I appreciate that Jay Powell is no ideologue. His Fed has made some historic missteps, and Powell as Chair has sometimes flailed. But I’m willing to cut him some slack. I hold his predecessors responsible for the Bubble predicament. Greenspan and Bernanke certainly share responsibility for the absolute mess made of contemporary central bank doctrine. No doubt about it, decades of poor analysis, flawed doctrine, bad decisions and obfuscations are coming home to roost on Powell’s watch. The future holds so much uncertainty. One thing seems clear: he’ll be ruthlessly tarred and feathered.
I believe Powell is a good man and wants to do right for the country. At critical junctures, Greenspan and Bernanke consistently veered toward looser and ever more precarious policy courses. Never did I witness the courage necessary to accept the short-term pain necessary to improve long-term outcomes (including reducing the likelihood of catastrophic financial and economic crises).
Monstrous egos put our nation’s wellbeing in jeopardy. When circumstances turned tough, they would resort to BS justification for only more outrageous monetary accommodation. Greenspan and Bernanke were both dangerous ideologues and inflationists that handed the keys to our nation’s future to Wall Street – in the process nurturing a prolonged cycle of runaway monetary inflation, speculative Bubbles, and deep financial and economic maladjustment.
Powell’s Jackson Hole speech was short and powerful. No academic elements with the potential to muddle his message or be misinterpreted. Ideology-free. Powell’s presentation was also notably short on doctrine. No talk of the Fed’s “dual mandate” – not a single mention of “maximum employment.”
Powell: “
The Federal Open Market Committee's (FOMC) overarching focus right now is to bring inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone.”“
Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth.”
“
While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
Markets were anticipating a hawkish Powell. Yet they were clearly uncomfortable with the Fed Chair demonstrating such uncompromising inflation resolve. This was more than lip-service. It was a veritable manifesto. Powell, addressing unavoidable pain for households and businesses, omitted any reference to a market priority: pain avoidance for the financial markets.
Only a month after misjudging a “dovish pivot,” Wall Street confronts a Federal Reserve pivot to unabashed inflation fighter. It will take some real back-peddling to convince me that this wasn’t a momentous inflection point for Monetary policy Management. As a long-time admirer, Powell Friday, in majestic Jackson Hole, resolutely stepped into Paul Volcker’s fly fishing waders.
Importantly, mention of “financial conditions” was MIA. Blacklisted. This is after Powell referred to “financial conditions” 17 times during his May post-FOMC press conference (reduced down to four at last month’s press conference). This omission was not accidental. Using market-based financial conditions as a primary policy reaction function was problematic and, in the end, untenable. Especially with today’s highly speculative and unstable market environment, financial conditions will ebb and flow right along with Fear and Greed – with “Risk Off” and “Risk On.”
While markets over recent decades relished being at the center of the monetary policy-making universe, this framework is ill-suited for the New Cycle’s inflationary backdrop. While not done formally – or with any fanfare – Powell’s speech suggests a momentous shift in monetary policy doctrine. The Fed is fixated on inflation, and deemphasized markets will just have to learn to live with it. Powell is moving the Federal Reserve back toward more traditional central banking.
When Powell (and Fed officials) utters “financial conditions,” market participants smile, nod and think happy “Fed put” thoughts. Since Bernanke in 2013 proclaimed the Fed would “push back” against tightening financial conditions, markets have increasingly believed market backstops were formally ingrained in contemporary central banking doctrine. This was certainly crystallised when the Fed repeatedly ratcheted up stimulus measures until markets reversed higher back in March 2020.
No one believes the “Fed put” has been abandoned, though that’s not the crucial issue. Powell’s Jackson Hole speech confirms the newfound ambiguity of the Federal Reserve’s market backstop. While unspoken, the Fed for years has operated on the basis that it was advantageous to address market instability early – before it had the opportunity to spiral out of control. For the free-market ideologue Greenspan, The Maestro was quick with a subtle little helping hand. All that was required was a well-timed cryptic utterance indicating attentiveness to market concerns. Off to the races. Bernanke’s “push back” comment clearly was to get ahead of developing market tumult. Powell began his term with agitated markets demanding – and receiving - a big dovish pivot.
Powell’s speech can be interpreted as the Fed raising its threshold of acceptable market instability. Especially after witnessing the recent rally briskly cutting 2022 losses in half, I would expect the Fed to be atypically dismissive of the markets’ next bout of “Risk Off.” This could quickly become an issue for the markets.
It is, after all, the second leg lower where already shaken bear market nerves tend to get really rattled. The past two months' rally has engendered acute vulnerabilities. Market hedges have been unwound or simply expired. A major short squeeze forced the unwind of short positions. And I’ll assume the leveraged speculating community was forced to jump on board the rally. All this creates a marketplace susceptible to weakness spurring abrupt shifts in positioning and hedging strategies, with clear potential to unleash selling-begetting-selling crash dynamics.
“Higher for longer is the new watchword,” Bloomberg quoted Peter Hooper, Deutsche Bank’s global head of economic research. Powell pushed back against market expectations for a loosening of monetary policy in 2023.
Powell: “
Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”“In particular, we are drawing on three important lessons. The first lesson is that central banks can and should take responsibility for delivering low and stable inflation… Our responsibility to deliver price stability is unconditional… Fed's tools work principally on aggregate demand. None of this diminishes the Federal Reserve's responsibility to carry out our assigned task of achieving price stability.”“
The second lesson is that the public's expectations about future inflation can play an important role in setting the path of inflation over time… During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decision-making of households and businesses… As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, ‘Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations…’”
“
That brings me to the third lesson, which is that we must keep at it until the job is done… The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.”“
We will keep at it until we are confident the job is done.”It was an ominous end to an ominous week. A while back, it became clear that elevated inflation wasn’t transitory. It was as if there was suddenly recognition that even the recent dramatic inflationary spike might not prove transitory either. And the Fed was not the only central bank adjusting to what appears to be a secular shift to highly elevated inflationary risks.
August 26 – Reuters (Balazs Koranyi): “Some European Central Bank policymakers want to discuss a 75 basis point interest rate hike at the September policy meeting, even if recession risks loom, as the inflation outlook is deteriorating, five sources with direct knowledge of the process told Reuters… While no policymaker has publicly advocated such a large move, back-to-back 75 basis point hikes from the U.S. Federal Reserve and a stubborn deterioration of the euro area inflation outlook strengthen the case for such a discussion.”August 26 – Bloomberg (Jana Randow): “Some European Central Bank officials want to begin a debate by year-end on when and how to shrink the almost 5 trillion euros ($5 trillion) of bonds accumulated during recent crises. Deciding how to go about the process -- known as quantitative tightening -- is the logical next step after the ECB raised interest rates for the first time since 2011 in July, people familiar with the plans said… The Governing Council hasn’t discussed the issue yet, and it’s unclear when the best moment would be to start reducing the balance sheet, given the increasing likelihood of a recession in the 19-member euro zone, according to the people.”August 23 – Bloomberg (William Mathis): “Power prices for Wednesday soared to records around Europe, heaping further pressure on governments to accelerate plans for how to shield households from devastating bills and rising inflation… Fresh highs are becoming a nearly daily occurrence for Europe’s power markets… Wednesday rates rose to records in the UK, France, Germany, Italy and the Nordic region. In France, where traders are paying the most, the day-ahead contract gained 5.5% to 645.54 euros ($640.83) a megawatt-hour on the Epex Spot SE in Paris. That’s more than seven times higher than a year ago, when prices had already risen far above the longer-term average.”Global central bankers must these days contend with powerful forces that didn’t even exist during the previous cycle. European gas supplies from Russia were cut further this week for Nord Stream 1 “maintenance.” Many fear Putin could completely halt energy exports into Europe ahead of the winter heating season, as extraordinary geopolitical risks take center stage. Meanwhile, it was as if a lightbulb went off regarding rapidly mounting climate change impacts on inflation and growth dynamics.
August 24 – Washington Post (Christian Shepherd and Ian Livingston): “The unprecedented heat wave that has engulfed China this summer has dried up rivers, wilted crops and sparked forest fires. It has grounded ships, caused hydropower shortages and forced major cities to dim lights. Receding waters have revealed long-submerged ancient bridges and Buddhist statues. Among the many striking images is a pattern left in the mud flats around Poyang Lake, usually the largest freshwater body in the country, which has shrunk by more than two-thirds. Chinese media dubbed the branchlike patterns carved by trickling waters ‘Earth tree,’ calling the lake’s condition a warning about a dangerous future of intensifying extreme weather.”August 25 – Bloomberg (Brian K Sullivan): “Rivers across the globe are disappearing. From the US to Italy to China, waters have receded, leaving nothing but barren banks of silt and oozing, muddied sand. Canals are empty. Reservoirs have turned to dust. The world is fully in the grip of accelerating climate change, and it has a profound economic impact. Losing waterways means a serious risk to shipping routes, agriculture, energy supplies — even drinking water. Rivers that have been critical to commerce for centuries are now shriveled, threatening the global movement of chemicals, fuel, food and other commodities.”Powell: “When inflation is persistently high, households and businesses must pay close attention and incorporate inflation into their economic decisions… The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.”There is every indication that geopolitical and climate risks will only intensify going forward. How secure are global supply chains in a world hamstrung by today’s energy and climate uncertainties? We will all be forced to incorporate this unique inflationary backdrop into our economic decisions. Will Europeans have sufficient energy to make it through the winter? What might global inflationary and economic consequences be if China’s (and the world’s, for that matter) extreme drought persists into next year?
It appears the Federal Reserve and global central bank community have begun to appreciate that slower growth and weaker financial markets are prerequisites for reducing the likelihood of entrenched expectations of higher inflation. The unspoken reality of the situation is that previously unimaginable debt growth (i.e. the U.S. and China) must slow significantly to thwart an inflationary spiral. This is a New Cycle Dynamic, and it’s categorically negative for financial assets.
The S&P500 this week sank 4.0%, the Nasdaq100 4.8%, Germany’s DAX 4.2%, and France’s CAC40 3.4%. Much of the losses were suffered during Friday’s session (S&P500 down 3.4% and Nasdaq100 down 4.1%). High yield CDS surged 29 (largest one-day jump since June 28th) Friday to a one-month high 499 bps. The VIX (equities volatility) Index surged 3.8 points Friday (5 points for the week) to a six-week high 25.56.
Europe’s high yield (“crossover”) CDS surged 35 to a one-month high 560 bps. Italian yields jumped 20 bps to 3.70% (high since June 20th), with Greek yields up 27 bps to 3.96%. Spanish (2.59%) and Portuguese (2.49%) yields rose 20 bps – to two-month highs.
It was a curious week for Treasury prices. Powell was unambiguous: higher for longer. Yet Powell’s speech was good for only a 1.5 bps increase in 10-year yields (2-yr yields up 3bps). The Fed Chair pushed back against market expectations for a 2023 rate cut. Yet there was little movement in market pricing for peak Fed funds in March 2023.
My read. There’s little Powell can say at this point that would change market expectations for easing measures next year. The bond market peers out at the horizon and sees distinct Crisis Dynamics. And while the equities market frets “Fed put” ambiguities, it actually matters little to the Treasury market. After all, deferred monetary stimulus only ensures acute crisis. For the Treasury market, lower rates and additional QE are virtually a foregone conclusion.
It was interesting to listen to Wall Street analysts praise Powell’s speech. They liked the inflation fighting message. And discussions quickly shifted to 50 or 75 bps at the September meeting - or how next week’s data (including Friday’s August payrolls data) might impact Fed thinking. The nuance of Powell’s message just did not register. Most analysts and pundits remain trapped in the previous cycle’s mindset.
Believe it or not, it’s possible that financial markets no longer command central bankers’ undivided attention. I believe Powell and at least a core group of top Fed officials now recognize they face a serious inflation problem. The Fed Chair appears to have ample support within the FOMC, from both sides of the political spectrum, and from the public to mount an aggressive inflation fight.
For how long is an open issue. For now, however, Jay Powell appears willing to lead the charge. Perhaps even Volckeresque. I seriously doubt this can go smoothly. Has the world ever faced such a litany of major uncertainties? I fear the next phase of financial asset repricing will be both disorienting and destabilizing.
For the Week:
The S&P500 sank 4.0% (down 14.9% y-t-d), and the Dow fell 4.2% (down 11.2%). The Utilities declined 2.6% (up 4.6%). The Banks slumped 4.0% (down 18.6%), and the Broker/Dealers lost 1.8% (down 8.0%). The Transports dropped 2.7% (down 12.7%). The S&P 400 Midcaps fell 3.0% (down 12.0%), and the small cap Russell 2000 dropped 2.9% (down 15.4%). The Nasdaq100 sank 4.8% (down 22.8%). The Semiconductors were hammered 5.2% (down 29.1%). The Biotechs fell 3.3% (down 14.3%). With bullion down $9, the HUI gold equities index declined 1.2% (down 23.7%).
Three-month Treasury bill rates ended the week at 2.76%. Two-year government yields jumped 17 bps to 3.40% (up 267bps y-t-d). Five-year T-note yields rose 11 bps to 3.21% (up 194bps). Ten-year Treasury yields gained seven bps to 3.04% (up 153bps). Long bond yields declined two bps to 3.19% (up 129bps). Benchmark Fannie Mae MBS yields jumped 13 bps to 4.49% (up 242bps).
Greek 10-year yields surged 27 bps to 3.96% (up 264bps). Spain's 10-year yields rose 21 bps to 2.59% (up 203bps). German bund yields gained 16 bps to 1.39% (up 157bps). French yields jumped 21 bps to 2.02% (up 182bps). The French to German 10-year bond spread widened five to 63 bps. U.K. 10-year gilt yields rose 19 bps to 2.60% (up 163bps). U.K.'s FTSE equities index declined 1.6% (up 0.6% y-t-d).
Japan's Nikkei Equities Index declined 1.0% (down 0.5% y-t-d). Japanese 10-year "JGB" yields increased two bps to 0.22% (up 15bps y-t-d). France's CAC40 dropped 3.4% (down 12.3%). The German DAX equities index sank 4.2% (down 18.3%). Spain's IBEX 35 equities index fell 3.3% (down 7.5%). Italy's FTSE MIB index lost 2.8% (down 19.9%). EM equities were mixed. Brazil's Bovespa index added 0.7% (up 7.1%), while Mexico's Bolsa index sank 2.5% (down 11.5%). South Korea's Kospi index declined 0.5% (down 16.7%). India's Sensex equities index declined 1.4% (up 1.0%). China's Shanghai Exchange Index slipped 0.7% (down 11.1%). Turkey's Borsa Istanbul National 100 index jumped 4.2% (up 69.4%). Russia's MICEX equities index rose 3.4% (down 40.1%).
Investment-grade bond funds posted outflows of $806 million, and junk bond funds reported negative flows of $4.568 billion (from Lipper).
Federal Reserve Credit last week dropped $18.5bn to $8.819 TN. Fed Credit is down $71.1bn from the June 22nd peak. Over the past 154 weeks, Fed Credit expanded $5.092 TN, or 137%. Fed Credit inflated $6.008 Trillion, or 21%, over the past 511 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $5.1bn to an eight-week high $3.386 TN. "Custody holdings" were down $115bn, or 3.3%, y-o-y.
Total money market fund assets rose $8.1bn to $4.570 TN. Total money funds were up $43bn, or 1.0%, y-o-y.
Total Commercial Paper gained $6.4bn to $1.196 TN. CP was up $47bn, or 4.1%, over the past year.
Freddie Mac 30-year fixed mortgage rates surged 42 bps to 5.55% (up 268bps y-o-y). Fifteen-year rates jumped 30 bps to 4.85% (up 271bps). Five-year hybrid ARM rates slipped three bps to 4.36% (up 194bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 20 bps to 5.87% (up 279bps).
Currency Watch:
August 25 – Bloomberg: “China took steps to support the weakening yuan Thursday, after a resurgent dollar pushed the currency to a fresh two-year low. The People’s Bank of China set its yuan reference rate at a stronger-than-expected level for the managed currency… It was seen a signal the central bank wants to slow the pace of yuan depreciation, which has accelerated as aggressive bets on US rate hikes boosts the greenback.”
August 23 – Bloomberg (Jaehyun Eom and Sam Kim): “South Korea is stepping up surveillance of the won after the currency tumbled to a 13-year low, with the authorities warning that they are watching for any offshore speculative factors… The tone of the latest warning is stronger than a caution issued in June, and comes as the won tumbled to a 13-year low of 1,345.80 per dollar on Tuesday.”
For the week, the U.S. Dollar Index added 0.6% to 108.80 (up 13.7% y-t-d). For the week on the upside, the Brazilian real increased 2.1%, the South African rand 0.7%, the Mexican peso 0.7%, the Norwegian krone 0.6% and the Australian dollar 0.3%. On the downside, the New Zealand dollar declined 0.9%, the British pound 0.7%, the euro 0.7%, the Swiss franc 0.7%, the Swedish krona 0.7%, the Japanese yen 0.5%, the South Korean won 0.4%, the Canadian dollar 0.3% and the Singapore dollar 0.1%. The Chinese (onshore) renminbi declined 0.79% versus the dollar (down 7.50% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index gained 1.9% (up 25.6% y-t-d). Spot Gold slipped 0.5% to $1,738 (down 5.0%). Silver declined 0.8% to $18.90 (down 18.9%). WTI crude rallied $2.29 to $93.06 (up 23.7%). Gasoline sank 5.5% (up 28%), and Natural Gas slipped 0.4% to $9.30 (up 149%). Copper increased 0.7% (down 17%). Wheat recovered 4.4% (up 5%), and Corn surged 6.6% (up 12%). Bitcoin fell $620, or 2.9%, this week to $20,658 (down 55%).
Market Instability Watch:
August 23 – Bloomberg (Gowri Gurumurthy): “The US junk bond market was pummeled after a six-week rally as yields jumped to near 8% Monday… US junk bonds suffered the worst rout in two months, with a loss of 0.88%. The losses extended across the high-yield market, with CCCs suffering the most posting a loss of 0.97%.”
August 26 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Global equity funds witnessed their biggest weekly capital withdrawals in five weeks in the week to Aug. 24 on concerns that rate hikes would lead to a recession… According to Refinitiv Lipper, investors disposed of a net $10.48 billion worth of global equity funds in the week, which compares with just $3.15 billion worth of purchases in the previous week.”
Bursting Bubble and Mania Watch:
August 22 – Wall Street Journal (By Corrie Driebusch): “The IPO market is on pace for its worst year in decades, leaving fledgling companies with few options but to burn through cash while they wait for the stock market to calm. Late last year, hundreds of companies were in the final stages of preparing to go public, encouraged by the best 18 months ever for U.S. initial public offerings. Then a combination of factors—sky-high inflation, rising interest rates and Russia’s invasion of Ukraine—sent shock waves through the stock market. The IPO pipeline froze. So far this year, traditional IPOs have raised only $5.1 billion all told, Dealogic data show. Typically at this point in the year, traditional IPOs have raised around $33 billion… Last year at this point, these offerings raised more than $100 billion.”
August 22 – Bloomberg (Romy Varghese): “California collected 12% less in revenue than it expected in July, adding to signs that years of surpluses are ending. Cash totaled $9.2 billion in the first month of the fiscal year, almost $1.3 billion below the state’s budget forecast… The amount of personal income tax withheld from paychecks fell short of expectations -- by 10% in July and 5.8% in June. ‘Shortfalls in July continued to be largely driven by lower proceeds from personal income tax,’ the release said.”
August 23 – Bloomberg (Claire Ruckin): “Global banks stuck with $80 billion in unappealing M&A financing debt are trying new tactics to find buyers. In the case of the private-equity buyout of Citrix Systems Inc., they’re cutting the debt into smaller pieces to attract a wider pool of investors. Euro debt is being added to some financing packages, as in the case of ETC Group’s takeover… Many of these M&A financing packages were put together months ago, when stocks were near all-time highs.”
August 25 – Bloomberg (Patrick Clark and Dawn Lim): “Home Partners of America, the single-family landlord owned by Blackstone Inc., will stop buying homes in 38 US cities, becoming the latest institutional investor to back away from an overheated housing market. The company, acquired by Blackstone in June 2021 for $6 billion, told customers that as of Sept. 1, it is pausing applications and property submissions in Boise, Idaho; Fresno, California; Memphis, Tennessee, and 25 other areas. It will go on hiatus in 10 additional cities on Oct. 1.”
August 22 – Bloomberg (Eva Szalay): “Last year, five US professors opened two brokerage accounts and placed identical orders to test an algorithm. The next day, one was down by $150. The other was up $12. They discovered it wasn’t a one-time anomaly. Over more than five months, the academics used their own funds to execute 85,000 trades in 128 different stocks and made what they consider an important discovery: They were getting significantly different prices to buy and sell shares, depending on which brokerage handled the trade. Extrapolating from the results, they estimate it costs small-time US investors as much as $34 billion a year, said Christopher Schwarz, the finance professor at the University of California, Irvine who wrote the study along with four colleagues. The paper indicates there are hidden costs to the day trading that’s proliferated along with no-fee brokerage accounts.”
Ukraine War Watch:
August 22 – Financial Times (Henry Foy): “Moscow sees no possibility of a diplomatic solution to end the war in Ukraine and expects a long conflict, a senior Russian diplomat has warned… Gennady Gatilov, Russia’s permanent representative to the UN in Geneva, told the Financial Times that the UN should be playing a bigger role in attempts to end the conflict and accused the US and other Nato countries of pressing Ukraine to walk away from negotiations. There would be no direct talks between Putin and Ukraine’s president Volodymyr Zelenskyy, he said. ‘Now, I do not see any possibility for diplomatic contacts,’ Gatilov said. ‘And the more the conflict goes on, the more difficult it will be to have a diplomatic solution.’”
August 25 – Associated Press (Frank Jordans and Hanna Arhirova): “The Zaporizhzhia nuclear power plant in the middle of the fighting in Ukraine was temporarily knocked offline Thursday because of fire damage to a transmission line, causing a blackout across the region and heightening fears of a catastrophe in a country still haunted by the Chernobyl disaster. The complex, Europe’s largest nuclear plant, has been occupied by Russian forces and run by Ukrainian workers since the early days of the 6-month-old war. Ukraine alleges Russia is essentially holding the plant hostage, storing weapons there and launching attacks from around it, while Moscow accuses Ukraine of recklessly firing on the facility.”
August 25 – Reuters (Yuliya Talmazan): “Russian President Vladimir Putin signed a decree… increasing the size of his country’s armed forces, as the Kremlin’s war in Ukraine passed the six month mark. Putin’s decree will increase the number of soldiers in the Russian armed forces by 137,000, or about 10%, up from 1.01 million to 1.15 million.”
U.S./Russia/China Watch:
August 21 – Bloomberg (Ailing Tan): “China continues to expand its reliance on Russian energy, with purchases of crude, oil products, gas and coal rising to $35 billion since the war in Ukraine began, from about $20 billion a year earlier… The increase comes as other countries shun Russian goods as punishment for the invasion. Imports in July included a record haul of Russian coal, which rose 14% on year to 7.4 million tons, with coking coal for the steel industry hitting 2 million tons, an increase of 63%. Russia is now China’s top supplier of the fuel…”
August 26 – Reuters (Samuel Shen, Xie Yu, Julie Zhu and Selena Li, Michelle Price and Tom Westbrook): “The U.S. audit regulator said… it has signed an agreement with Chinese regulators, taking a first step toward inspecting and investigating registered accounting firms in China and Hong Kong. The Public Company Accounting Oversight Board (PCAOB) said it was the most detailed and prescriptive agreement the regulator has ever reached with China. U.S. regulators have for long been demanding access to audit papers of Chinese companies listed in the United States, but Beijing has been reluctant to let overseas regulators inspect accounting firms…”
Economic War/Iron Curtain Watch:
August 24 – Reuters (Andrew Osborn): “Cold winters helped Moscow defeat Napoleon and Hitler. President Vladimir Putin is now betting that sky-rocketing energy prices and possible shortages this winter will persuade Europe to strong arm Ukraine into a truce -- on Russia's terms. That, say two Russian sources familiar with Kremlin thinking, is the only path to peace that Moscow sees, given Kyiv says it will not negotiate until Russia leaves all of Ukraine. ‘We have time, we can wait,’ said one source close to the Russian authorities… ‘It's going to be a difficult winter for Europeans. We could see protests, unrest. Some European leaders might think twice about continuing to support Ukraine and think it's time for a deal.’”
Inflation Watch:
August 23 – Bloomberg (Jinglu Gu): “The extreme weather hitting China on all points of the compass comes at a pivotal time for the harvest in the world’s most populous nation. China has largely escaped this year’s surge in global food prices... But persistent, searing heat in central and southwestern areas, and flooding in the northeast -- all worsened by climate change -- now threaten a grain harvest that runs to hundreds of millions of tons, most of which is gathered in the fall. The broadest risk is that lost output could raise China’s already hefty import needs, adding to intense price pressures in the rest of the world.”
August 24 – Reuters (Priyamvada C): “U.S. new vehicle prices are expected to hit a record high in August on the back of strong demand despite rising interest rates… Average transaction prices are set to reach a record $46,259, an 11.5% increase from a year earlier, according to… J.D. Power and LMC Automotive. However, an inventory shortage continues to shackle new vehicle sales. Retail sales of new vehicles are expected to reach 980,400 units in August, a 2.6% decrease from a year earlier…”
August 22 – Bloomberg (Annie Lee): “Prices of lithium in China are close to a record high as a power crisis in the nation’s major hub for the vital electric-vehicle battery ingredient threatens an already-tight market. Sichuan, home to more than a fifth of China’s lithium production, extended industrial power cuts this week amid the most intense heat wave in more than a half century. The supply disruptions in the province are set to add fuel to the battery metal’s stunning rally in the past year, with lithium carbonate prices on Monday reaching the highest level since April at 484,500 yuan ($70,610) a ton.”
August 24 – Bloomberg (Mai Ngoc Chau): “Vietnam’s vast hoard of coffee beans is shrinking, a phenomenon that’s set to push rising global prices even higher. Stockpiles will halve by the end of September from a year earlier, according to… a Bloomberg survey of traders. Output from Vietnam, the world’s largest robusta supplier and second-largest coffee producer, is also expected to drop in 2022-23. The dwindling reserves and poor harvest outlook come at a time when global coffee consumption is recovering from a virus-induced slump. Benchmark robusta prices have surged 17% from a 10-month low in the middle of July on supply worries from Brazil to Africa.”
August 20 – Bloomberg (Tarso Veloso Ribeiro, Tatiana Freitas, and Marvin G Perez): “Extreme weather is wreaking havoc upon virtually all of the world’s largest cotton suppliers. In India, the top-producing country, heavy rains and pests have cut into cotton crops so much that the nation is importing supplies. A heat wave in China is raising concerns about the upcoming harvest there. In the US, the largest exporter of the commodity, a worsening drought is ravaging farms and is set to drag production to the lowest level in more than a decade. And now Brazil, the second-largest exporter, is battling extreme heat and drought that have already cut yields by nearly 30%. This confluence of extreme weather events brought on by climate change has sent cotton prices soaring by as much as 30%.”
Biden Administration Watch:
August 25 – Bloomberg (Olivia Rockeman, Katia Dmitrieva and Alex Tanzi): “President Joe Biden’s plan to forgive a portion of student loans held by tens of millions of people will ripple through the economy as personal spending and savings shift, but no factor will be more closely watched than inflation. In announcing the plan Wednesday, the White House flagged that the move would have competing impacts. On the one hand, it would reduce overall household debt and potentially provide more spending power. On the other, it offers a timeline to restart payments that have been suspended for more than two years.”
August 25 – Reuters (Costas Pitas): “A U.S. plan announced this week to forgive $10,000 in student loans for millions of debt-saddled former college students will cost roughly $24 billion a year assuming that three quarters of those eligible take up the offer, the White House said. The move, announced by President Joe Biden…, kept a pledge he made in the 2020 campaign for the White House and could boost support for his fellow Democrats in the November congressional elections.”
Federal Reserve Watch:
August 25 – Bloomberg (Jonnelle Marte and Catarina Saraiva): “Two years into a new framework that was supposed to overhaul how the Federal Reserve conducts monetary policy, the central bank is struggling to tame the one thing it didn’t envisage in its revamp: inflation running way above its target. Unveiled at the Fed’s Jackson Hole forum in August of 2020, after an 18-month review, the new approach was aimed at a specific peril: How to beat the weak inflation that had long dogged central bankers. As policy makers return to their retreat in Wyoming’s Grand Teton mountains faced with the hottest inflation in almost 40 years, that problem is a distant memory, posing questions for the framework’s future.”
August 25 – Bloomberg (Matthew Boesler): “The Federal Reserve hasn’t yet raised interest rates to levels that are weighing on the economy and may have to take them above 4% for a time, Kansas City Fed President Esther George said. ‘It’s very important that we are clear in our communication about the destination we are headed,’ she told Michael McKee and Kathleen Hays… in Jackson Hole… ‘We have to get interest rates higher to slow down demand and bring inflation back to our target…’ Asked how high the Fed should raise rates, George said there was ‘more room to go’ and pushed back against bets in financial markets the central bank would begin cutting rates next year. ‘I think we will have to hold -- it could be over 4%. I don’t think that’s out of the question,’ she said.”
August 25 – Bloomberg (Matthew Boesler, Jonnelle Marte and Steve Matthews): “US central bankers stressed the need to keep raising interest rates and St. Louis Fed chief James Bullard said officials should act quickly and lift their policy benchmark to a 3.75% to 4% range by year end. ‘I like the front-loading. I like the idea that you get the rate increases in earlier rather than later,’ he told CNBC… in Jackson Hole... ‘You show you are serious about inflation fighting and you want to get up to the level that will put downward pressure on inflation. We are at 2.33% right now. That is not high enough,’ he said…”
August 23 – Bloomberg (Matthew Boesler and Alister Bull): “Federal Reserve Bank of Minneapolis President Neel Kashkari said US inflation is very high and the central bank must act to bring it back under control. ‘By many, many measures we are at maximum employment and we are at very high inflation. So this is a completely unbalanced situation, which means to me it’s very clear: We need to tighten monetary policy to bring things into balance… When inflation is 8% or 9%, we run the risk of unanchoring inflation expectations and leading to very bad outcomes that would cause us to have to be very aggressive -- Volcker-esque -- to then re-anchor them,’ he said…”
U.S. Bubble Watch:
August 23 – Bloomberg (Will Wade and Mark Chediak): “Adrienne Nice woke up early on the morning of July 25 to news she’d been dreading. The power company, Xcel Energy Inc., had shut off the electricity to the small Minneapolis apartment she shares with her teenage son, just as a heat wave was bearing down on the city. Nice had been struggling financially ever since the pandemic hit, racking up more than $3,000 in past-due utility bills. The warnings she’d gotten on her monthly statement—“FINAL NOTICE” scrawled in big, bold letters—had prepared her to some degree, but it was still jarring to find the fridge dark and the air conditioner silent… The Nice household is one of some 20 million across the country—about 1 in 6 American homes—that have fallen behind on their utility bills. It is, according to the National Energy Assistance Directors Association (Neada), the worst crisis the group has ever documented. Underpinning those numbers is a blistering surge in electricity prices, propelled by the soaring cost of natural gas.”
August 23 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes plunged to a 6-1/2-year low in July as persistently high mortgage rates and house prices further eroded affordability. The report… added to a stream of weak housing data, and suggested that the Federal Reserve's aggressive monetary policy tightening campaign to slow the economy in order to tame inflation was achieving some desired results in the housing market. But with house prices remaining elevated amid a critical shortage of previously owned properties, a total housing market collapse is unlikely… New home sales tumbled 12.6% to a seasonally adjusted annual rate of 511,000 units last month, the lowest level since January 2016. June's sales pace was revised down to 585,000 units from the previously reported 590,000 units.”
August 24 – Reuters (Lucia Mutikani): “New orders for U.S.-manufactured capital goods increased in July, but the pace slowed from the prior month, suggesting a moderate rebound in business spending this quarter… While part of the rise was because businesses are spending more due to higher prices, the data was another sign that the economy continues to grow at a slow pace and was not in recession. ‘The absence of a sustained decline in orders suggests that businesses are still investing despite tighter financial market conditions, a drop in sentiment and worries about a recession,’ said Ryan Sweet, a senior economist at Moody's Analytics... Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.4% last month. Data for June was revised higher…”
August 23 – Reuters (Dan Burns): “U.S. private-sector business activity contracted for a second straight month in August to its weakest in 27 months with particular softness registered in the services sector as demand weakened in the face of inflation and tighter financial conditions. The S&P Global flash composite purchasing managers index (PMI) for August dropped to 45 this month - the lowest since May 2020 - from a final reading of 47.7 in July.”
August 25 – Dow Jones (Jeffry Bartash): “Many companies still hiring even as economy slows. The numbers: The number of people who applied for unemployment benefits last week fell to a one-month low of 243,000, indicating layoffs remain near record lows and that a tight labor market is keeping the economy moving forward. Initial jobless claims fell by 2,000 from a revised 245,000 in the prior week.”
August 21 – Financial Times (Andrew Edgecliffe-Johnson): “Walmart’s top executives had to laugh as they prepared to discuss their latest earnings with analysts, admitted chief executive Doug McMillon. The conflicting anecdotes the US retailer was about to share about consumer demand — back to school backpacks flying off the shelves even as it had to slash prices to clear excess stock and its poorest customers traded down from beef to beans — seemed like a Rorschach test of economic interpretations. But if the company that sells more goods to more Americans than any other is struggling to interpret the consumer mood, spare a thought for those parsing such snippets for clues as to whether or not inflation is tipping the US into a recession. Consumer confidence surveys, usually a reliable source of advance warning on which way spending is heading, could not paint a much more dire picture of the outlook as the Federal Reserve scrambles to tame rising prices… Yet this pessimism is not showing up in the sales story being told by Walmart and its rivals.”
August 24 – CNBC (Diana Olick): “Mortgage demand continues to weaken, still right around a 22-year low, but there was a sign in the weekly numbers that first-time buyers may be slowly returning. Mortgage applications to purchase a home fell 1% last week compared with the previous week… Volume was 21% lower than the same week one year ago. There was, however, a jump in demand for loans offering lower down payments… ‘Last week’s purchase results varied, with conventional applications declining 2% and government applications increasing 4%, which is potentially a sign of more first-time homebuyer activity,’ said Joel Kan, an MBA economist.”
August 24 – CNBC (Diana Olick): “Home prices declined 0.77% from June to July, the first monthly fall in nearly three years, according to Black Knight… While the drop may seem small, it is the largest single-month decline in prices since January 2011. It is also the second-worst July performance dating back to 1991, behind the 0.9% decline in July 2010... The sharp and fast rise in mortgage rates this year caused an already pricey housing market to become even less affordable. Home prices rose sharply during the first years of the Covid pandemic because demand was incredibly strong, supply historically weak and mortgage rates set more than a dozen record lows.”
August 22 – Bloomberg (Paulina Cachero): “Home sellers in pandemic boomtowns are slashing prices as they adapt their expectations to a rapidly cooling market. Take Boise, Idaho, where 70% of houses for sale dropped their asking price in July, more than double the 30% that cut prices a year earlier. It’s also the highest share of price drops out of 97 US metro areas analyzed by… Redfin. ‘Individual home sellers and builders were both quick to drop their prices early this summer, mostly because they had unrealistic expectations of both price and timelines,’ said Boise Redfin agent Shauna Pendleton. ‘They priced too high because their neighbor’s home sold for an exorbitant price a few months ago, and expected to receive multiple offers the first weekend because they heard stories about that happening.’”
August 23 – Bloomberg (Claire Ballentine and Charlie Wells): “Employees across many industries have spent the last two years seeking — and often receiving — previously unimaginable perks and compensation, part of the pandemic-fueled labor market shift. But in a new survey conducted by the Harris Poll for Bloomberg News, 58% of respondents said they believe companies have more leverage in the job market these days, an increase of five percentage points from January.”
August 22 – Bloomberg (Alexandre Tanzi): “A jump in apartment construction in the US may help provide some relief to renters who’ve faced soaring prices -- eventually. This year, 420,000 apartments are expected to be delivered nationwide, according to… RentCafe. It would be the second year in a row that the industry tops 400,000 units, a mark that was last reached in 1972.”
China Watch:
August 24 – Reuters (David Stanway): “Extreme heat in China played havoc on Wednesday despite lower temperatures in some regions, with authorities across the Yangtze river basin scrambling to limit the damage from climate change on power, crops and livestock. China's heatwave, stretching past 70 days, is its longest and most widespread on record, with around 30% of the 600 weather stations along the Yangtze recording their highest temperatures ever by last Friday.”
August 24 – Bloomberg: “Wan Jinjun, a 62-year-old retiree who has swum the Yangtze River almost every day for the past decade in Wuhan, said he’s never seen a drought like this before. An extreme summer has taken a toll on Asia’s longest river, which flows about 3,900 miles through China and feeds farms that provide much of the country’s food and massive hydroelectric stations, including the Three Gorges Dam — the world’s biggest power plant. A year ago, water lapped almost as high as the riverbank where Wan swims. Now, the level is at the lowest for this time of year since records began in 1865, exposing swathes of sand, rock and oozing brown mud that reeks of rotting fish.”
August 23 – Bloomberg: “The Chinese yuan’s slump to its weakest against the dollar in almost two years adds to what is already a precarious balancing act for Beijing, which is seeking ways to prop up its struggling economy without stoking financial instability. There’s opportunity in the falling exchange rate, which cushions exporters and provides an additional source of support as the People’s Bank of China lowers interest rates and as provincial governments borrow to fund infrastructure… ‘Yuan depreciation seems one last policy option left,’ said Gene Ma, chief China economist at the Institute of International Finance... ‘Housing has failed to respond to policy easing and monetary policy has fallen into a ‘liquidity trap’ as loan demand is so weak.’ A weaker currency, though, also accelerates capital outflows and market volatility.”
August 24 – Bloomberg: “China stepped up its economic stimulus with a further 1 trillion yuan ($146bn) of funding largely focused on infrastructure spending, support that likely won’t go far enough to counter the damage from repeated Covid lockdowns and a property market slump. The State Council, China’s Cabinet, outlined a 19-point policy package on Wednesday, including another 300 billion yuan that state policy banks can invest in infrastructure projects, on top of 300 billion yuan already announced at the end of June. Local governments will be allocated 500 billion yuan of special bonds from previously unused quotas.”
August 24 – Wall Street Journal (Brian Spegele): “China’s government unveiled tens of billions of dollars of economic support for its power and agricultural industries, which have been grappling with a record heat wave and drought that have cut into industrial production. The State Council, which serves as China’s cabinet, approved 200 billion yuan ($29bn) in new debt for the country’s power generators and an additional 20 billion yuan fighting the drought and aiding the nation’s rice harvest. The financial support for China’s power sector is unlikely to do much in the near term to alleviate power shortages... But they show how closely the central government is monitoring the matter ahead of a sensitive Communist Party meeting set to take place later this year.”
August 22 – Bloomberg: “China will offer 200 billion yuan ($29.3bn) in special loans to ensure stalled housing projects are delivered to buyers…, ramping up financing support for its beleaguered property sector. The previously unreported size of the lending program, which was announced with scant details by China’s housing ministry, finance ministry and the central bank late Friday, would make it the biggest financial commitment yet from Beijing to contain a property crisis that’s seen home prices slump and real estate sales plummet.”
August 24 – Wall Street Journal (Rebecca Feng): “Chinese regulators are attempting to revive a sagging property market with new bond guarantees for a select group of developers. Investors think it will take a lot more to pull the real-estate sector out of its deepest slump in years. Many of the country’s real-estate companies are struggling. More than 30 have defaulted on their dollar-denominated bonds, and even the strongest private-sector developers have faced challenges selling new debt as their bond prices have tumbled and yields have soared… The Chinese government plans to help at least six developers raise money by offering full guarantees on their domestic yuan-denominated bond sales… The guarantees won’t apply to dollar debt.”
August 21 – Financial Times (Hudson Lockett): “China has slashed its mortgage lending rate for the second time this year as the country’s central bank seeks to limit the fallout from a liquidity crisis in the property sector. The five-year loan prime rate was lowered to 4.3% from 4.45%..., The reduction in the benchmark loan prime rate will cut borrowing costs on new mortgages nationwide and boost the country’s debt-laden real estate sector, which accounts for almost a third of annual economic output.”
August 22 – Bloomberg: “China’s central bank called on major financial institutions to take the lead in keeping credit growth stable with the nation’s economy at a critical moment. Financial institutions, especially major state-owned banks, should increase loan issuance to the real economy, the People’s Bank of China said… following a meeting chaired by governor Yi Gang. They should also improve the credit support for small- and micro-enterprises, green development, scientific and technological innovation and other fields… ‘We must consolidate the foundation of economic recovery and development with a sense of urgency that no time can wait,’ it said.”
August 22 – Bloomberg: “Chinese banks are employing unusual practices to inflate their loan volumes as they struggle to meet government demands to pump more credit into an economy beset by Covid lockdowns and a beleaguered property market. With borrowers reluctant to take on debt as economic growth slows, some state-owned banks are extending loans to companies and then allowing them to deposit funds at the same interest rate, according to executives at six banks… Others are borrowing from each other through short-term financing arrangements that can be dressed up as new loans to boost volumes, the executives said.”
August 23 – Financial Times (Hudson Lockett, Cheng Leng and Thomas Hale): “Investors are pricing in almost $130bn in losses on Chinese property developers’ dollar debt on mounting worries the country's housing market will face a protracted crisis unless Beijing steps in with a large-scale bailout. Two-thirds of the more than 500 outstanding dollar bonds issued by Chinese developers are now priced below 70 cents on the dollar, a common threshold for distressed status… The rising pressure on the market comes a year after Evergrande, the world’s most indebted developer, began spiralling into default, unleashing tumult throughout a sector responsible for roughly 30% of the country’s annual economic output.”
August 23 – Bloomberg: “Shopping malls in China’s financial hub are seeing a surge in vacancies after Covid Zero lockdowns hammered consumer demand, adding to the woes of developers and asset managers owning them. Vacancy rates in the city’s malls climbed to 7% in the second quarter, above a ‘warning line’ of 5%, said China Real Estate Information Corp., citing research of 20 major malls. The worst hit was Super Brand Mall, which sits at the heart of Shanghai’s Lujiazui financial district. It saw 34% of its shops shuttered, CRIC said.”
Central Banker Watch:
August 20 – Financial Times (Martin Arnold): “Germany’s central bank chief has warned that interest rates need to keep rising despite the risk of recession as inflation reaches double-digit levels for the first time since 1951. Bundesbank president Joachim Nagel told the Rheinische Post that the recent surge in energy prices caused by Russia’s squeeze on gas supplies was likely to drive German inflation above 10% this autumn and keep it elevated next year. ‘The issue of inflation will not go away in 2023,’ said Nagel. ‘Supply bottlenecks and geopolitical tensions are likely to continue. Meanwhile, Russia has drastically reduced its gas supplies, and natural gas and electricity prices have risen more than expected.’”
August 23 – Reuters (Francesca Landini): “The European Central Bank must exercise caution with further rate hikes as a looming recession could ease inflationary pressures, lessening the need for central bank action, ECB board member Fabio Panetta said… The ECB raised rates back to zero from negative territory in July and will likely hike again in September, fearing that inflation, now approaching double digits, is at risk of getting embedded in a hard-to-break wage-price spiral. ‘We may have to adjust our monetary stance further, but .... we have to be fully aware that the probability of a recession is increasing.’ Panetta told a financial conference.. ‘If we will have a significant slowdown or even a recession, this would mitigate inflationary pressures,’ Panetta said.”
August 23 – Reuters (William Schomberg and Balazs Koranyi): “This time last year, the world's biggest central banks were united in getting the inflation story wrong. Now, as top policymakers gather for the Kansas City Federal Reserve's annual monetary policy conference in Jackson Hole, Wyoming, the U.S. central bank looks like it might manage a ‘soft landing’ for its own economy, but the outlook for Europe is far more worrying. Much of the world is facing the fastest price growth since the early 1980s, raising fears of a repeat of that era’s wage-price spiral phenomenon that required double-digit interest rates - and painful recessions - to restore price stability.”
August 24 – Wall Street Journal (Nick Timiraos): “Central bankers worry that the recent surge in inflation may represent not a temporary phenomenon but a transition to a new, lasting reality. To counter the impact of a decline in global commerce and persistent shortages of labor, commodities and energy, central bankers might lift interest rates higher and for longer than in recent decades—which could result in weaker economic growth, higher unemployment and more frequent recessions. The Federal Reserve’s current round of interest-rate increases… could be a taste of this new environment. ‘The global economy is undergoing a series of major transitions,’ said Mark Carney, former Bank of Canada and Bank of England governor… ‘The long era of low inflation, suppressed volatility and easy financial conditions is ending.’”
Global Bubble and Instability Watch:
August 23 – Bloomberg (Alexander Weber, Enda Curran and Reade Pickert): “Economic activity weakened from the US to Europe and Asia, reinforcing concerns that soaring prices and the war in Ukraine will tip the world into a recession. US business activity contracted for a second-straight month in August, falling to the weakest level since May 2020, S&P Global data showed... Activity in Asia slumped, and output in the 19-nation euro zone also fell as record energy and food inflation saps demand and more sectors succumb to the darkening outlook. The US figures pointed to weaker demand at both manufacturers and service providers as rising interest rates and high inflation weighed on consumers. New orders shrank for the second time in three months, and employers scaled back hiring.”
August 23 – Wall Street Journal (Paul Hannon and Gabriel T. Rubin): “Business activity in the U.S., Europe and Japan fell in August, according to new surveys, pointing to a sharp slowdown in global economic growth as higher prices weaken consumer demand and the war in Ukraine scrambles supply chains. U.S. companies reported a sharp drop in business activity in August in a broad-based decline led by services companies... High inflation, material shortages, delivery delays and interest-rate rises all weighed on business activity, the S&P Global survey said. The composite purchasing managers index for the U.S. economy—which measures activity in both the manufacturing and services sectors—was 45.0 in August, down from 47.7 in July.”
August 24 – Wall Street Journal (Erich Schwartzel and Anne Steele): “Hollywood studio executives charged with projecting global box-office revenues are putting $0 in the China column. Baccarat tables in Macau sit empty. Singers skip Shanghai concert halls on tour. American entertainment and leisure industries are facing an unsettling reality: China’s wallet is getting harder to access. The movie, concert and casino businesses, which have resumed activity in much of the world after Covid-19 shutdowns, are among the hardest-hit by the continued limited access to China’s middle class. Companies that once saw China as a vital growth market stand to lose out on billions of dollars in $100 concert tickets, $12 matinee stubs and $5 bets. The factors in China putting pressure on America’s pastime industries range from repetitive Covid lockdowns to censorship and political headwinds, all slowing the chance to capture leisure time of China’s 1.4 billion citizens.”
Europe Watch:
August 22 – Reuters (Balazs Koranyi): “It was meant to be Europe's stellar year. A post-pandemic spending euphoria, supported by copious government spending was set to drive the economy and help fatigued households regain a sense of normality after two dreadful years. But all that changed on Feb. 24 with Russia's invasion of Ukraine. Normality is gone and crisis has become permanent. A recession is now almost certain, inflation is nearing double digits and a winter with looming energy shortages is fast approaching. Though bleak, this outlook is still likely to get worse before any significant improvement well into 2023. ‘Crisis is the new normal,’ says the Alexandre Bompard, the Chief Executive of retailer Carrefour. ‘What we have been used to in the last decades - low inflation, international trade - it's over,’ he told investors.”
August 24 – Bloomberg (Lenka Ponikelska, Peter Laca and Samy Adghirni): “European Union energy ministers may hold an emergency meeting to discuss the spike in power markets as leaders strike a more urgent tone on the unfolding crisis. The Czech Republic, which holds the EU’s rotating presidency, is considering calling a gathering to debate the idea of capping electricity prices… Europe is grappling with the worst energy crisis in decades, with spiking costs of gas and electricity driving inflation and threatening to drag economies into recession. European power prices have soared in the past weeks with Russian gas supply cuts in the wake of Moscow’s invasion of Ukraine.”
August 23 – Bloomberg (Kevin Whitelaw): “Europe is currently in the throes of a drought that appears to be the worst in at least 500 years, according to a preliminary analysis by experts from the European Union’s Joint Research Center. Some 64% of the EU is under a drought warning or alert, according to a new report from the European Drought Observatory. The bloc’s experts said they expect the warm and dry conditions, which are fueling wildfires and reducing crop outputs, to continue in parts of the region until November.”
August 22 – Reuters (David Milliken): “Britain recorded its biggest fall in output in more than 300 years in 2020 when it faced the brunt of the COVID-19 pandemic, as well as a larger decline than any other major economy, updated official figures showed… Gross domestic product fell by 11.0% in 2020… This was a bigger drop than any of the ONS's previous estimates and the largest fall since 1709…”
August 24 – Bloomberg (Alexander Weber, Naomi Tajitsu and Jana Randow): “The euro is languishing below parity with the dollar after its latest selloff, and there’s little hope that even a hefty hike in interest rates would rescue it. Rather than monetary policy, it’s the interlinked threats of a recession and a Russian energy cutoff that are weighing down the common currency, according to analysts. Despite traders now bracing for one percentage points of rate hikes by October, such dynamics are hard for the European Central Bank to counter -- even if it deploys the kind of outsized moves in borrowing costs enacted recently by the Federal Reserve.”
EM Crisis Watch:
August 24 – Wall Street Journal (Chelsey Dulaney): “Emerging markets are burning through stockpiles of U.S. dollars and other foreign currency at the fastest rate since 2008, raising the risk of a wave of defaults across the world’s most fragile economies. Emerging and developing nations’ foreign reserves have shrunk by $379 billion this year through June, according to… the International Monetary Fund. Excluding the effects of exchange-rate fluctuations and the large foreign-exchange holdings of China and Gulf oil exporters, emerging markets are seeing the biggest drawdowns since 2008 according to JPMorgan… Central banks around the world are using reserves to defend their currencies against the rallying U.S. dollar and to cover higher import bills for food and fuel.”
August 22 – Bloomberg (Maria Elena Vizcaino): “September, historically the busiest month for high-yield sovereign bond sales, is set to disappoint this year as the risk of aggressive US rate hikes keep junk-rated nations on the sidelines. Banks including Morgan Stanley, JPMorgan… and Goldman Sachs expect subdued external debt sales from emerging countries next month, as borrowing costs at a three-year high and poor liquidity deter riskier nations from tapping the market.”
Japan Watch:
August 24 – Reuters (Leika Kihara): “The Bank of Japan must maintain massive monetary stimulus and its dovish policy guidance until wages show clearer signs of increasing, one of its board members said, reinforcing the central bank's outlier status in a global wave of monetary tightening. Board member Toyoaki Nakamura also ruled out the chance of tweaking Japan's ultra-low interest rates to stem the yen's falls against the dollar, saying there was not much the BOJ can do to reverse a trend largely driven by U.S. rate hikes.”
August 22 – Reuters (Daniel Leussink): “Japan's factory activity growth slowed to a 19-month low in August as output and new order declines deepened, amid growing pressure from persistent rises in raw material and energy costs and weakening global demand. Activity in the services sector contracted for the first time in five months… The au Jibun Bank Flash Japan Manufacturing Purchasing Managers' Index (PMI) fell to a seasonally adjusted 51.0 in August from a 52.1 final in July, marking the slowest expansion since January last year.”
Social, Political, Environmental, Cybersecurity Instability Watch:
August 21 – Wall Street Journal (Matthew Dalton, Jim Carlton and Sha Hua): “Severe droughts across the Northern Hemisphere—stretching from the farms of California to waterways in Europe and China—are further snarling supply chains and driving up the prices of food and energy, adding pressure to a global trade system already under stress. Parts of China are experiencing their longest sustained heat wave since record-keeping began in 1961, according to China’s National Climate Center, leading to manufacturing shutdowns owing to lack of hydropower. The drought affecting Spain, Portugal, France and Italy is on track to be the worst in 500 years, according to Andrea Toreti, a climate scientist at the European Commission’s Joint Research Center.”
August 24 – Reuters (Amina Ismail and Charlotte Bruneau): “The number of people facing acute food insecurity worldwide has more than doubled to 345 million since 2019 due to the COVID-19 pandemic, conflict and climate change, the World Food Programme (WFP) said… Before the coronavirus crisis, 135 million suffered from acute hunger worldwide, said Corinne Fleischer, the WFP's regional director... The numbers have climbed since and are expected to soar further because of climate change and conflict.”
August 24 – Wall Street Journal (Sumathi Reddy): “Between two million and four million Americans aren’t working due to the long-term effects of Covid-19, according to a new Brookings Institution report… The inability to work translates to roughly $170 billion a year in lost wages, the report estimates. It follows a January Brookings Institution report that estimated long Covid was potentially causing 15% of the country’s labor shortage. The report estimates that roughly 16 million Americans of working age—between 18 and 65—have long Covid, which most groups and doctors define as wide-ranging symptoms that persist for months following an infection and can include shortness of breath, extreme fatigue and neurocognitive issues.”
August 23 – Associated Press (Seth Borenstein): “Parts of northern Texas, mired in a drought labeled as extreme and exceptional, are flooding under torrential rain. In a drought. Sound familiar? It should. The Dallas region is just the latest drought-suffering-but-flooded locale during a summer of extreme weather whiplash… Parts of the world are lurching from drought to deluge. The St. Louis area and 88% of Kentucky early in July were considered abnormally dry and then the skies opened up, the rain poured in biblical proportions… The same thing happened in Yellowstone in June. Earlier this month, Death Valley, in a severe drought, got a near record amount of rainfall in one day, causing floods, and is still in a nasty drought.”
August 22 – Bloomberg (Marvin G Perez): “The outlook for cotton production in Texas, the nation’s largest producer, took a turn for the worse in a fresh blow to global supplies of the fiber. Only 11% of Texas crops were rated good-to-excellent in the week to Aug. 21, down from 14% a week earlier, matching the lowest since 2011… The portion of plants in poor-to-very poor conditions increased to 59% from 50% a week earlier.”
Levered Speculation Watch:
August 24 – Reuters (Nell Mackenzie): “Investors yanked a net $7.8 billion out of hedge funds in the second quarter…, as volatile markets sent many looking for safer places to keep their cash. Large investors like pension funds, asset managers and family offices pulled more money out of hedge funds than they added, ending an 18-month trend of them investing more, according to Citco… Global hedge funds that bet on equity markets suffered the biggest withdrawals, losing $6.4 billion of the net outflows, Citco's report showed. U.S.-based hedge funds were big losers, followed by those in Asia and in Europe.”
August 23 – Yahoo Finance (Julia La Roche): “Julian H. Robertson, the founder of Tiger Management LLC and mentor for a generation of hedge fund managers known as ‘Tiger Cubs,’ has died at the age of 90… Robertson built Tiger Management into one of the most successful hedge fund firms, starting with $8 million in assets and growing to more than $21 billion. One expert called him one of the ‘true founding fathers of the modern hedge fund industry.’ Along the way, he mentored a generation of some of the biggest hedge fund stars of our time…”
August 24 – Financial Times (Laurence Fletcher and Nikou Asgari): “Hedge funds have lined up the biggest bet against Italian government bonds since the global financial crisis on rising concerns over political turmoil in Rome and the country’s dependence on Russian gas imports. The total value of Italy’s bonds borrowed by investors to wager on a fall in prices hit its highest level since January 2008 this month, at more than €39bn, according… S&P Global Market Intelligence.”
August 24 – Bloomberg (Ishika Mookerjee): “Hedge funds ramped up bets on megacap US tech stocks and whittled down overall holdings to focus on favored names last quarter, with conviction climbing back to levels seen at the start of the pandemic, according to Goldman Sachs... The funds boosted tech and consumer discretionary holdings, while cutting energy and materials wagers… Separately, average weightings of top 10 holdings jumped to 70% in the three months ended June, the highest concentration since the first quarter of 2020.”
Geopolitical Watch:
August 21 – Reuters (Hyonhee Shin): “South Korea and the United States began their largest joint military drills in years on Monday with a resumption of field training, officials said, as the allies seek to tighten readiness over North Korea's potential weapons tests. The annual summertime exercises… came after South Korean President Yoon Suk-yeol, who took office in May, vowed to ‘normalise’ the combined exercises and boost deterrence against the North.”
August 20 – Reuters (Rocky Swift): “Japan is considering the deployment of 1,000 long-range cruise missiles to boost its counterattack capability against China, the Yomiuri newspaper reported… The missiles would be existing arms modified to extend their range from 100 km (62 miles) to 1,000 km, the daily said… The arms, launched by ships or aircraft, would be stationed mainly around the southern Nansei islands and capable of reaching the coastal areas of North Korea and China, the Yomiuri said.”
August 21 – Reuters: “Turkey doubled its imports of Russian oil this year, Refinitiv Eikon data showed…, as the two countries are set for broader cooperation in business and especially energy trade in the face of western sanctions against Moscow. Trade between Turkey and Russia has been booming since spring as Turkish companies not banned from dealing with Russian counterparts stepped in to fill the void created by EU businesses leaving Russia after its invasion of Ukraine earlier this year.”
