I had been anxiously waiting for new Credit data. The second quarter was miserable for the securities markets. There was the sharp drop in perceived wealth, along with a meaningful tightening of market financial conditions. Understandably, focus for many analysts had turned to economic recession. Meanwhile, the quarter was notable for an extraordinary surge in price pressures. How would these countervailing forces impact lending and Credit growth more generally? The Z.1 provides Valuable Insight.
Driven by a sharp reduction in Treasury borrowings (from 10.22% to a 5.56% pace), Non-Financial Debt (NFD) growth slowed from Q1’s 8.32% rate to 6.49%. Meanwhile, the Household Mortgage debt growth rate rose to 8.78%, the strongest pace since 2006. And not since 2001 has Consumer Credit expanded faster than Q2’s 8.51% rate. Corporate Borrowing declined ever so slightly, from 8.09% to 7.93%. Excluding pandemic year 2020, 2022 is on track for the fastest pace of corporate Credit growth since 2007. That this could unfold in the face of market instability is as extraordinary as it is telling.
For years overshadowed by booming securities markets, an invigorated banking system is puffing its chest. While Bank (“Private Depository Institutions”) Assets declined $285 billion during Q2, this was driven by a $642 billion drop in Reserves at the Federal Reserve. Meanwhile, Loans surged another $555 billion during the quarter, a slight second to pandemic Q1 2020’s record $561 billion.
For perspective, Loan growth averaged $363 billion annually over the two-decade period 2000 through 2019. Q3 2007’s $260 billion was the strongest quarterly growth during the mortgage finance Bubble period. Bank Loans expanded at a blistering 17.3% rate during Q2, with Loans up $1.265 TN, or 10.5%, over the past year. Only half way through the year, 2022 Loan growth ($721bn) has already exceeded 2005’s record $685 billion.
Bank Loans N.E.C. (not elsewhere classified/chiefly business) expanded $216 billion, or 19.4% annualized, to a record $4.674 TN. Loans N.E.C. expanded $568 billion, or 13.8%, over the past year. For perspective, 2007’s $318 billion was peak growth during the mortgage finance Bubble period, with 2020’s $362 billion the annual record.
Bank “Consumer Credit” Loans rose $118 billion, or 19.8% annualized, during the quarter to $2.494 TN. Consumer Credit rose $281 billion over the past four quarters, or 12.7%, surpassing 2010’s annual record of $269 billion. Annual growth averaged $77 billion over the two-decade period 2000-2019. Bank Mortgage Loans expanded $222 billion, or 14.9% annualized, surpassing the previous quarterly record of $156 billion from Q2 2004. Bank Mortgage Loans rose $417 billion, or 7.3%, over the past year.
Total system Mortgages expanded $415 billion, or 9.1% annualized, to a record $18.718 TN. This was only slightly below Q4 2021’s record $418 billion. Over four quarters, Mortgages were up $1.433 TN, or 8.4%. This is just below 2005’s annual record $1.466 TN. Mortgages expanded $2.393 TN over the past eight quarters.
By category, Home Mortgages expanded $281 billion, or 8.8% annualized, to $12.985 TN – the strongest quarterly expansion since Q2 2006. This pushed one-year growth to $961 billion, or 8.2% - also the strongest since 2006. Commercial Mortgages expanded $92 billion, or 10.9% annualized, second only to Q4 2021 ($98bn). One-year growth of $307 billion, or 9.9%, exceeded 2006’s annual record $284 billion. Multi-housing Mortgages gained $40 billion, or 8.3% annualized, to a record $1.961 billion, with one-year growth of $153 billion, of 8.6% - exceeding 2019’s annual record of $134 billion.
The GSE (government-sponsored enterprises) boom runs unabated. Agency Securities expanded $269 billion, or 9.8% annualized, during the quarter to a record $11.195 TN. Agency Securities were up $788 billion (7.6%) over the past year and $1.452 TN (14.9%) over two years. It’s worth noting that the strongest annual Agency Securities growth during the 2009-2019 period was 2019’s $317 billion.
Treasury issuance dropped dramatically, to only $34 billion during Q2 to a record $26.051 TN. Still, one-year growth remained a potent $1.749 TN, or 7.2%. Over the past 10 quarters, Treasuries ballooned an astonishing $7.470 TN, or 37.0%. Since the end of 2007, outstanding Treasuries have inflated $20.0 TN, or 331%. At 105%, the ratio of Treasuries-to-GDP is down from Q4 2020’s peak of 110%. But it compares to 55% at the end of 2007; 59% to end the nineties; 63% to close the eighties; and 50% to finish up the seventies.
Not surprising considering the market backdrop, Corporate Bond growth was muted. Q2’s $54 billion growth reversed Q1’s $28 billion contraction, with one-year growth of $370 billion, or 2.5%. Recall that Corporate Bonds expanded over $1.0 TN during the pandemic year Q2 2000 to Q2 2001.
Total Debt Securities (TDS) growth slowed to $312 billion during the quarter, or 2.2%, to a record $57.507 TN. As a percentage of GDP, Total Debt Securities declined to 231%, down from the Q2 2020 peak of 263%. For perspective, TDS-to-GDP ended 2007 at 201%; 1999 at 158%; and 1989 at 124%. But as the Securities-to-GDP ratio dropped, Bank Assets-to-GDP jumped from 92% to 102% since the end of 2019.
Broker/Dealer Assets declined $140 billion, or 12.3% annualized, during Q2 to $4.433 TN. Miscellaneous Assets fell $108 billion to $1.763 TN. Debt Securities Assets increased $37 billion to $176 billion. “Repo” Assets added $21 billion to $1.346 TN, while “Repo” Liabilities increased $10 billion to $1.534 TN.
System “Repo” (“Federal Funds and Securities Repurchase Agreements”) surged another $435 billion, or 30% annualized, to a record $6.150 TN. “Repo” expanded $1.315 TN, or 27.2%, over the past year. Money Market Funds’ “Repo” Assets increased $219 billion to $2.596 TN, with extraordinary one-year growth of $881 billion, or 51.4%. Federal Reserve “Reverse Repo” Liabilities jumped $448 billion during the quarter to $2.330 TN, with one-year growth of $1.338 TN, or 135%.
To put the ongoing enormous growth in Fed “Repo” Liabilities (reverse-repo) into some perspective, we must factor in the corresponding drop in banking system reserves held at the Fed. The Fed’s “Depository Institution Reserves” sank $642 billion during the quarter to $2.955 TN.
When the Fed purchases securities (i.e. QE), it pays for these transactions by issuing “immediately available funds” – or Fed “IOUs” – that circulate through the banking system, where those funds become reserves held at the Fed. Five Trillion of QE inundated the banking system with funds/reserves.
With the introduction of its “reverse repo” instrument, the Fed essentially created a new IOU that would circulate outside the banking system. Rather than Fed liquidity being exclusively processed through the banking system (where it became additional bank reserves), Wall Street firms, money market funds and GSEs could simply exchange immediately available funds for the Federal Reserve IOU “reverse repo.” It’s essentially the Fed exchanging one IOU for another. Over three quarters, “Reverse Repo” expanded $725 billion, while “Depository Institution Reserves” contracted $904 billion.
Total Fed Liabilities declined $43 billion during Q2 to $8.918 TN, with one-year growth of $830 billion, or 10.3%. In one of history’s most spectacular monetary inflations, Fed Liabilities surged an unprecedented $4.7 TN, or 111%, over the past 10 quarters.
As noted above, Household Net Worth declined $6.1 TN during Q2 to $143.763 TN. Yet Net Worth is still up $27 TN, or 23%, since the end of 2019. And while Net Worth-to-GDP has dropped to 578% from the Q4 2021 peak of 625%, this ratio remains highly inflated historically. Net Worth-to-GDP posted cycle peaks of 491% during Q1 2007 and 445% at Q1 2000. Net Worth-to-GDP began the nineties at 376%.
And while Net Worth took a hit from sinking stock prices, it’s worth noting that Household Real Estate holdings inflated $1.422 TN during the quarter to a record $45.531 TN. Real Estate increased an unprecedented $6.058 TN over the past year. At 183%, Household Real Estate-to-GDP is approaching the Q3 2006 Bubble peak of 190%.
The bottom line: despite pockets of weakness in securities finance, a historic system Credit inflation runs unabated. On a seasonally-adjusted and annualized basis (SAAR), Non-Financial Debt expanded at a $4.316 TN pace during Q2. This was more than double the $1.846 TN annual average for the decade 2010 to 2019, while almost 50% ahead of 2004’s cycle peak $2.899 TN - that was not exceeded until 2020’s insane $6.796 TN Credit splurge.
There are powerful inflationary biases percolating throughout the economy - unlike anything experienced in decades. Importantly, securities markets no longer completely dominate and dictate system financial conditions. Lending and bank Credit have become powerful drivers of Credit growth, along with ongoing deficit spending and the expansionary GSEs.
While it’s mum’s the word when it comes to Credit growth, Fed officials undoubtedly know the numbers. They must also know that inflation will not be moving back to their 2% target until they orchestrate a marked Credit slowdown (with myriad negative consequences). They’ve been forced to abandon the notion that tinkering with market financial conditions would do the trick. Now, it’s press ahead with a major tightening cycle until something works. And between the Z.1 and recent speculative market dynamics, there is certainly no reason to backtrack from the “they’ll hike until something breaks” thesis.
For the Week:
The S&P500 rallied 3.6% (down 14.7% y-t-d), and the Dow recovered 2.7% (down 11.5%). The Utilities surged 3.7% (up 6.7%). The Banks rallied 5.0% (down 16.6%), and the Broker/Dealers jumped 4.4% (down 6.6%). The Transports gained 2.4% (down 14.7%). The S&P 400 Midcaps rallied 4.4% (down 12.1%), and the small cap Russell 2000 recovered 4.0% (down 16.1%). The Nasdaq100 advanced 4.0% (down 22.9%). The Semiconductors jumped 4.7% (down 31.0%). The Biotechs surged 5.7% (down 10.0%). With bullion gaining $5, the HUI gold equities index rallied 6.2% (down 23.2%).
Three-month Treasury bill rates ended the week at 2.945%. Two-year government yields surged 17 bps to 3.56% (up 283bps y-t-d). Five-year T-note yields jumped 14 bps to 3.44% (up 217bps). Ten-year Treasury rose 12 bps to 3.31% (up 180bps). Long bond yields gained 10 bps to 3.45% (up 155bps). Benchmark Fannie Mae MBS yields jumped 13 bps to 4.81% (up 274bps).
Greek 10-year yields gained eight bps to 4.26% (up 295bps). Spain's 10-year yields jumped 14 bps to 2.86% (up 229bps). German bund yields rose 17 bps to 1.70% (up 188bps). French yields gained 12 bps to 2.27% (up 207bps). The French to German 10-year bond spread narrowed five to 57 bps. U.K. 10-year gilt yields jumped 14 bps to 3.10% (up 212bps). U.K.'s FTSE equities index rallied 1.0% (down 0.5% y-t-d).
Japan's Nikkei Equities Index rallied 2.0% (down 2.0% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.25% (up 18bps y-t-d). France's CAC40 gained 0.7% (down 13.2%). The German DAX equities index increased 0.3% (down 17.6%). Spain's IBEX 35 equities index recovered 1.3% (down 7.8%). Italy's FTSE MIB index rose 0.8% (down 19.2%). EM equities were mostly higher. Brazil's Bovespa index gained 1.3% (up 7.1%), and Mexico's Bolsa index jumped 2.5% (down 11.7%). South Korea's Kospi index fell 1.0% (down 19.9%). India's Sensex equities index advanced 1.7% (up 2.6%). China's Shanghai Exchange Index rallied 2.4% (down 10.4%). Turkey's Borsa Istanbul National 100 index surged 9.3% (up 89.6%). Russia's MICEX equities index dropped 1.8% (down 35.9%).
Investment-grade bond funds posted outflows of $866 million, and junk bond funds reported negative flows of $2.280 billion (from Lipper).
Federal Reserve Credit last week declined $8.7bn to $8.788 TN. Fed Credit is down $101bn from the June 22nd peak. Over the past 156 weeks, Fed Credit expanded $5.062 TN, or 136%. Fed Credit inflated $5.977 Trillion, or 213%, over the past 513 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $3.1bn to $3.388 TN. "Custody holdings" were down $83.2bn, or 2.4%, y-o-y.
Total money market fund assets slipped $3.3bn to $4.564 TN. Total money funds were up $60bn, or 1.3%, y-o-y.
Total Commercial Paper was little changed at $1.198 TN. CP was up $35bn, or 3.0%, over the past year.
Freddie Mac 30-year fixed mortgage rates surged 23 bps to 5.89% (up 301bps y-o-y) - the high since November 2008. Fifteen-year rates jumped 18 bps to a 13-year high 5.16% (up 297bps). Five-year hybrid ARM rates rose 13 bps to 4.64% (up 222bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates unchanged at 6.10% (up 305bps).
Currency Watch:
September 7 – Bloomberg: “China’s foreign exchange reserves declined for a second straight month to the lowest since October 2018 as global financial asset prices dropped… Reserves decreased to $3.0549 trillion as of the end of August, down $49.2 billion from a month ago… That was slightly below the median estimate of $3.065 trillion in a Bloomberg survey of economists… China’s trade surplus, a key source of foreign exchange, fell to $79.4 billion last month, $21.9 billion less than July. The drop was mainly led by weaker export growth…”
September 6 – Bloomberg: “China sent its most powerful signal yet on its discomfort with the yuan’s weakness by setting its reference rate for the currency with the strongest bias on record. The People’s Bank of China set the fix at 454 pips stronger than the average estimate in a Bloomberg survey of analysts and traders. The move marks the 11th straight day of stronger-than-expected fixings by the PBOC and follows a reduction in foreign-currency reserve requirements for financial institutions announced Monday, both measures aimed at propping up the currency. The yuan continued its decline toward the key 7-per dollar level as the greenback pushed higher against global peers.”
For the week, the U.S. Dollar Index declined 0.5% to 109.00 (up 13.9% y-t-d). For the week on the upside, the Swiss franc increased 2.1%, the Swedish krona 1.4%, the Norwegian krone 0.9%, the euro 0.9%, the Canadian dollar 0.8%, the British pound 0.7%, the Brazilian real 0.4%, the Australian dollar 0.4%, the Mexican peso 0.2%, the Singapore dollar 0.2% and the New Zealand dollar 0.1%. On the downside, the Japanese yen declined 1.6%, and the South Korean won fell 1.3%. The Chinese (onshore) renminbi declined 0.38% versus the dollar (down 8.24% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index slipped 0.5% (up 19.5% y-t-d). Spot Gold increased 0.3% to $1,717 (down 6.1%). Silver rallied 4.5% to $18.86 (down 19.1%). WTI crude was little changed at $86.79 (up 15%). Gasoline fell 1.2% (up 9%), and Natural Gas dropped 9.0% to $8.00 (up 114%). Copper recovered 4.5% (down 20%). Wheat surged 7.2% (up 13%), and Corn rose 2.9% (up 16%). Bitcoin jumped $1,348, or 6.8%, this week to $21,308 (down 54%).
Market Instability Watch:
September 6 – Bloomberg (Anna Shiryaevskaya): “European energy trading is being strained by margin calls of at least $1.5 trillion, putting pressure on governments to provide more liquidity buffers, according to Norway’s Equinor ASA. Aside from fanning inflation, the biggest energy crisis in decades is sucking up capital to guarantee trades amid wild price swings. That’s pushing European Union officials to intervene to prevent energy markets from stalling, while governments across the region are stepping in to backstop struggling utilities. Finland has warned of a ‘Lehman Brothers’ moment, with power companies facing sudden cash shortages. ‘Liquidity support is going to be needed,’ Helge Haugane, Equinor’s senior vice president for gas and power, said... The issue is focused on derivatives trading, while the physical market is functioning, he said, adding that the energy company’s estimate for $1.5 trillion to prop up so-called paper trading is ‘conservative.’”
September 9 – Bloomberg (Sonia Sirletti, Nicholas Comfort and Steven Arons): “The European Central Bank is intensifying discussions with bank executives over their readiness for a potential surge in company defaults and a drying-up of energy-market liquidity, amid the worsening stand-off over Russian gas supplies.”
September 9 – Bloomberg (Jorge Valero, Kamil Kowalcze and Jana Randow): “European Central Bank President Christine Lagarde ruled out providing short-term financing lines to struggling energy firms -- saying that’s the job of European Union governments. ‘In this current, very volatile environment, it’s important that fiscal measures be put in place to provide liquidity to solvent energy-market participants, in particular utility firms,’ Lagarde told a news conference… ‘As far as the ECB is concerned, and the national central banks of the Eurosystem, of course we stand ready to provide liquidity to banks, not to energy utility firms,’ she said.”
September 7 – Bloomberg (Garfield Reynolds): “The dollar is steamrolling currencies from Japan to South Africa and the UK as bond market bets on higher-for-longer US rates gave fresh fuel to the greenback’s rally, triggering a vocal pushback from officials in various countries. The yen dropped to a fresh 24-year low versus the greenback and speculation is swirling about the prospects for direct intervention, while the euro and British pound have been battered amid Europe’s escalating energy crisis. South Korea’s won weakened to levels not seen since 2009 and the rand was the next-worst emerging-market performer on the day. China’s yuan, meanwhile, was within a whisker of cracking the psychological 7 barrier.”
September 6 – Bloomberg (Marcus Wong and Cormac Mullen): “Rampant dollar strength is throwing up another stumbling block for emerging-market borrowers as it raises concerns about their ability to pay US currency debt. The spread between emerging-market dollar-denominated government bonds and local currency equivalents is close to the highest level since the pandemic…, putting the dollar debt on track for the worst annual performance since the gauge began in 2003.”
September 5 – Financial Times (Nathalie Thomas in Edinburgh and Philip Stafford and David Sheppard): “European electricity producers are calling for collateral requirements in wholesale power markets to be eased as they urge the EU to help stave off what some experts have warned could be the ‘energy sector’s version of Lehman Brothers’. Kristian Ruby, secretary-general of Eurelectric, which represents more than 3,500 European utilities, said the ballooning sums that power producers were required to post as collateral because of extreme price volatility in wholesale energy markets was of ‘grave concern’. He called for the rules to be softened so that generators could consistently put up other financial instruments, such as bank guarantees, at trading exchanges to avoid a liquidity crunch…”
Bursting Bubble and Mania Watch:
September 6 – Yahoo Finance (Dani Romero): “The recent synchronized selloff in stocks and bonds has crushed one of the most popular strategies for long-term investors: the 60/40 portfolio. According to data from strategists at Bank of America Global Research published last week, the 60/40 portfolio — a mix of 60% stocks and 40% bonds — was down 19.4% year-to-date through the end of August, on track for its worst year since 1936. Through the end of August, the S&P 500 was down over 16% year-to-date, while long-term Treasuries were down over 20% and investment grade corporate credit was down 13%.”
September 6 – Wall Street Journal (Matt Wirz): “Financial pain is spreading in the junk-loan market, showing how interest-rate increases are hurting debt-laden companies and worrying investors that a credit crunch looms as the economy slows. Defaults on so-called leveraged loans hit $6 billion in August, the highest monthly total since October 2020… The figure represents a fraction of the sprawling loan market, which doubled over the past decade to about $1.5 trillion. But more defaults are coming, analysts say… ‘Borrowers are particularly vulnerable to the double whammy of weaker earnings and rising interest rates,’ Morgan Stanley strategist Srikanth Sankaran said. That will trigger a wave of credit-rating downgrades and push average loan prices—currently 95 cents on the dollar—below 85 cents, a level breached only during the 2008 financial crisis and the depth of the Covid-19 pandemic, he said.”
September 9 – Bloomberg (John Gittelsohn): “San Francisco home prices tumbled last month as soaring interest rates and an exodus of tech workers battered demand in one of the most expensive US housing markets. In the four weeks through Sept. 4, the median single-family home price in the city fell 7% from same period a year earlier, to $1.4 million, according to… Redfin Corp.”
Ukraine War Watch:
September 7 – Bloomberg: “Russia’s war on Ukraine will likely stretch into next year, Ukraine’s top army commander, Valeriy Zaluzhnyi, warned in an article, where he pleaded for allies to send longer-range weapons. NATO Secretary General Jens Stoltenberg wrote in a guest article for the Financial Times that the war in Ukraine is ‘entering a critical phase’ and warned of a tough winter ahead for members of the military alliance that could include ‘energy cuts, disruptions and perhaps even civil unrest.’”
September 7 – Bloomberg: “President Vladimir Putin said Russia will emerge stronger from his invasion of Ukraine as he lashed out at US and European ‘sanctions fever’ in response to the war. ‘I’m sure that we’ve lost nothing and won’t lose anything,’ Putin said at the Eastern Economic Forum in Vladivistok…, after he was asked about the conflict in Ukraine by the panel’s moderator following a speech in which he didn’t directly mention the war. ‘The main thing we’ll gain is strengthening our sovereignty…’ ‘The epidemic has been replaced by other challenges, also of a global nature, threatening the whole world,’ Putin said… ‘I mean the sanctions fever of the West, its aggressive attempts to impose a model of behavior on other countries, deprive them of their sovereignty and subordinate them to their will.”
September 6 – Financial Times (Roman Olearchyk and John Paul Rathbone): “The UN’s nuclear watchdog has called for a security and safety zone to be set up around the Zaporizhzhia atomic power station, as it detailed the extensive damage its inspectors found during their visit to the plant that has been occupied by Russian forces. The International Atomic Energy Agency said… it was ‘gravely concerned’ by the situation at the facility, which has been continually shelled and fought over since it was taken by Russia in the early weeks of its full-scale invasion, calling it ‘not sustainable’. ‘There is an urgent need for interim measures to prevent a nuclear accident arising from physical damage caused by military means’ at the Zaporizhzhia plant, the report read.”
U.S./Russia/China Watch:
September 3 – Financial Times (Demetri Sevastopulo): “The US plans to sell Taiwan $1.1bn in weapons, including 60 Harpoon anti-ship missiles, as Washington steps up efforts to bolster the country’s defences as it comes under increasing military pressure from China. The Biden administration on Friday notified Congress about the proposed sale, which includes 100 Sidewinder air-to-air missiles in addition to equipment and support for a surveillance radar programme.”
September 7 – Bloomberg (Stephen Stapczynski): “China is lapping up liquefied natural gas shipments from Russia on the cheap. The Sakhalin-2 LNG export plant in Russia’s Far East sold several shipments to China for delivery through December at nearly half the current spot price in a tender that closed earlier this week, according to traders… Still, global rates have soared so much this year that the project can profit from those sales. The move is beneficial for both countries -- China is able to secure cheaper supply and resell shipments from more expensive exporters to utilities in Europe and Asia, while Russia can continue selling fuel at a profit.”
Economic War/Iron Curtain Watch:
September 9 – Financial Times (Ben Hall, Valentina Romei and Sam Fleming): “‘We are at war,’ Emmanuel Macron said on Monday as he outlined the emergency measures France was taking to shore up its energy supply and shelter its citizens and business from soaring costs. For months following Russia’s full-scale invasion of Ukraine, the French president aspired to act as intermediary and peacemaker between Kyiv and Moscow. This week he and fellow European leaders became belligerents in a sharply escalating energy conflict between Russia and the west. It was time, Macron said, for a ‘general mobilisation’. The Kremlin’s weaponisation of its fossil fuel has forced European governments to take drastic action, unthinkable only a few months ago… Sweden and Finland had to provide emergency liquidity assistance to their power producers that were facing surging demands for collateral for their hedging operations. Finnish economy minister Mika Lintilä said the region could be on the verge of the energy sector’s version of the Lehman Brothers bank collapse in 2008. Germany unveiled a second support package for households and businesses, worth €65bn, bringing to some €350bn the amount earmarked so far by EU governments to offset rocketing prices and diversify supply.”
September 7 – Reuters (Pavel Polityuk): “Russian President Vladimir Putin on Wednesday raised the idea of adding limits to a U.N.-brokered deal for Ukrainian grain exports via the Black Sea and threatened to halt all energy supplies to Europe if Brussels caps the price of Russian gas. In a combative speech to an economic forum in Russia's Far East region, Putin said Russia would not lose its war in Ukraine, which he says is being waged to ensure Russian security and to protect Russian-speakers there.”
September 5 – Financial Times (Max Seddon, David Sheppard and Henry Foy): “Russia’s gas supplies to Europe via the Nord Stream 1 pipeline will not resume in full until the ‘collective west’ lifts sanctions against Moscow over its invasion of Ukraine, the Kremlin has said. Dmitry Peskov, president Vladimir Putin’s spokesman, blamed EU, UK and Canadian sanctions for Russia’s failure to deliver gas through the key pipeline, which pumps gas to Germany from St Petersburg via the Baltic Sea. Although Moscow continues to claim technical faults have caused the cuts in gas supplies, Peskov’s comments were the starkest demand yet by the Kremlin that it wants the EU to roll back its sanctions in exchange for Russia resuming full gas deliveries to the continent.”
September 5 – Reuters (Guy Faulconbridge and Felix Light): “The Kremlin… blamed the West for triggering the worst European gas supply crisis ever and warned the Group of Seven advanced economies that Moscow would retaliate over its plan to impose a price cap on Russian oil… ‘Problems with gas supply arose because of the sanctions imposed on our country by Western states, including Germany and Britain,’ Kremlin spokesman Dmitry Peskov told reporters… ‘We see incessant attempts to shift responsibility and blame onto us. We categorically reject this and insist that the collective West – in this case, the EU, Canada, the UK - is to blame for the fact that the situation has reached the point where it is now.’”
September 7 – Reuters: “Russian President Vladimir Putin… warned of a looming global food crisis and said he would discuss amending a landmark grain deal with Ukraine to limit the countries that can receive cargo shipments. Putin said… Moscow had done everything it could to ensure Ukraine was able to export its grain, but that problems on the global food market were likely to intensify and that a humanitarian catastrophe was looming. Putin said Russia had signed the deal in July, brokered by Turkey and the United Nations, on the understanding it would help alleviate surging food prices in the developing world, but instead it was rich Western countries that were taking advantage of the deal. ‘If we exclude Turkey as an intermediary country, then almost all the grain exported from Ukraine is sent not to the poorest developing countries, but to European Union countries,’ Putin told an economic forum…”
September 7 – Bloomberg (Sybilla Gross): “Russian President Vladimir Putin’s criticism of the grain deal with Ukraine and the surge in wheat prices highlighted the fragility of the global crop trade, raising the specter of higher food prices to come… The comments sparked a surge of almost 7% in benchmark Chicago wheat futures.”
September 6 – Bloomberg: “Gazprom PJSC said it will shift its contract to supply gas to China to rubles and yuan from euros, as the Kremlin steps up efforts to move trade out of currencies it considers ‘unfriendly’ amid US and European sanctions. The state-run gas giant signed an additional agreement to its existing contract with China National Petroleum Corp. on the issue Tuesday... Payment will be made 50% in rubles and 50% in yuan, effective immediately…”
September 8 – Reuters (Sarah Wu): “Taiwan is confident it can sign a ‘high standard’ trade deal with the United States under a new framework, President Tsai Ing-wen told a visiting group of U.S. lawmakers… Washington and Taipei unveiled the U.S.-Taiwan Initiative on 21st Century Trade in June, days after the Biden administration excluded the Chinese-claimed island from its Asia-focused economic plan designed to counter China's growing influence… ‘We have already announced that negotiations under the U.S.-Taiwan Initiative on 21st Century Trade will begin soon. We are confident that through this initiative, we can sign a high-standard trade agreement and advance bilateral trade development,’ she said.”
September 6 – Reuters (Ali Kucukgocmen): “Turkish President Tayyip Erdogan said… Russia is cutting natural gas flows to Europe in retaliation for sanctions, adding that Europe is ‘reaping what it sowed’… ‘Europe is actually reaping what it sowed,’ Erdogan told reporters…, adding that sanctions drove Putin to retaliate using energy supplies. ‘Putin is using all his means and weapons, and the most important of these is natural gas. Unfortunately - we wouldn't want this but - such a situation is developing in Europe,’ Erdogan said. ‘I think Europe will experience serious problems this winter. We do not have such a problem,’ he added.”
September 8 – Reuters (Aftab Ahmed): “India's finance minister said… importing Russian oil was part of the country's inflation-management strategy and that other countries were doing something similar. Despite Western pressure, India has not condemned Russia's February invasion of Ukraine, instead calling for a diplomatic solution to the crisis and an end to violence. Russia has for decades been India's biggest foreign supplier of defence hardware.”
Inflation Watch:
September 5 – Washington Post (Laura Reiley): “It was a bad year for corn. And for tomatoes. And for many other American crops. Farmers, agricultural economists and others taking stock of this summer’s growing season say drought conditions and extreme weather have wreaked havoc on many row crops, fruits and vegetables, with the American Farm Bureau Federation suggesting yields could be down by as much as a third compared with last year. American corn is on track to produce its lowest yield since the drought of 2012… This year’s hard red winter wheat crop was the smallest since 1963… In Texas, cotton farmers have walked away from nearly 70% of their crop because the harvest is so paltry, according to the U.S. Department of Agriculture. The California rice harvest is half what it would be in a normal year, an industry group said.”
September 8 – Bloomberg (Pratik Parija and Swansy Afonso): “India, the world’s biggest rice shipper, restricted exports of key varieties that mainly go toward feeding Asia and Africa, threatening to rattle global crop markets and exacerbate food inflation and hunger. The government has imposed a 20% duty on shipments of white and brown rice, and banned broken rice sales abroad. The curbs apply to roughly 60% of India’s overall rice exports… The moves by India, which accounts for 40% of the global rice trade, will put further pressure on countries that are struggling with worsening hunger and soaring food inflation. Rice is a staple food for about half of the world’s population…”
Biden Administration Watch:
September 8 – Bloomberg (Eric Martin, Saleha Mohsin and Jennifer Jacobs): “President Joe Biden is holding back on a decision to scrap any Trump-era tariffs on China imports, while the administration studies ways to help businesses seeking relief, according to people familiar with the matter. Biden earlier in the summer had signed off on a new exclusion process for exemptions from tariffs on manufacturing materials imported from China, but has delayed making a final decision for now…”
September 7 – Reuters (Lananh Nguyen and Saeed Azhar): “The rise of fintech services and digital banking could spur financial risks and potentially a crisis over the long term, Michael Hsu, Acting Comptroller of the Currency, a major U.S. bank regulator, warned… ‘I believe fintechs and big techs are having a large impact and warrant much more of our attention,’ Hsu told a New York conference, noting the encroachment of fintech companies into the traditional financial sector, including via partnerships with banks, was creating more complexity and ‘de-integration’ across the banking sector.”
Federal Reserve Watch:
September 7 – Associated Press (Christopher Rugaber): “The Federal Reserve will need to continue lifting its short-term interest rate to a level that restricts economic growth and keep it there for an extended period, a top Fed official said… Fed Vice Chair Lael Brainard echoed similarly tough comments about inflation delivered by Chair Jerome Powell late last month in Jackson Hole. Other Fed officials have also in recent weeks emphasized their views that the Fed has to push borrowing costs higher to bring down inflation, currently near a four-decade high. ‘We are in this for as long as it takes to get inflation down,’ Brainard said... ‘Our resolve is firm, our goals are clear, and our tools are up to the task.’”
September 7 – Reuters (Lindsay Dunsmuir): “The high cost of rental accommodation in the United States has not yet fully filtered through to inflation measures, suggesting inflation may still rise further, Cleveland Federal Reserve Bank President Loretta Mester said… ‘I'm not even convinced that inflation's peaked yet,’ Mester said…, saying her focus is on the services sector. ‘That tends to be much more persistent and rents are still very elevated and it takes a while for rents to show up in underlying inflation. There's still more that's going to show up on that side...I haven't seen much in the way of suggesting that's starting to come back down.’”
September 8 – Bloomberg (Craig Torres and Jonnelle Marte): “Federal Reserve Governor Christopher Waller said he favors ‘another significant’ increase in interest rates when the central bank meets later this month, signaling his backing for a 75 bps move. ‘Inflation is far too high, and it is too soon to say whether inflation is moving meaningfully and persistently downward,’ Waller said… ‘I support a significant increase at our next meeting on September 20 and 21 to get the policy rate to a setting that is clearly restricting demand.’ His remarks were the latest to stress the Fed’s commitment to cooling the hottest price pressures in close to four decades.”
U.S. Bubble Watch:
September 6 – Bloomberg (Reade Pickert): “The US service sector expanded in August at the fastest pace in four months amid a pickup in business activity and new orders, while price pressures continued to ease. The Institute for Supply Management’s services index edged up to 56.9 from 56.7… Measures of business activity and new orders both advanced to their strongest readings of the year, reflecting both an ongoing shift in spending habits and steady wage gains. Demand strengthened abroad as well, with export orders expanding at the fastest pace in nearly a year. The upbeat report points to resilient and robust consumer demand for services despite high inflation, rising interest rates and general uncertainty about the economic outlook.”
September 7 – CNBC (Diana Olick): “In June the average rate on the 30-year fixed shot over 6% briefly, and that was enough to turn the once-hot housing market on its heels. Rates pulled back in July and August, but the damage was already done. Now rates are heading past 6% yet again, causing already beleaguered mortgage demand to fall even further… Mortgage applications to purchase a home dropped 1% for the week and were 23% lower than the same week one year ago. Given today’s higher rates, a person buying a $400,000 home would pay close to $700 more per month than they did a year ago.”
September 7 – CNBC (Diana Olick): “Some homeowners are losing wealth as high mortgage rates weigh on home values, at least on paper, as the once red-hot housing market cools quickly. Sales have been slowing down for several months, with mortgage rates now double what they were at the start of this year. Home prices, likewise, dropped 0.77% from June to July, according to… Black Knight… While that may not sound like a lot, it was the largest monthly decline since January 2011 and the first monthly drop of any size in 32 months. ‘Annual home price appreciation still came in at over 14%, but in a market characterized by as much volatility and rapid change as today’s, such backward-looking metrics can be misleading as they can mask more current, pressing realities,’ wrote Ben Graboske, president of Black Knight Data & Analytics.”
September 5 – The Hill (Sylvan Lane): “Persistent COVID-19 symptoms could be keeping millions of Americans out of the workforce. Economists and policymakers have struggled to figure out why a much lower percentage of working-age adults are in the labor force than before the pandemic. The number of Americans either employed or looking for work eclipsed its pre-pandemic level in August… But the labor force participation rate remains 1 percentage point below its February 2020 level, a gap roughly equivalent to 1.6 million people.”
September 7 – Reuters (Howard Schneider): “The U.S. unemployment rate may need to reach as high as 7.5%, double its current level, to end the country's outbreak of high inflation, according to new estimates from a team of researchers including two staff economists from the International Monetary Fund. That would entail job losses of perhaps 6 million people, but the research found that only under ‘quite optimistic assumptions’ about the behavior of the U.S. job market and inflation would the U.S. Federal Reserve be able to tame current price pressures with a smaller blow to employment.”
China Watch:
September 7 – Bloomberg: “China’s export growth slowed more than expected in August and imports stagnated, a sign of a darkening global economic picture and weak domestic growth hit by Covid lockdowns and a property slump. Exports in US dollar terms expanded 7.1% last month from a year earlier, the slowest pace since April when a lockdown in Shanghai disrupted shipping, and far weaker than economists had predicted. Imports grew just 0.3%, leaving a trade surplus of $79.4 billion last month. China’s slowdown is rippling across the world, with the weak import figures spelling bad news for major commodity producers such as Australia and Brazil. Top manufactured goods makers, like Germany and South Korea, are also seeing weaker demand from China.”
September 5 – Bloomberg: “China reduced the amount of foreign-exchange deposits banks need to set aside as reserves for the second time this year to boost the yuan after the currency hit a two-year low. Financial institutions will need to hold 6% of their foreign-currency deposits in reserves starting from Sept. 15, the People’s Bank of China said… -- lower than the current level of 8%. The move is expected to increase the supply of foreign currencies, thereby making it more appealing for traders to buy the yuan.”
September 6 – Financial Times (Cheng Leng and Edward White): “China’s biggest four banks have been hit by a more than 50% increase in overdue loans from the property sector over the past year, as the real estate market’s liquidity crunch spills into the financial sector. China’s top lenders — the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China — last week reported combined overdue property loans of Rmb136.6bn ($20bn) at the end of June, up from Rmb90bn at the same time last year. The rise in bad loans from the deteriorating property crisis is worsening asset quality across China’s Rmb367.7tn banking industry… A senior official at one of the Big Four lenders said the state of the property market meant that the banks had ‘no incentive’ to boost lending to the sector despite pressure from Beijing. ‘Our cost of capital is still too high. We have no incentive to beef up lending even though the regulator asked us to do so. The more loans we issue, the more [non-performing loans] we will have. The return on our lending business has gone down a lot while NPLs are taking off,’ the person said.”
September 6 – Reuters (Ziyi Tang, Engen Tham and Xie Yu): “Top tier Chinese banks preparing to respond to Beijing's call to boost lending to the real economy and debt-laden property sector are set to face a squeeze on their profit margins in the second half, bankers and analysts said. Five of China's biggest state-owned banks posted modest gains in profits in the second quarter. Four of the banks, except for Bank of China, however, reported falling net interest margins, a key gauge of bank profitability. The dour outlook for Chinese banks comes as the world's second-largest economy narrowly avoided contracting in the second quarter as widespread COVID-19 lockdowns and the slumping property sector badly damaged consumer and business confidence.”
September 9 – Wall Street Journal (Rebecca Feng): “China is increasingly counting on its banks to step up mortgage lending and help boost a sinking housing market. But there is a problem: Lenders are stuck with many mortgages from boom times that are at higher risk of not being repaid. Chinese property developers wrote at least $300 billion of mortgage guarantees over the past few years for partially built apartments that they presold, according to regulatory filings. The real-estate firms promised that they would cover home buyers’ interest and principal payments to banks if the borrowers defaulted before their apartments were completed and delivered. What used to be seen as a no-lose proposition has now become a drag on Chinese banks. Dozens of real-estate firms have slid into financial distress, making their mortgage guarantees far from certain. Many would-be home buyers no longer want to buy unfinished properties, reducing demand for loans.”
September 8 – Bloomberg: “China is stepping up its Covid defenses as a key Communist Party meeting looms, restricting internal travel further as swathes of the country remain under tight lockdowns. The National Health Commission… announced a raft of measures that will be in place until the end of next month to fight a virus that shows little sign of slowing. Authorities told citizens to minimize travel during the mid-Autumn festival next week and National Day holidays in October, ordinarily key periods for domestic tourism, and asked local governments to test all residents regularly for Covid regardless of infection levels.”
September 8 – Reuters (Ryan Woo and Roxanne Liu): “The Chinese city of Chengdu extended a lockdown for a majority of its more than 21 million residents on Thursday to prevent further transmission of COVID-19 while millions more in other parts of China were told to shun travel in upcoming holidays. Chengdu… was locked down on Sept. 1 after COVID cases were detected, becoming the largest Chinese metropolis hit with curbs since Shanghai's lockdown in April and May.”
September 5 – CNN (Nectar Gan, Shawn Deng): “More than 70 Chinese cities have been placed under full or partial Covid lockdowns since late August, impacting more than 300 million people, as local authorities rush to stamp out infections at all cost in the final countdown to leader Xi Jinping's expected third term. Since August 20, at least 74 cities with a combined population of 313 million have imposed lockdowns that cover entire cities, districts or multiple neighborhoods, according to CNN's calculations. They include 15 provincial capitals and Tianjin, a provincial-level municipality. Many of the restrictions are still in place. According to Chinese financial magazine Caixin, 33 cities are currently under partial or full lockdowns. Experts say more cities are likely to be added in the coming weeks.”
September 8 – Reuters (Liangping Gao and Ryan Woo): “China's consumer prices rose at a slower-than-expected pace in August while the rate of producer inflation hit an 18-month low… The consumer price index (CPI) increased 2.5% from the same month a year earlier…, slower than 2.7% in July and the 2.8% average forecast… Slower growth in consumer prices came as food prices rose 6.1% on year in August, versus 6.3% in July, with non-food items at 1.7% from July's 1.9% rise.”
September 7 – Bloomberg (Alice Huang and Shawna Kwan): “Smaller creditors of embattled Chinese property firms are increasingly turning to court to obtain payments, highlighting the turmoil in the property sector as developers rush to craft debt-resolution plans. The most recent cases were filed against Sunac China Holdings Ltd. and Jiayuan International Group Ltd. They’re among at least six builders the past several months to receive winding-up petitions filed in Hong Kong or the Cayman Islands. Sunac, Jiayuan and China Evergrande Group all have November hearings scheduled for their cases.”
September 7 – Bloomberg (Dorothy Ma and Lulu Yilun Chen): “Chinese builder Logan Group Co. has briefed some creditors about a draft proposal to restructure more than $6 billion in offshore borrowings, as indebted developers seek solutions after a series of defaults. The proposal would include public bonds plus private notes and some syndicated loans… The plan would extend the average term of Logan’s debt to slightly more than five years…”
September 6 – Bloomberg: “Xi Jinping renewed calls for China to step up the development of technology critical to national security, issuing a forceful reminder just as escalating US sanctions threaten Beijing’s efforts to become self-reliant in semiconductors. Invoking the so-called ‘whole nation system’ that propelled China’s space and nuclear weapons programs, Xi exhorted top officials to pool their resources and focus on breakthroughs critical to the country’s future. The government should play a more active role in orchestrating this process, he told a Party summit…”
Central Banker Watch:
September 7 – Reuters (Julie Gordon): “The Bank of Canada hiked interest rates by 75-bps to a 14-year high on Wednesday, as expected, and said the policy rate would need to go higher still given the fight against raging inflation. The central bank, in a regular rate decision, increased its policy rate to 3.25% from 2.5%, matching analyst forecasts to hit a level not seen since April 2008. The decision lifted rates above the neutral range for the first time in about two decades.”
September 5 – Bloomberg (Swati Pandey): “Australia’s central bank raised interest rates by a half-percentage point for a fourth consecutive meeting and signaled further hikes ahead in its drive to rein in inflation. The Reserve Bank took the cash rate to 2.35%, the highest level since 2015… The tightening is Australia’s quickest in a generation with the cycle beginning in May at a record-low 0.1%. Today’s decision reflects a resolve among global central bankers to keep increasing borrowing costs until inflation meaningfully eases, even at the cost of economic growth.”
September 6 – Bloomberg (Matthew Malinowski and Valentina Fuentes): “Chile’s central bank stunned investors by delivering a bigger-than-expected interest rate hike of 100 bps to combat rising inflation forecasts while also signaling that the end to its bold tightening cycle is near. The bank board… lifted borrowing costs to 10.75% late on Tuesday…”
Global Bubble and Instability Watch:
September 7 – Bloomberg: “China has surged ahead of the US for corporate bond deals in its yuan credit market in recent months, a rare shift that highlights the deepening impact of the two countries’ diverging monetary policies. Yuan-denominated bond issuance by non-financial firms exceeded that in the greenback in both July and August, a first for two consecutive months… The momentum has started building since the Federal Reserve kicked off its tightening cycle in March: Sales of yuan notes, almost entirely by Chinese firms, totaled 2.04 trillion yuan ($306bn based on exchange rates at the time of deals) between April and August, versus $283 billion of dollar debt worldwide.”
September 6 – Bloomberg (Swati Pandey): “Australia’s economy powered ahead in the three months through June, underscoring the strong momentum the Reserve Bank has highlighted as it delivered a series of rapid interest rate increases. The A$2.2 trillion ($1.5 trillion) economy expanded 0.9% from the first quarter, buoyed by household spending and high export prices… That drove growth to 3.6% from a year earlier -- well above the pre-pandemic average of around 2%. For the central bank, the data validate its hawkish approach to tackling inflation, having hiked by a half percentage point Tuesday to take the cash rate to 2.35%.”
September 6 – Bloomberg (Lorretta Chen): “Asian companies are increasingly resorting to loans, some just months in length, as a record bond rout this year complicates access to the more secure longer-term funding market. Among firms that had been active bond issuers in Asia, the number seeking short-term loan facilities this year has increased some 30% to 40%, according to Christophe Cretot, head of debt origination and advisory, Asia-Pacific at Credit Agricole SA… ‘We have seen that in markets such as Singapore, Indonesia and China where issuers with maturing bonds in the next three to six months are looking for facilities of nine to 12 months to buy some time before issuing again,’ he said.”
Europe Watch:
September 5 – Reuters (Nicholas Larkin and Eddie Spence): “Europe’s energy crisis is getting worse, piling pressure on the commodities industries that provide building blocks for the continent’s economy. Power- and gas-intensive sectors such as steel, fertilizers and aluminum -- the most widely used base metal -- are being forced to close factories or pass on soaring costs to customers. Even sugar makers are feeling the pinch. The tumult risks further squeezing households during the worst cost-of-living crisis in decades and pushing economies into recession.”
September 7 – Financial Times (Andy Bounds and Judith Evans): “Farmers and food producers in Europe have warned of seasonal shortages and significant price increases across a wide range of everyday products this winter, as they called for government support to offset surging energy costs. Copa-Cogeca, the EU farmers’ union, and FoodDrink Europe and PFP, two of the big food producer associations, said their members had already begun to close operations and reduce their output… ‘The latest increases in energy prices, especially natural gas and electricity, threaten the continuity of agri-food production cycles and therefore the ability to continue delivering essential agricultural commodities, food products and feed materials,’ they said…”
September 6 – Associated Press (Danica Kirka and Jell Lawless): “Liz Truss became U.K. prime minister on Tuesday and immediately faced up to the enormous tasks ahead of her: curbing soaring prices, boosting the economy, easing labor unrest and fixing a national health care system burdened by long waiting lists and staff shortages… Truss — Britain’s third female prime minister — named a top team diverse in gender and ethnicity, but loyal to her and her free-market politics. Kwasi Kwarteng becomes the first Black U.K. Treasury chief, and Therese Coffey its first female deputy prime minister.”
September 4 – Reuters (Francesco Zecchini): “Italy should not take on more debt to respond to the energy crisis but it should be able to amend its European Union-backed recovery programme to ease pressures, Brothers of Italy leader Giorgia Meloni said… Meloni's party is the largest in a centre-right alliance on course for victory in a Sept. 25 national election. There are concerns that a new government might shy away from some of the reforms needed to ensure Italy gets access to some 200 billion euros ($199bn) in EU funds for its post-COVID Recovery and Resilience Plan (PNRR).”
September 4 – Reuters (Michael Kahn): “An estimated 70,000 people protested in Prague against the Czech government on Saturday, calling on the ruling coalition to do more to control soaring energy prices and voicing opposition to the European Union and NATO. Organisers of the demonstration from a number of far-right and fringe political groups including the Communist party, said the central European nation should be neutral militarily and ensure direct contracts with gas suppliers, including Russia.”
EM Crisis Watch:
September 5 – Reuters (Beril Akman): “Turkish inflation exceeded 80% for the first time since September 1998, as policies that prioritized economic growth and cheap lending exact a toll on the lira and price stability. Annual inflation quickened for a 15th consecutive month to 80.2% in August, up from 79.6% in July… President Recep Tayyip Erdogan, who believes that cheaper borrowing costs can slow inflation instead of pushing it higher, has kept exports and employment at the top of the agenda.”
Japan Watch:
September 6 – Bloomberg (Chikako Mogi): “The Bank of Japan said it would boost scheduled bond purchases as the intensifying Treasuries selloff puts upward pressure on global yields and weakens the yen. The BOJ said it would buy 550 billion yen ($3.8bn) of five-10 year bonds at its regular operations, up from 500 billion yen scheduled. The move comes as Japan’s benchmark 10-year yield hit 0.245%, approaching the 0.25% upper limit of the BOJ’s tolerated trading band. Japanese government bonds last came under pressure in June when only unprecedented BOJ buying kept benchmark yields below the 0.25% ceiling.”
September 7 – Financial Times (Leo Lewis, Kana Inagaki and Song Jung-a): “The yen fell further against the dollar on Wednesday, leaving it down a fifth this year as Japan’s government stepped up its verbal intervention aimed at stemming an acute sell-off in the currency. Japan’s currency declined to ¥144 against the dollar, its weakest level since 1998, despite a shift in language by Japanese officials, which gave the strongest hints to date that they could take action if the currency continues to slide. Finance minister Shunichi Suzuki said yen moves should be stable and reflect economic fundamentals, calling for stability in currency markets.”
September 8 – Bloomberg (Yoshiaki Nohara): “Japanese Prime Minister Fumio Kishida ordered the putting together of a fresh stimulus package in October to help the economy weather the impact of inflation in addition to a round of price-relief steps updated on Friday. The government will consider an extra budget to fund the extra stimulus in the autumn, which will also include efforts to promote a new form of capitalism… A previous package announced in April had 6.2 trillion yen ($43.2bn) in measures to help households and businesses deal with inflation.”
September 4 – Reuters (Daniel Leussink): “Japan's services sector activity shrank for the first time in five months in August as a resurgence of COVID-19 infections hurt demand… The contraction shows that a recovery of the world's third-largest economy remains fragile at best and is worrying at a time when the global growth outlook is turning increasingly pessimistic. The final au Jibun Bank Japan Services purchasing managers' index (PMI) dropped to a seasonally adjusted 49.5, marking the first contraction since March.”
Social, Political, Environmental, Cybersecurity Instability Watch:
September 5 – Financial Times (Aime Williams and Steven Bernard): “Deadly flooding in Pakistan destroyed homes and decimated crops in what the country’s officials say is an unprecedented climate disaster, affecting an estimated 30mn people or about 15% of the population. About one-third of the country was still submerged last Tuesday when satellite data from the European Space Agency mapped the extent of the deluge.”
September 7 – Bloomberg (Kim Chipman): “California’s wine country, including the famed Napa and Sonoma valleys, faces a climate crisis so dire that it’s posing an existential threat to the future of the state’s industry. Grapes have been hit with one extreme after another. This year’s season started out with a deep frost that iced over verdant green buds, nipping them right off the vine. For the crops that survived, the freeze quickly gave way to drought and heat. Just in the past week, record-breaking temperatures baked parched vineyards. Then there’s the ever-present threat of wildfires and smoke damage.”
Levered Speculation Watch:
September 6 – Bloomberg (Bei Hu): “Hedge fund managers were in an upbeat mood at last year’s Sohn Hong Kong investment conference, only for many to see their bullish bets derailed by the market turmoil that followed… The turmoil has clearly been felt in hedge fund returns. The Eurekahedge Asian Hedge Fund Index is down 7.4% this year, heading for the worst annual performance since 2018…”
September 6 – Reuters (Summer Zhen): “Some of Asia's large China-focused hedge funds are buying more non-China stocks as regulatory scrutiny, policy uncertainties and a slowing mainland economy force them to cut exposure to offshore Chinese assets. Beijing's clampdown on technology companies, a real estate debt crisis, Sino-U.S. audit tensions and disruptions from zero-COVID policies, have hit sentiment, portfolio managers said… ‘The past year has been extremely difficult for funds that are based in Hong Kong and focusing on investing in offshore China stocks,’ said a Hong Kong-based hedge fund portfolio manager. Hedge funds are aggressive users of leverage and derivatives to generate yields. China-focused funds have traditionally kept a large portion of portfolios in American Depository Receipts (ADRs) of mainland firms.”
Geopolitical Watch:
September 5 – Financial Times (Henry Foy, Felicia Schwartz and Najmeh Bozorgmehr): “The EU’s chief diplomat has said that efforts to strike a new agreement on Iran’s nuclear program are ‘in danger’ after the US and Iranian positions diverged in recent days. Josep Borrell, who chairs the indirect negotiations between Washington and Tehran on reviving the 2015 Joint Comprehensive Plan of Action (JCPOA), said on Monday that he was losing confidence in finding a deal. In his most pessimistic remarks since he sent both sides a ‘final draft’ of a possible agreement last month, the EU’s high representative for foreign and security policy said: ‘The positions are not closer . . . If the process does not converge, then the whole process is in danger.’”
September 5 – MarketWatch (Clive McKeef): “Historian Niall Ferguson warned… the world is sleepwalking into an era of political and economic upheaval akin to the 1970s — only worse. Speaking to CNBC…, Ferguson said the catalysts had already occurred to spark a repeat of the 1970s, a period characterized by an OPEC oil embargo, Middle East war and high inflation. Yet this time, the severity of recent shocks was likely to be greater and more sustained. ‘The ingredients of the 1970s are already in place,’ Ferguson… told CNBC’s Steve Sedgwick. ‘The monetary- and fiscal-policy mistakes of last year, which set this inflation off, are very alike to the ’60s,’ he said, likening recent price hikes to the high inflation of the 1970s… ‘At least in the 1970s you had détente between superpowers. I don’t see much détente between Washington and Beijing right now. In fact, I see the opposite,’ he said…”
September 3 – NBC (Rhoda Kwan and Meredith Chen): “Anti-Japanese hatred appears to be on the rise in China, as the neighbors look to mark a half-century since the normalization of diplomatic ties between Beijing and Tokyo next month. The public mood in China has turned against even small signs of Japanese culture in the country in recent weeks, from a woman wearing a kimono to conventions for fans of anime. Anti-Japanese sentiment runs deep in China, where an intensifying nationalism has also emerged as Beijing clashes with the Western alliance of which Japan is a member.”
September 6 – Los Angeles Times (Andrew Wilks): “Troubled relations between regional rivals Turkey and Greece worsened Tuesday, with Turkey's president doubling down on a thinly veiled invasion threat and Athens responding that it's ready to defend its sovereignty. Turkey and Greece have decades-old disputes over an array of issues, including territorial claims in the Aegean Sea and disagreements over the airspace there. The friction between the neighbors has brought the NATO allies to the brink of war three times in the last half-century. Turkish President Recep Tayyip Erdogan said Turkey could ‘come all of a sudden one night’ in response to perceived Greek threats, suggesting a Turkish attack on its neighbor cannot be ruled out.”
The S&P500 rallied 3.6% (down 14.7% y-t-d), and the Dow recovered 2.7% (down 11.5%). The Utilities surged 3.7% (up 6.7%). The Banks rallied 5.0% (down 16.6%), and the Broker/Dealers jumped 4.4% (down 6.6%). The Transports gained 2.4% (down 14.7%). The S&P 400 Midcaps rallied 4.4% (down 12.1%), and the small cap Russell 2000 recovered 4.0% (down 16.1%). The Nasdaq100 advanced 4.0% (down 22.9%). The Semiconductors jumped 4.7% (down 31.0%). The Biotechs surged 5.7% (down 10.0%). With bullion gaining $5, the HUI gold equities index rallied 6.2% (down 23.2%).
Three-month Treasury bill rates ended the week at 2.945%. Two-year government yields surged 17 bps to 3.56% (up 283bps y-t-d). Five-year T-note yields jumped 14 bps to 3.44% (up 217bps). Ten-year Treasury rose 12 bps to 3.31% (up 180bps). Long bond yields gained 10 bps to 3.45% (up 155bps). Benchmark Fannie Mae MBS yields jumped 13 bps to 4.81% (up 274bps).
Greek 10-year yields gained eight bps to 4.26% (up 295bps). Spain's 10-year yields jumped 14 bps to 2.86% (up 229bps). German bund yields rose 17 bps to 1.70% (up 188bps). French yields gained 12 bps to 2.27% (up 207bps). The French to German 10-year bond spread narrowed five to 57 bps. U.K. 10-year gilt yields jumped 14 bps to 3.10% (up 212bps). U.K.'s FTSE equities index rallied 1.0% (down 0.5% y-t-d).
Japan's Nikkei Equities Index rallied 2.0% (down 2.0% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.25% (up 18bps y-t-d). France's CAC40 gained 0.7% (down 13.2%). The German DAX equities index increased 0.3% (down 17.6%). Spain's IBEX 35 equities index recovered 1.3% (down 7.8%). Italy's FTSE MIB index rose 0.8% (down 19.2%). EM equities were mostly higher. Brazil's Bovespa index gained 1.3% (up 7.1%), and Mexico's Bolsa index jumped 2.5% (down 11.7%). South Korea's Kospi index fell 1.0% (down 19.9%). India's Sensex equities index advanced 1.7% (up 2.6%). China's Shanghai Exchange Index rallied 2.4% (down 10.4%). Turkey's Borsa Istanbul National 100 index surged 9.3% (up 89.6%). Russia's MICEX equities index dropped 1.8% (down 35.9%).
Investment-grade bond funds posted outflows of $866 million, and junk bond funds reported negative flows of $2.280 billion (from Lipper).
Federal Reserve Credit last week declined $8.7bn to $8.788 TN. Fed Credit is down $101bn from the June 22nd peak. Over the past 156 weeks, Fed Credit expanded $5.062 TN, or 136%. Fed Credit inflated $5.977 Trillion, or 213%, over the past 513 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $3.1bn to $3.388 TN. "Custody holdings" were down $83.2bn, or 2.4%, y-o-y.
Total money market fund assets slipped $3.3bn to $4.564 TN. Total money funds were up $60bn, or 1.3%, y-o-y.
Total Commercial Paper was little changed at $1.198 TN. CP was up $35bn, or 3.0%, over the past year.
Freddie Mac 30-year fixed mortgage rates surged 23 bps to 5.89% (up 301bps y-o-y) - the high since November 2008. Fifteen-year rates jumped 18 bps to a 13-year high 5.16% (up 297bps). Five-year hybrid ARM rates rose 13 bps to 4.64% (up 222bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates unchanged at 6.10% (up 305bps).
Currency Watch:
September 7 – Bloomberg: “China’s foreign exchange reserves declined for a second straight month to the lowest since October 2018 as global financial asset prices dropped… Reserves decreased to $3.0549 trillion as of the end of August, down $49.2 billion from a month ago… That was slightly below the median estimate of $3.065 trillion in a Bloomberg survey of economists… China’s trade surplus, a key source of foreign exchange, fell to $79.4 billion last month, $21.9 billion less than July. The drop was mainly led by weaker export growth…”
September 6 – Bloomberg: “China sent its most powerful signal yet on its discomfort with the yuan’s weakness by setting its reference rate for the currency with the strongest bias on record. The People’s Bank of China set the fix at 454 pips stronger than the average estimate in a Bloomberg survey of analysts and traders. The move marks the 11th straight day of stronger-than-expected fixings by the PBOC and follows a reduction in foreign-currency reserve requirements for financial institutions announced Monday, both measures aimed at propping up the currency. The yuan continued its decline toward the key 7-per dollar level as the greenback pushed higher against global peers.”
For the week, the U.S. Dollar Index declined 0.5% to 109.00 (up 13.9% y-t-d). For the week on the upside, the Swiss franc increased 2.1%, the Swedish krona 1.4%, the Norwegian krone 0.9%, the euro 0.9%, the Canadian dollar 0.8%, the British pound 0.7%, the Brazilian real 0.4%, the Australian dollar 0.4%, the Mexican peso 0.2%, the Singapore dollar 0.2% and the New Zealand dollar 0.1%. On the downside, the Japanese yen declined 1.6%, and the South Korean won fell 1.3%. The Chinese (onshore) renminbi declined 0.38% versus the dollar (down 8.24% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index slipped 0.5% (up 19.5% y-t-d). Spot Gold increased 0.3% to $1,717 (down 6.1%). Silver rallied 4.5% to $18.86 (down 19.1%). WTI crude was little changed at $86.79 (up 15%). Gasoline fell 1.2% (up 9%), and Natural Gas dropped 9.0% to $8.00 (up 114%). Copper recovered 4.5% (down 20%). Wheat surged 7.2% (up 13%), and Corn rose 2.9% (up 16%). Bitcoin jumped $1,348, or 6.8%, this week to $21,308 (down 54%).
Market Instability Watch:
September 6 – Bloomberg (Anna Shiryaevskaya): “European energy trading is being strained by margin calls of at least $1.5 trillion, putting pressure on governments to provide more liquidity buffers, according to Norway’s Equinor ASA. Aside from fanning inflation, the biggest energy crisis in decades is sucking up capital to guarantee trades amid wild price swings. That’s pushing European Union officials to intervene to prevent energy markets from stalling, while governments across the region are stepping in to backstop struggling utilities. Finland has warned of a ‘Lehman Brothers’ moment, with power companies facing sudden cash shortages. ‘Liquidity support is going to be needed,’ Helge Haugane, Equinor’s senior vice president for gas and power, said... The issue is focused on derivatives trading, while the physical market is functioning, he said, adding that the energy company’s estimate for $1.5 trillion to prop up so-called paper trading is ‘conservative.’”
September 9 – Bloomberg (Sonia Sirletti, Nicholas Comfort and Steven Arons): “The European Central Bank is intensifying discussions with bank executives over their readiness for a potential surge in company defaults and a drying-up of energy-market liquidity, amid the worsening stand-off over Russian gas supplies.”
September 9 – Bloomberg (Jorge Valero, Kamil Kowalcze and Jana Randow): “European Central Bank President Christine Lagarde ruled out providing short-term financing lines to struggling energy firms -- saying that’s the job of European Union governments. ‘In this current, very volatile environment, it’s important that fiscal measures be put in place to provide liquidity to solvent energy-market participants, in particular utility firms,’ Lagarde told a news conference… ‘As far as the ECB is concerned, and the national central banks of the Eurosystem, of course we stand ready to provide liquidity to banks, not to energy utility firms,’ she said.”
September 7 – Bloomberg (Garfield Reynolds): “The dollar is steamrolling currencies from Japan to South Africa and the UK as bond market bets on higher-for-longer US rates gave fresh fuel to the greenback’s rally, triggering a vocal pushback from officials in various countries. The yen dropped to a fresh 24-year low versus the greenback and speculation is swirling about the prospects for direct intervention, while the euro and British pound have been battered amid Europe’s escalating energy crisis. South Korea’s won weakened to levels not seen since 2009 and the rand was the next-worst emerging-market performer on the day. China’s yuan, meanwhile, was within a whisker of cracking the psychological 7 barrier.”
September 6 – Bloomberg (Marcus Wong and Cormac Mullen): “Rampant dollar strength is throwing up another stumbling block for emerging-market borrowers as it raises concerns about their ability to pay US currency debt. The spread between emerging-market dollar-denominated government bonds and local currency equivalents is close to the highest level since the pandemic…, putting the dollar debt on track for the worst annual performance since the gauge began in 2003.”
September 5 – Financial Times (Nathalie Thomas in Edinburgh and Philip Stafford and David Sheppard): “European electricity producers are calling for collateral requirements in wholesale power markets to be eased as they urge the EU to help stave off what some experts have warned could be the ‘energy sector’s version of Lehman Brothers’. Kristian Ruby, secretary-general of Eurelectric, which represents more than 3,500 European utilities, said the ballooning sums that power producers were required to post as collateral because of extreme price volatility in wholesale energy markets was of ‘grave concern’. He called for the rules to be softened so that generators could consistently put up other financial instruments, such as bank guarantees, at trading exchanges to avoid a liquidity crunch…”
Bursting Bubble and Mania Watch:
September 6 – Yahoo Finance (Dani Romero): “The recent synchronized selloff in stocks and bonds has crushed one of the most popular strategies for long-term investors: the 60/40 portfolio. According to data from strategists at Bank of America Global Research published last week, the 60/40 portfolio — a mix of 60% stocks and 40% bonds — was down 19.4% year-to-date through the end of August, on track for its worst year since 1936. Through the end of August, the S&P 500 was down over 16% year-to-date, while long-term Treasuries were down over 20% and investment grade corporate credit was down 13%.”
September 6 – Wall Street Journal (Matt Wirz): “Financial pain is spreading in the junk-loan market, showing how interest-rate increases are hurting debt-laden companies and worrying investors that a credit crunch looms as the economy slows. Defaults on so-called leveraged loans hit $6 billion in August, the highest monthly total since October 2020… The figure represents a fraction of the sprawling loan market, which doubled over the past decade to about $1.5 trillion. But more defaults are coming, analysts say… ‘Borrowers are particularly vulnerable to the double whammy of weaker earnings and rising interest rates,’ Morgan Stanley strategist Srikanth Sankaran said. That will trigger a wave of credit-rating downgrades and push average loan prices—currently 95 cents on the dollar—below 85 cents, a level breached only during the 2008 financial crisis and the depth of the Covid-19 pandemic, he said.”
September 9 – Bloomberg (John Gittelsohn): “San Francisco home prices tumbled last month as soaring interest rates and an exodus of tech workers battered demand in one of the most expensive US housing markets. In the four weeks through Sept. 4, the median single-family home price in the city fell 7% from same period a year earlier, to $1.4 million, according to… Redfin Corp.”
Ukraine War Watch:
September 7 – Bloomberg: “Russia’s war on Ukraine will likely stretch into next year, Ukraine’s top army commander, Valeriy Zaluzhnyi, warned in an article, where he pleaded for allies to send longer-range weapons. NATO Secretary General Jens Stoltenberg wrote in a guest article for the Financial Times that the war in Ukraine is ‘entering a critical phase’ and warned of a tough winter ahead for members of the military alliance that could include ‘energy cuts, disruptions and perhaps even civil unrest.’”
September 7 – Bloomberg: “President Vladimir Putin said Russia will emerge stronger from his invasion of Ukraine as he lashed out at US and European ‘sanctions fever’ in response to the war. ‘I’m sure that we’ve lost nothing and won’t lose anything,’ Putin said at the Eastern Economic Forum in Vladivistok…, after he was asked about the conflict in Ukraine by the panel’s moderator following a speech in which he didn’t directly mention the war. ‘The main thing we’ll gain is strengthening our sovereignty…’ ‘The epidemic has been replaced by other challenges, also of a global nature, threatening the whole world,’ Putin said… ‘I mean the sanctions fever of the West, its aggressive attempts to impose a model of behavior on other countries, deprive them of their sovereignty and subordinate them to their will.”
September 6 – Financial Times (Roman Olearchyk and John Paul Rathbone): “The UN’s nuclear watchdog has called for a security and safety zone to be set up around the Zaporizhzhia atomic power station, as it detailed the extensive damage its inspectors found during their visit to the plant that has been occupied by Russian forces. The International Atomic Energy Agency said… it was ‘gravely concerned’ by the situation at the facility, which has been continually shelled and fought over since it was taken by Russia in the early weeks of its full-scale invasion, calling it ‘not sustainable’. ‘There is an urgent need for interim measures to prevent a nuclear accident arising from physical damage caused by military means’ at the Zaporizhzhia plant, the report read.”
U.S./Russia/China Watch:
September 3 – Financial Times (Demetri Sevastopulo): “The US plans to sell Taiwan $1.1bn in weapons, including 60 Harpoon anti-ship missiles, as Washington steps up efforts to bolster the country’s defences as it comes under increasing military pressure from China. The Biden administration on Friday notified Congress about the proposed sale, which includes 100 Sidewinder air-to-air missiles in addition to equipment and support for a surveillance radar programme.”
September 7 – Bloomberg (Stephen Stapczynski): “China is lapping up liquefied natural gas shipments from Russia on the cheap. The Sakhalin-2 LNG export plant in Russia’s Far East sold several shipments to China for delivery through December at nearly half the current spot price in a tender that closed earlier this week, according to traders… Still, global rates have soared so much this year that the project can profit from those sales. The move is beneficial for both countries -- China is able to secure cheaper supply and resell shipments from more expensive exporters to utilities in Europe and Asia, while Russia can continue selling fuel at a profit.”
Economic War/Iron Curtain Watch:
September 9 – Financial Times (Ben Hall, Valentina Romei and Sam Fleming): “‘We are at war,’ Emmanuel Macron said on Monday as he outlined the emergency measures France was taking to shore up its energy supply and shelter its citizens and business from soaring costs. For months following Russia’s full-scale invasion of Ukraine, the French president aspired to act as intermediary and peacemaker between Kyiv and Moscow. This week he and fellow European leaders became belligerents in a sharply escalating energy conflict between Russia and the west. It was time, Macron said, for a ‘general mobilisation’. The Kremlin’s weaponisation of its fossil fuel has forced European governments to take drastic action, unthinkable only a few months ago… Sweden and Finland had to provide emergency liquidity assistance to their power producers that were facing surging demands for collateral for their hedging operations. Finnish economy minister Mika Lintilä said the region could be on the verge of the energy sector’s version of the Lehman Brothers bank collapse in 2008. Germany unveiled a second support package for households and businesses, worth €65bn, bringing to some €350bn the amount earmarked so far by EU governments to offset rocketing prices and diversify supply.”
September 7 – Reuters (Pavel Polityuk): “Russian President Vladimir Putin on Wednesday raised the idea of adding limits to a U.N.-brokered deal for Ukrainian grain exports via the Black Sea and threatened to halt all energy supplies to Europe if Brussels caps the price of Russian gas. In a combative speech to an economic forum in Russia's Far East region, Putin said Russia would not lose its war in Ukraine, which he says is being waged to ensure Russian security and to protect Russian-speakers there.”
September 5 – Financial Times (Max Seddon, David Sheppard and Henry Foy): “Russia’s gas supplies to Europe via the Nord Stream 1 pipeline will not resume in full until the ‘collective west’ lifts sanctions against Moscow over its invasion of Ukraine, the Kremlin has said. Dmitry Peskov, president Vladimir Putin’s spokesman, blamed EU, UK and Canadian sanctions for Russia’s failure to deliver gas through the key pipeline, which pumps gas to Germany from St Petersburg via the Baltic Sea. Although Moscow continues to claim technical faults have caused the cuts in gas supplies, Peskov’s comments were the starkest demand yet by the Kremlin that it wants the EU to roll back its sanctions in exchange for Russia resuming full gas deliveries to the continent.”
September 5 – Reuters (Guy Faulconbridge and Felix Light): “The Kremlin… blamed the West for triggering the worst European gas supply crisis ever and warned the Group of Seven advanced economies that Moscow would retaliate over its plan to impose a price cap on Russian oil… ‘Problems with gas supply arose because of the sanctions imposed on our country by Western states, including Germany and Britain,’ Kremlin spokesman Dmitry Peskov told reporters… ‘We see incessant attempts to shift responsibility and blame onto us. We categorically reject this and insist that the collective West – in this case, the EU, Canada, the UK - is to blame for the fact that the situation has reached the point where it is now.’”
September 7 – Reuters: “Russian President Vladimir Putin… warned of a looming global food crisis and said he would discuss amending a landmark grain deal with Ukraine to limit the countries that can receive cargo shipments. Putin said… Moscow had done everything it could to ensure Ukraine was able to export its grain, but that problems on the global food market were likely to intensify and that a humanitarian catastrophe was looming. Putin said Russia had signed the deal in July, brokered by Turkey and the United Nations, on the understanding it would help alleviate surging food prices in the developing world, but instead it was rich Western countries that were taking advantage of the deal. ‘If we exclude Turkey as an intermediary country, then almost all the grain exported from Ukraine is sent not to the poorest developing countries, but to European Union countries,’ Putin told an economic forum…”
September 7 – Bloomberg (Sybilla Gross): “Russian President Vladimir Putin’s criticism of the grain deal with Ukraine and the surge in wheat prices highlighted the fragility of the global crop trade, raising the specter of higher food prices to come… The comments sparked a surge of almost 7% in benchmark Chicago wheat futures.”
September 6 – Bloomberg: “Gazprom PJSC said it will shift its contract to supply gas to China to rubles and yuan from euros, as the Kremlin steps up efforts to move trade out of currencies it considers ‘unfriendly’ amid US and European sanctions. The state-run gas giant signed an additional agreement to its existing contract with China National Petroleum Corp. on the issue Tuesday... Payment will be made 50% in rubles and 50% in yuan, effective immediately…”
September 8 – Reuters (Sarah Wu): “Taiwan is confident it can sign a ‘high standard’ trade deal with the United States under a new framework, President Tsai Ing-wen told a visiting group of U.S. lawmakers… Washington and Taipei unveiled the U.S.-Taiwan Initiative on 21st Century Trade in June, days after the Biden administration excluded the Chinese-claimed island from its Asia-focused economic plan designed to counter China's growing influence… ‘We have already announced that negotiations under the U.S.-Taiwan Initiative on 21st Century Trade will begin soon. We are confident that through this initiative, we can sign a high-standard trade agreement and advance bilateral trade development,’ she said.”
September 6 – Reuters (Ali Kucukgocmen): “Turkish President Tayyip Erdogan said… Russia is cutting natural gas flows to Europe in retaliation for sanctions, adding that Europe is ‘reaping what it sowed’… ‘Europe is actually reaping what it sowed,’ Erdogan told reporters…, adding that sanctions drove Putin to retaliate using energy supplies. ‘Putin is using all his means and weapons, and the most important of these is natural gas. Unfortunately - we wouldn't want this but - such a situation is developing in Europe,’ Erdogan said. ‘I think Europe will experience serious problems this winter. We do not have such a problem,’ he added.”
September 8 – Reuters (Aftab Ahmed): “India's finance minister said… importing Russian oil was part of the country's inflation-management strategy and that other countries were doing something similar. Despite Western pressure, India has not condemned Russia's February invasion of Ukraine, instead calling for a diplomatic solution to the crisis and an end to violence. Russia has for decades been India's biggest foreign supplier of defence hardware.”
Inflation Watch:
September 5 – Washington Post (Laura Reiley): “It was a bad year for corn. And for tomatoes. And for many other American crops. Farmers, agricultural economists and others taking stock of this summer’s growing season say drought conditions and extreme weather have wreaked havoc on many row crops, fruits and vegetables, with the American Farm Bureau Federation suggesting yields could be down by as much as a third compared with last year. American corn is on track to produce its lowest yield since the drought of 2012… This year’s hard red winter wheat crop was the smallest since 1963… In Texas, cotton farmers have walked away from nearly 70% of their crop because the harvest is so paltry, according to the U.S. Department of Agriculture. The California rice harvest is half what it would be in a normal year, an industry group said.”
September 8 – Bloomberg (Pratik Parija and Swansy Afonso): “India, the world’s biggest rice shipper, restricted exports of key varieties that mainly go toward feeding Asia and Africa, threatening to rattle global crop markets and exacerbate food inflation and hunger. The government has imposed a 20% duty on shipments of white and brown rice, and banned broken rice sales abroad. The curbs apply to roughly 60% of India’s overall rice exports… The moves by India, which accounts for 40% of the global rice trade, will put further pressure on countries that are struggling with worsening hunger and soaring food inflation. Rice is a staple food for about half of the world’s population…”
Biden Administration Watch:
September 8 – Bloomberg (Eric Martin, Saleha Mohsin and Jennifer Jacobs): “President Joe Biden is holding back on a decision to scrap any Trump-era tariffs on China imports, while the administration studies ways to help businesses seeking relief, according to people familiar with the matter. Biden earlier in the summer had signed off on a new exclusion process for exemptions from tariffs on manufacturing materials imported from China, but has delayed making a final decision for now…”
September 7 – Reuters (Lananh Nguyen and Saeed Azhar): “The rise of fintech services and digital banking could spur financial risks and potentially a crisis over the long term, Michael Hsu, Acting Comptroller of the Currency, a major U.S. bank regulator, warned… ‘I believe fintechs and big techs are having a large impact and warrant much more of our attention,’ Hsu told a New York conference, noting the encroachment of fintech companies into the traditional financial sector, including via partnerships with banks, was creating more complexity and ‘de-integration’ across the banking sector.”
Federal Reserve Watch:
September 7 – Associated Press (Christopher Rugaber): “The Federal Reserve will need to continue lifting its short-term interest rate to a level that restricts economic growth and keep it there for an extended period, a top Fed official said… Fed Vice Chair Lael Brainard echoed similarly tough comments about inflation delivered by Chair Jerome Powell late last month in Jackson Hole. Other Fed officials have also in recent weeks emphasized their views that the Fed has to push borrowing costs higher to bring down inflation, currently near a four-decade high. ‘We are in this for as long as it takes to get inflation down,’ Brainard said... ‘Our resolve is firm, our goals are clear, and our tools are up to the task.’”
September 7 – Reuters (Lindsay Dunsmuir): “The high cost of rental accommodation in the United States has not yet fully filtered through to inflation measures, suggesting inflation may still rise further, Cleveland Federal Reserve Bank President Loretta Mester said… ‘I'm not even convinced that inflation's peaked yet,’ Mester said…, saying her focus is on the services sector. ‘That tends to be much more persistent and rents are still very elevated and it takes a while for rents to show up in underlying inflation. There's still more that's going to show up on that side...I haven't seen much in the way of suggesting that's starting to come back down.’”
September 8 – Bloomberg (Craig Torres and Jonnelle Marte): “Federal Reserve Governor Christopher Waller said he favors ‘another significant’ increase in interest rates when the central bank meets later this month, signaling his backing for a 75 bps move. ‘Inflation is far too high, and it is too soon to say whether inflation is moving meaningfully and persistently downward,’ Waller said… ‘I support a significant increase at our next meeting on September 20 and 21 to get the policy rate to a setting that is clearly restricting demand.’ His remarks were the latest to stress the Fed’s commitment to cooling the hottest price pressures in close to four decades.”
U.S. Bubble Watch:
September 6 – Bloomberg (Reade Pickert): “The US service sector expanded in August at the fastest pace in four months amid a pickup in business activity and new orders, while price pressures continued to ease. The Institute for Supply Management’s services index edged up to 56.9 from 56.7… Measures of business activity and new orders both advanced to their strongest readings of the year, reflecting both an ongoing shift in spending habits and steady wage gains. Demand strengthened abroad as well, with export orders expanding at the fastest pace in nearly a year. The upbeat report points to resilient and robust consumer demand for services despite high inflation, rising interest rates and general uncertainty about the economic outlook.”
September 7 – CNBC (Diana Olick): “In June the average rate on the 30-year fixed shot over 6% briefly, and that was enough to turn the once-hot housing market on its heels. Rates pulled back in July and August, but the damage was already done. Now rates are heading past 6% yet again, causing already beleaguered mortgage demand to fall even further… Mortgage applications to purchase a home dropped 1% for the week and were 23% lower than the same week one year ago. Given today’s higher rates, a person buying a $400,000 home would pay close to $700 more per month than they did a year ago.”
September 7 – CNBC (Diana Olick): “Some homeowners are losing wealth as high mortgage rates weigh on home values, at least on paper, as the once red-hot housing market cools quickly. Sales have been slowing down for several months, with mortgage rates now double what they were at the start of this year. Home prices, likewise, dropped 0.77% from June to July, according to… Black Knight… While that may not sound like a lot, it was the largest monthly decline since January 2011 and the first monthly drop of any size in 32 months. ‘Annual home price appreciation still came in at over 14%, but in a market characterized by as much volatility and rapid change as today’s, such backward-looking metrics can be misleading as they can mask more current, pressing realities,’ wrote Ben Graboske, president of Black Knight Data & Analytics.”
September 5 – The Hill (Sylvan Lane): “Persistent COVID-19 symptoms could be keeping millions of Americans out of the workforce. Economists and policymakers have struggled to figure out why a much lower percentage of working-age adults are in the labor force than before the pandemic. The number of Americans either employed or looking for work eclipsed its pre-pandemic level in August… But the labor force participation rate remains 1 percentage point below its February 2020 level, a gap roughly equivalent to 1.6 million people.”
September 7 – Reuters (Howard Schneider): “The U.S. unemployment rate may need to reach as high as 7.5%, double its current level, to end the country's outbreak of high inflation, according to new estimates from a team of researchers including two staff economists from the International Monetary Fund. That would entail job losses of perhaps 6 million people, but the research found that only under ‘quite optimistic assumptions’ about the behavior of the U.S. job market and inflation would the U.S. Federal Reserve be able to tame current price pressures with a smaller blow to employment.”
China Watch:
September 7 – Bloomberg: “China’s export growth slowed more than expected in August and imports stagnated, a sign of a darkening global economic picture and weak domestic growth hit by Covid lockdowns and a property slump. Exports in US dollar terms expanded 7.1% last month from a year earlier, the slowest pace since April when a lockdown in Shanghai disrupted shipping, and far weaker than economists had predicted. Imports grew just 0.3%, leaving a trade surplus of $79.4 billion last month. China’s slowdown is rippling across the world, with the weak import figures spelling bad news for major commodity producers such as Australia and Brazil. Top manufactured goods makers, like Germany and South Korea, are also seeing weaker demand from China.”
September 5 – Bloomberg: “China reduced the amount of foreign-exchange deposits banks need to set aside as reserves for the second time this year to boost the yuan after the currency hit a two-year low. Financial institutions will need to hold 6% of their foreign-currency deposits in reserves starting from Sept. 15, the People’s Bank of China said… -- lower than the current level of 8%. The move is expected to increase the supply of foreign currencies, thereby making it more appealing for traders to buy the yuan.”
September 6 – Financial Times (Cheng Leng and Edward White): “China’s biggest four banks have been hit by a more than 50% increase in overdue loans from the property sector over the past year, as the real estate market’s liquidity crunch spills into the financial sector. China’s top lenders — the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China — last week reported combined overdue property loans of Rmb136.6bn ($20bn) at the end of June, up from Rmb90bn at the same time last year. The rise in bad loans from the deteriorating property crisis is worsening asset quality across China’s Rmb367.7tn banking industry… A senior official at one of the Big Four lenders said the state of the property market meant that the banks had ‘no incentive’ to boost lending to the sector despite pressure from Beijing. ‘Our cost of capital is still too high. We have no incentive to beef up lending even though the regulator asked us to do so. The more loans we issue, the more [non-performing loans] we will have. The return on our lending business has gone down a lot while NPLs are taking off,’ the person said.”
September 6 – Reuters (Ziyi Tang, Engen Tham and Xie Yu): “Top tier Chinese banks preparing to respond to Beijing's call to boost lending to the real economy and debt-laden property sector are set to face a squeeze on their profit margins in the second half, bankers and analysts said. Five of China's biggest state-owned banks posted modest gains in profits in the second quarter. Four of the banks, except for Bank of China, however, reported falling net interest margins, a key gauge of bank profitability. The dour outlook for Chinese banks comes as the world's second-largest economy narrowly avoided contracting in the second quarter as widespread COVID-19 lockdowns and the slumping property sector badly damaged consumer and business confidence.”
September 9 – Wall Street Journal (Rebecca Feng): “China is increasingly counting on its banks to step up mortgage lending and help boost a sinking housing market. But there is a problem: Lenders are stuck with many mortgages from boom times that are at higher risk of not being repaid. Chinese property developers wrote at least $300 billion of mortgage guarantees over the past few years for partially built apartments that they presold, according to regulatory filings. The real-estate firms promised that they would cover home buyers’ interest and principal payments to banks if the borrowers defaulted before their apartments were completed and delivered. What used to be seen as a no-lose proposition has now become a drag on Chinese banks. Dozens of real-estate firms have slid into financial distress, making their mortgage guarantees far from certain. Many would-be home buyers no longer want to buy unfinished properties, reducing demand for loans.”
September 8 – Bloomberg: “China is stepping up its Covid defenses as a key Communist Party meeting looms, restricting internal travel further as swathes of the country remain under tight lockdowns. The National Health Commission… announced a raft of measures that will be in place until the end of next month to fight a virus that shows little sign of slowing. Authorities told citizens to minimize travel during the mid-Autumn festival next week and National Day holidays in October, ordinarily key periods for domestic tourism, and asked local governments to test all residents regularly for Covid regardless of infection levels.”
September 8 – Reuters (Ryan Woo and Roxanne Liu): “The Chinese city of Chengdu extended a lockdown for a majority of its more than 21 million residents on Thursday to prevent further transmission of COVID-19 while millions more in other parts of China were told to shun travel in upcoming holidays. Chengdu… was locked down on Sept. 1 after COVID cases were detected, becoming the largest Chinese metropolis hit with curbs since Shanghai's lockdown in April and May.”
September 5 – CNN (Nectar Gan, Shawn Deng): “More than 70 Chinese cities have been placed under full or partial Covid lockdowns since late August, impacting more than 300 million people, as local authorities rush to stamp out infections at all cost in the final countdown to leader Xi Jinping's expected third term. Since August 20, at least 74 cities with a combined population of 313 million have imposed lockdowns that cover entire cities, districts or multiple neighborhoods, according to CNN's calculations. They include 15 provincial capitals and Tianjin, a provincial-level municipality. Many of the restrictions are still in place. According to Chinese financial magazine Caixin, 33 cities are currently under partial or full lockdowns. Experts say more cities are likely to be added in the coming weeks.”
September 8 – Reuters (Liangping Gao and Ryan Woo): “China's consumer prices rose at a slower-than-expected pace in August while the rate of producer inflation hit an 18-month low… The consumer price index (CPI) increased 2.5% from the same month a year earlier…, slower than 2.7% in July and the 2.8% average forecast… Slower growth in consumer prices came as food prices rose 6.1% on year in August, versus 6.3% in July, with non-food items at 1.7% from July's 1.9% rise.”
September 7 – Bloomberg (Alice Huang and Shawna Kwan): “Smaller creditors of embattled Chinese property firms are increasingly turning to court to obtain payments, highlighting the turmoil in the property sector as developers rush to craft debt-resolution plans. The most recent cases were filed against Sunac China Holdings Ltd. and Jiayuan International Group Ltd. They’re among at least six builders the past several months to receive winding-up petitions filed in Hong Kong or the Cayman Islands. Sunac, Jiayuan and China Evergrande Group all have November hearings scheduled for their cases.”
September 7 – Bloomberg (Dorothy Ma and Lulu Yilun Chen): “Chinese builder Logan Group Co. has briefed some creditors about a draft proposal to restructure more than $6 billion in offshore borrowings, as indebted developers seek solutions after a series of defaults. The proposal would include public bonds plus private notes and some syndicated loans… The plan would extend the average term of Logan’s debt to slightly more than five years…”
September 6 – Bloomberg: “Xi Jinping renewed calls for China to step up the development of technology critical to national security, issuing a forceful reminder just as escalating US sanctions threaten Beijing’s efforts to become self-reliant in semiconductors. Invoking the so-called ‘whole nation system’ that propelled China’s space and nuclear weapons programs, Xi exhorted top officials to pool their resources and focus on breakthroughs critical to the country’s future. The government should play a more active role in orchestrating this process, he told a Party summit…”
Central Banker Watch:
September 7 – Reuters (Julie Gordon): “The Bank of Canada hiked interest rates by 75-bps to a 14-year high on Wednesday, as expected, and said the policy rate would need to go higher still given the fight against raging inflation. The central bank, in a regular rate decision, increased its policy rate to 3.25% from 2.5%, matching analyst forecasts to hit a level not seen since April 2008. The decision lifted rates above the neutral range for the first time in about two decades.”
September 5 – Bloomberg (Swati Pandey): “Australia’s central bank raised interest rates by a half-percentage point for a fourth consecutive meeting and signaled further hikes ahead in its drive to rein in inflation. The Reserve Bank took the cash rate to 2.35%, the highest level since 2015… The tightening is Australia’s quickest in a generation with the cycle beginning in May at a record-low 0.1%. Today’s decision reflects a resolve among global central bankers to keep increasing borrowing costs until inflation meaningfully eases, even at the cost of economic growth.”
September 6 – Bloomberg (Matthew Malinowski and Valentina Fuentes): “Chile’s central bank stunned investors by delivering a bigger-than-expected interest rate hike of 100 bps to combat rising inflation forecasts while also signaling that the end to its bold tightening cycle is near. The bank board… lifted borrowing costs to 10.75% late on Tuesday…”
Global Bubble and Instability Watch:
September 7 – Bloomberg: “China has surged ahead of the US for corporate bond deals in its yuan credit market in recent months, a rare shift that highlights the deepening impact of the two countries’ diverging monetary policies. Yuan-denominated bond issuance by non-financial firms exceeded that in the greenback in both July and August, a first for two consecutive months… The momentum has started building since the Federal Reserve kicked off its tightening cycle in March: Sales of yuan notes, almost entirely by Chinese firms, totaled 2.04 trillion yuan ($306bn based on exchange rates at the time of deals) between April and August, versus $283 billion of dollar debt worldwide.”
September 6 – Bloomberg (Swati Pandey): “Australia’s economy powered ahead in the three months through June, underscoring the strong momentum the Reserve Bank has highlighted as it delivered a series of rapid interest rate increases. The A$2.2 trillion ($1.5 trillion) economy expanded 0.9% from the first quarter, buoyed by household spending and high export prices… That drove growth to 3.6% from a year earlier -- well above the pre-pandemic average of around 2%. For the central bank, the data validate its hawkish approach to tackling inflation, having hiked by a half percentage point Tuesday to take the cash rate to 2.35%.”
September 6 – Bloomberg (Lorretta Chen): “Asian companies are increasingly resorting to loans, some just months in length, as a record bond rout this year complicates access to the more secure longer-term funding market. Among firms that had been active bond issuers in Asia, the number seeking short-term loan facilities this year has increased some 30% to 40%, according to Christophe Cretot, head of debt origination and advisory, Asia-Pacific at Credit Agricole SA… ‘We have seen that in markets such as Singapore, Indonesia and China where issuers with maturing bonds in the next three to six months are looking for facilities of nine to 12 months to buy some time before issuing again,’ he said.”
Europe Watch:
September 5 – Reuters (Nicholas Larkin and Eddie Spence): “Europe’s energy crisis is getting worse, piling pressure on the commodities industries that provide building blocks for the continent’s economy. Power- and gas-intensive sectors such as steel, fertilizers and aluminum -- the most widely used base metal -- are being forced to close factories or pass on soaring costs to customers. Even sugar makers are feeling the pinch. The tumult risks further squeezing households during the worst cost-of-living crisis in decades and pushing economies into recession.”
September 7 – Financial Times (Andy Bounds and Judith Evans): “Farmers and food producers in Europe have warned of seasonal shortages and significant price increases across a wide range of everyday products this winter, as they called for government support to offset surging energy costs. Copa-Cogeca, the EU farmers’ union, and FoodDrink Europe and PFP, two of the big food producer associations, said their members had already begun to close operations and reduce their output… ‘The latest increases in energy prices, especially natural gas and electricity, threaten the continuity of agri-food production cycles and therefore the ability to continue delivering essential agricultural commodities, food products and feed materials,’ they said…”
September 6 – Associated Press (Danica Kirka and Jell Lawless): “Liz Truss became U.K. prime minister on Tuesday and immediately faced up to the enormous tasks ahead of her: curbing soaring prices, boosting the economy, easing labor unrest and fixing a national health care system burdened by long waiting lists and staff shortages… Truss — Britain’s third female prime minister — named a top team diverse in gender and ethnicity, but loyal to her and her free-market politics. Kwasi Kwarteng becomes the first Black U.K. Treasury chief, and Therese Coffey its first female deputy prime minister.”
September 4 – Reuters (Francesco Zecchini): “Italy should not take on more debt to respond to the energy crisis but it should be able to amend its European Union-backed recovery programme to ease pressures, Brothers of Italy leader Giorgia Meloni said… Meloni's party is the largest in a centre-right alliance on course for victory in a Sept. 25 national election. There are concerns that a new government might shy away from some of the reforms needed to ensure Italy gets access to some 200 billion euros ($199bn) in EU funds for its post-COVID Recovery and Resilience Plan (PNRR).”
September 4 – Reuters (Michael Kahn): “An estimated 70,000 people protested in Prague against the Czech government on Saturday, calling on the ruling coalition to do more to control soaring energy prices and voicing opposition to the European Union and NATO. Organisers of the demonstration from a number of far-right and fringe political groups including the Communist party, said the central European nation should be neutral militarily and ensure direct contracts with gas suppliers, including Russia.”
EM Crisis Watch:
September 5 – Reuters (Beril Akman): “Turkish inflation exceeded 80% for the first time since September 1998, as policies that prioritized economic growth and cheap lending exact a toll on the lira and price stability. Annual inflation quickened for a 15th consecutive month to 80.2% in August, up from 79.6% in July… President Recep Tayyip Erdogan, who believes that cheaper borrowing costs can slow inflation instead of pushing it higher, has kept exports and employment at the top of the agenda.”
Japan Watch:
September 6 – Bloomberg (Chikako Mogi): “The Bank of Japan said it would boost scheduled bond purchases as the intensifying Treasuries selloff puts upward pressure on global yields and weakens the yen. The BOJ said it would buy 550 billion yen ($3.8bn) of five-10 year bonds at its regular operations, up from 500 billion yen scheduled. The move comes as Japan’s benchmark 10-year yield hit 0.245%, approaching the 0.25% upper limit of the BOJ’s tolerated trading band. Japanese government bonds last came under pressure in June when only unprecedented BOJ buying kept benchmark yields below the 0.25% ceiling.”
September 7 – Financial Times (Leo Lewis, Kana Inagaki and Song Jung-a): “The yen fell further against the dollar on Wednesday, leaving it down a fifth this year as Japan’s government stepped up its verbal intervention aimed at stemming an acute sell-off in the currency. Japan’s currency declined to ¥144 against the dollar, its weakest level since 1998, despite a shift in language by Japanese officials, which gave the strongest hints to date that they could take action if the currency continues to slide. Finance minister Shunichi Suzuki said yen moves should be stable and reflect economic fundamentals, calling for stability in currency markets.”
September 8 – Bloomberg (Yoshiaki Nohara): “Japanese Prime Minister Fumio Kishida ordered the putting together of a fresh stimulus package in October to help the economy weather the impact of inflation in addition to a round of price-relief steps updated on Friday. The government will consider an extra budget to fund the extra stimulus in the autumn, which will also include efforts to promote a new form of capitalism… A previous package announced in April had 6.2 trillion yen ($43.2bn) in measures to help households and businesses deal with inflation.”
September 4 – Reuters (Daniel Leussink): “Japan's services sector activity shrank for the first time in five months in August as a resurgence of COVID-19 infections hurt demand… The contraction shows that a recovery of the world's third-largest economy remains fragile at best and is worrying at a time when the global growth outlook is turning increasingly pessimistic. The final au Jibun Bank Japan Services purchasing managers' index (PMI) dropped to a seasonally adjusted 49.5, marking the first contraction since March.”
Social, Political, Environmental, Cybersecurity Instability Watch:
September 5 – Financial Times (Aime Williams and Steven Bernard): “Deadly flooding in Pakistan destroyed homes and decimated crops in what the country’s officials say is an unprecedented climate disaster, affecting an estimated 30mn people or about 15% of the population. About one-third of the country was still submerged last Tuesday when satellite data from the European Space Agency mapped the extent of the deluge.”
September 7 – Bloomberg (Kim Chipman): “California’s wine country, including the famed Napa and Sonoma valleys, faces a climate crisis so dire that it’s posing an existential threat to the future of the state’s industry. Grapes have been hit with one extreme after another. This year’s season started out with a deep frost that iced over verdant green buds, nipping them right off the vine. For the crops that survived, the freeze quickly gave way to drought and heat. Just in the past week, record-breaking temperatures baked parched vineyards. Then there’s the ever-present threat of wildfires and smoke damage.”
Levered Speculation Watch:
September 6 – Bloomberg (Bei Hu): “Hedge fund managers were in an upbeat mood at last year’s Sohn Hong Kong investment conference, only for many to see their bullish bets derailed by the market turmoil that followed… The turmoil has clearly been felt in hedge fund returns. The Eurekahedge Asian Hedge Fund Index is down 7.4% this year, heading for the worst annual performance since 2018…”
September 6 – Reuters (Summer Zhen): “Some of Asia's large China-focused hedge funds are buying more non-China stocks as regulatory scrutiny, policy uncertainties and a slowing mainland economy force them to cut exposure to offshore Chinese assets. Beijing's clampdown on technology companies, a real estate debt crisis, Sino-U.S. audit tensions and disruptions from zero-COVID policies, have hit sentiment, portfolio managers said… ‘The past year has been extremely difficult for funds that are based in Hong Kong and focusing on investing in offshore China stocks,’ said a Hong Kong-based hedge fund portfolio manager. Hedge funds are aggressive users of leverage and derivatives to generate yields. China-focused funds have traditionally kept a large portion of portfolios in American Depository Receipts (ADRs) of mainland firms.”
Geopolitical Watch:
September 5 – Financial Times (Henry Foy, Felicia Schwartz and Najmeh Bozorgmehr): “The EU’s chief diplomat has said that efforts to strike a new agreement on Iran’s nuclear program are ‘in danger’ after the US and Iranian positions diverged in recent days. Josep Borrell, who chairs the indirect negotiations between Washington and Tehran on reviving the 2015 Joint Comprehensive Plan of Action (JCPOA), said on Monday that he was losing confidence in finding a deal. In his most pessimistic remarks since he sent both sides a ‘final draft’ of a possible agreement last month, the EU’s high representative for foreign and security policy said: ‘The positions are not closer . . . If the process does not converge, then the whole process is in danger.’”
September 5 – MarketWatch (Clive McKeef): “Historian Niall Ferguson warned… the world is sleepwalking into an era of political and economic upheaval akin to the 1970s — only worse. Speaking to CNBC…, Ferguson said the catalysts had already occurred to spark a repeat of the 1970s, a period characterized by an OPEC oil embargo, Middle East war and high inflation. Yet this time, the severity of recent shocks was likely to be greater and more sustained. ‘The ingredients of the 1970s are already in place,’ Ferguson… told CNBC’s Steve Sedgwick. ‘The monetary- and fiscal-policy mistakes of last year, which set this inflation off, are very alike to the ’60s,’ he said, likening recent price hikes to the high inflation of the 1970s… ‘At least in the 1970s you had détente between superpowers. I don’t see much détente between Washington and Beijing right now. In fact, I see the opposite,’ he said…”
September 3 – NBC (Rhoda Kwan and Meredith Chen): “Anti-Japanese hatred appears to be on the rise in China, as the neighbors look to mark a half-century since the normalization of diplomatic ties between Beijing and Tokyo next month. The public mood in China has turned against even small signs of Japanese culture in the country in recent weeks, from a woman wearing a kimono to conventions for fans of anime. Anti-Japanese sentiment runs deep in China, where an intensifying nationalism has also emerged as Beijing clashes with the Western alliance of which Japan is a member.”
September 6 – Los Angeles Times (Andrew Wilks): “Troubled relations between regional rivals Turkey and Greece worsened Tuesday, with Turkey's president doubling down on a thinly veiled invasion threat and Athens responding that it's ready to defend its sovereignty. Turkey and Greece have decades-old disputes over an array of issues, including territorial claims in the Aegean Sea and disagreements over the airspace there. The friction between the neighbors has brought the NATO allies to the brink of war three times in the last half-century. Turkish President Recep Tayyip Erdogan said Turkey could ‘come all of a sudden one night’ in response to perceived Greek threats, suggesting a Turkish attack on its neighbor cannot be ruled out.”