering hiring bonuses, providing the training needed to get a commercial driver’s license and increasing hourly pay to attract more drivers. The shortage of bus drivers is complicating the start of a school year already besieged by the highly contagious delta variant of COVID-19…”
August 26 – CNBC (Kif Leswing): “Apple CEO Tim Cook received more than 5 million shares of Apple stock this week, selling most of the stock for more than $750 million… The tranche of stock is the final part of the compensation package that Cook received when he took over as CEO of Apple 10 years ago.”
Fixed-Income Bubble Watch:
August 23 – Wall Street Journal (Ben Eisen): “Wall Street is diving back into the business of turning home loans into bonds, injecting new competition into a market long dominated by government-backed mortgage giants Fannie Mae and Freddie Mac. The so-called private-label mortgage market—in which financial firms serve the middleman role of creating giant pools of loans and selling them to investors—had more than $42 billion of issuance in the second quarter. That is the most since the pandemic started and almost the most for any quarter since the last financial crisis, according to Inside Mortgage Finance…”
China Watch:
August 25 – Reuters (William Schomberg and Ludwig Burger): “China will incorporate ‘Xi Jinping Thought’ into its national curriculum to help ‘establish Marxist belief’ in the country's youth, the education ministry said in new guidelines… The Ministry of Education said Chinese President Xi Jinping's ‘thought on socialism with Chinese characteristics in the new era’ would be taught from primary school level all the way to university. The move is aimed at strengthening ‘resolve to listen to and follow the Party’ and new teaching materials must ‘cultivate patriotic feelings’, the guidelines said. Since coming to power in 2012, the Chinese President has sought to strengthen the ruling Chinese Communist Party's role in all areas of society, including its businesses, schools and cultural institutions.”
August 25 – Bloomberg: “China’s Communist Party vowed to promote the welfare of all people and redistribute income, underscoring its push to achieve ‘common prosperity’ in the country. Having achieved a goal of building a moderately prosperous society, ‘we will make the pie bigger and divide it well,’ Han Wenxiu, a senior official at the party’s central financial and economic affairs commission, said… Authorities will push for high-quality development, raise the income of urban and rural residents, gradually reduce the gap in distribution, and ‘resolutely prevent polarization,’ he said.”
August 22 – Bloomberg: “President Xi Jinping’s rhetoric about ‘common prosperity’ surged this year, evidence of the Communist Party’s commitment to closing the country’s yawning wealth gap. The term appeared sporadically in his first eight years in power. Last year, he began to reference ‘common prosperity’ more often and has picked up the pace: The phrase has appeared 65 times in Xi’s speeches and meetings so far this year, compared with 30 in all of last year.”
August 26 – Bloomberg: “Under mounting pressure from financial regulators to shore up its finances, China Evergrande Group is poised to dump more of its sprawling empire. The clock is ticking for billionaire Hui Ka Yan and his company, which is laden with $300 billion in liabilities to banks, suppliers and homebuyers. Despite getting temporary relief from some major creditors, the message from policy makers is clear: Evergrande must resolve its debt woes fast enough to avoid roiling the world’s second-largest economy.”
August 23 – Bloomberg: “China Evergrande Group sank to an almost six-year low and its electric-vehicle unit lost more than a quarter of its value amid mounting concern that shareholders will bear the brunt of the developer’s liquidity crisis. Shares of Evergrande slid 12% on Monday in Hong Kong to close at the lowest since September 2015. China Evergrande New Energy Vehicle Group Ltd. tumbled 27%, the most since October 2015. The group’s property services unit dropped 9%.”
August 26 – Bloomberg (Sofia Horta e Costa): “Shares of China Evergrande Group’s electric vehicle unit are collapsing in Hong Kong, wiping about $80 billion from what was the property developer’s most valuable listed asset. China Evergrande New Energy Vehicle Group Ltd. sank as much as 22% Thursday after its parent said the unit lost 4.8 billion yuan ($740 million) in the first half.”
August 26 – Financial Times (Ian Smith and Thomas Hale): “China’s Ping An promised to be more prudent with future investments after the insurer took a Rmb20.8bn ($3.2bn) post-tax hit from its exposure to a troubled property developer. Reporting a fall in its first-half net profits…, the financial services group — which offers banking, investment and technology services as well as insurance — said it attached ‘great importance to investment risks caused by the debt crisis of China Fortune’.”
August 25 – Wall Street Journal (Stella Yifan Xie and Liyan Qi): “Labor shortages are materializing across China as young people shun factory jobs and more migrant workers stay home, offering a possible preview of larger challenges ahead as the workforce ages and shrinks. With global demand for Chinese goods surging this year, factory owners say they are struggling to fill jobs that make everything from handbags to cosmetics. Some migrant workers are worried about catching Covid-19 in cities or factories, despite China’s low caseload. Other young people are gravitating toward service-industry jobs that pay more or are less demanding.”
August 23 – Financial Times (Tom Mitchell and Sun Yu): “The Chinese Communist party has warned thousands of officials in the city of Hangzhou, home of leading technology companies such as Jack Ma’s Alibaba, to root out any ‘conflicts of interest’ they or their family members may have with local businesses. The statement was posted online by the Central Commission for Discipline Inspection, the party’s corruption watchdog, on Monday, two days after the city’s top party official was detained for ‘serious violations of discipline’ — a phrase that is commonly used by Chinese authorities as a euphemism for corruption.”
August 22 – Bloomberg: “China’s market regulator halted 42 initial public offerings in Shanghai and Shenzhen after starting a probe into an investment bank, a law firm and other parties involved in the deals… China Securities Regulatory Commission started a probe of China Dragon Securities Co., Beijing-based law firm Tian Yuan, Carea Assets Appraisal Co. and Zhongxingcai Guanghua Certified Public Accountants LLP… The halts come amid a broader crackdown on the private sector in China, which has roiled capital markets.”
August 25 – Bloomberg: “Seven Chinese billionaires have directed a record $5 billion to charity so far this year…, a sum that exceeds by 20% total national giving in 2020. Their pledges, whether through corporate interests, foundations or personal wealth, arrive as President Xi Jinping pushes for ‘common prosperity,’ a sprawling campaign to close the country’s wealth gap.”
August 24 – Financial Times (Sun Yu): “Officials in an economic backwater in central China have struck upon a novel way to boost the local property market: schools funded by developers that have earned a reputation for getting their students into the country’s top universities. Property sales in Hengshui, a city of 4.3m in Hebei province, are soaring despite recent attempts by the central government to rein in both runaway property prices and China’s booming private education sector. ‘I have closed more deals over the past two months than the previous two years combined,’ said Li Hongning, a real estate agent in downtown Hengshui. ‘Clients are willing to pay extra to finish the transaction as soon as possible.’”
Central Banker Watch:
August 26 – CNBC (Weizhen Tan): “South Korea’s central bank raised interest rates on Thursday in a decision that was expected as financial risks heat up despite the virus threat. The Bank of Korea raised its policy rate by 25 bps to 0.75% for the first time in nearly three years, becoming the first developed economy to raise interest rates during the pandemic era.”
August 27 – Reuters (Dan Burns): “While the financial world waits for the Federal Reserve to start reversing its ultra-loose policy stance, recent moves by a clutch of other central banks signal the days of pandemic-era accommodation are already numbered even as COVID-19 continues to impede smooth economic recoveries... South Korea's central bank on Thursday raised its benchmark interest rate by a quarter of a percentage point to blunt rising financial stability risks posed by a surge in household debt… Even before the rate hike in South Korea, though, central banks in Latin America and eastern and central Europe had begun lifting interest rates this year to beat back inflation that is building on the back of currency fluctuations, global supply chain bottlenecks and regional labor shortages.”
August 26 – Financial Times (Valentina Romei): “Holdouts on the European Central Bank’s governing council disagree with its new guidance on the future path of policy because they fear it understates the risk of rising inflation, according to the minutes of its latest policy meeting. The ECB published revised forward guidance last month to incorporate the findings of its strategy review, which altered its primary policy target to make it more tolerant of above-target inflation.”
Global Bubble Watch:
August 23 – Bloomberg (Mervyn King and Dan Katz): “Central bankers and journalists will assemble for the virtual Jackson Hole conference later this week. Their agenda will be broad. The future path of quantitative easing, the health of the labor market, and other critical monetary and regulatory matters will command center stage. But we can also expect pronouncements on issues once considered the domain of elected politicians, including climate change, racial justice and inequality. The emergence of central-bank commentary on hot-button political issues is a significant departure from the practice of just a generation ago. Central bankers who lived through the 1970s remembered the experience of high and volatile inflation. They saw independence as essential to the ability of central banks to maintain economic stability. And this autonomy went hand in hand with clear goals and mandates, such as inflation targets. The global financial crisis and its aftermath greatly expanded the role of central banks.”
August 23 – Reuters (Andrea Shalal): “The IMF will distribute about $650 billion in new Special Drawing Rights to its members on Monday, providing a ‘significant shot in the arm’ for global efforts to combat the COVID-19 pandemic, Managing Director Kristalina Georgieva said. The International Monetary Fund's largest-ever distribution of monetary reserves will provide additional liquidity for the global economy, supplementing member countries’ foreign exchange reserves and reducing their reliance on more expensive domestic or external debt, Georgieva said… ‘The allocation is a significant shot in the arm for the world and, if used wisely, a unique opportunity to combat this unprecedented crisis,’ she said.”
August 25 – Bloomberg (Cindy Wang and Enda Curran): “A supply chain crunch that was meant to be temporary now looks like lasting well into next year as the surging delta variant upends factory production in Asia and disrupts shipping, posing more shocks to the world economy. Manufacturers reeling from shortages of key components and higher raw material and energy costs are being forced into bidding wars to get space on vessels, pushing freight rates to records and prompting some exporters to raise prices or simply cancel shipments altogether. ‘We can’t get enough components, we can’t get containers, costs have been driven up tremendously,’ said Christopher Tse, chief executive officer of Hong Kong-based Musical Electronics Ltd…”
August 23 – Reuters (William Schomberg): “British manufacturers reported the worst stock shortages on record, caused in large part by a post-lockdown lack of components for the electronics industry and in plastics... The Confederation of British Industry's index for stock adequacy fell to the lowest since the survey began in 1977, sinking to -14 from July's -11, the third record low in as many months. The survey also showed expectations for output price growth over the next three months remained close to June's nearly 30-year high…”
August 22 – Financial Times (Kate Duguid): “For months the world’s largest shipping groups have grappled with container shortages and a lack of berths in ports, as seesawing demand and Covid-19 heaped pressure on global logistics. Now another shortage is occupying the industry’s attention: that of the ships themselves. Executives have warned that, despite a recent surge in orders for new vessels, the availability of container ships is likely to remain strained in coming years given soaring demand for their services and the complexity of retooling fleets for environmental reasons. Xavier Destriau, chief financial officer of Israel’s Zim, one the world’s largest shipping groups, said that the tight supply of vessels posed ‘a potential major threat’ given that many companies have hesitated until this year to order new capacity, while many old ships are overdue for scrapping.”
EM Watch:
August 25 – Bloomberg (Maria Eloisa Capurro): “Brazil’s consumer prices rose more than expected as the central bank readies its fifth straight interest rate hike in efforts to tame above-target inflation. Prices rose 0.89% in mid-August from a month prior, more than all estimates… It was the highest mid-month print for August since 2002… Annual inflation sped up to 9.30%.”
August 26 – Wall Street Journal (Frances Yoon): “The spread of the highly contagious Delta variant of Covid-19 across Asia is weighing on emerging-market debt in the region. In recent months, investors have been demanding higher returns on bonds from Southeast Asian nations with relatively low vaccination rates that have reported sharp increases in Covid-19 cases. Governments in the region have imposed fresh lockdowns or social-distancing restrictions that are slowing their economic recoveries, and are spending more to help their citizens and businesses.”
August 23 – Bloomberg (Sam Kim): “South Korea’s ballooning household debt set new records last quarter, offering support for views that the central bank will raise interest rates as early as this week to deflate a debt bubble. Total credit extended to households jumped 10.3% from a year earlier to 1,806 trillion won ($1.54 trillion)… From the previous three months, credit rose by 41.2 trillion won, the biggest increase for an April-June quarter. The growing indebtedness underpins BOK’s concerns that financial imbalances are rising at a pace that may imperil the economy…”
Europe Watch:
August 23 – Financial Times (Darren Dodd): “‘Supply chain delays continue to wreak havoc, leaving companies frequently unable to meet demand and pushing firms’ costs higher,’ wrote Chris Williamson, chief business economist at IHS Markit, on this morning’s otherwise impressive set of data for the eurozone in his company’s closely watched PMI survey. Costs for business and the prices they charge rose in August at some of the fastest rates in the past 20 years, the survey said, as the rate of growth in manufacturing hit a six-month low. Similar concerns were aired in the UK PMI report, where supply chain problems on top of staff shortages left businesses struggling to meet demand.”
August 25 – Bloomberg (Alexander Weber and Francine Lacqua): “Germany’s economic recovery is coming under threat from a persistent global supply squeeze and rising Covid-19 infection numbers. A key measure of business confidence in Europe’s largest economy by the Munich-based Ifo institute slipped to 99.4 in August from 100.7 in July… ‘It’s quite clear that the growth outlook will have to be revised downwards,’ Ifo President Clemens Fuest told Bloomberg… He said shortages in intermediate products weren’t just confined to semiconductors, which has hit the nation’s dominant auto industry. ‘It’s metal products, it’s plastic products, paper even. And then it’s certainly the pandemic,’ he said.”
Japan Watch:
August 25 – Reuters (Leika Kihara and Kantaro Komiya): “The prices Japanese companies charge each other for services rose for a fifth straight month in July…, a sign the economy was holding up despite the hit from a resurgence in COVID-19 cases… The services producer price index rose 1.1% in July from a year earlier after a revised 1.3% gain in June… Japan’s wholesale prices spiked 5.6% in July from a year earlier to mark the fastest annual increase in 13 years.”
Social, Political, Environmental, Cybersecurity Instability Watch:
August 24 – Wall Street Journal (Kirk Maltais): “Drought is blistering key U.S. cash crops, further elevating prices for staples including corn and wheat. The punishing dynamics of a torrid summer were evident this month on the Pro Farmer Crop Tour… Driving along state Route 14 outside of Verdigre, Neb., Randy Wiese turned to see a farmer harvesting hay. The piles were small. ‘That farmer is sick to his stomach,’ said Mr. Wiese, who farms 800 acres of soybeans and corn… Extreme heat is baking most of the U.S. North Dakota, South Dakota, Minnesota, Iowa and Nebraska all contain areas of extreme drought… North Dakota and Minnesota, in particular, are experiencing near-record lows in soil moisture… As a result, many crops planted this spring are wilting. Some 63% of the U.S. spring wheat crop is in poor or very poor condition, versus 6% at this time last year…”
August 23 – Bloomberg (Lauren Coleman-Lochner): “The extreme drought that has gripped much of the western United States has shriveled crops, stoked wildfires, and drained reservoirs across several states. According the U.S. Drought Monitor, more than 60 million people are currently living under drought conditions in the region. For some cities, lack of water could be a fiscal as well as an environmental disaster: Prolonged droughts are threatening the creditworthiness of local governments, utilities and irrigation districts. According to a new report from S&P Global Ratings…, drought-struck municipalities may generate less income from their water systems because there’s less to sell or they may have higher costs to provide adequate supplies.”
August 23 – Bloomberg (Brian K. Sullivan): “As the western U.S. bakes and burns under an unprecedented heat dome, Henri leaves a deluged East Coast staggering after a summer of deadly floods and record-setting tropical storms. Climate scientists say one is due to the other and both come against the backdrop of a warming planet. The high pressure that got stuck across the West causing drought and fire actually created the conditions for low-pressure-driven storms in the East. So while July was the hottest month ever recorded on Earth, it was the sixth wettest in U.S. records going back 127 years, according to the National Centers for Environment Information.”
August 23 – Financial Times (Camilla Hodgson): “Extreme rainfall such as that behind last month’s floods in Germany and Belgium will become more frequent and increasingly intense as climate change warms the planet, according to a study of the disaster by leading meteorologists. Research by the World Weather Attribution initiative, an international group of experts, said the unprecedented rain that led to the deaths of more than 200 people in Germany and Belgium was between 1.2 and nine times more likely to happen today, compared with pre-industrial times.”
Leveraged Speculation Watch:
August 24 – Bloomberg (Melissa Karsh and Bei Hu): “Goldman Sachs Group Inc.’s hedge fund clients focused on Chinese stocks once again saw steep losses as concerns about the nation’s increased oversight of tech and other fast-growing businesses sparked a broad sell off. China fundamental long-short hedge fund clients lost an estimated 3.2% on average last week, taking August’s decline to 3.9%… Goldman Sachs’ clients focused on fundamental stock picking for China had their second-worst month on record in July, losing an estimated 5.6% on average.”
August 25 – Financial Times (Robin Wigglesworth): “Hedge funds that seek to profit from stricken companies are enjoying their best year since the aftermath of the financial crisis as the stimulus-driven market rally boosts the price of debt that had been skirting with default. Distressed debt funds — specialists in picking up bonds and loans issued by companies in trouble — made their tenth consecutive month of gains in July, extending returns for the year to the end of July to 11.45%. The run is the strongest over the same period since 2009 and marks the best performance of any major hedge fund strategy of 2021…”
August 22 – Reuters (Aakriti Bhalla): “Kenneth Griffin's Citadel LLC and Citadel partners are planning to redeem about $500 million of the $2 billion they invested in Melvin Capital, the Wall Street Journal reported…”
Geopolitical Watch:
August 24 – Reuters: “President Joe Biden said on Tuesday the United States is on pace to finish evacuations from Afghanistan by Aug. 31, but left open the chance of extending the deadline, saying reaching that goal depends on cooperation from the country's new Taliban rulers. The Taliban said earlier on Tuesday that all foreign evacuations from the country must be completed by Aug. 31, and asked Washington to stop urging highly skilled Afghans to leave the country.”
August 24 – Bloomberg (Jenny Leonard and Philip J. Heijmans): “Vice President Kamala Harris warned that China poses a threat to countries in Asia, while reassuring nations in the region the U.S. won’t force countries to choose between the world’s biggest economies… In her most pointed comments at Beijing, Harris accused China of coercion and intimidation over its vast territorial claims in the South China Sea. ‘Beijing’s actions continue to undermine the rules-based order and threaten the sovereignty of nations,’ she said.”
August 25 – Reuters (Gabriel Crossley and Michael Martina): “China… criticized the U.S. ‘politicization’ of efforts to trace the origin of the coronavirus, demanding without any evidence that American labs be investigated, ahead of the release of a U.S. intelligence report on the virus. The U.S. report is intended to resolve disputes among intelligence agencies considering different theories about how the coronavirus emerged, including a once-dismissed theory about a Chinese laboratory accident. ‘Scapegoating China cannot whitewash the U.S.,’ Fu Cong, director-general of the Ministry of Foreign Affairs' arms control department, told a briefing. U.S. President Joe Biden received a copy and was briefed on the classified report on Tuesday, White House press secretary Jen Psaki told reporters…”
August 23 – Reuters (Sanjeev Miglani, Asif Shahzad and Yew Lun Tian): “The Russian and British empires battled over Afghanistan in the 19th century, and the United States and the Soviet Union in the 20th. As the Taliban takes over in the strategic, landlocked nation, the new Great Game has Pakistan in control, with its ally China looking to cement its grip on the region. Pakistan has deep ties with the Taliban and has been accused of supporting the Islamist group as it battled the U.S.-backed government in Kabul - charges denied by Islamabad. When the Taliban captured Kabul last week, Pakistan Prime Minister Imran Khan said Afghans had broken the ‘shackles of slavery’.”
August 23 – Bloomberg (Iain Marlow and Enda Curran): “When the U.S. invaded Afghanistan in 2001, the global economy looked a lot different: Tesla Inc. wasn’t a company, the iPhone didn’t exist and artificial intelligence was best known as a Steven Spielberg film. Now all three are at the cutting edge of a modern economy driven by advancements in high-tech chips and large-capacity batteries that are made with a range of minerals, including rare earths. And Afghanistan is sitting on deposits estimated to be worth $1 trillion or more, including what may be the world’s largest lithium reserves -- if anyone can get them out of the ground… ‘With the U.S. withdrawal, Beijing can offer what Kabul needs most: political impartiality and economic investment,’ Zhou Bo, who was a senior colonel in the People’s Liberation Army…, wrote… ‘Afghanistan in turn has what China most prizes: opportunities in infrastructure and industry building -- areas in which China’s capabilities are arguably unmatched -- and access to $1 trillion in untapped mineral deposits.’”
August 26 – Bloomberg (Isabel Reynolds, Emi Nobuhiro, and Cindy Wang): “Lawmakers from Japan’s ruling party backed Taiwan’s entry into a Pacific trade pact meant to counter China’s influence, in the latest effort by Tokyo to bolster the democratically ruled island. Liberal Democratic Party lawmakers pledged to support Taiwan’s addition to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership during first-of-their-kind security talks with Taiwanese counterparts Friday.”
August 24 – Financial Times (Kana Inagaki, Robin Harding and Kathrin Hille): “The ruling parties of Japan and Taiwan will hold their first bilateral security talks on Friday as the two nations seek to strengthen ties to counter an increasingly belligerent China. In an interview with the Financial Times…, Masahisa Sato, a parliamentarian who runs foreign affairs for Japan’s ruling Liberal Democratic party, said deeper dialogue was needed because Taiwan’s future would have ‘a serious impact’ on Japan’s security and economy. ‘That is how important we feel the situation in Taiwan is at the moment,’ Sato said… Details of the online meeting were revealed as US vice-president Kamala Harris, during a visit to south-east Asia, castigated China for its threatening behaviour towards its neighbours. ‘Beijing continues to coerce, to intimidate and to make claims to the vast majority of the South China Sea,’ Harris said…, describing China’s claims as ‘unlawful’. She added that ‘the United States stands with our allies and partners in the face of these threats’.”
August 25 – Wall Street Journal (Benoit Faucon and Ian Talley): “Iran this week restarted fuel exports to Afghanistan that had been disrupted by fighting between the Taliban and forces under the now deposed Afghan government, traders in Tehran and former U.S. officials say, with the Taliban now providing critical dollars to the sanctions-crushed Iranian economy from its lucrative narcotics operations. The burgeoning trade relationship between Tehran and the Taliban threatens to undermine key U.S. pressure campaigns against both.”
The S&P500 rallied 1.5% to a new record high (up 20.1% y-t-d), and the Dow gained 1.0% (up 15.8%). The Utilities dropped 2.3% (up 8.7%). The Banks surged 5.2% (up 34.5%), and the Broker/Dealers rose 4.5% (up 30.2%). The Transports jumped 2.4% (up 19.2%). The S&P 400 Midcaps gained 3.4% (up 20.0%), and the small cap Russell 2000 surged 5.1% (up 15.3%). The Nasdaq100 advanced 2.3% (up 19.7%). The Semiconductors jumped 5.5% (up 22.9%). The Biotechs rose 2.9% (up 3.5%). With bullion recovering $36, the HUI gold index rallied 6.0% (down 15.1%).
Three-month Treasury bill rates ended the week at 0.045%. Two-year government yields slipped a basis point to 0.22% (up 10bps y-t-d). Five-year T-note yields gained two bps to 0.80% (up 44bps). Ten-year Treasury yields rose five bps to 1.31% (up 39bps). Long bond yields jumped five bps to 1.92% (up 27bps). Benchmark Fannie Mae MBS yields dipped one basis point to 1.77% (up 43bps).
Greek 10-year yields jumped 13 bps to 0.69% (up 7bps y-t-d). Ten-year Portuguese yields rose seven bps to 0.17% (up 14bps). Italian 10-year yields jumped nine bps to 0.63% (up 9bps). Spain's 10-year yields rose eight bps to 0.29% (up 25bps). German bund yields gained seven bps to negative 0.42% (up 15bps). French yields rose eight bps to negative 0.07% (up 27bps). The French to German 10-year bond spread widened one to 35 bps. U.K. 10-year gilt yields gained five bps to 0.58% (up 38bps). U.K.'s FTSE equities index increased 0.8% (up 10.6% y-t-d).
Japan's Nikkei Equities Index rallied 2.3% (up 0.7% y-t-d). Japanese 10-year "JGB" yields rose two bps to 0.03% (up 1 bp y-t-d). France's CAC40 gained 0.8% (up 20.4%). The German DAX equities index added 0.3% (up 15.5%). Spain's IBEX 35 equities index was little changed (up 10.5%). Italy's FTSE MIB index increased 0.3% (up 17.0%). EM equities were higher. Brazil's Bovespa index recovered 2.2% (up 1.4%), and Mexico's Bolsa rose 2.0% (up 19.0%). South Korea's Kospi index jumped 2.4% (up 9.1%). India's Sensex equities index gained 1.4% (up 17.5%). China's Shanghai Exchange rallied 2.8% (up 1.4%). Turkey's Borsa Istanbul National 100 index rose 0.9% (down 1.3%). Russia's MICEX equities index recovered 1.4% (up 18.2%).
Investment-grade bond funds saw inflows of $3.362 billion, and junk bond funds posted positive flows of $532 million (from Lipper).
Federal Reserve Credit last week rose $25.8bn to a record $8.323 TN. Over the past 102 weeks, Fed Credit expanded $4.597 TN, or 123%. Fed Credit inflated $5.513 Trillion, or 196%, over the past 459 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week slipped $0.6bn to $3.502 TN. "Custody holdings" were up $88.3bn, or 2.6%, y-o-y.
Total money market fund assets increased $4.3bn to $4.527 TN. Total money funds declined $13bn y-o-y, or 0.3%.
Total Commercial Paper rose $11.3bn to $1.150 TN. CP was up $138bn, or 13.6%, year-over-year.
Freddie Mac 30-year fixed mortgage rates added a basis point to 2.87% (down 4bps y-o-y). Fifteen-year rates slipped two bps to 2.14% (down 32bps). Five-year hybrid ARM rates declined one basis point to 2.42% (down 49bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up five bps to 3.08% (down 3bps).
Currency Watch:
August 24 – Bloomberg: “One of the dullest currencies in the world is gaining attention due to China’s regulatory crackdown and bets on higher U.S. rates. The Hong Kong dollar has fallen 0.2% in August, poised for its biggest monthly loss since March… The currency is now around 150 pips short of the midpoint of its 7.75 to 7.85 trading band against the dollar. A sustained breach of the 7.8 level could accelerate further declines…”
For the week, the U.S. Dollar Index declined 0.9% to 92.69 (up 3.1% y-t-d). For the week on the upside, the South African rand increased 3.9%, the Norwegian krone 3.6%, the Brazilian real 3.4%, the New Zealand dollar 2.6%, the Australian dollar 2.5%, the Swedish krona 1.9%, the Canadian dollar 1.6%, the Singapore dollar 1.2%, the British pound 1.0%, the South Korean won 0.9%, the euro 0.8%, the Mexican peso 0.8%, and the Swiss franc 0.6%. The Chinese renminbi gained 0.46% versus the dollar (up 0.85% y-t-d).
Commodities Watch:
August 26 – Bloomberg (Eddie Spence): “Many gold investors might be fretting over the prospect of the Federal Reserve curbing monetary stimulus, but Germans are still loading up. Demand for physical bullion in Germany, traditionally the biggest coin and bar buyer in Europe, was the highest since at least 2009 in the first half… While purchases in other Western markets have also been strong, Germans in particular are pouring into the metal as a hedge against rising inflation… ‘We have a long history of inflation fear in our DNA. Now the inflation risk is picking up,’ said Raphael Scherer, a managing director at metals dealer Philoro Edelmetalle GmbH, whose gold sales are up 25% on what was already a strong 2020. ‘The outlook for precious metals is very positive.’”
August 23 – Wall Street Journal (Rhiannon Hoyle): “One of this year’s hottest commodities is flaming out. The price of iron ore has fallen roughly 40% since mid-July on concerns about demand from China, which makes more than half of the world’s steel. The downturn has dealt a blow to producing countries, notably Australia and Brazil, that are battling to protect fragile economic recoveries from outbreaks of the highly contagious Delta variant of the coronavirus.”
The Bloomberg Commodities Index surged 5.7% (up 23.4% y-t-d). Spot Gold rallied $36 to $1,818 (down 4.3%). Silver jumped 4.3% to $24.03 (down 9.0%). WTI crude recovered $6.60 to $68.74 (up 42%). Gasoline surged 12.4% (up 61%), and Natural Gas 13.9% (up 73%). Copper rose 5.1% (up 23%). Wheat increased 0.6% (up 14%). Corn advanced 3.1% (up 14%). Bitcoin dipped $309 this week to $48,939 (up 68%).
Coronavirus Watch:
August 25 – Wall Street Journal (Talal Ansari): “U.S. Covid-19 hospitalizations have surpassed 100,000 for the first time since January, nearly doubling since the start of August. While the figure remains below the country’s winter peak, hospitals in some parts of the U.S. are straining under the load, and officials in states including Georgia, Kentucky, Tennessee and Idaho have requested extra personnel and resources. The number of patients in hospital beds with confirmed and suspected Covid-19 cases hit 100,517 on Tuesday… That is up from 53,529 on Aug. 1.”
August 25 – CNBC (Berkeley Lovelace Jr. and Nate Rattner): “Children are now being hospitalized in record numbers across the United States, and doctors are warning that it could get worse as schools begin to reopen and the swift-moving coronavirus delta variant drives cases higher. New Covid hospital admissions for kids have reached their highest levels since the U.S. started tracking pediatric cases about a year ago, peaking at an average of 303 new admissions per day… Kids still account for a very small number of hospitalizations, doctors note, making up roughly 1.8% of all Covid hospitalizations in the U.S.”
August 26 – Associated Press (Sudhin Thanawala and Jay Reeves): “Kentucky and Texas joined a growing list of states that are seeing record numbers of hospitalized COVID-19 patients in a surge that is overwhelming doctors and nurses and afflicting more children. Intensive care units around the nation are packed with patients extremely ill with the coronavirus — even in places where hospitalizations have not yet reached earlier peaks… Texas and Kentucky on Wednesday reported more COVID-19 patients in their hospitals than at any other time since the pandemic began, 14,255 and 2,074, respectively… At least six other states — Arkansas, Florida, Louisiana, Hawaii, Mississippi and Oregon — have already broken their hospitalization records.”
August 25 – Reuters (William Schomberg and Ludwig Burger): “Protection against COVID-19 offered by two doses of the Pfizer/BioNTech and the Oxford/AstraZeneca vaccines begins to fade within six months…, according to researchers in Britain. After five to six months, the effectiveness of the Pfizer jab at preventing COVID-19 infection in the month after the second dose fell from 88% to 74%, an analysis of data collected in Britain's ZOE COVID study showed. For the AstraZeneca vaccine, effectiveness fell from 77% to 67% after four to five months.”
August 25 – Reuters (Julie Steenhuysen): “Some 25% of SARS-CoV-2 infections among Los Angeles County residents occurred in fully vaccinated residents from May through July 25, a period that includes the impact of the highly transmissible Delta variant… The data, published in the U.S. Centers for Disease Control and Prevention's weekly report on death and disease, shows an increase in so-called ‘breakthrough’ infections among fully vaccinated individuals… According to the study, 3.2% of fully vaccinated individuals who were infected with the virus were hospitalized, just 0.5% were admitted to an intensive care unit and 0.2% were placed on a ventilator.”
Market Mania Watch:
August 25 – Wall Street Journal (Gunjan Banerji): “U.S. companies are rushing to cash in on soaring stock prices. It isn’t just the white-hot market for initial public offerings. Companies are returning to the public markets to issue shares and raise cash from investors at the same time that existing shareholders are tapping the public market to unload their stockholdings at a record clip. Companies including Zoom Video Communications Inc. and Norwegian Cruise Line Holdings Ltd. have sold billions of dollars of shares this year… There have been 556 follow-on offerings, or stock sales by companies or existing shareholders, among U.S. companies this year, the most since 1996, according to Dealogic... They have raised a total of $133 billion. Behind the boom in share issuance? An ascendant stock market.”
August 23 – CNBC (MacKenzie Sigalos): “Clip art of a rock just sold for 400 ether, or about $1.3 million, late Monday afternoon. The transaction marks the latest sale of EtherRock, a brand of crypto collectible that’s been around since 2017 – making it one of the oldest non-fungible tokens (NFTs) on the block. EtherRock is, as the name implies, a JPEG of a cartoon rock, built and sold on the ethereum blockchain. There are only 100 out there, and that scarcity is part of what’s driving up its value. So, what are these rock pics good for? According to the EtherRock website, ‘These virtual rocks serve NO PURPOSE beyond being able to be brought and sold, and giving you a strong sense of pride in being an owner of 1 of the only 100 rocks in the game :)’”
August 25 – Reuters (Elizabeth Howcroft): “Non-fungible token (NFT) sales surged in August, according to the largest platform for the burgeoning digital asset class, as speculators bet growing interest across the art, sport and media worlds will keep prices rising. The niche crypto asset, which is a blockchain-based record of ownership of a digital item such as an image or a video, exploded in popularity in early 2021, leaving many confused as to why so much money was being spent on items which do not physically exist… Sales volumes recorded on the largest NFT trading platform, OpenSea, have hit $1.9 billion so far this month, more than ten times March's $148 million. In January 2021, the monthly volume recorded on the platform was just over $8 million.”
Market Instability Watch:
August 23 – Financial Times (Kate Duguid): “Trading conditions in the $22tn US government bond market, a bedrock of the global financial system, have deteriorated as traders brace themselves for a key speech this week from Federal Reserve chief Jay Powell. Liquidity, or the ease with which traders can buy and sell bonds, has worsened as a series of jerky price movements and uncertainty over Fed policy have kept investors from making big bets. Thin trading volumes, with many market participants out of the office in August, have exacerbated the problem.”
August 25 – Bloomberg (Wes Goodman): “China’s extraordinary griping over U.S. inflation may spell higher yields ahead if overseas investors are starting to sour on U.S. debt. The U.S. faces the ‘most severe’ inflation risks of any major economy because of the large deviation between the growth in the money supply and GDP, the People’s Bank of China said recently in its quarterly monetary policy report. ‘A large amount of currency will inevitably lead to inflation.’ That’s from a nation that owns over $1t of the U.S. debt.”
August 23 – Bloomberg (Alexandra Harris): “The Federal Reserve’s floor for overnight funding markets is proving to be no match for the deluge of cash. Money-market securities ranging from Treasury bills to repurchase agreements continue to trade below 0.05% -- the offering rate on the overnight reverse repo facility, which is supposed to act like a floor for the front end. The Fed at its June meeting had raised the rate by five basis points to help support the smooth functioning of short-term funding markets. Still, usage of the tool climbed to a record $1.136 trillion on Monday, eclipsing the previous high of $1.116 trillion on Aug. 18.”
Inflation Watch:
August 23 – CNBC (Amelia Lucas): “You’ve seen headlines for pay hikes at McDonald’s, Chipotle and other restaurants. Now it’s showing up in the data. Wages for hourly limited-service restaurant workers climbed 10% in the second quarter compared with a year ago, according to a new report from industry tracker Black Box Intelligence and Snagajob. It’s the largest quarterly jump in years. For comparison, hourly limited-service employees saw their wages rise just 4.1% in the first quarter compared with a year prior.”
August 22 – Wall Street Journal (Jaewon Kang): “Grocery-store chains are still battling supply challenges that some executives said are as bad as what they saw in spring 2020, when hoarding left holes in stocks of some staples. Industry executives say new problems are arising weekly, driven by shortages of labor and raw materials. Groceries including frozen waffles and beverages remain scarce as some food companies anticipate disruptions lasting into 2022. A wider range of products is running short and logistical challenges are compounding for many retailers. Donny Rouse, chief executive of… Rouses Markets, said he is struggling to fill shelves as his company runs low on everything from pet food to canned goods. The chain of more than 60 supermarkets is sometimes receiving as little as 40% of what it orders, prompting Mr. Rouse and his staff to try to secure products earlier and more often.”
August 26 – Wall Street Journal (Yang Jie, Stephanie Yang and Yoko Kubota): “The world’s largest contract chip maker is raising prices by as much as 20%, according to people familiar with the matter, a move that could result in consumers paying more for electronics. Taiwan Semiconductor Manufacturing Co. plans to increase the prices of its most advanced chips by roughly 10%, while less advanced chips used by customers like auto makers will cost about 20% more... The higher prices will generally take effect late this year or next year… Apple Inc. is one of TSMC’s largest customers and its iPhones use advanced microprocessors made in TSMC foundries.”
August 23 – Bloomberg (Damian Shepherd and Alex Longley): “For a glimpse at how fast demand for commodities has rebounded in the wake of the coronavirus, look no further than the market for shipping them. Monday marked the 10th consecutive increase for the Baltic Dry Index, a benchmark measure of commodity hauling costs that has surged to an 11-year high. ‘Earlier in the year, people thought this was a short-term spike in the market, but now people see it as more structural and longer term,’ said Jan Rindbo, the chief executive officer of D/S Norden A/S, a 150-year-old Danish operator of more than 500 vessels… The Baltic Dry hit 4,147 points on Monday, the highest since May 2010.”
August 25 – Bloomberg (Elizabeth Elkin): “Fertilizer is seeing fierce demand and constraints on supplies at the same time, making it the latest market with prices touching near-decade highs. Farmers are throwing more fertilizer onto their fields in pursuit of bigger corn, soy and wheat yields, because those crops have become so valuable. As a result, global fertilizer costs are at the highest since 2012. It may be at the point where U.S. farmers have to curb their purchases, according to a Rabobank report. Besides demand, a number of other factors are helping to drive up prices for the crop fertility chemicals. There are elevated freight rates, increased tariffs, bigger energy costs and supply constraints for nitrogen, potash and phosphate.”
Biden Administration Watch:
August 25 – Associated Press (Lisa Mascaro and Kevin Freking): “Striking a deal with moderates, House Democratic leaders have muscled President Joe Biden’s multitrillion-dollar budget blueprint over a key hurdle, ending a risky standoff and putting the party’s domestic infrastructure agenda back on track. The 220-212 vote Tuesday was a first move toward drafting Biden’s $3.5 trillion rebuilding plan this fall, and the narrow outcome, in the face of unanimous Republican opposition, signaled the power a few voices have to alter the debate and the challenges ahead still threatening to upend the president’s agenda.”
Federal Reserve Watch:
August 24 – Bloomberg (Lisa Abramowicz): “Federal Reserve officials often decry the unprecedented disparity between the wealthy and poor. But they usually avoid mentioning the direct role they have played in widening these financial disparities over the past few decades. Expect this week’s Jackson Hole symposium to be a prime example of this dual reality, especially because its stated topic is ‘Macroeconomic Policy in an Uneven Economy.’ The goal sounds good and noble, and without a doubt Fed officials are arguably talking more than ever before about inequalities of all kinds in the U.S. economy. But the problem is, the longer they continue ultra-easy monetary conditions, the more the richest families benefit disproportionately. And without different fiscal policies from Washington, the poorest families largely miss out directly.”
August 26 – Bloomberg (Steve Matthews and Catarina Saraiva): “Three of the Federal Reserve’s leading hawks, on the eve of the central bank’s annual Jackson Hole symposium, urged that policy makers move quickly to slow asset purchases despite the risk from the spreading delta variant. Federal Reserve Bank of Dallas President Robert Kaplan said he favors an announcement at the central bank’s September meeting to begin tapering bond buying and implementing it in October or shortly after. St. Louis’s James Bullard called for a start in the fall -- finishing by the end of the first quarter in 2022, while Kansas City Fed’s Esther George urged an early move begin this year… ‘I think it’s important to get started and the conditions of pace, timing of when we end, I’m open minded to listening to the debates around that,’ George said… ‘But I am less interested in deferring that decision.”
August 26 – Reuters (Ann Saphir): “Dallas Federal Reserve President Robert Kaplan suggested… that he continues to expect the Fed to start raising interest rates next year, after what he hopes to be an eight-month-long process of phasing out its monthly asset purchases, starting in October. ‘I don’t see anything that is likely to change my submission materially,’ he told Yahoo Finance, referring to the economic projections he and other Fed policymakers submit each quarter, most recently in June when he penciled in an expectation for a 2022 start to Fed interest rate hikes.”
August 23 – New York Times (Neil Irwin): “There is a big idea in economic policy that has become ascendant in recent years: Great things can be achieved for American workers if the economy is allowed to run hot. The notion of creating a ‘high-pressure’ economy is that government should be willing to risk a bit of inflation in the near term to achieve conditions that will over the long run lift people out of poverty, prevent the scars of recessions from becoming permanent, and make the nation’s economic potential stronger. This idea has origins in a 1973 paper by Arthur M. Okun, and was largely confined to think tank conferences in the 2010s. Now, it is the intellectual underpinning of American economic policy, embraced at the highest levels by the Biden administration and the Federal Reserve.”
August 21 – Bloomberg (Saleha Mohsin and Jennifer Jacobs): “U.S. Treasury Secretary Janet Yellen has told senior White House advisers that she supports reappointing Jerome Powell as Federal Reserve chair, according to people familiar…, a move that greatly increases his chance for a second term. President Joe Biden hasn’t made a decision yet and is likely to make his choice around Labor Day… Keeping someone viewed by Wall Street as a trusted policy maker in charge of the world’s most powerful central bank would send a signal of continuity as the economy recovers from the pandemic.”
U.S. Bubble Watch:
August 23 – Reuters (Dan Burns): “U.S. business activity growth slowed for a third straight month in August as capacity constraints, supply shortages and the rapidly spreading Delta variant of the coronavirus weaken the momentum of the rebound from last year's pandemic-induced recession… Shortages of raw materials and labor now appear to be holding back output as well as fanning inflation, according to the IHS Markit data. New order growth was the weakest so far this year, while employment grew at the slowest rate in more than a year. ‘Not only have supply chain delays hit a new survey record high, but the August survey saw increasing frustrations in relation to hiring,’ said Chris Williamson, chief business economist at IHS Markit. ‘Jobs growth waned to the lowest since July of last year as companies either failed to find suitable staff or existing workers switched jobs.’”
August 23 – Dow Jones (Xavier Fontdegloria): “Economic activity in the U.S. showed signs of slowing down in August, particularly in the services sector, amid the recent increase in Covid-19 cases due to the spread of the Delta variant. The flash reading for the U.S. Composite Output Index decreased to 55.4 in August from 59.9 in July, data from IHS Markit showed…, an eight-month low. The indicator suggests that the U.S. private sector activity is still expanding, but to a lesser degree than in previous months…”
August 23 – CNBC (Diana Olick): “Sales of existing homes in July rose 2% from June to a seasonally adjusted, annualized rate of 5.99 million units… These sales figures are based on closings, so they reflect contracts signed in May and June. Sales were 1.5% higher than July 2020. That is the second straight month of gains after a pullback in the spring. Sales are likely improving due to rising supply. The inventory of homes at the end of July stood at 1.32 million, down 12% from a year ago, but that is a smaller annual decline than in recent months. At the current sales pace, that represents a 2.6-month supply… The median price of an existing home sold in July was $359,900. That is a 17.8% increase compared with July 2020.”
August 24 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes increased in July after three straight monthly declines, but housing market momentum is slowing as surging housing prices amid tight supply sideline some first-time buyers from the market… New home sales rose 1.0% to a seasonally adjusted annual rate of 708,000 units last month. June's sales pace was revised up to 701,000 units from the previously reported 676,000 units… Sales dropped 27.2% on a year-on-year basis in July. The median new house price soared 18.4% from a year earlier to a record $390,500 in July.”
August 27 – Reuters (Lucia Mutikani): “U.S. consumer spending slowed in July as shortages of motor vehicles tempered a rise in outlays on in-person services… Consumer spending… increased 0.3% last month… Data for June was revised up to show spending advancing 1.1% instead of 1.0% as previously reported… The government reported… consumer spending grew at a robust 11.9% annualized rate in the second quarter… The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, gained 0.3% in July after advancing 0.5% in June. In the 12 months through July, the so-called core PCE price index rose 3.6% after a similar increase in June.”
August 26 – Reuters (Kannaki Deka and Nathan Gomes): “U.S. auto retail sales are expected to fall in August, as the global semiconductor shortage coupled with the fast spreading Delta variant of the coronavirus squeezed inventory at dealerships, consultants J.D. Power and LMC Automotive said. Retail sales of new vehicles are expected to fall 14.3% to 987,100 in August from a year earlier…”
August 25 – Reuters (Lucia Mutikani): “New orders for key U.S.-made capital goods were unexpectedly flat in July amid supply constraints and a shift in demand to services, suggesting that business spending on equipment could slow in the second half after robust growth over the past year. Still, business investment in equipment remains strong… Orders are 18% above their pre-pandemic levels. Investment in equipment is expected to help offset cooling consumer spending and keep the economy on a solid growth path this quarter.”
August 25 – Bloomberg (Katia Dmitrieva, Amanda Albright and Reade Pickert): “In Albuquerque, New Mexico, landing a job with the police force or fire department may get you a sign-on bonus of $15,000, close to what some Wall Street bankers might expect. Despite such incentives, about 1 in 10 local government jobs remains unfilled. Wait times on the city’s non-emergency police line are upwards of 45 minutes and several bus routes are cut each week. Thousands of cities, towns and states across the U.S. are facing the most acute labor shortage in recent memory.”
August 22 – Associated Press (Amy Beth Hanson and Lindsay Whitehurst): “A Montana school district is dangling $4,000 bonuses and inviting people to test drive big yellow school buses in hopes of enticing them to take a job that schools are struggling to fill as kids return to in-person classes. A Delaware school district offered to pay parents $700 to take care of their own transportation, and a Pittsburgh district delayed the start of classes and said hundreds more children would have to walk to school. Schools across the U.S. are offering hiring bonuses, providing the training needed to get a commercial driver’s license and increasing hourly pay to attract more drivers. The shortage of bus drivers is complicating the start of a school year already besieged by the highly contagious delta variant of COVID-19…”
August 26 – CNBC (Kif Leswing): “Apple CEO Tim Cook received more than 5 million shares of Apple stock this week, selling most of the stock for more than $750 million… The tranche of stock is the final part of the compensation package that Cook received when he took over as CEO of Apple 10 years ago.”
Fixed-Income Bubble Watch:
August 23 – Wall Street Journal (Ben Eisen): “Wall Street is diving back into the business of turning home loans into bonds, injecting new competition into a market long dominated by government-backed mortgage giants Fannie Mae and Freddie Mac. The so-called private-label mortgage market—in which financial firms serve the middleman role of creating giant pools of loans and selling them to investors—had more than $42 billion of issuance in the second quarter. That is the most since the pandemic started and almost the most for any quarter since the last financial crisis, according to Inside Mortgage Finance…”
China Watch:
August 25 – Reuters (William Schomberg and Ludwig Burger): “China will incorporate ‘Xi Jinping Thought’ into its national curriculum to help ‘establish Marxist belief’ in the country's youth, the education ministry said in new guidelines… The Ministry of Education said Chinese President Xi Jinping's ‘thought on socialism with Chinese characteristics in the new era’ would be taught from primary school level all the way to university. The move is aimed at strengthening ‘resolve to listen to and follow the Party’ and new teaching materials must ‘cultivate patriotic feelings’, the guidelines said. Since coming to power in 2012, the Chinese President has sought to strengthen the ruling Chinese Communist Party's role in all areas of society, including its businesses, schools and cultural institutions.”
August 25 – Bloomberg: “China’s Communist Party vowed to promote the welfare of all people and redistribute income, underscoring its push to achieve ‘common prosperity’ in the country. Having achieved a goal of building a moderately prosperous society, ‘we will make the pie bigger and divide it well,’ Han Wenxiu, a senior official at the party’s central financial and economic affairs commission, said… Authorities will push for high-quality development, raise the income of urban and rural residents, gradually reduce the gap in distribution, and ‘resolutely prevent polarization,’ he said.”
August 22 – Bloomberg: “President Xi Jinping’s rhetoric about ‘common prosperity’ surged this year, evidence of the Communist Party’s commitment to closing the country’s yawning wealth gap. The term appeared sporadically in his first eight years in power. Last year, he began to reference ‘common prosperity’ more often and has picked up the pace: The phrase has appeared 65 times in Xi’s speeches and meetings so far this year, compared with 30 in all of last year.”
August 26 – Bloomberg: “Under mounting pressure from financial regulators to shore up its finances, China Evergrande Group is poised to dump more of its sprawling empire. The clock is ticking for billionaire Hui Ka Yan and his company, which is laden with $300 billion in liabilities to banks, suppliers and homebuyers. Despite getting temporary relief from some major creditors, the message from policy makers is clear: Evergrande must resolve its debt woes fast enough to avoid roiling the world’s second-largest economy.”
August 23 – Bloomberg: “China Evergrande Group sank to an almost six-year low and its electric-vehicle unit lost more than a quarter of its value amid mounting concern that shareholders will bear the brunt of the developer’s liquidity crisis. Shares of Evergrande slid 12% on Monday in Hong Kong to close at the lowest since September 2015. China Evergrande New Energy Vehicle Group Ltd. tumbled 27%, the most since October 2015. The group’s property services unit dropped 9%.”
August 26 – Bloomberg (Sofia Horta e Costa): “Shares of China Evergrande Group’s electric vehicle unit are collapsing in Hong Kong, wiping about $80 billion from what was the property developer’s most valuable listed asset. China Evergrande New Energy Vehicle Group Ltd. sank as much as 22% Thursday after its parent said the unit lost 4.8 billion yuan ($740 million) in the first half.”
August 26 – Financial Times (Ian Smith and Thomas Hale): “China’s Ping An promised to be more prudent with future investments after the insurer took a Rmb20.8bn ($3.2bn) post-tax hit from its exposure to a troubled property developer. Reporting a fall in its first-half net profits…, the financial services group — which offers banking, investment and technology services as well as insurance — said it attached ‘great importance to investment risks caused by the debt crisis of China Fortune’.”
August 25 – Wall Street Journal (Stella Yifan Xie and Liyan Qi): “Labor shortages are materializing across China as young people shun factory jobs and more migrant workers stay home, offering a possible preview of larger challenges ahead as the workforce ages and shrinks. With global demand for Chinese goods surging this year, factory owners say they are struggling to fill jobs that make everything from handbags to cosmetics. Some migrant workers are worried about catching Covid-19 in cities or factories, despite China’s low caseload. Other young people are gravitating toward service-industry jobs that pay more or are less demanding.”
August 23 – Financial Times (Tom Mitchell and Sun Yu): “The Chinese Communist party has warned thousands of officials in the city of Hangzhou, home of leading technology companies such as Jack Ma’s Alibaba, to root out any ‘conflicts of interest’ they or their family members may have with local businesses. The statement was posted online by the Central Commission for Discipline Inspection, the party’s corruption watchdog, on Monday, two days after the city’s top party official was detained for ‘serious violations of discipline’ — a phrase that is commonly used by Chinese authorities as a euphemism for corruption.”
August 22 – Bloomberg: “China’s market regulator halted 42 initial public offerings in Shanghai and Shenzhen after starting a probe into an investment bank, a law firm and other parties involved in the deals… China Securities Regulatory Commission started a probe of China Dragon Securities Co., Beijing-based law firm Tian Yuan, Carea Assets Appraisal Co. and Zhongxingcai Guanghua Certified Public Accountants LLP… The halts come amid a broader crackdown on the private sector in China, which has roiled capital markets.”
August 25 – Bloomberg: “Seven Chinese billionaires have directed a record $5 billion to charity so far this year…, a sum that exceeds by 20% total national giving in 2020. Their pledges, whether through corporate interests, foundations or personal wealth, arrive as President Xi Jinping pushes for ‘common prosperity,’ a sprawling campaign to close the country’s wealth gap.”
August 24 – Financial Times (Sun Yu): “Officials in an economic backwater in central China have struck upon a novel way to boost the local property market: schools funded by developers that have earned a reputation for getting their students into the country’s top universities. Property sales in Hengshui, a city of 4.3m in Hebei province, are soaring despite recent attempts by the central government to rein in both runaway property prices and China’s booming private education sector. ‘I have closed more deals over the past two months than the previous two years combined,’ said Li Hongning, a real estate agent in downtown Hengshui. ‘Clients are willing to pay extra to finish the transaction as soon as possible.’”
Central Banker Watch:
August 26 – CNBC (Weizhen Tan): “South Korea’s central bank raised interest rates on Thursday in a decision that was expected as financial risks heat up despite the virus threat. The Bank of Korea raised its policy rate by 25 bps to 0.75% for the first time in nearly three years, becoming the first developed economy to raise interest rates during the pandemic era.”
August 27 – Reuters (Dan Burns): “While the financial world waits for the Federal Reserve to start reversing its ultra-loose policy stance, recent moves by a clutch of other central banks signal the days of pandemic-era accommodation are already numbered even as COVID-19 continues to impede smooth economic recoveries... South Korea's central bank on Thursday raised its benchmark interest rate by a quarter of a percentage point to blunt rising financial stability risks posed by a surge in household debt… Even before the rate hike in South Korea, though, central banks in Latin America and eastern and central Europe had begun lifting interest rates this year to beat back inflation that is building on the back of currency fluctuations, global supply chain bottlenecks and regional labor shortages.”
August 26 – Financial Times (Valentina Romei): “Holdouts on the European Central Bank’s governing council disagree with its new guidance on the future path of policy because they fear it understates the risk of rising inflation, according to the minutes of its latest policy meeting. The ECB published revised forward guidance last month to incorporate the findings of its strategy review, which altered its primary policy target to make it more tolerant of above-target inflation.”
Global Bubble Watch:
August 23 – Bloomberg (Mervyn King and Dan Katz): “Central bankers and journalists will assemble for the virtual Jackson Hole conference later this week. Their agenda will be broad. The future path of quantitative easing, the health of the labor market, and other critical monetary and regulatory matters will command center stage. But we can also expect pronouncements on issues once considered the domain of elected politicians, including climate change, racial justice and inequality. The emergence of central-bank commentary on hot-button political issues is a significant departure from the practice of just a generation ago. Central bankers who lived through the 1970s remembered the experience of high and volatile inflation. They saw independence as essential to the ability of central banks to maintain economic stability. And this autonomy went hand in hand with clear goals and mandates, such as inflation targets. The global financial crisis and its aftermath greatly expanded the role of central banks.”
August 23 – Reuters (Andrea Shalal): “The IMF will distribute about $650 billion in new Special Drawing Rights to its members on Monday, providing a ‘significant shot in the arm’ for global efforts to combat the COVID-19 pandemic, Managing Director Kristalina Georgieva said. The International Monetary Fund's largest-ever distribution of monetary reserves will provide additional liquidity for the global economy, supplementing member countries’ foreign exchange reserves and reducing their reliance on more expensive domestic or external debt, Georgieva said… ‘The allocation is a significant shot in the arm for the world and, if used wisely, a unique opportunity to combat this unprecedented crisis,’ she said.”
August 25 – Bloomberg (Cindy Wang and Enda Curran): “A supply chain crunch that was meant to be temporary now looks like lasting well into next year as the surging delta variant upends factory production in Asia and disrupts shipping, posing more shocks to the world economy. Manufacturers reeling from shortages of key components and higher raw material and energy costs are being forced into bidding wars to get space on vessels, pushing freight rates to records and prompting some exporters to raise prices or simply cancel shipments altogether. ‘We can’t get enough components, we can’t get containers, costs have been driven up tremendously,’ said Christopher Tse, chief executive officer of Hong Kong-based Musical Electronics Ltd…”
August 23 – Reuters (William Schomberg): “British manufacturers reported the worst stock shortages on record, caused in large part by a post-lockdown lack of components for the electronics industry and in plastics... The Confederation of British Industry's index for stock adequacy fell to the lowest since the survey began in 1977, sinking to -14 from July's -11, the third record low in as many months. The survey also showed expectations for output price growth over the next three months remained close to June's nearly 30-year high…”
August 22 – Financial Times (Kate Duguid): “For months the world’s largest shipping groups have grappled with container shortages and a lack of berths in ports, as seesawing demand and Covid-19 heaped pressure on global logistics. Now another shortage is occupying the industry’s attention: that of the ships themselves. Executives have warned that, despite a recent surge in orders for new vessels, the availability of container ships is likely to remain strained in coming years given soaring demand for their services and the complexity of retooling fleets for environmental reasons. Xavier Destriau, chief financial officer of Israel’s Zim, one the world’s largest shipping groups, said that the tight supply of vessels posed ‘a potential major threat’ given that many companies have hesitated until this year to order new capacity, while many old ships are overdue for scrapping.”
EM Watch:
August 25 – Bloomberg (Maria Eloisa Capurro): “Brazil’s consumer prices rose more than expected as the central bank readies its fifth straight interest rate hike in efforts to tame above-target inflation. Prices rose 0.89% in mid-August from a month prior, more than all estimates… It was the highest mid-month print for August since 2002… Annual inflation sped up to 9.30%.”
August 26 – Wall Street Journal (Frances Yoon): “The spread of the highly contagious Delta variant of Covid-19 across Asia is weighing on emerging-market debt in the region. In recent months, investors have been demanding higher returns on bonds from Southeast Asian nations with relatively low vaccination rates that have reported sharp increases in Covid-19 cases. Governments in the region have imposed fresh lockdowns or social-distancing restrictions that are slowing their economic recoveries, and are spending more to help their citizens and businesses.”
August 23 – Bloomberg (Sam Kim): “South Korea’s ballooning household debt set new records last quarter, offering support for views that the central bank will raise interest rates as early as this week to deflate a debt bubble. Total credit extended to households jumped 10.3% from a year earlier to 1,806 trillion won ($1.54 trillion)… From the previous three months, credit rose by 41.2 trillion won, the biggest increase for an April-June quarter. The growing indebtedness underpins BOK’s concerns that financial imbalances are rising at a pace that may imperil the economy…”
Europe Watch:
August 23 – Financial Times (Darren Dodd): “‘Supply chain delays continue to wreak havoc, leaving companies frequently unable to meet demand and pushing firms’ costs higher,’ wrote Chris Williamson, chief business economist at IHS Markit, on this morning’s otherwise impressive set of data for the eurozone in his company’s closely watched PMI survey. Costs for business and the prices they charge rose in August at some of the fastest rates in the past 20 years, the survey said, as the rate of growth in manufacturing hit a six-month low. Similar concerns were aired in the UK PMI report, where supply chain problems on top of staff shortages left businesses struggling to meet demand.”
August 25 – Bloomberg (Alexander Weber and Francine Lacqua): “Germany’s economic recovery is coming under threat from a persistent global supply squeeze and rising Covid-19 infection numbers. A key measure of business confidence in Europe’s largest economy by the Munich-based Ifo institute slipped to 99.4 in August from 100.7 in July… ‘It’s quite clear that the growth outlook will have to be revised downwards,’ Ifo President Clemens Fuest told Bloomberg… He said shortages in intermediate products weren’t just confined to semiconductors, which has hit the nation’s dominant auto industry. ‘It’s metal products, it’s plastic products, paper even. And then it’s certainly the pandemic,’ he said.”
Japan Watch:
August 25 – Reuters (Leika Kihara and Kantaro Komiya): “The prices Japanese companies charge each other for services rose for a fifth straight month in July…, a sign the economy was holding up despite the hit from a resurgence in COVID-19 cases… The services producer price index rose 1.1% in July from a year earlier after a revised 1.3% gain in June… Japan’s wholesale prices spiked 5.6% in July from a year earlier to mark the fastest annual increase in 13 years.”
Social, Political, Environmental, Cybersecurity Instability Watch:
August 24 – Wall Street Journal (Kirk Maltais): “Drought is blistering key U.S. cash crops, further elevating prices for staples including corn and wheat. The punishing dynamics of a torrid summer were evident this month on the Pro Farmer Crop Tour… Driving along state Route 14 outside of Verdigre, Neb., Randy Wiese turned to see a farmer harvesting hay. The piles were small. ‘That farmer is sick to his stomach,’ said Mr. Wiese, who farms 800 acres of soybeans and corn… Extreme heat is baking most of the U.S. North Dakota, South Dakota, Minnesota, Iowa and Nebraska all contain areas of extreme drought… North Dakota and Minnesota, in particular, are experiencing near-record lows in soil moisture… As a result, many crops planted this spring are wilting. Some 63% of the U.S. spring wheat crop is in poor or very poor condition, versus 6% at this time last year…”
August 23 – Bloomberg (Lauren Coleman-Lochner): “The extreme drought that has gripped much of the western United States has shriveled crops, stoked wildfires, and drained reservoirs across several states. According the U.S. Drought Monitor, more than 60 million people are currently living under drought conditions in the region. For some cities, lack of water could be a fiscal as well as an environmental disaster: Prolonged droughts are threatening the creditworthiness of local governments, utilities and irrigation districts. According to a new report from S&P Global Ratings…, drought-struck municipalities may generate less income from their water systems because there’s less to sell or they may have higher costs to provide adequate supplies.”
August 23 – Bloomberg (Brian K. Sullivan): “As the western U.S. bakes and burns under an unprecedented heat dome, Henri leaves a deluged East Coast staggering after a summer of deadly floods and record-setting tropical storms. Climate scientists say one is due to the other and both come against the backdrop of a warming planet. The high pressure that got stuck across the West causing drought and fire actually created the conditions for low-pressure-driven storms in the East. So while July was the hottest month ever recorded on Earth, it was the sixth wettest in U.S. records going back 127 years, according to the National Centers for Environment Information.”
August 23 – Financial Times (Camilla Hodgson): “Extreme rainfall such as that behind last month’s floods in Germany and Belgium will become more frequent and increasingly intense as climate change warms the planet, according to a study of the disaster by leading meteorologists. Research by the World Weather Attribution initiative, an international group of experts, said the unprecedented rain that led to the deaths of more than 200 people in Germany and Belgium was between 1.2 and nine times more likely to happen today, compared with pre-industrial times.”
Leveraged Speculation Watch:
August 24 – Bloomberg (Melissa Karsh and Bei Hu): “Goldman Sachs Group Inc.’s hedge fund clients focused on Chinese stocks once again saw steep losses as concerns about the nation’s increased oversight of tech and other fast-growing businesses sparked a broad sell off. China fundamental long-short hedge fund clients lost an estimated 3.2% on average last week, taking August’s decline to 3.9%… Goldman Sachs’ clients focused on fundamental stock picking for China had their second-worst month on record in July, losing an estimated 5.6% on average.”
August 25 – Financial Times (Robin Wigglesworth): “Hedge funds that seek to profit from stricken companies are enjoying their best year since the aftermath of the financial crisis as the stimulus-driven market rally boosts the price of debt that had been skirting with default. Distressed debt funds — specialists in picking up bonds and loans issued by companies in trouble — made their tenth consecutive month of gains in July, extending returns for the year to the end of July to 11.45%. The run is the strongest over the same period since 2009 and marks the best performance of any major hedge fund strategy of 2021…”
August 22 – Reuters (Aakriti Bhalla): “Kenneth Griffin's Citadel LLC and Citadel partners are planning to redeem about $500 million of the $2 billion they invested in Melvin Capital, the Wall Street Journal reported…”
Geopolitical Watch:
August 24 – Reuters: “President Joe Biden said on Tuesday the United States is on pace to finish evacuations from Afghanistan by Aug. 31, but left open the chance of extending the deadline, saying reaching that goal depends on cooperation from the country's new Taliban rulers. The Taliban said earlier on Tuesday that all foreign evacuations from the country must be completed by Aug. 31, and asked Washington to stop urging highly skilled Afghans to leave the country.”
August 24 – Bloomberg (Jenny Leonard and Philip J. Heijmans): “Vice President Kamala Harris warned that China poses a threat to countries in Asia, while reassuring nations in the region the U.S. won’t force countries to choose between the world’s biggest economies… In her most pointed comments at Beijing, Harris accused China of coercion and intimidation over its vast territorial claims in the South China Sea. ‘Beijing’s actions continue to undermine the rules-based order and threaten the sovereignty of nations,’ she said.”
August 25 – Reuters (Gabriel Crossley and Michael Martina): “China… criticized the U.S. ‘politicization’ of efforts to trace the origin of the coronavirus, demanding without any evidence that American labs be investigated, ahead of the release of a U.S. intelligence report on the virus. The U.S. report is intended to resolve disputes among intelligence agencies considering different theories about how the coronavirus emerged, including a once-dismissed theory about a Chinese laboratory accident. ‘Scapegoating China cannot whitewash the U.S.,’ Fu Cong, director-general of the Ministry of Foreign Affairs' arms control department, told a briefing. U.S. President Joe Biden received a copy and was briefed on the classified report on Tuesday, White House press secretary Jen Psaki told reporters…”
August 23 – Reuters (Sanjeev Miglani, Asif Shahzad and Yew Lun Tian): “The Russian and British empires battled over Afghanistan in the 19th century, and the United States and the Soviet Union in the 20th. As the Taliban takes over in the strategic, landlocked nation, the new Great Game has Pakistan in control, with its ally China looking to cement its grip on the region. Pakistan has deep ties with the Taliban and has been accused of supporting the Islamist group as it battled the U.S.-backed government in Kabul - charges denied by Islamabad. When the Taliban captured Kabul last week, Pakistan Prime Minister Imran Khan said Afghans had broken the ‘shackles of slavery’.”
August 23 – Bloomberg (Iain Marlow and Enda Curran): “When the U.S. invaded Afghanistan in 2001, the global economy looked a lot different: Tesla Inc. wasn’t a company, the iPhone didn’t exist and artificial intelligence was best known as a Steven Spielberg film. Now all three are at the cutting edge of a modern economy driven by advancements in high-tech chips and large-capacity batteries that are made with a range of minerals, including rare earths. And Afghanistan is sitting on deposits estimated to be worth $1 trillion or more, including what may be the world’s largest lithium reserves -- if anyone can get them out of the ground… ‘With the U.S. withdrawal, Beijing can offer what Kabul needs most: political impartiality and economic investment,’ Zhou Bo, who was a senior colonel in the People’s Liberation Army…, wrote… ‘Afghanistan in turn has what China most prizes: opportunities in infrastructure and industry building -- areas in which China’s capabilities are arguably unmatched -- and access to $1 trillion in untapped mineral deposits.’”
August 26 – Bloomberg (Isabel Reynolds, Emi Nobuhiro, and Cindy Wang): “Lawmakers from Japan’s ruling party backed Taiwan’s entry into a Pacific trade pact meant to counter China’s influence, in the latest effort by Tokyo to bolster the democratically ruled island. Liberal Democratic Party lawmakers pledged to support Taiwan’s addition to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership during first-of-their-kind security talks with Taiwanese counterparts Friday.”
August 24 – Financial Times (Kana Inagaki, Robin Harding and Kathrin Hille): “The ruling parties of Japan and Taiwan will hold their first bilateral security talks on Friday as the two nations seek to strengthen ties to counter an increasingly belligerent China. In an interview with the Financial Times…, Masahisa Sato, a parliamentarian who runs foreign affairs for Japan’s ruling Liberal Democratic party, said deeper dialogue was needed because Taiwan’s future would have ‘a serious impact’ on Japan’s security and economy. ‘That is how important we feel the situation in Taiwan is at the moment,’ Sato said… Details of the online meeting were revealed as US vice-president Kamala Harris, during a visit to south-east Asia, castigated China for its threatening behaviour towards its neighbours. ‘Beijing continues to coerce, to intimidate and to make claims to the vast majority of the South China Sea,’ Harris said…, describing China’s claims as ‘unlawful’. She added that ‘the United States stands with our allies and partners in the face of these threats’.”
August 25 – Wall Street Journal (Benoit Faucon and Ian Talley): “Iran this week restarted fuel exports to Afghanistan that had been disrupted by fighting between the Taliban and forces under the now deposed Afghan government, traders in Tehran and former U.S. officials say, with the Taliban now providing critical dollars to the sanctions-crushed Iranian economy from its lucrative narcotics operations. The burgeoning trade relationship between Tehran and the Taliban threatens to undermine key U.S. pressure campaigns against both.”
