Changes in structure have altered market function, especially compared to previous crisis periods. First and foremost, the pandemic unleashed unprecedented central bank liquidity. This significantly boosted cash holdings across the system, including those of financial institutions, investment managers, the leveraged speculating community, corporations and households. Spectacular asset price inflation (i.e. stocks and securities, houses, crypto, etc.) enlarged already inflated financial cushions for market operators, corporations and the household sector. For speculators large and small, an enormous pool of the “house’s money” became available for wagering and absorbing losses.
In short, the wild inflation of the world’s major central bank balance sheets significantly expanded private sector assets – from American households’ financial and real estate holdings to emerging market country international reserves.
Especially after the recent market rally, talk of “resilient” has become commonplace and central to the bullish narrative. And this resilience – at home and abroad – is undoubtedly associated with the “buffer” created from Trillions of pandemic QE. The significant tightening of market financial conditions for the most part didn’t spark panic in corporate boardrooms. Household net worth took a hit from sinking stock prices. But the extraordinary inflation in securities and home prices ensures perceived household wealth remains significantly above pre-pandemic levels. And for the vulnerable emerging markets, huge international reserve holdings made “risk off” deleveraging and “hot money” outflows more manageable.
Back to “risk on/risk off.” Central bankers across the global were raising rates. Faced with acute inflation risk, the Fed was especially hawkish. Bubbles were bursting – from Chinese developers and apartments, to global bond markets, to technology stocks and the cryptocurrencies. There was every reason to hedge risk across the markets, and players from major institutions to hedge funds to individual investors flocked to derivatives markets for protection.
When a large segment of a marketplace offloads risk to derivatives markets, there becomes clear and present danger for “risk off” derivatives-related selling spurring illiquidity, dislocation and a market crash. The near collapse of the UK gilts market underscored how leverage and derivatives combine for a potentially lethal mix.
But current market structure also creates susceptibility to abrupt market reversals, squeezes, and the unwind of hedges to spark powerful bear market rallies. Post-pandemic QE-related resilience significantly boosts the probability of robust counter-trend market advances. Indeed, in the event of “risk off” market weakness and associated derivatives-related selling, markets will tend toward bipolar outcomes. The prospect of a derivative-related “accident” will induce additional hedging and selling, with markets pushed to the brink. But if markets avoid downside dislocation, odds then surge for a reversal and period of upside discontinuity.
Global markets were careening toward dislocation when the Bank of England restarted QE in emergency operations to thwart bond market collapse. Global bond markets were buckling under the pressure of a concerted hawkish tightening cycle and deleveraging. Sentiment was also hurt last month by China’s disturbing national congress. What’s more, the dollar’s destabilizing melt-up was stoking global de-risking/deleveraging, with a “doom loop” dynamic of spiking yields, EM foreign reserve liquidations (for currency support operations), derivatives-related selling and only higher global yields.
Following the Bank of England’s lead, the global central bank community scaled back hawkishness. Fed officials definitely toned down their hawkish narrative. It might not yet have met the standards of a “dovish pivot” – and Chair Powell remains focused on his inflation-fighting credentials. Yet the Fed’s more balanced discussion was sufficient to assuage fears that the Fed “put” was missing in action. Indeed, markets saw crucial confirmation of the assumption that instability would bring the Fed’s tough inflation fight to a pleasingly early conclusion.
After jumping to 4.22% in the sessions immediately following Powell’s hawkish November 2nd press conference, 10-year Treasury yields closed this holiday week at 3.68%. In Europe, Italian yields traded this week to 3.64%, down from October’s 4.78% high. The reversal of short positions and hedges has surely played a major role in the global bond market rally – with declining yields integral to global “risk on.”
Let’s not neglect the impact of Chinese developments on global “risk on.” Economic fragility, record Covid infections, and an increasingly desperate Beijing have created an ideal blend of support for the global rally. On the one hand, lockdowns and the growing possibility of infections spiraling out of control have provided a meaningful lift to global bond markets (lower yields). Meanwhile, global risk markets have taken comfort from a litany of Beijing measures employed to support China’s developers and economy (see “China Watch” below). For highly speculative markets, it has flashed nirvana: visions of a disinflationary Chinese downturn dampening global inflation pressures, bond yields and hawkish central bankers, with an energized Beijing slashing the risk of a near-term Chinese accident.
With about a month to go, markets sense there’s a good shot at a decent year-end rally. And a solid December would be expected to presage a strong start to 2023. But that would not change my “countertrend” rally view. This market recovery, especially if it gets legs, is problematic.
Importantly, the factors that have supported system resilience simultaneously buttress inflation. I saw merit in the Fed’s inflation-fighting strategy of orchestrating a rapid increase in rates and attendant tightening of financial conditions. There were two major risks: aggressive tightening would break things (aka market dislocation), or market instability would compel the Fed to stand down before financial conditions tightened sufficiently to quash inflationary pressures.
There are always costs associated with the delay of appropriate central bank tightening. Not only did the Fed “print” $5 TN, it stuck with zero rates for way too long. And while the crypto and stock market manias were running wild, a furtive boom was taking hold in “private credit,” “decentralized finance,” and bank and non-bank lending more generally. Indeed, this lending boom has been fundamental to what I call “inflationary biases” percolating throughout the economy.
Even as equities and corporate bond markets tumbled, scores of lenders throughout the economy never had it so good. Rising prices boost demand for Credit card and home equity loans, while small and medium-sized businesses have never enjoyed such borrowing options. Market financial conditions tightened, though lending conditions for much of the economy have remained extraordinarily loose.
Short of a hawkish Fed tightening market “accident,” the lending boom would have to run its course. Strong system Credit growth ensured resilience in spending, economic growth and price inflation. Meanwhile, there are major New Cycle dynamics underpinning both the economy and inflation. “De-globalization” and the emergent Iron Curtain have the potential to spur robust investment in domestic manufacturing capacity. Perhaps at least as important, climate change creates virtually endless possibilities for investment spending. With loose lending conditions, 10 million vacant jobs, and increasingly entrenched inflation, there have been all the makings for upside surprises in both GDP and CPI.
Previous cycle thinking still dominates in markets and at the Federal Reserve. Our central bank believes it will soon wrap up its tightening cycle, with cooperative inflation retreating back to its 2% target. Markets believe great bull markets will get back on track as soon as the Fed pivots out of the way.
The Fed administered way too much monetary inflation for too long, moved belatedly to crush price inflation, and now appears prematurely losing its nerve. At this point, a significant recession and/or market accident would likely be required to rein in powerful inflationary forces operating throughout the economy. Otherwise, prepare for an extended tightening cycle with potential for meaningfully higher rates over the next couple years.
Frederick Schultz, Nancy Teeters, Emmett Rice, Lyle Gramley, Preston Martin and Martha Seger. Not household names. One must be a student of the Federal Reserve to recognize that these were members of the Board of Governors serving under Chairman Paul Volcker.
November 23 – Bloomberg (Craig Torres): “Federal Reserve officials concluded earlier this month that the central bank should soon moderate the pace of interest-rate increases to mitigate risks of overtightening, signaling they were leaning toward downshifting to a 50 bps hike in December. ‘A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate,’ according to minutes from their Nov. 1-2 gathering… In addition, while Chair Jerome Powell said during his post-meeting press conference that rates will probably ultimately go higher than officials’ September forecasts indicated, Wednesday’s report gave a more nuanced take: ‘Various’ officials -- a descriptor not commonly used in the minutes -- had concluded that rates would ultimately peak at a higher level than previously expected.’”
The stage is set for an intriguing December 14th FOMC meeting. Expect an increasingly divided Fed. I’ll assume that Chair Powell compromised with Lael Brainard and the dovish contingent in allowing the inclusion of dovish language in the previous meeting’s statement. But there was no compromising during his press conference.
Powell is undoubtedly concerned. His perceived dovish-leaning July press conference unleashed a market rally and loosened financial conditions. He has since remained keenly focused on maintaining the hawkish resolve necessary to ensure market alignment with the Fed’s inflation fight. And for a while, the entire committee was aligned behind Powell. But market instability – including a major spike in mortgage rates – has caused a splintering.
Rate markets are now pricing 5% peak Fed funds at the May 3rd FOMC meeting. The Treasury 2yr/10yr yield spread closed the week at negative 78 bps, the greatest inversion since Volcker was at the helm of the Fed in 1981. At a 3.68%, the key 10-year Treasury yield is now hindering the Fed’s inflation fight.
The bond rally and low market yields underpin “risk on.” After the squeeze and unwind of hedges, a speculative marketplace will undoubtedly anticipate the end of Fed tightening. Declining market yields will be viewed as confirmation of waning inflation.
But I see bond yields more as a reflection of market dynamics and accident risk. As usual, stocks have their short-term focus. Bonds still see accidents in the making – China, Japan, EM, tech, crypto, housing, Credit and so on. Stocks are currently enjoying a bout of “risk on.” Meanwhile, major New Cycle developments lurk in the not too distant future.
Previous cycle thinking has the Fed, the global central bank community, and Beijing with everything under control. That they were ready to push back against crisis dynamics was all that was necessary to reverse markets and stoke “risk on”. But I expect New Cycle Realities to show themselves over time. In reality, central banks and Beijing don’t have things under control.
A major de-risking/deleveraging would force the Fed and other central banks to restart QE, with problematic decisions including how big and how to respond to market reactions. I doubt bond markets will be as cooperative as they were to 2020’s series of ballooning QE announcements. Unless inflationary pressures dissipate more quickly than I expect, Powell will not haphazardly open the monetary floodgates.
And China. Markets are today content with dismal fundamentals that ensure a keenly focused and hardworking Beijing. Markets are today relaxed about the short-term – confident that Beijing has everything under control and that crisis dynamics will be held sufficiently at bay. But perhaps the U.S. Treasury market has its gaze further out on the horizon, where it sees the outlines of a “things are spiraling out of control” “Lehman moment” panic.
For now, “risk on” is working its magic. For the start of 2023, there will likely be less shorting and hedging. There will be more bullishness, with FOMO ensuring the marketplace becomes more aggressively positioned.
While most anticipate resurgent bull markets, New Cycle Realities fester. More layoffs and strikes. Additional tech and crypto bursting Bubble fallout. Deeper housing market angst. Rising delinquencies and Credit issues. Newfound caution from bankers and the slew of new non-bank lenders. Persistent geopolitical instability. Resilient inflation and a hawkish Powell. Meanwhile, QE-related “buffers”, which have underpinned markets and the economy over the past year, will have dissipated.
There will be fragilities coupled with extraordinary uncertainty. With everyone fixated on short-term speculative dynamics, the New Cycle is stealthily poised to disappoint. And does Powell have the resolve to attempt a Volcker-type legacy? Or might he capitulate to a group of doves that no one will have ever heard of forty years from now?
For the Week:
The S&P500 gained 1.5% (down 15.5% y-t-d), and the Dow rose 1.8% (down 5.5%). The Utilities jumped 3.1% (down 2.7%). The Banks rose 2.0% (down 18.3%), and the Broker/Dealers increased 1.6% (down 2.2%). The Transports gained 1.3% (down 12.4%). The S&P 400 Midcaps jumped 1.9% (down 9.9%), and the small cap Russell 2000 gained 1.1% (down 16.8%). The Nasdaq100 increased 0.7% (down 28.0%). The Semiconductors advanced 1.0% (down 30.3%). The Biotechs gained 0.6% (down 5.4%). With bullion increasing $4, the HUI gold equities index jumped 3.9% (down 12.7%).
Three-month Treasury bill rates ended the week at 4.16%. Two-year government yields fell eight bps to 4.56% (up 372bps y-t-d). Five-year T-note yields dropped 15 bps to 3.86% (up 260bps). Ten-year Treasury yields fell 15 bps to 3.68% (up 217bps). Long bond yields sank 19 bps to 3.74% (up 183bps). Benchmark Fannie Mae MBS yields dropped 17 bps to 5.14% (up 308bps).
Greek 10-year yields fell 11 bps to 4.14% (up 283bps y-t-d). Italian yields declined four bps to 3.85% (up 268bps). Spain's 10-year yields slipped five bps to 2.96% (up 239bps). German bund yields declined four bps to 1.97% (up 215bps). French yields fell five bps to 2.44% (up 224bps). The French to German 10-year bond spread narrowed about one to 47 bps. U.K. 10-year gilt yields dropped 12 bps to 3.12% (up 215bps). U.K.'s FTSE equities index gained 1.4% (up 1.4% y-t-d).
Japan's Nikkei Equities Index rallied 1.4% (down 1.8% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.25% (up 18bps y-t-d). France's CAC40 rose 1.0% (down 6.2%). The German DAX equities index increased 0.8% (down 8.5%). Spain's IBEX 35 equities index surged 3.6% (down 3.4%). Italy's FTSE MIB index increased 0.2% (down 9.6%). EM equities were mixed. Brazil's Bovespa index was little changed (up 4.0%), while Mexico's Bolsa index increased 0.2% (down 3.0%). South Korea's Kospi index dipped 0.3% (down 18.1%). India's Sensex equities index gained 1.0% (up 6.9%). China's Shanghai Exchange Index was about unchanged (down 14.8%). Turkey's Borsa Istanbul National 100 index surged 7.7% (up 162%). Russia's MICEX equities index declined 0.5% (down 42%).
Investment-grade bond funds posted outflows of $1.789 billion, while junk bond funds reported inflows of $2.207 billion (from Lipper).
Federal Reserve Credit dropped $41.3bn last week to $8.588 TN. Fed Credit was down $313bn from the June 22nd peak. Over the past 167 weeks, Fed Credit expanded $4.861 TN, or 130%. Fed Credit inflated $5.777 Trillion, or 206%, over the past 524 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $2.1bn to $3.310 TN - near the low since June 2017. "Custody holdings" were down $165bn, or 4.7%, y-o-y.
Total money market fund assets rose $16.1bn to $4.641 TN. Total money funds were up $43bn, or 0.9%, y-o-y.
Total Commercial Paper gained $5.2bn to $1.309 TN - the high since 2009. CP was up $206bn, or 18.7%, over the past year.
Freddie Mac 30-year fixed mortgage rates slipped two bps to 6.54% (up 344bps y-o-y). Fifteen-year rates dropped 10 bps to 5.88% (up 346bps). Five-year hybrid ARM rates declined two bps to 5.51% (up 304bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down nine bps to 6.76% (up 359bps).
Currency Watch:
For the week, the U.S. Dollar Index declined 0.9% to 105.96 (up 10.8% y-t-d). For the week on the upside, the Norwegian krone increased 3.1%, the Swedish krona 1.9%, the British pound 1.7%, the New Zealand dollar 1.6%, the South Korean won 1.2%, the Australian dollar 1.2%, the South African rand 1.0%, the Swiss franc 0.9%, the Japanese yen 0.9%, the euro 0.7% and the Mexican peso 0.6%. On the downside, the Brazilian real declined 0.4% and the Singapore dollar dipped 0.1%. The Chinese (onshore) renminbi declined 0.63% versus the dollar (down 11.29% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index was little changed (up 15.9% y-t-d). Spot Gold added 0.2% to $1,755 (down 4.1%). Silver jumped 3.8% to $21.75 (down 6.7%). WTI crude sank $3.80 to $80.08 (up 1%). Gasoline dropped 3.8% (up 5%), while Natural Gas surged 11.4% to $7.02 (up 88%). Copper slipped 0.3% (down 19%). Wheat dropped 3.0% (up 3%), while Corn added 0.2% (up 13%). Bitcoin declined $90 this week, or 0.5%, to $16,530 (down 64%).
Market Instability Watch:
November 24 – Bloomberg: “Singapore’s central bank warned of ‘potential dysfunction’ in global funding markets and liquidity strains on financial firms that could spill over to banks and companies, amid intensifying risks to international financial stability. Central banks should step up as market makers of last resort should liquidity stresses emerge that could threaten severe disruptions in core funding markets, the Monetary Authority of Singapore said…, referring to the issue as ‘the most immediate risk’ to global financial stability. ‘Targeted and temporary interventions aimed at smoothing volatility would help avoid a breakdown in market functioning, without obstructing the necessary tightening of monetary policy to deal with the inflationary pressures in the economy,’ the MAS said.”
Crypto Bubble Collapse Watch:
November 23 – Bloomberg (Joanna Ossinger): “Sam Bankman-Fried, disgraced founder of the now collapsed crypto exchange FTX and trading house Alameda Research, apologized to staff in a letter that outlined a crash in ‘collateral’ to $9 billion from $60 billion. ‘I didn’t mean for any of this to happen, and I would give anything to be able to go back and do things over again,’ he wrote… A slide in digital-asset markets in spring roughly halved collateral to $30 billion, while liabilities were $2 billion, he said. A combination of a credit squeeze, a further selloff in virtual coins and a ‘run on the bank’ left collateral at $9 billion ahead of FTX’s Nov. 11 bankruptcy… The estimate for liabilities had reached $8 billion by then, he said. ‘I did not realize the full extent of the margin position, nor did I realize the magnitude of the risk posed by a hyper-correlated crash,’ Bankman-Fried said.”
November 22 – Reuters (Manya Saini): “Troubled cryptocurrency lender Genesis Global Capital has hired investment bank Moelis & Company to explore options including a potential bankruptcy, the New York Times reported… The company has not yet made a final decision on bankruptcy and it was still possible to be averted, the NYT added… On Monday, Genesis had asserted it had no plans to file bankruptcy imminently, days after it suspended customer redemptions citing the collapse of FTX.”
November 22 – Wall Street Journal (Peter Rudegeair and Vicky Ge Huang): “Digital Currency Group Inc. said 2022 revenue is on track to reach $800 million, down about 20% from what the cryptocurrency-focused conglomerate expected to generate last year. DCG is the parent company of Genesis Global Capital, a crypto lending firm that paused redemptions and loan originations on Nov. 16… DCG owes Genesis around $575 million that is due in May 2023, in addition to a $1.1 billion promissory note to Genesis due in June 2032, DCG Chief Executive Barry Silbert said… DCG is trying to assuage the fears of crypto traders and investors following the meltdown of crypto exchange FTX this month. Exposures that once seemed manageable have grown across the crypto industry, and investors are questioning the health of firms once viewed as safe.”
November 22 – Bloomberg: “Top partners at Sequoia Capital apologized to investors for backing FTX, whose bankruptcy had its first US court hearing. Sam Bankman-Fried in a letter outlined a crash in collateral to $9 billion from $60 billion. An attorney representing Bankman-Fried’s collapsed FTX Group said a ‘substantial amount’ of its assets ‘have either been stolen or are missing.’ Identifiable information of FTX’s top creditors is being kept secret for now.”
November 24 – Reuters (Huw Jones): “The crash of FTX exchange has injected greater urgency into regulating the crypto sector and targeting such 'conglomerate' platforms will be the focus for 2023, the new chair of global securities watchdog IOSCO said… Jean-Paul Servais said regulating crypto platforms could draw on principles from other sectors which handle conflicts of interest, such as at credit rating agencies and compilers of market benchmarks, without having to start from scratch.”
November 21 – Financial Times (Akila Quinio and Joshua Oliver): “Crypto exchanges such as the bankrupt FTX that bundle together services kept separate by mainstream institutions should be more tightly regulated before they become a risk to the financial system, a senior Bank of England official has warned… Sir Jon Cunliffe, deputy governor of the Bank of England, said digital asset exchanges created risks to their market by operating businesses that encompassed trading, lending, clearing and custody of client assets. Traditional markets maintain careful separation between these different roles to guard against risks, he said.”
November 21 – Bloomberg (Katie Greifeld): “Cascading crypto blowups have only exacerbated problems for Grayscale’s $10.5 billion Bitcoin fund. The Grayscale Bitcoin Trust closed a record 45% below the value of its underlying coins on Friday…”
November 21 – Bloomberg (Matt Turner and Abhishek Vishnoi): “Wall Street’s waning conviction in Coinbase Global Inc. has done little to deter Cathie Wood. Instead, she’s been scooping up shares of the struggling cryptocurrency exchange in the wake of the collapse of Sam Bankman-Fried’s FTX. Wood’s Ark Investment Management funds have bought more than 1.3 million shares of Coinbase since the start of November, worth about $56 million… The shopping spree, which started just as FTX’s demise began, has boosted Ark’s total holdings by roughly 19% to about 8.4 million shares. That equates to around 4.7% of Coinbase’s total outstanding shares.”
November 23 – Bloomberg (Sunil Jagtiani and Akshay Chinchalkar): “Pick a number and cross your fingers. Crypto naysayers who argue that’s the essence of Bitcoin prognostication are likely finding validation in the thick uncertainty shrouding the sector. Over the past few days, long-term targets for the world’s largest token by market value have ranged from $5,000 at strategists BCA Research Inc. to $1 million by 2030 for Ark Investment Management’s Cathie Wood.”
November 22 – Reuters (Koh Gui Qing): “Sam Bankman-Fried's FTX, his parents and senior executives of the failed cryptocurrency exchange bought at least 19 properties worth nearly $121 million in the Bahamas over the past two years… Separately, attorneys for FTX said… one of the company's units spent $300 million in the Bahamas buying homes and vacation properties for its senior staff…”
Bursting Bubble and Mania Watch:
November 25 – Bloomberg (David Brooke): “Private credit firms, flush with money to invest in an economy that may be on the brink of a recession, are increasingly looking at lending on companies with assets that can collateralize loans, to limit potential losses. In focusing on asset-based loans, direct lenders are muscling in on a type of lending that has historically been dominated by banks. But the $1.3 trillion private credit industry has spent years chiseling away at banks’ syndicated leveraged loan business, which is often based on borrowers’ cash flow, and the lenders may make similar inroads in loans tied to assets. ‘A lot of banks have come out of the market and we’ve found opportunities to grow,’ said Carlos Mendez, co-founder of Crayhill Capital Management, a specialty lender.”
Ukraine War Watch:
November 23 – Associated Press (John Leicester and Sam Mednick): “Russia unleashed a new missile onslaught on Ukraine’s battered energy grid Wednesday, robbing cities of power and some of water and public transport, too, compounding the hardship of winter for millions. The aerial mauling of power supplies also took nuclear plants and internet links offline and spilled blackouts into neighbor Moldova. Multiple regions reported attacks in quick succession and cascading outages. Ukraine’s Energy Ministry said supplies were cut to ‘the vast majority of electricity consumers.’ …All of Kyiv lost water, the capital’s mayor said.”
November 20 – Wall Street Journal (Ian Lovett): “Ukrainian officials encouraged people from recently recaptured territories to evacuate, as the country tries to ease the strain on its damaged electric grid ahead of the winter. Deputy Prime Minister Iryna Vereshchuk said… evacuations from recently reclaimed territory in the southern Kherson region would be voluntary, and that the state would pay the cost of transportation. ‘Everyone can go to safer regions if they wish, and the state will ensure their delivery, accommodation, medical care and so on,’ Ms. Vereshchuk said…”
November 19 – Reuters (Phil Stewart and Idrees Ali): “Russia's surge in missile strikes in Ukraine is partly designed to exhaust Kyiv's supplies of air defenses and finally achieve dominance of the skies above the country, a senior Pentagon official said… Russia has been hammering cities across Ukraine with missile strikes over the past week, in one of the heaviest waves of missile attacks since Moscow began its invasion nearly nine months ago.”
November 22 – Reuters (Pavel Polityuk): “Ukraine's national power grid operator said… the damage dealt to Ukrainian power generating facilities by Russian missile attacks was ‘colossal’ but dismissed the need to evacuate civilians. Volodymyr Kudrytskyi, chief executive officer of Ukrenergo, told a briefing that Ukrainians could face long power outages but that the grid operator wanted to help provide the conditions for people to remain in the country through winter.”
November 21 – Reuters: “The head of Russia's state-run atomic energy agency, Rosatom, warned… there was a risk of a nuclear accident at the Zaporizhzhia nuclear power plant, Europe's largest, following renewed shelling over the weekend. Moscow and Kyiv have traded accusations of shelling the facility for months since Russian forces took control of it in March, shortly after invading Ukraine. Renewed shelling on Sunday triggered fresh fears of a possible disaster at the site.”
U.S./Russia/China Watch:
November 23 – Reuters (Jan Strupczewski): “European Union governments failed to reach a deal on Wednesday at what level to cap prices for Russian sea-borne oil under the Group of Seven nations (G7) scheme and will resume talks on Thursday evening or on Friday, EU diplomats said. Earlier on Thursday representatives of the EU's 27 governments met in Brussels to discuss a G7 proposal to set the price cap in the range of $65-$70 per barrel, but the level proved too low for some and too high for others. ‘There are still differences on the price cap level. We need to proceed bilaterally,’ one EU diplomat said. ‘The next meeting of ambassadors of EU countries will be either tomorrow evening or on Friday,’ the diplomat said.”
De-globalization and Iron Curtain Watch:
November 19 – Bloomberg (Stephen Engle, Michelle Jamrisko and Suttinee Yuvejwattana): “The rise of trade barriers against China and other countries over the past year could cost the global economy $1.4 trillion, on top of the severe damage being done by the war in Ukraine, the head of the International Monetary Fund said. ‘What I am hoping to see is some reversals in policy blocks towards China and globally,’ Kristalina Georgieva told Bloomberg… ‘The world is going to lose 1.5% of gross domestic product just because of division that may split us into two trading blocs. This is $1.4 trillion.’”
November 24 – Reuters (Essi Lehto): “The European Union is pressing ahead with a ninth sanctions package on Russia in response to Moscow's attack on Ukraine, European Commission chief Ursula von der Leyen said… ‘We are working hard to hit Russia where it hurts to blunt even further its capacity to wage war on Ukraine and I can announce today that we are working full speed on a ninth sanctions package,’ von der Leyen told a news conference. ‘And I'm confident that we will very soon approve a global price cap on Russian oil with the G7 and other major partners. We will not rest until Ukraine has prevailed over Putin and his unlawful and barbaric war,’ she said.”
Inflation Watch:
November 22 – Bloomberg (Elizabeth Elkin): “Egg prices are soaring as bird flu causes havoc in the industry while demand rises ahead of the holiday season. Prices for eggs climbed more than 10% from September to October, according to the latest Consumer Price Index data... Prices in October were 43% higher than the same month a year ago.”
November 23 – Bloomberg (Kim Chapman): “California’s worst drought has left growers in the top US agricultural state facing losses of $3 billion, just as producers brace for more widespread cuts to water supplies. The state’s driest three-year period on record resulted in the crop revenue losses after growers left a total of 1.3 million acres unplanted over 2021 and 2022 as compared with 2019…”
Federal Reserve Watch:
November 22 – Reuters (Lindsay Dunsmuir): “The Federal Reserve may need to raise interest rates to a higher level and hold them there for longer in order to successfully moderate consumer demand and bring down high inflation given the amount of spare savings households still hold since the pandemic, Kansas City Fed President Esther George said… ‘The dynamics of this excess saving and the distribution...is a key factor shaping the outlook for output, inflation and certainly for interest rates,’ George said… ‘Higher saving of course can lessen a precautionary pullback in consumption, and it could well take a higher interest rate for some time to convince households to hold on to their savings rather than spend it down, and that of course (is) adding to inflationary pressure.’”
November 21 – CNBC (Jeff Cox): “Cleveland Federal Reserve President Loretta Mester said… inflation will need to show more signs of progress before she’s ready to stop advocating for interest rate increases… ‘We’re going to have more work to do, because we need to see inflation really on a sustainable downward path back to 2%,’ she said… ‘We’ve had some good news on the inflation front, but we need to see more good news and sustained good news to make sure that we are returning to price stability as soon as we can.’”
November 22 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of Cleveland President Loretta Mester said officials are fully focused on curbing inflation while her Kansas City colleague Esther George cautioned that ample US savings may warrant higher interest rates to cool demand. ‘Given the high level of inflation, restoring price stability remains the number one focus of the FOMC,’ Mester told a virtual event… ‘We’re committed to using our tools to put inflation on a sustainable downward trajectory to 2%.’”
November 21 – Reuters (Michael S. Derby): “San Francisco Federal Reserve President Mary Daly said… the real-world impact of the U.S. central bank's interest rate hikes is likely greater than what its short-term rate target implies. Against the Fed's current short-term target rate of between 3.75% and 4.00%, Daly said some researchers have found ‘the level of financial tightening in the economy is much higher than what the (federal) funds rate tells us.’ Compared to the current target rate, she added, ‘financial markets are acting like it is around 6%.’”
U.S. Bubble Watch:
November 23 – Reuters (Lucia Mutikani): “U.S. business activity contracted for a fifth straight month in November, with a measure of new orders dropping to its lowest level in 2-1/2 years as higher interest rates slowed demand. S&P Global said… its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 46.3 this month from a final reading of 48.2 in October… The flash composite new orders index dropped to 46.4, the lowest level since May 2020, from a final reading of 49.2 in October. Outside the initial wave of the COVID-19 pandemic, this was the worst reading since 2009. ‘Companies are reporting increasing headwinds from the rising cost of living, tightening financial conditions - notably higher borrowing costs – and weakened demand across both home and export markets,’ said Chris Williamson, chief business economist at S&P Global Market Intelligence.”
November 21 – Associated Press (Josh Funk): “Consumers could see higher gas prices and shortages of some of their favorite groceries during the winter holiday season if railroads and all of their unions can’t agree on new contracts by an early-December deadline that had already been pushed back. The likelihood of a strike that would paralyze the nation’s rail traffic grew on Monday when the largest of the 12 rail unions, which represents mostly conductors, rejected management’s latest offering that included 24% raises and $5,000 in bonuses. With four of the 12 unions that represent half of the 115,000 rail workers holding out for a better deal, it might fall to Congress to impose one to protect the U.S. economy.”
November 21 – Bloomberg (Jonnelle Marte): “US consumers continued to seek out more credit cards this year even as the Federal Reserve aggressively lifted borrowing costs, a shift that cooled demand for mortgages, auto loans and other types of credit, according to research from the New York Fed. The New York Fed’s most recent credit-access survey showed an application rate for credit cards of 27.1% for October, remaining ‘robust’ after a 26.5% rate seen a year before… Demand for any kind of credit is strongest from consumers with high credit scores…”
November 23 – Bloomberg (Reade Pickert): “Sales of new US homes unexpectedly rose in October, largely driven by an increase in the South and likely representing a pause in an otherwise weak housing market. Purchases of new single-family homes increased 7.5% to an annualized 632,000 pace last month after falling in September… The report… showed the median sales price of a new home rose 15.4% from a year earlier, to $493,000.”
November 23 – Reuters (Kannaki Deka): “U.S. new vehicle retail sales are expected to be relatively flat in November as high vehicle prices, coupled with interest rate increase, are moderating demand, a report from industry consultants J.D. Power-LMC Automotive showed… Consumers who were willing to shell out more money for cars amid a shortage are now pulling back from spending as higher loan payment pressures affordability. The average monthly finance payment in November is set to be $712, up 7.2% from November 2021…”
November 23 – Bloomberg (Molly Smith): “US mortgage rates retreated sharply for a second week, hitting a two-month low and providing a bit of traction for the beleaguered housing market. The contract rate on a 30-year fixed mortgage decreased 23 bps to 6.67% in the week ended Nov. 18…”
November 23 – CNBC (Diana Olick): “Mortgage applications rose 2.2% last week compared with the previous week, prompted by a slight decline in interest rates, according to the Mortgage Bankers Association’s seasonally adjusted index… Mortgage applications to purchase a home rose 3% for the week, but they were down 41% from a year ago.”
November 22 – Reuters (P.j. Huffstutter and Bianca Flowers): “Montana farmer Sarah Degn had big plans to invest the healthy profits she gleaned for her soybeans and wheat this year into upgrading her planter or buying a new storage bin. But those plans have gone by the wayside. Everything Degn needs to farm is more expensive – and for the first time in her five-year career, so is the interest rate on the short-term debt she and nearly every other U.S. farmer relies upon to grow their crops and raise their livestock. ‘We might have made more money this year, but we spent just as much as we made,’ said Degn, a fourth-generation farmer in Sidney, Montana. The interest rate on her operating note doubled this year and will be higher in 2023. ‘We can't get ahead.’”
Fixed-Income Watch:
November 21 – Financial Times (Eric Platt and Harriet Clarfelt): “Wall Street banks are using a thaw in corporate debt markets to offload billions of dollars’ worth of loans tied to risky private equity takeovers, but many are still incurring losses to clinch deals with investors. The sale of debt earlier this month linked to the buyout of television ratings provider Nielsen offered a reprieve to lenders including Bank of America and Barclays, which are desperate to clear ‘hung’ deals that have piled up on their balance sheets this year because of a dearth of investor appetite. The $3.2tn market for riskier corporate bonds and leveraged loans has begun revving up in recent weeks after a long lull, paving the way for banks to consider selling some debt on to investors. However, confidence in markets remains shaky…”
November 24 – Wall Street Journal (Mark Maurer): “High-yield companies in the consumer goods, healthcare and entertainment industries are increasingly at risk of credit downgrades and even defaults as they battle rising interest rates and falling revenue, forcing some finance chiefs to consider alternative financing options. Default rates for low-rated U.S. companies will likely reach 3.75% for the 12 months ending in September 2023, up from 1.6% in September 2022, but lower than the long-term average of 4.1% and the 6.3% default rate in September 2020, ratings firm S&P Global Ratings said...”
China Watch:
November 23 – CNBC (Evelyn Cheng): “Surging Covid infections across mainland China make it harder for the government to achieve zero-Covid without reverting to a harsh lockdown, Macquarie’s Chief China Economist Larry Hu said… ‘China might have already passed the point of no return, as it’s unlikely to achieve zero Covid again without another Shanghai-style hard lockdown,’ Hu said... ‘What policymakers could do now is to slow the spread of virus, i.e. flatten the curve, by tightening the Covid controls for the time being.’”
November 25 – Bloomberg (Shirley Zhao): “China’s daily Covid infections broke through 30,000 for the first time ever as officials struggle to contain outbreaks that have triggered a growing number of restrictions across the country’s most important cities. There were 31,987 new infections reported for Thursday, up from Wednesday’s record of 29,754. The southern city of Guangzhou reported more than 7,500, while cases in the metropolis of Chongqing topped 6,000. The capital, Beijing, saw daily infections exceed 1,800 with the record tally and lockdown-like restrictions sparking panic buying in parts of the capital.”
November 25 – Bloomberg: “Beijing’s streets are deserted and grocery delivery services are running out of capacity as rising Covid cases trigger lockdown-like restrictions across swathes of the Chinese capital. The city saw 1,854 new infections Thursday, up from 1,611 on Wednesday, as China’s wider outbreak reaches record levels. While food was plentiful in many stores, delivery apps like Alibaba Group Holding Ltd.’s Freshippo -- known as Hema in Chinese -- and Walmart Inc.’s Sam’s Club were overwhelmed as residents hunkered down. Grocery outlets in Chaoyang, Beijing’s biggest district, no longer took delivery orders. Many restaurants halted even takeout services.”
November 22 – Financial Times (Ryan McMorrow): “Days after the northern Chinese city of Shijiazhuang reopened from a Covid-19 lockdown, barista Lu Mengyuan donned her apron, applied her eye glitter and was again whipping up coffee and hot Chinese crepes for the trickle of residents venturing slowly from their homes. Like many others, Lu believed the city’s abrupt reopening in the middle of a Covid wave and its vow to do away with mass testing marked a turning point. ‘We’re the first in China, an experiment,’ she said last Wednesday. ‘We will not lock back up.’ This week, however, Lu was again isolated and her silver Airstream coffee truck closed, as authorities reacted to a near record number of new Covid cases spreading across the country by locking down again. ‘I really have egg on my face,’ she said.”
November 25 – Bloomberg: “There are serious ramifications to being exposed to Covid-19 in China -- and not just infection. As the country confronts its biggest outbreak ever, residents in major cities are hunkering down because of the prospect of being sent to a quarantine camp or locked down at home. Going out in the capital of Beijing means having to scan a QR code to enter venues like shops and restaurants, or to even take public transportation. Under the country’s ubiquitous contract-tracing surveillance system, visiting the same places as someone who later turns up infected can land you in a government isolation facility, where conditions can be so poor that some people say they are buying chamber pots and portable tents in preparation.”
November 20 – Wall Street Journal (Stella Yifan Xie): “Chinese consumer spending is buckling under the country’s dual campaigns against rising property prices and Covid-19 outbreaks, flashing a warning for global companies that have pinned their hopes on a more free-spending Chinese customer. Retail sales unexpectedly dropped last month and are expected to continue to struggle as Chinese authorities launch wide-ranging lockdowns to contain the latest fastest-spreading Covid outbreaks, and as easing measures do little to reverse a worsening property market meltdown.”
November 22 – Bloomberg: “Covid control restrictions now weigh on a fifth of China’s economy as infections continue their upward march, defying the central government’s call for more targeted, less disruptive Covid Zero measures… The continued climb in cases has spooked local authorities into reintroducing measures like expanded testing and shuttering offices and schools in big cities, despite the new directives over a week ago that marked an easing in the official Covid Zero playbook.”
November 23 – Bloomberg: “China’s lack of intensive care hospital beds leaves the nation facing a slow exit from Covid Zero, likely stretching beyond 2023. A full reopening may lead to 5.8 million people being admitted to intensive care, overwhelming a health system that currently has less than four ICU beds per 100,000 people, far less than developed countries, according to Bloomberg Intelligence senior pharmaceutical analyst Sam Fazeli. The euphoric reaction to China’s softening of its zero-Covid-19 stance looks misplaced…”
November 23 – Reuters (Brenda Goh and Yimou Lee): “Hundreds of workers joined protests at Foxconn's flagship iPhone plant in China, with some men smashing surveillance cameras and windows, footage uploaded on social media showed. The rare scenes of open dissent in China mark an escalation of unrest at the massive factory in Zhengzhou city that has come to symbolise a dangerous build-up in frustration with the country's ultra-severe COVID rules as well as inept handling of the situation by the world's largest contract manufacturer. The trigger for the protests, which began early on Wednesday, appeared to be a plan to delay bonus payments…”
November 25 – Reuters (Yimou Lee): “Foxconn's flagship iPhone plant in China is set to see its November shipments further reduced by the latest bout of worker unrest this week, a source with direct knowledge of the matter said…, as thousands of employees left the site. The company could now see more than 30% of the site's November production affected, up from an internal estimate of up to 30% when the factory's worker troubles started in late October…”
November 25 – Bloomberg: “China’s central bank cut the amount of cash lenders must hold in reserve for the second time this year, ramping up support for an economy racked by surging Covid cases and a continued property downturn. The People’s Bank of China reduced the reserve requirement ratio for most banks by 25 basis points… The adjustment takes effect on Dec. 5 and will inject 500 billion yuan ($70bn) of liquidity into the economy. The cut is aimed at ‘keeping liquidity reasonably ample” and ‘increasing the support for the real economy,’ as well as helping banks support industries damaged by the Covid pandemic, the PBOC said…”
November 25 – Reuters (Julie Zhu and Engen Tham): “China's central bank will offer cheap loans to financial firms for buying bonds issued by property developers…, the strongest policy support yet for the crisis-hit sector. The People's Bank of China (PBOC) hopes the loans will boost market sentiment toward the heavily indebted property sector, which has lurched from crisis to crisis over the past year, and rescue a number of private developers, said the people…”
November 23 – Financial Times (Cheng Leng and Thomas Hale): “China’s state-owned banks have launched a concerted effort to strengthen the finances of the country’s struggling property developers, with more than Rmb220bn ($30.7bn) being announced on Wednesday in new credit lines. Bank of Communications, China’s sixth-largest bank by assets, was the first to announce support, agreeing a Rmb100bn credit line for Chinese developer Vanke and Rmb20bn for Midea Real Estate, in a clear sign of greater government support for stronger players in the real estate sector. BoCom said the loans would support the developers’ needs in ‘project developments, mortgages, merger and acquisition deals, bond investment, letter of guarantee and supply chain financing’.”
November 25 – Bloomberg: “China’s mega banks, led by Industrial & Commercial Bank of China Ltd., pledged financing support of at least 1.28 trillion yuan ($179bn) to property developers as part of a push to ease turmoil in the nation’s real estate market. ICBC, the world’s largest bank by assets…, said it would provide 655 billion yuan in credit lines to 12 developers, including Country Garden Holdings Co. Bank of China Ltd., Bank of Communications Co., Postal Savings Bank of China Ltd. and Agricultural Bank of China Ltd. and China Construction Bank Corp. also disclosed they would extend financing.”
November 23 – Reuters (Xie Yu): “Major Chinese developer Country Garden has signed a contract with the Postal Savings Bank of China for a credit line of up to 50 billion yuan ($7.0bn)… The credit line will be used for loans for land development, mergers and acquisitions, and mortgage financing, it said.”
November 25 – Bloomberg: “Signs are growing in China that local government debt burdens are becoming unsustainable. China’s 31 provincial governments have a stockpile of outstanding bonds that’s close to the Ministry of Finance’s risk threshold of 120% of income. Breaching that line could mean regions will face more regulatory hurdles to borrow, hampering their ability to drive up economic growth. In addition, local authorities will face a massive maturity wall over the next five years as bonds worth almost 15 trillion yuan ($2.1 trillion) -- more than 40% of their outstanding debt -- fall due.”
November 22 – Bloomberg: “China’s zero tolerance approach to combating Covid infections will curb the benefits expected from recent measures to support a struggling property market, according to Goldman Sachs… ‘Because of the Zero Covid policy, all the ongoing property easing might not be transmitted into the property sector recovery,’ Hui Shan, chief China economist at Goldman…, said… The Covid strategy ‘is a big roadblock for the property sector, for the labor market and a number of aspects of the economy,’ she said.”
Central Banker Watch:
November 22 – Financial Times (Chris Giles): “The Treasury has had to bail out the Bank of England for the first losses it has made on its quantitative easing programme since 2009, which resulted from rises in official interest rates. In figures published on Tuesday evening, the central bank reported that the Treasury had transferred £828mn during the third quarter and that it expected these payments would continue for the foreseeable future.”
November 21 – Financial Times (Martin Arnold): “The European Central Bank needs to maintain the pace of rate rises at its next vote to convince the public that policymakers are ‘serious’ about taming inflation, said Austria’s hawkish central bank chief. Robert Holzmann, head of the National Bank of Austria and member of the ECB’s governing council, backed a third straight 0.75 percentage point rise in the deposit rate at the next rate-setting meeting in mid-December. The move would raise benchmark borrowing costs to 2.25%. His comments underline the potential for a clash at the next vote…”
November 22 – Bloomberg (Tracy Withers): “New Zealand’s central bank raised interest rates by a record 75 bps and signaled further tightening ahead, stepping up its inflation fight even as it forecasts a recession next year. Short-maturity bond yields surged after the Reserve Bank’s Monetary Policy Committee lifted the Official Cash Rate to 4.25% from 3.5%... Its forecasts show the OCR peaking at 5.5% in the third quarter of 2023, up from a previous peak of 4.1%. ‘The RBNZ sees inflation as deeply embedded,’ said Michael Gordon, acting New Zealand chief economist at Westpac Banking Corp. ‘It now believes that a recession will be needed to bring inflation back within the 1-3% target range.’”
November 23 – Bloomberg (Philip Aldrick and Liza Tetley): “The Bank of England needs to raise interest rates further to tackle inflationary pressures that are becoming increasingly domestic, Chief Economist Huw Pill said. ‘My judgment there is still some more to do in order to address prevailing inflationary pressures and complete the necessary normalisation of monetary policy following a decade or more of exceptional accommodation,’ he said…”
November 23 – Bloomberg (Sam Kim and Hooyeon Kim): “Bank of Korea Governor Rhee Chang-yong signaled the end may be near for the country’s unprecedented streak of policy tightening to curb inflation, returning to a smaller interest-rate hike as concerns grow over economic growth and credit markets. ‘I am aware that the pain among economic players is deepening as rates rise and the economy weakens,’ Rhee said…, adding that the BOK is focusing on relieving price pressures quickly so that rates can start to stabilize soon.”
Global Bubble Watch:
November 21 – Bloomberg (Ari Altstedter, Kevin Orland, and Lizzie Kane): “For the past 25 years, Canada has been in the grip of the world’s biggest housing boom, a near unbroken run of price appreciation unparalleled among its developed peers. Now it’s over, and pain is starting to spread. Soaring interest rates have squelched demand and sent home prices sliding, engulfing people like Cam Ly, who recently found himself sitting in a car with his wife and two kids, watching prospective buyers tour their modest townhouse in Toronto’s suburbs. Ly had taken a second, and then a third, mortgage out on the property when family finances got tight during the pandemic — a move that made sense to him after the home’s assessed value soared 60% in little over 12 months. But with both loans coming due by the end of the year, he found himself unable to afford the rates his lenders asked to refinance, and was left with no choice but to sell the house…”
November 21 – Reuters (Juliette Portala): “The outlook for credit conditions next year for non-financial companies in Europe, Middle East and Africa is negative, credit rating agency Moody's said…, as financing conditions degrade and energy and wage costs loom. After more than a decade of ultra-loose monetary policy, financing conditions are tightening, inflation is rising and the global economy looks poised to fall into its first recession since 2009. ‘Higher interest rates will cause financing conditions to deteriorate and will weaken liquidity and credit quality,’ Moody's said. This could compel many companies to focus on cash conservation by curtailing shareholder returns and debt-funded M&A.”
Europe Watch:
November 23 – Bloomberg (Jana Randow): “Euro-area businesses see tentative signs that the region’s economic slump may be easing as record inflation cools and expectations for future production improve. A gauge measuring activity in manufacturing and services unexpectedly rose in November, according to S&P Global. While it still firmly indicates a recession in the 19-nation region is underway, it offers some room to think the downturn may be shallower than previously predicted.”
November 24 – Bloomberg (Jana Randow and Alexander Weber): “Financial stability in Germany, Europe’s largest economy, has taken a substantial turn for the worse this year, triggering warnings from the Bundesbank. Banks, insurers and investment funds have already recorded losses as markets adapt to deteriorating growth prospects, stubbornly high inflation and rising interest-rate and risk premiums, Germany’s central bank said in its annual Financial Stability Report. ‘A worsening energy crisis, a sharp economic slump and abruptly rising market interest rates could put the German financial system under considerable pressure,’ the Bundesbank said... ‘Rising costs are limiting the financial leeway of households and enterprises. Future credit risks are increasing as a result.’”
EM Crisis Watch:
November 22 – Associated Press (David Biller and Carla Bridi): “More than three weeks after losing a reelection bid, President Jair Bolsonaro… blamed a software bug and demanded the electoral authority annul votes cast on most of Brazil’s nation’s electronic voting machines, though independent experts say the bug doesn’t affect the reliability of results. Such an action would leave Bolsonaro with 51% of the remaining valid votes — and a reelection victory, Marcelo de Bessa, the lawyer who filed the 33-page request on behalf of the president and his Liberal Party, told reporters.”
November 21 – Reuters (Marc Jones): “Nomura has warned that seven countries - Egypt, Romania, Sri Lanka, Turkey, Czech Republic, Pakistan and Hungary - are now at a high risk of currency crises. The Japanese bank said that 22 of the 32 countries covered by its in-house ‘Damocles’ warning system have seen their risk rise since its last update since May, with the largest increases in the Czech Republic and Brazil.”
Japan Watch:
November 24 – Reuters (Takahiko Wada and Leika Kihara): “Core consumer prices in Japan's capital, a leading indicator of nationwide trends, rose at their fastest annual pace in 40 years in November and exceeded the central bank's 2% target for a sixth straight month, signalling broadening inflationary pressure. The increase, driven mostly by food and fuel bills but spreading to a broader range of goods, cast doubt on the view of the Bank of Japan (BOJ) that recent cost-push inflation will prove transitory… The Tokyo core consumer price index (CPI), which excludes fresh food but includes fuel, was 3.6% higher in November than a year earlier… The rise exceeded a median market forecast of 3.5% and the 3.4% increase seen in October. The last time Tokyo inflation was faster was April 1982…”
November 21 – Reuters (Leika Kihara): “Japan's weighted median inflation rate, which is closely watched as an indicator on whether price rises are broadening, hit a record 1.1% in October in a sign of heightening inflationary pressure from rising raw material and labour costs. The data will likely keep alive market expectations the Bank of Japan (BOJ) may tweak its ultra-low interest rates if wages pick up in tandem with inflation next year.”
Social, Political, Environmental, Cybersecurity Instability Watch:
November 20 – Bloomberg (Jennifer A. Dlouhy, Akshat Rathi, John Ainger and Antony Sguazzin): “The United Nations climate summit concluded with landmark agreements on compensation for poorer countries affected by global warming and plans to mitigate the effects of climate change. But many delegates were upset that little progress was made on some other major goals, including stronger commitments to curb the use of fossil fuels and to limit warming to 1.5C by the end of the century. ‘Why are we celebrating loss and damage when we have failed on mitigation and adaptation?’ asked Aminath Shauna, Minister of Environment for the Maldives. ‘We are just a meter above sea level — I want my two-year old daughter to live in the Maldives.’”
November 20 – Wall Street Journal (Rachel Wolfe and Jon Hilsenrath): “Households, retailers and charities nationwide, feeling the pinch of inflation, are bracing for a humbug holiday season. U.S. consumers and businesses have trimmed spending plans for gifts, charitable contributions and holiday events... The penny-pinching threatens to spoil the year-end for many, especially firms and nonprofits that tally their largest share of sales and donations in November and December. ‘We’re hopeful for a strong giving season, but we’re not counting on it,’ said Thomas Tighe, chief executive of Direct Relief, a medical-assistance nonprofit that takes in around $2 billion a year in donated medicine, supplies and cash to deliver help around the world.”
Leveraged Speculation Watch:
November 23 – Bloomberg (Hema Parmar): “Tiger Global Management marked down the value of its private funds by almost a quarter this year, contributing to a $42 billion decline in assets, one of the industry’s biggest ever. In addition, some of the previously private but now-public companies held by Tiger Global’s venture unit lost value, according to people familiar with the matter… The unit oversaw about $43 billion as of Sept. 30, down from $65 billion at year-end, after accounting for fundraising and redistributions to investors. The division marked down the value of its private investments by 24%. Assets in Tiger Global’s public investment arm shriveled to $15 billion from $35 billion…”
November 21 – Financial Times (Laurence Fletcher and Joshua Oliver): “Hedge funds have billions of dollars stuck on failed cryptocurrency exchange FTX and could face years of waiting to recover anything at all from a marketplace they once believed to be one of the industry’s most reliable bets. In a situation reminiscent of Lehman Brothers in 2008, which left billions of dollars of hedge funds’ assets trapped for years, investors who traded on the Bahamas-based exchange have found themselves among the thousands of creditors in a highly complex bankruptcy. The sudden failure this month of FTX, valued at $32bn this year, has shocked investors who backed it and traders who used it.”
November 21 – Bloomberg (Jeff Cox): “Professional speculators are sticking to their long-held cautious stance even after the latest equity rally forced them to unwind short trades at one of the fastest paces in years… Fund clients tracked by JPMorgan... have reduced wagers in both their long and short books, reversing all the risky exposures that they had taken on between late August and the end of September. At Goldman Sachs…, hedge funds saw their combined trading flow falling for a fifth straight week.”
Geopolitical Watch:
November 19 – Reuters (Hyonhee Shin): “North Korean leader Kim Jong Un pledged to counter U.S. nuclear threats with nuclear weapons as he inspected a test of the country's new intercontinental ballistic missile (ICBM), state media KCNA said… The isolated country tested the Hwasong-17 ICBM on Friday a day after warning of ‘fiercer military responses’ to Washington beefing up its regional security presence including nuclear assets.”
November 22 – Financial Times (Najmeh Bozorgmehr): “Iran has announced an expansion of its nuclear enrichment programme, in a provocative response to a rebuke by the UN’s watchdog over the alleged existence of undeclared nuclear sites. The head of the Atomic Energy Organization of Iran… said it had added the underground Fordow facility to the list of locations where it was enriching uranium to the 60% purity level, just below weapons grade. This followed a resolution by the International Atomic Energy Agency’s board last week calling on Iran to co-operate over uranium traces found at three undeclared sites in the country.”
The S&P500 gained 1.5% (down 15.5% y-t-d), and the Dow rose 1.8% (down 5.5%). The Utilities jumped 3.1% (down 2.7%). The Banks rose 2.0% (down 18.3%), and the Broker/Dealers increased 1.6% (down 2.2%). The Transports gained 1.3% (down 12.4%). The S&P 400 Midcaps jumped 1.9% (down 9.9%), and the small cap Russell 2000 gained 1.1% (down 16.8%). The Nasdaq100 increased 0.7% (down 28.0%). The Semiconductors advanced 1.0% (down 30.3%). The Biotechs gained 0.6% (down 5.4%). With bullion increasing $4, the HUI gold equities index jumped 3.9% (down 12.7%).
Three-month Treasury bill rates ended the week at 4.16%. Two-year government yields fell eight bps to 4.56% (up 372bps y-t-d). Five-year T-note yields dropped 15 bps to 3.86% (up 260bps). Ten-year Treasury yields fell 15 bps to 3.68% (up 217bps). Long bond yields sank 19 bps to 3.74% (up 183bps). Benchmark Fannie Mae MBS yields dropped 17 bps to 5.14% (up 308bps).
Greek 10-year yields fell 11 bps to 4.14% (up 283bps y-t-d). Italian yields declined four bps to 3.85% (up 268bps). Spain's 10-year yields slipped five bps to 2.96% (up 239bps). German bund yields declined four bps to 1.97% (up 215bps). French yields fell five bps to 2.44% (up 224bps). The French to German 10-year bond spread narrowed about one to 47 bps. U.K. 10-year gilt yields dropped 12 bps to 3.12% (up 215bps). U.K.'s FTSE equities index gained 1.4% (up 1.4% y-t-d).
Japan's Nikkei Equities Index rallied 1.4% (down 1.8% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.25% (up 18bps y-t-d). France's CAC40 rose 1.0% (down 6.2%). The German DAX equities index increased 0.8% (down 8.5%). Spain's IBEX 35 equities index surged 3.6% (down 3.4%). Italy's FTSE MIB index increased 0.2% (down 9.6%). EM equities were mixed. Brazil's Bovespa index was little changed (up 4.0%), while Mexico's Bolsa index increased 0.2% (down 3.0%). South Korea's Kospi index dipped 0.3% (down 18.1%). India's Sensex equities index gained 1.0% (up 6.9%). China's Shanghai Exchange Index was about unchanged (down 14.8%). Turkey's Borsa Istanbul National 100 index surged 7.7% (up 162%). Russia's MICEX equities index declined 0.5% (down 42%).
Investment-grade bond funds posted outflows of $1.789 billion, while junk bond funds reported inflows of $2.207 billion (from Lipper).
Federal Reserve Credit dropped $41.3bn last week to $8.588 TN. Fed Credit was down $313bn from the June 22nd peak. Over the past 167 weeks, Fed Credit expanded $4.861 TN, or 130%. Fed Credit inflated $5.777 Trillion, or 206%, over the past 524 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $2.1bn to $3.310 TN - near the low since June 2017. "Custody holdings" were down $165bn, or 4.7%, y-o-y.
Total money market fund assets rose $16.1bn to $4.641 TN. Total money funds were up $43bn, or 0.9%, y-o-y.
Total Commercial Paper gained $5.2bn to $1.309 TN - the high since 2009. CP was up $206bn, or 18.7%, over the past year.
Freddie Mac 30-year fixed mortgage rates slipped two bps to 6.54% (up 344bps y-o-y). Fifteen-year rates dropped 10 bps to 5.88% (up 346bps). Five-year hybrid ARM rates declined two bps to 5.51% (up 304bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down nine bps to 6.76% (up 359bps).
Currency Watch:
For the week, the U.S. Dollar Index declined 0.9% to 105.96 (up 10.8% y-t-d). For the week on the upside, the Norwegian krone increased 3.1%, the Swedish krona 1.9%, the British pound 1.7%, the New Zealand dollar 1.6%, the South Korean won 1.2%, the Australian dollar 1.2%, the South African rand 1.0%, the Swiss franc 0.9%, the Japanese yen 0.9%, the euro 0.7% and the Mexican peso 0.6%. On the downside, the Brazilian real declined 0.4% and the Singapore dollar dipped 0.1%. The Chinese (onshore) renminbi declined 0.63% versus the dollar (down 11.29% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index was little changed (up 15.9% y-t-d). Spot Gold added 0.2% to $1,755 (down 4.1%). Silver jumped 3.8% to $21.75 (down 6.7%). WTI crude sank $3.80 to $80.08 (up 1%). Gasoline dropped 3.8% (up 5%), while Natural Gas surged 11.4% to $7.02 (up 88%). Copper slipped 0.3% (down 19%). Wheat dropped 3.0% (up 3%), while Corn added 0.2% (up 13%). Bitcoin declined $90 this week, or 0.5%, to $16,530 (down 64%).
Market Instability Watch:
November 24 – Bloomberg: “Singapore’s central bank warned of ‘potential dysfunction’ in global funding markets and liquidity strains on financial firms that could spill over to banks and companies, amid intensifying risks to international financial stability. Central banks should step up as market makers of last resort should liquidity stresses emerge that could threaten severe disruptions in core funding markets, the Monetary Authority of Singapore said…, referring to the issue as ‘the most immediate risk’ to global financial stability. ‘Targeted and temporary interventions aimed at smoothing volatility would help avoid a breakdown in market functioning, without obstructing the necessary tightening of monetary policy to deal with the inflationary pressures in the economy,’ the MAS said.”
Crypto Bubble Collapse Watch:
November 23 – Bloomberg (Joanna Ossinger): “Sam Bankman-Fried, disgraced founder of the now collapsed crypto exchange FTX and trading house Alameda Research, apologized to staff in a letter that outlined a crash in ‘collateral’ to $9 billion from $60 billion. ‘I didn’t mean for any of this to happen, and I would give anything to be able to go back and do things over again,’ he wrote… A slide in digital-asset markets in spring roughly halved collateral to $30 billion, while liabilities were $2 billion, he said. A combination of a credit squeeze, a further selloff in virtual coins and a ‘run on the bank’ left collateral at $9 billion ahead of FTX’s Nov. 11 bankruptcy… The estimate for liabilities had reached $8 billion by then, he said. ‘I did not realize the full extent of the margin position, nor did I realize the magnitude of the risk posed by a hyper-correlated crash,’ Bankman-Fried said.”
November 22 – Reuters (Manya Saini): “Troubled cryptocurrency lender Genesis Global Capital has hired investment bank Moelis & Company to explore options including a potential bankruptcy, the New York Times reported… The company has not yet made a final decision on bankruptcy and it was still possible to be averted, the NYT added… On Monday, Genesis had asserted it had no plans to file bankruptcy imminently, days after it suspended customer redemptions citing the collapse of FTX.”
November 22 – Wall Street Journal (Peter Rudegeair and Vicky Ge Huang): “Digital Currency Group Inc. said 2022 revenue is on track to reach $800 million, down about 20% from what the cryptocurrency-focused conglomerate expected to generate last year. DCG is the parent company of Genesis Global Capital, a crypto lending firm that paused redemptions and loan originations on Nov. 16… DCG owes Genesis around $575 million that is due in May 2023, in addition to a $1.1 billion promissory note to Genesis due in June 2032, DCG Chief Executive Barry Silbert said… DCG is trying to assuage the fears of crypto traders and investors following the meltdown of crypto exchange FTX this month. Exposures that once seemed manageable have grown across the crypto industry, and investors are questioning the health of firms once viewed as safe.”
November 22 – Bloomberg: “Top partners at Sequoia Capital apologized to investors for backing FTX, whose bankruptcy had its first US court hearing. Sam Bankman-Fried in a letter outlined a crash in collateral to $9 billion from $60 billion. An attorney representing Bankman-Fried’s collapsed FTX Group said a ‘substantial amount’ of its assets ‘have either been stolen or are missing.’ Identifiable information of FTX’s top creditors is being kept secret for now.”
November 24 – Reuters (Huw Jones): “The crash of FTX exchange has injected greater urgency into regulating the crypto sector and targeting such 'conglomerate' platforms will be the focus for 2023, the new chair of global securities watchdog IOSCO said… Jean-Paul Servais said regulating crypto platforms could draw on principles from other sectors which handle conflicts of interest, such as at credit rating agencies and compilers of market benchmarks, without having to start from scratch.”
November 21 – Financial Times (Akila Quinio and Joshua Oliver): “Crypto exchanges such as the bankrupt FTX that bundle together services kept separate by mainstream institutions should be more tightly regulated before they become a risk to the financial system, a senior Bank of England official has warned… Sir Jon Cunliffe, deputy governor of the Bank of England, said digital asset exchanges created risks to their market by operating businesses that encompassed trading, lending, clearing and custody of client assets. Traditional markets maintain careful separation between these different roles to guard against risks, he said.”
November 21 – Bloomberg (Katie Greifeld): “Cascading crypto blowups have only exacerbated problems for Grayscale’s $10.5 billion Bitcoin fund. The Grayscale Bitcoin Trust closed a record 45% below the value of its underlying coins on Friday…”
November 21 – Bloomberg (Matt Turner and Abhishek Vishnoi): “Wall Street’s waning conviction in Coinbase Global Inc. has done little to deter Cathie Wood. Instead, she’s been scooping up shares of the struggling cryptocurrency exchange in the wake of the collapse of Sam Bankman-Fried’s FTX. Wood’s Ark Investment Management funds have bought more than 1.3 million shares of Coinbase since the start of November, worth about $56 million… The shopping spree, which started just as FTX’s demise began, has boosted Ark’s total holdings by roughly 19% to about 8.4 million shares. That equates to around 4.7% of Coinbase’s total outstanding shares.”
November 23 – Bloomberg (Sunil Jagtiani and Akshay Chinchalkar): “Pick a number and cross your fingers. Crypto naysayers who argue that’s the essence of Bitcoin prognostication are likely finding validation in the thick uncertainty shrouding the sector. Over the past few days, long-term targets for the world’s largest token by market value have ranged from $5,000 at strategists BCA Research Inc. to $1 million by 2030 for Ark Investment Management’s Cathie Wood.”
November 22 – Reuters (Koh Gui Qing): “Sam Bankman-Fried's FTX, his parents and senior executives of the failed cryptocurrency exchange bought at least 19 properties worth nearly $121 million in the Bahamas over the past two years… Separately, attorneys for FTX said… one of the company's units spent $300 million in the Bahamas buying homes and vacation properties for its senior staff…”
Bursting Bubble and Mania Watch:
November 25 – Bloomberg (David Brooke): “Private credit firms, flush with money to invest in an economy that may be on the brink of a recession, are increasingly looking at lending on companies with assets that can collateralize loans, to limit potential losses. In focusing on asset-based loans, direct lenders are muscling in on a type of lending that has historically been dominated by banks. But the $1.3 trillion private credit industry has spent years chiseling away at banks’ syndicated leveraged loan business, which is often based on borrowers’ cash flow, and the lenders may make similar inroads in loans tied to assets. ‘A lot of banks have come out of the market and we’ve found opportunities to grow,’ said Carlos Mendez, co-founder of Crayhill Capital Management, a specialty lender.”
Ukraine War Watch:
November 23 – Associated Press (John Leicester and Sam Mednick): “Russia unleashed a new missile onslaught on Ukraine’s battered energy grid Wednesday, robbing cities of power and some of water and public transport, too, compounding the hardship of winter for millions. The aerial mauling of power supplies also took nuclear plants and internet links offline and spilled blackouts into neighbor Moldova. Multiple regions reported attacks in quick succession and cascading outages. Ukraine’s Energy Ministry said supplies were cut to ‘the vast majority of electricity consumers.’ …All of Kyiv lost water, the capital’s mayor said.”
November 20 – Wall Street Journal (Ian Lovett): “Ukrainian officials encouraged people from recently recaptured territories to evacuate, as the country tries to ease the strain on its damaged electric grid ahead of the winter. Deputy Prime Minister Iryna Vereshchuk said… evacuations from recently reclaimed territory in the southern Kherson region would be voluntary, and that the state would pay the cost of transportation. ‘Everyone can go to safer regions if they wish, and the state will ensure their delivery, accommodation, medical care and so on,’ Ms. Vereshchuk said…”
November 19 – Reuters (Phil Stewart and Idrees Ali): “Russia's surge in missile strikes in Ukraine is partly designed to exhaust Kyiv's supplies of air defenses and finally achieve dominance of the skies above the country, a senior Pentagon official said… Russia has been hammering cities across Ukraine with missile strikes over the past week, in one of the heaviest waves of missile attacks since Moscow began its invasion nearly nine months ago.”
November 22 – Reuters (Pavel Polityuk): “Ukraine's national power grid operator said… the damage dealt to Ukrainian power generating facilities by Russian missile attacks was ‘colossal’ but dismissed the need to evacuate civilians. Volodymyr Kudrytskyi, chief executive officer of Ukrenergo, told a briefing that Ukrainians could face long power outages but that the grid operator wanted to help provide the conditions for people to remain in the country through winter.”
November 21 – Reuters: “The head of Russia's state-run atomic energy agency, Rosatom, warned… there was a risk of a nuclear accident at the Zaporizhzhia nuclear power plant, Europe's largest, following renewed shelling over the weekend. Moscow and Kyiv have traded accusations of shelling the facility for months since Russian forces took control of it in March, shortly after invading Ukraine. Renewed shelling on Sunday triggered fresh fears of a possible disaster at the site.”
U.S./Russia/China Watch:
November 23 – Reuters (Jan Strupczewski): “European Union governments failed to reach a deal on Wednesday at what level to cap prices for Russian sea-borne oil under the Group of Seven nations (G7) scheme and will resume talks on Thursday evening or on Friday, EU diplomats said. Earlier on Thursday representatives of the EU's 27 governments met in Brussels to discuss a G7 proposal to set the price cap in the range of $65-$70 per barrel, but the level proved too low for some and too high for others. ‘There are still differences on the price cap level. We need to proceed bilaterally,’ one EU diplomat said. ‘The next meeting of ambassadors of EU countries will be either tomorrow evening or on Friday,’ the diplomat said.”
De-globalization and Iron Curtain Watch:
November 19 – Bloomberg (Stephen Engle, Michelle Jamrisko and Suttinee Yuvejwattana): “The rise of trade barriers against China and other countries over the past year could cost the global economy $1.4 trillion, on top of the severe damage being done by the war in Ukraine, the head of the International Monetary Fund said. ‘What I am hoping to see is some reversals in policy blocks towards China and globally,’ Kristalina Georgieva told Bloomberg… ‘The world is going to lose 1.5% of gross domestic product just because of division that may split us into two trading blocs. This is $1.4 trillion.’”
November 24 – Reuters (Essi Lehto): “The European Union is pressing ahead with a ninth sanctions package on Russia in response to Moscow's attack on Ukraine, European Commission chief Ursula von der Leyen said… ‘We are working hard to hit Russia where it hurts to blunt even further its capacity to wage war on Ukraine and I can announce today that we are working full speed on a ninth sanctions package,’ von der Leyen told a news conference. ‘And I'm confident that we will very soon approve a global price cap on Russian oil with the G7 and other major partners. We will not rest until Ukraine has prevailed over Putin and his unlawful and barbaric war,’ she said.”
Inflation Watch:
November 22 – Bloomberg (Elizabeth Elkin): “Egg prices are soaring as bird flu causes havoc in the industry while demand rises ahead of the holiday season. Prices for eggs climbed more than 10% from September to October, according to the latest Consumer Price Index data... Prices in October were 43% higher than the same month a year ago.”
November 23 – Bloomberg (Kim Chapman): “California’s worst drought has left growers in the top US agricultural state facing losses of $3 billion, just as producers brace for more widespread cuts to water supplies. The state’s driest three-year period on record resulted in the crop revenue losses after growers left a total of 1.3 million acres unplanted over 2021 and 2022 as compared with 2019…”
Federal Reserve Watch:
November 22 – Reuters (Lindsay Dunsmuir): “The Federal Reserve may need to raise interest rates to a higher level and hold them there for longer in order to successfully moderate consumer demand and bring down high inflation given the amount of spare savings households still hold since the pandemic, Kansas City Fed President Esther George said… ‘The dynamics of this excess saving and the distribution...is a key factor shaping the outlook for output, inflation and certainly for interest rates,’ George said… ‘Higher saving of course can lessen a precautionary pullback in consumption, and it could well take a higher interest rate for some time to convince households to hold on to their savings rather than spend it down, and that of course (is) adding to inflationary pressure.’”
November 21 – CNBC (Jeff Cox): “Cleveland Federal Reserve President Loretta Mester said… inflation will need to show more signs of progress before she’s ready to stop advocating for interest rate increases… ‘We’re going to have more work to do, because we need to see inflation really on a sustainable downward path back to 2%,’ she said… ‘We’ve had some good news on the inflation front, but we need to see more good news and sustained good news to make sure that we are returning to price stability as soon as we can.’”
November 22 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of Cleveland President Loretta Mester said officials are fully focused on curbing inflation while her Kansas City colleague Esther George cautioned that ample US savings may warrant higher interest rates to cool demand. ‘Given the high level of inflation, restoring price stability remains the number one focus of the FOMC,’ Mester told a virtual event… ‘We’re committed to using our tools to put inflation on a sustainable downward trajectory to 2%.’”
November 21 – Reuters (Michael S. Derby): “San Francisco Federal Reserve President Mary Daly said… the real-world impact of the U.S. central bank's interest rate hikes is likely greater than what its short-term rate target implies. Against the Fed's current short-term target rate of between 3.75% and 4.00%, Daly said some researchers have found ‘the level of financial tightening in the economy is much higher than what the (federal) funds rate tells us.’ Compared to the current target rate, she added, ‘financial markets are acting like it is around 6%.’”
U.S. Bubble Watch:
November 23 – Reuters (Lucia Mutikani): “U.S. business activity contracted for a fifth straight month in November, with a measure of new orders dropping to its lowest level in 2-1/2 years as higher interest rates slowed demand. S&P Global said… its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 46.3 this month from a final reading of 48.2 in October… The flash composite new orders index dropped to 46.4, the lowest level since May 2020, from a final reading of 49.2 in October. Outside the initial wave of the COVID-19 pandemic, this was the worst reading since 2009. ‘Companies are reporting increasing headwinds from the rising cost of living, tightening financial conditions - notably higher borrowing costs – and weakened demand across both home and export markets,’ said Chris Williamson, chief business economist at S&P Global Market Intelligence.”
November 21 – Associated Press (Josh Funk): “Consumers could see higher gas prices and shortages of some of their favorite groceries during the winter holiday season if railroads and all of their unions can’t agree on new contracts by an early-December deadline that had already been pushed back. The likelihood of a strike that would paralyze the nation’s rail traffic grew on Monday when the largest of the 12 rail unions, which represents mostly conductors, rejected management’s latest offering that included 24% raises and $5,000 in bonuses. With four of the 12 unions that represent half of the 115,000 rail workers holding out for a better deal, it might fall to Congress to impose one to protect the U.S. economy.”
November 21 – Bloomberg (Jonnelle Marte): “US consumers continued to seek out more credit cards this year even as the Federal Reserve aggressively lifted borrowing costs, a shift that cooled demand for mortgages, auto loans and other types of credit, according to research from the New York Fed. The New York Fed’s most recent credit-access survey showed an application rate for credit cards of 27.1% for October, remaining ‘robust’ after a 26.5% rate seen a year before… Demand for any kind of credit is strongest from consumers with high credit scores…”
November 23 – Bloomberg (Reade Pickert): “Sales of new US homes unexpectedly rose in October, largely driven by an increase in the South and likely representing a pause in an otherwise weak housing market. Purchases of new single-family homes increased 7.5% to an annualized 632,000 pace last month after falling in September… The report… showed the median sales price of a new home rose 15.4% from a year earlier, to $493,000.”
November 23 – Reuters (Kannaki Deka): “U.S. new vehicle retail sales are expected to be relatively flat in November as high vehicle prices, coupled with interest rate increase, are moderating demand, a report from industry consultants J.D. Power-LMC Automotive showed… Consumers who were willing to shell out more money for cars amid a shortage are now pulling back from spending as higher loan payment pressures affordability. The average monthly finance payment in November is set to be $712, up 7.2% from November 2021…”
November 23 – Bloomberg (Molly Smith): “US mortgage rates retreated sharply for a second week, hitting a two-month low and providing a bit of traction for the beleaguered housing market. The contract rate on a 30-year fixed mortgage decreased 23 bps to 6.67% in the week ended Nov. 18…”
November 23 – CNBC (Diana Olick): “Mortgage applications rose 2.2% last week compared with the previous week, prompted by a slight decline in interest rates, according to the Mortgage Bankers Association’s seasonally adjusted index… Mortgage applications to purchase a home rose 3% for the week, but they were down 41% from a year ago.”
November 22 – Reuters (P.j. Huffstutter and Bianca Flowers): “Montana farmer Sarah Degn had big plans to invest the healthy profits she gleaned for her soybeans and wheat this year into upgrading her planter or buying a new storage bin. But those plans have gone by the wayside. Everything Degn needs to farm is more expensive – and for the first time in her five-year career, so is the interest rate on the short-term debt she and nearly every other U.S. farmer relies upon to grow their crops and raise their livestock. ‘We might have made more money this year, but we spent just as much as we made,’ said Degn, a fourth-generation farmer in Sidney, Montana. The interest rate on her operating note doubled this year and will be higher in 2023. ‘We can't get ahead.’”
Fixed-Income Watch:
November 21 – Financial Times (Eric Platt and Harriet Clarfelt): “Wall Street banks are using a thaw in corporate debt markets to offload billions of dollars’ worth of loans tied to risky private equity takeovers, but many are still incurring losses to clinch deals with investors. The sale of debt earlier this month linked to the buyout of television ratings provider Nielsen offered a reprieve to lenders including Bank of America and Barclays, which are desperate to clear ‘hung’ deals that have piled up on their balance sheets this year because of a dearth of investor appetite. The $3.2tn market for riskier corporate bonds and leveraged loans has begun revving up in recent weeks after a long lull, paving the way for banks to consider selling some debt on to investors. However, confidence in markets remains shaky…”
November 24 – Wall Street Journal (Mark Maurer): “High-yield companies in the consumer goods, healthcare and entertainment industries are increasingly at risk of credit downgrades and even defaults as they battle rising interest rates and falling revenue, forcing some finance chiefs to consider alternative financing options. Default rates for low-rated U.S. companies will likely reach 3.75% for the 12 months ending in September 2023, up from 1.6% in September 2022, but lower than the long-term average of 4.1% and the 6.3% default rate in September 2020, ratings firm S&P Global Ratings said...”
China Watch:
November 23 – CNBC (Evelyn Cheng): “Surging Covid infections across mainland China make it harder for the government to achieve zero-Covid without reverting to a harsh lockdown, Macquarie’s Chief China Economist Larry Hu said… ‘China might have already passed the point of no return, as it’s unlikely to achieve zero Covid again without another Shanghai-style hard lockdown,’ Hu said... ‘What policymakers could do now is to slow the spread of virus, i.e. flatten the curve, by tightening the Covid controls for the time being.’”
November 25 – Bloomberg (Shirley Zhao): “China’s daily Covid infections broke through 30,000 for the first time ever as officials struggle to contain outbreaks that have triggered a growing number of restrictions across the country’s most important cities. There were 31,987 new infections reported for Thursday, up from Wednesday’s record of 29,754. The southern city of Guangzhou reported more than 7,500, while cases in the metropolis of Chongqing topped 6,000. The capital, Beijing, saw daily infections exceed 1,800 with the record tally and lockdown-like restrictions sparking panic buying in parts of the capital.”
November 25 – Bloomberg: “Beijing’s streets are deserted and grocery delivery services are running out of capacity as rising Covid cases trigger lockdown-like restrictions across swathes of the Chinese capital. The city saw 1,854 new infections Thursday, up from 1,611 on Wednesday, as China’s wider outbreak reaches record levels. While food was plentiful in many stores, delivery apps like Alibaba Group Holding Ltd.’s Freshippo -- known as Hema in Chinese -- and Walmart Inc.’s Sam’s Club were overwhelmed as residents hunkered down. Grocery outlets in Chaoyang, Beijing’s biggest district, no longer took delivery orders. Many restaurants halted even takeout services.”
November 22 – Financial Times (Ryan McMorrow): “Days after the northern Chinese city of Shijiazhuang reopened from a Covid-19 lockdown, barista Lu Mengyuan donned her apron, applied her eye glitter and was again whipping up coffee and hot Chinese crepes for the trickle of residents venturing slowly from their homes. Like many others, Lu believed the city’s abrupt reopening in the middle of a Covid wave and its vow to do away with mass testing marked a turning point. ‘We’re the first in China, an experiment,’ she said last Wednesday. ‘We will not lock back up.’ This week, however, Lu was again isolated and her silver Airstream coffee truck closed, as authorities reacted to a near record number of new Covid cases spreading across the country by locking down again. ‘I really have egg on my face,’ she said.”
November 25 – Bloomberg: “There are serious ramifications to being exposed to Covid-19 in China -- and not just infection. As the country confronts its biggest outbreak ever, residents in major cities are hunkering down because of the prospect of being sent to a quarantine camp or locked down at home. Going out in the capital of Beijing means having to scan a QR code to enter venues like shops and restaurants, or to even take public transportation. Under the country’s ubiquitous contract-tracing surveillance system, visiting the same places as someone who later turns up infected can land you in a government isolation facility, where conditions can be so poor that some people say they are buying chamber pots and portable tents in preparation.”
November 20 – Wall Street Journal (Stella Yifan Xie): “Chinese consumer spending is buckling under the country’s dual campaigns against rising property prices and Covid-19 outbreaks, flashing a warning for global companies that have pinned their hopes on a more free-spending Chinese customer. Retail sales unexpectedly dropped last month and are expected to continue to struggle as Chinese authorities launch wide-ranging lockdowns to contain the latest fastest-spreading Covid outbreaks, and as easing measures do little to reverse a worsening property market meltdown.”
November 22 – Bloomberg: “Covid control restrictions now weigh on a fifth of China’s economy as infections continue their upward march, defying the central government’s call for more targeted, less disruptive Covid Zero measures… The continued climb in cases has spooked local authorities into reintroducing measures like expanded testing and shuttering offices and schools in big cities, despite the new directives over a week ago that marked an easing in the official Covid Zero playbook.”
November 23 – Bloomberg: “China’s lack of intensive care hospital beds leaves the nation facing a slow exit from Covid Zero, likely stretching beyond 2023. A full reopening may lead to 5.8 million people being admitted to intensive care, overwhelming a health system that currently has less than four ICU beds per 100,000 people, far less than developed countries, according to Bloomberg Intelligence senior pharmaceutical analyst Sam Fazeli. The euphoric reaction to China’s softening of its zero-Covid-19 stance looks misplaced…”
November 23 – Reuters (Brenda Goh and Yimou Lee): “Hundreds of workers joined protests at Foxconn's flagship iPhone plant in China, with some men smashing surveillance cameras and windows, footage uploaded on social media showed. The rare scenes of open dissent in China mark an escalation of unrest at the massive factory in Zhengzhou city that has come to symbolise a dangerous build-up in frustration with the country's ultra-severe COVID rules as well as inept handling of the situation by the world's largest contract manufacturer. The trigger for the protests, which began early on Wednesday, appeared to be a plan to delay bonus payments…”
November 25 – Reuters (Yimou Lee): “Foxconn's flagship iPhone plant in China is set to see its November shipments further reduced by the latest bout of worker unrest this week, a source with direct knowledge of the matter said…, as thousands of employees left the site. The company could now see more than 30% of the site's November production affected, up from an internal estimate of up to 30% when the factory's worker troubles started in late October…”
November 25 – Bloomberg: “China’s central bank cut the amount of cash lenders must hold in reserve for the second time this year, ramping up support for an economy racked by surging Covid cases and a continued property downturn. The People’s Bank of China reduced the reserve requirement ratio for most banks by 25 basis points… The adjustment takes effect on Dec. 5 and will inject 500 billion yuan ($70bn) of liquidity into the economy. The cut is aimed at ‘keeping liquidity reasonably ample” and ‘increasing the support for the real economy,’ as well as helping banks support industries damaged by the Covid pandemic, the PBOC said…”
November 25 – Reuters (Julie Zhu and Engen Tham): “China's central bank will offer cheap loans to financial firms for buying bonds issued by property developers…, the strongest policy support yet for the crisis-hit sector. The People's Bank of China (PBOC) hopes the loans will boost market sentiment toward the heavily indebted property sector, which has lurched from crisis to crisis over the past year, and rescue a number of private developers, said the people…”
November 23 – Financial Times (Cheng Leng and Thomas Hale): “China’s state-owned banks have launched a concerted effort to strengthen the finances of the country’s struggling property developers, with more than Rmb220bn ($30.7bn) being announced on Wednesday in new credit lines. Bank of Communications, China’s sixth-largest bank by assets, was the first to announce support, agreeing a Rmb100bn credit line for Chinese developer Vanke and Rmb20bn for Midea Real Estate, in a clear sign of greater government support for stronger players in the real estate sector. BoCom said the loans would support the developers’ needs in ‘project developments, mortgages, merger and acquisition deals, bond investment, letter of guarantee and supply chain financing’.”
November 25 – Bloomberg: “China’s mega banks, led by Industrial & Commercial Bank of China Ltd., pledged financing support of at least 1.28 trillion yuan ($179bn) to property developers as part of a push to ease turmoil in the nation’s real estate market. ICBC, the world’s largest bank by assets…, said it would provide 655 billion yuan in credit lines to 12 developers, including Country Garden Holdings Co. Bank of China Ltd., Bank of Communications Co., Postal Savings Bank of China Ltd. and Agricultural Bank of China Ltd. and China Construction Bank Corp. also disclosed they would extend financing.”
November 23 – Reuters (Xie Yu): “Major Chinese developer Country Garden has signed a contract with the Postal Savings Bank of China for a credit line of up to 50 billion yuan ($7.0bn)… The credit line will be used for loans for land development, mergers and acquisitions, and mortgage financing, it said.”
November 25 – Bloomberg: “Signs are growing in China that local government debt burdens are becoming unsustainable. China’s 31 provincial governments have a stockpile of outstanding bonds that’s close to the Ministry of Finance’s risk threshold of 120% of income. Breaching that line could mean regions will face more regulatory hurdles to borrow, hampering their ability to drive up economic growth. In addition, local authorities will face a massive maturity wall over the next five years as bonds worth almost 15 trillion yuan ($2.1 trillion) -- more than 40% of their outstanding debt -- fall due.”
November 22 – Bloomberg: “China’s zero tolerance approach to combating Covid infections will curb the benefits expected from recent measures to support a struggling property market, according to Goldman Sachs… ‘Because of the Zero Covid policy, all the ongoing property easing might not be transmitted into the property sector recovery,’ Hui Shan, chief China economist at Goldman…, said… The Covid strategy ‘is a big roadblock for the property sector, for the labor market and a number of aspects of the economy,’ she said.”
Central Banker Watch:
November 22 – Financial Times (Chris Giles): “The Treasury has had to bail out the Bank of England for the first losses it has made on its quantitative easing programme since 2009, which resulted from rises in official interest rates. In figures published on Tuesday evening, the central bank reported that the Treasury had transferred £828mn during the third quarter and that it expected these payments would continue for the foreseeable future.”
November 21 – Financial Times (Martin Arnold): “The European Central Bank needs to maintain the pace of rate rises at its next vote to convince the public that policymakers are ‘serious’ about taming inflation, said Austria’s hawkish central bank chief. Robert Holzmann, head of the National Bank of Austria and member of the ECB’s governing council, backed a third straight 0.75 percentage point rise in the deposit rate at the next rate-setting meeting in mid-December. The move would raise benchmark borrowing costs to 2.25%. His comments underline the potential for a clash at the next vote…”
November 22 – Bloomberg (Tracy Withers): “New Zealand’s central bank raised interest rates by a record 75 bps and signaled further tightening ahead, stepping up its inflation fight even as it forecasts a recession next year. Short-maturity bond yields surged after the Reserve Bank’s Monetary Policy Committee lifted the Official Cash Rate to 4.25% from 3.5%... Its forecasts show the OCR peaking at 5.5% in the third quarter of 2023, up from a previous peak of 4.1%. ‘The RBNZ sees inflation as deeply embedded,’ said Michael Gordon, acting New Zealand chief economist at Westpac Banking Corp. ‘It now believes that a recession will be needed to bring inflation back within the 1-3% target range.’”
November 23 – Bloomberg (Philip Aldrick and Liza Tetley): “The Bank of England needs to raise interest rates further to tackle inflationary pressures that are becoming increasingly domestic, Chief Economist Huw Pill said. ‘My judgment there is still some more to do in order to address prevailing inflationary pressures and complete the necessary normalisation of monetary policy following a decade or more of exceptional accommodation,’ he said…”
November 23 – Bloomberg (Sam Kim and Hooyeon Kim): “Bank of Korea Governor Rhee Chang-yong signaled the end may be near for the country’s unprecedented streak of policy tightening to curb inflation, returning to a smaller interest-rate hike as concerns grow over economic growth and credit markets. ‘I am aware that the pain among economic players is deepening as rates rise and the economy weakens,’ Rhee said…, adding that the BOK is focusing on relieving price pressures quickly so that rates can start to stabilize soon.”
Global Bubble Watch:
November 21 – Bloomberg (Ari Altstedter, Kevin Orland, and Lizzie Kane): “For the past 25 years, Canada has been in the grip of the world’s biggest housing boom, a near unbroken run of price appreciation unparalleled among its developed peers. Now it’s over, and pain is starting to spread. Soaring interest rates have squelched demand and sent home prices sliding, engulfing people like Cam Ly, who recently found himself sitting in a car with his wife and two kids, watching prospective buyers tour their modest townhouse in Toronto’s suburbs. Ly had taken a second, and then a third, mortgage out on the property when family finances got tight during the pandemic — a move that made sense to him after the home’s assessed value soared 60% in little over 12 months. But with both loans coming due by the end of the year, he found himself unable to afford the rates his lenders asked to refinance, and was left with no choice but to sell the house…”
November 21 – Reuters (Juliette Portala): “The outlook for credit conditions next year for non-financial companies in Europe, Middle East and Africa is negative, credit rating agency Moody's said…, as financing conditions degrade and energy and wage costs loom. After more than a decade of ultra-loose monetary policy, financing conditions are tightening, inflation is rising and the global economy looks poised to fall into its first recession since 2009. ‘Higher interest rates will cause financing conditions to deteriorate and will weaken liquidity and credit quality,’ Moody's said. This could compel many companies to focus on cash conservation by curtailing shareholder returns and debt-funded M&A.”
Europe Watch:
November 23 – Bloomberg (Jana Randow): “Euro-area businesses see tentative signs that the region’s economic slump may be easing as record inflation cools and expectations for future production improve. A gauge measuring activity in manufacturing and services unexpectedly rose in November, according to S&P Global. While it still firmly indicates a recession in the 19-nation region is underway, it offers some room to think the downturn may be shallower than previously predicted.”
November 24 – Bloomberg (Jana Randow and Alexander Weber): “Financial stability in Germany, Europe’s largest economy, has taken a substantial turn for the worse this year, triggering warnings from the Bundesbank. Banks, insurers and investment funds have already recorded losses as markets adapt to deteriorating growth prospects, stubbornly high inflation and rising interest-rate and risk premiums, Germany’s central bank said in its annual Financial Stability Report. ‘A worsening energy crisis, a sharp economic slump and abruptly rising market interest rates could put the German financial system under considerable pressure,’ the Bundesbank said... ‘Rising costs are limiting the financial leeway of households and enterprises. Future credit risks are increasing as a result.’”
EM Crisis Watch:
November 22 – Associated Press (David Biller and Carla Bridi): “More than three weeks after losing a reelection bid, President Jair Bolsonaro… blamed a software bug and demanded the electoral authority annul votes cast on most of Brazil’s nation’s electronic voting machines, though independent experts say the bug doesn’t affect the reliability of results. Such an action would leave Bolsonaro with 51% of the remaining valid votes — and a reelection victory, Marcelo de Bessa, the lawyer who filed the 33-page request on behalf of the president and his Liberal Party, told reporters.”
November 21 – Reuters (Marc Jones): “Nomura has warned that seven countries - Egypt, Romania, Sri Lanka, Turkey, Czech Republic, Pakistan and Hungary - are now at a high risk of currency crises. The Japanese bank said that 22 of the 32 countries covered by its in-house ‘Damocles’ warning system have seen their risk rise since its last update since May, with the largest increases in the Czech Republic and Brazil.”
Japan Watch:
November 24 – Reuters (Takahiko Wada and Leika Kihara): “Core consumer prices in Japan's capital, a leading indicator of nationwide trends, rose at their fastest annual pace in 40 years in November and exceeded the central bank's 2% target for a sixth straight month, signalling broadening inflationary pressure. The increase, driven mostly by food and fuel bills but spreading to a broader range of goods, cast doubt on the view of the Bank of Japan (BOJ) that recent cost-push inflation will prove transitory… The Tokyo core consumer price index (CPI), which excludes fresh food but includes fuel, was 3.6% higher in November than a year earlier… The rise exceeded a median market forecast of 3.5% and the 3.4% increase seen in October. The last time Tokyo inflation was faster was April 1982…”
November 21 – Reuters (Leika Kihara): “Japan's weighted median inflation rate, which is closely watched as an indicator on whether price rises are broadening, hit a record 1.1% in October in a sign of heightening inflationary pressure from rising raw material and labour costs. The data will likely keep alive market expectations the Bank of Japan (BOJ) may tweak its ultra-low interest rates if wages pick up in tandem with inflation next year.”
Social, Political, Environmental, Cybersecurity Instability Watch:
November 20 – Bloomberg (Jennifer A. Dlouhy, Akshat Rathi, John Ainger and Antony Sguazzin): “The United Nations climate summit concluded with landmark agreements on compensation for poorer countries affected by global warming and plans to mitigate the effects of climate change. But many delegates were upset that little progress was made on some other major goals, including stronger commitments to curb the use of fossil fuels and to limit warming to 1.5C by the end of the century. ‘Why are we celebrating loss and damage when we have failed on mitigation and adaptation?’ asked Aminath Shauna, Minister of Environment for the Maldives. ‘We are just a meter above sea level — I want my two-year old daughter to live in the Maldives.’”
November 20 – Wall Street Journal (Rachel Wolfe and Jon Hilsenrath): “Households, retailers and charities nationwide, feeling the pinch of inflation, are bracing for a humbug holiday season. U.S. consumers and businesses have trimmed spending plans for gifts, charitable contributions and holiday events... The penny-pinching threatens to spoil the year-end for many, especially firms and nonprofits that tally their largest share of sales and donations in November and December. ‘We’re hopeful for a strong giving season, but we’re not counting on it,’ said Thomas Tighe, chief executive of Direct Relief, a medical-assistance nonprofit that takes in around $2 billion a year in donated medicine, supplies and cash to deliver help around the world.”
Leveraged Speculation Watch:
November 23 – Bloomberg (Hema Parmar): “Tiger Global Management marked down the value of its private funds by almost a quarter this year, contributing to a $42 billion decline in assets, one of the industry’s biggest ever. In addition, some of the previously private but now-public companies held by Tiger Global’s venture unit lost value, according to people familiar with the matter… The unit oversaw about $43 billion as of Sept. 30, down from $65 billion at year-end, after accounting for fundraising and redistributions to investors. The division marked down the value of its private investments by 24%. Assets in Tiger Global’s public investment arm shriveled to $15 billion from $35 billion…”
November 21 – Financial Times (Laurence Fletcher and Joshua Oliver): “Hedge funds have billions of dollars stuck on failed cryptocurrency exchange FTX and could face years of waiting to recover anything at all from a marketplace they once believed to be one of the industry’s most reliable bets. In a situation reminiscent of Lehman Brothers in 2008, which left billions of dollars of hedge funds’ assets trapped for years, investors who traded on the Bahamas-based exchange have found themselves among the thousands of creditors in a highly complex bankruptcy. The sudden failure this month of FTX, valued at $32bn this year, has shocked investors who backed it and traders who used it.”
November 21 – Bloomberg (Jeff Cox): “Professional speculators are sticking to their long-held cautious stance even after the latest equity rally forced them to unwind short trades at one of the fastest paces in years… Fund clients tracked by JPMorgan... have reduced wagers in both their long and short books, reversing all the risky exposures that they had taken on between late August and the end of September. At Goldman Sachs…, hedge funds saw their combined trading flow falling for a fifth straight week.”
Geopolitical Watch:
November 19 – Reuters (Hyonhee Shin): “North Korean leader Kim Jong Un pledged to counter U.S. nuclear threats with nuclear weapons as he inspected a test of the country's new intercontinental ballistic missile (ICBM), state media KCNA said… The isolated country tested the Hwasong-17 ICBM on Friday a day after warning of ‘fiercer military responses’ to Washington beefing up its regional security presence including nuclear assets.”
November 22 – Financial Times (Najmeh Bozorgmehr): “Iran has announced an expansion of its nuclear enrichment programme, in a provocative response to a rebuke by the UN’s watchdog over the alleged existence of undeclared nuclear sites. The head of the Atomic Energy Organization of Iran… said it had added the underground Fordow facility to the list of locations where it was enriching uranium to the 60% purity level, just below weapons grade. This followed a resolution by the International Atomic Energy Agency’s board last week calling on Iran to co-operate over uranium traces found at three undeclared sites in the country.”