May 19 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Kansas City President Esther George said the ‘rough week in the equity markets’ was not surprising, partially reflecting the central bank’s policy tightening, and doesn’t alter her support for half-point interest-rate hikes to cool inflation. ‘I think what we are looking for is the transmission of our policy through markets’ understanding that tightening should be expected,’ George said… ‘It is one of the avenues through which tighter financial conditions will emerge… Right now, inflation is too high and we will need to make a series of rate adjustments to bring that down… We do see financial conditions beginning to tighten so I think that’s something we’ll have to watch carefully. It’s hard to know how much will be needed.’”
Esther George could not have been much clearer. Inflation is too high and must come down. Financial conditions must tighten, and securities markets are a key monetary policy transmission mechanism. And the Fed today has little clarity on how far this tightening process will need to go.
The “world” – certainly including Market Structure – has gone through monumental change since the last real tightening cycle back in 1994. The Fed has lost control.
It was only during the early-nineties Greenspan era that financial conditions came to play such a prominent role in policymaking. He aggressively manipulated the yield curve (slashed short rates 5 percentage points in less than two years to a three-decade low 3% as of Sept. 1992), creating an extraordinarily profitable (borrow short/lend long) “carry trade” for the severely impaired U.S. banking system. Financial history was fundamentally altered, as Fed policy created enormous easy profits for the fledgling leveraged speculating community. The 1994 bond bust would have posed an existential threat to the hedge fund industry, if not for the powerful GSE liquidity backstop.
Greenspan came to relish the incredible power he could wield over system Credit, market liquidity, financial conditions and economic development. Moreover, the Federal Reserve system emerged from 1994's acute speculative deleveraging and market instability with a new doctrine of avoiding policy measures that could unleash a “risk off” tightening of financial conditions.
Since 1994, so-called “tightening” cycles have been gradual and timid affairs, with the clear intention of avoiding bouts of de-risking/deleveraging. Indeed, Washington would move aggressively to thwart stress building on the leveraged speculating community. Bouts of late-nineties instability were met by rate cuts, massive GSE liquidity injections, and Fed-orchestrated bailouts. Between 1994 and 2003, GSE assets inflated $2.254 TN or 360%. With accounting fraud curbing the GSE’s capacity for market liquidity backstops, it was then left to the Fed and QE to deal with 2008’s de-risking/deleveraging mayhem.
I often ponder analysis of the traditional gold standard monetary regime. Pegging Credit expansion to the supply of gold reserves proved a powerful restraint on monetary excess and inflation. Equally influential but less appreciated, assurance that policymakers were committed to the stability of the regime was fundamental to its success. Market operators well understood the nature of policy responses if the system began to diverge from general stability. Importantly, mounting excess would be predictably countered with effective tightening measures. Wise to the process, speculators would bet on a return to stability – trading activity that would tend to support system stabilization. Importantly, a stable monetary regime operated with inherent self-correcting and adjusting mechanisms. Indeed, the interplay of policymaking and speculation worked as an inherent stabilizing mechanism.
To more clearly grasp the current predicament, a key is to appreciate that the policymaking and speculation nexus has worked as a destabilizing mechanism inherently reinforcing excess for decades. Central banks repeatedly responded to financial excess and resulting market instability with measures that only more aggressively accommodated leveraged speculation.
The egregious leverage and speculative excess that precipitated the 1994, 1998, 2000-2002 and 2008 crises each time engendered monetary policy measures only more advantageous to leveraged speculation (i.e. rate cuts, bailouts, liquidity injections, broadening securities purchases, and only more telegraphed and gradual rate increases). Decades of this deeply flawed monetary regime promoted a gargantuan leveraged speculating community that bet only more aggressively on increasingly egregious monetary inflation.
Stealthily, leveraged speculation evolved into the marginal source of system Credit and liquidity, with limitless finance fueling historic Bubbles. And, importantly, this inherently highly unstable finance maintained a semblance of stability only so long as aggressively accommodated by loose monetary policy and conditions
For more than 25 years, the Fed operated with little concern for a rapid rise in consumer prices. Over time, the primary policy focus shifted to ensuring that booming asset market inflation sustained loose financial conditions and attendant robust economic expansion. The cycle has now clearly shifted. Consumer inflation has become a serious issue and monetary policy priority. Securities market price deflation is apparently viewed by Fed officials as a necessary facet of tighter financial conditions and inflation containment.
May 16 – CNBC (Jeff Cox): “Former Federal Reserve Chair Ben Bernanke said the central bank erred in waiting to address an inflation problem that has turned into the worst episode in U.S. financial history since the early 1980s. Bernanke, who guided the Fed through the financial crisis that exploded in 2008 and presided over unprecedented monetary policy expansion, told CNBC that the issue of when action should have been taken to tame inflation is ‘complicated.’ ‘The question is why did they delay that. ... Why did they delay their response? I think in retrospect, yes, it was a mistake,’ he told CNBC’s Andrew Ross Sorkin… ‘And I think they agree it was a mistake.’”
Why did the Fed delay? Because they preferred to gamble on transitory inflation, rather than risk the certainty of market and economic instability unleashed by tightening financial conditions and bursting market Bubbles. Ironically, it was chairman Bernanke that advanced the policy of overtly backstopping financial markets back in July 2013.
July 10, 2013 (Reuters): “Federal Reserve Chairman Ben Bernanke said… that the U.S. central bank might have to ‘push back’ if financial conditions tightened so much as to threaten the economy’s progress. ‘If financial conditions were to tighten to the extent that they jeopardized the achievement of our inflation and employment objectives, then we would have to push back against that,’ Bernanke said…”
Coming in the throes of fledgling global “taper tantrum” de-risking/deleveraging, Bernanke’s comment was interpreted as a signal that the Fed would not tolerate much market weakness. Markets rallied strongly on Bernanke’s comment and didn’t look back. De-risking/deleveraging and Crisis Dynamics quickly gained momentum when the new Fed Chair expressed willingness to tolerate tighter financial conditions (to begin having the markets stand on their own). “Risk on” then made a brisk return on the “Powell pivot,” though a bout of repo market instability in the summer of 2019 spurred a hasty revival of Fed QE. Markets were at the brink of collapse in March 2020, when the monetary floodgates were opened in historic - cycle culmination - fashion.
Not only did massive QE thwart de-risking/deleveraging, it also triggered blow-off excess throughout leveraged speculation, along with myriad manias (stocks, crypto, ETFs, options, derivatives, etc.). Not surprisingly, it also stoked already heightened price pressures into dangerous inflation dynamics. Raging leveraged speculation, runaway manias, and surging inflation were a central banker’s nightmare.
The Nasdaq100 sank 4.5% this week, boosting 2022 losses to 27.5%. Many popular hedge fund long positions have suffered huge losses.
May 17 – Bloomberg (Hema Parmar and Alex Wittenberg): “Tiger Global Management was already off to a ‘very disappointing’ first quarter, when it cut some of the biggest tech losers of 2022 from its portfolio and added others. But things went from bad to worse for Chase Coleman’s firm. It added to its stake in beleaguered online used-vehicle dealer Carvana Co., which has lost more than two-thirds of its value since the end of the quarter. It exited 83 stocks, including Netflix Inc. and Adobe Inc., while paring its holding of pandemic darling DoorDash… Meanwhile, it added just two new positions. One of them, digital banking-services provider Dave Inc., has plunged 64% since March 31. That helped fuel a 15% April decline for Tiger Global’s flagship hedge fund, extending its loss for the year to 44%.”
When things turn sour for leveraged speculation, they tend to really turn sour. Losses beget de-risking/deleveraging that begets lower prices, waning liquidity, fear, and intensifying de-risking. As 2022 unfolded, many hedge funds (and “family offices”) were holding their own despite pockets of equity market weakness. It appears that much of the industry has taken a fateful turn for the worse over recent weeks.
May 18 – Reuters (Svea Herbst-Bayliss): “Melvin Capital, once one of Wall Street's most successful hedge funds which then lost billions in the meme stock saga, will shut down after it was hit again by this year's market slump. Gabe Plotkin, widely regarded as one of the industry's best traders after posting years of double digit returns, told investors that the last 17 months have been ‘an incredibly trying time.’ Plotkin had been trying to turn around the firm after being caught out in early 2021 betting against retail favorite GameStop and after being wrong footed again by tumbling markets this year. ‘The appropriate next step is to wind down the Funds by fully liquidating the Funds' assets and accounts and returning cash to all investors,’ Plotkin wrote…”
May 15 – Financial Times (Eric Platt, Ortenca Aliaj and Nicholas Megaw): “Hedge funds focused on US equities are pulling back sharply on their bets after the longest stretch of sustained selling in more than a decade left many managers nursing stiff losses. The S&P 500 index has fallen for six weeks in a row in a tumultuous stretch that on Thursday left Wall Street’s benchmark share barometer down by almost a fifth from the peak it reached at the start of 2022... Long-short equity funds, which pitch themselves on the ability to protect client money in down markets, have lost 18.3% for the year up to and including Wednesday, according to Goldman Sachs...”
As mounting losses are reported to investors, expect a flurry of redemption requests. This will spur more selling and only steeper losses. Many will choose to sell ahead of others that will be forced to sell. It appears a particularly precarious cycle is now unfolding. And long-term readers will remember that this is not my first warning of serious unfolding issues for the global leveraged speculating community. Previous industry crises, however, were rather quickly mollified by Fed and global central bank easing measures – policies that turned increasingly reckless. With seemingly no massive market bailout in the cards, a serious de-risking/deleveraging episode will now pose an existential threat.
High-yield Credit default swap (CDS) prices surged 39 this week to 523 bps, trading intraday Friday above 530 bps for the first time since June 2020. After beginning the year at 2.78, high yield spreads to Treasuries have widened over 100 bps in three weeks to an 18-month high 4.82 percentage points. The iShares High Yield Corporate Bond ETF (HYG) has declined 2.3% this month (down 10.8% y-t-d), underperforming both the iShares Investment Grade ETF (LQD) (positive 0.1%) and the iShares Treasury Bond ETF (TLT) (negative 0.6%).
May 20 – Bloomberg (Jeannine Amodeo): “Leveraged loans remain under pressure as volatility across credit seeps into the market. What looked like a promising start to the week with five deals launching, and then a heavily oversubscribed deal for Peloton Interactive Inc., didn’t last long. Average loan prices have sunk below 95 cents on the dollar as investors flee the asset class on concerns that inflation and a potential recession will hurt heavily-indebted companies. The sell-off has brought the market for new loan and bond sales to a virtual halt, as investors just aren’t stepping in to buy deals amid concerns that prices will go even lower.”
Leveraged Loan prices dropped 3.5% over the past month, in the steepest decline since March 2020. It’s worth noting that after trading at 96.75 on February 23rd 2020, leveraged loan prices collapsed to 78.36 over the following month. And recall also that High Yield (HYG ETF) sank 22% between February 23 and March 23, 2020, while Investment Grade (LQD) dropped 12.8%.
There is surely enormous speculative leverage in high-yield bonds, leveraged loans, and throughout Wall Street “structured finance”. And at this point, high-yield finance is basically closed for new issuance. This dramatic tightening of financial conditions puts scores of negative cash-flow companies in jeopardy. And the rapidly deteriorating Credit backdrop ensures even more intense speculator de-risking/deleveraging. The likely scenario is liquidation, illiquidity and market dislocation. A run on corporate bond ETFs is a growing risk.
Barely off the ground, the Fed’s first tightening cycle in 28 years is nonetheless about to strangle high-yield finance and leveraged speculation. And this dramatic tightening of one important segment of finance has begun to deflate Wall Street’s historic Bubble in the financing of uneconomic enterprises. This will negatively impact scores of start-ups and Wall Street creations, but also Arms Race over-investment by scores of our nation’s largest companies. This dynamic surely supported this week’s 14 bps decline in 10-year Treasury yields (2.78%), along with the notable 17 bps drop in the Treasury five-year “breakeven” inflation rate (down 44 bps in three weeks to a three-month low 2.90%).
May 20 – Bloomberg (Jeannine Amodeo and Natalie Harrison): “A group of banks led by Bank of America Corp. has been forced 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, according to people with knowledge of the matter. The move allows Bain, which agreed to buy the outsourcing company from Carlyle Group Inc. earlier this year, to close the acquisition while the banks work out a solution to offload the debt, said the people…”
Bank of America CDS jumped eight this week to 104 bps, the high since April 2020. JPMorgan CDS rose eight to 99 bps (high since March 2020) and Citigroup nine to 119 bps (April 2020). Morgan Stanley (116bps) and Goldman Sachs (118bps) CDS both rose eight this week to highs since early-April 2020.
It was curious to see U.S. banks on the top of this week’s global bank CDS leaderboard. But, then again, U.S. stocks were huge underperformers. Most EM equities indices posted decent gains and European stocks were relatively stable, while the Nasdaq100 sank 4.5% and the S&P500 fell 3.0%. Meanwhile, the high-flying U.S. dollar reversed lower. Call trend reversals at your own peril. Yet it is becoming increasingly clear that a historic financial Bubble has begun to deflate in the U.S.
I have held that the Fed's ability to sustain U.S. securities market price inflation has for decades provided key unappreciated support to our currency – offsetting unending massive Current Account Deficits and general monetary inflation (currency debasement). From this perspective, I’m increasingly on guard for a consequential shift in dollar sentiment that would catch a vulnerable market by surprise. And a weakening dollar would support precious metals and commodities prices, in the process solidifying the secular transition of Hard Asset outperformance relative to financial assets.
The renminbi rallied 1.44% versus the dollar this week. Finally, the People’s Bank of China cut benchmark interest rates (15 bps to 4.45%). This follows marginal cuts in mortgage rates. The Shanghai Composite rallied 2.0%, though reaction in the troubled developer bond universe was at best muted.
May 19 – Bloomberg: “China’s plans to bolster growth as Covid outbreaks and lockdowns crush activity will see a whopping $5.3 trillion pumped into its economy this year. The figure -- based on Bloomberg’s calculation of monetary and fiscal measures announced so far -- equates to roughly a third of China’s $17 trillion economy, but is actually smaller than the stimulus in 2020 when the pandemic first hit. That suggests even more could be spent if the economy fails to pick up from its current funk -- a possibility raised by Premier Li Keqiang earlier this week.”
China – its citizens, bankers, corporate management teams, investment professionals, and policymakers – has no experience with collapsing apartment and financial Bubbles. They also have minimal experience managing through a major de-risking/deleveraging episode. Levered speculation has flourished over recent years. My thesis holds that colossal speculative leverage has accumulated throughout Chinese securities and derivatives markets – both from domestic and international operators. More support this week for the thesis of China finance at high-risk of dislocation.
May 20 – Bloomberg: “China’s almost-trillion dollar hedge fund industry risks worsening the turmoil in its stock market as deepening portfolio losses trigger forced selling by some managers. About 2,350 stock-related hedge funds last month dropped below a threshold that typically activates clauses requiring them to slash exposures, with many headed toward a level that mandates liquidation, according to an industry data provider. Such signs of stress were ‘close to the historical high,’ China Merchants Securities Co. analysts said in a report this month. Unusual elsewhere, the selling rules are common in China, where they were introduced to protect hedge fund investors from outsized losses. They can, however, backfire in a falling market when many funds are forced to pare their stock holdings.”
That both major pillars of the great global Bubble – the U.S. and China – face such serious de-risking/deleveraging risk is troubling, to say the least. Bottom line: The New Cycle of heightened inflation, tighter financial conditions, and great uncertainty is inhospitable to leveraged speculation. Today’s backdrop has troubling parallels to pre-Lehman 2008, with unsustainable highly leveraged holdings of mispriced securities and derivatives.
Rather than subprime mortgages as the system’s weak link, today it’s “subprime” corporate Credit. History suggests today’s festering issues in Credit derivatives and “structured finance” will prove woefully worse than anyone today appreciates. And there is little policymakers can do to remedy the situation. The cycle has changed. The amount of stimulus necessary to one more time resuscitate Bubble Dynamics would risk hyperinflation.
May 17 – Financial Times (Laurence Fletcher, Akila Quinio, Miles Kruppa and Antoine Gara): “Early last year Chase Coleman wrote to investors to celebrate the 20-year record of Tiger Global, one of the biggest winners from a technology bull market that had run since the financial crisis. Now the best-known of the so-called Tiger cub firms has become the highest-profile hedge fund casualty of the tech stock hammering as interest rates have started to rise. Tiger’s hedge fund has lost about $17bn this year…, erasing about two-thirds of the dollar gains made for investors since its 2001 launch. Coupled with losses suffered late last year, that puts the fund well below the point at which it charges investors its lucrative 20% performance fees. ‘A fall of this magnitude is rare’ in the hedge fund industry, said Amin Rajan, chief executive of consultancy Create Research. ‘Getting back to its glory days will be an Everest of a task, if the rate-hiking cycle is prolonged and severe.’”
For the Week:
The S&P500 dropped 3.0% (down 18.1% y-t-d), and the Dow fell 2.9% (down 14.0%). The Utilities increased 0.4% (down 1.6%). The Banks declined 0.7% (down 19.4%), and the Broker/Dealers fell 1.3% (down 19.1%). The Transports sank 6.7% (down 18.1%). The S&P 400 Midcaps slumped 1.9% (down 16.1%), and the small cap Russell 2000 declined 1.1% (down 21.0%). The Nasdaq100 sank 4.5% (down 27.5%). The Semiconductors dropped 3.0% (down 27.0%). The Biotechs increased 0.7% (down 17.5%). With bullion recovering $35, the HUI gold index rallied 3.5% (down 1.0%).
Three-month Treasury bill rates ended the week at 0.9925%. Two-year government yields were little changed at 2.58% (up 185bps y-t-d). Five-year T-note yields fell seven bps to 2.80% (up 154bps). Ten-year Treasury yields dropped 14 bps to 2.78% (up 127bps). Long bond yields fell nine bps to 2.99% (up 109bps). Benchmark Fannie Mae MBS yields sank 16 bps 4.00% (up 193bps).
Greek 10-year yields surged 24 bps to 3.71% (up 240bps y-t-d). Ten-year Portuguese yields rose seven bps to 2.13% (up 167bps). Italian 10-year yields jumped 15 bps to 3.00% (up 183bps). Spain's 10-year yields gained eight bps to 2.08% (up 152bps). German bund yields were little changed at 0.94% (up 112bps). French yields added a basis point to 1.47% (up 127bps). The French to German 10-year bond spread widened one to 53 bps. U.K. 10-year gilt yields rose 15 bps to 1.89% (up 92bps). U.K.'s FTSE equities index slipped 0.4% (unchanged y-t-d).
Japan's Nikkei Equities Index rallied 1.2% (down 7.1% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.24% (up 17bps y-t-d). France's CAC40 fell 1.2% (down 12.1%). The German DAX equities index slipped 0.3% (down 12.0%). Spain's IBEX 35 equities index jumped 1.8% (down 2.6%). Italy's FTSE MIB index increased 0.2% (down 11.9%). EM equities were mostly higher. Brazil's Bovespa index rose 1.5% (up 3.5%), and the Mexico's Bolsa index surged 3.9% (down 3.3%). South Korea's Kospi index gained 1.3% (down 11.4%). India's Sensex equities index recovered 2.9% (down 6.7%). China's Shanghai Exchange Index advanced 2.0% (down 13.6%). Turkey's Borsa Istanbul National 100 index fell 1.9% (up 27.7%). Russia's MICEX equities index rallied 2.8% (down 37.3%).
Investment-grade bond funds saw outflows of $4.269 billion, and junk bond funds posted negative flows of $2.605 billion (from Lipper).
Federal Reserve Credit last week expanded $14.8bn to a record $8.919 TN. Over the past 140 weeks, Fed Credit expanded $5.193 TN, or 139%. Fed Credit inflated $6.109 Trillion, or 217%, over the past 497 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week added $0.4bn to $3.423 TN. "Custody holdings" were down $108bn, or 3.1%, y-o-y.
Total money market fund assets fell $16.2bn to $4.485 TN. Total money funds were down $56bn, or 1.2%, y-o-y.
Total Commercial Paper gained $8.4bn to $1.121 TN. CP was down $77bn, or 6.4%, over the past year.
Freddie Mac 30-year fixed mortgage rates declined five bps to 5.25% (up 225bps y-o-y) - near highs since August 2009. Fifteen-year rates fell five bps to 4.43% - near highs since December 2009 (up 214bps). Five-year hybrid ARM rates jumped 10 bps to 4.08% (up 149bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 18 bps to 5.37% (up 226bps).
Currency Watch:
May 18 – Bloomberg (Ruth Carson and Amelia Pollard): “The dollar’s skyrocketing rise has some contemplating a rare, if not unthinkable, action: major nations agreeing to manipulate the US currency until it falls. It has happened before -- most notably with 1985’s Plaza Accord -- which took place against a backdrop of soaring inflation, an aggressive Federal Reserve rate-hike campaign and surging dollar. In other words, a scene that looks a lot like today -- a parallel that won’t be lost on Group-of-Seven finance ministers and central bank governors as they meet this week.”
For the week, the U.S. Dollar Index dropped 1.4% to 103.15 (up 7.8% y-t-d). For the week on the upside, the Brazilian real increased 3.7%, the Swiss franc 2.7%, the South African rand 2.0%, the New Zealand dollar 1.9%, the British pound 1.8%, the euro 1.5%, the Australian dollar 1.4%, the South Korean won 1.3%, the Mexican peso 1.2%, the Swedish krona 1.2%, the Japanese yen 1.1%, the Singapore dollar 0.9%, the Canadian dollar 0.7%, and the Norwegian krone 0.3%. The Chinese (onshore) renminbi rallied 1.44% versus the dollar (down 5.03% y-t-d).
Commodities Watch:
May 16 – Bloomberg (Pratik Parija): “Wheat jumped by the exchange limit to near a record high after India’s move to restrict exports, exposing just how tight global supplies are during the war in Ukraine and threatening to drive up food prices even more. The government will suspend overseas sales to manage its food security... This drew criticism from the agriculture ministers of the Group of Seven nations, who said that such measures make the world’s crisis worse.”
May 18 – Bloomberg (Jen Skerritt): “Farmers in parts of Canada’s Prairies are struggling to get crops in the ground as heavy rains continue to wallop the eastern region in the latest threat to global grain supplies. Virtually no seeding has been done in Manitoba as more than 90% of the crop land is suffering from excess moisture, said Trevor Hadwen, agroclimate specialist with Agriculture and Agri-Food Canada. Only 4% of the province’s crops have been sown as of May 17, lagging the five-year average of 50%. Farmers are scrambling to look for dry areas to plant…”
The Bloomberg Commodities Index recovered 1.7% (up 31.6% y-t-d). Spot Gold rallied 1.9% to $1,847 (up 0.9%). Silver jumped 3.1% to $21.78 (down 6.6%). WTI crude rose $2.74 to $113.23 (up 51%). Gasoline dropped 3.1% (up 72%), while Natural Gas rallied 5.5% (up 117%). Copper gained 2.4% (down 4.2%). Wheat slipped 0.7% (up 52%), and Corn dipped 0.3% (up 31%). Bitcoin fell $550, or 1.8%, this week to $29,250 (down 37%).
Market Instability Watch:
May 20 – Bloomberg (Sagarika Jaisinghani and Ksenia Galouchko): “Investors fled most major asset classes in the past week, with US equities and Treasuries a rare exception to the massive exodus, amid concerns that tightening monetary policy will push leading economies into a recession. Global equity funds had $5.2 billion of outflows in the week to May 18, led by redemptions from mutual funds, although US stock funds managed to attract a small $0.3 billion inflow, according to Bank of America Corp.’s note citing EPFR... Bond fund outflows reached $12.3 billion, with only Treasuries and government debt seeing additions. Investors also exited cash and gold.”
May 18 – Axios (Neil Irwin): “If you took out a mortgage over the last couple of years, there's a good chance the holder of that loan is America’s central bank — a consequence of its monetary stimulus efforts throughout the pandemic. Why it matters: The Fed will face a series of political and economic headaches as it attempts to move away from subsidizing home lending by shrinking its portfolio of mortgage-backed securities. The problem: Extracting itself from this market risks crashing the housing industry and creating intense political blowback for incurring financial losses. By the numbers: Back in February 2020, the Fed owned $1.4 trillion in mortgage-backed securities, and the number was falling rapidly. But when the pandemic took hold, the central bank began a new round of bond purchases (known as ‘quantitative easing’), swelling that number to $2.7 trillion.”
May 18 – Bloomberg (Garfield Reynolds): “This is shaping up to be the most volatile year for Treasuries in over a decade, as uncertainty about the impact of aggressive Federal Reserve tightening whipsaws yields. The yield on 10-year US notes has traded in a range of at least 10 bps in 50 of 95 trading days so far in 2022. That puts it on track for an annual rate of more than 130 episodes, which would be the highest since 2009.”
May 18 – Financial Times (Hudson Lockett): “International investors dumped a record $35bn worth of renminbi-denominated bonds in the first four months of 2022 as Covid-19 lockdowns hit the country’s currency and rising US yields reduced appetite for Chinese debt. Foreign investors sold more than Rmb108bn ($16bn) worth of Chinese debt in April, taking net outflows from the country’s renminbi-denominated bond market to a record Rmb235bn for the year to date… That marked the third straight month of net sales. Soaring interest rates in developed markets, particularly the US, have eroded some of the advantages of holding typically high-yielding Chinese bonds. At the same time, a weakening renminbi, which has fallen almost 5% against the dollar this year as a harsh lockdown of Shanghai stokes concerns about China’s economic outlook, has reduced the value of interest and principal payments for foreign holders of Chinese debt.”
May 18 – Bloomberg (Liz Capo McCormick and Alex Tanzi): “Like a supertanker, US debt-service costs only change course very slowly. But it’s happening now -- and from Washington’s point of view, the new direction is the wrong one: they’re heading up. The results of a double jump in the government’s borrowing costs and its debt pile are starting to show up in the federal budget. Monthly net interest payments rose to a record in April, at least in dollar terms. And broader measures of debt expenses are set to climb over the coming years -- potentially squeezing out other kinds of public spending. That’s because Treasury yields have surged, with inflation running hot and the Federal Reserve in an aggressive tightening mode -- while the national debt has grown by some $6 trillion since the pandemic began…”
Bursting Bubble/Mania Watch:
May 18 – New York Times (Tara Siegel Bernard): “Millions of amateur investors got into the stock market during the pandemic — some gingerly, some aggressively, some determined to teach Wall Street bigwigs a lesson — and almost couldn’t help but make money, riding a bull market for the better part of two years. Now they may have to wrestle with a bear… In response, many of the estimated 20 million amateurs who started trading in the past two years — whether bored sports bettors or meme-stock aficionados who piled into GameStop — have tapped the brakes, or scrambled to shuffle their portfolios into more defensive positions.”
May 15 – Wall Street Journal (Gunjan Banerji): “Options trading by individual investors is fading, the latest sign that the stock market’s speculative fever has broken. Those individual investors had embraced options as a way of riding the stock market’s momentum that drove shares of companies from Apple Inc. to Nvidia Corp. to new heights. Now, the Federal Reserve’s move to raise interest rates to tame inflation has thrown that dynamic into reverse, sending the prices of stocks skidding. Individual investors made up 26% of total options activity in March, down from nearly 30% early last year. That marked the lowest level since March 2020, though was still well above prepandemic levels…”
May 19 – Financial Times (Joshua Oliver in London and Miles Kruppa): “The $40bn collapse last week of popular crypto token Luna underscores the crucial role exchanges play as gatekeepers that rule on which digital assets are readily available to mainstream traders. Fierce competition among exchanges has led to a sharp rise in the number of tokens available on platforms that are popular with have-a-go investors. But the risks of listing newer tokens — and the lack of regulation around these assets — was highlighted last week when terraUSD, a coin that promised to match the value of the US dollar, became nearly worthless, also wiping out the value of its sister token Luna, in what research firm CryptoCompare called ‘the largest destruction of wealth in this amount of time in a single project in crypto’s history’.”
May 16 – Yahoo Finance (Jennifer Schonberger): “On the back of a meltdown in crypto markets last week, Securities and Exchange Commission Chairman Gary Gensler sent a stern warning to the investing public on crypto, calling it a ‘highly speculative asset class’ and reiterating its lack of investor protections. During an appearance at a FINRA conference…, Gensler opined that the investing public isn’t getting full and fair disclosures and that cryptocurrencies should be regulated as securities. ‘The investment public is not getting disclosures…When you make other asset purchases, we have this basic bargain, you the investing public can make your choices about what risks you take… There's supposed to be full and fair disclosure, and people aren't supposed to lie to you. Right now, many of these entrepreneurs come up with an idea … and they want to raise money from you. That puts it inside of the securities laws.’”
May 19 – Reuters (Francesco Canepa and Jan Strupczewski): “The world's top financial leaders called… for the swift and comprehensive regulation of cryptocurrencies following turmoil that has seen the demise of the Terra stablecoin last week, a draft communique showed… ‘In light of the recent turmoil in the crypto-asset market, the G7 urges the FSB (Financial Stability Board)...to advance the swift development and implementation of consistent and comprehensive regulation,’ finance ministers and central bankers from the Group of Seven industrialised nations said in the document.”
May 16 – Financial Times (Scott Chipolina): “Traders have yanked $7bn from Tether since the world’s biggest stablecoin last week briefly lost its peg against the US dollar, intensifying concerns about the assets that underpin the global cryptocurrency market. Tether’s market value has fallen by 9% since May 12 to $76bn as tokens have been removed from circulation to meet redemption requests, CryptoCompare data show. The decline came after Tether last Thursday traded at about 95 cents, well below the $1 level it seeks to maintain following the failure of a smaller rival. Observers inside and outside the crypto market have warned that deeper or more lasting volatility in stablecoins, which are designed to maintain a one-to-one peg with the dollar, could drag down the value of thousands of speculative crypto assets that have drawn buyers around the world.”
Russia/Ukraine War Watch:
May 20 – Reuters (Natalia Zinets): “Russian forces bombarded areas of Ukraine's eastern Donbas region from land and air on Friday, destroying houses in residential districts and killing a number of civilians, Ukrainian officials said. President Volodymyr Zelenskiy said the assaults had turned the Donbas into ‘hell’. In the southern port city of Mariupol, scene of the war's bloodiest siege, the last heavily wounded fighters from hold-out Ukrainian units had been evacuated from their bastion, the Azovstal steelworks… The Kremlin meanwhile said it was bolstering its forces on Russia's western border, saying that moves by Finland and Sweden to join NATO were part of an increase in military threats. As the war neared its three-month mark, the Ukrainian military said massive artillery barrages, including from multiple rocket-launchers, had hit civilian infrastructure in the Donbas region bordering Russia.”
May 18 – Reuters (Guy Faulconbridge): “Russia… said it was using a new generation of powerful laser weapons in Ukraine to burn up drones, deploying some of Moscow's secret weapons to counter a flood of Western arms supplied to its former Soviet neighbour. President Vladimir Putin in 2018 unveiled an array of new weapons including a new intercontinental ballistic missile, underwater nuclear drones, a supersonic weapon and a new laser weapon.”
Economic War/Iron Curtain Watch:
May 18 – Bloomberg (Laura Benitez): “Russian default risk surged as investors reacted to the possibility that the Biden administration will fully block bond payments from the country to US investors from next week. The move may be the final straw in Russia’s debt saga, pushing the country into its first foreign default in a century. Despite sweeping sanctions, it’s so far managed to avoid that, thanks in part to a US US waiver that allowed bond payments to US investors. But on Wednesday, Treasury Secretary Janet Yellen confirmed that it’s unlikely that the exemption will be extended once it expires on May 25. ‘The expectation was that it was time-limited,’ she said…”
May 14 – Financial Times (Guy Chazan): “German foreign minister Annalena Baerbock said the G7 group of industrialised nations was urgently seeking alternative routes for the export of Ukrainian grain as Russia’s war against its western neighbour raised the risk of a global ‘hunger crisis’. Speaking at the conclusion of a three-day meeting of G7 foreign ministers in Germany, Baerbock said some 25mn tonnes of grain were stuck in Ukrainian ports that were being blockaded by Russian forces — ‘grain that the world urgently needs’. ‘Every tonne we can get out will help a bit to get to grips with this hunger crisis,’ she said. ‘In the situation we’re in, every week counts.’”
May 15 – Reuters (Jonathan Landay and Tom Balmforth): “Russia pummelled positions in the east of Ukraine on Sunday, its defence ministry said, as it sought to encircle Ukrainian forces in the battle for Donbas and fend off a counteroffensive around the strategic Russian-controlled city of Izium. The North Atlantic Treaty Organization (NATO) secretary general, meanwhile, told a meeting in Germany that Ukraine could win the war, calling for more military support and fast-track approval of Finland and Sweden's expected bids to join the alliance.”
U.S./Russia Watch:
May 14 – Reuters (Alexander Ratz and John Irish): “Group of Seven foreign ministers vowed… to reinforce Russia's economic and political isolation, continue supplying weapons to Ukraine and tackle what Germany's foreign minister described as a ‘wheat war’ being waged by Moscow. After meeting in the Baltic Sea resort of Weissenhaus, senior diplomats from Britain, Canada, Germany, France, Italy, Japan, the United States and the European Union also pledged to continue their military and defence assistance for ‘as long as necessary’. They would also tackle what they called Russian misinformation aimed at blaming the West for food supply issues around the world due to economic sanctions on Moscow and urged China not to assist Moscow or justify Russia's war… ‘Have we done enough to mitigate the consequences of this war? It is not our war. It's a war by the president of Russia, but we have global responsibility,’ Germany's Foreign Minister Annalena Baerbock told reporters.”
May 14 – Reuters (Mark Trevelyan): “Russian Foreign Minister Sergei Lavrov said… that Moscow was the target of ‘total hybrid war’ by the West but would withstand sanctions by forging deeper partnerships with China, India and others. In a speech on the 80th day since Russia invaded Ukraine, Lavrov pointed to the barrage of sanctions imposed by the West in an effort to portray Russia as the target, not the perpetrator, of aggression. ‘The collective West has declared total hybrid war on us and it is hard to predict how long all this will last but it is clear the consequences will be felt by everyone, without exception… We did everything to avoid a direct clash - but now that the challenge has been thrown down, we of course accept it. We are no strangers to sanctions: they were almost always there in one form or another.’”
May 15 – Associated Press (David Koenig and Dee-Ann Durbin): “McDonald’s is closing its doors in Russia, ending an era of optimism and increasing the country’s isolation over its war in Ukraine. The Chicago burger giant confirmed Monday that it is selling its 850 restaurants in Russia. McDonald’s said it will seek a buyer who will employ its 62,000 workers in Russia, and will continue to pay those workers until the deal closes. ‘Some might argue that providing access to food and continuing to employ tens of thousands of ordinary citizens, is surely the right thing to do,’ McDonald’s President and CEO Chris Kempczinski said in a letter to employees. ‘But it is impossible to ignore the humanitarian crisis caused by the war in Ukraine.’”
China/Russia/U.S. Watch:
May 17 – Bloomberg (Christopher Anstey and Christopher Condon): “Treasury Secretary Janet Yellen said that western democracies have become ‘too vulnerable’ to countries that use their market positions as geopolitical leverage, and called for the US and Europe to coordinate their approach toward China after having united against Russia. ‘We have a common interest in incentivizing China to refrain from economic practices that have disadvantaged us all,’ Yellen said… ‘These practices range from those affecting trade and investment, to development and climate policies, to approaches to provide debt relief to countries facing unsustainable debt burdens.’ Yellen said there’s ‘a strong case for pursuing common goals jointly, not unilaterally.’ In that way, ‘China is more likely to respond favorably if it cannot play one of us off against another,’ she said.”
May 17 – Bloomberg: “China’s most senior diplomat vowed to counter any perceived US efforts to disrupt a once-in-five-year Communist Party meeting at which President Xi Jinping is set to secure a precedent-breaking third term. Beijing should ‘resolutely respond to any words and deeds by Washington to suppress and contain China’ before the 20th party congress later this year, Yang Jiechi wrote in a front-page commentary in People’s Daily... Without naming the US, he also said ‘some individual country’ was striving to ‘maintain its hegemony,’ a common reference to America. Yang, who leads the ruling party’s top foreign policy body, added that Beijing should continue to promote its ‘comprehensive strategic partnership’ with Moscow… He added that China should continue to urge the US to meet it ‘half way’ and properly manage differences.”
May 20 – Reuters (Chen Aizhu and Florence Tan): “China is quietly ramping up purchases of oil from Russia at bargain prices, according to shipping data and oil traders who spoke to Reuters, filling the vacuum left by Western buyers backing away from business with Russia after its invasion of Ukraine in February. The move by the world's biggest oil importer comes a month after it initially cut back on Russian supplies, for fear of appearing to openly support Moscow and potentially expose its state oil giants to sanctions.”
May 18 – Bloomberg (Anna Kitanaka): “China is seeking to replenish its strategic crude stockpiles with cheap Russian oil, a sign Beijing is strengthening its energy ties with Moscow just as Europe works toward banning imports due to the war in Ukraine. Beijing is in discussions with Moscow to buy additional supplies, according to people with knowledge of the plan… Crude would be used to fill China’s strategic petroleum reserves, and talks are being conducted at a government level with little direct involvement from oil companies, said one person.”
May 19 – Wall Street Journal (Chun Han Wong): “China’s Communist Party will block promotions for senior cadres whose spouses or children hold significant assets abroad, people familiar with the matter said, as Beijing seeks to insulate its top officials from the types of sanctions now being directed at Russia. The ban, outlined in an internal notice by the party’s powerful Central Organization Department, could play a role in Chinese leader Xi Jinping’s efforts to increase his influence at a twice-a-decade leadership shuffle scheduled for later this year. Issued in March, the directive prohibits spouses and children of ministerial-level officials from holding—directly or indirectly—any real estate abroad or shares in entities registered overseas, the people said.”
Europe/Russia/China Watch:
May 15 – Bloomberg (Michael Nienaber): “Germany plans to stop importing Russian oil by the end of the year even if the European Union fails to agree on an EU-wide ban in its next set of sanctions, government officials said. Efforts to seal deals with alternative suppliers are progressing at the chancellery in Berlin and the government is confident it can solve remaining logistical problems within the next six to seven months, according to the officials, who spoke on condition of anonymity.”
Inflation Watch:
May 16 – Reuters (Marcy de Luna and Bianca Flowers): “Skyrocketing natural gas prices have raised manufacturing and transportation costs across many U.S. industries, and the situation should persist as the United States exports more gas to Europe to make up for Russian supplies lost to sanctions. U.S. natural gas futures have doubled this year, far more than the increases in retail gasoline and diesel that have made Americans angry at the U.S. energy industry and the government. Many industrial company executives believe the United States… should stop exporting gas and prioritize its own needs. But gas producers are pushing for more export capacity along with more permits for drilling. Gas output in key locales in the United States has slowed this year, partly due to insufficient pipeline capacity. Bad weather also cut production and boosted demand.”
May 16 – Bloomberg (Chunzi Xu): “From record prices to blowout spreads and falling stockpiles, a handful of financial and physical indicators are pointing to expensive and possibly tighter gasoline markets across the US this summer. Gasoline futures trading in New York are extending a record rally on Monday, while US retail prices continue to set fresh peaks for the past week. Gasoline stockpiles are falling to their lowest level since 2015 for this time of year.”
May 16 – Bloomberg (Scott Moritz): “Verizon Communications Inc. will raise prices on its wireless bills for the first time in two years as the largest US wireless carrier grapples with higher costs. Millions of consumers will see a $1.35 increase in administrative charges for each voice line starting in their June phone bill. And business customers will see a new ‘economic adjustment charge’ beginning June 16, with mobile phone data plans increasing by $2.20 a month…”
May 18 – Bloomberg (Amy Yee and Tarso Veloso Ribeiro): “With a gallon of milk up about 25% since before the pandemic, and retail bacon 35% higher, it’s hard to imagine how US food inflation could get any worse. But evidence suggests that even higher prices are on the horizon. Consumers have actually been shielded so far from the full brunt of soaring expenses that are facing producers, distributors and small businesses like restaurants. But they can only hold back for so much longer. Take the case of Jeff Good, who co-founded three restaurants in Jackson, Mississippi. Around 18 months ago, a 40-pound box of chicken wings cost him about $85. Now, it can go as high as roughly $150. Expenses for cooking oil and flour have nearly doubled in the past five months... But it’s not just ingredient prices going up. He’s paying more for labor and services, too. Even the company that maintains his air conditioners has tacked on a $40 fuel charge per visit. To cope, he’s raised menu prices.”
Biden Administration Watch:
May 17 – Reuters (Sakura Murakami): “Japan and the United States have started preparing a statement that promises the two countries will cooperate to ‘deter’ and respond to China, the Nikkei newspaper reported… The statement is being prepared ahead of U.S. President Joe Biden's summit with Japanese Prime Minister Fumio Kishida set for May 23, it added.”
May 18 – Reuters (David Lawder): “U.S. Treasury Secretary Janet Yellen… confirmed she is advocating within the Biden administration for eliminating some tariffs on Chinese imports that ‘aren't very strategic’ but are hurting U.S. consumers and businesses. Yellen told a press conference ahead of a G7 finance ministers and central bank governors' meeting that internal discussions are underway about the punitive ‘Section 301’ tariffs imposed by former U.S. president Donald Trump on hundreds of billions of dollars in Chinese goods.”
May 18 – Reuters (Trevor Hunnicutt, David Brunnstrom and Michael Martina): “Joe Biden will visit Japan and South Korea on his first Asian trip as U.S. president, carrying a clear message to China, advisers and analysts say - don't try what Russia did in Ukraine anywhere in Asia, and especially not in Taiwan. Biden departs for the five day trip on Thursday, after spending several months organizing allies to punish Russia for its invasion of Ukraine… He meets new South Korean President Yoon Suk-yeol in Seoul and Japanese Prime Minister Fumio Kishida in Tokyo, leaders who share anxieties about North Korea and China and are eager to build on their long alliances with Washington. ‘At its core this (trip) is about building out the alliance network in East Asia,’ in part to counter any Chinese actions against Taiwan, said Evan Medeiros, an Asia specialist in the… Obama administration.”
May 17 – Bloomberg (Jennifer Jacobs, Daniel Flatley, Justin Sink and Fabiola Zerpa): “The Biden administration plans to ease sanctions on Venezuelan oil in a bid to bring more of the country’s crude to Europe. The U.S. will allow European companies still operating in Venezuela to divert more oil to the continent immediately while Chevron will be allowed to negotiate a resumption of operations in the country, according to a person familiar… The U.S.-backed Venezuelan opposition supports the move, the person said.”
Federal Reserve Watch:
May 17 – Bloomberg (Matthew Boesler and Craig Torres): “Federal Reserve Chair Jerome Powell, in his most hawkish remarks to date, said the US central bank will keep raising interest rates until there is ‘clear and convincing’ evidence that inflation is in retreat. ‘What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that,’ Powell said… ‘If that involves moving past broadly understood levels of ‘neutral,’ we won’t hesitate at all to do that.’ The Fed chair repeatedly stressed the need to curb the hottest inflation in decades…, calling price stability ‘the bedrock of the economy’ and acknowledging that some pain in achieving this -- including a slight rise in the unemployment rate -- was a cost worth paying in order to achieve it.”
May 17 – Wall Street Journal (Nick Timiraos and Michael S. Derby): “Federal Reserve Chairman Jerome Powell said the central bank’s resolve in combating the highest inflation in 40 years shouldn’t be questioned, even if it requires pushing up unemployment. ‘Restoring price stability is an unconditional need. It is something we have to do,’ Mr. Powell said… ‘There could be some pain involved…’ “We will go until we feel like we are at a place where we can say, ‘Yes, financial conditions are at an appropriate place. We see inflation coming down… We will go to that point, and there will not be any hesitation about that.’”
May 16 – Bloomberg (Matthew Boesler): “A top Federal Reserve official downplayed deteriorating liquidity conditions in financial markets, telling an audience… it was to be expected given rising volatility as investors grapple with uncertainty over global events and shifting U.S. monetary policy. ‘In the global environment there’s a lot of uncertainty, and a lot of events happening. We’re also seeing our actions moving monetary policy, I think, in a very strong direction, to more normal rates,’ New York Fed President John Williams told a Mortgage Bankers Association conference... ‘Some of that volatility -- in say, the Treasury market -- is really the markets digesting that information.’ Signs of deteriorating liquidity in U.S. Treasuries… are ‘more or less in line with the increase in volatility in markets,’ he said. ‘It’s just a reflection more of: A lot’s happening with market rates moving around, and therefore you’re seeing some of these measures of liquidity deteriorate somewhat, and pretty much consistent with past experience there.’”
May 18 – Reuters (Ann Saphir): “Two U.S. central bankers say they expect the Federal Reserve to downshift to a more measured pace of policy tightening after July as it seeks to quell inflation without lifting borrowing costs so high that they send the economy into recession. It's not clear if that view - mapped out on Tuesday by Chicago Federal Reserve Bank President Charles Evans and on Wednesday by Philadelphia Fed chief Patrick Harker - marks a consensus at the Fed for how to bring down the highest inflation in 40 years. But it does suggest that while policymakers broadly back using half-point rate hikes to get short-term borrowing costs to a range of 1.75%-2% over the next two months, support for sticking to that pace beyond July may be limited. Evans… told an audience… that he expects to transition to ‘measured’ rate hikes after an initial burst of policy tightening. In the Fed lexicon, ‘measured’ means quarter-point rate hikes. On Wednesday Harker gave a similar assessment…”
U.S. Bubble Watch:
May 17 – Bloomberg (Olivia Rockeman): “US retail sales grew at a solid pace in April, reflecting broad-based gains and suggesting demand for merchandise remains resilient despite rampant inflation. The value of overall retail purchases increased 0.9%, after an upwardly revised 1.4% gain in March… Excluding vehicles and gas stations, sales rose 1% last month… The data suggest that Americans are still spending on merchandise at a rapid clip -- potentially fueled by credit-card borrowing -- even as prices rise at the fastest pace in decades. That said, economists expect consumer spending to shift away from goods and toward services like travel and entertainment as pandemic-related health concerns wane… To keep pace with price increases, consumers are loading up on their credit cards… Borrowing in March soared by the most on record, and a separate report from the New York Fed showed Americans opened a record 537 million credit card accounts in the first quarter.”
May 17 – Reuters (Uday Sampath Kumar and Siddharth Cavale): “Walmart Inc reported a 25% drop in quarterly earnings and cut its full-year profit outlook… as rising costs of fuel and labor hurt its bottom line while shoppers squeezed by decades-high inflation moved to buy lower-margin basics. Shares of the retailer fell nearly 10% in morning trading…”
May 19 – Associated Press (Anne D’Innocenzio): “The pandemic vastly changed the way Americans spend money and now as they return to pre-pandemic behavior, they’re tripping up retailers again. That dynamic has only been intensified in recent months as inflation jumps sharply, and the latest financial report from Target underscores the challenges. Target reported… that its profit tumbled 52% compared with the same period last year in an environment of rising costs for things like fuel, and also a lightening quick return by consumers to more normalized spending. Purchases of big TVs and appliances that Americans loaded up on during the pandemic have faded, leaving Target with a bloated inventory that must be marked down to sell.”
May 17 – Bloomberg (Christopher Anstey): “US consumers beset by inflation are already relying on leverage to some extent to fund their spending, according to Goldman Sachs… chief economist, Jan Hatzius. ‘Borrowing is going to be a short-term driver of spending, and I think has been to some degree’ already, Hatzius said… ‘Consumer spending is going to be relatively slow. Income is going to be quite weak in 2022.’ He said consumer credit is on the rise, and there has been a pickup in mortgage-equity withdrawal, where homeowners take out a loan against the appreciated equity in their property. Hatzius observed that both dynamics are supporting spending.”
May 16 – Bloomberg (Reade Pickert): “New York state manufacturing activity unexpectedly contracted in May for the second time in three months, reflecting plunges in orders and shipments. The Federal Reserve Bank of New York’s general business conditions index dropped over 36 points to minus 11.6… Figures less than zero indicate contraction… The group’s gauge of new orders dropped nearly 34 points in May to minus 8.8, and the shipments measure fell at the fastest pace since early in the pandemic, sinking about 50 points.”
May 18 – Reuters (Lucia Mutikani): “Permits for future U.S. homebuilding tumbled to a five-month low in April, suggesting the housing market was slowing as rising mortgage rates contribute to reduced affordability… But the report from the Commerce Department on Wednesday also showed a record backlog of houses still to be constructed, indicating the moderation in homebuilding would be marginal… Building permits dropped 3.2% to a seasonally adjusted annual rate of 1.819 million units in April, the lowest level since last November. They rose 3.1% on a year-on-year basis.”
May 17 – CNBC (Diana Olick): “Builder sentiment in the market for single-family homes fell sharply in May, as mortgage rates shot higher and building material costs showed no relief. Sentiment fell an outsized 8 points to 69 in May, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Readings above 50 are considered positive, but this is the fifth straight month that builder sentiment has declined. It’s the lowest reading since June 2020… Builder sentiment hit a record high of 90 by November 2020.”
May 17 – CNBC (Diana Olick): “Mortgage rates actually fell slightly last week, but the damage has already been done to housing affordability. Both refinance and purchase loan demand dropped, pulling total mortgage application volume down 11% for the week, according to the Mortgage Bankers Association’s seasonally adjusted index. Mortgage applications to purchase a home declined 12% week to week and were 15% lower compared with the same week one year ago.”
May 15 – Wall Street Journal (Nicole Friedman): “People who agreed to buy homes under construction but haven’t yet closed are facing mortgage-interest rates that could be nearly double what they anticipated when they paid their deposits. New-home buyers are confronting multiple obstacles this year, from surging mortgage rates to home construction that is taking longer than usual due to supply-chain and labor constraints. Many home buyers who signed contracts for new homes in 2021 or early this year calculated monthly payments based on near-record-low mortgage rates of around 3% or less. But average mortgage rates have climbed this spring to 5.3%..., as the Federal Reserve started raising short-term interest rates.”
May 18 – Bloomberg (Paulina Cachero): “The days of homebuyers getting into knock- down-drag-out bidding wars may soon be over. After two years of a pandemic-driven buying frenzy that sent home values soaring, the competition for listings is showing signs of cooling off as mortgage rates hit the highest level since 2009. According to a new Redfin report, 61% of home offers faced bidding wars in April, down from 63% a month earlier and 67% in the same period of 2021.”
May 20 – New York Times (Gregory Schmidt): “Americans have more equity in their homes, thanks to a red-hot housing market pushing up the value of their properties, new research shows. In the first quarter of 2022, 44.9% of the homes in the United States were considered ‘equity-rich,’ meaning the balance of the loan on the home was 50% or less of the estimated market value, according to a new report from Attom, a real estate data analytics firm. That’s slightly higher than the 41.9% recorded in the fourth quarter of 2021 and a jump from 31.9% in the first quarter of 2021, according to Attom, which analyzed… more than 155 million U.S. properties. The increase in equity is prompting some owners to cash out and move, said Rick Sharga, the executive vice president of market intelligence at Attom.”
May 18 – Bloomberg (Alex Tanzi): “The urban real estate market has been running hot in the US since last summer. But the suburbs have been even hotter, according to an analysis from Zillow... From January 2013 through June 2021, urban homes have generally been gaining dollar value more quickly. But a switch happened after July 2021 as the economy recovered from the pandemic: Home values in suburban zip codes rose faster on annual basis, fueled by the widespread shift to remote work that spurred millions Americans to look for greener locales and bigger homes.”
May 18 – Financial Times (Nicholas Megaw): “US companies are accelerating capital spending despite slower economic growth, as the impact of supply chain disruptions and ‘deglobalisation’ override worries about a looming recession. A wave of recent disruptions… have led many high-profile investors and executives to predict a reversal of the decades-long trend toward sprawling global supply chains and ‘just in time’ inventory management. Recent quarterly reports from the largest US companies provide some of the first concrete signs that companies are following through on their plans, putting pressure on their profitability just as the economic recovery begins to lose steam. With the majority of companies in the S&P 500 index having reported first-quarter results, capital expenditure across its members rose 20% year on year in the first quarter, according to Bank of America data. The proportion of companies providing guidance for higher future spending than analysts had expected also rose. The trend was broad-based, with every sector except real estate increasing spending.”
May 19 – CNBC (Stephanie Landsman): “Stagflation is making a comeback, according to former Morgan Stanley Asia chairman Stephen Roach. He warns the U.S. is on a dangerous path that leads to higher prices coupled with slower growth. ‘This inflation problem is widespread, it’s persistent and likely to be protracted,’ Roach told CNBC… ‘The markets are not even close to discounting the full extent of what’s going to be required to bring the demand side under control... That just underscores the deep hole [Fed chief] Jerome Powell is in right now.’ Roach, a Yale University senior fellow and former Federal Reserve economist, calls stagflation his base case and the peak inflation debate absurd. ‘The demand side has really gotten away from the Fed,’ he said. ‘The Fed has a massive amount of tightening to do.’”
May 18 – Bloomberg (Simon Kennedy): “The US economy won’t be able to avoid a bout of stagflation and markets have yet to tune into the risk of a significant slowdown in growth, said Mohamed El-Erian, the chair of Gramercy Fund Management and former chief executive officer of Pimco. While the US can perhaps avoid a recession, ‘what is unavoidable is stagflation,’ El-Erian told Bloomberg… ‘We’ve seen growth coming down and we’re seeing inflation remaining high.’ He blamed the situation in part on the Federal Reserve’s view from 2021 that inflation would at some point fade. It’s since retired the ‘transitory’ thesis and is now tightening monetary policy…”
May 16 – Bloomberg (Fola Akinnibi): “Property values in Los Angeles County are projected to rise by a record $100 billion this year, providing a boon to municipal coffers on the back of a hot housing market. The amount translates to $1.86 trillion in net value for taxable properties in the county, a 6% increase from 2021, according to a May forecast of the county’s assessment roll… The increase is expected to result in more than $18 billion in property tax revenue for governments that will be used for public services like education. The 6% annual increase is greater than the rate of 2021, when the property tax assessment roll grew 3.7% to $1.76 trillion from the prior year.”
Fixed-Income Bubble Watch:
May 18 – Bloomberg (Olivia Raimonde): “Carnival Corp. is providing more evidence that the easy money era is over. The cruise operator, one of the biggest beneficiaries of the Federal Reserve’s pandemic-era monetary policy, spent more than a year chipping away at the high interest burden it took on to weather travel bans and lockdowns. Now, with the Fed shifting course and credit markets rattled, Carnival is offering a $1 billion refinancing and is poised to pay well beyond the 8.13% average yield on debt in the B tier. Initial pricing discussions are in the range of 10.25%-10.5%... ‘What makes this deal more interesting is the higher coupon compared to what it saw over the past year,’ said Jody Lurie, Bloomberg Intelligence analyst. ‘It’s a little bit of a head scratcher that they would issue debt in the high-yield market that has been less favorable for new issuance.’ Just seven months ago, Carnival was able to sell bonds -- after increasing the offering’s size by 25% to $2 billion because of demand -- to yield 6%.”
May 18 – Wall Street Journal (AnnaMaria Andriotis): “Consumers with low credit scores are falling behind on payments for car loans, personal loans and credit cards, a sign that the healthiest consumer lending environment on record in the U.S. is coming to an end. The share of subprime credit cards and personal loans that are at least 60 days late is rising faster than normal, according to… Equifax Inc. In March, those delinquencies rose month over month for the eighth time in a row, nearing their prepandemic levels. Delinquencies on subprime car loans and leases hit an all-time high in February, based on Equifax’s tracking that goes back to 2007.”
Economic Dislocation Watch:
May 18 – Bloomberg (Ann Koh and Kyunghee Park): “China appears to be gradually easing its lockdown of Shanghai, but that won’t bring immediate relief to global supply-chain congestion, according to a major shipping company. Shortages of rail, port and trucking workers in China and the US need to get resolved quicker than is currently happening as they are delaying ships at the world’s major ports, said Jeremy Nixon, chief executive officer of Ocean Network Express Pte. ‘Every government is doing their best to address the issue, but labor shortages still exist and infrastructure shortages still exist,’ Nixon said... ‘We’re putting more ships into service, but we can’t magic up more when we’re running out.’”
May 18 – Reuters (Howard Schneider and Balazs Koranyi): “Global central banks hoping that high inflation would ease through improving global supply chains saw little relief through April as new coronavirus lockdowns in China and the war in Ukraine lengthened delivery times and drove costs higher, new analyses from the New York Federal Reserve and others indicates. A global supply chain pressure index, released… by the New York Fed, rose in April after four months in which supply troubles appeared to ease, a reversal that, if continued, potentially means more persistent inflation even as central banks move to control rising prices.”
China Watch:
May 19 – Bloomberg: “Chinese Premier Li Keqiang told local governments to ‘act decisively’ on measures to support growth in the coming weeks in an effort to bring the economy back on track as soon as possible. Everyone should ‘add a sense of urgency’ to their actions to counter ‘further intensified new downward pressure’ on the economy, Li said… He encouraged local authorities to roll out new measures this month if possible, adding that policies outlined in this year’s government work report or in prior economic meetings should be enacted by the end of June.”
May 19 – Reuters (Winni Zhou, Andrew Galbraith, and Kevin Yao): “China cut its benchmark reference rate for mortgages by an unexpectedly wide margin on Friday, its second reduction this year as Beijing seeks to revive the ailing housing sector to prop up the economy. Senior officials have pledged further measures to fight a slowdown in the world's second-biggest economy, hit by COVID-19 outbreaks that prompted stringent measures and mobility restrictions and causing huge disruptions to activity… China, in a monthly fixing, lowered the five-year loan prime rate (LPR) by 15 bps to 4.45%, the biggest reduction since China revamped the interest rate mechanism in 2019…”
May 15 – Bloomberg: “China lowered the mortgage rate for first-time homebuyers and announced a phased reopening of shops in Shanghai, taking steps to bolster growth before figures due Monday that will illustrate the economic toll of the country’s strict Covid lockdowns. The central bank on Sunday cut the lower-bound range of mortgage interest rates to 4.4% from 4.6%, one of China’s most significant nationwide efforts yet to boost the ailing housing market.”
May 17 – Bloomberg: “China’s top economic official gave an unusual public show of support for digital platform companies…, suggesting Beijing may be ready to let up on a year-long clampdown on technology giants as it battles a slowing economy. The government will support the development of digital economy companies and their public listings, Vice Premier Liu He, who is President Xi Jinping’s most senior economic aide, said… Liu’s remarks reported by state media were short on detail but signal further easing of the regulatory risk for China’s technology behemoths…”
May 16 – Bloomberg: “China’s economy is paying the price for the nation’s Covid Zero policy, with industrial output and consumer spending sliding to the worst levels since the pandemic began and analysts warning of no quick recovery. Industrial output unexpectedly fell 2.9% in April from a year ago, while retail sales contracted 11.1% in the period, weaker than a projected 6.6% drop. The unemployment rate climbed to 6.1% and the youth jobless rate hit a record. Investors responded by selling everything from Chinese shares to US index futures and oil.”
May 17 – Bloomberg: “China’s government finances worsened measurably in April as Covid spread, with government spending rising to help pay for the cost of Covid Zero policies and income slumping due to tax breaks to help affected businesses. Government income from taxes and fees was 1.23 trillion yuan ($182bn) in April…, 41% down on April 2021. For the first four months of the year income was 7.43 trillion yuan, down 4.8% from the same period last year… General fiscal spending, which includes areas like education or healthcare, increased 5.9% during the same period to 8.1 trillion yuan, the ministry said.”
May 17 – Bloomberg: “China’s home prices fell for an eighth month in April as measures to alleviate the real estate downturn failed to revive buyer confidence amid Covid outbreaks. New home prices in 70 cities… dropped 0.3% from March, the fastest decline in five months, National Bureau of Statistics figures showed…. Values slid year-on-year for the first time since 2015.”
May 15 – Reuters (Liangping Gao and Clare Jim): “China's property sales in April fell at their fastest pace in around 16 years as COVID-19 lockdowns further cooled demand despite more policy easing steps aimed at reviving a key pillar of the world's second-largest economy. Property sales by value in April slumped 46.6% from a year earlier, the biggest drop since August 2006, and sharply widening from the 26.17% fall in March… Property sales in January-April by value fell 29.5% year-on-year, compared with a 22.7% decline in the first three months… In April, property investment fell 10.1% year-on-year, the fastest pace since December, compared with the 2.4% decline in March. New construction starts measured by floor area plunged 44.19% from a year earlier, the fastest pace since January-February 2020.”
May 19 – Wall Street Journal (Rebecca Feng): “China is helping some stronger developers tap the domestic bond market, the latest move to support the ailing property sector amid a broader economic slowdown. With the industry in crisis, markets in mainland China and abroad are mostly shut to privately owned developers. The new deals address that problem by packaging some bonds with credit derivatives, so that buyers are shielded against the risk of default. The initiative follows other measures, including a cut by the central bank in mortgage rates for first-time home buyers, and easing in different regions for things like down payments and home-purchasing restrictions.”
May 17 – Financial Times (Sun Yu): “An official in the north-eastern city of Jilin said authorities had earmarked a ‘significant’ portion of state-backed funds intended to reduce poverty to buy PCR tests, after an outbreak that has infected more than 26,000 people since March. In the southern industrial hub of Quanzhou, local officials said an ambitious infrastructure investment plan had slowed in part because the authority reallocated funds to testing following an outbreak that has infected more than 3,000 people over the past two months. The struggle by local authorities to underwrite the testing drive has added to the financial pressures as the world’s second-largest economy faces its worst coronavirus outbreak since the start of the pandemic.”
May 18 – Reuters (Engen Tham): “Three banks in China's central Henan province have frozen at least $178 million of deposits, offering scant information on why or for how long, leaving firms unable to pay workers and individuals locked out of savings, depositors told Reuters. Yu Zhou Xin Min Sheng Village Bank, Shangcai Huimin Country Bank and Zhecheng Huanghuai Community Bank froze all deposits on April 18, with all three telling customers they were upgrading internal systems. The banks have not issued any communication on the matter since, depositors said.”
May 19 – Bloomberg (Shawna Kwan): “Florence Mok, a new mother, thought she wouldn’t be able to get a mortgage for her HK$9 million ($1.1 million) dream apartment. When her family signed the papers, China Evergrande Group sales staff said not to worry. The developer’s financing arm offered them 90% leverage, no bank stress-test needed. Now Mok’s suffering from the fallout of Evergrande’s debt crisis. With the cash-strapped company no longer willing to provide financing, her family can’t find a bank for a mortgage. They might lose the down payment and apartment.”
Central Banker Watch:
May 17 – Financial Times (Martin Arnold, Colby Smith and Chris Giles): “Almost all central bankers in the US and Europe agree rates must rise to tackle soaring inflation. What is open for debate is where they should stop. Monetary policymakers and markets are trying to assess where lies the ‘Goldilocks’, or neutral, level of rates — the optimal level where an economy is neither overheating nor being held back. But, after almost 15 years of tepid inflation and ultra-low borrowing costs, no one is quite sure what ‘just right’ looks like. ‘Everybody is trying to understand where the neutral rate is and where the tightening cycle will end up,’ said Camille de Courcel, head of strategy… at BNP Paribas. ‘It will be the driving factor for rates markets in the coming months.’ The risk is that policymakers get it wrong and let inflation jump out of control by keeping rates too low, or trigger a brutal recession by increasing too much.”
May 17 – Financial Times (Martin Arnold, Adam Samson and Ian Johnston): “A top European Central Bank official has raised the prospect of a half percentage point interest rate increase in July if inflation continues to climb, the first time such an aggressive shift has been mooted. Tuesday’s comments by Dutch central bank chief Klaas Knot, one of the more hawkish members of the ECB’s rate-setting body, sent ripples through financial markets, as the euro rose 1.1% against the US dollar to $1.0546 and eurozone government bond prices fell. ECB president Christine Lagarde has signalled that the bank’s first rate rise for more than a decade is likely to occur at July’s governing council meeting. But she and many other policymakers have stressed they will move only ‘gradually’ — indicating any change to rates will be in quarter-point increments.”
May 18 – Reuters (Francesco Canepa): “The European Central Bank has told banks to buckle up and prepare for a bumpy road ahead as the Ukraine war hits the economy and a sudden surge in interest rates makes markets more volatile, the ECB top supervisor Andrea Enria said… Euro zone banks were just coming out of emergency measures imposed at the height of the coronavirus pandemic, including a cap on dividend payouts, when the conflict broke out in February and the economic outlook darkened again… ‘We have asked banks to reassess their projections and capital trajectories in the light of the new macroeconomic picture, also considering adverse scenarios,’ Enria told Italian daily Repubblica.”
Global Bubble and Instability Watch:
May 19 – Bloomberg (Enda Curran and Yuko Takeo): “The world economy is increasingly succumbing to the threat of stagflation reminiscent of its 1970s ordeal, a mounting headache for global finance chiefs already navigating the fallout from the war in Ukraine. With China’s economy slowing sharply, and the Federal Reserve’s stepped-up vow to crush inflation raising worries of a widespread hard landing, warnings of the consequent dangers are intensifying. Group of Seven finance ministers and central bankers… are now indicating outright concern that stagflation can no longer be swerved. ‘The war in Ukraine has had additional implications for the economy,’ German Finance Minister Christian Lindner… told reporters… “That means a boost in inflation, coupled with a loss of post-pandemic recovery momentum. That’s why we’ll have to discuss what we can do to avoid stagflation scenarios.’”
May 18 – Reuters (Stella Qiu, Tom Westbrook, Christian Kraemer, Mark John and Howard Schneider): “A sharp slowdown in China's economy caused by its strict zero-COVID rules and Beijing's shift away from a traditional reliance on external demand have cast doubts over how much the country will contribute to future global trade and investment. While China staged a remarkably quick recovery from its initial pandemic slump, thanks to bumper exports and factory production, analysts expect the current downturn will be harder to shake off… The gloomier outlook presents challenges not only for leaders in Beijing worried about rising unemployment, but foreign businesses counting on China to resume its level of engagement it had with the rest of the world before the pandemic. Calculations based on International Monetary Fund projections show China's expected average annual contribution to global economic growth through to 2027 at about 29%. While that's a considerable addition, it contrasts with the years following the 2008 global financial crisis when that averaged closer to 40%.”
May 18 – Bloomberg (Philip Aldrick): “Britain’s worst bout of inflation in 40 years is quickly becoming a crisis both for Prime Minister Boris Johnson’s government and the Bank of England. The central bank is in the eye of the storm after consumer prices surged 9% in the year through April. Cabinet ministers, economists and even a former BOE boss are complaining that Governor Andrew Bailey was too slow to act and is failing in his job to keep inflation to 2%. That finger-pointing may be meant to distract from rising pressure on Johnson’s administration to protect voters from the biggest squeeze on living standards in memory. Chancellor of the Exchequer Rishi Sunak to date has targeted relief at those in work, while the Labour opposition says help should be extended to pensioners and those on benefits.”
May 16 – Bloomberg (Theophilos Argitis): “Canadian consumer confidence recorded its sharpest weekly decline since the depths of the pandemic, with inflation and a deteriorating outlook for housing weighing on sentiment. The Bloomberg Nanos Canadian Confidence Index, a measure of sentiment based on weekly polling, dropped to 54.3 last week, the lowest reading since December 2020. The 1.8-point decline is the largest one-week slump in the index since April 2020.”
May 16 – Bloomberg (Ari Altstedter and Brian Platt): “Canadian home prices fell for the first time in two years as a rapid rise in interest rates looks set to threaten one of the world’s hottest housing markets. Benchmark home prices declined 0.6% in April from the month before, the first drop since April 2020… The number of sales, meanwhile, plunged 12.6%.”
May 18 – Bloomberg (Swati Pandey): “Australian unemployment fell to the lowest level in almost 50 years in April, delivering a fillip to Prime Minister Scott Morrison’s government as it enters the final days of campaigning for Saturday’s election. The jobless rate declined to 3.9%, a level last recorded in August 1974… Employment rose by 4,000 from a month earlier, as a surge in full-time roles was partly offset by a drop in part-time.”
May 18 – Bloomberg (Sydney Maki and Amelia Pollard): “Sri Lanka’s impending default on $12.6 billion of overseas bonds is flashing a warning sign to investors in other developing nations that surging inflation is set to take a painful toll. The South Asian nation is set to blow through the grace period on $78 million of payments Wednesday, marking its first sovereign debt default since it gained independence from Britain in 1948… ‘The Sri Lanka default is an ominous sign for emerging markets,’ said Guido Chamorro, the co-head of emerging-market hard-currency debt at Pictet Asset Management… ‘We expect the good times to stop. Slowing growth and more difficult funding conditions will increase default risk particularly for frontier countries.’”
Europe Watch:
May 16 – Financial Times (Sam Fleming and Javier Espinoza): “Brussels has cut its growth forecasts further and raised its inflation outlook as the energy crisis triggered by Russia’s invasion of Ukraine exacts its toll on the EU economy. Both the EU and euro area are set to expand 2.7% this year, well shy of the previous expectation of 4%... Growth is tipped to be 2.3% in 2023. Inflation is expected to surge above 6% in both the EU and euro area this year, with some central and eastern European countries likely to see double-digit price rises in 2022.”
EM Bubble Watch:
May 16 – Wall Street Journal (Serena Ng): “Once the place to be for yield-seeking global investors, Asia’s junk-bond market has shrunk drastically and new debt issuance has slowed to a trickle. Less than 18 months ago, the dollar-bond market for noninvestment grade companies from China to Indonesia was booming. It neared $300 billion in size, thanks in large part to numerous bond sales by Chinese property developers such as China Evergrande Group. Since then, a spate of defaults and a massive selloff have resulted in big losses for investors, erasing more than $100 billion in value from one widely watched bond index. The total market value of Asian high-yield bonds—excluding defaulted debt—is now about $184 billion…”
May 15 – Financial Times (Jonathan Wheatley): “Carlos Vieira, a carpenter in São Paulo, hoped runaway inflation was consigned to Brazil’s past. Now, with the cost of his materials doubling in just three years, he fears those days are back. ‘Since I set up the workshop in 1998, I’ve never seen anything like this… There have always been ups and downs, but now we’re suffering from this crisis and the one before,’ the 57-year-old said, referring to the Ukraine war and the pandemic. At 12%, annual inflation in Brazil is now at an almost two-decade high. Triggered by the surge in global food and fuel costs, officials are increasingly concerned that price pressures are becoming entrenched across the economy.”
The S&P500 dropped 3.0% (down 18.1% y-t-d), and the Dow fell 2.9% (down 14.0%). The Utilities increased 0.4% (down 1.6%). The Banks declined 0.7% (down 19.4%), and the Broker/Dealers fell 1.3% (down 19.1%). The Transports sank 6.7% (down 18.1%). The S&P 400 Midcaps slumped 1.9% (down 16.1%), and the small cap Russell 2000 declined 1.1% (down 21.0%). The Nasdaq100 sank 4.5% (down 27.5%). The Semiconductors dropped 3.0% (down 27.0%). The Biotechs increased 0.7% (down 17.5%). With bullion recovering $35, the HUI gold index rallied 3.5% (down 1.0%).
Three-month Treasury bill rates ended the week at 0.9925%. Two-year government yields were little changed at 2.58% (up 185bps y-t-d). Five-year T-note yields fell seven bps to 2.80% (up 154bps). Ten-year Treasury yields dropped 14 bps to 2.78% (up 127bps). Long bond yields fell nine bps to 2.99% (up 109bps). Benchmark Fannie Mae MBS yields sank 16 bps 4.00% (up 193bps).
Greek 10-year yields surged 24 bps to 3.71% (up 240bps y-t-d). Ten-year Portuguese yields rose seven bps to 2.13% (up 167bps). Italian 10-year yields jumped 15 bps to 3.00% (up 183bps). Spain's 10-year yields gained eight bps to 2.08% (up 152bps). German bund yields were little changed at 0.94% (up 112bps). French yields added a basis point to 1.47% (up 127bps). The French to German 10-year bond spread widened one to 53 bps. U.K. 10-year gilt yields rose 15 bps to 1.89% (up 92bps). U.K.'s FTSE equities index slipped 0.4% (unchanged y-t-d).
Japan's Nikkei Equities Index rallied 1.2% (down 7.1% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.24% (up 17bps y-t-d). France's CAC40 fell 1.2% (down 12.1%). The German DAX equities index slipped 0.3% (down 12.0%). Spain's IBEX 35 equities index jumped 1.8% (down 2.6%). Italy's FTSE MIB index increased 0.2% (down 11.9%). EM equities were mostly higher. Brazil's Bovespa index rose 1.5% (up 3.5%), and the Mexico's Bolsa index surged 3.9% (down 3.3%). South Korea's Kospi index gained 1.3% (down 11.4%). India's Sensex equities index recovered 2.9% (down 6.7%). China's Shanghai Exchange Index advanced 2.0% (down 13.6%). Turkey's Borsa Istanbul National 100 index fell 1.9% (up 27.7%). Russia's MICEX equities index rallied 2.8% (down 37.3%).
Investment-grade bond funds saw outflows of $4.269 billion, and junk bond funds posted negative flows of $2.605 billion (from Lipper).
Federal Reserve Credit last week expanded $14.8bn to a record $8.919 TN. Over the past 140 weeks, Fed Credit expanded $5.193 TN, or 139%. Fed Credit inflated $6.109 Trillion, or 217%, over the past 497 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week added $0.4bn to $3.423 TN. "Custody holdings" were down $108bn, or 3.1%, y-o-y.
Total money market fund assets fell $16.2bn to $4.485 TN. Total money funds were down $56bn, or 1.2%, y-o-y.
Total Commercial Paper gained $8.4bn to $1.121 TN. CP was down $77bn, or 6.4%, over the past year.
Freddie Mac 30-year fixed mortgage rates declined five bps to 5.25% (up 225bps y-o-y) - near highs since August 2009. Fifteen-year rates fell five bps to 4.43% - near highs since December 2009 (up 214bps). Five-year hybrid ARM rates jumped 10 bps to 4.08% (up 149bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 18 bps to 5.37% (up 226bps).
Currency Watch:
May 18 – Bloomberg (Ruth Carson and Amelia Pollard): “The dollar’s skyrocketing rise has some contemplating a rare, if not unthinkable, action: major nations agreeing to manipulate the US currency until it falls. It has happened before -- most notably with 1985’s Plaza Accord -- which took place against a backdrop of soaring inflation, an aggressive Federal Reserve rate-hike campaign and surging dollar. In other words, a scene that looks a lot like today -- a parallel that won’t be lost on Group-of-Seven finance ministers and central bank governors as they meet this week.”
For the week, the U.S. Dollar Index dropped 1.4% to 103.15 (up 7.8% y-t-d). For the week on the upside, the Brazilian real increased 3.7%, the Swiss franc 2.7%, the South African rand 2.0%, the New Zealand dollar 1.9%, the British pound 1.8%, the euro 1.5%, the Australian dollar 1.4%, the South Korean won 1.3%, the Mexican peso 1.2%, the Swedish krona 1.2%, the Japanese yen 1.1%, the Singapore dollar 0.9%, the Canadian dollar 0.7%, and the Norwegian krone 0.3%. The Chinese (onshore) renminbi rallied 1.44% versus the dollar (down 5.03% y-t-d).
Commodities Watch:
May 16 – Bloomberg (Pratik Parija): “Wheat jumped by the exchange limit to near a record high after India’s move to restrict exports, exposing just how tight global supplies are during the war in Ukraine and threatening to drive up food prices even more. The government will suspend overseas sales to manage its food security... This drew criticism from the agriculture ministers of the Group of Seven nations, who said that such measures make the world’s crisis worse.”
May 18 – Bloomberg (Jen Skerritt): “Farmers in parts of Canada’s Prairies are struggling to get crops in the ground as heavy rains continue to wallop the eastern region in the latest threat to global grain supplies. Virtually no seeding has been done in Manitoba as more than 90% of the crop land is suffering from excess moisture, said Trevor Hadwen, agroclimate specialist with Agriculture and Agri-Food Canada. Only 4% of the province’s crops have been sown as of May 17, lagging the five-year average of 50%. Farmers are scrambling to look for dry areas to plant…”
The Bloomberg Commodities Index recovered 1.7% (up 31.6% y-t-d). Spot Gold rallied 1.9% to $1,847 (up 0.9%). Silver jumped 3.1% to $21.78 (down 6.6%). WTI crude rose $2.74 to $113.23 (up 51%). Gasoline dropped 3.1% (up 72%), while Natural Gas rallied 5.5% (up 117%). Copper gained 2.4% (down 4.2%). Wheat slipped 0.7% (up 52%), and Corn dipped 0.3% (up 31%). Bitcoin fell $550, or 1.8%, this week to $29,250 (down 37%).
Market Instability Watch:
May 20 – Bloomberg (Sagarika Jaisinghani and Ksenia Galouchko): “Investors fled most major asset classes in the past week, with US equities and Treasuries a rare exception to the massive exodus, amid concerns that tightening monetary policy will push leading economies into a recession. Global equity funds had $5.2 billion of outflows in the week to May 18, led by redemptions from mutual funds, although US stock funds managed to attract a small $0.3 billion inflow, according to Bank of America Corp.’s note citing EPFR... Bond fund outflows reached $12.3 billion, with only Treasuries and government debt seeing additions. Investors also exited cash and gold.”
May 18 – Axios (Neil Irwin): “If you took out a mortgage over the last couple of years, there's a good chance the holder of that loan is America’s central bank — a consequence of its monetary stimulus efforts throughout the pandemic. Why it matters: The Fed will face a series of political and economic headaches as it attempts to move away from subsidizing home lending by shrinking its portfolio of mortgage-backed securities. The problem: Extracting itself from this market risks crashing the housing industry and creating intense political blowback for incurring financial losses. By the numbers: Back in February 2020, the Fed owned $1.4 trillion in mortgage-backed securities, and the number was falling rapidly. But when the pandemic took hold, the central bank began a new round of bond purchases (known as ‘quantitative easing’), swelling that number to $2.7 trillion.”
May 18 – Bloomberg (Garfield Reynolds): “This is shaping up to be the most volatile year for Treasuries in over a decade, as uncertainty about the impact of aggressive Federal Reserve tightening whipsaws yields. The yield on 10-year US notes has traded in a range of at least 10 bps in 50 of 95 trading days so far in 2022. That puts it on track for an annual rate of more than 130 episodes, which would be the highest since 2009.”
May 18 – Financial Times (Hudson Lockett): “International investors dumped a record $35bn worth of renminbi-denominated bonds in the first four months of 2022 as Covid-19 lockdowns hit the country’s currency and rising US yields reduced appetite for Chinese debt. Foreign investors sold more than Rmb108bn ($16bn) worth of Chinese debt in April, taking net outflows from the country’s renminbi-denominated bond market to a record Rmb235bn for the year to date… That marked the third straight month of net sales. Soaring interest rates in developed markets, particularly the US, have eroded some of the advantages of holding typically high-yielding Chinese bonds. At the same time, a weakening renminbi, which has fallen almost 5% against the dollar this year as a harsh lockdown of Shanghai stokes concerns about China’s economic outlook, has reduced the value of interest and principal payments for foreign holders of Chinese debt.”
May 18 – Bloomberg (Liz Capo McCormick and Alex Tanzi): “Like a supertanker, US debt-service costs only change course very slowly. But it’s happening now -- and from Washington’s point of view, the new direction is the wrong one: they’re heading up. The results of a double jump in the government’s borrowing costs and its debt pile are starting to show up in the federal budget. Monthly net interest payments rose to a record in April, at least in dollar terms. And broader measures of debt expenses are set to climb over the coming years -- potentially squeezing out other kinds of public spending. That’s because Treasury yields have surged, with inflation running hot and the Federal Reserve in an aggressive tightening mode -- while the national debt has grown by some $6 trillion since the pandemic began…”
Bursting Bubble/Mania Watch:
May 18 – New York Times (Tara Siegel Bernard): “Millions of amateur investors got into the stock market during the pandemic — some gingerly, some aggressively, some determined to teach Wall Street bigwigs a lesson — and almost couldn’t help but make money, riding a bull market for the better part of two years. Now they may have to wrestle with a bear… In response, many of the estimated 20 million amateurs who started trading in the past two years — whether bored sports bettors or meme-stock aficionados who piled into GameStop — have tapped the brakes, or scrambled to shuffle their portfolios into more defensive positions.”
May 15 – Wall Street Journal (Gunjan Banerji): “Options trading by individual investors is fading, the latest sign that the stock market’s speculative fever has broken. Those individual investors had embraced options as a way of riding the stock market’s momentum that drove shares of companies from Apple Inc. to Nvidia Corp. to new heights. Now, the Federal Reserve’s move to raise interest rates to tame inflation has thrown that dynamic into reverse, sending the prices of stocks skidding. Individual investors made up 26% of total options activity in March, down from nearly 30% early last year. That marked the lowest level since March 2020, though was still well above prepandemic levels…”
May 19 – Financial Times (Joshua Oliver in London and Miles Kruppa): “The $40bn collapse last week of popular crypto token Luna underscores the crucial role exchanges play as gatekeepers that rule on which digital assets are readily available to mainstream traders. Fierce competition among exchanges has led to a sharp rise in the number of tokens available on platforms that are popular with have-a-go investors. But the risks of listing newer tokens — and the lack of regulation around these assets — was highlighted last week when terraUSD, a coin that promised to match the value of the US dollar, became nearly worthless, also wiping out the value of its sister token Luna, in what research firm CryptoCompare called ‘the largest destruction of wealth in this amount of time in a single project in crypto’s history’.”
May 16 – Yahoo Finance (Jennifer Schonberger): “On the back of a meltdown in crypto markets last week, Securities and Exchange Commission Chairman Gary Gensler sent a stern warning to the investing public on crypto, calling it a ‘highly speculative asset class’ and reiterating its lack of investor protections. During an appearance at a FINRA conference…, Gensler opined that the investing public isn’t getting full and fair disclosures and that cryptocurrencies should be regulated as securities. ‘The investment public is not getting disclosures…When you make other asset purchases, we have this basic bargain, you the investing public can make your choices about what risks you take… There's supposed to be full and fair disclosure, and people aren't supposed to lie to you. Right now, many of these entrepreneurs come up with an idea … and they want to raise money from you. That puts it inside of the securities laws.’”
May 19 – Reuters (Francesco Canepa and Jan Strupczewski): “The world's top financial leaders called… for the swift and comprehensive regulation of cryptocurrencies following turmoil that has seen the demise of the Terra stablecoin last week, a draft communique showed… ‘In light of the recent turmoil in the crypto-asset market, the G7 urges the FSB (Financial Stability Board)...to advance the swift development and implementation of consistent and comprehensive regulation,’ finance ministers and central bankers from the Group of Seven industrialised nations said in the document.”
May 16 – Financial Times (Scott Chipolina): “Traders have yanked $7bn from Tether since the world’s biggest stablecoin last week briefly lost its peg against the US dollar, intensifying concerns about the assets that underpin the global cryptocurrency market. Tether’s market value has fallen by 9% since May 12 to $76bn as tokens have been removed from circulation to meet redemption requests, CryptoCompare data show. The decline came after Tether last Thursday traded at about 95 cents, well below the $1 level it seeks to maintain following the failure of a smaller rival. Observers inside and outside the crypto market have warned that deeper or more lasting volatility in stablecoins, which are designed to maintain a one-to-one peg with the dollar, could drag down the value of thousands of speculative crypto assets that have drawn buyers around the world.”
Russia/Ukraine War Watch:
May 20 – Reuters (Natalia Zinets): “Russian forces bombarded areas of Ukraine's eastern Donbas region from land and air on Friday, destroying houses in residential districts and killing a number of civilians, Ukrainian officials said. President Volodymyr Zelenskiy said the assaults had turned the Donbas into ‘hell’. In the southern port city of Mariupol, scene of the war's bloodiest siege, the last heavily wounded fighters from hold-out Ukrainian units had been evacuated from their bastion, the Azovstal steelworks… The Kremlin meanwhile said it was bolstering its forces on Russia's western border, saying that moves by Finland and Sweden to join NATO were part of an increase in military threats. As the war neared its three-month mark, the Ukrainian military said massive artillery barrages, including from multiple rocket-launchers, had hit civilian infrastructure in the Donbas region bordering Russia.”
May 18 – Reuters (Guy Faulconbridge): “Russia… said it was using a new generation of powerful laser weapons in Ukraine to burn up drones, deploying some of Moscow's secret weapons to counter a flood of Western arms supplied to its former Soviet neighbour. President Vladimir Putin in 2018 unveiled an array of new weapons including a new intercontinental ballistic missile, underwater nuclear drones, a supersonic weapon and a new laser weapon.”
Economic War/Iron Curtain Watch:
May 18 – Bloomberg (Laura Benitez): “Russian default risk surged as investors reacted to the possibility that the Biden administration will fully block bond payments from the country to US investors from next week. The move may be the final straw in Russia’s debt saga, pushing the country into its first foreign default in a century. Despite sweeping sanctions, it’s so far managed to avoid that, thanks in part to a US US waiver that allowed bond payments to US investors. But on Wednesday, Treasury Secretary Janet Yellen confirmed that it’s unlikely that the exemption will be extended once it expires on May 25. ‘The expectation was that it was time-limited,’ she said…”
May 14 – Financial Times (Guy Chazan): “German foreign minister Annalena Baerbock said the G7 group of industrialised nations was urgently seeking alternative routes for the export of Ukrainian grain as Russia’s war against its western neighbour raised the risk of a global ‘hunger crisis’. Speaking at the conclusion of a three-day meeting of G7 foreign ministers in Germany, Baerbock said some 25mn tonnes of grain were stuck in Ukrainian ports that were being blockaded by Russian forces — ‘grain that the world urgently needs’. ‘Every tonne we can get out will help a bit to get to grips with this hunger crisis,’ she said. ‘In the situation we’re in, every week counts.’”
May 15 – Reuters (Jonathan Landay and Tom Balmforth): “Russia pummelled positions in the east of Ukraine on Sunday, its defence ministry said, as it sought to encircle Ukrainian forces in the battle for Donbas and fend off a counteroffensive around the strategic Russian-controlled city of Izium. The North Atlantic Treaty Organization (NATO) secretary general, meanwhile, told a meeting in Germany that Ukraine could win the war, calling for more military support and fast-track approval of Finland and Sweden's expected bids to join the alliance.”
U.S./Russia Watch:
May 14 – Reuters (Alexander Ratz and John Irish): “Group of Seven foreign ministers vowed… to reinforce Russia's economic and political isolation, continue supplying weapons to Ukraine and tackle what Germany's foreign minister described as a ‘wheat war’ being waged by Moscow. After meeting in the Baltic Sea resort of Weissenhaus, senior diplomats from Britain, Canada, Germany, France, Italy, Japan, the United States and the European Union also pledged to continue their military and defence assistance for ‘as long as necessary’. They would also tackle what they called Russian misinformation aimed at blaming the West for food supply issues around the world due to economic sanctions on Moscow and urged China not to assist Moscow or justify Russia's war… ‘Have we done enough to mitigate the consequences of this war? It is not our war. It's a war by the president of Russia, but we have global responsibility,’ Germany's Foreign Minister Annalena Baerbock told reporters.”
May 14 – Reuters (Mark Trevelyan): “Russian Foreign Minister Sergei Lavrov said… that Moscow was the target of ‘total hybrid war’ by the West but would withstand sanctions by forging deeper partnerships with China, India and others. In a speech on the 80th day since Russia invaded Ukraine, Lavrov pointed to the barrage of sanctions imposed by the West in an effort to portray Russia as the target, not the perpetrator, of aggression. ‘The collective West has declared total hybrid war on us and it is hard to predict how long all this will last but it is clear the consequences will be felt by everyone, without exception… We did everything to avoid a direct clash - but now that the challenge has been thrown down, we of course accept it. We are no strangers to sanctions: they were almost always there in one form or another.’”
May 15 – Associated Press (David Koenig and Dee-Ann Durbin): “McDonald’s is closing its doors in Russia, ending an era of optimism and increasing the country’s isolation over its war in Ukraine. The Chicago burger giant confirmed Monday that it is selling its 850 restaurants in Russia. McDonald’s said it will seek a buyer who will employ its 62,000 workers in Russia, and will continue to pay those workers until the deal closes. ‘Some might argue that providing access to food and continuing to employ tens of thousands of ordinary citizens, is surely the right thing to do,’ McDonald’s President and CEO Chris Kempczinski said in a letter to employees. ‘But it is impossible to ignore the humanitarian crisis caused by the war in Ukraine.’”
China/Russia/U.S. Watch:
May 17 – Bloomberg (Christopher Anstey and Christopher Condon): “Treasury Secretary Janet Yellen said that western democracies have become ‘too vulnerable’ to countries that use their market positions as geopolitical leverage, and called for the US and Europe to coordinate their approach toward China after having united against Russia. ‘We have a common interest in incentivizing China to refrain from economic practices that have disadvantaged us all,’ Yellen said… ‘These practices range from those affecting trade and investment, to development and climate policies, to approaches to provide debt relief to countries facing unsustainable debt burdens.’ Yellen said there’s ‘a strong case for pursuing common goals jointly, not unilaterally.’ In that way, ‘China is more likely to respond favorably if it cannot play one of us off against another,’ she said.”
May 17 – Bloomberg: “China’s most senior diplomat vowed to counter any perceived US efforts to disrupt a once-in-five-year Communist Party meeting at which President Xi Jinping is set to secure a precedent-breaking third term. Beijing should ‘resolutely respond to any words and deeds by Washington to suppress and contain China’ before the 20th party congress later this year, Yang Jiechi wrote in a front-page commentary in People’s Daily... Without naming the US, he also said ‘some individual country’ was striving to ‘maintain its hegemony,’ a common reference to America. Yang, who leads the ruling party’s top foreign policy body, added that Beijing should continue to promote its ‘comprehensive strategic partnership’ with Moscow… He added that China should continue to urge the US to meet it ‘half way’ and properly manage differences.”
May 20 – Reuters (Chen Aizhu and Florence Tan): “China is quietly ramping up purchases of oil from Russia at bargain prices, according to shipping data and oil traders who spoke to Reuters, filling the vacuum left by Western buyers backing away from business with Russia after its invasion of Ukraine in February. The move by the world's biggest oil importer comes a month after it initially cut back on Russian supplies, for fear of appearing to openly support Moscow and potentially expose its state oil giants to sanctions.”
May 18 – Bloomberg (Anna Kitanaka): “China is seeking to replenish its strategic crude stockpiles with cheap Russian oil, a sign Beijing is strengthening its energy ties with Moscow just as Europe works toward banning imports due to the war in Ukraine. Beijing is in discussions with Moscow to buy additional supplies, according to people with knowledge of the plan… Crude would be used to fill China’s strategic petroleum reserves, and talks are being conducted at a government level with little direct involvement from oil companies, said one person.”
May 19 – Wall Street Journal (Chun Han Wong): “China’s Communist Party will block promotions for senior cadres whose spouses or children hold significant assets abroad, people familiar with the matter said, as Beijing seeks to insulate its top officials from the types of sanctions now being directed at Russia. The ban, outlined in an internal notice by the party’s powerful Central Organization Department, could play a role in Chinese leader Xi Jinping’s efforts to increase his influence at a twice-a-decade leadership shuffle scheduled for later this year. Issued in March, the directive prohibits spouses and children of ministerial-level officials from holding—directly or indirectly—any real estate abroad or shares in entities registered overseas, the people said.”
Europe/Russia/China Watch:
May 15 – Bloomberg (Michael Nienaber): “Germany plans to stop importing Russian oil by the end of the year even if the European Union fails to agree on an EU-wide ban in its next set of sanctions, government officials said. Efforts to seal deals with alternative suppliers are progressing at the chancellery in Berlin and the government is confident it can solve remaining logistical problems within the next six to seven months, according to the officials, who spoke on condition of anonymity.”
Inflation Watch:
May 16 – Reuters (Marcy de Luna and Bianca Flowers): “Skyrocketing natural gas prices have raised manufacturing and transportation costs across many U.S. industries, and the situation should persist as the United States exports more gas to Europe to make up for Russian supplies lost to sanctions. U.S. natural gas futures have doubled this year, far more than the increases in retail gasoline and diesel that have made Americans angry at the U.S. energy industry and the government. Many industrial company executives believe the United States… should stop exporting gas and prioritize its own needs. But gas producers are pushing for more export capacity along with more permits for drilling. Gas output in key locales in the United States has slowed this year, partly due to insufficient pipeline capacity. Bad weather also cut production and boosted demand.”
May 16 – Bloomberg (Chunzi Xu): “From record prices to blowout spreads and falling stockpiles, a handful of financial and physical indicators are pointing to expensive and possibly tighter gasoline markets across the US this summer. Gasoline futures trading in New York are extending a record rally on Monday, while US retail prices continue to set fresh peaks for the past week. Gasoline stockpiles are falling to their lowest level since 2015 for this time of year.”
May 16 – Bloomberg (Scott Moritz): “Verizon Communications Inc. will raise prices on its wireless bills for the first time in two years as the largest US wireless carrier grapples with higher costs. Millions of consumers will see a $1.35 increase in administrative charges for each voice line starting in their June phone bill. And business customers will see a new ‘economic adjustment charge’ beginning June 16, with mobile phone data plans increasing by $2.20 a month…”
May 18 – Bloomberg (Amy Yee and Tarso Veloso Ribeiro): “With a gallon of milk up about 25% since before the pandemic, and retail bacon 35% higher, it’s hard to imagine how US food inflation could get any worse. But evidence suggests that even higher prices are on the horizon. Consumers have actually been shielded so far from the full brunt of soaring expenses that are facing producers, distributors and small businesses like restaurants. But they can only hold back for so much longer. Take the case of Jeff Good, who co-founded three restaurants in Jackson, Mississippi. Around 18 months ago, a 40-pound box of chicken wings cost him about $85. Now, it can go as high as roughly $150. Expenses for cooking oil and flour have nearly doubled in the past five months... But it’s not just ingredient prices going up. He’s paying more for labor and services, too. Even the company that maintains his air conditioners has tacked on a $40 fuel charge per visit. To cope, he’s raised menu prices.”
Biden Administration Watch:
May 17 – Reuters (Sakura Murakami): “Japan and the United States have started preparing a statement that promises the two countries will cooperate to ‘deter’ and respond to China, the Nikkei newspaper reported… The statement is being prepared ahead of U.S. President Joe Biden's summit with Japanese Prime Minister Fumio Kishida set for May 23, it added.”
May 18 – Reuters (David Lawder): “U.S. Treasury Secretary Janet Yellen… confirmed she is advocating within the Biden administration for eliminating some tariffs on Chinese imports that ‘aren't very strategic’ but are hurting U.S. consumers and businesses. Yellen told a press conference ahead of a G7 finance ministers and central bank governors' meeting that internal discussions are underway about the punitive ‘Section 301’ tariffs imposed by former U.S. president Donald Trump on hundreds of billions of dollars in Chinese goods.”
May 18 – Reuters (Trevor Hunnicutt, David Brunnstrom and Michael Martina): “Joe Biden will visit Japan and South Korea on his first Asian trip as U.S. president, carrying a clear message to China, advisers and analysts say - don't try what Russia did in Ukraine anywhere in Asia, and especially not in Taiwan. Biden departs for the five day trip on Thursday, after spending several months organizing allies to punish Russia for its invasion of Ukraine… He meets new South Korean President Yoon Suk-yeol in Seoul and Japanese Prime Minister Fumio Kishida in Tokyo, leaders who share anxieties about North Korea and China and are eager to build on their long alliances with Washington. ‘At its core this (trip) is about building out the alliance network in East Asia,’ in part to counter any Chinese actions against Taiwan, said Evan Medeiros, an Asia specialist in the… Obama administration.”
May 17 – Bloomberg (Jennifer Jacobs, Daniel Flatley, Justin Sink and Fabiola Zerpa): “The Biden administration plans to ease sanctions on Venezuelan oil in a bid to bring more of the country’s crude to Europe. The U.S. will allow European companies still operating in Venezuela to divert more oil to the continent immediately while Chevron will be allowed to negotiate a resumption of operations in the country, according to a person familiar… The U.S.-backed Venezuelan opposition supports the move, the person said.”
Federal Reserve Watch:
May 17 – Bloomberg (Matthew Boesler and Craig Torres): “Federal Reserve Chair Jerome Powell, in his most hawkish remarks to date, said the US central bank will keep raising interest rates until there is ‘clear and convincing’ evidence that inflation is in retreat. ‘What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that,’ Powell said… ‘If that involves moving past broadly understood levels of ‘neutral,’ we won’t hesitate at all to do that.’ The Fed chair repeatedly stressed the need to curb the hottest inflation in decades…, calling price stability ‘the bedrock of the economy’ and acknowledging that some pain in achieving this -- including a slight rise in the unemployment rate -- was a cost worth paying in order to achieve it.”
May 17 – Wall Street Journal (Nick Timiraos and Michael S. Derby): “Federal Reserve Chairman Jerome Powell said the central bank’s resolve in combating the highest inflation in 40 years shouldn’t be questioned, even if it requires pushing up unemployment. ‘Restoring price stability is an unconditional need. It is something we have to do,’ Mr. Powell said… ‘There could be some pain involved…’ “We will go until we feel like we are at a place where we can say, ‘Yes, financial conditions are at an appropriate place. We see inflation coming down… We will go to that point, and there will not be any hesitation about that.’”
May 16 – Bloomberg (Matthew Boesler): “A top Federal Reserve official downplayed deteriorating liquidity conditions in financial markets, telling an audience… it was to be expected given rising volatility as investors grapple with uncertainty over global events and shifting U.S. monetary policy. ‘In the global environment there’s a lot of uncertainty, and a lot of events happening. We’re also seeing our actions moving monetary policy, I think, in a very strong direction, to more normal rates,’ New York Fed President John Williams told a Mortgage Bankers Association conference... ‘Some of that volatility -- in say, the Treasury market -- is really the markets digesting that information.’ Signs of deteriorating liquidity in U.S. Treasuries… are ‘more or less in line with the increase in volatility in markets,’ he said. ‘It’s just a reflection more of: A lot’s happening with market rates moving around, and therefore you’re seeing some of these measures of liquidity deteriorate somewhat, and pretty much consistent with past experience there.’”
May 18 – Reuters (Ann Saphir): “Two U.S. central bankers say they expect the Federal Reserve to downshift to a more measured pace of policy tightening after July as it seeks to quell inflation without lifting borrowing costs so high that they send the economy into recession. It's not clear if that view - mapped out on Tuesday by Chicago Federal Reserve Bank President Charles Evans and on Wednesday by Philadelphia Fed chief Patrick Harker - marks a consensus at the Fed for how to bring down the highest inflation in 40 years. But it does suggest that while policymakers broadly back using half-point rate hikes to get short-term borrowing costs to a range of 1.75%-2% over the next two months, support for sticking to that pace beyond July may be limited. Evans… told an audience… that he expects to transition to ‘measured’ rate hikes after an initial burst of policy tightening. In the Fed lexicon, ‘measured’ means quarter-point rate hikes. On Wednesday Harker gave a similar assessment…”
U.S. Bubble Watch:
May 17 – Bloomberg (Olivia Rockeman): “US retail sales grew at a solid pace in April, reflecting broad-based gains and suggesting demand for merchandise remains resilient despite rampant inflation. The value of overall retail purchases increased 0.9%, after an upwardly revised 1.4% gain in March… Excluding vehicles and gas stations, sales rose 1% last month… The data suggest that Americans are still spending on merchandise at a rapid clip -- potentially fueled by credit-card borrowing -- even as prices rise at the fastest pace in decades. That said, economists expect consumer spending to shift away from goods and toward services like travel and entertainment as pandemic-related health concerns wane… To keep pace with price increases, consumers are loading up on their credit cards… Borrowing in March soared by the most on record, and a separate report from the New York Fed showed Americans opened a record 537 million credit card accounts in the first quarter.”
May 17 – Reuters (Uday Sampath Kumar and Siddharth Cavale): “Walmart Inc reported a 25% drop in quarterly earnings and cut its full-year profit outlook… as rising costs of fuel and labor hurt its bottom line while shoppers squeezed by decades-high inflation moved to buy lower-margin basics. Shares of the retailer fell nearly 10% in morning trading…”
May 19 – Associated Press (Anne D’Innocenzio): “The pandemic vastly changed the way Americans spend money and now as they return to pre-pandemic behavior, they’re tripping up retailers again. That dynamic has only been intensified in recent months as inflation jumps sharply, and the latest financial report from Target underscores the challenges. Target reported… that its profit tumbled 52% compared with the same period last year in an environment of rising costs for things like fuel, and also a lightening quick return by consumers to more normalized spending. Purchases of big TVs and appliances that Americans loaded up on during the pandemic have faded, leaving Target with a bloated inventory that must be marked down to sell.”
May 17 – Bloomberg (Christopher Anstey): “US consumers beset by inflation are already relying on leverage to some extent to fund their spending, according to Goldman Sachs… chief economist, Jan Hatzius. ‘Borrowing is going to be a short-term driver of spending, and I think has been to some degree’ already, Hatzius said… ‘Consumer spending is going to be relatively slow. Income is going to be quite weak in 2022.’ He said consumer credit is on the rise, and there has been a pickup in mortgage-equity withdrawal, where homeowners take out a loan against the appreciated equity in their property. Hatzius observed that both dynamics are supporting spending.”
May 16 – Bloomberg (Reade Pickert): “New York state manufacturing activity unexpectedly contracted in May for the second time in three months, reflecting plunges in orders and shipments. The Federal Reserve Bank of New York’s general business conditions index dropped over 36 points to minus 11.6… Figures less than zero indicate contraction… The group’s gauge of new orders dropped nearly 34 points in May to minus 8.8, and the shipments measure fell at the fastest pace since early in the pandemic, sinking about 50 points.”
May 18 – Reuters (Lucia Mutikani): “Permits for future U.S. homebuilding tumbled to a five-month low in April, suggesting the housing market was slowing as rising mortgage rates contribute to reduced affordability… But the report from the Commerce Department on Wednesday also showed a record backlog of houses still to be constructed, indicating the moderation in homebuilding would be marginal… Building permits dropped 3.2% to a seasonally adjusted annual rate of 1.819 million units in April, the lowest level since last November. They rose 3.1% on a year-on-year basis.”
May 17 – CNBC (Diana Olick): “Builder sentiment in the market for single-family homes fell sharply in May, as mortgage rates shot higher and building material costs showed no relief. Sentiment fell an outsized 8 points to 69 in May, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Readings above 50 are considered positive, but this is the fifth straight month that builder sentiment has declined. It’s the lowest reading since June 2020… Builder sentiment hit a record high of 90 by November 2020.”
May 17 – CNBC (Diana Olick): “Mortgage rates actually fell slightly last week, but the damage has already been done to housing affordability. Both refinance and purchase loan demand dropped, pulling total mortgage application volume down 11% for the week, according to the Mortgage Bankers Association’s seasonally adjusted index. Mortgage applications to purchase a home declined 12% week to week and were 15% lower compared with the same week one year ago.”
May 15 – Wall Street Journal (Nicole Friedman): “People who agreed to buy homes under construction but haven’t yet closed are facing mortgage-interest rates that could be nearly double what they anticipated when they paid their deposits. New-home buyers are confronting multiple obstacles this year, from surging mortgage rates to home construction that is taking longer than usual due to supply-chain and labor constraints. Many home buyers who signed contracts for new homes in 2021 or early this year calculated monthly payments based on near-record-low mortgage rates of around 3% or less. But average mortgage rates have climbed this spring to 5.3%..., as the Federal Reserve started raising short-term interest rates.”
May 18 – Bloomberg (Paulina Cachero): “The days of homebuyers getting into knock- down-drag-out bidding wars may soon be over. After two years of a pandemic-driven buying frenzy that sent home values soaring, the competition for listings is showing signs of cooling off as mortgage rates hit the highest level since 2009. According to a new Redfin report, 61% of home offers faced bidding wars in April, down from 63% a month earlier and 67% in the same period of 2021.”
May 20 – New York Times (Gregory Schmidt): “Americans have more equity in their homes, thanks to a red-hot housing market pushing up the value of their properties, new research shows. In the first quarter of 2022, 44.9% of the homes in the United States were considered ‘equity-rich,’ meaning the balance of the loan on the home was 50% or less of the estimated market value, according to a new report from Attom, a real estate data analytics firm. That’s slightly higher than the 41.9% recorded in the fourth quarter of 2021 and a jump from 31.9% in the first quarter of 2021, according to Attom, which analyzed… more than 155 million U.S. properties. The increase in equity is prompting some owners to cash out and move, said Rick Sharga, the executive vice president of market intelligence at Attom.”
May 18 – Bloomberg (Alex Tanzi): “The urban real estate market has been running hot in the US since last summer. But the suburbs have been even hotter, according to an analysis from Zillow... From January 2013 through June 2021, urban homes have generally been gaining dollar value more quickly. But a switch happened after July 2021 as the economy recovered from the pandemic: Home values in suburban zip codes rose faster on annual basis, fueled by the widespread shift to remote work that spurred millions Americans to look for greener locales and bigger homes.”
May 18 – Financial Times (Nicholas Megaw): “US companies are accelerating capital spending despite slower economic growth, as the impact of supply chain disruptions and ‘deglobalisation’ override worries about a looming recession. A wave of recent disruptions… have led many high-profile investors and executives to predict a reversal of the decades-long trend toward sprawling global supply chains and ‘just in time’ inventory management. Recent quarterly reports from the largest US companies provide some of the first concrete signs that companies are following through on their plans, putting pressure on their profitability just as the economic recovery begins to lose steam. With the majority of companies in the S&P 500 index having reported first-quarter results, capital expenditure across its members rose 20% year on year in the first quarter, according to Bank of America data. The proportion of companies providing guidance for higher future spending than analysts had expected also rose. The trend was broad-based, with every sector except real estate increasing spending.”
May 19 – CNBC (Stephanie Landsman): “Stagflation is making a comeback, according to former Morgan Stanley Asia chairman Stephen Roach. He warns the U.S. is on a dangerous path that leads to higher prices coupled with slower growth. ‘This inflation problem is widespread, it’s persistent and likely to be protracted,’ Roach told CNBC… ‘The markets are not even close to discounting the full extent of what’s going to be required to bring the demand side under control... That just underscores the deep hole [Fed chief] Jerome Powell is in right now.’ Roach, a Yale University senior fellow and former Federal Reserve economist, calls stagflation his base case and the peak inflation debate absurd. ‘The demand side has really gotten away from the Fed,’ he said. ‘The Fed has a massive amount of tightening to do.’”
May 18 – Bloomberg (Simon Kennedy): “The US economy won’t be able to avoid a bout of stagflation and markets have yet to tune into the risk of a significant slowdown in growth, said Mohamed El-Erian, the chair of Gramercy Fund Management and former chief executive officer of Pimco. While the US can perhaps avoid a recession, ‘what is unavoidable is stagflation,’ El-Erian told Bloomberg… ‘We’ve seen growth coming down and we’re seeing inflation remaining high.’ He blamed the situation in part on the Federal Reserve’s view from 2021 that inflation would at some point fade. It’s since retired the ‘transitory’ thesis and is now tightening monetary policy…”
May 16 – Bloomberg (Fola Akinnibi): “Property values in Los Angeles County are projected to rise by a record $100 billion this year, providing a boon to municipal coffers on the back of a hot housing market. The amount translates to $1.86 trillion in net value for taxable properties in the county, a 6% increase from 2021, according to a May forecast of the county’s assessment roll… The increase is expected to result in more than $18 billion in property tax revenue for governments that will be used for public services like education. The 6% annual increase is greater than the rate of 2021, when the property tax assessment roll grew 3.7% to $1.76 trillion from the prior year.”
Fixed-Income Bubble Watch:
May 18 – Bloomberg (Olivia Raimonde): “Carnival Corp. is providing more evidence that the easy money era is over. The cruise operator, one of the biggest beneficiaries of the Federal Reserve’s pandemic-era monetary policy, spent more than a year chipping away at the high interest burden it took on to weather travel bans and lockdowns. Now, with the Fed shifting course and credit markets rattled, Carnival is offering a $1 billion refinancing and is poised to pay well beyond the 8.13% average yield on debt in the B tier. Initial pricing discussions are in the range of 10.25%-10.5%... ‘What makes this deal more interesting is the higher coupon compared to what it saw over the past year,’ said Jody Lurie, Bloomberg Intelligence analyst. ‘It’s a little bit of a head scratcher that they would issue debt in the high-yield market that has been less favorable for new issuance.’ Just seven months ago, Carnival was able to sell bonds -- after increasing the offering’s size by 25% to $2 billion because of demand -- to yield 6%.”
May 18 – Wall Street Journal (AnnaMaria Andriotis): “Consumers with low credit scores are falling behind on payments for car loans, personal loans and credit cards, a sign that the healthiest consumer lending environment on record in the U.S. is coming to an end. The share of subprime credit cards and personal loans that are at least 60 days late is rising faster than normal, according to… Equifax Inc. In March, those delinquencies rose month over month for the eighth time in a row, nearing their prepandemic levels. Delinquencies on subprime car loans and leases hit an all-time high in February, based on Equifax’s tracking that goes back to 2007.”
Economic Dislocation Watch:
May 18 – Bloomberg (Ann Koh and Kyunghee Park): “China appears to be gradually easing its lockdown of Shanghai, but that won’t bring immediate relief to global supply-chain congestion, according to a major shipping company. Shortages of rail, port and trucking workers in China and the US need to get resolved quicker than is currently happening as they are delaying ships at the world’s major ports, said Jeremy Nixon, chief executive officer of Ocean Network Express Pte. ‘Every government is doing their best to address the issue, but labor shortages still exist and infrastructure shortages still exist,’ Nixon said... ‘We’re putting more ships into service, but we can’t magic up more when we’re running out.’”
May 18 – Reuters (Howard Schneider and Balazs Koranyi): “Global central banks hoping that high inflation would ease through improving global supply chains saw little relief through April as new coronavirus lockdowns in China and the war in Ukraine lengthened delivery times and drove costs higher, new analyses from the New York Federal Reserve and others indicates. A global supply chain pressure index, released… by the New York Fed, rose in April after four months in which supply troubles appeared to ease, a reversal that, if continued, potentially means more persistent inflation even as central banks move to control rising prices.”
China Watch:
May 19 – Bloomberg: “Chinese Premier Li Keqiang told local governments to ‘act decisively’ on measures to support growth in the coming weeks in an effort to bring the economy back on track as soon as possible. Everyone should ‘add a sense of urgency’ to their actions to counter ‘further intensified new downward pressure’ on the economy, Li said… He encouraged local authorities to roll out new measures this month if possible, adding that policies outlined in this year’s government work report or in prior economic meetings should be enacted by the end of June.”
May 19 – Reuters (Winni Zhou, Andrew Galbraith, and Kevin Yao): “China cut its benchmark reference rate for mortgages by an unexpectedly wide margin on Friday, its second reduction this year as Beijing seeks to revive the ailing housing sector to prop up the economy. Senior officials have pledged further measures to fight a slowdown in the world's second-biggest economy, hit by COVID-19 outbreaks that prompted stringent measures and mobility restrictions and causing huge disruptions to activity… China, in a monthly fixing, lowered the five-year loan prime rate (LPR) by 15 bps to 4.45%, the biggest reduction since China revamped the interest rate mechanism in 2019…”
May 15 – Bloomberg: “China lowered the mortgage rate for first-time homebuyers and announced a phased reopening of shops in Shanghai, taking steps to bolster growth before figures due Monday that will illustrate the economic toll of the country’s strict Covid lockdowns. The central bank on Sunday cut the lower-bound range of mortgage interest rates to 4.4% from 4.6%, one of China’s most significant nationwide efforts yet to boost the ailing housing market.”
May 17 – Bloomberg: “China’s top economic official gave an unusual public show of support for digital platform companies…, suggesting Beijing may be ready to let up on a year-long clampdown on technology giants as it battles a slowing economy. The government will support the development of digital economy companies and their public listings, Vice Premier Liu He, who is President Xi Jinping’s most senior economic aide, said… Liu’s remarks reported by state media were short on detail but signal further easing of the regulatory risk for China’s technology behemoths…”
May 16 – Bloomberg: “China’s economy is paying the price for the nation’s Covid Zero policy, with industrial output and consumer spending sliding to the worst levels since the pandemic began and analysts warning of no quick recovery. Industrial output unexpectedly fell 2.9% in April from a year ago, while retail sales contracted 11.1% in the period, weaker than a projected 6.6% drop. The unemployment rate climbed to 6.1% and the youth jobless rate hit a record. Investors responded by selling everything from Chinese shares to US index futures and oil.”
May 17 – Bloomberg: “China’s government finances worsened measurably in April as Covid spread, with government spending rising to help pay for the cost of Covid Zero policies and income slumping due to tax breaks to help affected businesses. Government income from taxes and fees was 1.23 trillion yuan ($182bn) in April…, 41% down on April 2021. For the first four months of the year income was 7.43 trillion yuan, down 4.8% from the same period last year… General fiscal spending, which includes areas like education or healthcare, increased 5.9% during the same period to 8.1 trillion yuan, the ministry said.”
May 17 – Bloomberg: “China’s home prices fell for an eighth month in April as measures to alleviate the real estate downturn failed to revive buyer confidence amid Covid outbreaks. New home prices in 70 cities… dropped 0.3% from March, the fastest decline in five months, National Bureau of Statistics figures showed…. Values slid year-on-year for the first time since 2015.”
May 15 – Reuters (Liangping Gao and Clare Jim): “China's property sales in April fell at their fastest pace in around 16 years as COVID-19 lockdowns further cooled demand despite more policy easing steps aimed at reviving a key pillar of the world's second-largest economy. Property sales by value in April slumped 46.6% from a year earlier, the biggest drop since August 2006, and sharply widening from the 26.17% fall in March… Property sales in January-April by value fell 29.5% year-on-year, compared with a 22.7% decline in the first three months… In April, property investment fell 10.1% year-on-year, the fastest pace since December, compared with the 2.4% decline in March. New construction starts measured by floor area plunged 44.19% from a year earlier, the fastest pace since January-February 2020.”
May 19 – Wall Street Journal (Rebecca Feng): “China is helping some stronger developers tap the domestic bond market, the latest move to support the ailing property sector amid a broader economic slowdown. With the industry in crisis, markets in mainland China and abroad are mostly shut to privately owned developers. The new deals address that problem by packaging some bonds with credit derivatives, so that buyers are shielded against the risk of default. The initiative follows other measures, including a cut by the central bank in mortgage rates for first-time home buyers, and easing in different regions for things like down payments and home-purchasing restrictions.”
May 17 – Financial Times (Sun Yu): “An official in the north-eastern city of Jilin said authorities had earmarked a ‘significant’ portion of state-backed funds intended to reduce poverty to buy PCR tests, after an outbreak that has infected more than 26,000 people since March. In the southern industrial hub of Quanzhou, local officials said an ambitious infrastructure investment plan had slowed in part because the authority reallocated funds to testing following an outbreak that has infected more than 3,000 people over the past two months. The struggle by local authorities to underwrite the testing drive has added to the financial pressures as the world’s second-largest economy faces its worst coronavirus outbreak since the start of the pandemic.”
May 18 – Reuters (Engen Tham): “Three banks in China's central Henan province have frozen at least $178 million of deposits, offering scant information on why or for how long, leaving firms unable to pay workers and individuals locked out of savings, depositors told Reuters. Yu Zhou Xin Min Sheng Village Bank, Shangcai Huimin Country Bank and Zhecheng Huanghuai Community Bank froze all deposits on April 18, with all three telling customers they were upgrading internal systems. The banks have not issued any communication on the matter since, depositors said.”
May 19 – Bloomberg (Shawna Kwan): “Florence Mok, a new mother, thought she wouldn’t be able to get a mortgage for her HK$9 million ($1.1 million) dream apartment. When her family signed the papers, China Evergrande Group sales staff said not to worry. The developer’s financing arm offered them 90% leverage, no bank stress-test needed. Now Mok’s suffering from the fallout of Evergrande’s debt crisis. With the cash-strapped company no longer willing to provide financing, her family can’t find a bank for a mortgage. They might lose the down payment and apartment.”
Central Banker Watch:
May 17 – Financial Times (Martin Arnold, Colby Smith and Chris Giles): “Almost all central bankers in the US and Europe agree rates must rise to tackle soaring inflation. What is open for debate is where they should stop. Monetary policymakers and markets are trying to assess where lies the ‘Goldilocks’, or neutral, level of rates — the optimal level where an economy is neither overheating nor being held back. But, after almost 15 years of tepid inflation and ultra-low borrowing costs, no one is quite sure what ‘just right’ looks like. ‘Everybody is trying to understand where the neutral rate is and where the tightening cycle will end up,’ said Camille de Courcel, head of strategy… at BNP Paribas. ‘It will be the driving factor for rates markets in the coming months.’ The risk is that policymakers get it wrong and let inflation jump out of control by keeping rates too low, or trigger a brutal recession by increasing too much.”
May 17 – Financial Times (Martin Arnold, Adam Samson and Ian Johnston): “A top European Central Bank official has raised the prospect of a half percentage point interest rate increase in July if inflation continues to climb, the first time such an aggressive shift has been mooted. Tuesday’s comments by Dutch central bank chief Klaas Knot, one of the more hawkish members of the ECB’s rate-setting body, sent ripples through financial markets, as the euro rose 1.1% against the US dollar to $1.0546 and eurozone government bond prices fell. ECB president Christine Lagarde has signalled that the bank’s first rate rise for more than a decade is likely to occur at July’s governing council meeting. But she and many other policymakers have stressed they will move only ‘gradually’ — indicating any change to rates will be in quarter-point increments.”
May 18 – Reuters (Francesco Canepa): “The European Central Bank has told banks to buckle up and prepare for a bumpy road ahead as the Ukraine war hits the economy and a sudden surge in interest rates makes markets more volatile, the ECB top supervisor Andrea Enria said… Euro zone banks were just coming out of emergency measures imposed at the height of the coronavirus pandemic, including a cap on dividend payouts, when the conflict broke out in February and the economic outlook darkened again… ‘We have asked banks to reassess their projections and capital trajectories in the light of the new macroeconomic picture, also considering adverse scenarios,’ Enria told Italian daily Repubblica.”
Global Bubble and Instability Watch:
May 19 – Bloomberg (Enda Curran and Yuko Takeo): “The world economy is increasingly succumbing to the threat of stagflation reminiscent of its 1970s ordeal, a mounting headache for global finance chiefs already navigating the fallout from the war in Ukraine. With China’s economy slowing sharply, and the Federal Reserve’s stepped-up vow to crush inflation raising worries of a widespread hard landing, warnings of the consequent dangers are intensifying. Group of Seven finance ministers and central bankers… are now indicating outright concern that stagflation can no longer be swerved. ‘The war in Ukraine has had additional implications for the economy,’ German Finance Minister Christian Lindner… told reporters… “That means a boost in inflation, coupled with a loss of post-pandemic recovery momentum. That’s why we’ll have to discuss what we can do to avoid stagflation scenarios.’”
May 18 – Reuters (Stella Qiu, Tom Westbrook, Christian Kraemer, Mark John and Howard Schneider): “A sharp slowdown in China's economy caused by its strict zero-COVID rules and Beijing's shift away from a traditional reliance on external demand have cast doubts over how much the country will contribute to future global trade and investment. While China staged a remarkably quick recovery from its initial pandemic slump, thanks to bumper exports and factory production, analysts expect the current downturn will be harder to shake off… The gloomier outlook presents challenges not only for leaders in Beijing worried about rising unemployment, but foreign businesses counting on China to resume its level of engagement it had with the rest of the world before the pandemic. Calculations based on International Monetary Fund projections show China's expected average annual contribution to global economic growth through to 2027 at about 29%. While that's a considerable addition, it contrasts with the years following the 2008 global financial crisis when that averaged closer to 40%.”
May 18 – Bloomberg (Philip Aldrick): “Britain’s worst bout of inflation in 40 years is quickly becoming a crisis both for Prime Minister Boris Johnson’s government and the Bank of England. The central bank is in the eye of the storm after consumer prices surged 9% in the year through April. Cabinet ministers, economists and even a former BOE boss are complaining that Governor Andrew Bailey was too slow to act and is failing in his job to keep inflation to 2%. That finger-pointing may be meant to distract from rising pressure on Johnson’s administration to protect voters from the biggest squeeze on living standards in memory. Chancellor of the Exchequer Rishi Sunak to date has targeted relief at those in work, while the Labour opposition says help should be extended to pensioners and those on benefits.”
May 16 – Bloomberg (Theophilos Argitis): “Canadian consumer confidence recorded its sharpest weekly decline since the depths of the pandemic, with inflation and a deteriorating outlook for housing weighing on sentiment. The Bloomberg Nanos Canadian Confidence Index, a measure of sentiment based on weekly polling, dropped to 54.3 last week, the lowest reading since December 2020. The 1.8-point decline is the largest one-week slump in the index since April 2020.”
May 16 – Bloomberg (Ari Altstedter and Brian Platt): “Canadian home prices fell for the first time in two years as a rapid rise in interest rates looks set to threaten one of the world’s hottest housing markets. Benchmark home prices declined 0.6% in April from the month before, the first drop since April 2020… The number of sales, meanwhile, plunged 12.6%.”
May 18 – Bloomberg (Swati Pandey): “Australian unemployment fell to the lowest level in almost 50 years in April, delivering a fillip to Prime Minister Scott Morrison’s government as it enters the final days of campaigning for Saturday’s election. The jobless rate declined to 3.9%, a level last recorded in August 1974… Employment rose by 4,000 from a month earlier, as a surge in full-time roles was partly offset by a drop in part-time.”
May 18 – Bloomberg (Sydney Maki and Amelia Pollard): “Sri Lanka’s impending default on $12.6 billion of overseas bonds is flashing a warning sign to investors in other developing nations that surging inflation is set to take a painful toll. The South Asian nation is set to blow through the grace period on $78 million of payments Wednesday, marking its first sovereign debt default since it gained independence from Britain in 1948… ‘The Sri Lanka default is an ominous sign for emerging markets,’ said Guido Chamorro, the co-head of emerging-market hard-currency debt at Pictet Asset Management… ‘We expect the good times to stop. Slowing growth and more difficult funding conditions will increase default risk particularly for frontier countries.’”
Europe Watch:
May 16 – Financial Times (Sam Fleming and Javier Espinoza): “Brussels has cut its growth forecasts further and raised its inflation outlook as the energy crisis triggered by Russia’s invasion of Ukraine exacts its toll on the EU economy. Both the EU and euro area are set to expand 2.7% this year, well shy of the previous expectation of 4%... Growth is tipped to be 2.3% in 2023. Inflation is expected to surge above 6% in both the EU and euro area this year, with some central and eastern European countries likely to see double-digit price rises in 2022.”
EM Bubble Watch:
May 16 – Wall Street Journal (Serena Ng): “Once the place to be for yield-seeking global investors, Asia’s junk-bond market has shrunk drastically and new debt issuance has slowed to a trickle. Less than 18 months ago, the dollar-bond market for noninvestment grade companies from China to Indonesia was booming. It neared $300 billion in size, thanks in large part to numerous bond sales by Chinese property developers such as China Evergrande Group. Since then, a spate of defaults and a massive selloff have resulted in big losses for investors, erasing more than $100 billion in value from one widely watched bond index. The total market value of Asian high-yield bonds—excluding defaulted debt—is now about $184 billion…”
May 15 – Financial Times (Jonathan Wheatley): “Carlos Vieira, a carpenter in São Paulo, hoped runaway inflation was consigned to Brazil’s past. Now, with the cost of his materials doubling in just three years, he fears those days are back. ‘Since I set up the workshop in 1998, I’ve never seen anything like this… There have always been ups and downs, but now we’re suffering from this crisis and the one before,’ the 57-year-old said, referring to the Ukraine war and the pandemic. At 12%, annual inflation in Brazil is now at an almost two-decade high. Triggered by the surge in global food and fuel costs, officials are increasingly concerned that price pressures are becoming entrenched across the economy.”
May 19 – Reuters (Daniel Leussink): “Japan's core consumer inflation in April exceeded a central bank target of 2% for the first time in seven years, but only thanks to rising import costs, not the strong domestic demand that the central bank has been trying to kindle. Still, the 2.1% rise in the core consumer price index (CPI)… reinforces market scepticism that the Bank of Japan (BOJ) will maintain its ultra-loose monetary policy, especially since households are suffering rising costs without substantial wage growth.”
May 15 – Reuters (Daniel Leussink): “Japan's wholesale prices in April jumped 10% from the same month a year earlier, data showed on Monday, rising at a record rate as the Ukraine crisis and a weak yen pushed up the cost of energy and raw materials. The surge in the corporate goods price index (CGPI), which measures the price companies charge each other for their goods and services, marked the fastest year-on-year rise in a single month since comparable data became available in 1981.”
May 17 – Reuters (Daniel Leussink and Tetsushi Kajimoto): “Japan's economy shrank for the first time in two quarters in the January-March period as COVID-19 curbs hit the service sector and surging commodity prices created new pressures… The decline presents a challenge for Prime Minister Fumio Kishida's drive to achieve growth and wealth distribution under his ‘new capitalism’ agenda, stoking fears of stagflation - a mix of tepid growth and rising inflation. The world's No. 3 economy fell at an annualised rate of 1.0% in January-March from the previous quarter, gross domestic product (GDP) figures showed…”
May 19 – Bloomberg (Yoshiaki Nohara): “Japan’s trade deficit widened in April as a weaker yen drove up the cost of imports, while the impact of lockdowns in China added to concerns about the outlook for global commerce. The trade deficit swelled to 839.2 billion yen ($6.6bn) from 414 billion yen in April as imports jumped 28.2% from a year ago… The shortfall was driven by Japan’s ballooning energy import bill, with the value of oil imports doubling and coal imports trebling from the previous year.”
Leveraged Speculation Watch:
May 17 – Bloomberg (Sridhar Natarajan): “Before Bill Hwang sent a slate of stocks on a manic climb last year, he had already started bleeding billions of dollars on a bearish bet after seeking Morgan Stanley’s help. It’s an untold chapter that played out just before Hwang’s famously bullish trades came tumbling down in early 2021, wiping out his Archegos Capital Management and leading to criminal charges. Months before all of that, Archegos was trying to exit a wager against a Chinese online broker and sought help from Pawan Passi, the Morgan Stanley banker placed on leave as the US probes whether Wall Street is too loose-lipped when handling big trades. Hwang had placed a massive short bet on Futu Holdings Ltd. using swaps, and wanted to close out his position around the end of 2020. He told Morgan Stanley he needed to buy a large block of shares to unwind the position… But before Hwang managed to defuse the bet, Futu’s price skyrocketed, gaining more than 400% in the two months after that Christmas. That jump took an almost $4 billion bite out of Hwang’s portfolio.”
Covid Watch:
May 18 – Wall Street Journal (Jon Kamp and Brianna Abbott): “The latest Covid-19 case surge is expanding beyond the Northeast, with places from the Midwest to Florida and California under rising pressure. Fueled by highly contagious versions of the Omicron variant, the tide is posing a test of how much new infections matter in a changing pandemic. Though built-up immunity in the population has kept more people out of hospitals, federal health officials… urged people in hot spots to take precautions… ‘We’ve got to do what we can to prevent infections,’ said Ashish Jha, the White House Covid-19 response coordinator. ‘We’ve got to do what we can to ensure that infections don’t turn into severe illness.’”
Social, Political, Environmental, Cybersecurity Instability Watch:
May 17 – CNBC (Charlotte Morabito): “Americans are more stressed about money than they’ve ever been, according to the American Psychological Association’s latest Stress In America Survey. ‘Eighty-seven percent of Americans said that inflation and the rising costs of everyday goods is what’s driving their stress,’ said Vaile Wright, senior director of health care innovation at the American Psychological Association… Some Americans lack hope they will ever have enough money to retire, with roughly 40% saying their ability to be financially secure in retirement is ‘going to take a miracle,’ according to the 2021 Natixis Global Retirement Index. ‘I think that people need to have a sense of hope,’ said Mark Hamrick, Washington bureau chief at Bankrate. ‘When the economy is working for them, there’s a greater likelihood that people will have hope that they can accomplish their basic personal financial objectives.’”
May 15 – CNN (Rachel Ramirez): “California is facing a crisis. Not only are its reservoirs already at critically low levels due to unrelenting drought, residents and businesses across the state are also using more water now than they have in seven years, despite Gov. Gavin Newsom’s efforts to encourage just the opposite. Newsom has pleaded with residents and businesses to reduce their water consumption by 15%. But in March, urban water usage was up by 19% compared to March 2020, the year the current drought began. It was the highest March water consumption since 2015… Part of the problem is that the urgency of the crisis isn’t breaking through to Californians.”
May 19 – Yahoo Finance (Akiko Fujita): “California energy officials issued a sobering warning this month, telling residents to brace for potential blackouts as the state’s energy grid faces capacity constraints heading into the summer months. And since the state has committed to phase out all new gas-powered vehicles by 2035… the additional load from electric vehicle (EV) charging could add more strain to the electric grid. ‘Let’s say we were to have a substantial number of [electric] vehicles charging at home as everybody dreams,’ Ram Rajagopal, an associate professor of Civil and Environmental Engineering at Stanford University, who authored a recent study looking at the strain electric vehicle adoption is expected to place on the power grid, told Yahoo Finance. ‘Today’s grid may not be able to support it. It all boils down to: Are you charging during the time solar power is on?’”
May 18 – Reuters (Jake Spring): “The world's oceans grew to their warmest and most acidic levels on record last year, the World Meteorological Organization (WMO) said…, as United Nations officials warned that war in Ukraine threatened global climate commitments. Oceans saw the most striking extremes as the WMO detailed a range of turmoil wrought by climate change in its annual ‘State of the Global Climate’ report. It said melting ice sheets had helped push sea levels to new heights in 2021. ‘Our climate is changing before our eyes. The heat trapped by human-induced greenhouse gases will warm the planet for many generations to come,’ said WMO Secretary-General Petteri Taalas…”
May 15 – Bloomberg (Brian K Sullivan and Vincent Del Giudice): “Already, 2022 is taking its place in a pantheon of years that have seen the nature of fire change — and all parts of the world fall under threat. It’s only expected to get worse, with drought and heat waves looming over the horizon for many parts of the globe. At the epicenter of the fury will be the US West, where the decades-long megadrought has led to an ‘aridification,’ according to Daniel Swain, a climatologist at the University of California, Los Angeles. So far this year, more than 24,000 fires have burned across the US, the highest in at least 10 years…”
May 18 – Reuters (Yuka Obayashi and Kiyoshi Takenaka): “Japan's Nuclear Regulation Authority (NRA) granted an initial approval… for a Tokyo Electric Power's (Tepco) plan for releasing water from the destroyed Fukushima nuclear power plant into sea, citing there are no safety issues. The NRA plans to make a decision on final approval after a one-month public comment period… In 2021, the Japanese government approved the release of over 1 million tonnes of irradiated water from the site after treatment into the ocean, starting around spring 2023.”
May 17 – Reuters (Carolyn Cohn): “Climate change is hurting the insurance industry and only 8% of insurers are preparing adequately for its impact, consultants Capgemini and financial industry body Efma said… Insured losses from natural catastrophes have increased 250% in the last 30 years, with perils such as wildfires and storms, seen as particularly impacted by climate change, causing an even faster rise in insured losses, the report said.”
Geopolitical Watch:
May 14 – Reuters (Jeff Mason, David Brunnstrom and Michael Martina): “U.S. President Joe Biden said… a first summit in Washington with leaders from the Association of Southeast Asian Nations (ASEAN) marked the launch of a ‘new era’ in the relationship between the United States and the 10-nation bloc. In a joint 28-point ‘vision statement’ after a two-day meeting, the two sides took what analysts called a symbolic step of committing to raise their relationship from a strategic partnership to a ‘comprehensive strategic partnership’ in November. On Ukraine they reaffirmed ‘respect for sovereignty, political independence, and territorial integrity,’ wording that a regional expert said went further than past ASEAN statements… The summit marked the first time ASEAN leaders gathered as a group in Washington and their first meeting hosted by a U.S. president since 2016. Biden's administration hopes the effort will show that the United States remains focused on the Indo-Pacific and the long-term challenge of China, which it views as its main competitor, despite Russia's invasion of Ukraine.”