Credit Bubble Bulletin : January 2022

Wednesday’s FOMC meeting made for a hawkish week, at least within the headlines. “Banks Scramble to Change Fed Rate Calls After Hawkish Shift.” “Rate Traders See Risk of More Than Four U.S. Fed Hikes This Year After Hawkish Powell.” “US Stocks Drop in Wake of Hawkish Federal Reserve.” “Hawkish Fed Shakes Investors” And from Reuters: “’I do not think Fed Chair Powell could have been more hawkish during his press conference than if he raised rates today,’ said Tom di Galoma, managing director at Seaport Global Holdings…”

Geez. I guess it’s been a long time since we’ve experienced a hawkish central banker. Powell, of course, needed to talk tough on inflation. Yet he seemed determined to occupy the middle ground. There was no suggestion of the possibility of a 50 bps rate hike in March. There was no announcement of an immediate end to QE purchases. No rush to begin reducing the size of the Fed’s balance sheet. A dove in hawk’s clothing and no surprises.

From Mohamed El-Erian’s Bloomberg piece: “The Fed delivered what I expected but not what I think is needed for sustainable economic well-being. It should have stopped purchasing assets immediately and given a clearer signal on rate increases. Instead, the central bank doubled down on its 2021 trade-off of trying to please financial markets at the cost of increasing the challenges ahead for the economy, sound policy making and its own credibility.”

In a sign of changing times – and the Federal Reserve’s newfound predicament - it was as if Powell provided something for everyone – not to like.

Powell quotes from the “hawkish” side: “Economic activity expanded at a robust pace last year.” “The economy has shown great strength and resilience.” “There’s a risk that the high inflation we’re seeing will be prolonged, and there’s a risk that it will move even higher.” “We understand that high inflation imposes significant hardship.” “While the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, price increases have now spread to a broader range of goods and services.” “We’re not making progress” on relieving supply-chain pressures. “Things like the semiconductor issue… they’re going to be [around] quite a long time.”

Compensating for the Fed’s belated recognition of labor tightness, Powell repeatedly highlighted job market strength: “A tremendously strong labor market.” “The labor market has made remarkable progress and by many measures is very strong.” “Labor demand remains historically strong.” “Employers are having difficulties filling job openings, and wages are rising at their fastest pace in many years.” “Most FOMC participants agree that labor market conditions are consistent with maximum employment.”

“Monetary policy will be becoming significantly less accommodative.” “This is going to be a year in which we move steadily away from the very highly accommodative monetary policy…” “The best thing we can do to support continued labor market gains is to promote a long expansion, and that will require price stability.”

“The balance sheet is substantially larger than it needs to be… So, there’s a substantial amount of shrinkage in the balance sheet to be done. That’s going to take some time. We want that process to be orderly and predictable.”

“We fully appreciate that this is a different situation. If you look back to where we were in 2015 '16, '17, '18 when we were raising rates, inflation was very close to 2%, even below 2%.”

But Powell’s press conference was not without shout-outs to the jittery doves. “…There are other forces at work this year, which should also help bring down inflation… including improvement on the supply side… fiscal policy is going to be less supportive of growth this year… So, there are multiple forces which should be working over the course of the year for inflation to come down.”

“I think the path is highly uncertain, in that we’re committed to using our tools to make sure that inflation, high inflation that we’re seeing does not become entrenched… A number of factors are supporting a decline in inflation…”

The Powell Fed surely recognizes it has commenced a tricky High-Wire Act. Inflation vs. Market Fragility. Powell mentioned “nimble” four times and “adaptable” and “humble” twice each.

“It is not possible to predict with much confidence exactly what path for our policy rate is going to prove appropriate. And so, at this time, we haven’t made any decisions about the path of policy. And I stress again that we'll be humble and nimble.”

“And we’re going to need to be, as I've mentioned, nimble about this. And the economy is quite different this time. I've said this several times now. The economy is quite different, it’s stronger. Inflation is higher. The labor market is much, much stronger than it was. And growth is above trend.”

“There’s a case that, for whatever reason, the economy slows more and inflation slows more than expected, we'll react to that. If, instead, we see inflation at a higher level or a more persistent level, then we'll react to that.”

“We need to be quite adaptable.” “We have our eyes on the risks, particularly around the world.”

The Fed Chair was notably cautious in his comments regarding the market hot-button issue of balance sheet reduction: “Balance sheet is still a relatively new thing for the markets and for us, so we're less certain about that.” “Our decisions to reduce our balance sheet will be guided by our maximum employment and price stability goals.” “Building up and then shrinking the balance sheet is a complicated one, and it involves inevitably surprises. And, so, during the years there in the prior cycle, we amended our balance sheet principles a number of times.”

Two-year Treasury yields surged 13 bps Wednesday to 1.15%, the largest one-day jump in 22 months. Five-year yields rose 13 bps to 1.68%, the high since January 2020. The market came into the Fed meeting expecting 3.91 rate increases by the FOMC’s December 14th meeting. It ended Wednesday at 4.62 rate increases and closed the week at 4.75.

Bloomberg quoted a factual statement from JPMorgan chief U.S. economist Mike Feroli: “Powell’s remarks after the meeting were arguably the most hawkish he’s made as Fed Chair.”

While it was more middle ground than hammering home hawkishness, there was a lot for Wall Street not to like from the Fed Chair. But everyone knew Powell would be determined to present a hard line on inflation. Wall Street is also comfortable that Powell is willing to “pivot” in the event of serious market trouble. “Nimble” is code for readiness to doff the hawk outfit.

Other headlines for the week: “Where’s the ‘Fed Put’?” “Markets Wonder if the Fed Put is Dead, or Just Resting?” “The Fed Put is Dead.”

No one can seriously believe the ‘Fed Put’ has met its maker. It’s this murky new strike price that will create restless nights. What will it take in the markets to force another big pivot from the Fed Chair? And what are the consequences if he drags his pivot foot?

There’s a narrative that seemed to gather some momentum as a wild market week came to an end (10-yr yields ended the week 11bps below Wednesday’s highs): “Peak hawkishness and policy mistake fear.” I can make sense of part of this. With BofA calling for seven rate hikes this year, it won’t be easy to turn much more hawkish on rates. Yet I don’t believe policy mistake fears will revolve around the course of interest-rates. It’s when the Fed fails to quickly come to the markets’ defense, as de-risking/deleveraging dynamics gather momentum, that will provoke shrieks of “policy mistake!”

I’ve been closely following the Fed for a few decades. I have similar questions today as I’ve had more than a few times over the years, all the way back to 1990. Are they attuned to heightened systemic risks – and just putting on brave faces? Or are they less informed than they should be – sometimes bordering on oblivious? Inquiring minds want to know.

Powell’s in a really tough spot. I still believe he wanted to commence the process of letting Wall Street stand on its own when he was appointed Fed Chair in 2018. The Street put a quick kibosh to that: Powell Pivot #1. Unless he’s today overcome by deep denial, he appreciates that the Fed has nurtured a real monster. And it was only 22 months ago that the FOMC was throwing the kitchen sink (overflowing with liquidity) at Wall Street to thwart collapse. He can’t be oblivious to latent fragilities at this point, right? Perhaps he’s reluctant now to feed the beast. And having the markets tighten before the Fed even gets going in a way provides an element of plausible deniability (for when the wheels come off).

Powell had a couple opportunities to provide traders a little empathy. They received none, which could be the best explanation for the market consternation his press conference generated. Powell: “Communications… are working.”

Axios’ Neil Irwin: “I was wondering if the volatility we’ve seen in the financial markets in the last few weeks strikes you as anything alarming or that might affect the trajectory of policy. Conversely, to the degree that financial conditions have tightened some, might that be desirable in some ways in achieving your tightening goals?”

Powell: “So… the ultimate focus that we have is on the real economy, maximum employment, and price stability. And financial conditions matter to the extent that they have implications for achieving the dual mandate… Markets are now pricing in a number of rate increases. Surveys show that market participants are expecting a balance sheet runoff to begin… at the appropriate time sometime later this year perhaps… So, we feel like the communications we have with market participants and with the general public are working and that financial conditions are reflecting in advance the decisions that we make. And monetary policy works significantly through expectations. So that in and of itself is appropriate.”

Yahoo Finance’s Brian Cheung: “Within the context of other hiking cycles, it seems like worries about asset bubbles emerging as a result of easing rates has been part of that. I didn’t know if that was part of the discussion today.”

Chair Powell: “I would just say this. We, of course, have a financial stability framework. And what it shows is a number of positive aspects of financial stability. But you mentioned really asset prices is one of the four. So, asset prices are somewhat elevated, and they reflect a high-risk appetite and that sort of thing. I don’t really think asset prices themselves represent a significant threat to financial stability, and that’s because households are in good shape financially than they have been. Businesses are in good shape financially. Defaults on business loans are low and that kind of thing. The banks are highly capitalized with high liquidity and quite resilient and strong. There are some concerns in the non-bank financial sector around -- still around money market funds, although the SEC has made some very positive proposals there. And we also saw some things in the Treasury market during the acute phase of the crisis which we’re looking at ways to address. But, overall, the financial stability vulnerabilities are manageable, I would say.”

I believe Powell is a “good man.” I’ve sympathized with his predicament from day one. This runaway Bubble was not of his making – though he’s definitely made it significantly more difficult to make this case today. Moreover, history will not be kind to this week’s downplay of systemic risk.

In reality, asset prices themselves represent a significant threat to financial stability. Households have never been so exposed to securities market bubbles. Corporate credit is extraordinarily vulnerable to a tightening of financial conditions. The banking system is heavily exposed to potential asset market instability and a deeply maladjusted economic structure. It’s wishful thinking not to believe the banks have over this long cycle found all kinds of clever ways to get themselves into trouble. And when it comes to the “non-bank financial sector,” money market funds should be the least of the Fed’s worries. I would start with derivatives markets, the ETF complex and the leveraged speculating community, all having grown tremendously since the near financial meltdown they played integral roles in a mere 22 months ago. I guess it’s easier to just pound away at the money funds.

January 25 – Bloomberg (Emily Graffeo): “The stock market’s dramatic turns are fueling record trading in ETFs, the highly liquid investment vehicles that traders are using to keep pace with surging volatility. That jump in activity lifted the entire U.S. ETF market’s dollar value of shares traded… to a record high, with more than $478 billion trading on Monday… That surpassed the previous record $404 billion from Feb. 28, 2020.”

January 25 – Financial Times (Eric Platt): “Investors are racing to protect their portfolios from damage as volatility sweeps across Wall Street… Put options contracts, which can shield against losses from declines in share prices, were in heavy demand at the start of the week, when the S&P 500 benchmark index of US stocks registered a 10% drop from recent highs. Traders bought 31.3m equity put options contracts that day…, just shy of the all-time high set on Friday, when 32.3m of the contracts were bought. Both days far surpassed the previous record of 26.7m contracts set in February 2020 when the coronavirus pandemic began to rattle US financial markets.”

January 28 – Bloomberg (Michael Msika): “The brutal selloff this week isn’t scaring investors from putting their money in the stock market. In the week that pushed the S&P 500 Index to the verge of a correction, stock funds absorbed billions of cash. There’s ‘zero capitulation in equity positioning,’ Bank of America Corp. strategists led by Michael Hartnett wrote... The strategists, who track EPFR Global data, said equity mutual funds and exchange-traded products took in $17.1 billion in the week to Jan. 26.”

And let’s be clear: It was years of an ultra-dovish Fed – as opposed a hawkishy Wednesday Powell – responsible for the unfolding market accident – one that made some impressive headway this week.

January 24 – Bloomberg (Lu Wang): “That was some ride U.S. stocks just took. The Nasdaq 100, along with the rest of the market, turned on a dime in the middle of its worst selloff in two years and vaulted back into the green, erasing a loss of nearly 5%. The move was the latest in a series of heart-stopping turnarounds that have dogged markets amid rising tensions around Federal Reserve policy. Days like Monday are not unprecedented… Today’s move was the biggest of its kind since Jan. 8, 2001, in the middle of the come-down from the dot-com bubble. Most of the other similar moves occurred in the three years that crash took to play out, with a few others coming in the heart of the 2008 financial crisis.”

January 28 – Bloomberg (Lu Wang and Jessica Menton): “In another week of severe equity turbulence, the S&P 500 saw three of the biggest intraday reversals of the decade, Microsoft Corp. swung 15% in 15 hours, and stock volatility doubled. In the end, for one last twist, the index rallied Friday, erasing losses for the week to post one of its smallest wire-to-wire moves in months. It was the final irony for a week in which investors just couldn’t make up their minds, amid a panoply of warring narratives.”

I’m not so sure actual investors have much to do with this extreme volatility. It’s about speculative dynamics, and this week there were indications of rising probabilities for a dislocation/crash scenario. And this development unleashes some panic selling, huge amounts of hedging, erratic sell and buy programs from derivatives-related algorithmic “dynamic trading,” destabilizing flows within the ETF complex, along with aggressive speculative trading (some betting on a “crash,” but with hair-triggers to reverse bearish wagers on rallies).

The VIX Index traded Monday to almost 39, the high since October 2020. It was five sessions of unrelenting volatility. Monday trading saw the gap between intraday lows and highs in the S&P500 of 4.6%. Tuesday it was 2.9%, Wednesday 3.3%, Thursday 2.7%, and Friday 3.25%.

Importantly, risk aversion began seeping more steadily into the Credit market. Investment-grade CDS traded as high as 65 bps Friday morning, the high since November 2020 (ending the week up 3 to 61bps). High-yield CDS jumped to 358 early Friday (high since November 2020), before closing the week up 13 to 343 bps. Bloomberg: “Junk Sees Biggest Loss in 15 months as Risk Cut.” Junk bond funds saw outflows jump to a chunky $2.81 billion, making three straight weeks of negative flows.

Bank CDS were under notable pressure. JPMorgan CDS jumped six this week to 60 bps, the high since July 2020. BofA CDS rose seven to 62 bps (high since July 2020), and Citi seven to 68 bps (July 2020). Goldman Sachs CDS gained four to 79 bps. It was curious to see the major U.S. financial institutions on top of this week’s global bank CDS leaderboard (and, for the most part, year-to-date).

“Munis Post Biggest Weekly Slump in 11 Months as Rate Hikes Loom.” After all the hullabaloo about the hawkish Fed, 10-year Treasury yields this week added one basis point (to 1.77%). WTI crude jumped another $1.68 to $86.82, with the Bloomberg Commodities Index’s January gain rising to 8.0%.

Heightened instability is a global phenomenon. European high-yield CDS surged 16 to 285 bps, trading Friday to a 15-month high. Bloomberg: “Global Junk-Bond Markets Wobble, Spelling Risk for M&A Financing.” Asian equities were under heavy selling pressure. Major indices sank 6.0% in South Korea, 5.6% in Hong Kong, 4.8% in Australia, 3.1% in India, 3.0% in Taiwan and 2.9% in Japan. “Risk off” saw the Dollar Index jump 1.7%, with a lot of EM and “carry trade” currencies taken out to the woodshed.

While global markets are generally synchronized to the downside, it’s notable that China joins the U.S. for some of the heftier losses. The Shanghai Composite sank 4.6% this week, with a 2022 decline of 7.6%. The growth-oriented ChiNext Index dropped 4.1%, boosting y-t-d losses to 12.5%. This week’s self-off is notable for rebuffing recent rate cuts and measures to loosen real estate finance.

January 28 – Bloomberg: “Chinese stocks extended their nearly $1.2 trillion rout this month even as mutual funds, state media and companies all intensified efforts to support the market. At least 15 mutual funds have committed to buying their own equity-focused products in the past couple of days, a move that may have been coordinated. A series of recent articles in state media have touted the attractiveness of Chinese stocks on valuation and policy support, with the Securities Times calling the act of the funds ‘setting a good example.’”

January 28 – Bloomberg (Rebecca Choong Wilkins): “Fresh signs of contagion are rippling through China’s property industry, with a spate of auditor resignations deepening concerns about developers’ financial health in the run-up to earnings season. Investors moved to pare risk exposure on Friday after Hopson Development Holdings Ltd. said its auditor PricewaterhouseCoopers resigned after receiving insufficient information to complete auditing procedures. Hopson Development’s dollar bonds were on pace for record declines, while its shares fell the most since 2009. China’s high-yield dollar bonds dropped at least 3 cents on the dollar…”

Developer shares were slammed 7.5% this week, reversing almost all the sector’s recent rally. Industry leader Country Garden saw its bond yields surge 170 bps this week to 9.07%. And while developer bonds were generally mixed for the week, the impact of recent policy measures meant to boost the sector appear short-lived.

January 26 – Bloomberg: “On the surface, the recent land auction by the Chinese city of Rizhao appeared routine. There were four bids, pushing the price up 11% to $170 million. A closer look reveals something curious: The offers were reportedly made by a finance entity owned by the Rizhao government, meaning the city effectively sold land to itself. Across China, local government financing vehicles have replaced cash-strapped property developers as the biggest buyers of land…, stoking fresh concerns over the ability of these off-balance sheet borrowers to repay a debt pile that tops $8.4 trillion by some estimates. In nine of 21 large Chinese cities that packed in land sales over the last two months of 2021, at least half of the plots were bought by these so-called LGFVs… Some of these purchases were worth billions of dollars.”

Worries about off-balance sheet liabilities. Fear auditors could flee the developer sector. Concerns as to who is behind land purchases. It all has the inklings of incipient systemic confidence issues. It’s worth noting that the big Chinese banks are seeing CDS prices quietly drift higher. This week saw China Construction Bank CDS rise two to 64 bps; China Development Bank rose three to 61 bps; Industrial & Commercial Bank of China added two to 64 bps; and Bank of China CDS increased two to 63 bps. China sovereign CDS was back above 50 bps (up 2.5 this week), after beginning the month at 40 bps (early-September at 32 bps).

For a while now, my analytical framework has focused on the interplay of two separate yet interdependent Chinese and U.S. Bubbles. That China’s Bubble is faltering significantly elevates U.S. Bubble risk – and vice versa – which essentially places a world of Bubbles in jeopardy.

Global markets have entered a highly uncertain and volatile backdrop. The White House warns that a Russian invasion of Ukraine could be “imminent.” The Beijing Winter Olympics opening ceremony is next Friday, with closing ceremonies on the 20th. Putin is expected to attend opening festivities and meet directly with Xi in Beijing. While Russia has orchestrated a couple invasions during recent Olympics, I doubt Putin would risk displeasing Xi, while it’s difficult to believe Xi would embrace a highly destabilizing development as his nation showcases such a prestigious global occasion. Yet mobilizations – Russian and NATO – will continue, and the standoff will surely intensify.

There have been record put option purchases over recent sessions. February options expiration is on the 18th. I’d be prepared for a volatile few weeks.

For the Week:

The S&P500 increased 0.8% (down 7.0% y-t-d), and the Dow rallied 1.3% (down 4.4%). The Utilities fell 1.8% (down 5.9%). The Banks recovered 1.6% (up 1.7%), and the Broker/Dealers advanced 1.3% (down 3.9%). The Transports fell 1.3% (down 8.7%). The S&P 400 Midcaps dipped 0.6% (down 9.3%), and the small cap Russell 2000 declined 1.0% (down 12.3%). The Nasdaq100 was little changed (down 11.4%). The Semiconductors dropped 3.8% (down 16.3%). The Biotechs rallied 0.9% (down 10.3%). With bullion down $44, the HUI gold index sank 6.3% (down 7.2%).

Three-month Treasury bill rates ended the week at 0.1725%. Two-year government yields surged 16 bps to 1.16% (up 43bps y-t-d). Five-year T-note yields increased five bps to 1.61% (up 35bps). Ten-year Treasury yields added a basis point to 1.77% (up 26bps). Long bond yields were little changed at 2.08% (up 17bps). Benchmark Fannie Mae MBS yields increased two bps to a two-year high 2.55% (up 48bps).

Greek 10-year yields surged 17 bps to 1.85% (up 54bps y-t-d). Ten-year Portuguese yields rose six bps to 0.62% (up 16bps). Italian 10-year yields slipped a basis point to 1.28% (up 11bps). Spain's 10-year yields gained six bps to 0.70% (up 13bps). German bund yields increased two bps to negative 0.05% (up 13bps). French yields rose three bps to 0.37% (up 17bps). The French to German 10-year bond spread widened about one to 42 bps. U.K. 10-year gilt yields jumped seven bps to 1.24% (up 27bps). U.K.'s FTSE equities index declined 0.4% (up 1.1% y-t-d).

Japan's Nikkei Equities Index fell 2.9% (down 7.2% y-t-d). Japanese 10-year "JGB" yields rose three bps to 0.17% (up 10bps y-t-d). France's CAC40 lost 1.5% (down 2.6%). The German DAX equities index dropped 1.8% (down 3.6%). Spain's IBEX 35 equities index declined 1.0% (down 1.2%). Italy's FTSE MIB index slumped 1.8% (down 2.9%). EM equities were mostly under pressure. Brazil's Bovespa index jumped 2.7% (up 6.8%), while Mexico's Bolsa fell 1.8% (down 4.9%). South Korea's Kospi index sank 6.0% (down 10.6%). India's Sensex equities index dropped 3.1% (down 1.8%). China's Shanghai Exchange dropped 4.6% (down 7.6%). Turkey's Borsa Istanbul National 100 index fell 1.4% (up 6.8%). Russia's MICEX equities index recovered 1.4% (down 7.9%).

Investment-grade bond funds saw outflows of $465 million, and junk bond funds posted negative flows of $2.807 billion (from Lipper).

Federal Reserve Credit last week expanded $12.9bn to a record $8.839 TN. Over the past 124 weeks, Fed Credit expanded $5.112 TN, or 137%. Fed Credit inflated $6.028 Trillion, or 214%, over the past 481 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $11.3bn to $3.458 TN. "Custody holdings" were down $74.7bn, or 2.1%, y-o-y.

Total money market fund assets jumped $28.6bn to $4.645 TN. Total money funds increased $321bn y-o-y, or 7.7%.

Total Commercial Paper dropped $19bn to $1.025 TN. CP was down $43.6bn, or 4.1%, over the past year.

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.55% (up 82bps y-o-y). Fifteen-year rates added a basis point to 2.80% (up 60bps). Five-year hybrid ARM rates rose 10 bps to 2.70% (down 10bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates surge 19 bps to a 21-month high 3.78% (up 89bps).

Currency Watch:

For the week, the U.S. Dollar Index increased 1.7% to 97.27 (up 1.7% y-t-d). For the week on the upside, the Brazilian real increased 1.3%. On the downside, the South African rand declined 3.2%, the Australian dollar 2.7%, the New Zealand dollar 2.5%, the Swedish krona 2.5%, the Swiss franc 2.0%, the euro 1.7%, the Mexican peso 1.6%, the Canadian dollar 1.5%, the Japanese yen 1.4%, the British pound 1.1%, the South Korean won 1.1%, the Norwegian krone 0.8%, and the Singapore dollar 0.5%. The Chinese renminbi declined 0.35% versus the dollar (down 0.08 y-t-d).

Commodities Watch:

January 24 – Bloomberg (Mohammed Hatem and Zainab Fattah): “Yemen’s Iranian-backed Houthi group targeted the United Arab Emirates on Monday for the second time in a week, stoking tensions in the oil-exporting region even as the Gulf nation and U.S. forces said they had intercepted the threat. Oil gained, remaining near the highest levels since 2014 as geopolitical risk and the prospect of improving demand pushed crude to five straight weekly gains.”

January 25 – Bloomberg (Ari Natter and Sheela Tobben): “The U.S. Department of Energy announced the loan of 13.4 million barrels of crude oil from its strategic reserve as part of a renewed effort by the Biden administration to contain oil prices that have surged to their highest level since 2014. The awards to seven companies… mark the second-largest exchange of oil from the Strategic Petroleum Reserve ever, and bring the total amount of oil released from the cache to nearly 40 million barrels…”

The Bloomberg Commodities Index rose 1.7% (up 8.0% y-t-d). Spot Gold dropped 2.4% to $1,792 (down 2.1%). Silver sank 7.5% to $22.47 (down 3.6%). WTI crude gained $1.68 to $86.82 (up 15%). Gasoline jumped 4.1% (up 14%), and Natural Gas surged 16.0% (up 24%). Copper sank 4.7% (down 3%). Wheat gained 0.8% (up 2%), and Corn jumped 3.2% (up 7%). Bitcoin rallied $1,409, or 3.9%, this week to $37,801 (down 18.5%).

Coronavirus Watch:

January 26 – Wall Street Journal (Jon Kamp, Renee Onque and Margherita Stancati): “More signs emerged that the Omicron wave is taking a less serious human toll in Europe than earlier phases of the pandemic, while U.S. data showed daily average deaths from the disease exceeding the peak reached during the surge driven by the previously dominant Delta variant. In the U.S., the seven-day average for newly reported Covid-19 deaths reached 2,258 a day on Tuesday, up about 1,000 from daily death counts two months ago… That is the highest since February 2021 as the country was emerging from the worst of last winter’s wave.”

Covid Disruption Watch:

January 24 – New York Times (Ben Casselman and Sydney Ember): “The Omicron wave of the coronavirus appears to be cresting in much of the country. But its economic disruptions have made a postpandemic normal ever more elusive. Forecasters have slashed their estimates for economic growth in the first three months of 2022. Some expect January to show the first monthly decline in employment in more than a year. And retail sales and manufacturing production fell in December… More than 8.7 million Americans weren’t working in late December and early January because they had Covid-19 or were caring for someone who did… Another 5.3 million were taking care of children who were home from school or day care. The cumulative impact is larger than at any other point in the pandemic.”

January 23 – Wall Street Journal (Jesse Newman and Jaewon Kang): “The U.S. food system is under renewed strain as Covid-19’s Omicron variant stretches workforces from processing plants to grocery stores, leaving gaps on supermarket shelves. In Arizona, one in 10 processing plant and distribution workers at a major produce company were recently out sick. In Massachusetts, employee illnesses have slowed the flow of fish to supermarkets and restaurants. A grocery chain in the U.S. Southeast had to hire temporary workers after roughly one-third of employees at its distribution centers fell ill. Food-industry executives and analysts warn that the situation could persist for weeks or months… Recent virus-related absences among workers have added to continuing supply and transportation disruptions, keeping some foods scarce.”

January 22 – Bloomberg (Enda Curran): “The surging omicron variant is complicating the recovery for a world economy that continues to be wracked by supply chain chaos, worker absenteeism and faltering assembly lines. Supermarkets are struggling to stock shelves amid chronic staff shortages. Airlines are grounding flights. Manufacturers are facing disruption and shipping lines remain backed up. At the same time, surging energy prices are adding to inflation, pressuring central banks to raise interest rates even as the recovery slows.”

January 24 – CNBC (Weizhen Tan): “Covid lockdowns, quarantines and restrictions are causing a backlog in some of China’s major ports, resulting in ‘chaos’ and pushing up air freights by as much as 50% in some cases, analysts tell CNBC. Ahead of the extended Lunar New Year holiday in China, air freight rates have spiked and some shipping firms have suspended services, putting the spotlight on overwhelmed supply chains again. It comes as China pushes ahead with its zero-Covid strategy — which means a recent spike in infections has resulted in lockdowns and curbs in the largest port hubs and major cities across the country.”

Market Mania Watch:

January 24 – Bloomberg (Claire Ballentine and Paulina Cachero): “Just a few months ago, it seemed everyone was embracing crypto: Wall Street banks were building an army of experts and billionaires were finally jumping in. The mood in the market was FOMO. Now, crypto is in freefall, with the price of Bitcoin falling to a six-month low below the $34,000 mark — a 50% crash from its record high in November. Tokens like Ether and Solana are faring worse, and the mood has turned nightmarish for some retail investors who bought into the hype.”

January 24 – Bloomberg (Emily Nicolle and Akayla Gardner): “Bitcoin snapped a five-day slide as a late rally in U.S. equities suggested that investors were retaining some degree of risk appetite following the recent rout in global markets. The most popular cryptocurrency rose as much as 6.2% to $37,548 as of 4:36 p.m. in New York. It fell to $32,970 earlier, the least since July.”

January 28 – Bloomberg (Swetha Gopinath and Thyagaraju Adinarayan): “Robinhood Markets Inc. shares are in a tailspin and that’s making them the worst high-profile global stock market debut since the onset of the pandemic… The retail brokerage’s shares slumped as much as 14% Friday to $9.94 after it reported fourth-quarter revenue and losses that were worse than analysts’ estimates. It took losses since their initial public offering in July to 73%, making it the worst performer among companies that raised $2 billion or more on global exchanges since early 2020.”

January 27 – Bloomberg (Bailey Lipschultz): “Some of the blank-check world’s shrewdest sponsors are pulling new offerings amid miserable returns for the sector and mounting signs of investor exhaustion. Dealmakers aborted at least 14 planned listings this month alone for so-called special-purpose acquisition companies that were looking to raise a combined $4 billion… ‘Even among the higher-caliber people, too much money has already been raised,’ said Greg Martin, managing director… of Rainmaker Securities. ‘The SPAC craze is over; I think we’re going to have a tremendous compression of the number of SPACs that go public.’”

January 26 – Reuters (Katanga Johnson): “A year after the ‘meme stock’ rally humbled hedge funds and roiled Wall Street, U.S. regulators are studying ways to crack down on psychological prompts used by Robinhood Inc and other commission-free brokers to promote frequent stock trading on smartphone apps… The SEC has found that many brokers, as well as roboadvisors, increasingly use analytics driven by artificial intelligence, video game-like features and other behavioral prompts to encourage stock trading or to sell certain products. Trading contests, points and rewards are just some of these techniques. There are also lively sounds and bright colors, notifications, social networking tools, and curated lists of trading and investment ideas, among other practices.”

January 25 – Wall Street Journal (Peter Grant): “Investors set a record for U.S. commercial-property sales last year… Real-estate buyers loaded up on warehouses, which serve as fulfillment centers for the e-commerce boom. They bought apartment buildings to capitalize on record high rents. They paid up for resorts and vacation-oriented hotels that benefited from the resurgence in travel to leisure destinations… Overall, commercial-property sales totaled a record $809 billion in 2021, according to data firm Real Capital Analytics. That was nearly double 2020’s total, and it exceeded the previous record of about $600 billion in 2019.”

January 27 – Bloomberg (Jo Constantz): “The opulent seaside retreats of New York’s Hamptons have lured buyers from across the globe at a time when work-from-anywhere has gone mainstream. Their deals are stripping the market clean… The 54 luxury homes that changed hands in the quarter sold for a median of $8.05 million, near the record high and up 34% from a year earlier. An unprecedented 24% of those deals saw bidding wars.”

Market Instability Watch:

January 24 – Bloomberg (Simon Kennedy): “Goldman Sachs… economists said they see a risk the Federal Reserve will tighten monetary policy more aggressively this year than the Wall Street bank now anticipates. The Goldman Sachs economists led by Jan Hatzius said in a weekend report to clients that they currently expect rates to be increased in March, June, September and December and for the central bank to announce the start of a balance sheet reduction in July. But they said inflation pressures mean that the ‘risks are tilted somewhat to the upside of our baseline.’”

January 24 – Bloomberg (Payne Lubbers): “Volatility has surged back in the world’s currency markets, ending nearly two months of diminishing price swings. JPMorgan Chase & Co.’s Global FX Volatility Index, which tracks three-month option volatilities, on Monday posted its largest gain since late November as stocks tumbled globally… The same shift was seen in the G7 volatility index, which tracks the greenback’s developed-market peers.”

January 28 – Bloomberg (Laura Benitez): “Fears of rising rates have slowed junk bond issuance to three-year lows, spelling trouble for companies needing to refinance debt and bankers waiting to sell billions to fund major acquisition deals. Sales of high-yield bonds are down by more than 50% so far in 2022, the worst start to a year since 2019… The majority of bonds that managed to get issued have almost immediately lost value as traders bet on looming interest-rate hikes, leaving investors cautiously guarding their cash.”

January 28 – Bloomberg (Jack Pitcher and Carmen Arroyo): “The U.S. corporate bond market is relatively calm so far about the Federal Reserve’s plans to start tightening the money supply in March, but pain for the debt could be coming from an unlikely source: home loans. Most of those mortgages get bundled into bonds backed by U.S. government agencies, securities that have been weakening since November... The central bank is the biggest single buyer of mortgage-backed securities now. Once mortgage-backeds get cheap enough, investors might start snatching them up again, selling shorter-term investment-grade company debt in the process…”

January 27 – Bloomberg (Sridhar Natarajan and Max Reyes): “Just as the Federal Reserve was about to talk up its commitment to taming the hottest inflation in almost 40 years, a top U.S. banking leader delivered an unusually brusque critique of the central bank. Goldman Sachs… President John Waldron said the independence of the Fed has been damaged in recent years and that it’s lost credibility in markets… What’s gone on in the past couple of years has brought ‘into question the independence of the Fed,’ Waldron said… He questioned the Fed’s strength to act as an ‘independent, monetary policy engine that is doing what it thinks is right and not what’s expedient.’ ‘They have a chance here to do that, but I am a little worried about whether they’ll stand up and do it,’ Waldron said…”

Inflation Watch:

January 24 – Bloomberg (Katia Dmitrieva and Michael Sasso): “The American heartland has become an inflation hotbed, highlighting how difficult it will be for U.S. policy makers to cool decades-high inflation that is gripping the economy. Small towns in the Midwest and South are among the hardest hit, with consumer prices rising 9% or more -- faster even than the red-hot national average of 7%. The state with the most small cities registering inflation of at least 8% last quarter was Wisconsin… A close second was Texas, where several oil towns experienced a surge in prices at the end of the year.”

January 28 – CNBC (Jeff Cox): “A gauge the Federal Reserve prefers to measure inflation rose 4.9% from a year ago, the biggest gain going back to September 1983… The core personal consumption expenditures price index excluding food and energy was slightly more than the 4.8% Dow Jones estimate and ahead of the 4.7% pace in November. The monthly gain of 0.5% was in line with expectations.”

January 24 – Wall Street Journal (Jaewon Kang): “Rising food prices are leading American consumers to fill their shopping carts with cheaper groceries. Shoppers are seeking more discounts and are switching to lower-cost store brands for cooking oil, frozen food and items in other grocery sections, supermarket executives said. To stretch their dollars, people increasingly are comparing prices at various stores and signing up for savings programs such as automatic delivery that give additional discounts. The move marks a shift in consumer behavior after shoppers splurged on food earlier in the pandemic.”

January 28 – Bloomberg (Prashant Gopal and Patrick Clark): “For the U.S., the housing shortage is a crisis. For Wall Street, it’s a land rush. Institutional investors from JPMorgan… and Morgan Stanley to the Arizona State Retirement System are pouring billions into their next big housing bet: building communities of single-family homes in the suburbs for renters getting priced out of homeownership. Finding tenants is the easy part… But to succeed, landlords and their backers have to outcompete homebuilders for labor, materials and, most of all, land. That’s contributing to skyward costs that are rippling through the market — meaning prices for newly built homes may climb even further out of reach for would-be buyers.”

January 25 – Financial Times (Aime Williams): “Chip inventory held by manufacturers has plummeted to an average of just five days’ supply, as the global semiconductor shortage continues to wreak havoc on industry, the US Department of Commerce has warned. According to a survey by the department of roughly 150 companies worldwide, manufacturers’ median chip inventory plunged from 40 days supply in 2019 to about five days late last year. US commerce secretary Gina Raimondo… warned US companies remain vulnerable to the weakened supply chain, adding that some could be forced to temporarily close and furlough workers in the event of even minor disruptions.”

January 27 – CNBC (Kif Leswing): “Apple CEO Tim Cook said the company is seeing inflationary pressure in an interview with CNBC… as the company reported nearly $124 billion in sales in its December quarter. ‘We try to price our products for the value that we deliver and we are seeing inflationary pressure,” Cook said. ‘I think everybody’s seeing inflationary pressure. There’s no two ways about that.’”

January 24 – Bloomberg (Mark Burton): “Lithium prices are continuing their breakneck ascent in China, with surging electric-vehicle sales underpinning a fivefold gain over the past year. Chinese lithium carbonate prices tracked by Asian Metal Inc. rose to a fresh record on Monday, as data showed a 35% month-on-month jump in electric-vehicle registrations in December… But with lithium prices blowing past previous records, there’s a growing risk that raw-material inflation could soon create headwinds for the burgeoning industry.”

January 27 – Bloomberg (Chunzi Xu): “Wholesale gasoline in the New York market surged to the highest seasonal level in three decades of record keeping as deliveries of domestic and foreign supplies failed to keep pace with demand.”

Biden Administration Watch:

January 24 – Washington Post (Robyn Dixon, David L. Stern, Isabelle Khurshudyan, John Hudson, Rachel Pannett): “President Biden and Russian President Vladimir Putin traded provocations Tuesday, with the Kremlin broadcasting a new round of military exercises within striking distance of Ukraine and Washington rushing a fresh shipment of weapons to Kyiv while suggesting thousands of U.S. troops could be deployed soon to shore up allies’ defenses in Eastern Europe. Officials on both sides accused the other of bringing Europe closer to a full-blown war — an outcome Biden said would have ‘enormous consequences worldwide.’ ‘This would be the largest … invasion since World War II,’ the president told reporters... ‘It would change the world.’”

January 23 – Associated Press (Matthew Lee): “The State Department on Sunday ordered the families of all American personnel at the U.S. Embassy in Ukraine to leave the country amid heightened fears of a Russian invasion… It also said that non-essential embassy staff could leave Ukraine at government expense.”

January 25 – Associated Press (Robert Burns and Lorne Cook): “The Pentagon ordered 8,500 troops on higher alert… to potentially deploy to Europe as part of a NATO ‘response force’ amid growing concern that Russia could soon make a military move on Ukraine. President Joe Biden consulted with key European leaders, underscoring U.S. solidarity with allies there… At stake, beyond the future of Ukraine, is the credibility of a NATO alliance that is central to U.S. defense strategy but that Putin views as a Cold War relic and a threat to Russian security. For Biden, the crisis represents a major test of his ability to forge a united allied stance against Putin.”

January 24 – CBS (Ed O’Keefe): “The Biden administration is considering controlling exports related to semiconductors to harm Russian industries, should Russia invade Ukraine, a senior administration official confirmed... The move could be done in a way to keep new smartphones and other technology from Russian citizens.”

'January 26 – Wall Street Journal (Paul Kiernan): “Federal regulators proposed measures that would significantly increase their visibility into private-equity funds and some hedge funds, the first in a range of plans to expand oversight of private markets. The Securities and Exchange Commission voted 3-1 to issue a proposal that would increase the amount and timeliness of confidential information that private-equity and hedge funds report to the agency on a document known as Form PF. The main goal, Chairman Gary Gensler said, is to allow regulators to better spot risks building up in private markets, stepping up an effort that began after the 2008 financial crisis.”

January 24 – Bloomberg (Ailing Tan): “The landmark trade deal signed in 2020 between the world’s two largest economies failed to reduce the bilateral trade deficit, adding pressure on the Biden administration to deal with the unresolved economic problems with China. In the two years since former President Donald Trump signed the deal in January 2020, China bought about $237 billion of U.S. agricultural, manufactured, and energy goods, 63% of the goods it promised to buy…”

January 26 – Reuters (Michael Martina): “The U.S. State Department is considering whether to authorize departures for American diplomats and their families in China who wish to leave due to the U.S. government's inability to prevent Chinese authorities from subjecting them to intrusive pandemic control measures, sources told Reuters. Two sources familiar with the issue said the U.S. Embassy on Monday had sent the request to Washington for formal sign off…”

Federal Reserve Watch:

January 26 – Financial Times (Colby Smith and Kate Duguid): “Jay Powell… refused to rule out a more aggressive string of interest rate rises than markets had been expecting as he all but confirmed the first increase would be implemented in March. Powell dodged a question on whether the Fed could raise rates at every subsequent meeting this year — which would amount to seven increases in 2022 — instead saying that the central bank would be ‘humble and nimble’ and ‘guided by the data’.”

January 26 – Financial Times (Coby Smith): “Jay Powell had always said that if inflation was in danger of spiralling out of control, the Federal Reserve would be willing to bring out the hammer to knock prices down. On Wednesday, in his most hawkish press conference since the start of the pandemic, the chair of the Fed gave the clearest signal yet that such a moment was fast approaching. ‘Powell essentially said to the markets and the economy, ‘put on your seatbelt, we are getting ready to take off’,’ said Nathan Sheets, global chief economist at Citigroup and a former under-secretary at the US Treasury. ‘If inflation doesn’t fall as they expect, the Fed is prepared to be vigorous.’”

U.S. Bubble Watch:

January 26 – The Hill (Mychael Schnell): “The U.S. trade deficit for goods surpassed $1 trillion for the first time in 2021… The trade gap in goods increased to $1.08 trillion in 2021…, which was up from $893.5 billion the year before. The international trade deficit rose 3% in December…, increasing from $98 billion in November to $101 billion in December. That jump was the largest monthly growth on record.., and the first time the statistic has surpassed $100 billion…”

January 24 – Dow Jones (Xavier Fontdegloria): “Economic activity in the U.S. cooled sharply at the beginning of the year as the rapid spread of the Covid-19 Omicron variant hit the services sector, according to data from a purchasing managers survey… The U.S. IHS Markit flash composite purchasing managers index, which gauges activity in both the manufacturing and services sectors, decreased to 50.8 in January from 57.0 in December, signaling the slowest growth since July 2020… ‘Soaring virus cases have brought the U.S. economy to a near standstill at the start of the year, with businesses disrupted by worsening supply-chain delays and staff shortages, with new restrictions to control the spread of Omicron adding to firms' headwinds,’ said Chris Williamson, chief business economist at IHS Markit.”

January 24 – Dow Jones (Xavier Fontdegloria): “U.S. economic growth declined in December for the first time since February, according to an index compiled by the Federal Reserve Bank of Chicago... The Chicago Fed National Activity Index decreased to minus 0.15 in December from 0.44 in November, missing the 0.25 consensus forecast… The CFNAI index is composed of 85 economic indicators from four broad categories of data: production and income; employment, unemployment and hours; personal consumption and housing; and sales, orders and inventories.”

January 26 – Associated Press (Paul Wiseman): “The U.S. economy grew last year at the fastest pace since Ronald Reagan’s presidency, bouncing back with resilience from 2020′s brief but devastating coronavirus recession. The nation’s gross domestic product… expanded 5.7% in 2021. It was the strongest calendar-year growth since a 7.2% surge in 1984 after a previous recession. The economy ended the year by growing at an unexpectedly brisk 6.9% annual pace from October through December as businesses replenished their inventories… Growth last year was driven up by a 7.9% surge in consumer spending and a 9.5% increase in private investment. For the final three months of 2021, consumer spending rose at a more muted 3.3% annual pace. But private investment rocketed 32% higher, boosted by a surge in business inventories as companies stocked up... Rising inventories, in fact, accounted for 71% of the fourth-quarter growth.”

January 27 – CNBC (Jeff Cox): “The U.S. economy grew at a much better-than-expected pace to end 2021 from sizeable boosts in inventories and consumer spending… Gross domestic product… increased at a 6.9% annualized pace... Economists surveyed by Dow Jones had been looking for a gain of 5.5%.”

January 25 – Associated Press (Matt Ott): “U.S. consumer confidence declined this month as persistent inflation and the highly-contagious omicron variant of the coronavirus dinged the optimism of Americans. The Conference Board… said… its consumer confidence index — which takes into account consumers’ assessment of current conditions and the their outlook for the future — fell to 113.8 in January, from 115.2 in December.”

January 28 – Financial times (Colby Smith): “US labour costs have risen sharply, contributing to the rapid climb of inflation… The latest employment cost index (ECI) report, which tracks wages and benefits paid out by US employers, showed total pay for civilian workers during the fourth quarter increased 1%, just shy of the record-setting 1.3% jump seen between July and the end of September… That translated to a 4% jump for the 12-month period ending last month. Wages shot up 4.5% during that window, nearly double the pace during the same time last year. Benefits rose 2.8%.”

January 27 – Associated Press: “Fewer Americans applied for unemployment benefits last week following three straight increases amid a surge in cases of the omicron variant of COVID-19. Jobless claims fell by 30,000 to 260,000 last week… The four-week average of claims… rose by 15,000 to 247,000, the highest in two months.”

January 25 – CNBC (Diana Olick): “Even as the housing market entered its traditionally slower season in November, home prices showed big gains from a year ago. Prices rose 18.8% year over year on the S&P CoreLogic Case-Shiller National Home Price Index… The 10-city composite climbed 16.8% annually, down from 17.2% in the previous month. The 20-city composite grew 18.3%, down from 18.5% in October. ‘Despite this deceleration, it’s important to remember that November’s 18.8% gain was the sixth-highest reading in the 34 years covered by our data (the top five were the months immediately preceding November),’ noted Craig Lazzara, managing director at S&P DJI.”

January 26 – Bloomberg (Olivia Rockeman): “Sales of new U.S. homes rose in December to a nine-month high, indicating firmer demand at the end of 2021 despite high prices and still-limited inventory. Purchases rose 11.9% from a month earlier to an 811,000 annualized pace… The median estimate… called for a 760,000 rate, and the December level exceeded all but one forecast… Of the homes sold last month, construction on 231,000 had yet to be started, the most since May.”

January 26 – Wall Street Journal (Ben Eisen): “Big banks are pushing deeper into auto lending. Bank of America Corp. said last year was a record for auto-loan originations. Wells Fargo & Co. posted three straight quarters of records and said the fourth quarter was up 77% from a year earlier. Ally Financial Inc. said 2021 was its biggest year for auto lending since 2004. Auto lending is a bread-and-butter business for many consumer banks. But their financial results for 2021… showed it was a particularly bright spot when consumers and businesses were otherwise flush with cash and slow to take out loans. U.S. banks increased their auto-loan balances by 12% over the course of 2021…”

January 27 – Bloomberg (Alexandre Tanzi): “Strong demand and limited supply led to a historic jump in the value of the U.S. housing stock, which surged to $43.4 trillion last year. The aggregate value of homes has now doubled since a decade ago, when the market was recovering from the Great Recession, according to Zillow... Cities that have attracted people during the pandemic saw the biggest percentage gains last year, with Austin and Raleigh, North Carolina, topping the Zillow data. New York City, which many fled in the past two years, had the smallest increase among 50 metro areas, at 10.9%.”

January 24 – Bloomberg (Claire Ballentine and Alice Kantor): “Surging markets spurred a buying frenzy for everything from stocks and cryptocurrencies to new homes over the last two years. Now, with inflation at a nearly 40-year high and at least three priced-in rate hikes, the hunt for investing safe havens is on. Real estate is considered one approach to hedge against inflation, given the asset class usually has little correlation with stocks and bonds. So naturally, investor interest is soaring — even against the backdrop of a super hot real estate market, a low supply of houses and mortgage rates threatening to creep up.”

Fixed-Income Bubble Watch:

January 26 – CNBC (Diana Olick): “Rising interest rates are causing big headaches for mortgage lenders, especially those who depend most on refinance business. Demand is simply drying up… As a result mortgage refinance applications… fell 13% for the week and were 53% lower year over year... Rates have now been moving higher for five straight weeks.”

January 27 – Financial Times (Romy Varghese and Danielle Moran): “Investors yanked the most cash out of municipal-bond mutual funds since April 2020… Muni mutual funds saw $1.4 billion withdrawn during the week…, according to Refinitiv Lipper... That follows last week’s $239 million outflow, which ended 45 straight weeks of gains.”

January 25 – Bloomberg (Shruti Date Singh): “The $4 trillion muni market, often a haven when other markets tumble, is suffering through its worst January on record as investors grow skittish about the prospect of Federal Reserve interest rate hikes. The Bloomberg U.S. municipal bond index has fallen 1.46% this month through Monday, and is on track for its worst January performance in records dating back to 1980.”

China Watch:

January 25 – Bloomberg: “A rapid withdrawal of stimulus by some countries could hurt China’s exports, an official with the Ministry of Commerce said, as he warned of ‘unprecedented’ difficulties ahead this year… “Global systemic risks are on the rise due to unbalanced economic recoveries… The overly fast withdrawal of stimulus policies by some countries could trigger contractions in demand, fluctuations in prices and in turn affect the exports of Chinese industry.’”

January 28 – Wall Street Journal (Lingling Wei): “Imbalances in the Chinese economy have worsened and delayed China’s transition to consumption-led growth, the International Monetary Fund said…, slashing its outlook for the country this year. The IMF assessment, in its Article IV review, reflects growing concern among some economists and officials that greater state intervention in the economy could be hindering China’s long-held goal of ‘high-quality’ growth—one driven by consumption rather than investment.”

January 27 – Bloomberg: “Chinese authorities are considering a proposal to dismantle China Evergrande Group by selling the bulk of its assets, according to people familiar... The restructuring proposal, submitted to Beijing by officials in Evergrande’s home province of Guangdong, calls for the developer to sell most assets except for its separately listed property management and electric vehicle units…”

January 26 – Reuters (Katanga Johnson): “China Evergrande Group said… it aims to have a preliminary restructuring proposal in place within six months as the debt-laden developer scrambles to reassure creditors spooked by defaults since its finances began to unravel last year. The long-awaited communication came against the backdrop of Beijing tightening control over the property developer, while taking measures to stabilise China's crisis-hit property sector. But some bondholders said they were disappointed by the 25-minute call with creditors, which included prepared answers to questions, saying it lacked insight on Evergrande's plans.”

January 25 – Bloomberg: “Shimao Group Holdings Ltd. has put 34 projects across China up for sale, as the embattled developer seeks to raise billions of dollars amid mounting debt repayment pressures... The assets are residential, office, commercial and hotel projects in 17 cities including Beijing, Shanghai and Hangzhou and in the Greater Bay Area in southern China… Shimao is asking for 42.2 billion yuan ($6.7bn) for 15 of the projects…”

January 25 – Reuters (Claire Jim): “Chinese state-owned property firms are expected to acquire more assets from cash-strapped private developers, analysts said, as Beijing steps up efforts to stabilise and tighten control over a crisis-hit sector that accounts for a quarter of its economy. The market has seen over half a dozen deals in recent weeks following easing of rules to issue debt for quality property firms, and initiatives by local governments to facilitate asset disposal for distressed firms.”

January 26 – Bloomberg: “China will allow government-owned borrowers in Guizhou province to negotiate with banks to extend debt repayments, stoking fears the local authorities may be struggling to meet debt obligations. ‘Financing platform companies will be permitted to negotiate with financial institutions to appropriately extend the maturity of existing hidden debt that meet certain requirements or restructure their borrowings to maintain cash flow,’ according to… the State Council on supporting Guizhou’s development.”

January 26 – Bloomberg: “China’s local governments have been selling bonds at a modest pace in January, undermining market expectations of a strong fiscal boost early in the year to cushion a slowing economy. Local authorities are scheduled to issue 516.8 billion yuan ($81.8bn) of new general and special bonds by the end of January, which accounts for 12% of estimated annual quota for 2022… The bonds are mainly used for infrastructure spending, a key way for policy makers to deliver stimulus to the economy.”

January 24 – Bloomberg (Tom Hancock): “Looser monetary policy in China won’t be sufficient to stabilize the economy, a former adviser to the central bank said, arguing that the government needs to speed up spending as well. ‘Under the current economic situation, the role the PBOC can play is limited,’ said Yu Yongding, a member of the monetary policy committee of the People’s Bank of China in the mid 2000s… The central bank has taken a series of easing steps in recent weeks, cutting key interest rates for the first time in nearly two years and encouraging banks to accelerate lending.”

January 25 – Reuters (Ryan McMorrow): “China has launched a month-long campaign to clean up online content during next week’s lunar new year festival, in its latest effort to reshape behaviour on the internet. The Cyberspace Administration of China, the country’s top internet regulator, has instructed officials to sweep away ‘illegal content and information’ and target celebrity fan groups, online abuse, money worship, child influencers and the homepages of media sites. The campaign will apply the tradition of cleaning house before the new year, the most important holiday in China, to the internet, envisioning a ‘purification’ of the online world.”

January 26 – Bloomberg (Shawna Kwan): “The world’s most expensive office market has more empty floorspace than ever. Vacant office stock in Hong Kong climbed to a record high in December to 9.1 million square feet… - equivalent to nearly 158 football fields, according to… CBRE Group Inc. In Central, the city’s prized financial center, the supply is set to increase further. Li Ka-shing and Lee Shau Kee, Hong Kong’s richest property tycoons, are building new office blocks that are slated to open next year.”

Central Banker Watch:

January 24 – Reuters (David Milliken): “Britain's central bank looks on course to raise interest rates next week for the second time in less than two months…, after inflation jumped to its highest in nearly 30 years. Inflation has risen sharply across advanced economies… But the Bank of England has moved faster than other big central banks because of fears that costly energy and a tight labour market could see price pressures become entrenched.”

January 24 – Reuters (Aradhana Aravindan and Anshuman Daga): “Singapore's central bank tightened its monetary policy settings… in its first out-of-cycle move in seven years, as global supply constraints and brisk economic demand elevate inflation pressures across the region.”

Global Bubble Watch:

January 25 – CNBC (Karen Gilchrist): “The International Monetary Fund has downgraded its global growth forecast for this year as rising Covid-19 cases, supply chain disruptions and higher inflation hamper economic recovery. In its delayed World Economic Outlook report…, the IMF said it expects global gross domestic product to weaken from 5.9% in 2021 to 4.4% in 2022 — with this year’s figure being half a percentage point lower than previously estimated. ‘The global economy enters 2022 in a weaker position than previously expected,’ the report noted, highlighting ‘downside surprises’ such as the emergence of the omicron Covid variant, and subsequent market volatility, since its October forecast.”

January 28 – Bloomberg (Giulia Morpurgo): “The cost of insuring European junk bonds climbed to its highest level since November 2020 as investors turn away from risky assets at the end of a volatile week for markets. An index of credit default swaps for non-investment grade corporates in Europe rose as high as 295 bps on Friday, exceeding a recent peak in November 2021, according to Markit data.”

January 24 – Reuters (Wayne Cole): “Australia’s core inflation flew to its fastest annual pace since 2014 in the December quarter as fuel and housing costs led broad-based price pressures, a shock that will stoke market speculation of an early hike in interest rates… The headline consumer price index (CPI) rose 1.3% in the fourth quarter and 3.5% for the year, topping forecasts. The trimmed mean measure of core inflation favoured by the Reserve Bank of Australia (RBA) jumped 1.0% in the quarter, the largest increase since 2008.”

January 23 – Bloomberg (Garfield Reynolds and Swati Pandey): “Australian bond yields are primed to set new highs as bets that the central bank will scrap quantitative easing reach a crescendo ahead of a pivotal inflation report. Traders are girding for the risk of fresh turmoil, with unemployment’s drop to a 13-year low raising the prospect of a sharper-than-expected spike in consumer price data on Tuesday.”

January 26 – Bloomberg (Tracy Withers): “New Zealand’s inflation accelerated to the fastest pace in more than 31 years, reinforcing bets that the nation’s central bank will remain one of the leaders of the global tightening cycle. Annual inflation surged to 5.9% in the final three months of 2021 from 4.9% in the prior period…”

EM Watch:

January 26 – Bloomberg (Maria Elena Vizcaino): “Money managers are pulling money from emerging-market bond funds at the fastest pace in months as anxiety builds over tighter monetary conditions and the threat of a conflict over Russia’s troops at the Ukraine border.”

January 22 – Bloomberg (Baris Balci, Ugur Yilmaz and Onur Ant): “Turkish Finance Minister Nureddin Nebati told economists he expects the inflation rate to peak at about 40% in the months ahead and not to surpass 50% this year, according to people who attended. Nebati provided his most detailed outlook yet for consumer prices in 2022 during a meeting with 60 economists and analysts…”

Europe Watch:

January 24 – Bloomberg (Ben Holland and Anya Andrianova): “The European Union has a lot more to lose than the U.S. from conflict with Russia, one reason why the western allies are having difficulty agreeing on a tough stance in the standoff over Ukraine. Russia ranks as the EU’s fifth-biggest trade partner -- as well as its top energy supplier -- while for the U.S. it barely makes the top 30. There’s a similar gap for investment… With inflation surging and consumers squeezed by a surge in energy prices, EU officials are moving carefully on the prospect of sanctions. They want Russia to feel more pain than Europe from measures aimed at preventing an invasion of Ukraine. They’re worried a war could choke off natural gas supplies in the middle of winter when they’re needed most.”

January 23 – Wall Street Journal (Bojan Pancevskiand Georgi Kantchev): “Germany’s dependence on Russian gas has left Europe short of options to sanction Moscow if it invades Ukraine—and itself vulnerable should Russia stop gas exports to the West. A two-decade-old decision to phase out nuclear power and more recent moves to cut reliance on coal in an effort to bring down CO2 emissions mean Germany is now more reliant on Russian gas than most of its neighbors, not just for heating but also for power generation. This year, the country’s last three nuclear power plants will be closed, just as Germany faces some of the highest energy prices in the developed world. All German coal plants are due to be closed by 2038.”

Japan Watch:

January 28 – Bloomberg (Toru Fujioka): “Governor Haruhiko Kuroda said the Bank of Japan won’t be switching its bond yield target until inflation rises high enough to warrant exit talks. ‘It’s too early and inappropriate to raise interest rates or steepen the yield curve by changing the yield curve control program now,’ Kuroda said… in response to questions by a lawmaker… ‘Those points will probably be discussed when we can talk about exit,” when the 2% inflation target is in sight.”

Social, Political, Environmental, Cybersecurity Instability Watch:

January 26 – Bloomberg: “President Xi Jinping said efforts to achieve China’s climate targets need to work in lockstep with the government’s other objectives, as policy makers seek to balance sometimes conflicting environmental and economic aims. Xi said the nation’s carbon goals shouldn’t clash with other priorities, which include securing adequate supplies of food, energy and materials ‘to ensure the normal life of the masses,’ according to comments made at a Politburo session…”

January 24 – USAT (Josh Meyer): “A new Department of Homeland Security bulletin warns that Russia could launch a cyberattack against U.S. targets on American soil if it believes Washington’s response to its potential invasion of Ukraine threatens its long-term national security. DHS blasted out the memo Sunday to U.S. critical infrastructure operators and state and local governments around the country, warning that ‘Russia maintains a range of offensive cyber tools that it could employ against U.S. networks’ that make everything from planes to hospitals to dams and bridges operate. Separately, a well-respected private cybersecurity firm leader warns that while ‘cyber espionage is already a regular facet of global activity, as the situation deteriorates, we are likely to see more aggressive information operations and disruptive cyberattacks within and outside of Ukraine.’”

January 25 – Associated Press: “Extremist groups in the United States appear to increasingly view attacking the power grid as a means of disrupting the country, according to a government report aimed at law enforcement agencies and utility operators. Domestic extremists ‘have developed credible, specific plans to attack electricity infrastructure since at least 2020,’ according to the report from the Department of Homeland Security... The report warns that extremists ‘adhering to a range of ideologies will likely continue to plot and encourage physical attacks against electrical infrastructure…’”

Leveraged Speculation Watch:

January 24 – Financial Times (Joe Rennison, Madison Darbyshire, Philip Stafford and Stefania Palma): “It was in the late 1980s that Ken Griffin set his sights on what Citadel Securities would eventually become. An early trade with Susquehanna Investment Group paid out less than the young Griffin was expecting. One version of the story has him sitting on the telephone in his Harvard dorm room, complaining to the Susquehanna trader and vowing to start a competing business… Whether apocryphal, few would dispute that Griffin — the founder of Citadel Securities and its related $35bn hedge fund Citadel — has fulfilled this vow. The initial ideas that would evolve into Citadel Securities took life in the early 2000s… Since then it has grown into one of the largest trading houses in the world, involved in roughly one in four of all US stock trades and nearly 40% of all those involving individual retail investors.”

January 26 – Bloomberg (Ben Bain and Robert Schmidt): “Large hedge funds and private-equity firms may soon have to start reporting steep losses, major redemptions and other extraordinary events in near real-time to the U.S. Securities and Exchange Commission -- a change that the regulator says will help it protect the financial system during meltdowns and wild swings like the meme stock mania that roiled markets a year ago.”

January 28 – Bloomberg (Edward Bolingbroke): “The Treasury yield-curve collapse that followed this week’s Federal Reserve policy meeting cloaked a stampede of hedge funds that had been leaning the wrong way. Short-dated Treasury yields rocketed higher, outpacing longer-dated ones Wednesday as expectations for Fed rate hikes mounted based on comments by Chair Jerome Powell. The spread between 5- and 30-year yields dropped to 48 bps from 54 bps that day, and reached 42 bps Thursday, the tightest since the March 2020 liquidity crisis.”

Geopolitical Watch:

January 28 – Reuters (Dmitry Antonov and Alexander Marrow): “Russian and Chinese presidents Vladimir Putin and Xi Jinping will spend a ‘lot of time’ discussing security in Europe and the set of demands Moscow has made of the West when they meet for talks next week, the Kremlin said… Putin will travel to China to attend the opening ceremony of the Beijing Winter Olympics on Feb. 4 against the backdrop of a tense confrontation with the West over Ukraine.”

January 27 – New York Times (Anton Troianovski, Michael Schwirtz and Andrew E. Kramer): “In the early years of Vladimir V. Putin’s tenure as Russia’s leader, the country’s military was a hollowed-out but nuclear-armed shell. It struggled to keep submarines afloat in the Arctic and an outgunned insurgency at bay in Chechnya. Senior officers sometimes lived in moldy, rat-infested tenements… Two decades later, it is a far different fighting force that has massed near the border with Ukraine. Under Mr. Putin’s leadership, it has been overhauled into a modern sophisticated army, able to deploy quickly and with lethal effect in conventional conflicts... It features precision-guided weaponry, a newly streamlined command structure and well-fed and professional soldiers. And they still have the nuclear weapons. The modernized military has emerged as a key tool of Mr. Putin’s foreign policy…”

January 25 – Associated Press (Yuras Karmanau): “Ukraine’s leaders sought Tuesday to reassure the nation that an invasion from neighboring Russia was not imminent, even as they acknowledged the threat is real and received a shipment of U.S. military equipment to shore up their defenses. Moscow has denied it is planning an assault, but it has massed an estimated 100,000 troops near Ukraine in recent weeks and is holding military drills at multiple locations in Russia. That has led the United States and its NATO allies to rush to prepare for a possible war. U.S. President Joe Biden told reporters that Russian President Vladimir Putin ‘continues to build forces along Ukraine’s border,’ and an attack ‘would be the largest invasion since World War II. It would change the world.’”

January 28 – Associated Press (Vladimir Isachenkov and Nomaan Merchant): “The White House says President Joe Biden warned Ukraine’s president Thursday that there is a ‘distinct possibility’ Russia could take military action against Ukraine in February. The Kremlin likewise sounded a grim note, saying it saw ‘little ground for optimism’ in resolving the crisis after the U.S. this week again rejected Russia’s main demands. Russian officials said dialogue was still possible to end the crisis, but Biden again offered a stark warning amid growing concerns that Russian President Vladimir Putin will give the go-ahead for a further invasion of Ukrainian territory in the not-so-distant future.”

January 27 – Washington Post (Anthony Faiola): “More than 100,000 Russian troops are massed near Ukraine amid a flurry of diplomatic efforts to defuse the prospect of conflict. Should peace not prevail, western-gazing Ukrainians would pay the highest price. But in a worst-case scenario, the cost of a major Russian invasion of Ukraine — one of the world’s largest grain exporters — could ripple across the globe, driving up already surging food prices and increasing the risk of social unrest well beyond Eastern Europe.”

January 24 – Reuters (Dmitry Antonov and Sabine Siebold): “NATO said… it was putting forces on standby and reinforcing eastern Europe with more ships and fighter jets, in what Russia denounced as Western ‘hysteria’ in response to its build-up of troops on the Ukraine border… So far, NATO has about 4,000 troops in multinational battalions in Estonia, Lithuania, Latvia and Poland, backed by tanks, air defences and intelligence and surveillance units.”

January 22 – Financial Times (Gideon Rachman): “The western alliance has threatened the Kremlin with ‘massive’ and ‘unprecedented’ sanctions if Russia attacks Ukraine. But, as the Ukraine crisis reaches boiling point, western efforts to isolate and punish Russia are likely to be undermined by the support of China — Russia’s giant neighbour. When Vladimir Putin travels to Beijing for the beginning of the Winter Olympics on February 4, the Russian president will meet the leader who has become his most important ally — Xi Jinping of China. In a phone call between Putin and Xi in December, the Chinese leader supported Russia’s demand that Ukraine must never join Nato. A decade ago, such a relationship seemed unlikely: China and Russia were as much rivals as partners. But after a period when both countries have sparred persistently with the US, Xi’s support for Putin reflects a growing identity between the interests and world views of Moscow and Beijing.”

January 24 – Associated Press (John Daniszewski): “The crisis in Ukraine is hardly going away — a showdown of two world views that could upend Europe. It carries echoes of the Cold War and resurrects an idea left over from the 1945 Yalta Conference: that the West should respect a Russian sphere of influence in Central and Eastern Europe. Since coming to power in 2000, Russian President Vladimir Putin has worked steadily and systematically to reverse what he views as the humiliating breakup of the Soviet Union... While massing troops along Ukraine’s border and holding war games in Belarus, close to the borders of NATO members Poland and Lithuania, Putin is demanding that Ukraine be permanently barred from exercising its sovereign right to join the Western alliance, and that other NATO actions, such as stationing troops in former Soviet bloc countries, be curtailed. NATO has said the demands are unacceptable and that joining the alliance is a right of any country and does not threaten Russia.”

January 25 – Reuters (William James and Alistair Smout): “British Prime Minister Boris Johnson… said he was discussing banning Russia from the Swift global payments system with the United States. Asked about the Swift payment system and whether Britain would ban Russia, Johnson said: ‘There is no doubt that that would be a very potent weapon.’ ‘I'm afraid it can only really be deployed with the assistance of the United States though. We are in discussions about that,’ he told lawmakers.”

January 25 – Associated Press (Ellen Knickmeyer): “The financial options being considered to punish President Vladimir Putin if Russia invades Ukraine range from the sweeping to the acutely personal — from cutting Russia off from U.S. dollars and international banking to slapping sanctions on a former Olympic gymnast reported to be Putin’s girlfriend. Publicly, the United States and European allies have promised to hit Russia financially like never before if Putin does roll his military into Ukraine. Leaders have given few hard details to the public, however, arguing it’s best to keep Putin guessing.”

January 23 – Financial Times (Max Seddon and Roman Olearchyk): “The last time Ukrainians heard of Yevhen Murayev was when the pro-Russian former lawmaker unfurled a banner in central Kyiv last autumn with the inscription ‘This is our land!’ Following a public outcry, it was taken down a few hours later… Murayev seemed destined to remain in obscurity until Saturday, when the UK claimed he was in line to lead a pliant Ukrainian government as part of a Russian regime-change plot… The US and UK have warned that Moscow might move to topple Putin’s Ukrainian counterpart, Volodymyr Zelensky, in a coup. ‘We’ve been concerned and have been warning about exactly these kinds of tactics for weeks,’ US secretary of state Antony Blinken said…, referring to the UK allegations. ‘This is very much part of the Russian playbook.’”

January 26 – Reuters (Gabrielle Tétrault-Farber): “Russian warships entered the Barents Sea on Wednesday to rehearse protecting a major shipping lane in the Arctic, its Northern Fleet said on Wednesday, as Moscow stages sweeping military exercises involving all of its fleets… Moscow said last week it would stage a series of drills involving all its fleets in the seas directly adjacent to Russia. The exercises will also include manoeuvres in the Mediterranean, the North Sea, the Sea of Okhotsk, the northeast Atlantic Ocean and the Pacific.”

January 27 – Financial Times (Eleanor Olcott, Demetri Sevastopulo and James Politi): “China has offered support for Russia in the face of its stand-off with the US and Nato over Ukraine, saying Moscow had ‘reasonable security concerns’ that Washington and its allies should take ‘seriously’. Wang Yi, the Chinese foreign minister, told Antony Blinken, US secretary of state, that European regional security could not be guaranteed by ‘strengthening or even expanding military blocs’, in comments that appeared to back Russian opposition to Ukraine joining Nato in the future.”

January 24 – Reuters (Ben Blanchard): “Taiwan… reported the largest incursion since October by China’s air force in its air defence zone, with the island’s defence ministry saying Taiwanese fighters scrambled to warn away 39 aircraft in the latest uptick in tensions. Taiwan… has complained for more than a year of repeated missions by China's air force near the democratically governed island, often in the southwestern part of its air defence identification zone, or ADIZ, close to the Taiwan-controlled Pratas Islands.”

January 26 – Reuters (Dan Whitcomb): “The U.S. government ‘condemns’ North Korea's launch of two ballistic missiles, a State Department spokesperson said…, calling the tests a violation of multiple United Nations Security Council resolutions.”

Credit Bubble Bulletin

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Weekly Commentary: The High-Wire Act Has Commenced