History doesn’t repeat itself, but it rhymes. Silicon Valley Bank (SVB) is not Lehman Brothers, but we can make uncomfortable comparisons. Both failed institutions were central players in their respective Bubbles. Lehman was a key player in risky mortgage loans, while SVB is the dominant financier for Silicon Valley startups. Lehman fatefully compounded its risk profile by aggressively leveraging a portfolio of high-risk securitizations. SVB ended 2022 with a $120 billion securities portfolio, the vast majority mortgage securities (MBS and CMOs). Lehman falling into distress had a major negative impact on the underlying securities on its balance sheet. SVB’s spectacular collapse will have a major negative impact on its $74 billion loan portfolio. Lehman’s collapse unleashed “the great financial crisis.”
March 10 – Bloomberg (Lynn Doan, Hannah Miller and Katie Roof): “Startup founders are beginning to worry about whether they’ll be able to keep paying employees following the failure of Silicon Valley Bank. Payroll service provider Rippling notified customers on Friday that some payroll processing had stalled because SVB helped process its payments. The company, a startup itself, switched to JPMorgan Chase, but not soon enough: Paychecks were already ‘in flight’ with SVB and have yet to be paid out — and the firm is still trying to understand what the bank’s collapse on Friday will mean for them… Startup founder Brad Hargreaves said some firms may not be able to make payroll next week. And because boards are incredibly sensitive to employing workers they can’t pay, he said, ‘Expect mass layoffs later today, Monday at latest…’ More than half of tech companies ‘keep the lion’s share of their cash at SVB,’ said Greg Martin, founding partner of the investment firm Liquid Stock. ‘They all need to make payroll early next week.’”
A tangled web… Apparently, SVB startup borrowers were required to keep their cash deposited at SVB. By their nature, startups generally operate negative cash-flow operations. If they lose access to new cash, they’re in trouble. While finance tightened markedly last year, SVB still expanded its loan portfolio at a double-digit (12%) rate. Now scores of companies that require new financings to survive have in 48 hours lost their key lender, along with access to their cash.
How could it have ever made sense to run a risky startup loan portfolio simultaneously with a huge portfolio of risky mortgage securities? Because it worked miraculously during a protracted cycle of zero interest-rates, a surefire Fed liquidity backstop, bubbling market and venture capital environments, and generally ultra-loose “money”.
This one will not be easy to explain. With assets below $250 billion, SVB was able to avoid the more onerous post-GFC regulatory regime for systemically important financial institutions. At least that’s the excuse we’ll hear. Unfortunately, bank regulators for way too long looked the other way. Worse yet, the Federal Home Loan Bank advanced SVB $15 billion last year, a liquidity backstop that surely contributed to complacency and deeply flawed risk management.
The Fed’s Q4 Z.1 “flow of funds” Credit report was released Thursday. The data help provide some clarity on today’s most unusual backdrop. I’ll attempt to interweave the Z.1 with the mounting systemic risk illuminated late this week with SVB’s crisis.
Importantly, Credit growth slowed markedly during Q4. And while booming markets surely spurred a Q1 pickup in Credit in some areas, the underlying backdrop is one of a faltering Credit Bubble.
Non-Financial Debt (NFD) growth slowed to a 3.00% pace in Q4, the slowest rate since Q1 2017. Household Mortgage Debt growth slowed to 4.39% (from Q3’s 6.66%), while non-mortgage consumer debt growth increased to 6.96%. Growth in Total Business Borrowings dropped to 2.16% from Q3’s 4.00%, the weakest expansion since Q3 2020. In what will surely reverse soon, federal debt growth slowed to a five-quarter low 3.98% annual growth rate.
And while system Credit growth slowed, cooling had yet to materialize in bank lending data. Bank Loans expanded $361 billion, or 10.5% annualized, during Q4 to a record $14.054 TN. This pushed 2022 Loan growth to an annual record $1.424 TN, or 11.3%. Bank Mortgage lending slowed to a still robust $142 billion, or 9.0%. At $541 billion, 2022 growth in Bank Mortgages was the strongest since 2004. Bank Consumer loans expanded $87 billion, or 13.5% annualized, boosting 2022 growth to a record $303 billion, or 12.8%. Q4 business “not elsewhere classified” Loans rose $131 billion, or 11.0%, to an annual record $584 billion, or 13.6%.
Curiously, Financial Sector borrowings expanded at a 10.0% pace during Q4, up from Q3’s 6.71% and Q4 2021’s 6.25%. GSE (government-sponsored enterprises) Assets expanded $241 billion, or 10.7% annualized, during Q4, to a record $9.224 TN. Last year’s record growth of $921 billion, or 11.1%, exceeded previous record 2020 by 54%. The pre-pandemic record was $301 billion set in 2007. Over 12 quarters, GSE assets surged $2.094 TN, or 29.4%.
In my analysis of the Q3 Z.1, underscoring the rapid expansion of GSE assets, I asked “Why?” Clearly, there has been a major push to sustain a historic lending boom. FHLB advances/loans expanded $163 billion during Q4 (100% annualized!) to a record $824 billion, the strongest quarterly growth since the Q3 2007 subprime blowup. For 2022, FHLB Loans surged an unprecedented $477 billion, or 138%, more than double the previous record set in 2007 ($226bn). This is crazy-time late-cycle growth by a highly levered institution in a rising rate and faltering Bubble backdrop.
From the Federal Home Loan Bank of San Francisco’s February 22nd press release: “At December 31, 2022, total assets were $121.1 billion, an increase of $67.0 billion from $54.1 billion at December 31, 2021. Advances increased to $89.4 billion at December 31, 2022, from $17.0 billion at December 31, 2021, an increase of $72.4 billion, as member demand for primarily short-term advances increased.”
I’ll assume the San Francisco FHLB advanced the $15 billion to SVB last year. It’s worth noting that this institution has “Total Capital” of $7.7 billion to support its Advances of $89.4 billion and Investments of $30.3 billion.
The combined FHLB system ended the year with Total Assets of $1.247 TN, having expanded $524 billion, or 72% over the previous 12 months. Total Capital ended September at $67.8 billion. A Friday evening Bloomberg headline: “White House Offers Assurances on Banks, Says 2008 Lesson Learned.” We clearly didn’t learn the right lessons from the bursting mortgage finance Bubble crisis. Unfortunately, another learning opportunity beckons.
Regional bank stocks came under heavy selling pressure this week. I’ll assume the SVB fiasco proves an inflection point for egregious FHLB growth, lending that has surely provided major support for the historic late-cycle bank lending boom. With system Credit growth already weakened, the financial system fragile, and the economy highly vulnerable, a tightening of bank lending will have major ramifications.
There is every reason to expect an especially brutal downside to this historic Credit cycle. Many will ask how trouble at a regional lender could rock global bank stocks and markets more generally. Well, a tightening of financial conditions in the U.S. banking system at this stage of the cycle will unleash powerful down-cycle dynamics – at home and abroad.
Bank of America CDS surged 11 bps Friday (to 86bps), the largest daily gain since March 20, 2020. The 17 bps jump for the week was the biggest since June 2020. Citigroup’s 8.4 bps Friday CDS increase was the largest since June 2022, with the 16.5 bps gain for the week the biggest since last September. Morgan Stanley’s 18.8 bps Friday CDS surge was the largest since March 18th, 2020, with the 28.3 bps gain for the week the biggest since the panic week March 20, 2020. JPMorgan’s 13.4 bps gain for the week was the largest since September 2022.
The KBW Bank Index sank 15.7% this week, the largest weekly decline since the 18.8% drop during covid panic week March 20, 2020. The Nasdaq Bank Index dropped 16.1%, and the NYSE Financials Index this week fell 7.5%. The Broker/Dealer Index (XBD) lost 9.3%. The European STOXX 600 Bank Index dropped 5.0%, and the Hang Seng China Financials Index fell 5.1%.
High-yield CDS jumped 23 bps Thursday, the largest daily increase since December (up another 19bps Friday). The 65 bps gain for the week was the largest since June 2020. Investment-grade CDS rose 12 bps this week, the biggest gain since September.
Rate markets believe SVB will have a significant influence on the Federal Reserve’s tightening cycle. Two-year Treasury yields traded up to 5.07% in Wednesday trading, the high since 2007. Two-year yields then reversed 48 bps lower to end the week at 4.59%. Market expectations for (what was “peak”) Fed funds at the September 20th FOMC meeting touched 5.70% late Wednesday, before reversing sharply lower to end the week at 5.18%. The probability of a 50 bps rate hike during the March 22nd FOMC meeting dropped from about 70% Wednesday to 33% to close the week.
March 10 – Bloomberg (Paige Smith): “The ripple effects of one of the biggest US bank runs in over a decade are reaching a wide variety of businesses, as companies from startups to vineyard owners raise alarms. Silicon Valley Bank, once a darling of the California financial system, fell swiftly on Friday, a day after investors and depositors tried to make $42 billion in withdrawals. Roku Inc., LendingClub Corp. and Eiger BioPharmaceuticals Inc. were among dozens of companies that revealed they have deposits stuck at the bank. The stranded funds show that SVB’s troubles are spreading throughout the Silicon Valley ecosystem and pose a risk to the economy at large.”
March 10 – Bloomberg (John Gittelsohn, Margi Murphy and Hannah Miller): “The shocking collapse of Silicon Valley Bank rippled across California Friday to industries far beyond the technology community that it played a major role in shaping. From wealthy founders to Napa vineyard owners, clients were scrambling to secure funds or find out basic information about what would happen to their deposits. Anxious customers formed lines outside branches across the Bay Area and fears grew that some companies will struggle to make payroll next week. The sudden implosion... delivered a deep blow to a Silicon Valley ecosystem already struggling with a rapid tech downturn, thousands of layoffs and the lingering economic effects of the Covid-19 pandemic. In a region that exploded over the past decade to generate massive wealth and become an engine of economic growth, the bank had extensive and far-ranging roots. ‘The reach into Silicon Valley is at the high level,’ said Louis Lehot, a partner at Foley & Lardner, a law firm that advises startups and public companies, who said thousands of bank clients will be affected. ‘It’s deep and broad at all levels of the ecosystem from big companies to startups to VCs, private equity firms and everything in between.’”
Friday’s intensely anticipated payrolls data – stronger-than-expected 311,000 jobs added, though the 0.2% gain in Average Weekly Earnings and the 0.2 increase to a 3.6% unemployment rate were on the weaker side – were completely overshadowed by SVB. And suddenly next week’s inflation data hardly seem life and death.
Early in the year, I posited that the big squeeze and resulting loosening of financial conditions would on the margin bolster lending and system Credit growth, somewhat extending the cycle. Post-SVB, I’m adjusting the analysis. I now see a market “risk off” tightening of conditions, coupled with a tightening of bank lending, inducing a problematic Credit slowdown. At this point, I don’t see a Lehman-style crisis of confidence in the “repo” market and seizing up of money and debt markets. But for scores of startups and negative cash-flow enterprises, the unfolding tightening of lending poses an existential threat. Contagion effects will be far-reaching, including residential and commercial real estate markets. There will be greater concern for uninsured deposits throughout the banking system.
The Fed now faces the predicament that has been galvanizing for the past year. It’s got a serious inflation problem, along with acute system fragility. Further tightening risks pushing the markets and economy over the proverbial cliff. Not tightening, with bond yields sinking in anticipation of rate cuts and more QE, risks underpinning inflationary pressures. Markets are now pricing in 40 bps of rate cuts between June and December FOMC meetings. Months of “risk on” have exacerbated fragilities.
For months, markets have been sniffing out an accident. It’s anything but clear how this all plays out. But SVB sure appears to be the start of a gigantic multi-vehicle pileup.
Meanwhile, I found this week’s comments from Xi Jinping and his new foreign minister alarming. It appears consistent with a major shift in strategy. I had assumed Beijing’s decision to play nice in the sandbox was a temporary measure seen as constructive for their focus on stabilizing the deflating Chinese economic Bubble. The U.S. wasn’t willing to play along, and now Beijing will play hardball.
Xi Jinping: “Western countries, led by the United States, have implemented all-round containment, encirclement and suppression against us, bringing unprecedentedly severe challenges to our country’s development.”
I’ve feared that when China’s Bubble inevitably collapsed, Beijing would blame the U.S. and its old nemesis Japan. Now Xi is finger-pointing directly at the U.S., as state media aggressively disseminate Cold War anti-American propaganda. It appears Xi is preparing the Chinese people for eventual conflict.
Foreign Minister Qin Gang: “If the United States does not hit the brake, but continues to speed down the wrong path, no amount of guardrails can prevent derailing and there surely will be conflict and confrontation. Such competition is a reckless gamble, with the stakes being the fundamental interests of the two peoples and even the future of humanity.”
Interjecting “even the future of humanity” strikes me as too close to Putin-style nuclear threats.
March 7 – Washington Post (Christian Shepherd): “China and the United States are careering toward an inevitable collision, Foreign Minister Qin Gang said Tuesday, a day after Chinese leader Xi Jinping made a rare direct accusation that Washington was trying to contain China. Together, the statements underscore the dire state of bilateral ties between the world's two biggest economies, a month since a rogue balloon brought a sudden and surprising end to efforts to ‘put a floor’ under the relationship. In a news conference on the sidelines of the National People's Congress, Qin, who was previously Beijing's ambassador in Washington but became foreign minister in December, deployed a range of often colorful — and occasionally off-color — metaphors to describe the severity of tensions.”
Week by week, Beijing (now Foreign Minister Qin Gang) is increasingly sounding like Moscow.
March 7 – Bloomberg: “The US Indo-Pacific strategy, which purportedly aims at upholding freedom and openness, maintaining security and promoting prosperity in the region, is in fact an attempt to gang up to form exclusive blocs to provoke confrontation by plotting an Asia-Pacific version of NATO...”
March 7 – Financial Times: “‘Why talk big about respecting sovereignty and territorial integrity on the Ukraine question but then not respect the sovereignty and territorial integrity in the question of China’s Taiwan?’ he said. ‘Why on the one hand demand China not provide weapons to Russia, but on the other hand sell weapons to Taiwan in long-term violation of [joint communiqués]?’ In a snub of Washington’s warnings not to provide weapons or munitions to Moscow, Qin praised China’s close partnership with Russia for blazing a trail of trust between major powers and creating a ‘model’ for international relations. ‘With China and Russia joining hands, the move towards a multipolar world and more democratic international system has gained momentum and global strategic balance and stability have gained a guarantor,’ Qin said. ‘The more turbulent the world is, the more China-Russia relations should keep moving forward.’”
A collapsing Bubble fixing Beijing’s sights on Taiwan. It’s a scenario I’ve feared for years. I just never imagined China and Russia as “partners without limits” in a fragmenting world of economic and military alliances. As I wrote to begin this analysis, a troubling week.
For the Week:
The S&P500 sank 4.5% (up 0.6% y-t-d), and the Dow fell 4.4% (down 3.7%). The Utilities lost 2.7% (down 9.9%). The Banks were clobbered 15.7% (down 8.6%), and the Broker/Dealers slumped 9.3% (up 0.7%). The Transports dropped 6.0% (up 6.1%). The S&P 400 Midcaps sank 7.4% (up 0.9%), and the small cap Russell 2000 dropped 8.1% (up 0.9%). The Nasdaq100 declined 3.7% (up 8.1%). The Semiconductors fell 3.4% (up 15.5%). The Biotechs slumped 6.5% (down 4.2%). While bullion gained $12, the HUI gold equities index dropped 5.5% (down 7.0%).
Three-month Treasury bill rates ended the week at 4.7475%. Two-year government yields dropped 27 bps this week to 4.59% (up 16bps y-t-d). Five-year T-note yields sank 28 bps to 3.97% (down 4bps). Ten-year Treasury yields dropped 25 bps to 3.70% (down 18bps). Long bond yields fell 17 bps to 3.71% (down 26bps). Benchmark Fannie Mae MBS yields declined 14 bps to 5.44% (up 5bps).
Greek 10-year yields fell 15 bps to 4.32% (down 25bps y-o-y). Italian yields sank 21 bps to 4.32% (down 38bps). Spain's 10-year yields fell 12 bps to 3.54% (up 3bps). German bund yields sank 21 bps to 2.51% (up 6bps). French yields dropped 19 bps to 3.01% (up 3bps). The French to German 10-year bond spread widened two to 50 bps. U.K. 10-year gilt yields sank 21 bps to 3.64% (down 3bps). U.K.'s FTSE equities index slumped 2.5% (up 4.0% y-t-d).
Japan's Nikkei Equities Index increased 0.8% (up 7.9% y-t-d). Japanese 10-year "JGB" yields dropped 10 bps to 0.41% (down 3bps y-t-d). France's CAC40 fell 1.7% (up 11.5%). The German DAX equities index declined 1.0% (up 10.8%). Spain's IBEX 35 equities index slumped 1.9% (up 12.8%). Italy's FTSE MIB index dropped 2.0% (up 15.1%). EM equities were mostly lower. Brazil's Bovespa index slipped 0.2% (down 5.6%), and Mexico's Bolsa index sank 2.6% (up 8.9%). South Korea's Kospi index declined 1.5% (up 7.1%). India's Sensex equities index lost 1.1% (down 2.8%). China's Shanghai Exchange Index sank 3.0% (up 4.6%). Turkey's Borsa Istanbul National 100 index fell 3.3% (down 2.3%). Russia's MICEX equities index added 0.2% (up 5.7%).
Investment-grade bond funds posted inflows of $717 million, and junk bond funds reported positive flows of $10 million (from Lipper).
Federal Reserve Credit declined $27.5bn last week to $8.305 TN. Fed Credit was down $596bn from the June 22nd peak. Over the past 182 weeks, Fed Credit expanded $4.578 TN, or 123%. Fed Credit inflated $5.494 Trillion, or 195%, over the past 539 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $7.1bn last week to $3.360 TN. "Custody holdings" were down $72.7bn, or 2.1%, y-o-y.
Total money market fund assets were unchanged at $4.894 TN. Total money funds were up $318bn, or 7.0%, y-o-y.
Total Commercial Paper dropped $35.8bn to $1.179 TN. CP was up $140bn, or 13.4%, over the past year.
Freddie Mac 30-year fixed mortgage rates declined three bps to 6.71% (up 286bps y-o-y). Fifteen-year rates rose 10 bps to 6.09% (up 300bps). Five-year hybrid ARM rates added three bps to 6.00% (up 303bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 15 bps to 7.02% (up 267bps).
Currency Watch:
For the week, the U.S. Dollar Index was little changed at 104.58 (up 1.0% y-t-d). For the week on the upside, the Swiss franc increased 1.7%, the Japanese yen 0.6% and the euro 0.1%. On the downside, the Mexican peso declined 3.0%, the Australian dollar 2.8%, the Swedish krona 2.3%, the Norwegian krone 2.3%, the South Korean won 1.8%, the Canadian dollar 1.7%, the New Zealand dollar 1.5%, the South African rand 1.0%, the Singapore dollar 0.4%, the Brazilian real 0.3%, and the British pound 0.1%. The Chinese (onshore) renminbi declined 0.19% versus the dollar (down 0.27% y-t-d).
Commodities Watch:
March 8 – Financial Times (Leslie Hook and Harry Dempsey): “Citigroup has warned clients about the risks of Russia weaponising its exports of materials such as aluminium, palladium and nuclear fuels, potentially leading to price rises for these critical commodities. None of these materials, widely used in industrial and energy production, has yet been subject to western sanctions or export restrictions by Russia since it began its full-scale invasion of Ukraine a year ago. Any move by Russia to restrict exports of such materials would send shockwaves through commodity markets, disrupting global supply chains and creating problems for manufacturers and automakers. The country accounts for about a quarter of world production for some metals. ‘Weaponising Russian metals exports may be around the corner,’ said Max Layton, head of Emea commodities research at Citi. ‘This could well see prices of these commodities spike.’ The warning marks a departure from Citi’s previous views on how the war might destabilise metals prices, which have typically been more conservative.”
The Bloomberg Commodities Index dropped 3.5% (down 7.3% y-t-d). Spot Gold increased 0.6% to $1,868 (up 2.4%). Silver fell 3.4% to $20.54 (down 14.3%). WTI crude lost $3.00 to $76.68 (down 5%). Gasoline fell 3.8% (up 8%), and Natural Gas sank 19.2% to $2.43 (down 46%). Copper declined 0.9% (up 6%). Wheat dropped 4.2% (down 14%), and Corn lost 3.5% (down 9%). Bitcoin sank $1,920, or 8.6%, this week to $20,415 (up 23.2%).
Market Instability Watch:
March 7 – Reuters (David Randall and Davide Barbuscia): “Hawkish comments by Federal Reserve Chairman Jerome Powell helped push a closely watched part of the U.S. Treasury yield curve to its deepest inversion since 1981…, once again putting a spotlight on what many investors consider a time-honored recession signal… The yield curve inverted further on Tuesday after Powell told Congress the Fed would need to raise rates higher than previously anticipated… Shorter-dated yields soared, with the rate on the two-year note closing at a new high since mid-2007 at 5.015%. Yields on the 10-year Treasury notes , meanwhile, fell 1.5 bps to 3.968%.”
March 6 – Reuters (Ankika Biswas and Medha Singh): “Trading in new near-dated U.S. options contracts can supercharge volatility in U.S. stocks, potentially leading to tremendous intraday declines, analysts at JPMorgan said. The U.S. equity options market has seen a rise in the trading of options contracts set to expire at the end of the trading day - dubbed 0DTE (zero day to expiry) options - with their daily notional value rising to about $1 trillion, according to JPMorgan... Their recent growth has been eyed as one cause of intraday volatility, with JPMorgan's Marko Kolanovic last month warning they could spark a massive volatility event under certain circumstances. In a Monday note, the bank’s analysts attempted to further quantify the derivatives’ potential impact, estimating that in an extremely dire scenario, 0DTE options could turn an intraday 5% drop in the S&P 500 (.SPX) into a 25% rout - a magnitude of decline not seen since the Black Monday crash of 1987, when the index fell 20.5%.”
March 8 – Bloomberg (Alice Atkins): “As equities take more pummeling, more traders are hiding out in credit markets. They’re finding refuge in top-quality bonds, especially short-term securities. So far this year, global investment-grade credit funds have absorbed almost $70 billion, making it the biggest inflow for this part of the year since EPFR Global started tracking the data in 2017. ‘Why would you subject yourself to this very data dependent, binary, weekly equity environment with rates repricing, when you can sleep at night sitting in Treasury bills or short-duration investment-grade credit,’ said Charlie McElligott, cross-asset macro strategist at Nomura Securities International.”
March 6 – Bloomberg (Alexandra Harris): “The three-month London interbank offered rate for dollars, a major global lending benchmark, surpassed 5% for the first time in more than 15 years on Monday. The benchmark rate for lending between banks rose 2.4 bps to 5.008%, the highest since December 2007.”
March 8 – Financial Times (Steve Johnson): “Investors pulled near-record sums from corporate bond exchange traded funds in February as robust US economic and inflation data fuelled expectations for further rate hikes. Investment-grade and high-yield corporate bond ETFs suffered a combined net outflow of $8.3bn in February, according to… BlackRock, the second-largest exodus on record, exceeded only by an isolated spike in June last year, when $9.7bn was pulled from the sector.”
March 8 – Bloomberg (Katherine Doherty and Isis Almeida): “A cyberattack that disrupted derivatives trading in January is prompting calls for more oversight to combat the risk of hacks across financial markets. The top US derivatives regulator wants to update standards and monitoring systems that will help minimize the frequency and magnitude of hacks. The Commodity Futures Trading Commission is pushing for futures and swaps dealers to exercise more due diligence and oversight of the third-party service providers they work with, and requiring that they have a plan for responding to cyber incidents... Derivatives shops, used to clearing hundreds of billions of dollars in trades every day, were forced to process trades manually after ION Trading UK — a little known company with technology that underpins the smooth functioning of markets — succumbed to a cyberattack earlier this year.”
March 5 – Bloomberg (Taiga Uranaka): “The unprecedented monetary easing by the Bank of Japan over the past decade has reshaped the nation’s lenders, from their asset holdings to loan income. That may be about to change as the central bank prepares to take on a new chief next month… The most notable case is Japan Post Bank Co., a unit of a former state-run mail services giant, which manages most of almost $2 trillion of assets in its securities portfolio. Where it once invested as much as 80% of its money in JGBs, this now accounts for less than 20%. Instead, the bank has rapidly built up its holdings of foreign bonds and other securities to 78 trillion yen ($572bn), accounting for about 35% of its entire portfolio.”
March 6 – Wall Street Journal (Eric Wallerstein): “Japan’s rebounding appetite for U.S. Treasurys supported shaky bond markets early this year. Now, investors worry it might be growing satiated. Japanese investors bought the most long-term foreign bonds in the week ended Feb. 17 since the onset of Covid-19… Institutional investors—comprising banks, life insurers and pensions—added nearly $21 billion to their foreign bondholdings. The following week, that fell to $1.6 billion.”
Bursting Bubble and Mania Watch:
March 6 – Wall Street Journal (Sean McLain): “For many of the electric-vehicle startups, last year was rife with supply-chain constraints and manufacturing troubles that hindered their efforts to get off to a fast start. Now, young companies such as Rivian Automotive Inc. and Lucid Group Inc. are facing a more pressing challenge this year: They need to right their factory operations before running through their cash reserves. The earnings results over the past few weeks for these EV makers illustrated the urgency of their predicament. While these companies are now producing vehicles, losses continue to mount as they have struggled to spool up assembly lines and boost sales as planned, whittling down their financial cushions and increasing the likelihood of needing to raise more money.”
March 6 – Bloomberg (Alexandra Harris, Caleb Mutua and Paige Smith): “US banks are being forced to do something they haven’t done for 15 years: fight for deposits. After years of earning next to nothing, depositors are discovering a trove of higher-yielding options like Treasury bills and money market funds as the Federal Reserve ratchets up benchmark interest rates. The shift has been so pronounced that commercial bank deposits fell last year for the first time since 1948 as net withdrawals hit $278 billion…”
March 7 – Reuters (Echo Wang and Lance Tupper): “Sales of shares in publicly listed U.S. companies had their strongest showing last week in more than a year, as companies and some of their shareholders, such as private equity firms, capitalized on the risk appetite of stock market investors. Stock sales reached $4.97 billion in the United States last week, the highest tally since the second week in 2022, according to… Dealogic. Globally, stock sales reached $12.3 billion, the most in more than 30 weeks.”
Crypto Bubble Collapse Watch:
March 8 – CNBC (MacKenzie Sigalos): “Silvergate Capital, a central lender to the crypto industry, said… it’s winding down operations and liquidating its bank. The stock plunged more than 36% in after-hours trading. Silvergate has served as one of the two main banks for crypto companies, along with… Signature Bank. Silvergate has just over $11 billion in assets, compared with over $114 billion at Signature. Bankrupt crypto exchange FTX was a major Silvergate customer. ‘In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of Bank operations and a voluntary liquidation of the Bank is the best path forward,’ the company said…”
March 9 – Bloomberg (Max Reyes): “Silvergate Capital Corp. spent its final days under siege… Officials from the Federal Deposit Insurance Corp. had arrived at the firm’s offices, intent on averting the US banking system’s first casualty from the crypto implosion. Among options they discussed were finding crypto-investors to help shore up liquidity amid the bank’s mounting losses. But a desperate round of calls to potential investors failed, with no firm willing to shoulder the burden of associating with a bank mired so deeply in the industry’s upheaval. With survival looking increasingly implausible and no buyer in sight, Silvergate said Wednesday it was closing its doors, ending a decade-long crypto dream that made it a central player while the industry boomed.”
Ukraine War Watch:
March 9 – Bloomberg (Olesia Safronova and Aliaksandr Kudrytski): “Russia launched a devastating bombardment against cities across Ukraine, killing at least five people and casting hundreds of thousands into sporadic blackouts with a new mix of weapons that mostly evaded air defenses. The strike was unusual in the number of expensive, high-end missiles used, raising the difficult to answer question of why Russian planners decided to deploy them in such numbers now.”
U.S./Russia/China/Europe Watch:
March 7 – New York Times (Keith Bradsher): “As he heads into an expected third term as president, China’s top leader, Xi Jinping, is signaling that he will take a harder stance against what he perceives as an effort by the United States to block China’s rise. And he’s doing so in uncommonly blunt terms. Mr. Xi has hailed China’s success as proof that modernization does not equal Westernization. He has urged China to strive to develop advanced technologies to reduce its reliance on Western know-how. Then on Monday, he made clear what he regarded as an important threat to China’s growth: the United States. ‘Western countries led by the United States have implemented all-around containment, encirclement and suppression of China, which has brought unprecedented severe challenges to our country’s development,’ Mr. Xi said in a speech…”
March 5 – Financial Times (Kathrin Hille): “China’s military spending will grow at its fastest pace in four years in 2023 and outpace other categories of expenditure, underscoring Beijing’s reweighting towards security over development. Defence expenditure will increase by 7.2% in 2023, well ahead of the 5.7% increase in general public expenditure… The defence budget points to a widening gap between China’s military and economic development, reversing a more than two-decade trend under which the expansion of defence capabilities took a back seat to economic growth.”
March 6 – Wall Street Journal (Peter Landers): “Russia’s invasion of Ukraine produced the opposite of what Moscow’s foreign policy had long sought by driving its neighbors into NATO. After boosting its military, China is now seeing a similar strengthening of U.S.-led alliances in the Pacific. The rapprochement between Seoul and Tokyo… marks the latest example of U.S. friends and allies in Asia building a network of ties in a way that is unwelcome in Beijing. The Philippines under President Ferdinand Marcos Jr. is giving U.S. forces more access to its bases. Taiwan has brought in more U.S. forces to its territory to help with training. Australia allied with the U.S. and U.K. to obtain nuclear submarines. And Japan is nearly doubling defense spending and linking its military operations closer to the U.S., calling China its biggest security challenge.”
March 8 – Reuters (Patricia Zengerle, Jonathan Landay and Michael Martinaema): “China will deepen its cooperation with Russia to try to challenge the United States despite international condemnation of the invasion of Ukraine, the leaders of U.S. intelligence agencies said… ‘Despite global backlash over Russia's invasion of Ukraine, China will maintain its diplomatic, defense, economic, and technology cooperation with Russia to continue trying to challenge the United States, even as it will limit public support,’ they said in a threat assessment released as the Senate Intelligence Committee held its annual hearing on worldwide threats to U.S. security.”
March 6 – Reuters (Ryan Woo): “China must advance its relations with Russia as the world becomes more turbulent, Foreign Minister Qin Gang said… Speaking to reporters at an annual parliamentary session in Beijing, Qin said the close interactions between both leaders - President Xi Jinping and President Vladimir Putin - provided the anchor for China-Russia relations.”
March 7 – Reuters (Ryan Woo): “The Ukraine crisis seems to be driven by an invisible hand pushing for the protraction and escalation of the conflict, China's foreign minister Qin Gang said… The ‘invisible hand’ is ‘using the Ukraine crisis to serve certain geopolitical agendas’, Qin said on the sidelines of an annual parliament meeting in Beijing… ‘Conflict, sanctions, and pressure will not solve the problem...The process of peace talks should begin as soon as possible, and the legitimate security concerns of all parties should be respected,’ Qin said.”
March 7 – Reuters: “China's exports and imports with Russia surged at a double-digit pace in January-February from a year earlier…, as China said it had to advance relations with its northern neighbour in an increasingly turbulent world. China's exports to Russia jumped 19.8% in the first two months, to a total of $15 billion, while it recorded shrinking demand from markets elsewhere. Imports from Russia soared by 31.3% to $18.65 billion.”
March 7 – Associated Press (Nomaan Merchant and Matthew Lee): “China has long been seen by the U.S. as a prolific source of anti-American propaganda but less aggressive in its influence operations than Russia, which has used cyberattacks and covert operations to disrupt U.S. elections and denigrate rivals. But many in Washington now think China is increasingly adopting tactics associated with Russia — and there’s growing concern the U.S. isn’t doing enough to respond.”
De-globalization and Iron Curtain Watch:
March 7 – Reuters (Nidhi Verma and Noah Browning): “U.S.-led international sanctions on Russia have begun to erode the dollar's decades-old dominance of international oil trade as most deals with India - Russia's top outlet for seaborne crude - have been settled in other currencies. The dollar's pre-eminence has periodically been called into question and yet it has continued because of the overwhelming advantages of using the most widely-accepted currency for business. India's oil trade… provides the strongest evidence so far of a shift into other currencies that could prove lasting. The country is the world's number three importer of oil and Russia became its leading supplier after Europe shunned Moscow's supplies…”
Inflation Watch:
March 7 – CNBC (Michael Wayland): “Consumers hoping for a deal this spring on a used car or truck might be out of luck, as wholesale used vehicle prices increased for a third consecutive month in February. Cox Automotive… reported wholesale used vehicle prices increased 4.3% in February from January — marking the largest increase between the two months since 2009. Although the prices were down 7% from inflated levels a year earlier, they’re trending back toward record levels, according to Cox’s Manheim Used Vehicle Value Index…”
Biden Administration Watch:
March 10 – Bloomberg (Viktoria Dendrinou and Christopher Condon): “The Biden administration on Friday reacted to the largest failure by a US lender in more than a decade, offering its assurance that the US financial system would weather fallout from the collapse of Silicon Valley Bank and that regulators were closely monitoring developments. Treasury Secretary Janet Yellen said she had ‘full confidence in banking regulators to take appropriate actions in response,’ adding that regulators ‘have effective tools’ to address the situation. Yellen called a meeting Friday with leaders from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency to discuss developments around SVB…”
March 7 – Bloomberg (Anthony Capaccio): “The spending plan President Joe Biden will propose Thursday includes what officials say is one of the nation’s largest peacetime defense budgets, with $170 billion for weapons procurement and $145 billion for research and development, both recent records. The Defense Department ‘top line’ for the year that begins Oct. 1 will exceed $835 billion, up from the $816 billion that Congress appropriated in the current fiscal year, according to one of the officials…”
Federal Reserve Watch:
March 7 – Associated Press (Christopher Rugaber): “The Federal Reserve could increase the size of its interest rate hikes and raise borrowing costs to higher levels than previously projected if evidence continues to point to a robust economy and persistently high inflation, Chair Jerome Powell told a Senate panel… ‘The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,’ Powell testified to the Senate Banking Committee. ‘If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.’ Powell’s comments reflect a sharp change in the economic outlook since the Fed’s most recent policy meeting in early February.”
March 8 – Associated Press (Christopher Rugaber): “Federal Reserve Chairman Jerome Powell stressed Wednesday that the central bank’s policymakers have yet to decide how large an interest rate hike to impose at its next meeting in two weeks in its drive to defeat high inflation. ‘If — and I stress that no decision has been made on this — if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,’ Powell said on his second day of semi-annual testimony… The Fed chair had made a similar comment Tuesday to a Senate panel but had not included the caveat that ‘no decision has been made.’”
March 8 – Bloomberg (Catarina Saraiva): “The economy proved resilient to start the new year, marked by steady consumer spending and stabilizing manufacturing activity, contacts surveyed in the Federal Reserve’s latest Beige Book said. ‘Overall economic activity increased slightly in early 2023,’ the Fed said… However, the outlook going forward is less optimistic. ‘Amid heightened uncertainty, contacts did not expect economic conditions to improve much in the months ahead,’ the report said, drawing from anecdotal information collected by the Fed’s 12 regional banks through Feb. 27.”
U.S. Bubble Watch:
March 10 – Bloomberg (Christopher Condon): “The US federal government’s budget deficit widened in February by $262 billion, bringing the gap for the first five months of the fiscal year to $723 billion. The amount the government pays out in interest on outstanding debt was once again a key driver of the deficit… The interest bill was $46 billion for February and some $307 billion in the fiscal year to-date — amounting to about a 29% jump from last year. After adjusting for calendar effects, the federal deficit for the fiscal year so far has widened by 62% over the year before.”
March 10 – CNBC (Jeff Cox): “Job creation decelerated in February but was still stronger than expected despite the Federal Reserve’s efforts to slow the economy and bring down inflation. Nonfarm payrolls rose by 311,000 for the month... That was above the 225,000 Dow Jones estimate and a sign that the employment market is still hot… The unemployment rate rose to 3.6%, above the expectation for 3.4%, amid a tick higher in the labor force participation rate to 62.5%, its highest level since March 2020… There also was some good news on the inflation side, as average hourly earnings climbed 4.6% from a year ago, below the estimate for 4.8%. The monthly increase of 0.2% also was below the 0.4% estimate.”
March 8 – Reuters (Lucia Mutikani): “U.S. job openings fell less than expected in January and data for the prior month was revised higher, pointing to persistently tight labor market conditions… But the Labor Department's monthly Job Openings and Labor Turnover Survey, or JOLTS report… also hinted at some cracks forming in the labor market. Layoffs rose in January and job cuts were higher than initially thought in 2022. Fewer people voluntarily quit their jobs. Nevertheless, the labor market remains strong, with 1.90 job openings per every unemployed worker in January.”
March 8 – Bloomberg (Reade Pickert): “US mortgage rates increased for a fourth week to the highest level since mid-November… The contract rate on a 30-year fixed mortgage rose 8 bps to 6.79%... Mortgage News Daily, which updates more frequently, put the 30-year rate at 7.03% on Tuesday.”
March 7 – Yahoo Finance (Gabriella Cruz-Martinez): “Americans are feeling worse about the housing market again. Fannie Mae’s gauge of housing sentiment dropped 3.8 points in February to 58.0, falling close to its record low set last year and reversing three months of consecutive gains. Overall, 44% of consumers reported that it’s a bad time to sell, up from 39% last month. At the same time, 24% of respondents expressed concern about losing their job in the next 12 months, up 18% last month. Both buyers and sellers were pessimistic about the market, Doug Duncan, chief economist and senior vice president at Fannie Mae, said. ‘With home-selling sentiment now lower than it was pre-pandemic – and home-buying sentiment remaining near its all-time low – consumers on both sides of the transaction appear to be feeling cautious about the housing market,’ Duncan said…”
March 8 – Wall Street Journal (Collin Eaton and Benoît Morenne): “The boom in oil production that over the last decade made the U.S. the world’s largest producer is waning, suggesting the era of shale growth is nearing its peak. Frackers are hitting fewer big gushers in the Permian Basin, America’s busiest oil patch, the latest sign they have drained their catalog of good wells. Shale companies’ biggest and best wells are producing less oil, according to data… The Journal reported last year companies would exhaust their best U.S. inventory in a handful of years if they resumed the breakneck drilling pace of prepandemic times. Now, recent results out of the Permian, spread across West Texas and New Mexico, are mimicking the onset of a production plateau that has taken place at other, more mature U.S. shale plays.”
Fixed Income Watch:
March 5 – Financial Times (Harriet Clarfelt): “Companies in the US and Europe that have borrowed on the cheap for years are facing the return of a once-familiar fear: ratings downgrades. Borrowing costs have soared since the Federal Reserve started pushing up benchmark interest rates in an effort to curb inflation. Investors now demand annual interest payments of about 9% a year from US businesses with low scores from rating agencies, up from just below 5% in March 2021. That punchy price tag means high-grade companies are steering clear of taking on extra debt to fund expansions or takeovers, instead relying more heavily on equity capital to keep their pristine ratings in place.”
March 6 – Wall Street Journal (Sam Goldfarb and Alana Pipe): “Bond yields have been rising again lately. That could create complications for low-rated companies that had just started to enjoy having easier access to credit. As inflation showed signs of easing early this year, investors bet that the Federal Reserve might pivot quickly to slashing interest rates. That increased demand for bonds, driving down yields on new and existing corporate debt. Speculative-grade companies such as Caesars Entertainment… seized the moment. Altogether, these companies issued almost as many bonds in January and February as they did in the entire second half of 2022…”
March 7 – Wall Street Journal (Heather Gillers): “Rising interest rates are squeezing cash-strapped towns and school systems that use short-term borrowing to keep cash flowing while they wait for property tax dollars to come in. A-rated cities and school districts are paying 3.16% for a one-year loan issued March 3, compared with 0.21% at the beginning of 2022... In places where local budgets are already burdened by inflation, rising borrowing costs add to the pressure to raise taxes or cut services. For most of the past decade, short-term borrowing cost almost nothing and offered an easy solution for places with limited reserves and slow-to-arrive revenues.”
China Watch:
March 7 – Associated Press (Joe McDonald): “China’s trade contracted again in January and February as U.S. and European demand weakened in the face of interest rate hikes, adding to pressure on official efforts to revive economic growth following the end of anti-virus controls. Exports sank 6.8% from a year earlier to $506.3 billion, an improvement over December’s 10.1% decline… Imports fell 10.2% to $389.4 billion, deepening December’s 7.3% contraction. China’s global trade surplus for the two months edged up 0.8% over a year earlier to $116.9 billion.”
March 8 – Reuters (Zhang Yan and Brenda Goh): “China's passenger vehicle sales fell 20% in the first two months of this year…, underscoring weak demand in the world's biggest auto market even as some car manufacturers offer reduced prices to revive demand. Sales in February, 1.42 million units, were 10.4% higher than a year earlier, a low base period when a week-long Lunar New Year holiday reduced business activity, the China Passenger Car Association (CPCA) said.”
March 6 – Associated Press: “After a decade in Chinese President Xi Jinping’s shadow, Li Keqiang is taking his final bow as the country’s premier, marking a shift away from the skilled technocrats who have helped steer the world’s second-biggest economy in favor of officials known mainly for their unquestioned loyalty to China’s most powerful leader in recent history. After exiting the ruling Communist Party’s all-powerful Politburo Standing Committee in October — despite being below retirement age — Li’s last major task was delivering the state of the nation address to the rubber-stamp parliament on Monday.”
March 7 – Wall Street Journal (Keith Zhai and Chun Han Wong): “China is preparing sweeping changes to its vast government bureaucracy, as leader Xi Jinping further strengthens Communist Party control and seeks to boost his country’s technological and financial prowess at a time of heightened competition with the West. Under a plan presented to lawmakers…, Beijing would create new regulatory bodies to oversee broad segments of China’s financial system, as well as the use of data and related digital technologies. Other state institutions, including the Ministry of Science and Technology, would be restructured or have some of their powers redistributed to other departments. Central-government agencies would cut their head count by 5% across the board.”
March 7 – Bloomberg: “China’s sweeping changes to the financial regulatory system will see the central bank lose some of its functions to a new and enlarged oversight body, leaving it focused on broader economic and financial stability management. The banking and insurance watchdog will be absorbed into a new bureau — a national financial regulatory administration — to oversee all financial sectors except the securities industry, according to a plan released at the National People’s Congress... Under the revamp, the People’s Bank of China will no longer have oversight of financial holding companies and financial consumer protection.”
March 5 – Wall Street Journal (Chun Han Wong and Keith Zhai): “The new top lieutenants of Chinese leader Xi Jinping are set to take up senior government positions at the annual session of China’s legislature this week, having risen to the Communist Party’s uppermost ranks last fall. The new leadership lineup, packed with men loyal to Mr. Xi, faces daunting challenges… As they take up their roles, one overarching question hovers above them: Will their relationships with Mr. Xi give them leeway to make hard decisions about China’s future direction, or will his demand for loyalty turn them into mere yes men?”
March 4 – Associated Press (Joe McDonald): “China’s government announced plans for a consumer-led revival of the struggling economy as its legislature opened a session Sunday that will tighten President Xi Jinping’s control over business and society. Premier Li Keqiang, the top economic official, set this year’s growth target at ‘around 5%’ following the end of anti-virus controls that kept millions of people at home and triggered protests. Last year’s growth in the world’s second-largest economy fell to 3%, the second-weakest level since at least the 1970s.”
March 4 – Reuters (Liangping Gao, Ryan Woo and Samuel Shen): “Warning that risks remain in the property market, China's government said in a report released at parliament's annual opening… that it would promote the sector's stable development and prevent disorderly expansion by developers. Premier Li Keqiang made guarding against risks to top property developers one of the government's priorities this year, amid still cautious buyer sentiment, following through on the work done at a key economic meeting in December.”
March 5 – Reuters (Winni Zhou and Brenda Goh): “Some Chinese companies are holding on to dollar revenues from exports, while others are turning to foreign exchange hedging in anticipation of a fall in the value of the yuan, according to executives, bankers and data analysed by Reuters. Several bankers in China told Reuters that clients are reluctant to convert export receipts, while exchange filings show more than 30 A-share listed companies have signed up to use currency derivatives for risk-hedging so far this year. Central bank data also shows a shift, with dollar deposits at China's commercial banks, which had declined over the past year, jumping by $34 billion in January to $887.8 billion.”
Central Banker Watch:
March 5 – Bloomberg (Alessandra Migliaccio): “One of the pioneers of European Central Bank monetary policy has a stark warning for officials about the threat of more inflation bearing down on the region’s economy. Otmar Issing, the former Bundesbanker who became the first chief economist of the… institution in 1998, reckons further consumer-price pressures may already be in the pipeline. ‘I expect that we will see wage increases, which will create new inflation shocks,’ the 86-year-old German economist said… ‘To act early is the best approach,’ he said. ‘The ECB missed that by quite a lot… Inflation was already under way before it was exacerbated by the war… I never understood why the ECB for so long neglected that inflation was rising.’”
March 5 – Financial Times (Martin Arnold): “Christine Lagarde has warned that underlying price pressures will remain ‘sticky in the short term’ and signalled that further interest rate rises from the European Central Bank are very likely as ‘inflation is a monster that we need to knock on the head’. The ECB was not seeking to ‘break the economy’ with rate increases, Lagarde told Spain’s El Correo… ‘We are making progress, but we still have work to do… For the moment, the economy is resilient, employment is robust and unemployment is the lowest it has ever been,’ the ECB president said…”
March 6 – Reuters (Friederike Heine and Balazs Koranyi): “The European Central Bank should raise interest rates by 50 bps at each of its next four meetings as inflation is proving to be stubborn, Austrian central bank chief Robert Holzmann told German business daily Handelsblatt. The ECB has raised rates by 3 percentage points since July and flagged a 50 bps increase for March… Holzmann, an outspoken conservative - or hawk in policy terms - however said that based on current trends, he would favour 50 bps moves in March, May, June and July. ‘I expect it to take a very long time for inflation to come down,’ Holzmann was quoted… as saying. ‘My hope is that within the next 12 months we will have reached the peak of interest rates.’”
March 8 – Bloomberg (Alessandra Migliaccio): “Ignazio Visco openly criticized hawkish European Central Bank colleagues for making statements about future increases in borrowing costs when officials had agreed not to give such guidance. The outburst by the Bank of Italy governor… is a pointed public attack that hints at rising tensions behind closed doors in advance of next week’s decision. ‘Uncertainty is so high that the Governing Council of the ECB has agreed to decide ‘meeting by meeting’, without ‘forward guidance,’’ he said. ‘I therefore don’t appreciate statements by my colleagues about future and prolonged interest rate hikes.’”
March 6 – Bloomberg (Swati Pandey): “Australia’s central bank signaled a pause in its 10-month tightening cycle is in prospect, prompting a selloff in the currency after policymakers delivered an expected interest-rate increase… The Reserve Bank lifted its cash rate by a quarter-percentage point to 3.6%, the highest level since May 2012. Governor Philip Lowe said in his statement that in assessing ‘when and how much further’ rates need to go up, the RBA will pay close attention to incoming economic data.”
Europe Watch:
March 7 – Reuters (Clotaire Achi and Stephane Mahe): “France's nationwide strike against a planned pension reform, which disrupted train services, shut schools and halted fuel deliveries, will spill into Wednesday as unions seek to force a government retreat on the deeply unpopular policy. Around 1.28 million people took to the streets on Tuesday in demonstrations across the country, the interior ministry said, making turnout for the protest day - the sixth against the reform this year - the highest so far.”
March 7 – Bloomberg (Peter O'Dwyer): “Irish Life Assurance Plc has blocked withdrawals from its $533 million Irish property fund for a six month period due to a recent increase in customer requests. The notice period will allow time to make any property sales ‘as required to pay future withdrawals’ and in a manner that is fair to all customers, the insurance and pension provider said... The move adds to signs of stress in the Irish commercial property market, which saw a significant reduction in investment volumes late last year as higher interest rates and inflation added to investor hesitancy.”
Japan Watch:
March 10 – Bloomberg (Toru Fujioka and Sumio Ito): “Haruhiko Kuroda finished his last meeting at the helm of the Bank of Japan by buffeting markets again with a straightforward stand-pat that contrasted with the explosive launch of his massive stimulus program a decade ago. The BOJ left its negative interest rate and its cap on government debt yields untouched Friday at the shortest regular meeting during Kuroda’s watch, as it stuck to its view that inflation at more than twice its 2% target level still isn’t sustainable.”
March 7 – Reuters (Tetsushi Kajimoto): “Japan logged its largest current account deficit ever in January as a combination of global slowdown and China's Lunar New Year holidays undermined the country's ability to earn from trade. The trade balance, a part of the current account, also hit a record deficit. The current account deficit, at 1.98 trillion yen ($14.43bn), was more than double a median market forecast of 818.4 billion yen. It was the biggest on record…”
March 7 – Reuters (Kantaro Komiya and Tetsushi Kajimoto): “Japan's real wages fell the most in nearly nine years in January…, as four-decade-high inflation squeezed the purchasing power of consumers and undercut efforts by policymakers to revive a COVID-ravaged economy. Wage trends in the world's third-largest economy are under close market scrutiny because Bank of Japan officials have said that pay hikes, combined with 2% inflation, are essential to it scaling back its loose monetary policy. Inflation-adjusted real wages… fell by 4.1% in January from a year earlier, the largest decrease since May 2014…”
March 7 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japan's big companies are expected to deliver the largest pay rise in 26 years in next week's ‘shunto’ wage negotiations, offering policymakers hope the country might finally emerge from its deflationary doldrums. But the expected average salary hike of around 3% will likely include just a 1% increase in base pay… The outcome of ‘shunto’ wage talks with unions, many of which conclude on March 15, will be crucial to how soon the Bank of Japan (BOJ) could end its bond yield control policy under incoming governor Kazuo Ueda.”
EM Crisis Watch:
March 6 – Bloomberg (Karl Lester M. Yap and Scott Squires): “Hospitals delaying surgery in Sri Lanka. International flights suspended in Nigeria. Car factories shuttered in Pakistan. In some of the world’s most vulnerable developing nations, the situations on the ground are dire. Shortages of dollars are crimping access to everything from raw materials to medicine. Meanwhile governments are struggling with their debts as they chase rescue packages from the International Monetary Fund. It’s forcing a rethink of the bullish emerging-market consensus that swept Wall Street just a few months ago.”
Social, Political, Environmental, Cybersecurity Instability Watch:
March 10 – Bloomberg (Brian K. Sullivan and David R. Baker): “Heavy rains and damaging winds swept into California as the first of two back-to-back atmospheric rivers brought the renewed threat of flooding and mudslides to a state already battered by deadly winter storms. The storm will likely be followed Monday by another atmospheric river, a weather system that delivers a focused plume of moisture off the ocean.”
March 7 – Reuters (Sybille de La Hamaide): “France has reported an outbreak of highly pathogenic H5N1 bird flu among red foxes northeast of Paris, the World Organisation for Animal Health (WOAH) said…, as the spread of the virus to mammals raised global concerns. After three foxes were found dead in a nature reserve in Meaux near where gulls had died, one of the foxes was collected and tested, WOAH said in a report…”
Geopolitical Watch:
March 7 – Reuters (Ben Blanchard and Ryan Woo): “Taiwan will not allow ‘repeated provocations’ from China, the island's defence minister said…, as China's foreign minister said Taiwan was the ‘first red line’ that must not be crossed in Sino-U.S. relations… Speaking to reporters at parliament, Taiwan Defence Minister Chiu Kuo-cheng said he was not aware of a planned meeting between Tsai and McCarthy. ‘The Chinese communists use any reason to send troops,’ Chiu said. ‘But we won’t just say ‘bring it on’. We will take a peaceful and rational approach.’ Although it hopes this does not happen, Taiwan's military is prepared to fight, he added. ‘If the Chinese communists move again, the armed forces' job is to fight,’ Chiu said. ‘We won't allow repeated provocations against us. We can't accept that.’”
March 8 – Reuters (Liz Lee, Ben Blanchard and Yimou Lee): “China said… it was ‘seriously concerned’ by Taiwan President Tsai Ing-wen's ‘transit’ plans and had asked Washington for clarification, amid reports she will meet U.S. House Speaker Kevin McCarthy in the United States. McCarthy plans to meet Tsai in the United States in coming weeks… That could be instead of the Republican Speaker's anticipated but sensitive trip to the democratically governed island claimed by China.”
March 10 – Reuters (Soo-Hyang Choi): “North Korea's Kim Jong Un ordered the military to intensify drills to deter and respond to a ‘real war’ if necessary…, after the leader oversaw a fire assault drill that it said proved the country's capabilities. North Korea fired a short-range ballistic missile off its west coast on Thursday, South Korea's military said, adding it was analysing possibilities the North may have launched multiple missiles simultaneously from the same area.”
March 6 – Associated Press (Hyung-Jin Kim): “The influential sister of North Korea’s leader warned… that her country is ready to take ‘quick, overwhelming action’ against the United States and South Korea, a day after the U.S. flew a nuclear-capable B-52 bomber in a demonstration of strength against the North… ‘We keep our eye on the restless military moves by the U.S. forces and the South Korean puppet military and are always on standby to take appropriate, quick and overwhelming action at any time according to our judgment,’ Kim Yo Jong said…”
March 6 – Reuters (Hyunsu Yim and Josh Smith): “North Korea said any move to shoot down one of its test missiles would be considered a declaration of war and blamed a joint military exercise between the United States and South Korea for growing tensions, state media KCNA said… Kim Yo Jong, the powerful sister of leader Kim Jong Un, warned… that Pyongyang would see it as a ‘declaration of war’ if the U.S. took military action against the North's strategic weapon tests.”
March 4 – Reuters (Karen Lema): “The Philippines said… it had spotted a Chinese navy ship and dozens of militia vessels around a contested Philippine-occupied island in the South China Sea, as territorial tensions mount in the area. The Philippine Coast Guard said 42 vessels believed to be crewed by Chinese maritime militia personnel were seen in the vicinity of Thitu island, while a Chinese navy vessel and coast guard ship were observed ‘slowly loitering’ in the surrounding waters.”
The S&P500 sank 4.5% (up 0.6% y-t-d), and the Dow fell 4.4% (down 3.7%). The Utilities lost 2.7% (down 9.9%). The Banks were clobbered 15.7% (down 8.6%), and the Broker/Dealers slumped 9.3% (up 0.7%). The Transports dropped 6.0% (up 6.1%). The S&P 400 Midcaps sank 7.4% (up 0.9%), and the small cap Russell 2000 dropped 8.1% (up 0.9%). The Nasdaq100 declined 3.7% (up 8.1%). The Semiconductors fell 3.4% (up 15.5%). The Biotechs slumped 6.5% (down 4.2%). While bullion gained $12, the HUI gold equities index dropped 5.5% (down 7.0%).
Three-month Treasury bill rates ended the week at 4.7475%. Two-year government yields dropped 27 bps this week to 4.59% (up 16bps y-t-d). Five-year T-note yields sank 28 bps to 3.97% (down 4bps). Ten-year Treasury yields dropped 25 bps to 3.70% (down 18bps). Long bond yields fell 17 bps to 3.71% (down 26bps). Benchmark Fannie Mae MBS yields declined 14 bps to 5.44% (up 5bps).
Greek 10-year yields fell 15 bps to 4.32% (down 25bps y-o-y). Italian yields sank 21 bps to 4.32% (down 38bps). Spain's 10-year yields fell 12 bps to 3.54% (up 3bps). German bund yields sank 21 bps to 2.51% (up 6bps). French yields dropped 19 bps to 3.01% (up 3bps). The French to German 10-year bond spread widened two to 50 bps. U.K. 10-year gilt yields sank 21 bps to 3.64% (down 3bps). U.K.'s FTSE equities index slumped 2.5% (up 4.0% y-t-d).
Japan's Nikkei Equities Index increased 0.8% (up 7.9% y-t-d). Japanese 10-year "JGB" yields dropped 10 bps to 0.41% (down 3bps y-t-d). France's CAC40 fell 1.7% (up 11.5%). The German DAX equities index declined 1.0% (up 10.8%). Spain's IBEX 35 equities index slumped 1.9% (up 12.8%). Italy's FTSE MIB index dropped 2.0% (up 15.1%). EM equities were mostly lower. Brazil's Bovespa index slipped 0.2% (down 5.6%), and Mexico's Bolsa index sank 2.6% (up 8.9%). South Korea's Kospi index declined 1.5% (up 7.1%). India's Sensex equities index lost 1.1% (down 2.8%). China's Shanghai Exchange Index sank 3.0% (up 4.6%). Turkey's Borsa Istanbul National 100 index fell 3.3% (down 2.3%). Russia's MICEX equities index added 0.2% (up 5.7%).
Investment-grade bond funds posted inflows of $717 million, and junk bond funds reported positive flows of $10 million (from Lipper).
Federal Reserve Credit declined $27.5bn last week to $8.305 TN. Fed Credit was down $596bn from the June 22nd peak. Over the past 182 weeks, Fed Credit expanded $4.578 TN, or 123%. Fed Credit inflated $5.494 Trillion, or 195%, over the past 539 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $7.1bn last week to $3.360 TN. "Custody holdings" were down $72.7bn, or 2.1%, y-o-y.
Total money market fund assets were unchanged at $4.894 TN. Total money funds were up $318bn, or 7.0%, y-o-y.
Total Commercial Paper dropped $35.8bn to $1.179 TN. CP was up $140bn, or 13.4%, over the past year.
Freddie Mac 30-year fixed mortgage rates declined three bps to 6.71% (up 286bps y-o-y). Fifteen-year rates rose 10 bps to 6.09% (up 300bps). Five-year hybrid ARM rates added three bps to 6.00% (up 303bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 15 bps to 7.02% (up 267bps).
Currency Watch:
For the week, the U.S. Dollar Index was little changed at 104.58 (up 1.0% y-t-d). For the week on the upside, the Swiss franc increased 1.7%, the Japanese yen 0.6% and the euro 0.1%. On the downside, the Mexican peso declined 3.0%, the Australian dollar 2.8%, the Swedish krona 2.3%, the Norwegian krone 2.3%, the South Korean won 1.8%, the Canadian dollar 1.7%, the New Zealand dollar 1.5%, the South African rand 1.0%, the Singapore dollar 0.4%, the Brazilian real 0.3%, and the British pound 0.1%. The Chinese (onshore) renminbi declined 0.19% versus the dollar (down 0.27% y-t-d).
Commodities Watch:
March 8 – Financial Times (Leslie Hook and Harry Dempsey): “Citigroup has warned clients about the risks of Russia weaponising its exports of materials such as aluminium, palladium and nuclear fuels, potentially leading to price rises for these critical commodities. None of these materials, widely used in industrial and energy production, has yet been subject to western sanctions or export restrictions by Russia since it began its full-scale invasion of Ukraine a year ago. Any move by Russia to restrict exports of such materials would send shockwaves through commodity markets, disrupting global supply chains and creating problems for manufacturers and automakers. The country accounts for about a quarter of world production for some metals. ‘Weaponising Russian metals exports may be around the corner,’ said Max Layton, head of Emea commodities research at Citi. ‘This could well see prices of these commodities spike.’ The warning marks a departure from Citi’s previous views on how the war might destabilise metals prices, which have typically been more conservative.”
The Bloomberg Commodities Index dropped 3.5% (down 7.3% y-t-d). Spot Gold increased 0.6% to $1,868 (up 2.4%). Silver fell 3.4% to $20.54 (down 14.3%). WTI crude lost $3.00 to $76.68 (down 5%). Gasoline fell 3.8% (up 8%), and Natural Gas sank 19.2% to $2.43 (down 46%). Copper declined 0.9% (up 6%). Wheat dropped 4.2% (down 14%), and Corn lost 3.5% (down 9%). Bitcoin sank $1,920, or 8.6%, this week to $20,415 (up 23.2%).
Market Instability Watch:
March 7 – Reuters (David Randall and Davide Barbuscia): “Hawkish comments by Federal Reserve Chairman Jerome Powell helped push a closely watched part of the U.S. Treasury yield curve to its deepest inversion since 1981…, once again putting a spotlight on what many investors consider a time-honored recession signal… The yield curve inverted further on Tuesday after Powell told Congress the Fed would need to raise rates higher than previously anticipated… Shorter-dated yields soared, with the rate on the two-year note closing at a new high since mid-2007 at 5.015%. Yields on the 10-year Treasury notes , meanwhile, fell 1.5 bps to 3.968%.”
March 6 – Reuters (Ankika Biswas and Medha Singh): “Trading in new near-dated U.S. options contracts can supercharge volatility in U.S. stocks, potentially leading to tremendous intraday declines, analysts at JPMorgan said. The U.S. equity options market has seen a rise in the trading of options contracts set to expire at the end of the trading day - dubbed 0DTE (zero day to expiry) options - with their daily notional value rising to about $1 trillion, according to JPMorgan... Their recent growth has been eyed as one cause of intraday volatility, with JPMorgan's Marko Kolanovic last month warning they could spark a massive volatility event under certain circumstances. In a Monday note, the bank’s analysts attempted to further quantify the derivatives’ potential impact, estimating that in an extremely dire scenario, 0DTE options could turn an intraday 5% drop in the S&P 500 (.SPX) into a 25% rout - a magnitude of decline not seen since the Black Monday crash of 1987, when the index fell 20.5%.”
March 8 – Bloomberg (Alice Atkins): “As equities take more pummeling, more traders are hiding out in credit markets. They’re finding refuge in top-quality bonds, especially short-term securities. So far this year, global investment-grade credit funds have absorbed almost $70 billion, making it the biggest inflow for this part of the year since EPFR Global started tracking the data in 2017. ‘Why would you subject yourself to this very data dependent, binary, weekly equity environment with rates repricing, when you can sleep at night sitting in Treasury bills or short-duration investment-grade credit,’ said Charlie McElligott, cross-asset macro strategist at Nomura Securities International.”
March 6 – Bloomberg (Alexandra Harris): “The three-month London interbank offered rate for dollars, a major global lending benchmark, surpassed 5% for the first time in more than 15 years on Monday. The benchmark rate for lending between banks rose 2.4 bps to 5.008%, the highest since December 2007.”
March 8 – Financial Times (Steve Johnson): “Investors pulled near-record sums from corporate bond exchange traded funds in February as robust US economic and inflation data fuelled expectations for further rate hikes. Investment-grade and high-yield corporate bond ETFs suffered a combined net outflow of $8.3bn in February, according to… BlackRock, the second-largest exodus on record, exceeded only by an isolated spike in June last year, when $9.7bn was pulled from the sector.”
March 8 – Bloomberg (Katherine Doherty and Isis Almeida): “A cyberattack that disrupted derivatives trading in January is prompting calls for more oversight to combat the risk of hacks across financial markets. The top US derivatives regulator wants to update standards and monitoring systems that will help minimize the frequency and magnitude of hacks. The Commodity Futures Trading Commission is pushing for futures and swaps dealers to exercise more due diligence and oversight of the third-party service providers they work with, and requiring that they have a plan for responding to cyber incidents... Derivatives shops, used to clearing hundreds of billions of dollars in trades every day, were forced to process trades manually after ION Trading UK — a little known company with technology that underpins the smooth functioning of markets — succumbed to a cyberattack earlier this year.”
March 5 – Bloomberg (Taiga Uranaka): “The unprecedented monetary easing by the Bank of Japan over the past decade has reshaped the nation’s lenders, from their asset holdings to loan income. That may be about to change as the central bank prepares to take on a new chief next month… The most notable case is Japan Post Bank Co., a unit of a former state-run mail services giant, which manages most of almost $2 trillion of assets in its securities portfolio. Where it once invested as much as 80% of its money in JGBs, this now accounts for less than 20%. Instead, the bank has rapidly built up its holdings of foreign bonds and other securities to 78 trillion yen ($572bn), accounting for about 35% of its entire portfolio.”
March 6 – Wall Street Journal (Eric Wallerstein): “Japan’s rebounding appetite for U.S. Treasurys supported shaky bond markets early this year. Now, investors worry it might be growing satiated. Japanese investors bought the most long-term foreign bonds in the week ended Feb. 17 since the onset of Covid-19… Institutional investors—comprising banks, life insurers and pensions—added nearly $21 billion to their foreign bondholdings. The following week, that fell to $1.6 billion.”
Bursting Bubble and Mania Watch:
March 6 – Wall Street Journal (Sean McLain): “For many of the electric-vehicle startups, last year was rife with supply-chain constraints and manufacturing troubles that hindered their efforts to get off to a fast start. Now, young companies such as Rivian Automotive Inc. and Lucid Group Inc. are facing a more pressing challenge this year: They need to right their factory operations before running through their cash reserves. The earnings results over the past few weeks for these EV makers illustrated the urgency of their predicament. While these companies are now producing vehicles, losses continue to mount as they have struggled to spool up assembly lines and boost sales as planned, whittling down their financial cushions and increasing the likelihood of needing to raise more money.”
March 6 – Bloomberg (Alexandra Harris, Caleb Mutua and Paige Smith): “US banks are being forced to do something they haven’t done for 15 years: fight for deposits. After years of earning next to nothing, depositors are discovering a trove of higher-yielding options like Treasury bills and money market funds as the Federal Reserve ratchets up benchmark interest rates. The shift has been so pronounced that commercial bank deposits fell last year for the first time since 1948 as net withdrawals hit $278 billion…”
March 7 – Reuters (Echo Wang and Lance Tupper): “Sales of shares in publicly listed U.S. companies had their strongest showing last week in more than a year, as companies and some of their shareholders, such as private equity firms, capitalized on the risk appetite of stock market investors. Stock sales reached $4.97 billion in the United States last week, the highest tally since the second week in 2022, according to… Dealogic. Globally, stock sales reached $12.3 billion, the most in more than 30 weeks.”
Crypto Bubble Collapse Watch:
March 8 – CNBC (MacKenzie Sigalos): “Silvergate Capital, a central lender to the crypto industry, said… it’s winding down operations and liquidating its bank. The stock plunged more than 36% in after-hours trading. Silvergate has served as one of the two main banks for crypto companies, along with… Signature Bank. Silvergate has just over $11 billion in assets, compared with over $114 billion at Signature. Bankrupt crypto exchange FTX was a major Silvergate customer. ‘In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of Bank operations and a voluntary liquidation of the Bank is the best path forward,’ the company said…”
March 9 – Bloomberg (Max Reyes): “Silvergate Capital Corp. spent its final days under siege… Officials from the Federal Deposit Insurance Corp. had arrived at the firm’s offices, intent on averting the US banking system’s first casualty from the crypto implosion. Among options they discussed were finding crypto-investors to help shore up liquidity amid the bank’s mounting losses. But a desperate round of calls to potential investors failed, with no firm willing to shoulder the burden of associating with a bank mired so deeply in the industry’s upheaval. With survival looking increasingly implausible and no buyer in sight, Silvergate said Wednesday it was closing its doors, ending a decade-long crypto dream that made it a central player while the industry boomed.”
Ukraine War Watch:
March 9 – Bloomberg (Olesia Safronova and Aliaksandr Kudrytski): “Russia launched a devastating bombardment against cities across Ukraine, killing at least five people and casting hundreds of thousands into sporadic blackouts with a new mix of weapons that mostly evaded air defenses. The strike was unusual in the number of expensive, high-end missiles used, raising the difficult to answer question of why Russian planners decided to deploy them in such numbers now.”
U.S./Russia/China/Europe Watch:
March 7 – New York Times (Keith Bradsher): “As he heads into an expected third term as president, China’s top leader, Xi Jinping, is signaling that he will take a harder stance against what he perceives as an effort by the United States to block China’s rise. And he’s doing so in uncommonly blunt terms. Mr. Xi has hailed China’s success as proof that modernization does not equal Westernization. He has urged China to strive to develop advanced technologies to reduce its reliance on Western know-how. Then on Monday, he made clear what he regarded as an important threat to China’s growth: the United States. ‘Western countries led by the United States have implemented all-around containment, encirclement and suppression of China, which has brought unprecedented severe challenges to our country’s development,’ Mr. Xi said in a speech…”
March 5 – Financial Times (Kathrin Hille): “China’s military spending will grow at its fastest pace in four years in 2023 and outpace other categories of expenditure, underscoring Beijing’s reweighting towards security over development. Defence expenditure will increase by 7.2% in 2023, well ahead of the 5.7% increase in general public expenditure… The defence budget points to a widening gap between China’s military and economic development, reversing a more than two-decade trend under which the expansion of defence capabilities took a back seat to economic growth.”
March 6 – Wall Street Journal (Peter Landers): “Russia’s invasion of Ukraine produced the opposite of what Moscow’s foreign policy had long sought by driving its neighbors into NATO. After boosting its military, China is now seeing a similar strengthening of U.S.-led alliances in the Pacific. The rapprochement between Seoul and Tokyo… marks the latest example of U.S. friends and allies in Asia building a network of ties in a way that is unwelcome in Beijing. The Philippines under President Ferdinand Marcos Jr. is giving U.S. forces more access to its bases. Taiwan has brought in more U.S. forces to its territory to help with training. Australia allied with the U.S. and U.K. to obtain nuclear submarines. And Japan is nearly doubling defense spending and linking its military operations closer to the U.S., calling China its biggest security challenge.”
March 8 – Reuters (Patricia Zengerle, Jonathan Landay and Michael Martinaema): “China will deepen its cooperation with Russia to try to challenge the United States despite international condemnation of the invasion of Ukraine, the leaders of U.S. intelligence agencies said… ‘Despite global backlash over Russia's invasion of Ukraine, China will maintain its diplomatic, defense, economic, and technology cooperation with Russia to continue trying to challenge the United States, even as it will limit public support,’ they said in a threat assessment released as the Senate Intelligence Committee held its annual hearing on worldwide threats to U.S. security.”
March 6 – Reuters (Ryan Woo): “China must advance its relations with Russia as the world becomes more turbulent, Foreign Minister Qin Gang said… Speaking to reporters at an annual parliamentary session in Beijing, Qin said the close interactions between both leaders - President Xi Jinping and President Vladimir Putin - provided the anchor for China-Russia relations.”
March 7 – Reuters (Ryan Woo): “The Ukraine crisis seems to be driven by an invisible hand pushing for the protraction and escalation of the conflict, China's foreign minister Qin Gang said… The ‘invisible hand’ is ‘using the Ukraine crisis to serve certain geopolitical agendas’, Qin said on the sidelines of an annual parliament meeting in Beijing… ‘Conflict, sanctions, and pressure will not solve the problem...The process of peace talks should begin as soon as possible, and the legitimate security concerns of all parties should be respected,’ Qin said.”
March 7 – Reuters: “China's exports and imports with Russia surged at a double-digit pace in January-February from a year earlier…, as China said it had to advance relations with its northern neighbour in an increasingly turbulent world. China's exports to Russia jumped 19.8% in the first two months, to a total of $15 billion, while it recorded shrinking demand from markets elsewhere. Imports from Russia soared by 31.3% to $18.65 billion.”
March 7 – Associated Press (Nomaan Merchant and Matthew Lee): “China has long been seen by the U.S. as a prolific source of anti-American propaganda but less aggressive in its influence operations than Russia, which has used cyberattacks and covert operations to disrupt U.S. elections and denigrate rivals. But many in Washington now think China is increasingly adopting tactics associated with Russia — and there’s growing concern the U.S. isn’t doing enough to respond.”
De-globalization and Iron Curtain Watch:
March 7 – Reuters (Nidhi Verma and Noah Browning): “U.S.-led international sanctions on Russia have begun to erode the dollar's decades-old dominance of international oil trade as most deals with India - Russia's top outlet for seaborne crude - have been settled in other currencies. The dollar's pre-eminence has periodically been called into question and yet it has continued because of the overwhelming advantages of using the most widely-accepted currency for business. India's oil trade… provides the strongest evidence so far of a shift into other currencies that could prove lasting. The country is the world's number three importer of oil and Russia became its leading supplier after Europe shunned Moscow's supplies…”
Inflation Watch:
March 7 – CNBC (Michael Wayland): “Consumers hoping for a deal this spring on a used car or truck might be out of luck, as wholesale used vehicle prices increased for a third consecutive month in February. Cox Automotive… reported wholesale used vehicle prices increased 4.3% in February from January — marking the largest increase between the two months since 2009. Although the prices were down 7% from inflated levels a year earlier, they’re trending back toward record levels, according to Cox’s Manheim Used Vehicle Value Index…”
Biden Administration Watch:
March 10 – Bloomberg (Viktoria Dendrinou and Christopher Condon): “The Biden administration on Friday reacted to the largest failure by a US lender in more than a decade, offering its assurance that the US financial system would weather fallout from the collapse of Silicon Valley Bank and that regulators were closely monitoring developments. Treasury Secretary Janet Yellen said she had ‘full confidence in banking regulators to take appropriate actions in response,’ adding that regulators ‘have effective tools’ to address the situation. Yellen called a meeting Friday with leaders from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency to discuss developments around SVB…”
March 7 – Bloomberg (Anthony Capaccio): “The spending plan President Joe Biden will propose Thursday includes what officials say is one of the nation’s largest peacetime defense budgets, with $170 billion for weapons procurement and $145 billion for research and development, both recent records. The Defense Department ‘top line’ for the year that begins Oct. 1 will exceed $835 billion, up from the $816 billion that Congress appropriated in the current fiscal year, according to one of the officials…”
Federal Reserve Watch:
March 7 – Associated Press (Christopher Rugaber): “The Federal Reserve could increase the size of its interest rate hikes and raise borrowing costs to higher levels than previously projected if evidence continues to point to a robust economy and persistently high inflation, Chair Jerome Powell told a Senate panel… ‘The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,’ Powell testified to the Senate Banking Committee. ‘If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.’ Powell’s comments reflect a sharp change in the economic outlook since the Fed’s most recent policy meeting in early February.”
March 8 – Associated Press (Christopher Rugaber): “Federal Reserve Chairman Jerome Powell stressed Wednesday that the central bank’s policymakers have yet to decide how large an interest rate hike to impose at its next meeting in two weeks in its drive to defeat high inflation. ‘If — and I stress that no decision has been made on this — if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,’ Powell said on his second day of semi-annual testimony… The Fed chair had made a similar comment Tuesday to a Senate panel but had not included the caveat that ‘no decision has been made.’”
March 8 – Bloomberg (Catarina Saraiva): “The economy proved resilient to start the new year, marked by steady consumer spending and stabilizing manufacturing activity, contacts surveyed in the Federal Reserve’s latest Beige Book said. ‘Overall economic activity increased slightly in early 2023,’ the Fed said… However, the outlook going forward is less optimistic. ‘Amid heightened uncertainty, contacts did not expect economic conditions to improve much in the months ahead,’ the report said, drawing from anecdotal information collected by the Fed’s 12 regional banks through Feb. 27.”
U.S. Bubble Watch:
March 10 – Bloomberg (Christopher Condon): “The US federal government’s budget deficit widened in February by $262 billion, bringing the gap for the first five months of the fiscal year to $723 billion. The amount the government pays out in interest on outstanding debt was once again a key driver of the deficit… The interest bill was $46 billion for February and some $307 billion in the fiscal year to-date — amounting to about a 29% jump from last year. After adjusting for calendar effects, the federal deficit for the fiscal year so far has widened by 62% over the year before.”
March 10 – CNBC (Jeff Cox): “Job creation decelerated in February but was still stronger than expected despite the Federal Reserve’s efforts to slow the economy and bring down inflation. Nonfarm payrolls rose by 311,000 for the month... That was above the 225,000 Dow Jones estimate and a sign that the employment market is still hot… The unemployment rate rose to 3.6%, above the expectation for 3.4%, amid a tick higher in the labor force participation rate to 62.5%, its highest level since March 2020… There also was some good news on the inflation side, as average hourly earnings climbed 4.6% from a year ago, below the estimate for 4.8%. The monthly increase of 0.2% also was below the 0.4% estimate.”
March 8 – Reuters (Lucia Mutikani): “U.S. job openings fell less than expected in January and data for the prior month was revised higher, pointing to persistently tight labor market conditions… But the Labor Department's monthly Job Openings and Labor Turnover Survey, or JOLTS report… also hinted at some cracks forming in the labor market. Layoffs rose in January and job cuts were higher than initially thought in 2022. Fewer people voluntarily quit their jobs. Nevertheless, the labor market remains strong, with 1.90 job openings per every unemployed worker in January.”
March 8 – Bloomberg (Reade Pickert): “US mortgage rates increased for a fourth week to the highest level since mid-November… The contract rate on a 30-year fixed mortgage rose 8 bps to 6.79%... Mortgage News Daily, which updates more frequently, put the 30-year rate at 7.03% on Tuesday.”
March 7 – Yahoo Finance (Gabriella Cruz-Martinez): “Americans are feeling worse about the housing market again. Fannie Mae’s gauge of housing sentiment dropped 3.8 points in February to 58.0, falling close to its record low set last year and reversing three months of consecutive gains. Overall, 44% of consumers reported that it’s a bad time to sell, up from 39% last month. At the same time, 24% of respondents expressed concern about losing their job in the next 12 months, up 18% last month. Both buyers and sellers were pessimistic about the market, Doug Duncan, chief economist and senior vice president at Fannie Mae, said. ‘With home-selling sentiment now lower than it was pre-pandemic – and home-buying sentiment remaining near its all-time low – consumers on both sides of the transaction appear to be feeling cautious about the housing market,’ Duncan said…”
March 8 – Wall Street Journal (Collin Eaton and Benoît Morenne): “The boom in oil production that over the last decade made the U.S. the world’s largest producer is waning, suggesting the era of shale growth is nearing its peak. Frackers are hitting fewer big gushers in the Permian Basin, America’s busiest oil patch, the latest sign they have drained their catalog of good wells. Shale companies’ biggest and best wells are producing less oil, according to data… The Journal reported last year companies would exhaust their best U.S. inventory in a handful of years if they resumed the breakneck drilling pace of prepandemic times. Now, recent results out of the Permian, spread across West Texas and New Mexico, are mimicking the onset of a production plateau that has taken place at other, more mature U.S. shale plays.”
Fixed Income Watch:
March 5 – Financial Times (Harriet Clarfelt): “Companies in the US and Europe that have borrowed on the cheap for years are facing the return of a once-familiar fear: ratings downgrades. Borrowing costs have soared since the Federal Reserve started pushing up benchmark interest rates in an effort to curb inflation. Investors now demand annual interest payments of about 9% a year from US businesses with low scores from rating agencies, up from just below 5% in March 2021. That punchy price tag means high-grade companies are steering clear of taking on extra debt to fund expansions or takeovers, instead relying more heavily on equity capital to keep their pristine ratings in place.”
March 6 – Wall Street Journal (Sam Goldfarb and Alana Pipe): “Bond yields have been rising again lately. That could create complications for low-rated companies that had just started to enjoy having easier access to credit. As inflation showed signs of easing early this year, investors bet that the Federal Reserve might pivot quickly to slashing interest rates. That increased demand for bonds, driving down yields on new and existing corporate debt. Speculative-grade companies such as Caesars Entertainment… seized the moment. Altogether, these companies issued almost as many bonds in January and February as they did in the entire second half of 2022…”
March 7 – Wall Street Journal (Heather Gillers): “Rising interest rates are squeezing cash-strapped towns and school systems that use short-term borrowing to keep cash flowing while they wait for property tax dollars to come in. A-rated cities and school districts are paying 3.16% for a one-year loan issued March 3, compared with 0.21% at the beginning of 2022... In places where local budgets are already burdened by inflation, rising borrowing costs add to the pressure to raise taxes or cut services. For most of the past decade, short-term borrowing cost almost nothing and offered an easy solution for places with limited reserves and slow-to-arrive revenues.”
China Watch:
March 7 – Associated Press (Joe McDonald): “China’s trade contracted again in January and February as U.S. and European demand weakened in the face of interest rate hikes, adding to pressure on official efforts to revive economic growth following the end of anti-virus controls. Exports sank 6.8% from a year earlier to $506.3 billion, an improvement over December’s 10.1% decline… Imports fell 10.2% to $389.4 billion, deepening December’s 7.3% contraction. China’s global trade surplus for the two months edged up 0.8% over a year earlier to $116.9 billion.”
March 8 – Reuters (Zhang Yan and Brenda Goh): “China's passenger vehicle sales fell 20% in the first two months of this year…, underscoring weak demand in the world's biggest auto market even as some car manufacturers offer reduced prices to revive demand. Sales in February, 1.42 million units, were 10.4% higher than a year earlier, a low base period when a week-long Lunar New Year holiday reduced business activity, the China Passenger Car Association (CPCA) said.”
March 6 – Associated Press: “After a decade in Chinese President Xi Jinping’s shadow, Li Keqiang is taking his final bow as the country’s premier, marking a shift away from the skilled technocrats who have helped steer the world’s second-biggest economy in favor of officials known mainly for their unquestioned loyalty to China’s most powerful leader in recent history. After exiting the ruling Communist Party’s all-powerful Politburo Standing Committee in October — despite being below retirement age — Li’s last major task was delivering the state of the nation address to the rubber-stamp parliament on Monday.”
March 7 – Wall Street Journal (Keith Zhai and Chun Han Wong): “China is preparing sweeping changes to its vast government bureaucracy, as leader Xi Jinping further strengthens Communist Party control and seeks to boost his country’s technological and financial prowess at a time of heightened competition with the West. Under a plan presented to lawmakers…, Beijing would create new regulatory bodies to oversee broad segments of China’s financial system, as well as the use of data and related digital technologies. Other state institutions, including the Ministry of Science and Technology, would be restructured or have some of their powers redistributed to other departments. Central-government agencies would cut their head count by 5% across the board.”
March 7 – Bloomberg: “China’s sweeping changes to the financial regulatory system will see the central bank lose some of its functions to a new and enlarged oversight body, leaving it focused on broader economic and financial stability management. The banking and insurance watchdog will be absorbed into a new bureau — a national financial regulatory administration — to oversee all financial sectors except the securities industry, according to a plan released at the National People’s Congress... Under the revamp, the People’s Bank of China will no longer have oversight of financial holding companies and financial consumer protection.”
March 5 – Wall Street Journal (Chun Han Wong and Keith Zhai): “The new top lieutenants of Chinese leader Xi Jinping are set to take up senior government positions at the annual session of China’s legislature this week, having risen to the Communist Party’s uppermost ranks last fall. The new leadership lineup, packed with men loyal to Mr. Xi, faces daunting challenges… As they take up their roles, one overarching question hovers above them: Will their relationships with Mr. Xi give them leeway to make hard decisions about China’s future direction, or will his demand for loyalty turn them into mere yes men?”
March 4 – Associated Press (Joe McDonald): “China’s government announced plans for a consumer-led revival of the struggling economy as its legislature opened a session Sunday that will tighten President Xi Jinping’s control over business and society. Premier Li Keqiang, the top economic official, set this year’s growth target at ‘around 5%’ following the end of anti-virus controls that kept millions of people at home and triggered protests. Last year’s growth in the world’s second-largest economy fell to 3%, the second-weakest level since at least the 1970s.”
March 4 – Reuters (Liangping Gao, Ryan Woo and Samuel Shen): “Warning that risks remain in the property market, China's government said in a report released at parliament's annual opening… that it would promote the sector's stable development and prevent disorderly expansion by developers. Premier Li Keqiang made guarding against risks to top property developers one of the government's priorities this year, amid still cautious buyer sentiment, following through on the work done at a key economic meeting in December.”
March 5 – Reuters (Winni Zhou and Brenda Goh): “Some Chinese companies are holding on to dollar revenues from exports, while others are turning to foreign exchange hedging in anticipation of a fall in the value of the yuan, according to executives, bankers and data analysed by Reuters. Several bankers in China told Reuters that clients are reluctant to convert export receipts, while exchange filings show more than 30 A-share listed companies have signed up to use currency derivatives for risk-hedging so far this year. Central bank data also shows a shift, with dollar deposits at China's commercial banks, which had declined over the past year, jumping by $34 billion in January to $887.8 billion.”
Central Banker Watch:
March 5 – Bloomberg (Alessandra Migliaccio): “One of the pioneers of European Central Bank monetary policy has a stark warning for officials about the threat of more inflation bearing down on the region’s economy. Otmar Issing, the former Bundesbanker who became the first chief economist of the… institution in 1998, reckons further consumer-price pressures may already be in the pipeline. ‘I expect that we will see wage increases, which will create new inflation shocks,’ the 86-year-old German economist said… ‘To act early is the best approach,’ he said. ‘The ECB missed that by quite a lot… Inflation was already under way before it was exacerbated by the war… I never understood why the ECB for so long neglected that inflation was rising.’”
March 5 – Financial Times (Martin Arnold): “Christine Lagarde has warned that underlying price pressures will remain ‘sticky in the short term’ and signalled that further interest rate rises from the European Central Bank are very likely as ‘inflation is a monster that we need to knock on the head’. The ECB was not seeking to ‘break the economy’ with rate increases, Lagarde told Spain’s El Correo… ‘We are making progress, but we still have work to do… For the moment, the economy is resilient, employment is robust and unemployment is the lowest it has ever been,’ the ECB president said…”
March 6 – Reuters (Friederike Heine and Balazs Koranyi): “The European Central Bank should raise interest rates by 50 bps at each of its next four meetings as inflation is proving to be stubborn, Austrian central bank chief Robert Holzmann told German business daily Handelsblatt. The ECB has raised rates by 3 percentage points since July and flagged a 50 bps increase for March… Holzmann, an outspoken conservative - or hawk in policy terms - however said that based on current trends, he would favour 50 bps moves in March, May, June and July. ‘I expect it to take a very long time for inflation to come down,’ Holzmann was quoted… as saying. ‘My hope is that within the next 12 months we will have reached the peak of interest rates.’”
March 8 – Bloomberg (Alessandra Migliaccio): “Ignazio Visco openly criticized hawkish European Central Bank colleagues for making statements about future increases in borrowing costs when officials had agreed not to give such guidance. The outburst by the Bank of Italy governor… is a pointed public attack that hints at rising tensions behind closed doors in advance of next week’s decision. ‘Uncertainty is so high that the Governing Council of the ECB has agreed to decide ‘meeting by meeting’, without ‘forward guidance,’’ he said. ‘I therefore don’t appreciate statements by my colleagues about future and prolonged interest rate hikes.’”
March 6 – Bloomberg (Swati Pandey): “Australia’s central bank signaled a pause in its 10-month tightening cycle is in prospect, prompting a selloff in the currency after policymakers delivered an expected interest-rate increase… The Reserve Bank lifted its cash rate by a quarter-percentage point to 3.6%, the highest level since May 2012. Governor Philip Lowe said in his statement that in assessing ‘when and how much further’ rates need to go up, the RBA will pay close attention to incoming economic data.”
Europe Watch:
March 7 – Reuters (Clotaire Achi and Stephane Mahe): “France's nationwide strike against a planned pension reform, which disrupted train services, shut schools and halted fuel deliveries, will spill into Wednesday as unions seek to force a government retreat on the deeply unpopular policy. Around 1.28 million people took to the streets on Tuesday in demonstrations across the country, the interior ministry said, making turnout for the protest day - the sixth against the reform this year - the highest so far.”
March 7 – Bloomberg (Peter O'Dwyer): “Irish Life Assurance Plc has blocked withdrawals from its $533 million Irish property fund for a six month period due to a recent increase in customer requests. The notice period will allow time to make any property sales ‘as required to pay future withdrawals’ and in a manner that is fair to all customers, the insurance and pension provider said... The move adds to signs of stress in the Irish commercial property market, which saw a significant reduction in investment volumes late last year as higher interest rates and inflation added to investor hesitancy.”
Japan Watch:
March 10 – Bloomberg (Toru Fujioka and Sumio Ito): “Haruhiko Kuroda finished his last meeting at the helm of the Bank of Japan by buffeting markets again with a straightforward stand-pat that contrasted with the explosive launch of his massive stimulus program a decade ago. The BOJ left its negative interest rate and its cap on government debt yields untouched Friday at the shortest regular meeting during Kuroda’s watch, as it stuck to its view that inflation at more than twice its 2% target level still isn’t sustainable.”
March 7 – Reuters (Tetsushi Kajimoto): “Japan logged its largest current account deficit ever in January as a combination of global slowdown and China's Lunar New Year holidays undermined the country's ability to earn from trade. The trade balance, a part of the current account, also hit a record deficit. The current account deficit, at 1.98 trillion yen ($14.43bn), was more than double a median market forecast of 818.4 billion yen. It was the biggest on record…”
March 7 – Reuters (Kantaro Komiya and Tetsushi Kajimoto): “Japan's real wages fell the most in nearly nine years in January…, as four-decade-high inflation squeezed the purchasing power of consumers and undercut efforts by policymakers to revive a COVID-ravaged economy. Wage trends in the world's third-largest economy are under close market scrutiny because Bank of Japan officials have said that pay hikes, combined with 2% inflation, are essential to it scaling back its loose monetary policy. Inflation-adjusted real wages… fell by 4.1% in January from a year earlier, the largest decrease since May 2014…”
March 7 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japan's big companies are expected to deliver the largest pay rise in 26 years in next week's ‘shunto’ wage negotiations, offering policymakers hope the country might finally emerge from its deflationary doldrums. But the expected average salary hike of around 3% will likely include just a 1% increase in base pay… The outcome of ‘shunto’ wage talks with unions, many of which conclude on March 15, will be crucial to how soon the Bank of Japan (BOJ) could end its bond yield control policy under incoming governor Kazuo Ueda.”
EM Crisis Watch:
March 6 – Bloomberg (Karl Lester M. Yap and Scott Squires): “Hospitals delaying surgery in Sri Lanka. International flights suspended in Nigeria. Car factories shuttered in Pakistan. In some of the world’s most vulnerable developing nations, the situations on the ground are dire. Shortages of dollars are crimping access to everything from raw materials to medicine. Meanwhile governments are struggling with their debts as they chase rescue packages from the International Monetary Fund. It’s forcing a rethink of the bullish emerging-market consensus that swept Wall Street just a few months ago.”
Social, Political, Environmental, Cybersecurity Instability Watch:
March 10 – Bloomberg (Brian K. Sullivan and David R. Baker): “Heavy rains and damaging winds swept into California as the first of two back-to-back atmospheric rivers brought the renewed threat of flooding and mudslides to a state already battered by deadly winter storms. The storm will likely be followed Monday by another atmospheric river, a weather system that delivers a focused plume of moisture off the ocean.”
March 7 – Reuters (Sybille de La Hamaide): “France has reported an outbreak of highly pathogenic H5N1 bird flu among red foxes northeast of Paris, the World Organisation for Animal Health (WOAH) said…, as the spread of the virus to mammals raised global concerns. After three foxes were found dead in a nature reserve in Meaux near where gulls had died, one of the foxes was collected and tested, WOAH said in a report…”
Geopolitical Watch:
March 7 – Reuters (Ben Blanchard and Ryan Woo): “Taiwan will not allow ‘repeated provocations’ from China, the island's defence minister said…, as China's foreign minister said Taiwan was the ‘first red line’ that must not be crossed in Sino-U.S. relations… Speaking to reporters at parliament, Taiwan Defence Minister Chiu Kuo-cheng said he was not aware of a planned meeting between Tsai and McCarthy. ‘The Chinese communists use any reason to send troops,’ Chiu said. ‘But we won’t just say ‘bring it on’. We will take a peaceful and rational approach.’ Although it hopes this does not happen, Taiwan's military is prepared to fight, he added. ‘If the Chinese communists move again, the armed forces' job is to fight,’ Chiu said. ‘We won't allow repeated provocations against us. We can't accept that.’”
March 8 – Reuters (Liz Lee, Ben Blanchard and Yimou Lee): “China said… it was ‘seriously concerned’ by Taiwan President Tsai Ing-wen's ‘transit’ plans and had asked Washington for clarification, amid reports she will meet U.S. House Speaker Kevin McCarthy in the United States. McCarthy plans to meet Tsai in the United States in coming weeks… That could be instead of the Republican Speaker's anticipated but sensitive trip to the democratically governed island claimed by China.”
March 10 – Reuters (Soo-Hyang Choi): “North Korea's Kim Jong Un ordered the military to intensify drills to deter and respond to a ‘real war’ if necessary…, after the leader oversaw a fire assault drill that it said proved the country's capabilities. North Korea fired a short-range ballistic missile off its west coast on Thursday, South Korea's military said, adding it was analysing possibilities the North may have launched multiple missiles simultaneously from the same area.”
March 6 – Associated Press (Hyung-Jin Kim): “The influential sister of North Korea’s leader warned… that her country is ready to take ‘quick, overwhelming action’ against the United States and South Korea, a day after the U.S. flew a nuclear-capable B-52 bomber in a demonstration of strength against the North… ‘We keep our eye on the restless military moves by the U.S. forces and the South Korean puppet military and are always on standby to take appropriate, quick and overwhelming action at any time according to our judgment,’ Kim Yo Jong said…”
March 6 – Reuters (Hyunsu Yim and Josh Smith): “North Korea said any move to shoot down one of its test missiles would be considered a declaration of war and blamed a joint military exercise between the United States and South Korea for growing tensions, state media KCNA said… Kim Yo Jong, the powerful sister of leader Kim Jong Un, warned… that Pyongyang would see it as a ‘declaration of war’ if the U.S. took military action against the North's strategic weapon tests.”
March 4 – Reuters (Karen Lema): “The Philippines said… it had spotted a Chinese navy ship and dozens of militia vessels around a contested Philippine-occupied island in the South China Sea, as territorial tensions mount in the area. The Philippine Coast Guard said 42 vessels believed to be crewed by Chinese maritime militia personnel were seen in the vicinity of Thitu island, while a Chinese navy vessel and coast guard ship were observed ‘slowly loitering’ in the surrounding waters.”