Q4 GDP growth was reported at a stronger-than-expected 2.9% pace, down marginally from Q3’s 3.2% - but solid nonetheless. The Atlanta Fed’s “GDPNow” model’s (“running estimate of real GDP growth based on available economic data for the current measured quarter”) first calculation of Q1 GDP came in this afternoon at 0.7%.
The short squeeze-induced markets rally, resurgent speculation, and significant loosening of financial conditions somewhat postpone the unavoidable Credit Cycle downturn. Market analysts today misinterpret loose conditions and the fundamental backdrop, believing a so-called “soft landing” is the most likely scenario. When I contemplate both the unprecedented scope and duration of Bubble excess, the odds of avoiding a hard landing appear remote. Case in point:
January 27 – Bloomberg (Claire Ballentine): “During the pandemic, a surge in used car prices forced buyers to take out bigger loans for their vehicles. The monthly payments seemed doable in an era of stimulus checks, a tight labor market and surging stocks, but that’s changed for many people as inflation eats into their budgets and the job market cools. Now, more Americans are falling behind on their car payments than during the financial crisis. In December, the percentage of subprime auto borrowers who were at least 60 days late on their bills rose to 5.67%, up from a seven-year low of 2.58% in April 2021, according to Fitch... That compares to 5.04% in January 2009, the peak during the Great Recession.”It's important to note that the unemployment rate was 7.8% in January 2009, up from a 5.0% rate one year earlier, and on its way to the October 2009 cycle peak of 10.0%.
That auto delinquencies surged from 2.58% (April 2021) to December’s 5.67%, as the unemployment rate dropped from 6.1% to last month’s 50-year low 3.5%, portends an arduous Credit cycle downturn ahead.
The above Bloomberg article noted several issues behind the rise in auto delinquencies. For one, the Covid stimulus spike in used car prices created higher loan balances and monthly payments. Loans often come with low “teaser rates,” while some borrowers opt for the initial lower payments on adjustable-rate auto loans. Many borrowers now face much higher monthly payments, just as savings have been hammered by surging housing, food and general consumer price inflation. Auto insurance premiums have jumped.
Inflating automobile prices was only one facet of what I call “monetary disorder”, a key consequence of imprudent monetary and fiscal stimulus. Price spikes undermined system stability, while stoking speculative excess across a wide range of asset markets, including crypto, equities, corporate Credit, and residential and commercial real estate. There has been significant crypto fallout, less for equities. Importantly, ongoing loose financial conditions are extending the cycle and delaying the day of reckoning for corporate Credit and real estate.
Next Wednesday’s FOMC meeting is pivotal. Especially following recent comments from Fed officials, markets are confidently pricing in a slackening to a 25 bps rate increase. With the conspicuous loosening of financial conditions, markets are prepared for a more hawkish leaning Powell press conference.
Markets price in a 4.90% expected (near) peak Fed funds rate at the May 3rd FOMC meeting, dismissing committee members’ calls for a 5% plus “terminal rate.” Markets discount a Fed pivot and the policy rate down to 4.47% by year end.
Chair Powell missed an opportunity to throw some hawkish cold water on market speculation during his Stockholm speech on the 10th. His task has become only more daunting. Speculative markets have become increasingly detached from the Fed’s inflation-fighting narrative. Powell’s hawkish inflation dictum is now well-worn.
If Powell is at this point compelled for more than push back lip service against the markets’ loosening of conditions, it will take something akin to his November 1st hawkish beat down. I just think his discomfort with the resulting 3.5% market downdraft galvanized a disciplined “balanced Powell.” And markets are happy to daydream of Balanced Powell and Sweet Goldilocks walking hand-in-hand along an idyllic garden pathway on a delightful spring afternoon.
Powell needs to break the markets’ spell. Truth be told, markets have expropriated the Fed’s tightening cycle. And it’s unclear whether the Chair or his committee fully appreciates this reality - or the ramifications. Market control of financial conditions guarantees wild “risk on” / “risk off” instability. Prevailing “risk on” looseness seems to ensure ongoing strong lending and Credit growth, sustenance for price inflation. Moreover, the longer highly speculative markets run unchecked, the greater the risk of severe “risk off” market illiquidity, dislocation and crisis.
Do Fed officials these days follow resurgent “meme stocks,” crypto and general market speculative impulses, and think, “Oh no, not again!”? Are they monitoring the year’s blistering start for corporate debt issuance? Do they appreciate that their inflation fight (more open-handed than clinched fists) today hangs in the balance?
It’s been almost three decades (1994) since the last real tightening cycle. Add an additional decade for when the Fed was engaged in an intense inflation fight. Money was tight back then. Painful monetary tightness was required.
Money today remains loose, much too loose to quash inflationary dynamics that have, after festering for years, metastasized throughout the system. And over decades, a massive and sophisticated financial structure evolved that essentially creates system-wide easy Credit Availability, virtually in every nook and cranny. A strong argument can be made that Credit has on a system-wide basis never been as easy to attain as it is today – from subprime auto and Credit cards to home mortgages to high-risk small business loans.
January 24 – Wall Street Journal (Dion Rabouin): “A surge in hiring by American small businesses could run afoul of the Federal Reserve’s efforts to cool inflation. Small companies have been responsible for all of the net job growth in the U.S. since the onset of the Covid-19 pandemic and account for almost four out of five available job openings… Since February 2020, small establishments—locations with fewer than 250 employees—have hired 3.67 million more people than have been laid off or who quit. Larger establishments—those with 250 employees or more—have cut a net 800,000 jobs during that time… Small businesses accounted for 78% of the U.S. job listings in November, the latest month for which data are available, and 91% of the postpandemic increase in job openings…”It seems clear that small businesses would not remain on such an extraordinary hiring spree if they were concerned by tightening lending standards and waning Credit availability. And as the source of marginal demand for workers in an intensely hot labor market, Credit conditions must tighten within small business for the Fed’s tightening cycle to successfully contain inflation.
Volcker had to punish folks to change behavior – lots of folks: borrowers, lenders, investors and speculators alike. In the grand scheme of things, the Powell Fed’s inflation fight has so far been largely pain-free.
The challenge for the Fed is that the Credit cycle is turning; the economy is poised to slow. Powell and Fed officials are likely to watch things play out, believing that time is on their side. With rate policy “normalized,” the system is now gravitating back to the previous low inflation equilibrium. No punishment necessary.
And this is along the same lines as late-cycle mistakes made repeatedly by central bankers - at home and abroad - over recent decades. They were willing to tolerate late-cycle excess because of fears of heightened financial and economic vulnerability. While justifiable, accommodating late-cycle excesses in hopes of avoiding bursting Bubbles and hard-landings ensures a further buildup of systemic risk.
Heading into Wednesday's FOMC meeting, let’s set the backdrop. Tesla was up 33% this week, lagging Lucid’s 65% surge, but ahead of Rivian’s 22.2%. For the week, Gamestop jumped 16.4%, Foot Locker 16.8%, and AirBNB 14.5%. In the S&P500, Western Digital gained 16.9%, Seagate 16.3%, Warner Brothers Discovery 14.5%, and Nvidia 14.2%.
The Goldman Sachs Most Short Index jumped another 5.8% this week, increasing January gains to 20.6%. Notable popular short position year-to-date gainers include Tesla (44.4%), Lucid (88.4%), Warner Brothers Discovery (57.3%), Carvana (63.9%), Wayfair (93.8%), Beyond Meat (50.4%), Lending Tree (79.7%), World Acceptance (56.4%), Carnival (36.7%), Expedia (32.6%), United Airlines (29.3%) and American Airlines (29.2%). In the Dow, Disney has jumped 26.1%, and Salesforce has gained 24%.
Year-to-date gains by sector include the Philadelphia Semiconductor Index (SOX) 16.3%, Nasdaq Industrials 12.9%, Nasdaq Computer 12.1%, NYSE TMT 11.6%, Philadelphia Gold & Silver Index 11.5%, Nasdaq100 11.2%, KBW Bank Index 11.1%, Nasdaq Composite 11.0%, Philadelphia Oil Services Index 10.9%, and the NYSE Arca Computer Technology Index 10.5%. The “average stock” Value Line Arithmetic Index enjoys a 9.45% y-t-d gain.
We can surely agree that stock market speculation has returned with a vengeance. And things aren’t looking too shabby in bondland either. The iShares Treasury Bond ETF (TLT) has returned 7.18% so far this month, with the iShares Corporate Investment Grade ETF (LQD) up 4.81%, and the iShares High Yield ETF (HYG) gaining 3.44%.
And how are financial conditions looking globally? Major equities indices are up 9.6% in France, 8.8% in German, 10.1% in Spain, 10.5% in Italy, 12.3% in Ireland, 10.8% in Czech Republic, 14.7% in Hong Kong, 11.1% in South Korea, 8.1% in China (CSI300), 6.5% in Australia, 6.9% in Canada, and 13% in Mexico. Yields are down 60 bps y-t-d in Italy, 45 bps in Portugal, 49 bps in Australia, 41 bps in Canada, 129 bps in Hungary, 107 bps in Poland, 50 bps in South Africa, and 82 bps in Colombia.
I’ll call it an “echo” speculative Bubble. And let’s Credit the Bank of England’s emergency operations, along with notably waning hawkish resolve from the Federal Reserve, Bank of Japan, ECB and the global central bank community generally. And it puts Jay Powell in a tough spot.
I think he knows what he needs to do. He must put the Jeffrey Gundlach types in their place. Markets need to listen to the Fed. And if you fight the Fed while the Fed’s trying to fight inflation, you’re apt to lose. But that’s Volcker, and not one Fed Chair since Volcker. It’s such a different era now. The Fed doesn’t dole out punishment. They just play Mr. Nice Guy to the markets and extend monetary rewards.
It is probably a little too soon for the Fed to recognize that markets are messing with its inflation fight. It’s not yet obvious Powell has to strike back hard. But does he emphasize that tight labor markets remain a major inflation issue? Does he deemphasize the possibility of a pause, noting labor and loosened financial conditions? And does he raise the possibility of the Fed funds rate rising meaningfully above 5% this year unless conditions tighten?
This is going to be interesting. Balanced Powell would see his hawkish elements dismissed by speculative markets. Financial markets, after all, are in the throes of a powerful cross-asset squeeze dynamic. And when there’s a big squeeze, little else seems to matter. The pain trade is lower yields and higher, more speculative, stock prices. At this point, I doubt Powell would be comfortable with markets rallying on his press conference comments. He’ll want to be heard. Markets would prefer not to listen.
For the Week:
The S&P500 rose 2.5% (up 6.0% y-t-d), and the Dow gained 1.8% (up 2.5%). The Utilities fell 1.0% (down 3.1%). The Banks surged 4.7% (up 11.1%), and the Broker/Dealers rose 2.2% (up 8.5%). The Transports added 0.9% (up 8.1%). The S&P 400 Midcaps gained 2.4% (up 7.8%), and the small cap Russell 2000 rose 2.4% (up 8.5%). The Nasdaq100 advanced 4.7% (up 11.2%). The Semiconductors surged 5.4% (up 16.3%). The Biotechs gained 1.1% (up 5.9%). While bullion up $2, the HUI gold equities index was little changed (up 12.6%).
Three-month Treasury bill rates ended the week at 4.55%. Two-year government yields added three bps this week to 4.20% (down 23bps y-t-d). Five-year T-note yields increased five bps to 3.61% (down 39bps). Ten-year Treasury yields gained two bps to 3.50% (down 37bps). Long bond yields declined three bps to 3.62% (down 34bps). Benchmark Fannie Mae MBS yields fell three bps to 4.85% (down 54bps).
Greek 10-year yields rose 10 bps to 4.24% (down 32bps y-o-y). Italian yields jumped 10 bps to 4.10% (down 60bps). Spain's 10-year yields gained nine bps to 3.23% (down 29bps). German bund yields increased six bps to 2.24% (down 21bps). French yields rose eight bps to 2.70% (down 28bps). The French to German 10-year bond spread widened about two to 46 bps. U.K. 10-year gilt yields fell six bps to 3.32% (down 35bps). U.K.'s FTSE equities index was little changed (up 4.2% y-t-d).
Japan's Nikkei Equities Index jumped 3.1% (up 4.9% y-t-d). Japanese 10-year "JGB" yields jumped 11 bps to 0.49% (up 7bps y-t-d). France's CAC40 gained 1.4% (up 9.6%). The German DAX equities index increased 0.8% (up 8.8%). Spain's IBEX 35 equities index rose 1.6% (up 10.1%). Italy's FTSE MIB index jumped 2.6% (up 11.5%). EM equities were mixed. Brazil's Bovespa index increased 0.2% (up 2.4%), and Mexico's Bolsa index rose 1.5% (up 13.0%). South Korea's Kospi index surged 3.7% (up 11.1%). India's Sensex equities index dropped 2.1% (down 2.5%). China's Shanghai Exchange Index was closed for holiday (up 5.7%). Turkey's Borsa Istanbul National 100 index sank 5.4% (down 5.8%). Russia's MICEX equities index rallied 1.0% (up 1.6%).
Investment-grade bond funds posted inflows of $3.278 billion, while junk bond funds reported outflows of $1.279 billion (from Lipper).
Federal Reserve Credit dropped $20.5bn last week to $8.447 TN. Fed Credit was down $454bn from the June 22nd peak. Over the past 176 weeks, Fed Credit expanded $4.720 TN, or 127%. Fed Credit inflated $5.636 Trillion, or 201%, over the past 533 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week fell $9.9bn to $3.321 TN. "Custody holdings" were down $137bn, or 4.0%, y-o-y.
Total money market fund assets rose $16.1bn to $4.819 TN. Total money funds were up $145bn, or 3.1%, y-o-y.
Total Commercial Paper gained $10.7bn to $1.311 TN. CP was up $287bn, or 28%, over the past year.
Freddie Mac 30-year fixed mortgage rates rose seven bps to 6.02% (up 247bps y-o-y). Fifteen-year rates slipped three bps to 5.15% (up 235bps). Five-year hybrid ARM rates gained six bps to 5.47% (up 277bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 10 bps to 6.47% (up 269bps).
Currency Watch:
For the week, the U.S. Dollar Index was little changed at 101.93 (down 1.5% y-t-d). For the week on the upside, the Australian dollar increased 2.0%, the Brazilian real 1.9%, the Mexican peso 0.6%, the Canadian dollar 0.5%, the Singapore dollar 0.4%, the South Korean won 0.4%, the New Zealand dollar 0.3%, and the euro 0.1%. On the downside, the South African rand declined 0.3%, the Japanese yen 0.2%, the Norwegian krone 0.1%, the Swedish krona 0.1%, and the British pound 0.1%. The Chinese (offshore) renminbi gained 0.36% versus the dollar (up 2.44% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index slipped 0.5% (down 1.1% y-t-d). Spot Gold was about unchanged at $1,928 (up 5.7%). Silver fell 1.4% to $23.60 (down 1.5%). WTI crude dropped $1.93, or 2.4%, to $79.68 (down 1%). Gasoline declined 2.1% (up 5%), and Natural Gas fell 2.0% to $3.11 (down 31%). Copper slipped 0.7% (up 11%). Wheat rallied 1.0% (down 5%), and Corn increased 1.0% (up 1%). Bitcoin gained $450, or 1.9%, this week to $23,090 (up 39%).
Market Instability Watch:
January 24 – Reuters (Katharine Jackson): “Atomic scientists set the ‘Doomsday Clock’ closer to midnight than ever before on Tuesday, saying threats of nuclear war, disease, and climate volatility have been exacerbated by Russia's invasion of Ukraine, putting humanity at greater risk of annihilation. The ‘Doomsday Clock,’ created by the Bulletin of the Atomic Scientists to illustrate how close humanity has come to the end of the world, moved its ‘time’ in 2023 to 90 seconds to midnight, 10 seconds closer than it has been for the past three years.”
January 24 – Associated Press (Christopher Rugaber and Stan Choe): “Sooner or later, either Wall Street or the Federal Reserve has to blink. Nearly a year into the Fed’s drive to quash inflation by hiking interest rates at a blistering pace, investors still don’t seem to fully believe what the Fed warns is coming next: Higher rates through the end of the year, which could sharply raise unemployment and slow growth. Wall Street has a more sanguine view: With inflation cooling from painful highs, investors are betting that the Fed will stop hiking rates soon, pause for a bit and then start cutting rates toward the end of the year to combat what many on Wall Street expect will be a mild recession. That relatively optimistic view has helped propel the broad S&P 500 stock index up 4.4% so far this year. Yet a host of Fed speakers last week underscored a contrasting message: They expect to raise their benchmark rate above 5%, modestly above Wall Street’s forecast.”
January 26 – Reuters (David Morgan): “Republicans who control the U.S. House of Representatives are divided over how hard a line to take on the debt ceiling, but were united on Wednesday in demanding that Democratic President Joe Biden agree to negotiate on spending as part of any deal. Hard-line Republican conservatives, who have the power to block any deal in the narrowly divided House, want to force deep spending cuts on Biden and the Democratic-led Senate in exchange for an agreement to avoid default on the $31.4 trillion debt.”
January 26 – Financial Times (Gillian Tett): “There is never a good moment for the US government to hit its ceiling for debt issuance — and spark speculation about a potential looming default if Congress refuses to raise it. Now, however, is particularly inopportune timing for this fight. That is partly because big foreign buyers have quietly trimmed their Treasury purchases in the last year… It is also because liquidity has repeatedly vanished from the Treasuries sector at times of stress in recent years, because of underlying vulnerabilities in the market structure. This could easily reoccur in a debt-ceiling shock, since these structural problems remain (lamentably) unaddressed. But the biggest reason to worry about the timing is that the financial system is at a crucial stage in the monetary cycle. After 15 years of accommodative monetary policy, during which the US Federal Reserve expanded its balance sheet from $1tn to $9tn, the central bank is now trying to suck liquidity out of the system, to the tune of about $1tn a year. This process is necessary, and long overdue.”
January 22 – New York Times (Tetsushi Kajimoto): “America’s debt is now six times what it was at the start of the 21st century. It is the largest it has been, compared with the size of the U.S. economy, since World War II, and it’s projected to grow an average of about $1.3 trillion a year for the next decade. The United States hit its $31.4 trillion legal limit on borrowing this past week, putting Washington on the brink of another fiscal showdown. Republicans are refusing to raise that limit unless President Biden agrees to steep spending cuts, echoing a partisan standoff that has played out multiple times in the last two decades. But America’s ballooning debt is the result of choices made by both Republicans and Democrats. Since 2000, politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers and emergency measures to help the nation endure two debilitating recessions.”
January 26 – Bloomberg (Liz Capo McCormick): “The three most-cited debt-rating firms are all expecting Congress ultimately to raise the federal debt ceiling… though they’re split on the implications of any move to prioritize payments on Treasuries in the event the debate goes into extra time. Moody’s…, S&P Global… and Fitch Ratings are all game-planning ahead of the time later this year when the Treasury Department will run out of cash if lawmakers don’t boost the ceiling. Economists and Wall Street analysts see that happening sometime in the third quarter… What the agencies do could play a major role in financial-market reaction, given the example of the debt-limit fight of 2011, when S&P cut the sovereign US rating from AAA for the first time.”
January 23 – Financial Times (Kana Inagaki and Leo Lewis): “The Bank of Japan appears to have reached a truce with bond traders betting it will have to ditch its efforts to control yields on government debt, as an expanded programme of loans to banks helps ease relentless recent pressure on the Japanese bond market. After more than a month battling huge speculative bets by hedge funds with record purchases of government bonds, the BoJ last week opted to maintain the main pillars of its ultra-loose monetary policy and indicated it had no plans to abandon so-called yield curve control. The central bank also extended a critical lending tool, a measure that has aided a rebound in Japanese government bonds. Under the expanded lending programme, the BoJ will offer loans of up to 10 years to banks at variable rates, instead of at a previous fixed rate of 0%.”
January 24 – Financial Times (Nichole Jao): “Index funds will control more than half of long-term invested US assets by the end of 2027, according to ISS Market Intelligence. Active fund’s share of the US market will fall from 53% in 2022 to 44% in five years… Most of the market share will go to index exchange traded funds, which are expected to garner $2tn in new sales. Active mutual funds, meanwhile, will bear the brunt of outflows, according to the report, with an estimated $1.4tn in net redemptions expected over the next five years. Investors have pulled an average of $258bn from active mutual funds each year since 2015... During the same period, passive mutual funds added an average of $138bn each year...”
January 25 – Wall Street Journal (Hardika Singh): “The dash for cash on Wall Street is back on. Investors have added about $135 billion to global money-market funds over the past four weeks, according to EPFR data through Jan. 18. That is the best stretch since the four-week period ended May 2020, when those funds logged roughly $175 billion in net inflows… Companies and consumers often use them like checking accounts to store their ready cash.”
Bursting Bubble and Mania Watch:
January 23 – New York Times (David Streitfeld): “Eighteen months ago, the online used car retailer Carvana had such great prospects that it was worth $80 billion. Now it is valued at less than $1.5 billion, a 98% plunge, and is struggling to survive. Many other tech companies are also seeing their fortunes reverse and their dreams dim. They are shedding employees, cutting back, watching their financial valuations shrivel — even as the larger economy chugs along with a low unemployment rate and a 3.2% annualized growth rate in the third quarter. One largely unacknowledged explanation: An unprecedented era of rock-bottom interest rates has abruptly ended. Money is no longer virtually free. For over a decade, investors desperate for returns sent their money to Silicon Valley, which pumped it into a wide range of start-ups that might not have received a nod in less heady times.”
January 26 – Financial Times (Antoine Gara): “Blackstone is facing more than $5bn in redemption requests from a second property vehicle, adding to pressure on the world’s largest alternative asset manager as investors try to pull their cash. Blackstone Property Partners, a real estate vehicle for big institutions such as pension funds and endowments, is facing redemption requests equal to 7% of its $73bn net asset value… BPP is a vehicle that gives access to dozens of funds Blackstone uses to invest in property. The withdrawal requests have not been fulfilled as the parts of BPP from which investors want to pull cash require that new money comes in before Blackstone has to meet redemptions. That stands in contrast to Blackstone Real Estate Income Trust, or Breit, which was hit by withdrawals last year by wealthy individual investors concerned about the long-term health of the property market and a need to raise short-term cash.”
January 24 – Reuters (Chibuike Oguh): “Investors looking to cash out of non-traded U.S. real estate income trusts (REITs) have pushed redemptions to an all-time high, forcing private equity firms to impose curbs to block withdrawals. Blackstone Inc, Starwood Capital Group and KKR & Co Inc have announced that they would stop investors from redeeming their investments after such withdrawals exceeded a preset 5% of the quarterly net asset value of the REITs. The volume of such redemptions across U.S. non-traded REITs jumped to $12.2 billion in 2022, eight times more than the $1.5 billion… in the previous year… The spike in redemptions comes as the returns of private REITs and their publicly-listed counterparts have diverged in recent months. REITs managed by Blackstone, Starwood and KKR reported returns of 8.4%, 6.3%, and 8.32% as of the end of December. The publicly traded Dow Jones U.S. Select REIT Total Return Index fell 25.96% over the same period.”
January 26 – Bloomberg (Dawn Lim): “One year after Blackstone Inc. Chief Executive Officer Steve Schwarzman told investors the firm would reach $1 trillion in assets under management in 2022, it’s shy of that mark… The tougher environment dragged down distributable earnings 41% to $1.3 billion as the firm’s dealmakers slowed sales in the three final months of 2022… Last year ‘represented the most challenging market environment since the global financial crisis,’ Schwarzman told analysts… Blackstone — a heavyweight investor in everything from consumer brands to transmission lines to student dorms and apartments — is first among the largest private equity firms to report results for the period. That makes it a bellwether for the broader industry and the economy.”
Crypto Bubble Collapse Watch:
January 21 – Wall Street Journal (Eric Wallerstein): “Two of the biggest banks to cryptocurrency companies are rushing to stem a flood of customer withdrawals by borrowing billions of dollars from Federal Home Loan Banks, the system originally designed to support mortgage lending in the 1930s. Signature Bank tapped its local home-loan bank for nearly $10 billion in the fourth quarter, among the largest such borrowings by any bank since early 2020... Silvergate Capital Corp., a competing lender that shifted its business toward crypto a decade ago, received at least $3.6 billion. The borrowings at Signature… are more than double its previous highest sum in several years. Silvergate, meanwhile, didn’t have any home-loan bank borrowings a year earlier.”
January 24 – Bloomberg (Max Reyes, Austin Weinstein, Allyson Versprille and Katanga Johnson): “A Depression-era backstop that Wall Street banks use for short-term funding is the latest corner of traditional finance to be ensnared by upheaval in the crypto industry. For decades, the Federal Home Loan Bank System has been a preferred option for lenders in need of cash. But recent revelations that some of the money went to crypto-friendly banks after the collapse of digital-asset exchange FTX is stoking concerns of mission creep, with funds going far afield from the home loans that the program was originally designed to boost… Each year, US lenders tap the FHLBank System to borrow hundreds of billions of dollars at rock-bottom rates and without the stigma of seeking help from the Federal Reserve. It’s widely seen as a safety net… The wonky public-policy debate over the role of FHLBanks is now morphing into a political one after crypto-friendly financial firms Silvergate Capital Corp., Signature Bank and Metropolitan Bank Holding Corp. said recently that they received loans.”
January 26 – Bloomberg (Emily Nicolle and Allyson Versprille): “Advisers to FTX say the collapsed crypto company owes a dizzying assortment of firms including Goldman Sachs..., JPMorgan…. and Wells Fargo..., bankruptcy court documents show… Other than the banks, named creditors include US governmental departments, both national and international securities regulators, other large crypto firms, media outlets, big tech companies and a global array of law firms and accountants.”
January 23 – Associated Press (Ken Sweet): “Over the past few years, a number of companies have attempted to act as the cryptocurrency equivalent of a bank, promising lucrative returns to customers who deposited their bitcoin or other digital assets. In a span of less than 12 months, nearly all of the biggest of those companies have failed spectacularly. Last week, Genesis filed Chapter 11, joining Voyager Digital, Celsius and BlockFi on the list of companies that have either filed for bankruptcy protection or gone out of business. This subset of the industry grew as cryptocurrency enthusiasts were looking to build their own parallel world in finance untethered to traditional banking and government-issued currencies. But lacking safeguards, and without a government backstop, these companies failed in domino-like fashion.”
January 23 – Bloomberg (Sidhartha Shukla): “The crypto rebound has gained so much speculative vigor that even tokens torpedoed last year by their dependence on discredited mogul Sam Bankman-Fried have rallied, with some more than doubling this month. The likes of FTT, Solana, Serum, Maps and Oxygen have surged despite doubts about their viability following Bankman-Fried’s arrest on charges including fraud. FTT, the token of his FTX exchange until the latter imploded, is up 160% in January after losing nearly all its value in 2022, CoinGecko data shows. These so-called ‘Sam Coins’ have jumped in a wider $250 billion crypto market bounce from last year’s rout.”
Ukraine War Watch:
January 25 – Reuters (Nandita Bose, Andreas Rinke and Tom Balmforth): “The United States said… it would supply Ukraine with 31 of its most advanced battle tanks after Germany broke a taboo with a similar announcement, moves hailed by Kyiv as a potential turning point in its battle to repel Russia's invasion. The U.S. decision to deliver M1 Abrams tanks helped break a diplomatic logjam with Germany over how to best to help Kyiv in its war with Russia, which hours earlier had condemned Berlin's decision to provide Leopard 2 tanks as a dangerous provocation.”
January 25 – Reuters (Nick Macfie): “Germany will send Leopard 2 tanks to Ukraine and approve their re-export from partner countries, German government spokesperson Steffen Hebestreit said... Russia has cast deliveries of heavy weapons to Ukraine as proof that the West is escalating the war. The Russian embassy in Germany said that Berlin's decision meant it was abandoning its ‘historical responsibility to Russia’ arising from Nazi crimes in World War Two. In a statement, the embassy said that the decision would escalate the conflict to a new level.”
January 26 – Bloomberg (Mark Trevelyan): “Russia said… it saw the promised delivery of Western tanks to Ukraine as evidence of direct and growing U.S. and European involvement in the conflict. The Kremlin was reacting for the first time to announcements by the United States and Germany… that they would arm Ukraine with dozens of battle tanks in its fight against Russia. ‘There are constant statements from European capitals and Washington that the sending of various weapons systems to Ukraine, including tanks, in no way signifies the involvement of these countries or the alliance in hostilities in Ukraine,’ Kremlin spokesman Dmitry Peskov told reporters. ‘We categorically disagree with this, and in Moscow, everything that the alliance and the capitals I mentioned are doing is seen as direct involvement in the conflict. We see that this is growing.’”
January 26 – Bloomberg: “Nearly a year into an invasion that was supposed to take weeks, Vladimir Putin is preparing a new offensive in Ukraine, at the same time steeling his country for a conflict with the US and its allies that he expects to last for years. The Kremlin aims to demonstrate that its forces can regain the initiative after months of losing ground, putting pressure on Kyiv and its backers to agree to some kind of truce that leaves Russia in control of the territory it now occupies, according to officials, advisers and others familiar with the situation.”
January 22 – Associated Press: “The speaker of Russia’s parliament warned… countries supplying Ukraine with more powerful weapons risked their own destruction, a message that followed new pledges of armored vehicles, air defense systems and other equipment but not the battle tanks Kyiv requested. ‘Supplies of offensive weapons to the Kyiv regime would lead to a global catastrophe,’ State Duma Chairman Vyacheslav Volodin said. ‘If Washington and NATO supply weapons that would be used for striking peaceful cities and making attempts to seize our territory as they threaten to do, it would trigger a retaliation with more powerful weapons.’”
U.S./Russia/China/Europe Watch:
January 24 – Bloomberg (Peter Martin and Jenny Leonard): “The Biden administration has confronted China’s government with evidence that suggests some Chinese state-owned companies may be providing assistance for Russia’s war effort in Ukraine, as it tries to ascertain if Beijing is aware of those activities… The people, who asked not to be identified…, declined to detail the support except to say that it consists of non-lethal military and economic assistance that stops short of wholesale evasion of the sanctions regime the US and its allies imposed... The trend is worrying enough that US officials have raised the matter with their Chinese counterparts and warned about the implications of supplying material support for the war…”
January 25 – CNBC (Holly Ellyatt): “The Russian Defense Ministry said… one of its hypersonic-missile carrying frigates had conducted ‘hypersonic missile exercises’ in the western part of the Atlantic Ocean. The frigate Admiral Gorshkov tested the strike capabilities of Russia’s much-hyped Zircon hypersonic missile in the western Atlantic Ocean, according to a statement released by the ministry, using ‘computer simulation’ exercises.”
De-globalization and Iron Curtain Watch:
January 23 – Financial Times (Gideon Rachman): “In 2022, something good came out of something bad. Russia’s invasion of Ukraine led to a remarkable display of unity and determination from the democratic world. The US, the EU, the UK, Japan, South Korea, Canada and Australia imposed unprecedented economic sanctions on Russia. Ukraine was provided with billions of dollars of military and economic support. In Europe, Germany promised to make historic shifts in its defence and energy policies. Finland and Sweden applied to join Nato. China’s hostility towards Taiwan and its announcement of a ‘no limits’ partnership with Russia also sparked a reaction in the Indo-Pacific. Japan announced a major increase in military spending. The Philippines tightened its ties with America. The Quad nations — India, Japan, Australia and the US — held a summit. Democracies in Europe and Asia also began to work more closely together. For the first time, Japan, South Korea and Australia attended a Nato summit.”
January 20 – Bloomberg (Jenny Leonard, Ian King and Cagan Koc): “The Netherlands and Japan, home to key suppliers of semiconductor manufacturing equipment, are close to joining a Biden administration-led effort to restrict exports of the technology to China and hobble its push into the chips industry. The Dutch and Japanese export controls may be agreed to and finalized as soon as the end of January, according to people familiar... Japan’s prime minister, Fumio Kishida, and the prime minister of the Netherlands, Mark Rutte, discussed their plans with US President Joe Biden at the White House earlier this month.”
January 23 – Reuters (Arjun Kharpal): “Apple is looking to manufacture 25% of all of its iPhones in India, the country’s commerce minister said… Piyush Goyal, India’s minister of commerce and industry, called Apple ‘another success story’ as he talked up the business credentials of the world’s fifth-largest economy. ‘They’re [Apple] already at about 5-7% of their manufacturing in India. If I am not mistaken, they are targeting to go up to 25% of their manufacturing,’ Goyal said at a conference.”
Inflation Watch:
January 22 – Wall Street Journal (Stella Yifan Xie): “Just when signs point to easing inflation worldwide, China’s economic reopening after years of strict pandemic controls is raising questions about whether it could spur costs higher again… China will likely consume more energy as its economy recovers, putting upward pressure on prices of oil and other commodities. At the same time, however, its reopening could ease supply-chain bottlenecks and enable factories to boost production, resolving some problems that contributed to higher inflation in 2022.”
January 21 – Yahoo Finance (Adriana Belmonte): “As the U.S. nears a potential recession, dairy producers are finding themselves impacted by both inflation and severe weather. ‘There’s certainly been a lot of talk about the inflation at the shelf and food prices,’ Tillamook County Creamery Association CEO Patrick Criteser told Yahoo Finance... ‘And there should be because that’s an 8-12% — even higher in some categories — increase in costs year-over-year that’s impacting families.’… The latest CPI report indicated that egg prices rose just under 60% year-over-year and 11.1% month-over-month, largely due to an outbreak of avian flu. Butter prices, meanwhile, rose by 35.3% annually while milk prices rose by 12.5%.”
January 26 – Bloomberg (Patpicha Tanakasempipat): “Rice prices are climbing, a sign that the food inflation shock that threw millions into poverty is still reverberating, even as the cost of wheat and other farm commodities has declined. Thai rice, a benchmark for Asia, has soared to the highest in almost two years. Strong demand lies at the heart of the rally, with some importers buying more of the grain to replace wheat after the war in Ukraine disrupted supplies.”
January 24 – Financial Times (Nic Fildes): “Australia’s inflation rate hit a 33-year high in the final quarter of 2022, pushed higher by rising costs of energy and new homes and a rebound in tourism, but the government said it hoped that price growth had peaked. Official data… showed that inflation rose 7.8% year on year in the October to December quarter, the highest rate since 1990. The reading will dash hopes of a pause in rising interest rates, which have climbed above 3% since May, putting pressure on household finances.”
Biden Administration Watch:
January 24 – Reuters (David Lawder): “U.S. Treasury Secretary Janet Yellen activated another extraordinary cash management measure on Tuesday to avoid breaching the federal debt limit, suspending daily reinvestments in a large government retirement fund that holds Treasury debt… In a letter notifying Congress of the move to access the Government Securities Investment Fund (G Fund), Yellen did not alter a projected early June deadline for when the Treasury may no longer be able to pay the nation's bills without an increase in the $31.4 trillion statutory borrowing limit.”
January 24 – Bloomberg (Laura Litvan): “Senate Republican Leader Mitch McConnell says it’s up to President Joe Biden and House Speaker Kevin McCarthy to avert a catastrophic debt default later this year. A compromise to raise debt ceiling and put in place spending cuts will ‘have to come out of the House,’ said McConnell… ‘That is where the solution lies.’ Any bill addressing the debt ceiling that can get the requisite 60 votes in the Democratic-led Senate won’t pass the House, where Republicans hold a slim majority, McConnell said.”
January 24 – Reuters (Diane Bartz and David Shepardson): “The U.S. Justice Department accused Alphabet Inc's Google… of abusing its dominance in digital advertising, threatening to dismantle a key business at the heart of one of Silicon Valley's most successful internet companies. The government said Google should be forced to sell its ad manager suite, tackling a business that generated about 12% of Google's revenues in 2021, but also plays a vital role in the search engine and cloud company's overall sales.”
January 25 – Reuters (Trevor Hunnicutt and Lindsay Dunsmuir): “Federal Reserve Vice Chair Lael Brainard is a contender for the White House's top economic policy position, joining a list that includes Deputy Treasury Secretary Wally Adeyemo and Commerce Secretary Gina Raimondo, two people familiar with the process said… Brainard is currently in the number two slot at the U.S. central bank, where she commands an influential role over monetary policy and regulation as the Fed battles to bring down high inflation.”
Federal Reserve Watch:
January 23 – Reuters (Howard Schneider): “Kansas City Federal Reserve President Esther George has urged her colleagues to come to terms ‘earlier than later’ on a plan for the U.S. central bank to exit the mortgage-backed securities (MBS) market and be more explicit on how bond purchases will figure into future monetary policy. ‘You can't just wake up one day and say, 'hey, we're going to get out of this business,’’ George, who is retiring from her position at the end of this month, told Reuters… She noted that Fed officials agree in principle that the central bank's securities portfolio should only include those assets issued by the U.S. Treasury - not those backed by home mortgages - but don't yet have a plan to get there.”
U.S. Bubble Watch:
January 25 – Reuters (Lucia Mutikani): “The U.S. economy grew faster than expected in the fourth quarter as consumers maintained a solid pace of spending, but momentum had slowed significantly by the end of the year… Gross domestic product increased at a 2.9% annualized rate last quarter… The economy grew at a 3.2% pace in the third quarter… Robust second-half growth erased the 1.1% contraction in the first six months of the year. For 2022, the economy expanded 2.1%, down from the 5.9% logged in 2021.”
January 25 – CNBC (Diana Olick): “Mortgage interest rates fell for the third straight week, while mortgage demand also rose again. Total application volume increased 7% last week compared with the previous week… Applications to refinance a home loan saw the sharpest gains, up 15%, compared with the previous week. They were still 77% lower than the same week a year ago, but that annual gain is now shrinking fast. Mortgage applications to purchase a home rose 3% for the week but were 39% lower year over year.”
January 26 – Bloomberg (Augusta Saraiva): “Sales of new US homes rose for a third month in December, wrapping up an otherwise disappointing year… Purchases of new single-family homes increased 2.3% to an annualized 616,000 pace after a downward revision to the prior month… Some 644,000 houses were bought in 2022, the smallest annual total in four years… The report… showed the median sales price of a new home rose 7.8% from a year earlier to $442,100… There were 461,000 new homes for sale as of the end of last month, though the majority remain under construction or not yet started.”
January 26 – Wall Street Journal (Chip Cutter and Theo Francis): “Dow Inc., International Business Machines Corp. IBM and SAP announced plans to cut thousands of jobs to prepare for a darkening economic outlook, as the current wave of corporate layoffs spreads beyond high-growth technology companies. Together with layoffs announced by manufacturer 3M Co. this week, these companies are trimming more than 10,000 jobs, just a fraction of their total workforces. Still, the decisions mark a shift in sentiment inside executive suites, where many leaders have been holding on to workers after struggling to hire and retain them in recent years when the pandemic disrupted workplaces.”
January 21 – Financial Times (Owen Walker and Katie Martin): “Banks are gearing up for the biggest round of job cuts since the global financial crisis, as executives come under pressure to slash costs following a collapse in investment banking revenues. The lay-offs — which are expected to be in the tens of thousands across the sector — reverse the mass hirings banks made over the past few years and the reluctance to fire staff during the Covid-19 pandemic. ‘The job cuts that are coming are going to be super brutal,’ said Lee Thacker, owner of financial services headhunting firm Silvermine Partners. ‘It’s a reset because they over-hired over the past two to three years.’”
January 24 – Wall Street Journal (Sarah Chaney Cambon): “Employers are shedding temporary workers at a fast rate, a sign that broader job losses could be on the horizon. In the last five months of 2022, employers cut 110,800 temp workers, including 35,000 in December, the largest monthly drop since early 2021. Many economists view the sector as an early indicator of future labor-market shifts.”
January 22 – Reuters (Lindsay Dunsmuir): “The likelihood that the United States is already in recession or will fall into one this year has dropped over the past three months to 56% from a nearly two-thirds possibility, according to a survey on business conditions… Approximately 53% of those polled by the National Association of Business Economics (NABE) said they had a more than-even expectation the United States would enter a recession over the next 12 months, while 3% indicated they thought the country was already in one. In the NABE's previous poll released in October, 64% of respondents indicated that the U.S. economy was either already in a recession or had a more-than-even likelihood of entering one in the next 12 months.”
January 21 – Bloomberg (Denitsa Tsekova): “In a week marked by fresh recession angst from Wall Street to Davos, JPMorgan... finds the odds of an economic downturn priced into financial markets have actually fallen sharply from their 2022 highs. According to the firm’s trading model, seven of nine asset classes from high-grade bonds to European stocks now show less than a 50% chance of a recession. That’s a big reversal from October when a contraction was effectively seen as a done deal across markets.”
Fixed-Income Watch:
January 27 – Bloomberg (Michael MacKenzie): “The US Treasury bond market is flirting with its best start to a new year in more than three decades, powered by a wave of money from investors fearful of missing out. It’s not that the forces behind last year’s bruising bear market have entirely subsided. In fact, the Federal Reserve is expected to increase its benchmark interest rate by another half percentage point over its next two meetings. The job market remains tight. And inflation is still well above the central bank’s target… But all of those risks are being brushed aside by investors rushing to seize on elevated Treasury yields before a potential recession or steep economic slowdown — and the rate cuts that would likely follow — come and take them away.”
China Watch:
January 25 – Bloomberg: “President Xi Jinping’s decision to dismantle Covid travel restrictions is accelerating an exodus by wealthy Chinese, who could fuel billions in capital outflows as they plow cash into property and assets abroad. Since the end of Covid Zero in December, many rich Chinese have begun traveling overseas to check out real estate or firm up plans to emigrate, immigration consultants said... That’s threatening a brain drain in the world’s second-largest economy as well as outflows that could pressure its financial markets.”
January 24 – Reuters (Jorgelina Do Rosario and Rachel Savage): “Loans committed by China's two main trade policy banks fell to a 13-year low of $3.7 billion in 2021 due to Beijing curtailing funding for large-scale oil projects, a study from Boston University Global Development Policy Center showed. Commitments made to 100 developing nations by the Export-Import Bank of China (China EximBank) and the China Development Bank (CDB) have fallen every year since hitting a record in 2016… ‘We expect an overall shift toward lower volume, higher quality investment from China,’ Kevin Gallagher, director of the university's Global Development Policy Center, told Reuters.”
January 23 – Financial Times (Hudson Lockett and Andy Lin): “Bonds issued by China’s highly indebted real estate developers have rebounded sharply over the past two months, in a sign that efforts by Chinese authorities to bolster the hard-hit sector are bearing fruit. China’s high-yield dollar bond index… has recovered almost 50% from the record low hit in early November. Bonds from higher-quality developers such as Country Garden have also recovered from distressed territory to trade close to their original value.”
January 21 – Reuters: “The possibility of a big COVID-19 rebound in China over the next two or three months is remote as 80% of people have been infected, a prominent government scientist said… The mass movement of people during the ongoing Lunar New Year holiday period may spread the pandemic, boosting infections in some areas, but a second COVID wave is unlikely in the near term, Wu Zunyou, chief epidemiologist at the China Center for Disease Control and Prevention, said…”
January 25 – Reuters (Farah Master and Josh Horwitz): “Critically ill COVID-19 cases in China are down 72% from a peak early this month while daily deaths among COVID-19 patients in hospitals have dropped 79% from their peak, the Center for Disease Control and Prevention said… The figures… come after a prominent government scientist said over the weekend that 80% of China's 1.4 billion population had already been infected, making the possibility of a big COVID-19 rebound over the next two or three months remote.”
January 24 – New York Times (Keith Bradsher): “For many people across China, a shortage of natural gas and alarmingly cold temperatures are making a difficult winter unbearable. For Li Yongqiang, they mean freezing nights without heat. ‘We dare not turn on the heat overnight — after using it for five or six hours, the gas stops again,’ Mr. Li, a 45-year-old grocer, said by telephone from his home in northern China’s Hebei Province. ‘The gas shortage is really affecting our lives.’ The lack of natural gas, which is used widely across China to heat homes and businesses, has angered tens of millions of people and spilled over into caustic complaints on social media.”
January 26 – Reuters (Donny Kwok): “Private home prices in Hong Kong… fell 15.6% in 2022 in the first annual drop since 2008… December saw the seventh consecutive month of decline, the data showed, with prices down 2.0% from a month earlier to the lowest since April 2017. That compared with a revised 3.2% drop in November and a 2.6% fall in October.”
Central Banker Watch:
January 23 – Bloomberg (Jana Randow): “Christine Lagarde said the European Central Bank will do everything necessary to return inflation to its goal, pointing to more ‘significant’ interest-rate increases at coming meetings. Borrowing costs will have to rise at a steady pace to reach levels that are sufficiently restrictive, and stay at those levels for as long as needed, Lagarde said... ‘We will stay the course to ensure the timely return of inflation to our target,’ the ECB president said. ‘It is vital that inflation rates above the ECB’s 2% target do not become entrenched in the economy.’”
January 24 – Bloomberg (Milda Seputyte and Alexander Weber): “The European Central Bank should continue lifting interest rates in half-point steps as workers secure bigger paychecks and underlying inflation pressures remain strong, according to Governing Council member Gediminas Simkus. There are no grounds to depart from the rate path laid out by the ECB in December…, the Lithuanian central bank chief said… ‘Core inflation remains strong and demonstrates that the fight against inflation is not over,’ Simkus said... ‘There’s a strong case for staying on the course that’s been set for the coming meetings of 50 bps increases. In my opinion, these 50 bps increases must be taken unequivocally.’”
January 23 – Reuters (Bart Meijer and Federico Maccioni): “The European Central Bank (ECB) is set to raise interest rates by 50 bps in both February and March and will continue to raise rates in the months after, ECB governing council member Klaas Knot said… ‘Expect us to raise rates by 0.5% in February and March and expect us to not be done by then and that more steps will follow in May and June,’ Knot said.”
January 23 – Bloomberg (Daniel Hornak): “European Central Bank Governing Council member Peter Kazimir joined a chorus of fellow hawks in rejecting suggestions that moderating inflation will soon warrant smaller interest-rate increases. ‘We need to deliver two more 50 bps moves,’ said Kazimir, who also heads Slovakia’s central bank and favors the monetary-tightening cycle being completed by the summer. ‘The fall in inflation for two months in a row is positive news. But there’s no reason to slow the pace of rate hikes.’”
January 24 – Bloomberg (Matthew Brockett): “New Zealand inflation held near a three-decade high in the fourth quarter but undershot the central bank’s forecast, potentially opening the door to less aggressive interest-rate hikes. Annual inflation was 7.2%, unchanged from the third quarter…”
January 25 – Bloomberg (Greg Ritchie and James Hirai): “Traders are betting the Bank of England will reverse course and cut its key interest rate later this year to shore up a flagging economy. For the first time since August, money-market wagers show a quarter-point rate cut is fully priced in by year-end. Rates are still expected to increase next month before peaking at around 4.5% in the summer.”
Europe Watch:
January 24 – Bloomberg (Hannah Benjamin-Cook and Priscila Azevedo Rocha): “Debt sales in Europe have broken through €240 billion ($260bn), beating a previous record for January set in 2020. Offerings from the UK and European Union on Tuesday pushed marketwide sales to almost €245 billion… It beats a previous record of just under €239 billion notched up in the same month three years ago.”
January 24 – Reuters (Jonathan Cable): “Euro zone business activity made a surprise return to modest growth in January, adding to signs the downturn in the bloc may not be as deep as feared and that the currency union may escape recession… S&P Global's flash Composite Purchasing Managers' Index (PMI), seen as a good gauge of overall economic health, climbed to 50.2 this month from 49.3 in December. January was the first time the index has been above the 50 mark…”
Global Bubble Watch:
January 23 – Bloomberg (Jack Sidders): “Turmoil at trophy properties in London and Frankfurt offer a glimpse of the damage awaiting European real estate investors as they face the sharpest reversal on record. From a fraught refinancing process for an office building in the City of London to the strained sale of the Commerzbank Tower in Germany’s financial hub, investors are scrambling to find ways to bridge financing gaps as lending markets seize up from rapidly rising interest rates. The reality check will start to hit in the coming weeks as lenders across Europe get results of year-end appraisals. Hefty declines in valuations threaten to cause breaches of loan covenants, triggering emergency funding measures from forced sales to pumping in fresh cash. ‘Europe is going to go through the great unwind of 10 years of easy money,’ said Skardon Baker, a partner at private equity firm Apollo Global Management. ‘The amount of distress and dislocation is off the spectrum.’”
January 24 – Bloomberg (Tom Rees): “British companies signaled output dropped at the fastest pace since the start of the pandemic as the government budget deficit widened to a record, adding to evidence that the economy may be in a shallow recession. S&P Global said its index of sentiment from purchasing managers fell more sharply than expected in January, led by a deterioration in services that had previously propped up the economy.”
January 25 – Bloomberg (Sam Kim): “South Korea’s economy shrank for the first time since the beginning of the pandemic last quarter, an outcome that supports the view the central bank is likely done with interest rate hikes for now. Gross domestic product contracted 0.4% from the previous three months as exports fell and consumer spending edged down…”
January 24 – Reuters (Allison Lampert): “Some U.S. business jet buyers are looking for new aircraft whose current owners are having trouble making payments ahead of delivery, in a possible sign of early cracks in what has been a soaring market up to now. From preowned planes selling more gradually to flattening business jet traffic, demand is beginning to moderate, aviation lawyers, brokers and analysts said. While defaults remain rare, those signs of uneven demand are drawing attention.”
EM Crisis Watch:
January 27 – Reuters (Chris Thomas, M. Sriram and Aditya Kalra): “Shares of India's Adani Enterprises plunged on Friday after a scathing report by a U.S. short seller triggered a selloff in the conglomerate's listed firms, casting doubts on the success of the company's record $2.45 billion secondary share sale. Seven listed companies of the Adani conglomerate - controlled by one of the world's richest men Gautam Adani - lost a combined $48 billion in market capitalisation, with U.S. bonds of Adani firms also falling after Hindenburg Research flagged concerns in a Jan. 24 report about debt levels and the use of tax havens.”
January 22 – Bloomberg (Sylvain Mehdi Chouaki, Tim Hakki and Oz Adan): “Turkey’s President Recep Tayyip Erdogan, hinting at a May 14 election, looks set to test the limits of fiscal prudence in months ahead after unorthodox monetary policies weakened the lira and fueled inflation. The government faces at least $95 billion of payments on bonds over two years, with corporate and financial issuers even more front-loaded in their borrowing... Central bank policy interventions have stabilized the lira, allowing it to hold the benchmark rate at 9% on Jan. 19. Yet traders are boosting hedges against lira declines and debt defaults.”
January 26 – Financial Times (Adam Samson): “Turkey has unveiled a new scheme to push exporters to hold less foreign currency as the government of Recep Tayyip Erdoğan steps up its battle to defend the lira ahead of this year’s elections. The country said… it would offer companies new incentives to swap money they earn abroad into lira in return for a vow not to purchase foreign currencies. The new programme is the latest sign of how Turkey is deploying a broad range of tools to prop up the lira and boost its $800bn economy ahead of presidential and parliamentary elections set for May 14.”
January 22 – Bloomberg (Daniel Carvalho and Maya Averbuch): “Argentina and Brazil are in the preliminary stages of renewing discussions on forming a common currency for financial and commercial transactions, reviving an often-discussed plan that would face numerous political and economic hurdles. South America’s two largest economies have considered options to coordinate their currencies for decades, often to counter the influence of the dollar in the region. The persistent macroeconomic imbalances of both countries, together with recurrent political obstacles to the idea, has resulted in little practical progress.”
Japan Watch:
January 27 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Inflation in Tokyo continued to outpace expectations, jumping above 4% and underscoring how price gains may be stronger than the Bank of Japan’s current view. Consumer prices excluding fresh food rose 4.3% in the capital in January, accelerating from December’s revised figure of 3.9%... The reading was the strongest since 1981 and beat analyst estimates, rising further beyond the central bank’s 2% target.”
January 25 – Financial Times (Kana Inagaki): “With less than three months until Haruhiko Kuroda steps down as governor of the Bank of Japan, none of the top candidates to replace the country’s longest-serving central bank chief seem to want the job. Their reluctance is understandable. After a decade of ‘unprecedented’ ultra-loose monetary policy, the next BoJ chief must take on the daunting challenge of steering Asia’s most advanced economy towards interest rate normalisation. If they fail, the consequences could be profound… ‘After three decades of low inflation, the BoJ is finally seeing a path towards sustainably achieving its 2% inflation target,’ said Goushi Kataoka, a former Bank of Japan board member... ‘For any candidate, you don’t want to be a governor now because there is no margin for error. If he/she failed, it would undermine the central bank’s raison d’être,’ he added. The head of one of Japan’s largest banks said: ‘My hope is that the new governor will be someone who doesn’t want to do the job. That’s because this job is impossible unless you know how difficult it’s going to be. But if you know how challenging it’s going to be, no one would want to do it.’”
January 25 – Reuters (Leika Kihara): “Bank of Japan policymakers were divided on prospects for achieving their 2% inflation target with some warning that it could take time for wages to rise sustainably, a summary of opinions from their latest meeting showed… The divergence in views highlight the challenge policymakers face in determining whether the recent cost-driven rise in inflation will shift to one backed by robust demand and higher wages - a prerequisite for raising ultra-low interest rates… While some in the nine-member board pointed to broadening price hikes and heightening prospects of wage increases, others said price growth will begin to slow as cost-push pressure eases... ‘Companies are becoming more keen on raising prices and wages. This could generate a positive cycle between the economy and prices, driven by increases in corporate profits,’ one board member was quoted as saying.”
January 25 – Bloomberg (Masaki Kondo and Yasutaka Tamura): “The Bank of Japan is facing a fresh headache in the dysfunctional local bond market — it has become so illiquid that some securities are being kicked out of an important global index. Japanese government bonds expiring in March 2032 and March 2024 are among the issues that have been booted out of the World Government Bond Index… The September 2032 and June 2032 tenors will follow suit next month... To be eligible for inclusion in the index, bonds should have a minimum outstanding amount of ¥500 billion ($3.8bn), excluding central bank holdings…”
January 26 – Financial Times (Kana Inagaki): “The IMF has warned that an abrupt change in Japan’s ultra-loose monetary regime would have ‘meaningful spillover’ effects on global financial markets, underscoring the need for the Bank of Japan to clearly communicate about its future policy… Gita Gopinath, the IMF’s first deputy managing director, called on the BoJ to take a flexible approach to controlling yields on government bonds as she warned of ‘significant upside risks’ to inflation in the near term. She added that Asia’s most advanced economy was at ‘a delicate juncture’. The BoJ, which will have a new governor in April, has come under increasing market pressure to shift away from its long-standing easing measures as Japan’s core inflation rate has risen to a 41-year high of 4%.”
January 22 – Reuters (Tetsushi Kajimoto): “Japanese Prime Minister Fumio Kishida said… he would nominate a new Bank of Japan governor next month, as markets test whether the central bank will change the ultra low-rate policy of the dovish Haruhiko Kuroda. Kishida initially told a TV Tokyo programme that he would decide on Kuroda's replacement by considering the economic situation for April, but when pressed he acknowledged this would likely be in February, ‘considering parliament's schedule.’”
January 23 – Reuters (Tetsushi Kajimoto): “Japan's finances are becoming increasingly precarious, Finance Minister Shunichi Suzuki warned…, just as markets test whether the central bank can keep interest rates ultra-low, allowing the government to service its debt.. ‘Japan's public finances have increased in severity to an unprecedented degree as we have compiled supplementary budgets to respond to the coronavirus and similar issues,’ Suzuki said…”
January 24 – Reuters (Tetsushi Kajimoto): “Japan raised its estimates for long-term interest rates over the coming few years in government's twice-yearly fiscal projections issued on Tuesday… Higher rates will test the government's ability to service the industrial world's heaviest debt burden at more than double the size of Japan's annual economic output… Long-term rates are expected to rise from 0.3% seen this fiscal year to 0.4% in 2023-2025 before climbing eventually to 3.1% in fiscal 2032, the projections showed. The projections show that a 0.5 percentage-point rise in long-term rates would add 3.3 percentage points to the debt-to-GDP ratio.”
January 24 – Bloomberg (Masaki Kondo): “Japan’s broken bond market continued to throw up anomalies with central bank ownership of some government debt exceeding the amount outstanding… There were four such issues among over 300 securities held by the Bank of Japan as of Jan. 20. A bond maturing in March 2030 saw the highest ownership with the BOJ holding ¥7.87 trillion ($60.5bn) compared with ¥6.86 trillion outstanding. It’s the cheapest-to-deliver security backing the current front-end contract of benchmark bond futures. How the central bank can own more than 100% of a bond is down to double counting. The BOJ lends out securities to alleviate a liquidity crunch in the market, but some of them get sold back to the central bank, resulting in them being counted twice in the ownership data.”
Social, Political, Environmental, Cybersecurity Instability Watch:
January 24 – New York Times (Ana Swanson): “Efforts to mitigate climate change are prompting countries across the world to embrace dramatically different policies toward industry and trade, bringing governments into conflict. These new clashes over climate policy are straining international alliances and the global trading system, hinting at a future in which policies aimed at staving off environmental catastrophe could also result in more frequent cross-border trade wars. In recent months, the United States and Europe have proposed or introduced subsidies, tariffs and other policies aimed at speeding the green energy transition. Proponents of the measures say governments must move aggressively to expand sources of cleaner energy and penalize the biggest emitters of planet-warming gases if they hope to avert a global climate disaster.”
Leveraged Speculation Watch:
January 22 – Bloomberg (Nishant Kumar): “Ken Griffin’s Citadel churned out a record $16 billion in profit for clients last year, outperforming the rest of the industry and eclipsing one of history’s most successful financial plays. The top 20 hedge fund firms collectively generated $22.4 billion in profit after fees… Citadel’s gain was the largest annual return for a hedge fund manager, surpassing the $15 billion that John Paulson generated in 2007 on his bet against subprime mortgages. This was described as the ‘greatest trade ever’ in a subsequent book of the same name by Gregory Zuckerman.”
January 27 – Bloomberg (Katherine Burton and Miles Weiss): “Anthony Scaramucci’s SkyBridge Capital lost 39% last year in its biggest funds after wrong-way bets on cryptocurrencies and now-bankrupt FTX, spurring investors to ask the firm to return more than half of their money. SkyBridge’s largest fund, with $1.3 billion of assets…, had one of its worst months of 2022 in November, when FTX declared bankruptcy… Investors, who are now limited to making two withdrawal requests each year, asked to pull 60% of the fund’s capital for the Sept. 30 redemption period, but SkyBridge only returned 10%...”
Geopolitical Watch:
January 23 – Bloomberg (Jana Randow): “China invoked the US’s brinkmanship over its own debt limit as it hit back at Treasury Secretary Janet Yellen’s criticism of Beijing’s handling of debt issues in developing countries. The criticism came from the Chinese embassy in Lusaka, Zambia…, which blasted the US over its ‘catastrophic debt problem’ and accused it of ‘sabotaging’ other nations’ efforts to resolve debt problems. Noting that the Treasury has begun taking extraordinary measures to meet its obligations…, the embassy said ‘the biggest contribution that the US can make to the debt issues outside the country is to act on responsible monetary policies, cope with its own debt problem, and stop sabotaging other sovereign countries’ active efforts to solve their debt issues.’”
