Friday, May 27, 2022

Weekly Commentary: Inflation Acquiescence

A headline this week from National Review: “The Fed’s Half-Hearted War on Inflation – It has the power, but does it have the will?”

Is the Fed all inflation bark and no bite? After all, CPI (y-o-y) surged to over 8% - and has been above the Fed’s 2% target now for 15 months – yet the target policy rate is today at only 0.75% to 1.0%. Inflation is exacting a heavy toll on the population; politicians are under the gun and vocal. The Fed, of course, is compelled to present steely resolve. “Fed Minutes Show Urgency…” “Fed Minutes Show Strong Commitment…” “Officials ‘noted that a restrictive stance of policy may well become appropriate.’”

How much of this is just superficial stuff – an expedient bordering on a ruse? Does the Fed have the resolve necessary to mount a serious inflation fight, one that would invariably unfold with significant market and economic turmoil? That the leading FOMC “hawk” would last week raise the possibility of rate cuts next year suggests some weakened knees. Bullard: “The more we can front-load and the more we can get inflation and inflation expectations under control, the better off we will be. In out years -- ’23 and ‘24 -- we could be lowering the policy rate because we got inflation under control.”

It’s way too early to advertise the possibility of pauses and even rate cuts. If the Fed is determined to actually restrain inflationary expectations and regain lost institutional credibility, it is imperative to insulate its inflation-fighting policy resolve from the unavoidable pressures associated with market instability. Bubble markets, by their nature, are acutely unstable and susceptible to any tightening of financial conditions. Is the Federal Reserve truly committed to reining in inflationary forces before they become more deeply ingrained – or not?

Powell’s post-meeting press conference suggested the Fed was becoming concerned by heightened market stress. Markets were heartened that Wednesday’s minutes from the FOMC’s May 4th meeting implied ample wiggle room in Fed resolve.

Bloomberg: “There were hints of a possible pause: an ‘expedited’ tightening would leave the Fed ‘well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.’

As I said, inflation is too high and must be addressed. The Federal Open Market Committee's overarching goal is to return inflation to our target range without triggering significant economic dislocation. While that will be a delicate undertaking, I believe economic conditions… are strong enough to allow us to achieve that outcome. Still, uncertainties shroud the economic outlook on virtually every front, from the pandemic to war in Ukraine to supply constraints. Monetary policy makers must be mindful of those uncertainties and proceed carefully in tightening policy. So as we expeditiously return monetary policy to a more neutral stance to get inflation closer to our 2% target, I plan to proceed with intention and without recklessness. We have seen throughout the pandemic that events and market shifts can happen quickly and in ways that dramatically alter the prevailing economic dynamic, in both good ways (the rapid rebound in employment right after the initial lockdown) and bad (the rapid rise of the delta and omicron variants). We all must be ready for the unexpected to occur, assess how risks have changed when it does, and stay aware of shifts in the strength of the economy. Given the very high level of inflation, some might be surprised by my injecting some caution here. But remember this: even firetrucks with sirens blaring slow down at intersections lest they cause further preventable trouble.” From Atlanta Fed President Raphael Bostic’s Tuesday speech, “Monetary Policy Amid Changing Labor Market Dynamics.”

“Overarching goal is to return inflation to our target range without triggering significant economic dislocation.” “Monetary policy makers must be mindful of those uncertainties and proceed carefully in tightening policy.” “…I plan to proceed with intention and without recklessness.” “Even firetrucks with sirens blaring slow down at intersections lest they cause further preventable trouble.” Not Volcker-esque.

I was adamantly opposed to market “tinkering” when Alan Greenspan began dabbling with this seductive policy departure in the early nineties. Similarly, “the maestro’s” asymmetric approach (ease aggressively while tightening timidly) was clearly a slippery slope of Bubble accommodation. Today, the Fed needs to be mindful of remaining too cautious in getting rates to a restrictive level in a timely manner. And “recklessness”? Where was that concern when the Fed injected $5 TN of liquidity into egregiously speculative markets over a two-year period?

And I have particular disdain for the “sirens blaring firetrucks slowing at intersections” analogy. Emergency vehicles engage their flashing lights and blaring sirens with the objective of arriving as quickly as possible to begin administering emergency operations. A single minute could be the difference between life and death.

Fed policy has certainly not been speeding hurriedly to pull us from the wreckage wrought by runaway inflation. Good grief, they’re afraid to even approach a conventional speed limit, content to yield to pedestrians waiting at crosswalks and keen to slow down at intersections in anticipation of traffic lights turning amber. In a severe drought, local officials should never have so actively promoted the use of fireworks. Seeing the community madly buying up all the available bottle rockets, they’d better have the available resources, planning and resolve to quickly get the situation under control. And if the community is at perilous risk, emergency responders are duty-bound to blow right through red traffic lights (and classroom doors).

“I think the Fed is going to have to decide between two policy mistakes: Hit the brakes too hard and risk a recession or tap the brakes in a stop and go pattern – including a pause in the September meeting would be an example of that – and risk having inflation well into 2023.” Mohamed El-Erian, Bloomberg TV, May 27, 2022

There’s a lot of talk these days of the potential for a Fed policy mistake. A string of historic misjudgments and policy blunders have already been committed. Damage from a requisite tightening cycle will be the unavoidable consequence of past monetary sins. Clearly, the Fed’s neglect of inflation risk has been an epic policy failing. Garnering less attention, the Federal Reserve’s doctrine of relying on so-called “macro-prudential” policies to address speculative excess and asset market Bubbles has been a similar abject failure.

I have great respect and admiration for Mohamed El-Erian. I agree that the Fed’s likely “stop and go pattern” would only add to a series of policy shortcomings. The risk, however, is much greater than “having inflation well into 2023.” That’s a given. The stakes seemingly couldn’t be much higher.

A lack of Federal Reserve fortitude risks unleashing a secular shift to high and unmanageable price pressures. Grave economic, social, political and geopolitical instabilities are at stake. At this point, a Volcker-type “slamming on the brakes” is likely the only course that would significantly reduce the likelihood of years of elevated (4-6% minimum) general price inflation. Volcker’s “policy mistake,” reviled in real-time, is canonized with the benefit of hindsight.

Labor markets today remain extremely taut, with Wage/Price Spiral Dynamics well on the way of becoming entrenched. Moreover, a new cycle of geopolitical instability, anti-globalization, and pressing climate change issues will act as an enduring supply shock and inflation boost.

There’s a further major risk with “stop and go.” It’s “tinkering” with dysfunctional markets with a dangerous proclivity for speculative excess and acute instability. It’s no coincidence Bullard comes out with his “we could be lowering the policy rate” as early as next year, with the market in serious trouble. I doubt Bostic this week invokes “reckless” policy tightening if not for sinking equities prices. Are Fed officials relieved by this week’s 6.6% surge in the S&P500 (Nasdaq100 7.1%)?

High-yield CDS prices collapsed 66 this week to 457 bps, the largest weekly decline since early-June 2020. “Biggest Junk-Bond ETF Sees Comeback With Best Rally Since 2020.” Investment-grade CDS dropped 12 to 79 bps, the biggest decline since November 2020. “Muni Market Posts ‘Stunning 180’ in Biggest Rally Since 2020.”

A Friday afternoon Bloomberg headline was spot on: “Big Up Week for Everything Is Latest Sudden Twist for Traders.” The Philadelphia Oil Services Index jumped 11.8% this week, the KBW Bank Index 9.2%, the Semiconductor (SOX) Index 8.1%, the Nasdaq Industrials 7.8%, the Nasdaq100 7.2%, and the NYSE Financial Index 7.1%. The “average stock” Value Line Arithmetic Index gained 6.2%. The SPDR S&P Retail ETF (XRT) surged 10.1%, reversing last week’s 9.4% drubbing. The Direxion Semiconductor Bear 3X sank 22.4%

Why the sudden burst of enthusiasm? First of all, option expiration surely contributed to last week’s acute selling pressure, the culmination of a seven-week selloff and resulting deeply “oversold” condition - conducive to an abrupt upside reversal. Reassessment of the Fed’s tightening cycle provided the catalyst. In general, this week’s economic data played into the “peak inflation” and wavering tightening cycle narrative. The weak Services PMI, putrid New Home Sales, and a downshift in Personal Income growth all fit well.

There’s always an ebb and flow to Crisis Dynamics. Things tend to proceed slowly, but, at some point, kick into the Acceleration Phase, as I titled the CBB from two weeks ago. And we’ve seen this play out repeatedly over the years (decades): the revelation of Crisis Dynamics prompts some degree of policy accommodation – rate cuts, emergency meetings or, more recently, shock and awe QE announcements.

While the typical policy menu is inappropriate in today’s backdrop, the Fed has offered faltering markets something crucial. Federal Reserve officials have affirmed the “Fed put,” and, importantly, they have signaled they will not wait for financial panic or deep recession.

The Fed had been talking tough on inflation – as if acting decisively to control it had become the overarching policy priority. Powell repeatedly invoked Paul Volcker. Even the doves were talking hawkish. Only a few weeks ago, FOMC officials were discussing the potential for 75 bps hikes. Bill Dudley, Larry Summers and others were discussing a 5 to 6% Fed funds rate.

Understandably, markets were initially skeptical of the notion of their well-being supplanted by the Fed’s newfound inflation focus. The Fed wouldn’t dare, would they? We’ve got them trapped, don’t we? But, for the most part, it was easy to dismiss the Fed’s inflation fixation - and ramifications for the “Fed put” - so long as the great bull market remained intact.

At this point, the bull is anything but intact. In particular, the latest incarnation of a historic “tech” Bubble is deflating. Credit and financial conditions tightened dramatically in high-yield, leveraged loans and risky finance more generally, with huge consequences for thousands of uneconomic enterprises having sprouted up over years of egregiously loose and speculative financial conditions.

Acute market fragilities were laid bare, and the Fed has done what the markets have long presumed: once again, they’ve essentially caved to the markets. This started with Powell’s press conference and gained momentum this week. And I expect the general response will be, “Say what, they haven’t changed anything – they’re still tough on inflation.”

Much has changed. Market fear of a “tone deaf” Fed willing to hike rates irrespective of market dynamics has been allayed. The Fed put is alive and well. Not only have 75 bps hikes been taken off the table, the Fed has also signaled a desire to quickly return to its standard little 25 bps “baby step” approach (with pauses so everyone can catch their breath). Inflation has not, in reality, supplanted market wellbeing in the eyes of the FOMC. Not only is the Fed wishing for a “pause,” they will surely back off their balance sheet unwind (QT).

It would be poor analysis to focus only on the Fed and U.S. markets. Christine Lagarde’s ECB is in stiff competition these days with Haruhiko Kuroda’s BOJ for the most reckless major central bank. Stocks were up 5.3% this week in Spain, 3.7% in France and 3.4% in Germany. Europe’s high-yield (“crossover”) CDS index collapsed 57 bps this week, the largest decline since June 2020. Greek 10-year yields dropped 23 bps (to 3.48%), as “periphery” bond spreads to German bund yields narrowed meaningfully. A toned-down Fed tightening cycle, it’s assumed, takes heat off global central bankers.

From my perspective, it all points to Inflation Acquiescence. The dollar index dropped 1.4% this week, certainly contributing to the 39 bps drop in EM CDS (to a 6-wk low 266bps). The Bloomberg Commodities Index jumped 2.5%, increasing y-t-d gains to 35%. Gasoline’s 4.7% advance boosted 2022 gains to 80%. Natural Gas surged another 8%, with y-t-d gains up to an astonishing 134%. The Treasury five-year “breakeven” inflation rate rose nine bps this week to 2.99%, the largest weekly advance since March.

Risk markets were overdue for a rally, and a decent countertrend advance would not be shocking. The S&P500 mustered a 14% rally in the Spring of 2008. But I don’t see the Bubble being resuscitated. I’ll be curious to observe how a confluence of recovering markets and Inflation Acquiescence would sit with the bond market. While “peak inflation” is music to the ears for equities, bonds face years of persistent price inflation. It's also worth noting that the investment-grade bond issuance boom runs unabated.  That, together with general inflationary pressures, are poised to spur sufficient system Credit expansion to sustain ever further inflationary pressures.

For global inflation and growth dynamics, China remains a major wildcard. Panic may be too strong, but Beijing is clearly increasingly alarmed by its deflating Bubble. Monday, “China rolled out a broad package of support measures” and “33-point plan”. Expect massive fiscal spending and bank lending directives.

May 25 – Bloomberg: “China’s Premier Li Keqiang gave his starkest warning yet about the economy, as it comes under severe strain from Covid outbreaks and lockdowns, suggesting the government’s growth target is moving further out of reach. Li held an emergency meeting on Wednesday with thousands of representatives from local governments, state-owned companies and financial firms, calling on them to do more to stabilize growth. He said the economy is in some respects faring worse than in 2020 when the pandemic first emerged and urged more efforts to reduce a soaring unemployment rate.”

Meanwhile, the geopolitical backdrop appears more ominous by the week.

May 26 – Bloomberg: “The US rejected a plan by Russian President Vladimir Putin to facilitate grain and fertilizer exports only if sanctions on his country are lifted, pinning the blame on the Kremlin for blocking shipments and stoking concerns of global food shortages.”

May 27 – Bloomberg (Iain Marlow and Peter Martin): “Secretary of State Antony Blinken said the US will seek to influence China’s behavior by shaping the world around Beijing in remarks that took direct aim at President Xi Jinping’s performance leading the world’s second-biggest economy. ‘Under President Xi, the ruling Chinese Communist Party has become more repressive at home and more aggressive abroad,’ Blinken said... ‘We cannot rely on Beijing to change its trajectory. So we will shape the strategic environment around Beijing to advance our vision for an open, inclusive international system.’ Blinken warned that China is seeking to dominate the industries of the future and said the US response will be to bolster investment at home; work closely with allies, particularly in the Indo-Pacific region; and compete with China on a ‘level playing field.’ He said Xi’s government is actively undercutting the international system that aided China’s own rise. ‘Rather than using its power to reinforce and revitalize the laws, agreements, principles and institutions that enabled its success, so that other countries can benefit from them too, Beijing is undermining it,’ Blinken said.”

May 24 – Financial Times (Demetri Sevastopulo, Kathrin Hille and Kana Inagaki): “Chinese and Russian strategic bombers flew over the Sea of Japan as Joe Biden attended a Quad summit in Tokyo, in a joint exercise the Japanese government denounced as ‘unacceptable’. The nuclear-capable bombers conducted a joint flight on Tuesday that began over the Sea of Japan as the US president was meeting his counterparts from Japan, Australia and India, Japanese and US officials said. Moscow said the 13-hour flight was carried out ‘strictly in accordance with the provisions of international law’ and was not directed against third countries. But Nobuo Kishi, Japan’s defence minister, condemned the exercise as ‘provocative’ and ‘unacceptable’.”

For the Week:

The S&P500 surged 6.6% (down 12.8% y-t-d), and the Dow rose 6.2% (down 8.6%). The Utilities jumped 5.1% (up 3.5%). The Banks surged 9.2% (down 12.1%), and the Broker/Dealers jumped 7.4% (down 13.1%). The Transports rallied 7.1% (down 12.3%). The S&P 400 Midcaps recovered 6.5% (down 10.6%), and the small cap Russell 2000 rose 6.5% (down 15.9%). The Nasdaq100 advanced 7.1% (down 22.3%). The Semiconductors rallied 8.1% (down 21.1%). The Biotechs gained 3.9% (down 14.3%). With bullion up $7, the HUI gold index increased 1.6% (up 0.6%).

Three-month Treasury bill rates ended the week at 1.015%. Two-year government yields dropped 11 bps to 2.48% (up 174bps y-t-d). Five-year T-note yields fell eight bps to 2.72% (up 145bps). Ten-year Treasury yields declined four bps to 2.74% (up 123bps). Long bond yields dipped two bps to 2.97% (up 106bps). Benchmark Fannie Mae MBS yields dropped 12 bps 3.88% (up 181bps).

Greek 10-year yields sank 23 bps to 3.48% (up 217bps y-t-d). Ten-year Portuguese yields declined six bps to 2.07% (up 161bps). Italian 10-year yields dropped 10 bps to 2.90% (up 173bps). Spain's 10-year yields declined four bps to 2.04% (up 148bps). German bund yields added two bps to 0.96% (up 114bps). French yields increased a basis point to 1.48% (up 128bps). The French to German 10-year bond spread narrowed one to 52 bps. U.K. 10-year gilt yields added two bps to 1.92% (up 95bps). U.K.'s FTSE equities index jumped 2.6% (up 2.7% y-t-d).

Japan's Nikkei Equities Index increased 0.2% (down 7.0% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.23% (up 16bps y-t-d). France's CAC40 surged 3.7% (down 8.9%). The German DAX equities index rallied 3.4% (down 9.0%). Spain's IBEX 35 equities index surged 5.3% (up 2.5%). Italy's FTSE MIB index rose 2.2% (down 9.9%). EM equities were mostly higher. Brazil's Bovespa index rose 3.2% (up 6.8%), and the Mexico's Bolsa index gained 1.8% (down 1.5%). South Korea's Kospi index was little changed (down 11.4%). India's Sensex equities index increased 1.0% (down 5.8%). China's Shanghai Exchange Index slipped 0.5% (down 14.0%). Turkey's Borsa Istanbul National 100 index rallied 2.8% (up 31.3%). Russia's MICEX equities index gained 1.4% (down 36.4%).

Investment-grade bond funds saw outflows of $1.698 billion, and junk bond funds posted negative flows of $236 million (from Lipper).

Federal Reserve Credit last week declined $18.6bn to $8.901 TN. Over the past 141 weeks, Fed Credit expanded $5.174 TN, or 139%. Fed Credit inflated $6.090 Trillion, or 217%, over the past 498 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $2.0bn to $3.425 TN. "Custody holdings" were down $110bn, or 3.1%, y-o-y.

Total money market fund assets jumped $44bn to $4.529 TN. Total money funds were down $80bn, or 1.7%, y-o-y.

Total Commercial Paper jumped $11.0bn to $1.132 TN. CP was down $57bn, or 4.8%, over the past year.

Freddie Mac 30-year fixed mortgage rates dropped 15 bps to 5.10% (up 215bps y-o-y). Fifteen-year rates fell 12 bps to 4.31% (up 204bps). Five-year hybrid ARM rates jumped 12 bps to 4.20% (up 161bps) - the high since 2010. Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 13 bps to 5.24% (up 214bps).

Currency Watch:

For the week, the U.S. Dollar Index dropped 1.4% to 101.67 (up 6.3% y-t-d). For the week on the upside, the Brazilian real increased 3.2%, the Norwegian krone 2.9%, the New Zealand dollar 2.2%, the Swiss franc 1.9%, the Australian dollar 1.7%, the euro 1.6%, the South African rand 1.6%, the Mexican peso 1.5%, the Swedish krona 1.3%, the British pound 1.2%, the South Korean won 0.9%, the Canadian dollar 0.9%, the Singapore dollar 0.8% and the Japanese yen 0.6%. The Chinese (onshore) renminbi declined 0.1% versus the dollar (down 5.12% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index rose 2.5% (up 35.0% y-t-d). Spot Gold increased 0.4% to $1,854 (up 1.3%). Silver gained 1.6% to $22.11 (down 5.1%). WTI crude added $1.87 to $114.07 (up 53%). Gasoline jumped 4.7% (up 80%), and Natural Gas surged 8.0% (up 134%). Copper increased 0.7% (down 4%). Wheat dipped 1.0% (up 50%), and Corn slipped 0.2% (up 31%). Bitcoin fell $480, or 1.7%, this week to $28,800 (down 38%).

Market Instability Watch:

May 25 – Bloomberg (Liz Capo McCormick, Alexandra Harris and Charles Williams): “The Treasuries market is girding for potential disruptions from the next and trickiest stage of policy makers’ tightening campaign: the shrinking of an $8.5 trillion bond portfolio. Minutes from the Federal Reserve’s May policy meeting revealed ‘several’ policy makers saw risk of ‘unanticipated effects’ on markets from the US central bank’s plans to let billions of dollars worth of bonds to mature each month without replacing them.”

May 27 – Bloomberg (Jeannine Amodeo): “Banks are facing the toughest market in months to sell leveraged loans for buyouts, leaving them at risk of lower fees or even potential losses. But they’re forging ahead anyway since there’s no obvious sign of a near-term catalyst which could help curb the meltdown. A group of banks led by Morgan Stanley was forced to slap one of the steepest discounts -- just 92 cents on the dollar -- on a $360 million loan to fund the buyout of manufacturer Therm-O-Disc Inc. this week after struggling to attract buyers. Another group of banks led by Bank of America… had to self-fund a $615 million loan supporting Bain Capital’s buyout of VXI Global Solutions after failing to place the debt with institutional investors. The secondary market remains under pressure with average prices hovering around 94 cents on the dollar.”

May 27 – Bloomberg (Lisa Lee): “European junk issuance is showing few signs of life amid rising rates, soaring inflation and mounting pessimism over the economic outlook. Of the 46.2 billion euros ($49.5bn) of debt sales in Europe this week, just over 1% came from high-yield issuers. That caps a miserable month for junk bond sales, which have trickled to a paltry 2 billion euros, after the market ground to a halt for the longest spell in over a decade… New leveraged-loan issuance has stalled as well and there’s just one deal in the pipeline.”

May 24 – Bloomberg (Katie Greifeld): “Traders are offloading sector-specific funds at the fastest pace on record as the looming bear market seemingly spares no corner of the equity world. Roughly $11.9 billion has been pulled from sector exchange-traded funds so far in May, putting the category on track for the biggest monthly drawdown on record… That’s the first time those ETFs have posted net outflows since September 2020.”

Bursting Bubble/Mania Watch:

May 27 – Wall Street Journal (Alexander Osipovich and Caitlin Ostroff): “TerraUSD was touted as a blue-chip cryptocurrency. Now its investors are reeling from painful losses and asking if it was all a get-rich-quick scheme. A surgeon in Massachusetts can’t stop thinking about how he lost his family’s nest egg. A young Ukrainian considered suicide after losing 90% of his savings. Other investors have given up dreams of starting new businesses or quitting their day jobs. All of them were swept up in the mania for TerraUSD, whose total value swelled to $18 billion before collapsing earlier this month. The coin’s sudden downfall is a reminder that crypto—which enjoyed a huge bull market last year—is often little more than a casino, with weak regulation and few means of recourse for the losers.”

May 24 – Reuters (Nivedita Balu and Medha Singh): “Snap Inc shares plunged more than 40% and sparked a sector-wide selloff on Tuesday after a profit warning from the Snapchat parent signaled tough times ahead for the once-booming digital ad industry. The company was on track to lose $15 billion in market capitalization, while shares of major online advertisers and social-media firms were set to lose a combine $200 billion in value from the rout… Snap said… it was expecting to miss quarterly revenue and profit targets set just a month earlier and would have to slow hiring and lower spending. Valuations for social media stocks are coming back down to earth after the companies posted unprecedented growth last year when advertisers began to recover from the pandemic, said Brian Wieser, global president of business intelligence at ad agency GroupM.”

May 24 – Financial Times (Joe Rennison): “Convertible bonds sold by high-flying tech companies last year have plummeted, in a stark illustration of how turbulence sweeping financial markets has dented the appeal of some of the stars of the pandemic. Spotify and Peloton were among a clutch of companies that sold convertible debt, a type of bond that can convert into equity, at the top of the market. However, those bonds are now sinking in price as the prospect dims that shares in the companies will reach the lofty levels needed to allow the debt to morph into equity. The fall in convertible bonds highlights the abrupt shift in market sentiment away from the investments that thrived during the boom in financial markets from early 2020 to January of this year.”

May 20 – Bloomberg (Cagan Koc): “European Central Bank President Christine Lagarde said crypto-currencies are ‘based on nothing’ and should be regulated to steer people away from speculating on them with their life savings. Lagarde told Dutch television that she’s concerned about people ‘who have no understanding of the risks, who will lose it all and who will be terribly disappointed, which is why I believe that that should be regulated.’”

May 27 – Wall Street Journal (Eliot Brown): “The SPAC boom brought a wave of companies to the public markets promising years of rapid growth and profits to investors. Two years since the boom began, many of these companies are already warning they may go bust. At least 25 companies that merged with special-purpose acquisition companies between 2020 and 2021 have issued so-called going-concern warnings in recent months, according to… Audit Analytics. Among those to issue the warnings—which come when a company’s auditor determines there is ‘substantial doubt’ about its ability to stay afloat for the next 12 months—are a company planning to build an air-taxi network, numerous upstart electric-vehicle companies and a scooter-rental business.”

May 24 – Bloomberg (Tom Maloney): “If the SPAC craze is over, it’s going out with a bang by making a Miami lawyer who has owned speedboats named ‘Class Action’ and ‘Power of Attorney’ one of the richest people in the US -- if only briefly. MSP Recovery was valued at $32.6 billion in its merger with special purpose acquisition company Lionheart Acquisition Corp. II, the largest such combination ever in the US as measured by enterprise value. It began trading Tuesday on the Nasdaq, plunging more than 60% to $3.85…, less than an hour after its debut.”

May 21 – Wall Street Journal (Ben Foldy and Caitlin Ostroff): “Public data suggests that several anonymous crypto investors profited from inside knowledge of when tokens would be listed on exchanges. Over six days last August, one crypto wallet amassed a stake of $360,000 worth of Gnosis coins, a token tied to an effort to build blockchain-based prediction markets. On the seventh day, Binance—the world’s largest cryptocurrency exchange by volume—said in a blog post that it would list Gnosis, allowing it to be traded among its users. Token listings add both liquidity and a stamp of legitimacy to the token, and often provide a boost to a token’s trading price. The price of Gnosis rose sharply, from around $300 to $410 within an hour. The value of Gnosis traded that day surged to more than seven times its seven-day average.”

Russia/Ukraine War Watch:

May 24 – Reuters (Pavel Polityuk and Conor Humphries): “Russian forces waged an all-out assault on Tuesday to encircle Ukrainian troops in twin eastern cities straddling a river, a battle that could determine the success or failure of Moscow's main campaign in the industrial heartland of Donbas. Russia is attempting to seize the separatist-claimed Donbas' two provinces, Donetsk and Luhansk, and trap Ukrainian forces in a pocket on the main eastern front… ‘The situation on the (eastern) front is extremely difficult because the fate of this country is perhaps being decided (there) right now,’ said Ukrainian Defence Ministry spokesman Oleksandr Motuzyanyk.”

May 25 – Bloomberg: “Ukraine Foreign Minister Dmytro Kuleba said peace negotiations with Russia are going ‘nowhere’ and compared Moscow’s offensive in the eastern Donbas region to a World War II battle. ‘Tanks, artillery, combat helicopters, air attacks, multiple-launch rocket systems, everything is involved,’ Kuleba said… ‘When you are conducting an operation like this you basically say no to negotiations.’”

May 25 – Reuters (Gus Trompiz and Bozorgmehr Sharafedin): “After making it through the spring planting season, sometimes with the help of bulletproof vests and helmets, Ukraine's farmers are facing another challenge – finding enough diesel for the harvest to come. The war with Russia cut fuel supplies just as farmers stepped up work for the spring season and they have lost about 85% of their normal supplies since the conflict started on Feb. 24, farmers, fuel distributors and analysts say.”

Economic War/Iron Curtain Watch:

May 24 – Guardian (Larry Elliott and Graeme Wearden): “The head of Nato has issued a blunt warning of the security risks of close economic ties with Russia and China as he told business leaders in Davos values should matter more than profits. Jens Stoltenberg, the secretary general of the western military alliance, said countries would be making a mistake if they traded short-term economic gain for long-term security. ‘Freedom is more important than free trade. The protection of our values is more important than profit,’ Stoltenberg told the World Economic Forum. The Nato head said globalisation had brought many economic benefits but the war in Ukraine had exposed how ties with authoritarian regimes created vulnerabilities.”

May 23 – Reuters (Lidia Kelly and Ronald Popeski): “Russia's foreign minister said… Moscow would consider offers from the West to re-establish ties and determine whether that is needed, but will focus on developing relations with China. Sergei Lavrov… said Western countries had espoused ‘russophobia’ since Russia launched its incursion into Ukraine… Russia was working to replace goods imported from Western countries, he said, and in future, would rely only on ‘reliable’ countries not beholden to the West. ‘If they (the West) want to offer something in terms of resuming relations, then we will seriously consider whether we will need it or not,’ Lavrov said… Lavrov set down grievances with Western countries that he said were determined to change the rules of international relations to Russia's detriment.”

May 22 – Financial Times (Kaye Wiggins, Antoine Gara and Jamie Smyth): “The three-decade era of globalisation risks going into reverse according to company executives and investors, as world leaders prepare to meet in the Swiss town of Davos… The geopolitical fallout from Russia’s war in Ukraine, combined with the disruption to global supply chains caused by the virus, recent market turmoil and the rapidly worsening economic outlook leave corporate leaders and investors grappling with vital strategic decisions… ‘Tension between the US and China was accelerated by the pandemic and now this invasion of Ukraine by Russia — all these trends are raising serious concerns about a decoupling world,’ said José Manuel Barroso, chair of Goldman Sachs International and a former president of the European Commission.”

May 21 – Wall Street Journal (Yang Jie): “Apple Inc. has told some of its contract manufacturers that it wants to boost production outside China, citing Beijing’s strict anti-Covid policy among other reasons, people involved in the discussions said. India and Vietnam, already sites for a small portion of Apple’s global production, are among the countries getting a closer look from the company as alternatives to China, the people said. More than 90% of Apple products such as iPhones, iPads and MacBook laptops are manufactured in China by outside contractors, according to analysts.”

May 25 – Reuters (Martin Quin Pollard): “China's foreign ministry said… a U.S.-backed economic plan for Asia seeks to decouple countries from the Chinese economy, but many countries are worried about the ‘huge cost’ of doing so. Speaking at a regular press briefing, ministry spokesman Wang Wenbin said the Indo Pacific Economic Framework for Prosperity (IPEF) serves U.S. interests and seeks to exclude other countries.”

U.S./Russia Watch:

May 25 – Bloomberg: “Russia will service its dollar debt in rubles after the expiry of a sanctions loophole closed the option of payments in the US currency, potentially putting Moscow on track to default. The announcement came a day after the US confirmed the end of the waiver, creating another headache for Russia as it tries to get funds to investors. A payment in rubles would breach the terms on a 2026 dollar bond with coupons due this Friday, triggering a 30-day grace period before Russia could potentially slip into default.”

China/Russia/U.S. Watch:

May 24 – Reuters (Nobuhiro Kubo, Hyonhee Shin and Michael Martina): “Russian and Chinese bombers flew joint patrols near Japanese and South Korea air defense zones on Tuesday in a pointed farewell to U.S. President Joe Biden as he concluded a trip to Asia that rankled Beijing. The patrols came hours after Biden angered China by saying he would be willing to respond militarily to defend Taiwan if it came under Chinese attack, and as he discussed responses to Russia's invasion of Ukraine with leaders of the Quad, which groups the United States with Australia, India and Japan. Japan said it scrambled jets after Russian and Chinese warplanes neared its airspace while Tokyo was hosting the Quad leaders. Tokyo called the drills a provocation. It was the first joint military exercise by China and Russia since Moscow invaded Ukraine on Feb. 24…”

May 23 – Bloomberg (Jordan Fabian and Peter Martin): “President Joe Biden is seeking to show US resolve against China, yet an ill-timed gaffe on Taiwan risks undermining his bid to curb Beijing’s growing influence over the region. Whether intentional or not, Biden provoked China with a vow to defend Taiwan militarily. After saying that US policy on Taiwan ‘had not changed at all’ during a news conference in Tokyo, he then answered ‘yes’ when asked if the US would act ‘militarily’ to defend the island in the event of a Chinese attack. ‘It’s a commitment we made,’ Biden added… One Chinese official suggested that Biden’s comment may have been deliberate, aimed at testing Beijing’s response to a policy change. The official, who asked not to be identified describing internal Chinese government discussions, portrayed such a potential US approach as dangerous.”

May 22 – Bloomberg: “Chinese Foreign Minister Wang Yi said the US’s Indo-Pacific strategy is ‘doomed to fail,’ making his remarks while President Joe Biden is in the region to increase engagement with allies and counter China’s rise and influence. ‘Facts will prove that the so-called ‘Indo-Pacific strategy’ is essentially a strategy for creating divisions, a strategy for inciting confrontation, and a strategy for destroying peace,’ the Chinese foreign ministry said in a statement after Wang met his Pakistani counterpart Bilawal Bhutto in Guangzhou...”

May 26 – Bloomberg (Sharon Cho): “A record volume of Russian oil is on board tankers, with unprecedented amounts heading to India and China as other nations restrict imports because of the war in Ukraine. Between 74 million and 79 million barrels from the OPEC+ producer were in transit and floating storage over the past week, more than double the 27 million barrels just before the February invasion of Ukraine, according to Kpler. Asia overtook Europe as the largest buyer for the first time last month…”

May 26 – Bloomberg (Sharon Cho): “China’s oil trading giant Unipec has significantly increased the number of hired tankers to ship a key crude from eastern Russia. China International United Petroleum & Chemical Co., better known as Unipec, has chartered at least 10 tankers so far this month to transport Russian ESPO crude that’s loaded from Kozmino port…”

Europe/Russia/China Watch:

May 25 – Reuters (Francesco Guarascio): “Italy and Hungary have urged the EU to call explicitly for a ceasefire in Ukraine and peace talks with Russia, putting themselves at odds with other member states determined to take a hard line with Moscow ahead of a summit next week. A draft concluding statement for the May 30-31 summit… describes the European Union as ‘unwavering in its commitment to help Ukraine exercise its inherent right of self-defence against the Russian aggression.’ It does not mention peace talks.”

Inflation Watch:

May 27 – Associated Press (David Koenig): “Airlines and tourist destinations are expecting monster crowds this summer as travel restrictions ease and pandemic fatigue overcomes lingering fear of contracting COVID-19 during travel. Many forecasters believe the number of travelers will match or even exceed levels in the good-old, pre-pandemic days. However, airlines have thousands fewer employees than they did in 2019, and that has at times contributed to widespread flight cancellations. People who are only now booking travel for the summer are experiencing the sticker shock. Domestic airline fares for summer are averaging more than $400 a round trip, 24% higher than this time in 2019, before the pandemic, and a whopping 45% higher than a year ago…”

May 24 – Reuters (Jessica DiNapoli and Dan Burns): “A growing world food crisis is precipitating protectionist moves by countries which are likely to compound the problem and could lead to a wider trade war, business leaders and policymakers at the World Economic Forum said. In a sign of the escalating squeeze on food supplies and rising prices, a government source told Reuters that India could restrict sugar exports for the first time in six years to prevent a surge in domestic prices… ‘It is a major issue, and frankly I think the problem is even bigger ahead of us than it is behind us,’ Gita Gopinath, first deputy managing director of the International Monetary Fund, told Reuters of rising food security concerns.”

May 24 – National Geographic (Joel K. Bourne, Jr.): “Think the global fertilizer shortage is someone else’s problem? Take a look in the mirror. If you are reading this in North America, Europe, Latin America, or Asia, chances are that the bundle of amino acids staring back at you is alive today because of chemical fertilizers. In fact, according to noted Canadian energy researcher Vaclav Smil, two-fifths of humanity—more than three billion people—are alive because of nitrogen fertilizer… The chemical fertilizer trifecta that tripled global grain production—nitrogen (N), phosphorus (P), and potassium (K)—enabled the greatest human population growth the planet has ever seen. Now, it is in short supply, and farmers, fertilizer companies, and governments around the globe are scrambling to avert a seemingly inevitable tumble in crop yields.”

May 25 – Bloomberg (Zijia Song and Dominic Carey): “Eggs will get even more expensive after US production plummeted to a seven-year low during one of the worst-ever bird flu outbreaks. The price for eggs is set to rise as much as 21% compared to a year ago, the biggest increase among all food staples tracked by the US Department of Agriculture. In April, the outlook was for an increase of 6% to 7%. The outbreak of avian influenza has affected more than 38 million birds in the US…”

Biden Administration Watch:

May 23 – Reuters (Michael Martina and David Brunnstrom): “There is an old saying in politics that a gaffe is when a politician says what they really mean. And critics of U.S. President Joe Biden say he has made his fair share when it comes to Taiwan… Biden said the United States would get involved militarily should China attack democratic Taiwan, seeming to break with a long-held policy of not making clear how the United States might react. For the U.S. commander in chief, it was the latest in a series of apparently off-the-cuff assertions that suggest his personal inclination is to defend the Chinese-claimed island. But even some who favor jettisoning Washington's policy of ‘strategic ambiguity’ over Taiwan have criticized the president, arguing that his muddying of the issue risks accelerating China's desire to act, without carrying the muscle of a formal security guarantee.”

May 26 – Wall Street Journal (Courtney McBride and Alex Leary): “The U.S. will bolster domestic investment and strengthen collaboration with foreign partners, advancing a vision of an inclusive, transparent international order that stands in contrast to China’s approach, the country’s top diplomat said… In a speech… that laid out the Biden administration’s China policy, Secretary of State Antony Blinken said that even as Russia wages war in Ukraine, China poses ‘the most serious long-term challenge to the international order.’ ‘China is the only country with both the intent to reshape the international order—and, increasingly, the economic, diplomatic, military, and technological power to do it,’ Mr. Blinken said. ‘Beijing’s vision would move us away from the universal values that have sustained so much of the world’s progress over the past 75 years.’”

May 22 – Reuters (Trevor Hunnicutt): “The United States is looking to deepen its economic partnership with Taiwan even if though it is excluded from President Joe Biden's new Asian economic initiative, a top official said. ‘Taiwan won’t be part of the launch,’ of Biden's Indo-Pacific Economic Framework for Prosperity (IPEF), U.S. National Security Advisor Jake Sullivan said… ‘But we are looking to deepen our economic partnership with Taiwan, including on high-technology issues, including on semiconductors and supply chains.’”

Federal Reserve Watch:

May 25 – Associated Press (Christopher Rugaber): “Federal Reserve officials agreed when they met earlier this month that they may have to raise interest rates to levels that would weaken the economy as part of their drive to curb inflation, which is near a four-decade high. At the same time, many of the policymakers also agreed that after a rapid series of rate increases in the coming months, they could ‘assess the effects’ of their rate hikes and, depending on the economy’s health, increase rates at a slower pace. After their meeting this month, the policymakers raised their benchmark short-term rate by a half-point — double the usual hike. According to minutes from the May 3-4 meeting…, most of the officials agreed that half-point hikes also ‘would likely be appropriate’ when they next meet in June and July.”

May 25 – Financial Times (James Politi): “Federal Reserve officials discussed the possibility of moving the US central bank to a ‘restrictive’ policy stance that would better fight inflation through more aggressive interest rate increases, but worried that this could undermine the strong recovery in the jobs market. According to minutes… most US monetary policymakers agreed on the need to keep increasing the Fed’s main interest rate — set at a range of between 0.75% and 1% — by 50 bps ‘at the next couple of meetings’. This would match the Fed’s goal of ‘expeditiously’ getting interest rates back up to a neutral setting, where it is neither boosting nor stunting the economy.”

May 25 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic has cracked open the door to discussing a September pause in the central bank’s aggressive rate hikes -- a move that will only be on the table if inflation falls more than expected over the summer… Pausing at the Fed’s September 20-21 meeting -- which Bostic said… might make ‘sense’ -- will probably require two tough conditions to be met: inflation slowing meaningfully and signs that the US economy is cooling enough to reduce future price pressures.”

May 24 – MarketWatch (Greg Robb): “The Federal Reserve should avoid being reckless in the way it raises its benchmark interest rate this year, said Atlanta Fed President Raphael Bostic… ‘Uncertainties shroud the economic outlook on virtually every front, from the pandemic to war in Ukraine to supply constraints. Monetary policy makers must be mindful of those uncertainties and proceed carefully in tightening policy,’ Bostic said, in an essay… ‘So as we expeditiously return monetary policy to a more neutral stance to get inflation closer to our 2% target, I plan to proceed with intention and without recklessness,’ he added.”

May 24 – Reuters (Howard Schneider): “The Fed's stock of Treasury bonds and mortgage backed securities is projected to decline by roughly $2.5 trillion by mid-2025, to about $5.9 trillion, when the central bank's run-off of assets is likely to be halted to maintain an adequate level of bank reserves, the New York Fed said… But that run-off will do little to trim what is the most controversial portion of the Fed's portfolio, the $2.7 trillion in mortgage-backed securities that it currently holds. Under the New York Fed's projections the portion of assets held in MBS would remain roughly constant through 2025, with the central bank still holding roughly $1 trillion of those securities by 2030.”

May 24 – Reuters (Gertrude Chavez-Dreyfuss): “Demand for the Federal Reserve's reverse repurchase (RRP) facility has surged in the last few weeks, as the U.S. Treasury Department's reduced supply of short-term bills left investors few options to park excess cash. Reverse repos are conducted by the New York Fed's Open Market Trading Desk. In a reverse repo, market participants lend cash to the Fed, usually overnight, at an interest rate of 80 bps, in exchange for Treasuries or other government securities, with a promise to buy them back. ‘We continue to see a grind higher in RRP balance,’ said Gennadiy Goldberg, senior rates strategist at TD Securities... ‘That's a function of two things: first, the extreme high demand for front-end assets, and second, the amount of bills outstanding has continued to decline as Treasury has cut back supply because of fairly strong tax collections,’ he added. The Fed's reverse repo window attracted a record $2.045 trillion on Monday…”

May 24 – Wall Street Journal (Nick Timiraos and Nicole Friedman): “When the Federal Reserve set out to cool the economy and slow inflation in the past, it counted on the housing market to do much of the work. By raising interest rates, the central bank made mortgages more expensive and trimmed the number of buyers. This time, America’s red-hot housing market threatens to make the Fed’s job tougher. With so many buyers competing for so few available properties, home prices in the U.S. rose 18.8% last year… With a nudge from the Fed’s recent interest rate increases, mortgage rates have risen almost 2.3 percentage points since November to 5.25% last week, the steepest rise in a six-month-span in decades. In the past, that kind of increase was usually enough for home buying and construction to fall sharply. Yet home prices could still hit new highs, even with sales starting to fall. Economists at Goldman Sachs estimate housing prices will grow around 10% this year; Bank of America forecast 15%.”

May 25 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Kansas City President Esther George will retire in January, creating a second leadership opening among the 12 regional Fed banks in 2023. George is stepping down as required by mandatory retirement rules for Reserve Bank presidents… She’s led the bank since October 2011. Her departure will come around the same time that Chicago Fed chief Charles Evans steps down.”

U.S. Bubble Watch:

May 24 – Dow Jones (Jeffry Bartash): “S&P 'flash' surveys fall in May to lowest level in several months. The numbers: U.S. businesses expanded at the slowest pace in several months, a pair of surveys showed, reflecting the effects of high inflation, ongoing supply shortages and some softening in customer demand. The S&P flash U.S. services index drop to a three-month low of 53.5 in May from 55.6 in the prior month. The flash U.S. manufacturing index, meanwhile, slid to a three-month low of 57.5 from 59.2… New orders rose at the slowest pace since August 2020, when the coronavirus was still affecting large swaths of the U.S. economy… The so-called input price index rose to a new series high.”

May 24 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes tumbled to a two-year low in April… New home sales plunged 16.6% to a seasonally adjusted annual rate of 591,000 units last month, the lowest level since April 2020. March's sales pace was revised down to 709,000 units from the previously reported 763,000 units. Sales dropped 5.9% in the Northeast and tumbled 15.1% in the Midwest. They plummeted 19.8% in the densely populated South and decreased 13.8% in the West. Economists… had forecast that new home sales, which account for 9.5% of U.S. home sales, would fall to a rate of 750,000 units. Sales dropped 26.9% on a year-on-year basis in April. They peaked at a rate of 993,000 units in January 2021, which was the highest level since the end of 2006… The median new house price in April soared 19.6% from a year ago to a record $450,600. The average house price surged at a much faster 31.2% to $570,300…”

May 26 – CNBC (Diana Olick): “Sharply higher mortgage rates have caused a sudden pullback in home sales, and now sellers are rushing to get in before the red-hot market cools off dramatically. The supply of homes for sale jumped 9% last week compared with the same period a year ago, according to That is the biggest annual gain the company has recorded since it began tracking the metric in 2017. Real estate brokerage Redfin also reported that new listings rose nearly twice as fast in the four weeks ended May 15 as they did during the same period a year ago.”

May 27 – Bloomberg (Ana Monteiro and Eric Martin): “The US merchandise-trade deficit shrank in April by the most since 2009 as imports fell amid lockdowns in China while exports increased to a record. The shortfall narrowed by 15.9% to $105.9 billion last month, following a record level in March… The figures… compared with a median estimate for a gap of $114.9 billion in a Bloomberg survey of economists.”

May 23 – Wall Street Journal (Anne Tergesen): “Millions of workers and retirees are more exposed to the stock-market slide than they might expect. Many Americans spent the past decade putting more of their retirement money into target-date funds, a type of set-it-and-forget-it investment product pitched as an easy way to invest in a diversified portfolio of stocks and bonds. The product works by shifting from stocks to bonds over time, giving an investor a more conservative mix as retirement age draws nearer. But many of these funds are shifting into bonds more slowly than they did a decade ago after managers loaded up on stocks. Portfolios for the youngest workers now invest 92% of contributions in stocks, up from 85% a decade ago, with some top-selling target-date funds nearing 100% in stocks at the outset of an investor’s working life, according to Morningstar Inc.”

May 22 – Wall Street Journal (Ruth Simon): “Small businesses are flashing warning signs on the U.S. economy as inflation, supply-chain snarls, a shortage of workers and rising interest rates darken the outlook for entrepreneurs. Fifty-seven percent of small-business owners expect economic conditions in the U.S. to worsen in the next year, up from 42% in April and equal to the all-time low recorded in April 2020, according to a survey of more than 600 small businesses… The measure is one part of a broader confidence index that in May posted its largest year-over-year drop since the Covid-related shutdowns of April and May 2020. Despite rising prices, the portion of small businesses that expects revenue to increase in the coming year fell to 61%, down from 79% in May 2020.”

May 21 – Bloomberg (Ben Steverman): “The world’s richest nation is waking up to an unpleasant and unfamiliar sensation: It’s getting poorer. Americans’ collective net worth had been climbing at a dizzying rate for the past two years, even as families and businesses contended with the ravages of Covid-19. Households piled up an extra $38.5 trillion from early 2020 to the end of last year, bringing their collective net worth to a record $142 trillion, the Federal Reserve estimates. Just as the US is learning to live with the virus and spending shifts back toward pre-pandemic normal, it faces a new scary threat: A plunge in wealth since the start of 2022 that JPMorgan Chase & Co. estimates totals at least $5 trillion -- and could reach $9 trillion by year-end.”

May 25 – CNBC (Kate Dore): “Some investors may be grappling with the sting of higher-than-expected capital gains for 2021 and losses in 2022. But experts say tax-planning opportunities may soften the blow. Individuals paid significantly more taxes this season, and the surge in capital gains in 2021 may be to blame, according to an analysis from the Penn Wharton Budget Model. Adjusted for inflation, filers paid more than $500 billion in April 2022, compared to north of $300 billion in the years before the pandemic…”

May 21 – CNBC (Nicolas Vega): “The average amount of personal savings dropped 15% from $73,100 in 2021 to $62,086 in 2022, according to Northwestern Mutual's recent 2022 Planning & Progress study. And 60% of U.S. adults say that the pandemic has been ‘highly disruptive’ to their finances. The annual study was conducted by The Harris Poll between Feb. 8 and Feb. 17 of this year, with data pulled from responses from 2,381 American adults.”

May 25 – Bloomberg (Christopher Condon): “The US federal budget deficit will shrink dramatically this year -- to an estimated $1 trillion -- due to a surge in tax revenue and the expiration of pandemic-related aid programs, the Congressional Budget Office said. The shortfall is also seen narrowing to $984 billion in the 2023 fiscal year, which begins Oct. 1. The deficits this year and next are notably smaller than the $2.8 trillion in 2021…”

May 24 – Wall Street Journal (Konrad Putzier and Will Parker): “Investors who bid up apartment-building prices to record levels over the past year are starting to come under pressure as rapidly rising interest rates squeeze their profits. Steeper borrowing rates make it harder for apartment landlords to pay back their loans. That could also be bad news for tenants, if it encourages building owners to raise rents higher than they might otherwise because that is their primary tool for generating more income. Sales of apartment buildings have been strong for years, but they broke records during the pandemic when rents soared to record levels. Prices of apartment buildings rose even faster, as investors bet that rents will keep going up in the future.”

May 25 – Wall Street Journal (Orla McCaffrey): “Mortgage lenders are scrambling to survive a sharp drop-off in the number of homeowners refinancing their loans, with demand drying up as interest rates rise. Mortgage giants including Wells Fargo & Co. and Rocket Cos. have trimmed staff this spring. Online lender has laid off or offered buyouts to about half of its workforce since last December. While home prices continue to rise and Americans are still buying houses, the drop-off in refinancing activity is a giant blow because refinancings made up the bulk of U.S. mortgage originations throughout the pandemic.”

Fixed-Income Bubble Watch:

May 26 – Bloomberg (Jack Pitcher): “As risks mount and markets convulse, corporate bond investors are focused on buying securities they can dump quickly if things get worse. That’s showing up in the primary market, where large, frequent issuers with bonds that trade often are being favored over smaller companies that only sell debt once every few years, bankers say. Institutional investors want to be able to move debt with ease, something that’s grown harder in recent years as Wall Street market makers keep fewer bonds in inventory. With some metrics showing liquidity deteriorating in the investment-grade corporate bond market, that’s become more important than ever.”

China Watch:

May 26 – Bloomberg: “The last time a top Chinese leader impromptu addressed thousands of officials in February 2020, President Xi Jinping called for a ‘people’s war’ against Covid-19 at the outset of the pandemic. On Wednesday, Premier Li Keqiang held a similarly rare video call with thousands of cadres across the nation to warn of an even worse economic crisis than two years ago, calling on them to better balance Covid controls and economic growth. Yet many government officials charged with implementing policy at the ground level aren’t quite sure who to listen to: Xi continues to emphasize the need for officials to push for zero Covid-19 cases, even as Li continuously urges them to bolster the economy and hit preordained growth targets. That dilemma is leading to paralysis within a nation normally hailed for speedy implementation of diktats from above, according to eight senior local government officials and financial bureaucrats who requested not to be named because they aren’t authorized to speak publicly.”

May 25 – Financial Times (Sun Yu, Cheng Leng and Tom Mitchell): “China’s premier has said the world’s second-largest economy could struggle to record positive growth in the current quarter, urging officials to help companies resume production after Covid-19 lockdowns. The comments by Li Keqiang, to tens of thousands of officials on an internal videocast on Wednesday, underscore the difficulties President Xi Jinping’s administration will have in reaching its annual growth target of 5.5% while also battling Omicron outbreaks. The last time China’s growth entered negative territory was when output plunged 6.9% year on year in the first quarter of 2020 after the coronavirus pandemic ended an era of uninterrupted growth dating back more than 30 years.”

May 26 – Bloomberg: “The last time a top Chinese leader impromptu addressed thousands of officials in February 2020, President Xi Jinping called for a ‘people’s war’ against Covid-19 at the outset of the pandemic. On Wednesday, Premier Li Keqiang held a similarly rare video call with thousands of cadres across the nation to warn of an even worse economic crisis than two years ago, calling on them to better balance Covid controls and economic growth. Yet many government officials charged with implementing policy at the ground level aren’t quite sure who to listen to: Xi continues to emphasize the need for officials to push for zero Covid-19 cases, even as Li continuously urges them to bolster the economy and hit preordained growth targets. That dilemma is leading to paralysis within a nation normally hailed for speedy implementation of diktats from above, according to eight senior local government officials and financial bureaucrats who requested not to be named because they aren’t authorized to speak publicly.”

May 22 – Wall Street Journal (Rebecca Feng, Quentin Webb and Dave Sebastian): “A withdrawal of foreign capital from China and a weaker yuan have prompted comparisons with 2015, when Beijing faced a vicious cycle of outflows and currency depreciation. China has plugged many of the holes that once allowed its citizens and companies to move money out of the country, making a destabilizing exodus of homegrown funds less likely this time around. But after years of heavy international buying of yuan-denominated stocks and bonds, some market participants are asking if those foreign flows could dry up, depressing asset prices and the currency. A second pillar of the yuan’s strength is also shaking, as the phenomenal export boom China enjoyed during the pandemic recedes. In China’s bond markets, April was the third straight month of substantial outflows… Over the three months, foreign investors reduced their holdings by about 301.4 billion yuan, equivalent to $45.03 billion. Foreigners have been pulling out of China’s equity markets, as well, selling a net 33.2 billion yuan, equivalent to $4.9 billion…”

May 24 – Bloomberg: “China rolled out a broad package of support measures largely targeted toward businesses struggling to cope with Covid lockdowns, with limited relief for consumers facing job losses and sliding incomes. The State Council, China’s cabinet, outlined a 33-point plan that gives companies more than 140 billion yuan ($21bn) of extra tax rebates and allows them to defer social insurance payments and loans. Additional emergency loans will go toward the aviation industry, and railway construction will be boosted by 300 billion yuan of bonds. Support for consumers was restricted to tax cuts on vehicle purchases, the deferment of some consumer and mortgage loans, and ensuring social benefits rose in line with price increases.”

May 24 – Bloomberg: “China’s central bank and banking regulator urged lenders to boost loans as the economy is battered by Covid outbreaks that have threatened growth this year. People’s Bank of China Governor Yi Gang and other officials met with 24 major financial institutions Monday to discuss credit conditions and work... The meeting called on banks to accelerate the delivery of approved loans, and also maintain the stable growth of property loans… ‘Major financial institutions need to shoulder their responsibilities, make use of all resources to effectively connect with credit demand and strengthen policy transmission,’ according to a statement… It added that banks should focus on key areas such as small businesses, green projects, technology innovation, energy supply and infrastructure.”

May 23 – Bloomberg: “For decades, the surest way for ordinary Chinese families to grow their wealth and guarantee future financial stability was to put most of their money into real estate, and the rest into the stock market. Now, even those with money to spare are clutching onto their cash, not willing to take a chance in the Covid-battered Chinese economy… Harry Kong, a bank executive in Shanghai, said his stock-market gains from last year have all been erased. He said he is the most pessimistic he’s ever been in 20 years of investing in stocks. ‘What I can do this year is to lie flat, and put my savings into big banks,’ Kong said. ‘No matter how low the deposit rates will be, it is safe at least…’ ‘No matter if you’re high net-worth or not that rich, the golden time of parking your money and letting your wealth grow, it’s gone,’ said Wei He, an economist at Gavekal Research Ltd. in Beijing. ‘There’s no other investment options,’ said Clawde Yin, a 45-year-old Shanghai resident. ‘I’ve got no choice but to wait and see.’”

May 23 – Bloomberg: “China’s cabinet introduced 33 policies on Monday to support businesses and consumer spending as economic activity is hammered by the country’s worst Covid outbreak since early 2020. The State Council’s measures, which total tens of billions of dollars worth of relief, include stimulus intended to aid companies that have buckled under the weight of the outbreaks and anti-Covid curbs, along with tools to boost infrastructure investment and improve supply chain disruptions.”

May 27 – Bloomberg (Rebecca Choong Wilkins): “A Chinese property company long considered among the nation’s most resilient shocked investors with a proposed dollar-bond payment delay, raising fresh doubts about the financial strength of the industry’s higher-rated borrowers. Greenland Holdings Corp., whose shareholders include the Shanghai government, is asking holders of a $488 million dollar note due June 25 to delay repayment by a year, a rare sign of stress at a state-linked firm. Its bond price tumbled from highs of 92 cents on the dollar to a record low of 41 cents in recent days as fears of an extension were confirmed.”

May 27 – Bloomberg (Alice Huang): “Greenland Holdings Corp.’s proposal to delay a bond repayment has raised concerns about the financial health of higher-rated developers, with another state-linked firm seeing its dollar bonds drop by the most in months on Friday. Sino-Ocean Group Holding Ltd., partly owned by the finance ministry…, saw its 2.7% note due 2025 slump as much as 11.1 cents on the dollar, the most since November. Other bonds fell by around 5 cents. The sharp drop occurred after Greenland, which is also state-backed, shocked investors in seeking a payment delay for a note due next month. Its bond prices tumbled to record lows this week... Such signs of stress may signal that even borrowers enjoying some level of state backing may not have sufficient support when they run into trouble.”

May 27 – Reuters (Xie Yu, Julie Zhu and Clare Jim): “China Evergrande Group is considering repaying offshore public bondholders owed around $19 billion with cash instalments and equity in two of its Hong Kong-listed units, two sources said, as the world's most indebted developer struggles to emerge from its financial crisis. Evergrande's entire $22.7 billion worth of offshore debt including loans and private bonds is deemed to be in default after missing payment obligations late last year. It said in March that it will unveil a preliminary debt restructuring proposal by the end of July.”

May 23 – Reuters (Liangping Gao and Ryan Woo): “China's property market woes are likely to worsen this year with prices remaining flat and sales and investment falling further, while tighter and widespread COVID-19 curbs weigh on still fragile demand despite more policy easing. The property market, a pillar of the world's second-largest economy, was weakened by a government clampdown on excessive borrowing from developers last year. Since the beginning of this year, over 100 cities have taken steps to boost demand via cuts in mortgage rates, smaller down-payments, and subsidies. The outlook for the property market is expected to remain bleak in the first half of the year and for the whole of 2022.”

May 26 – Bloomberg (Alice Huang): “Debt concerns in China’s property sector reached Greenland Holdings Corp., a Shanghai-based builder with a presence in 30 countries, as near-term dollar bonds plunged by record amounts. The company’s note maturing June 25 fell as much as 26 cents on the dollar to 64 cents… signaling investor concern about repayment. Other dollar bonds due later this year or early 2023 dropped at least 20 cents, were also on pace for their largest-ever drops.”

May 24 – Bloomberg: “President Xi Jinping’s punishing Covid Zero policy has angered Chinese citizens by invading the one place they’ve retained some small bit of privacy: their homes. A video of ‘Big White’ hazmat pandemic enforcers dousing disinfectant over an apartment in the eastern Chinese city of Xuzhou — even emptying the refrigerator for sterilization — sparked outrage on China’s Twitter-like Weibo. The clip was shared 50,000 times and clocked 10 million views before being censored. ‘Home is the last frontier for the Chinese,’ a blogger who goes by the name West Slope wrote afterward, in an essay viewed 100,000 times on messaging app WeChat. ‘Videos of unruly household invasions break the last psychological line of defense for many.’”

May 24 – Financial Times (Ryan McMorrow): “China’s elite universities have sealed their campuses and encouraged students to return home after the implementation of harsh restrictions to quash Covid-19 outbreaks sparked discontent and protests. Students at the country’s top two universities, Tsinghua and Peking, have been prevented from leaving their campuses for weeks as the schools enforce their own Covid bubbles… Officials in cities across China have employed some of the toughest tactics at college campuses… Tsinghua recently fortified a fence enclosing the campus with metal sheeting to prevent separated couples from holding hands through open slats and deliverymen from passing in hot food. When a makeshift fence was installed at nearby Peking University this month, dozens of students protested. Videos shared online showed students tearing down the fences and booing university staff… Videos and discussion of the Peking University student protests were quickly censored on Chinese social media.”

May 26 – Bloomberg: “Hundreds of people took to the streets of the largest city in China’s Henan province this week, calling on authorities to ensure the return of tens of billions of yuan invested in what could be one of the nation’s largest financial scams. Protesters gathered outside the local office of the China Banking and Insurance Regulatory Commission on Monday in Zhengzhou city, carrying signs that read ‘Return my savings’… The crowd was dispersed by police and told to return home as soon as possible, the people said. The protest, unusual for China, followed a freeze in online and mobile cash withdrawal services by four banks in Henan. A subsequent probe found that Henan Xincaifu Group Investment Holding Co., a private investment firm with stakes in all four lenders, colluded with bank employees to illicitly attract public funds via online platforms…”

Central Banker Watch:

May 24 – Bloomberg (Tracy Withers): “New Zealand’s central bank raised interest rates by half a percentage point for a second straight meeting and forecast further aggressive hikes to come to tame inflation. The Reserve Bank’s Monetary Policy Committee lifted the Official Cash Rate to 2% from 1.5%... It projected the OCR will rise to at least 3.25% this year and peak at close to 4% in 2023, higher than previously forecast. ‘It remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment,’ the RBNZ said. ‘The Committee is resolute in its commitment to ensure consumer price inflation returns to within the 1-3% target.’”

May 25 – Bloomberg (Craig Stirling): “The European Central Bank’s ‘massively expansionary’ monetary policy was fiercely criticized by the veteran British economist Charles Goodhart, who warned that its officials now face a ‘very difficult’ task ahead. ‘If inflation goes up and nominal interest rates do not anything like as much, that effectively is a decline in real interest rates’ to a current level of -8% in the euro zone, the former Bank of England policy maker told a conference in Madrid. ‘It’s extraordinary that this should have been allowed.’”

May 24 – Bloomberg (Alexander Weber, William Horobin and Jana Randow): “European Central Bank President Christine Lagarde said officials won’t rush into withdrawing stimulus as her French colleague echoed her to insist there’s no consensus for a half-point interest-rate hike. A day after the ECB chief’s timetable of two quarter-point increases irked hawkish officials wanting the option to act more aggressively, she and Bank of France Governor Francois Villeroy de Galhau emphasized… that tightening needs to proceed gradually. Two colleagues meanwhile aired the option of moving by a half point.”

May 25 – Bloomberg (Alexander Weber and Jana Randow): “European Central Bank colleagues lined up to back President Christine Lagarde’s plan to exit negative interest-rate policy by the end of the third quarter, though some stressed that more aggressive action can’t be ruled out. Following initial noises of alarm from hawkish officials earlier this week that the ECB chief’s signal for two quarter-point rate hikes in July and September seemed to exclude bigger moves, several policy makers declared support for her roadmap.”

May 23 – Bloomberg (Jana Randow and Alessandra Migliaccio): “European Central Bank President Christine Lagarde’s prospective timetable for two quarter-point interest-rate hikes has irked colleagues who want to keep open the option of moving faster… The plan to exit subzero monetary policy by the end of the third quarter that was revealed in a blog post on Monday would effectively exclude a half-point move, a position that leaves some more hawkish officials uncomfortable, said the people…”

Global Bubble and Instability Watch:

May 25 – Reuters (Rodrigo Campos): “The Institute of International Finance slashed its 2022 growth outlook for global output in half, citing the economic effects of Russia's invasion of Ukraine, China's response to a COVID-19 wave and tighter monetary policy in the United States. The IIF also expects capital flows to emerging markets to shrink by 42% from last year. Based on its new estimates, the global banking trade group said recession risk had risen as true growth was expected to flatline. ‘Weakness is broad-based and leaves little margin for error,’ IIF economists wrote in a report. ‘Global recession risk is elevated. In this context, we expect non-resident flows to emerging markets to slow significantly…’ Capital flows to emerging markets are expected to slow ‘significantly,’ according to the report, with nonresident flows dropping to $972 billion from $1.68 trillion last year. The figure drops to $645 billion when China is left out, down from $1.0 trillion.”

May 22 – Financial Times (Sid Venkataramakrishnan): “Technology often transcends borders. The internet is the clearest example: a network encircling the globe, connecting billions of people for everything from business to romance. Its role in enabling remote working has been underlined during the two years of the pandemic. Yet, as it has become ever clearer that the development, reach and success of technology are highly dependent on tightly linked supply chains, the very structure of those connections has become increasingly fragile. From the Russian invasion of Ukraine to national digital security concerns, geopolitics can threaten both the supply of physical components and the tech communities that are essential for innovation. For business students, it is becoming essential to understand that, while globalisation has been of great benefit to companies, they must also be aware of the risks posed by international turbulence such as trade disputes and security concerns — and consider ways to mitigate them.”

May 23 – Wall Street Journal (Chao Deng and Amira El-Fekki): “For decades, vendors sold subsidized Egyptian baladi bread for almost nothing in Al-Sayeda Zeinab market, a bustling hub for this city’s working class. One day last month, there was suddenly no baladi. Customers started shouting at Khalil Mohamed, a municipal bakery-shop worker. ‘You should have seen the fight,’ said Mr. Mohamed, 25 years old… Long the world’s top importer of wheat, Egypt has been hammered by Russia’s invasion of Ukraine, which has disrupted wheat supplies from both countries. The pair previously supplied more than 80% of Egypt’s imports. In a country where political discontent often follows spikes in food prices, the potential for bread shortages is among the most urgent security challenges the Egyptian state has faced since the 2013 coup…”

Europe Watch:

May 23 – Bloomberg (Abhinav Ramnarayan and Aisha S Gani): “Swedish buy-now-pay-later company Klarna Bank AB saw its borrowing costs climb to their highest level on record as rising rates hit the company’s debt and equity valuation. Europe’s most valuable fintech unicorn saw the credit spreads on some of its floating rate debt widen sharply in recent sessions as it looks set to take a $16 billion hit on its valuation in an upcoming funding round. The company said… it will lay off staff, with about 10% of the workforce impacted by cost-cutting measures.”

EM Bubble Watch:

May 23 – Reuters (Marc Jones): “Rising borrowing costs and the worldwide fallout from the Russia-Ukraine war could see up to 10% of riskier 'junk'-rated emerging market countries suffer debt crises this year, analysts at U.S. investment bank JPMorgan have warned. More acute balance of payment pressures and larger fiscal deficits are now compounding problems for heavily-indebted countries that import most of their energy and food… ‘Nearly half of the (52) country sample is classified as carrying high repayment risk in our assessment. Of these, eight are at risk of reserve depletion by the end of 2023, signalling high default risks. These are Sri Lanka, Maldives, Bahamas, Belize, Senegal, Rwanda, Grenada, and Ethiopia,’ said the note led by strategist Trang Nguyen…”

May 22 – Financial Times (Camilla Hodgson, Leslie Hook and Heba Saleh): “Egypt’s finance minister has warned that ‘millions’ could die globally because of the food price crisis triggered by the Ukraine war, echoing warnings made by the UN and G7 countries as worries about a worldwide wheat shortage intensify. In an interview..., Mohamed Maait warned of ‘food insecurity’ around the world. However, he insisted Egypt had enough wheat to last until the end of the year. ‘This is something that we have to be very careful about,’ said Maait. ‘We will feel shame if we find that millions of people are dying because of food insecurity. They are not responsible for that, they didn’t do anything wrong.’”

Japan Watch:

May 27 – Bloomberg (Masumi Suga): “Japan’s biggest steelmakers have warned they will push for more price hikes, intensifying inflationary pressures in a nation where carmakers to machinery industries are already grappling with surging costs… The steelmakers have already boosted prices to record levels over the past year, as costs of raw materials surged.”

Leveraged Speculation Watch:

May 24 – Bloomberg (Bei Hu): “Hedge funds globally are bracing for nearly $20 billion of investor redemptions for the rest of 2022, even after seeing a net inflow in the first quarter, according to… Citco Group Ltd. Investors are already scheduled to withdraw $13.5 billion from the industry in the current quarter and another $6.3 billion the rest of the year… While the numbers are smaller than the first-quarter redemptions of almost $39 billion, they can change significantly in either direction, depending on fund terms and investor actions.”

Social, Political, Environmental, Cybersecurity Instability Watch:

May 23 – Reuters (Dan Whitcomb): “California Governor Gavin Newsom… warned he would order strict cutbacks on water usage statewide if businesses and residents did not slash their own consumption in the face of a severe drought... ‘Every water agency across the state needs to take more aggressive actions to communicate about the drought emergency and implement conservation measures,’ Newsom said… ‘Californians made significant changes since the last drought but we have seen an uptick in water use, especially as we enter the summer months. We all have to be more thoughtful about how to make every drop count,’ the governor said.”

May 26 – Reuters (Seher Dareen): “The extended drought in California could lead to hydropower producing 8% of California's electricity generation compared with 15% under normal precipitation conditions, the U.S. Energy Information Administration (EIA) said… The EIA expects that the dip in hydropower generation would lead to an 8% increase in electricity generation from natural gas, an increase in energy-related carbon dioxide (CO2) emissions by 6%, and a roughly 5% increase in wholesale electricity prices throughout the West… Earlier this month, California energy officials issued a sober forecast for the state's electrical grid, saying it lacks sufficient capacity to keep the lights on this summer and beyond if heatwaves, wildfires or other extreme events take their toll.”

May 23 – Bloomberg (Dan Murtaugh, Rajesh Kumar Singh and Naureen Malik): “Global power grids are about to face their biggest test in decades with electricity generation strangled in the world’s largest economies. War. Drought. Production shortages. Historically low inventories. And pandemic backlash. Energy markets across the planet have been put through the wringer over the past year, and consumers have suffered the consequences of soaring prices. But, somehow, things are on track to get even worse. Blame the heat. Summer in much of the Northern Hemisphere is a typical peak for electricity use… Scientists are predicting scorching months ahead for the US. Power use will surge as homes and businesses crank up air conditioners. The problem is that energy supplies are so fragile that there just won’t be enough to go around…”

May 24 – Reuters (Brian K. Sullivan): “The Atlantic is poised for its seventh consecutive overactive hurricane season, a worrying forecast for coastal residents as well as energy and commodity markets already roiled by Russia’s war in Ukraine. Six to 10 hurricanes could form in the Atlantic between June and November, with three to six becoming major systems, the US National Oceanic and Atmospheric Administration predicted... In all, 14 to 21 named storms could form -- with the upper end matching last year as the third-most active season. Major storms boast winds of 111 miles per hour or more. An average season produces 14 named storms that produce winds of at least 39 miles an hour.”

May 22 – Reuters (Kirsty Needham): “Professional women and voters concerned about climate change unleashed a third force in Australia's election, taking a swath of seats that ended nine years of conservative rule even as votes for the winning Labor Party fell. Women who left successful careers in business, medicine and media to enter politics as independents were on track to win five seats from Prime Minister Scott Morrison's Liberal party in its affluent urban heartland in Saturday's general election, as moderate voters abandoned the government.”

Geopolitical Watch:

May 25 – Bloomberg: “China followed President Joe Biden’s vow to defend Taiwan militarily by announcing it held military exercises close to the democratically ruled island, underscoring its anger over the US stance. The air and sea ‘combat readiness patrol’ was ‘a solemn warning about the recent collusion between the US and Taiwan,’ Colonel Shi Yi said… ‘On the Taiwan issue, the US side says one thing and does another, giving repeated encouragement to ‘Taiwan independence’ forces. This is hypocritical and futile, and will only lead the situation to a dangerous situation, and it will also face serious consequences,’ Shi added.”

May 25 – Reuters (Hyonhee Shin and Soo-Hyang Choi): “North Korea fired three missiles on Wednesday, including one thought to be its largest intercontinental ballistic missile, after U.S. President Joe Biden ended an Asia trip where he agreed to new measures to deter the nuclear-armed state. South Korea's deputy national security adviser, Kim Tae-hyo, said the North also appeared to have conducted multiple experiments with a detonation device… In response to the missile launches, the United States and South Korea held combined live-fire drills, including surface-to-surface missile tests involving the U.S. Army Tactical Missile System (ATACMS) and the South's Hyunmoo-2 SRBM, both militaries said.”

May 20 – Reuters (Sakura Murakami): “Japanese Prime Minister Fumio Kishida said… he was disappointed in China's efforts to develop areas in the East China Sea, saying that it was ‘unacceptable.’ Speaking to reporters in the western city of Kyoto, he said that the government had lodged a complaint against China via diplomatic channels. The Japanese foreign ministry released a statement on Friday confirming an increase in Chinese efforts to develop natural resources in the East China Sea, including in areas that are west of the midpoint between Japan and China.”