Difficult this week to shake that foreboding feeling. It’s as if things barely clinging together started to come loose – a most tenuous stasis about to spiral out of control. Global markets. Gaza, Israel, the Middle East - and a hostile world.
In a barbarous terrorist attack reminiscent of the worst of ISIS, 1,300 Israelis were lost. Men, women, children, and babies executed in the most ruthless and despicable manner imaginable. It’s being called “Israel’s 9/11.” I recall the outpouring of global support America received following the 2001 terrorist attacks. Traveling in Brazil at the time, I was touched by the sincere sympathies expressed (including agents at the Sao Paulo airport upgrading my seat to first class for a flight to Europe).
It would be reasonable to assume that the world would today offer condolences and overwhelming support for Israel. But it’s a different country and a different - more hostile - era. In a deeply divided world, Israel and the Palestinian cause are the hottest of hot button issues. A single headline provides a woeful testament: “New York Jews ‘Feel Like They are Being Hunted Down’ on Global ‘Day of Rage’.”
The U.S. and a few others offer unyielding support. Many nations seem ambivalent, and even more focus on Palestinian civilians trapped in Gaza Armageddon rather than the tragic loss of life in Israel. Moreover, sentiments fall closely along pro- versus anti-U.S. lines.
The world changed last Saturday – and it was yet another dramatic change for the worse. There have been too many of these, and they’re hitting like a bat out of hell. The pandemic, Russia’s Ukraine invasion, China’s power play, and now the Israel/Gaza War. It’s dizzying and disruptive.
Moreover, these shocks are exacerbating divisiveness within universities, communities, societies, and the global community. They’re illuminating and intensifying the ongoing pandemic of political dysfunction. And from this week’s reactions of leaders and nations, there is confirmation of profound world change – of new world disorder. For fragmenting global systems, it’s not easy to think of an issue more polarizing than Israel’s callous assault on Gaza for the eradication of Hamas. Friday from Prime Minister Benjamin Netanyahu: “We are striking our enemies with unprecedented might. I emphasize that this is only the beginning.”
October 8 – Wall Street Journal (Summer Said, Benoit Faucon and Stephen Kalin): “Iranian security officials helped plan Hamas’s Saturday surprise attack on Israel and gave the green light for the assault at a meeting in Beirut last Monday, according to senior members of Hamas and Hezbollah… Officers of Iran’s Islamic Revolutionary Guard Corps had worked with Hamas since August to devise the air, land and sea incursions—the most significant breach of Israel’s borders since the 1973 Yom Kippur War—those people said. Details of the operation were refined during several meetings in Beirut attended by IRGC officers and representatives of four Iran-backed militant groups, including Hamas… and Hezbollah, a Shiite militant group and political faction in Lebanon, they said.”
The Wall Street Journal report of Iranian Revolutionary Guard officers meeting with Hamas and Hezbollah to plan attacks against Israel stoked fear of an expanding Middle East war. Quickly, U.S. officials downplayed this reporting, stating U.S. intelligence had no evidence of Iran’s direct involvement. Israel officials began the week similarly cautious. And with little indicating Hezbollah’s imminent involvement, U.S. stocks reversed Monday morning losses to post solid gains for the session. Stocks then rallied sharply Tuesday, closed higher on Wednesday, and traded to the week’s highs mid-session Thursday.
After being under serious pressure the previous week, Middle East tensions provided Treasuries desperately needed safe haven demand. While the cash market was closed Monday for holiday, bond futures pointed to a strong rally. And at Tuesday’s lows, yields were down 18 bps, surely fueled by short covering and the unwind of hedges. Ten-year Treasury yields closed Wednesday at 4.56%, down 24 bps w-t-d.
Thursday’s trading session is worth documenting. After trading down to 4.52%, 10-year yields reversed sharply higher – closing the session 18 bps off lows at 4.70%. Volatility was even greater for the 30-year Treasury bond. Trading as low as 4.67% in early trading, poor PPI data and a dreadful auction saw yields spike a notable 21 bps – before closing the session up 16 bps at 4.89%. If a global crisis can’t sustain a Treasury rally (from such “deeply oversold” conditions), what can? Thursday’s disorderly trading had traders on edge.
I’ll use “ominous” to describe Friday’s disorderly trading. Gold surged almost $64, or 3.4%, to $1,933, the largest one-day advance since (banking crisis) March 17th. Silver jumped 4.1%. Crude (October contract) surged $4.78, or 5.8%, to $87.70. It was fascinating to watch safe haven attributes materialize with some urgency. Treasuries also benefited from safe haven demand, though Friday’s nine bps decline in 10-year yields (4.61%) was rather unimpressive compared to the ascending precious metals. Moreover, the metals shined even though the dollar traded slightly higher in Friday trading.
At Thursday’s intraday highs, the S&P500 enjoyed a 1.8% w-t-d gain, though end-of-week selling cut this advance to 0.4%. A lot is riding on the big tech stocks (“magnificent seven”). By week’s end, many financial conditions indicators had reversed early-week “risk on” moves. Both U.S. investment-grade and high yield corporate CDS closed the week higher. Bank CDS bucked the trend, with Friday’s solid earnings reports sustaining early week CDS declines.
Emerging Market CDS shot higher, with a notable nine bps jump Friday to 237 bps. Israel CDS rose 13 Friday (33 for the week) to a decade-high 133 bps. The Friday surge in Middle East sovereign CDS contributed to a portentous session. Qatar CDS rose seven (up 16bps on the week) to a one-year high 62 bps, and Saudi Arabia five (9bps) to a 14-month high 69 bps. Bahrain rose seven (16bps) to 255 bps; Dubai nine (14bps) to 92 bps; and Kuwait two (11bps) to 64 bps.
October 13 – Reuters (Aziz El Yaakoubi and Parisa Hafezi): “Saudi Arabia is putting U.S.-backed plans to normalise ties with Israel on ice, two sources familiar with Riyadh's thinking said, signalling a rapid rethinking of its foreign policy priorities as war escalates between Israel and Palestinian group Hamas. The conflict has also pushed the kingdom to engage with Iran. Saudi Crown Prince Mohammed bin Salman took his first phone call from Iranian President Ebrahim Raisi as Riyadh tries to prevent a broader surge in violence across the region… ‘Normalisation was already considered taboo (in the Arab world)… this war only amplifies that,’ Saudi analyst Aziz Alghashian said.”
Many have suggested Hamas was motivated to attack Israel to quash Saudi/Israeli rapprochement. Yet with reports of Hamas having planned for these attacks over a two-year period, recent Hamas, Hezbollah, and Iranian collusion point to greater ambitions.
October 13 – Associated Press (Bassem Mroue): “Iran’s foreign minister warned Friday that if Israel’s attacks on the Gaza Strip don’t stop immediately, the violence could spread to other parts of the Middle East. Hossein Amirabdollahian is on a tour that took him to Baghdad before Beirut, and later in the day he went to the Syrian capital, Damascus. Iran heads the so-called ‘axis of resistance’ that includes powerful militant groups in the region, such as Hezbollah in Lebanon and the Popular Mobilization Forces in Iraq. Amirabdollahian spoke… after a meeting with his Lebanese counterpart, during which the two officials called for an end to Israel’s attacks on Gaza. He also met with Hezbollah leader Hassan Nasrallah, as well as caretaker Prime Minister Najib Mikati and the speaker of parliament.”
October 13 – CNBC (Emma Graham): “An exchange of fire between Lebanese militant group Hezbollah and the armed forces in northern Israel signal that the conflict in Gaza could spread regionally. With an Israeli ground incursion potentially imminent in the north of the Gaza Strip, the conflict could grow to involve other regional actors, including Hezbollah and potentially Iran, analysts say. And if Hezbollah decides to join the conflict in neighboring Israel, ‘it will be nothing short of a game-changer,’ Firas Maksad, a senior fellow at the Middle East Institute, told CNBC… Hamas is but the weak underling of Hezbollah, a much more formidable fighting force and widely recognized as the most powerful nonstate military in the world,’ he added. ‘This will be a game-changer, not only for Israel, but also for the entire region.’”
Ramifications of an expanding Middle East conflict are almost too disconcerting to contemplate. Hezbollah opening a northern front against Israel would increase the likelihood of Israel directly confronting Iran. And there’s the festering issue of Iran’s nuclear capabilities. The presence of the USS Gerald R. Ford Carrier Strike Group in the Eastern Mediterranean is surely meant to deter the Iranians and Hezbollah. Russia’s recent alignment with Iran is an issue, along with Putin’s craving to obstruct U.S. aims. There’s Assad’s Syria infested with scores of hardened militant groups. And there are bitter Shia/Sunni rivalries with scores to settle, along with “enemy of my enemy is my friend” anti-Israel alliances.
Israel has few friends in a dangerous neighborhood – with the U.S. not much more popular. The region is still a dominant oil producer. The bottom line: the Middle East is today a more combustible tinder box than ever. And the region caught fire last week. If a major conflict takes hold, I wouldn’t bet against an opportunistic Putin causing the U.S. as much grief (in the Middle East, Europe and elsewhere) as he can muster. And why wouldn’t Kim Jong Un rattle his nuclear saber more alarmingly? And surely Xi Jinping would relish the opportunity to spread the U.S. military even more thinly – in the South China Sea and the Taiwan Straits.
Markets have been content to ignore mounting geopolitical risks. Friday had the look of some reality beginning to set in.
October 12 – Reuters (Jeff Mason and Steve Holland): “U.S. President Joe Biden will release his supplemental funding request next week, White House spokeswoman Karine Jean-Pierre told reporters… without giving more details. A person familiar with the matter previously told Reuters that the Biden administration is planning to ask Congress for additional money for military aid for Israel after Saturday's attack by Hamas militants and for Ukraine…”
The week began with safe haven Treasury buying stirring imaginations of sinking market yields and a never-ending equities bull market. The reality is massive government deficits (Treasury supply) as far as the eye can see – and that’s before what will surely be a major increase in defense spending and ongoing support for our allies at war and in need. Haven buyers beware.
And so much political dysfunction. Hopefully, House Republicans can elect a Speaker well ahead of the November 17th continuing resolution deadline. Divided party, divided Congress, divided government, divided nation, and divided world. All deeply divided, nonetheless.
Friday’s report on University of Michigan Consumer Confidence had one-year inflation expectations jumping from 3.2% to a five-month high of 3.8%. This followed Wednesday’s stronger-than-expected 0.5% increase in Producer Prices, with worrying 1.8% (0.5%, 0.7% and 0.6%) three-month inflation. And Thursday’s CPI was reported at a stronger-than-expected 0.4% for the month (following August’s 0.6%). Inflation is demonstrating unmistakable persistence, with Middle East instability posing a clear and present danger of higher crude prices. Moreover, an increasingly fragmented global economy elevates the risk of supply chain issues and resource scarcities.
The Middle East crisis hit with incredibly inopportune timing. Global de-risking/deleveraging had already gained significant momentum. Thinking ahead, it’s anything but clear how the Fed and global central bank community will respond to market illiquidity and dislocation. At this point, massive liquidity injections would be required to reverse a serious de-leveraging episode. With inflation risk highly elevated, I assume central banks will approach additional QE cautiously. And when they’re forced to move aggressively, the bond market’s reaction will be both fascinating and highly consequential.
It's a different bond market these days, with this New Paradigm trading dynamic. Bonds may very well protest another big QE program, with economies in the throes of heightened inflation risk. A Middle East crisis and heightened geopolitical risk will likely only promote greater deficit spending at home and abroad.
October 10 – Bloomberg (Tom Hancock): “A rare mid-year revision to China’s national budget to juice the economic recovery with more stimulus would signal top leaders are moving away from a growth model that has piled ever more debt on local governments. That’s the verdict among economists after people familiar with the matter said policymakers are considering raising the budget deficit for 2023 by issuing at least 1 trillion yuan ($137bn) in sovereign debt for infrastructure spending… China has for years been loading debt on the balance sheets of local governments and companies they own to fund infrastructure spending… Putting more of the fiscal burden on the central government would underscore President Xi Jinping’s need to counter an economic slowdown, while also highlighting growing concern among authorities…”
The Bloomberg headline “China on Brink of Deflation Again…” notwithstanding, the great Chinese Credit Bubble is alive and unwell. About 12% ahead of estimates, Aggregate Financing expanded $564 billion during September. This put nine-month growth at $4.01 TN (11% annualized), just shy of 2020’s record pace. And with an increasingly desperate Beijing poised to aggressively borrow and spend, 2023 will likely post record annual Credit growth (of atrocious quality). Beijing is playing with fire. When I ponder things at risk of spiraling out of control, China’s currency is high on the list.
“The war in Ukraine compounded by last week’s attacks on Israel may have far-reaching impacts on energy and food markets, global trade, and geopolitical relationships. This may be the most dangerous time the world has seen in decades.” Jamie Dimon, October 13, 2023
For the Week:
The S&P500 added 0.4% (up 12.7% y-t-d), and the Dow increased 0.8% (up 1.6%). The Utilities rallied 3.6% (down 17.7%). The Banks were little changed (down 24.5%), while the Broker/Dealers fell 1.7% (up 5.8%). The Transports dipped 0.7% (up 9.8%). The S&P 400 Midcaps declined 0.5% (up 0.5%), and the small cap Russell 2000 fell 1.5% (down 2.4%). The Nasdaq100 was about unchanged (up 37.1%). The Semiconductors declined 0.6% (up 36.4%). The Biotechs lost 1.5% (down 5.8%). With bullion rallying $100, the HUI gold equities index surged 8.6% (down 2.7%).
Three-month Treasury bill rates ended the week at 5.325%. Two-year government yields slipped three bps this week to 5.05% (up 62bps y-t-d). Five-year T-note yields dropped 12 bps to 4.64% (up 63bps). Ten-year Treasury yields sank 19 bps to 4.61% (up 74bps). Long bond yields dropped 22 bps to 4.75% (up 79bps). Benchmark Fannie Mae MBS yields declined seven bps to 6.49% (up 110bps).
Greek 10-year yields fell nine bps to 4.29% (down 28bps y-t-d). Italian yields dropped 14 bps to 4.78% (up 8bps). Spain's 10-year yields fell 13 bps to 3.88% (up 37bps). German bund yields dropped 15 bps to 2.74% (up 29bps). French yields declined 11 bps to 3.37% (up 39bps). The French to German 10-year bond spread widened four to 63 bps. U.K. 10-year gilt yields dropped 19 bps to 4.39% (up 71bps). U.K.'s FTSE equities index rallied 1.4% (up 2.0% y-t-d).
Japan's Nikkei Equities Index rallied 4.3% (up 23.8% y-t-d). Japanese 10-year "JGB" yields declined four bps to 0.76% (up 34bps y-t-d). France's CAC40 declined 0.8% (up 8.2%). The German DAX equities index slipped 0.3% (up 9.1%). Spain's IBEX 35 equities index was unchanged (up 12.2%). Italy's FTSE MIB index recovered 1.5% (up 19.1%). EM equities were mixed. Brazil's Bovespa index gained 1.4% (up 5.5%), while Mexico's Bolsa index slipped 0.6% (up 1.90%). South Korea's Kospi index rallied 2.0% (up 9.8%). India's Sensex equities index added 0.4% (up 8.9%). China's Shanghai Exchange Index declined 0.7% (unchanged). Turkey's Borsa Istanbul National 100 index sank 4.2% (up 47.3%). Russia's MICEX equities index gained 1.5% (up 48.2%).
Federal Reserve Credit declined $29.8bn last week to $7.915 TN. Fed Credit was down $986bn from the June 22nd, 2022, peak. Over the past 212 weeks, Fed Credit expanded $4.188 TN, or 112%. Fed Credit inflated $5.104 TN, or 182%, over the past 570 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $0.9bn last week to $3.425 TN. "Custody holdings" were up $100bn, or 3.0%, y-o-y.
Total money market fund assets were little changed at $5.706 TN, with a 31-week gain of $813bn (28% annualized). Total money funds were up $1.118 TN, or 24.4%, y-o-y.
Total Commercial Paper rose gained $7.9bn to $1.210 TN. CP was down $46bn, or 3.7%, over the past year.
Freddie Mac 30-year fixed mortgage rates rose bps to 7.63% (up 71bps y-o-y) - the high since November 2000. Fifteen-year rates jumped 12 bps to 7.01% (up 92bps) - the high since December 2000. Five-year hybrid ARM rates gained 13 bps to 7.27% (up 146bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down seven bps to 7.81% (up 64bps).
Currency Watch:
October 12 – Reuters (Selena Li and Summer Zhen): “China has for the first time issued a notice prohibiting domestic brokerages and their overseas units from taking on new mainland clients for offshore trading… New investments by existing mainland clients are also to be ‘strictly monitored’ to prevent investors from bypassing China's foreign exchange controls, said the notice… The actions, which will restrict capital outflows, come as faltering growth for the world's second-largest economy has spurred investment overseas, weighing on the yuan and prompting authorities to ramp up efforts to stabilise the currency.”
For the week, the U.S. Dollar Index increased 0.5% to 106.65 (up 3.0% y-t-d). For the week on the upside, the South African rand increased 1.6%, the Brazilian real 1.3%, the Swiss franc 0.9%, and the Mexican peso 0.4%. On the downside, the New Zealand dollar declined 1.8%, the Australian dollar 1.4%, the British pound 0.8%, the euro 0.7%, the Swedish krona 0.6%, the Singapore dollar 0.3%, the Norwegian krone 0.3%, and the Japanese yen 0.2%. The Chinese (onshore) renminbi declined 0.10% versus the dollar (down 5.56%).
Commodities Watch:
October 8 – Bloomberg (Sybilla Gross): “Gold in China jumped to trade at the second-highest premium on record against the international benchmark, as mainland markets reopened following the Golden Week holiday. The Shanghai spot price was more than $112 an ounce higher than levels seen in London on Monday… The gap between the two markets has only been wider one other time, when Chinese prices last month blew out to trade at a premium of more than $120 over London as Beijing restricted shipments in a move that squeezed the market.”
The Bloomberg Commodities Index rallied 2.6% (down 6.7% y-t-d). Spot Gold surged 5.4% to $1,933 (up 6.0%). Silver jumped 5.2% to $22.72 (down 5.2%). WTI crude rallied $4.83, or 5.8%, to $87.69 (up 9%). Gasoline recovered 3.5% (down 8%), while Natural Gas fell 2.8% to $3.24 (down 28%). Copper dropped 1.7% (down 6%). Wheat gained 1.9% (down 27%), while Corn was little changed (down 26%). Bitcoin dropped $1,055, or 3.8%, to $26,930 (up 63%).
Middle East War Watch:
October 12 – Wall Street Journal (Dion Nissenbaum and Ari Flanzraich): “Israeli infantry and artillery units are digging in along the country’s northern border with Lebanon, reinforcing a stretch of frontier that could become a dangerous second front if Iran-backed Hezbollah militants launch broader attacks. Deadly, but so far sporadic, clashes with Hezbollah have already erupted in the area… If Hezbollah—which is designated a terrorist group by the U.S. and is closely linked to Iran—enters the conflict in a concerted way, it would stretch Israel’s army and strain the country’s air defenses, given Hezbollah’s arsenal of missiles capable of striking Tel Aviv.”
October 12 – Reuters (Henriette Chacar, Nidal Al-Mughrabi and Humeyra Pamuk): “Israel said on Thursday there would be no pause in its siege of the Gaza Strip for aid or evacuations until all its hostages were freed, as Washington urged it to protect civilians and the Red Cross warned of a humanitarian catastrophe in the enclave. U.S. Secretary of State Antony Blinken… told Prime Minister Benjamin Netanyahu that America would always be by Israel's side and give security assistance, but he urged Israel to show restraint ‘even when it’s difficult’.”
October 13 – CNN (Helen Regan, Caitlin Hu, Mohammed Tawfeeq, Akanksha Sharma, Nadeen Ebrahim and Sophie Tanno): “Israel’s military is telling 1.1 million people in northern Gaza to evacuate their homes immediately, as it appears to prepare to ramp up retaliation for Hamas’ October 7 terror attacks. Israeli warplanes continued on Friday to bombard the cramped coastal enclave, which Hamas controls. Civilians in Gaza crammed possessions into cars, taxis and pickup trucks in a mass rush toward the south. Those without other options walked, carrying what they could. Images on social media Friday showed the Israel Defense Forces dropping leaflets from planes telling Gazans to south or risk further danger.”
October 12 – Reuters (Nidal Al-Mughrabi and Jonathan Saul): “An Israeli invasion of Gaza will face an enemy that has built a formidable armoury with Iran's help, dug a vast tunnel network to evade attackers and has shown in past ground wars it can exact a heavier toll on Israeli troops each time. As Israel masses tanks on Gaza's border and ministers suggest the start of an invasion is a matter of when not if, Israel's generals will look to lessons learned from past ground offensives in 2008 and 2014 that also aimed to smash the Palestinian Islamist group Hamas, an Israeli security source and experts said.”
October 12 – Financial Times (Andrew England and Samer Al-Atrush): “As Israelis mourned their dead and struggled to come to terms with the darkest day in the Jewish state’s history, Arab social media was buzzing with variations of its own take on Hamas’s deadly attack: ‘Prison Break’. Across different platforms, posts displayed images ranging from the broken Israeli security barrier that hems in Gaza… to a clenched fist in the colours of the Palestinian flag breaking out of Israeli shackles. The viral posts reflect how many across the Arab world have been ambivalent or openly supportive of the brutal Hamas attack, seizing the moment to express their solidarity with the Palestinian cause.”
October 11 – Wall Street Journal (Warren P. Strobel and Michael R. Gordon): “Tehran likely knew Hamas was planning operations against Israel but didn’t know the precise timing or scope of the surprise attack the group mounted last week, according to a preliminary unclassified assessment by U.S. intelligence agencies. The judgment by the American intelligence community represents an initial effort to determine what role Iran might have played in an attack… The assessment also notes that U.S. intelligence agencies haven’t reached a definitive conclusion and will be looking in coming weeks at whether some in the regime might have had knowledge of what was being planned or helped direct the attacks.”
October 12 – Bloomberg (Dana Khraiche): “Israel fired missiles at Syria’s Damascus and Aleppo airports, putting both out of service…, the first such attack on the country since Hamas attacked Israel at the weekend. Israel carried out simultaneous airstrikes…, targeting the Damascus and Aleppo airports and damaging their runways… Iranian Foreign Minister Hossein Amirabdollahian is set to visit Damascus, part of a tour to Syria, Iraq and Lebanon. Syria said the attacks were part of Israel’s ‘efforts to divert attention from its crimes in Gaza.’”
October 11 – Reuters: “Iranian President Ebrahim Raisi and Saudi Crown Prince Mohammed bin Salman discussed the Palestinian-Israeli conflict on Wednesday, in the first telephone call between the two leaders since a China-brokered deal between Tehran and Riyadh to resume ties. The two leaders' call came as Israel carried out air strikes in the Gaza Strip in retaliation for a deadly attack by Palestinian Hamas militants in Israel. Raisi and the Saudi crown prince discussed the ‘need to end war crimes against Palestine,’ Iranian state media said. The Saudi crown prince… ‘affirmed that the Kingdom is making all possible efforts in communicating with all international and regional parties to stop the ongoing escalation,’ Saudi state news agency SPA said. He also reiterated Saudi Arabia's rejection of targeting civilians in any way…”
Market Instability Watch:
October 8 – Wall Street Journal (Eric Wallerstein): “The autumn bond rout is challenging Wall Street’s longstanding belief that the U.S. government can’t sell too many Treasurys. Ever since the Federal Reserve broke the inflation scare of the 1980s, Wall Street and Washington have shrugged off multitrillion-dollar deficits, counting on America’s global standing to provide perpetual demand for its debt that could finance the spending. Now, the steep declines in prices of Treasurys… are forcing markets to confront the possibility that the rates required to place all this debt will be higher than anyone expected.”
October 11 – Reuters (David Lawder): “The U.S. and China will both need to make major changes to put their medium-term debt and deficit on a sustainable path, International Monetary Fund Fiscal Affairs Director Vitor Gaspar said… Continuing along their projected fiscal paths will ultimately cause difficulties for the world's two largest economies, Gaspar told Reuters... ‘If you look at what is exactly driving the U.S. and China, you would say it’s large and persistent budget deficits on the order of 6% to 7% of GDP throughout the period up to 2028,’ Gaspar said. ‘Growth has slowed and the medium-term prospects are the weakest in some time’ for both countries.”
October 11 – Bloomberg (Rich Miller): “The forces underlying the Treasury debt market are extremely adverse as the US is on an unsustainable fiscal path, a senior International Monetary Fund official said. ‘US deficits are elevated and they’re projected to be persistent,’ said Vitor Gaspar, director of the IMF’s Fiscal Affairs Department. ‘Under unchanged policies, debt dynamics in the US are very unfavorable.’ Yields on Treasury securities have surged in recent weeks to the highest in more than 15 years, partly on concerns about burgeoning budget shortfalls… The US is forecast to post a fiscal deficit of around 6% of gross domestic product this year, even though the economy is expanding and unemployment is low.”
October 10 – Financial Times (Colby Smith and Sam Fleming): “The IMF has urged regulators to sharpen their scrutiny of threats from rising bond yields, as a continuing surge in global borrowing costs triggers ‘heightened risk’ in financial markets. ‘When you see large moves that are very fast, it has more potential to trigger instability, because market participants have to reposition and there are these accelerators in the system that could kick in,’ Tobias Adrian, director of the fund’s monetary and capital markets department told the Financial Times. ‘Hopefully, calm will prevail at some point, but there is certainly heightened risk [now].’”
October 12 – Bloomberg (Michael Tobin): “US speculative-grade companies are facing heightened refinancing and default risks amid higher-for-longer interest rates and limited credit market access, according to Moody’s... Junk-rated firms have $1.87 trillion of debt maturing between 2024 and 2028… That marks a 27% jump from the $1.47 trillion anticipated between 2023 and 2027 in last year’s study, wrote analysts including Botir Sharipov. ‘The increase – reflecting higher maturities for revolving credit facilities, loans and bonds – comes amid weak macroeconomic and credit conditions, raising companies’ refinancing and default risk,’ noted the analysts.”
October 12 – Bloomberg (Alice Atkins and Jenny Surane): “For signs of where the action is in the $7.5 trillion-a-day currency trading market, look no further than Apple Inc.’s balance sheet. The technology giant is sitting on $135 billion in foreign exchange derivatives, some of which are used to hedge against currency fluctuations across its many markets. Alphabet Inc. has about another $60 billion of these contracts… Revenue in corporate currency business at the world’s five biggest banks has jumped about 30% in the past five years, according to data firm Vali Analytics. For the top 50 banks, it’s now accounts on average for more than half of all currency revenue.”
Bubble and Mania Watch:
October 10 – Bloomberg (Ye Xie): “The global government bond market has hit a turning point: junk-rated debt now exceeds top-rated debt for the first time, following Fitch Ratings’ August move to strip the US off its AAA credit grade. Fitch’s downgrade of the $33 trillion US debt to AA+ means only $5 trillion of government debt globally is still rated AAA, leaving it as a smaller group than sub-investment-grade debt… The share of top-rated government bonds have fallen to just 6% of total debt outstanding, from more than 40%.”
October 9 – Wall Street Journal (Konrad Putzier): “America’s highest office vacancies aren’t in the East and West Coast cities that have been shedding population and workers. They are in Texas, a thriving Sunbelt state that has been luring companies away from the big coastal cities. Houston, Dallas and Austin top the list of major U.S. cities with the highest office-vacancy rates, according to Moody’s Analytics. About 25% of their office space wasn’t leased as of the third quarter. That was more than double New York’s vacancy rate of 12% and well above San Francisco’s vacancy rate of 17%.”
October 12 – Bloomberg (Katie Greifeld): “All year, Wall Street pros have been sinking record sums of cash into the world’s largest Treasury ETF in a high-conviction bet that interest rates have peaked. All year they’ve been wrong, with an estimated $10 billion loss — yet that’s not stopping a cohort of dip buyers braving the worst market drawdown in decades. The big reason: Even a modest rebound in long-dated government debt would spark bumper returns.”
October 12 – Bloomberg (John Sage, Ellen Schneider and Paula Seligson): “Private credit managers are quietly providing record loans to existing borrowers seeking small acquisitions, stealthily building the value of their lending portfolios while adding more concentrated risks. So-called add-on transactions are on the rise in the $1.5 trillion private credit market partly because a dramatic decline in large-scale leveraged buyouts has left lenders with excess cash and encouraged private equity firms to pursue smaller deals that can be tucked into existing portfolio companies.”
Banking Crisis Watch:
October 11 – Bloomberg (Shelly Hagan): “The biggest US banks are poised to write off more bad loans than they have since the early days of the pandemic as higher-for-longer interest rates and a potential economic downturn are putting borrowers in a bind. JPMorgan..., Citigroup Inc. and Wells Fargo & Co., which report third-quarter results Friday, will join Bank of America Corp. — which comes Tuesday — in posting roughly $5.3 billion in combined third-quarter net charge-offs, the highest for the group since the second quarter of 2020, according to data compiled by Bloomberg.”
October 8 – Financial Times (Stephen Gandel, Eric Platt, Harriet Clarfelt and Antoine Gara): “Bank of America, Barclays and other large banks that got stuck holding billions of dollars of leveraged loans in 2022 are sitting on the sidelines this year even as the buyout market revives. The group has become more reluctant to lead the financing for riskier buyouts, worried that the loans could get stuck on their balance sheets… Several were burnt last year when they struggled to find investors willing to purchase debt linked to Elon Musk’s purchase of Twitter and other deals for technology company Citrix, television ratings provider Nielsen and auto parts maker Tenneco.”
Ukraine War Watch:
October 12 – New York Times (Matthew Mpoke Bigg): “Since the attacks by Hamas on Israel last weekend, Ukraine has sought to position itself as a friend of Israel, while asserting that Moscow would try to use the conflict to drive a wedge between Ukraine and the countries that support it. Russia, for its part, has said that Israel’s war in Gaza shows the failure of the West and in particular U.S. policy in the region. The trading of accusations illustrates how, nearly two years into Russia’s full-scale invasion of Ukraine, the two countries are seeking to nurture their diplomatic alliances and influence opinion to bolster their respective military causes.”
U.S./Russia/China/Europe Watch:
October 12 – Reuters (Jonathan Landay): “The United States must prepare for possible simultaneous wars with Russia and China by expanding its conventional forces, strengthening alliances and enhancing its nuclear weapons modernization program, a congressionally appointed bipartisan panel said… The report from the Strategic Posture Commission comes amid tensions with China over Taiwan and other issues and worsening frictions with Russia over its invasion of Ukraine… ‘We worry ... there may be ultimate coordination between them in some way, which gets us to this two-war construct,’ the official said on condition of anonymity.”
October 12 – Financial Times (Demetri Sevastopulo): “The US must expand or restructure its nuclear arsenal to tackle the ‘existential challenge’ posed by the growing nuclear threat from China and existing risk from Russia, a new report by a congressionally mandated commission has said. The bipartisan Congressional Commission on the Strategic Posture of the US, which is tasked with examining American strategic policy, warned that Washington was ‘ill-prepared’ to tackle the challenge posed by having two peer nuclear adversaries for the first time. ‘The new global environment is fundamentally different than anything experienced in the past, even in the darkest days of the cold war,’ the panel warned… ‘The US is on the cusp of having not one, but two nuclear peer adversaries, each with ambitions to change the international status quo, by force, if necessary,’ it said.”
De-globalization and Iron Curtain Watch:
October 12 – Financial Times (Gillian Tett): “This week, the world is confronting the horrific human cost of conflict. But as more hellish headlines emerge from the Middle East and Ukraine, economists are also trying to tally the financial cost of this geopolitical fracture. Take the IMF… It has just released its latest World Economic Outlook, with the usual analysis of future trajectories for debt, growth and inflation. One novel feature of this year’s WEO is that the word ‘fragmentation’ is cited no less than 172 times; five years ago it was mentioned just once… ‘The splintering of countries into blocs that trade exclusively with one another… could reduce annual global GDP by up to 7%’… Indeed, in a striking reflection of this slide towards a cold war-style mentality, the IMF’s models of the costs of splintering alliances are based on the voting blocs that emerged in the UN after Russia’s invasion of Ukraine — a world in which China and Russia are allied against the west.”
October 12 – Bloomberg: “Russia’s government is reimposing tougher capital controls over the objections of the central bank…, acting to keep a closer grip on the ruble as Vladimir Putin prepares for presidential elections. The surprise announcement late on Wednesday imposed measures that will extend over the next six months… They will force 43 groups of exporter companies, including the country’s main oil producers, to sell their earnings from sales abroad on the domestic market for rubles to ensure a supply of foreign exchange.”
Inflation Watch:
October 12 – CNBC (Jeff Cox): “Prices that consumers pay for a wide variety of goods and services increased at a slightly faster-than-expected pace in September, keeping inflation in the spotlight for policymakers. The consumer price index… increased 0.4% on the month and 3.7% from a year ago… That compared with respective Dow Jones estimates of 0.3% and 3.6%... Excluding volatile food and energy prices, the so-called core CPI increased 0.3% on the month and 4.1% on a 12-month basis… Core inflation also increased 0.3% in August, when it was up 4.3% from the previous 12 months.”
October 11 – CNBC (Jeff Cox): “A measure of wholesale prices rose more than expected in September, indicating simmering inflation pressures for the U.S. economy. The producer price index… increased 0.5% for the month, against the… estimate for a 0.3% rise… That was less than the 0.7% increase in August. Excluding food and energy, the core PPI was up 0.3%, versus the forecast for 0.2%. Excluding food, energy and trade services, the index rose 0.2%, in line with the estimate.”
October 12 – Yahoo Finance (Dani Romero): “Housing is still propping up inflation more than the Federal Reserve wants. The shelter component of the Consumer Price Index (CPI) — one of the government’s main gauges of inflation — rose 0.6% over the last month and 7.1% on a yearly basis in September. It once again was the largest contributor to the monthly increase in inflation for all items, accounting for more than half of the increase.”
October 11 – Bloomberg (Reade Pickert and Rich Miller): “The rapid descent of US inflation over the last few months is likely too good to last. New upside risks in categories that have played an outsize role in the recent deceleration — like used cars and airfares — are raising the question: Can price pressures in services components like housing slow enough in coming months to sustain the downward trend?”
October 12 – Associated Press (Fatima Hussein): “Millions of Social Security recipients will get a 3.2% increase in their benefits in 2024, far less than this year’s historic boost and reflecting moderating consumer prices. The cost-of-living adjustment, or COLA, means the average recipient will receive more than $50 more every month beginning in January…”
October 11 – Bloomberg (Thomas Buckley): “Walt Disney Co. is raising ticket prices at its Disneyland resort by up to 9% and lifting annual pass prices at Walt Disney World by as much as 10%. The new prices take effect immediately, the company said…”
October 9 – Dow Jones: “A major Wall Street bank is warning about the risk that inflation expectations could become unanchored in a fashion similar to the 1970s stagflation era. Weekend attacks on Israel by Hamas illustrate how geopolitical risks can suddenly return -- adding to the surprise shocks of the current decade, such as the COVID-19 pandemic and Russia's invasion of Ukraine, said macro strategist Henry Allen and research analyst Cassidy Ainsworth-Grace of… Deutsche Bank.”
Biden Administration Watch:
October 11 – Bloomberg (Christopher Condon): “US Treasury Secretary Janet Yellen said the Biden administration hasn’t ruled out new sanctions against Iran in relation to renewed conflict in the Middle East, but no decisions have been made. ‘I wouldn’t take anything off the table in terms of future possible actions, but I certainly don’t want to get ahead of where we are now,’ Yellen said…”
Federal Reserve Watch:
October 11 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials were split over whether they would need to raise interest rates again this year when they decided last month to hold their benchmark policy rate steady. ‘A majority of participants judged that one more increase in the target federal-funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted,’ said the minutes from the Fed’s Sept. 19-20 policy meeting… Officials most recently raised their benchmark federal-funds rate in July to a range between 5.25% and 5.5%, a 22-year high.”
October 10 – Bloomberg (Craig Torres): “Federal Reserve Governor Christopher Waller said the US central bank is determined to bring inflation back to its 2% target... ‘We have reaffirmed this numerical goal repeatedly since 2012, and, in tightening monetary policy since early last year, we’ve made clear that we’re determined to bring inflation down to 2%,’ Waller said… ‘This is why we have taken forceful steps aimed at reducing inflation — and why we will stay on the job to achieve our objective.’”
October 11 – Bloomberg (Amanda Albright): “Federal Reserve Governor Christopher Waller said the US central bank can watch and see what happens before taking further action with interest rates as financial markets tighten. ‘The real side of the economy seems to be doing well. The nominal side is going in the direction we want. So we’re in this position where we kind of watch and see what happens on rates,’ Waller said… ‘Financial markets are tightening up and they are going to do some of the work for us,’ he said…”
October 10 – Reuters (Ann Saphir): “It’s ‘possible’ that the recent rise in yields on longer-term Treasuries means the Federal Reserve need not raise interest rates as much as otherwise, but it’s hard to know definitively, Minneapolis Fed President Neel Kashkari said… ‘It's certainly possible that higher long-term yields may do some of the work for us in terms of bringing inflation back down,’ Kashkari said... ‘But if those higher long-term yields are higher because their expectations about what we're going to do has changed, then we might actually need to follow through in their expectations in order to maintain those yields.’”
October 11 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic said the US central bank doesn’t need to keep raising interest rates unless inflation’s descent starts to stall. ‘Today, I don’t think we need to do anything more in terms of interest rates,’ Bostic said… If inflation stalls out or goes in the other direction, that would be a clear sign we need to do more, he said.”
U.S. Bubble Watch:
October 12 – Reuters (Joseph White, Abhirup Roy and David Shepardson): “The United Auto Workers' (UAW) snap strike on Wednesday at Ford's largest and most profitable factory is raising pressure on Stellantis NV and General Motors as negotiators resumed contract talks on Thursday. UAW negotiators are turning their attention on Thursday to talks with Chrysler-parent Stellantis, union President Shawn Fain said... ‘Here’s to hoping talks at Stellantis today are more productive than Ford yesterday,’ Fain wrote on social media.”
October 8 – New York Times (Noam Scheiber): “The list of gains that the Hollywood writers secured to end a nearly five-month strike with studios once seemed ludicrously ambitious: not just wage increases, but also minimum staffing levels for shows, new royalties on successful series and restrictions on outsourcing… to artificial intelligence. Yet far from an anomaly, the writers’ deal was the latest high-profile labor standoff that seemed to produce substantial gains for workers, and to suggest that they have more leverage than in the past. United Parcel Service employees won large pay increases for part-timers by pushing the company to the brink of a strike, while the lowest-paid academic student employees at the University of California won salary increases of more than 50% after a monthlong strike affected thousands of students.”
October 10 – Reuters (Amina Niasse): “U.S. small business sentiment declined slightly again in September on continued concern over inflation and persistent labor shortages, a survey… showed. The Small Business Optimism Index fell half a point last month to 90.8, according to the National Federation of Independent Business (NFIB)… ‘Owners remain pessimistic about future business conditions, which has contributed to the low optimism they have regarding the economy,’ said Bill Dunkelberg, the NFIB’s chief economist. ‘Sales growth among small businesses has slowed and the bottom line is being squeezed, leaving owners few options beyond raising selling prices for financial relief.’”
October 11 – Bloomberg (Augusta Saraiva): “US mortgage rates advanced last week to the highest level since 2000, keeping a lid on home-buying activity. The contract rate on a 30-year fixed mortgage rose by 14 basis points to 7.67% in the week ended Oct. 6, according to Mortgage Bankers Association data... That marked the fifth straight weekly increase.”
October 9 – Reuters (Howard Schneider): “The richest Americans are emerging from the coronavirus pandemic with their share of wealth and income on the rise again… Recent data from the Federal Reserve shows the top 1% of households by income held roughly 26.5% of household net worth at the end of June, up about 1.5 percentage points since 2019… New estimates from the U.S. Census Bureau, similarly, show the share of income going to the top 5% grew from 2019 through 2022 - to 23.5% from 23% - extending a trend dating from the 1980s that has given the highest earners greater fodder to build even more wealth.”
October 8 – Financial Times (Stephen Gandel and Colby Smith): “A drop in credit card spending is raising concerns about the financial health of the US consumer and the outlook for holiday sales as cardholders face record-high interest charges. The fall in card spending comes as consumers’ finances are being strained by both higher interest rates and debt loads… This debt has been rising in the past year and recently topped $1tn for all Americans for the first time. ‘Credit card spending was soft in September, and what was notable was that softness was across all sectors,’ said Citigroup economist Robert Sockin.”
Fixed Income Watch:
October 11 – Wall Street Journal (Heather Gillers): “Some municipal-bond funds are suffering their worst stretch since the 2008-09 financial crisis, an acute example of how two years of rising interest rates have slammed investors’ portfolios. Closed-end municipal-bond funds have been particularly hard-hit because they often use borrowed money to invest in fixed-rate, long-term bonds sold by state and local governments. The leverage helps boost the returns from debt that is ultrasafe, but pays relatively little interest.”
October 11 – Financial Times (Emma Boyde): “Investment grade corporate bond exchange traded funds suffered their second-highest monthly outflows on record in September, even as investors poured money into the large companies that issued the debt. Analysis from BlackRock shows net outflows of $4.1bn from investment grade credit ETFs… That number has only been exceeded once since BlackRock’s records began, in March 2020 when outflows from investment grade ETFs hit $5.1bn.”
China Watch:
October 8 – Bloomberg: “Chinese consumers traveled and spent less over the Golden Week holiday than the government had hoped, while lukewarm home sales stirred concerns about whether more support will be needed to bolster economic growth… ‘The National Day Golden Week tourism data suggest the services recovery has decelerated but continues,’ economists at Goldman Sachs Group Inc. wrote… ‘We believe additional policy easing will be necessary for further recovery in consumption and services, especially given the continued property downturn and still-dampened confidence.’”
October 8 – Bloomberg: “Tepid data on China home sales during the key vacation season raised doubts over whether Beijing’s steps to prop up the property market are ample to revive the sector this year. In the new-home market, daily sales during the eight-day Golden Week holiday declined 17% from last year, according to data on 35 major cities tracked by China Index Holdings Ltd. Daily sales of existing properties slid 8% over the period, separate data by China Real Estate Information Corp.’s tally on eight major cities showed.”
October 10 – Bloomberg (Pearl Liu and Wei Zhou): “Chinese developer Country Garden Holdings Co. offered the strongest indication yet that it’s set for a maiden default and debt restructuring, in the latest sign that authorities’ rescue efforts are far from enough to stop the nation’s property crisis from worsening. China’s former top builder warned in a stock exchange filing… that it will not be able to meet all of its future offshore payment obligations, including dollar bonds. Such non-payment may lead to relevant creditors demanding acceleration of payment or pursuing enforcement action…”
October 9 – Wall Street Journal (Frances Yoon and Rebecca Feng): “China Evergrande’s 11th-hour cancellation of a restructuring affecting more than $19 billion of its international bonds could lead to a messy collapse and have ‘a catastrophic effect’ on other troubled companies in the sector, its bond investors said… The Chinese property giant abandoned a bond restructuring deal late last month, after spending almost two years in discussions with its investors. Evergrande said regulators had barred it from issuing new securities—a key feature of the restructuring—because its main onshore real estate subsidiary was being investigated.”
October 9 – Financial Times (Thomas Hale): “Advisers to international bondholders in Evergrande, the Chinese property developer that defaulted on its debts in 2021, have warned about a potential liquidation after its restructuring plan was unexpectedly derailed last month. Investors were on the brink of a critical vote on the plan in late September when the developer revealed in a Hong Kong stock exchange filing that it could not proceed, citing domestic regulators and an unspecified investigation into the company.”
October 11 – Reuters (Clare Jim, Xie Yu and Davide Barbuscia): “As more Chinese property developers move towards restructuring billions of dollars of debt, their offshore creditors are expected to face another setback - the prospects of revamp terms being tightened due to a worsening outlook for the county's real estate sector. So far, developers accounting for 40% of Chinese home sales have defaulted on their debt obligations since 2021, according to JPMorgan. Those defaulted companies, mostly private, have issued around $110 billion worth of high-yield offshore bonds.”
October 11 – Bloomberg (Jacob Gu): “Chinese households remain cautious over the housing outlook despite Beijing’s slew of property easing measures, according to Morgan Stanley. More than 80% of surveyed households remain unwilling to enter the market or unsure about doing so when asked about their property purchase plans, Morgan Stanley said in a… note, citing a recent poll of around 2,000 consumers.”
October 8 – Bloomberg (Alfred Cang): “Executives at one of China’s largest copper trading houses have lost contact with the company’s founder and believe that he has been detained by police for questioning… He Jinbi founded and built Maike Metals International Co. into China’s biggest importer of refined copper before a liquidity crisis last year brought the company to its knees. Colleagues haven’t heard from him for at least a day, and have been informed that he was taken away by police…”
October 12 – Reuters (Ethan Wang, Albee Zhang and Bernard Orr): “The number of births in China tumbled 10% last year to hit their lowest level on record - a drop that comes despite a slew of government efforts to support parents and amid increasing alarm that the country become demographically imbalanced. China had just 9.56 million births in 2022… It was the lowest figure since records began in 1949.”
Global Bubble Watch:
October 11 – Financial Times (Colby Smith and Sam Fleming): “Governments around the world must take more meaningful steps to rein in public spending and raise revenues or risk hindering central banks’ efforts to tame inflation, an IMF official has warned. Vitor Gaspar, head of the fiscal affairs department…, urged policymakers to tighten fiscal policy at a time when it was becoming ‘increasingly difficult for most countries around the world to balance public finances’… ‘Timing matters, and the sooner [this] can be done in many countries the better, from the viewpoint of consistency between monetary and fiscal policy.”
October 10 – New York Times (Alan Rappeport and Patricia Cohen): “The International Monetary Fund said… the pace of the global economic recovery is slowing, a warning that came as a new war in the Middle East threatened to upend a world economy already reeling from several years of overlapping crises. The eruption of fighting between Israel and Hamas over the weekend… reflects how challenging it has become to shield economies from increasingly frequent and unpredictable global shocks. The conflict has cast a cloud over a gathering of top economic policymakers in Morocco for the annual meetings of the I.M.F. and the World Bank. Officials who planned to grapple with the lingering economic effects of the pandemic and Russia’s war in Ukraine now face a new crisis.”
October 11 – Financial Times (Delphine Strauss): “Employment rose to a record high across developed economies in the second quarter despite the growing pressures of high inflation and rising interest rates… The share of the working-age population in employment in the OECD’s 38 member countries rose above 70% for the first time in records going back to 2005… This reflected record highs in more than two-thirds of countries, as well as in the EU and eurozone overall. Workforce participation also rose to its highest level in records stretching back to 2008, among both men and women, with 73.7% of the working-age population either in work or seeking work. Even Italy… registered its best performance yet on both measures, as did France, Germany and Japan.”
October 9 – Financial Times (Akila Quinio): “Demand for office space has slumped further, with vacancies reaching at least 20-year highs in the US and London, as people continue to work from home despite companies’ attempts to get staff back in the office after the height of the Covid-19 pandemic. Vacancy rates have risen to fresh highs and investment in offices fell sharply in the third quarter this year compared with the same period in 2022 in London, New York and San Francisco, according to… CoStar… The sustained slowdown in the office market comes as higher borrowing costs and low occupancy are compressing building valuations…”
Europe Watch:
October 12 – Bloomberg (Stephen Stapczynski, Anna Shiryaevskaya and Ruth Liao): “Mounting threats to gas supply are sending most global fuel prices higher as fear takes hold of the market just ahead of the first signs of winter. Natural gas in Asia and Europe jumped this week, with the latter surging to the highest level in eight months, driven by the Israel-Hamas war, potential strikes at key export plants and infrastructure vulnerabilities, including a leak in a Baltic Sea pipeline where sabotage is suspected. The US stands apart, and price swings there have been much more muted thanks to ample domestic production.”
Japan Watch:
October 11 – Bloomberg (Yoshiaki Nohara): “The pace of gains in Japan’s producer prices decelerated more than expected in September, falling below the latest consumer inflation reading for the first time since early 2021… The measure of input prices for Japanese firms rose 2% from a year earlier, the slowest reading since March 2021… The data compared with economists’ expectations of a 2.4% gain. From the prior month, prices fell 0.3%, versus the consensus for a 0.1% gain.”
October 12 – Reuters (Tetsushi Kajimoto and Takahiko Wada): “There is no pressing need for the Bank of Japan to alter its yield control settings as it has room left for manouevre before the 10-year bond yield hits its ceiling, a central bank board member said… Pursuing a reflationary strategy to boost growth and break free of decades of debilitating deflation, the BOJ operates a yield curve control (YCC) policy, with a -0.1% target for short-term interest rates and 0% for the 10-year bond yield… But, with inflation exceeding its target for more than a year, market speculation is rife that the BOJ could make further adjustments to its tolerance band. Asahi Noguchi, a BOJ board member known for his reflationary stance, poured cold water over such speculation…”
EM Watch:
October 8 – Bloomberg (Selcuk Gokoluk): “Rapidly rising Treasury yields have brought back fears of a potential wave of defaults across emerging markets, with investors questioning which countries struggling with heavy debt loads will miss payments or be forced to restructure first. A total of 21 emerging-market nations have sovereign dollar debt trading near distressed levels, as measured by their sovereign dollar bonds trading around a 1,000 bps premium to Treasuries…”
October 8 – Reuters (Andrea Shalal): “Rising debt levels among ‘seemingly healthy’ countries in Asia could drag growth in the region below currently forecast levels, World Bank Chief Economist Indermit Gill told Reutes… Gill said he remained critical of the slow pace of debt restructurings under the Group of 20 Common Framework for restructuring the debt of the poorest countries… But he said surprisingly high debt levels in Asia were also a concern, noting that increased government borrowing from domestic markets would limit the level of credit available to private firms… ‘We have a simultaneous problems: too much debt and too little investment,’ he said. ‘There’s a lot of government consumption and private consumption being financed through debt. There is not a lot of investment being financed through credit, and that's not great.’”
October 8 – Reuters (Libby George and Sarah Morland): “Some of the world’s poorest countries face budget cuts topping $220 billion over the coming five years due to a debt crisis that has pushed dozens to the brink of default, according to an Oxfam International report… Oxfam’s report… also found that on current terms, low- and lower-middle income countries face nearly half a billion dollars a day in interest and debt repayments through 2029. A record number of developing nations are in debt distress as rising global interest rates, soaring inflation and a series of economic shocks following the COVID-19 pandemic hammer state finances. Ratings agency Fitch said that as of March, there have been 14 separate default events since 2020 across nine different sovereigns.”
Leveraged Speculation Watch:
October 9 – Bloomberg (Katie Greifeld and Emily Graffeo): “Even as stocks rallied back during the monetary panic last week, big disruptions in the world of Treasuries threaten fresh pain for a host of hedging strategies on Wall Street. Benchmark bonds capped their worst weekly selloff of the year Friday, with yields touching the highest in 15 years. For portfolios that rely on the world’s largest bond market to mitigate volatility elsewhere, the selloff has proved particularly troublesome. A Bloomberg gauge of the popular 60/40 model has slumped roughly 6% since the July peak, while the largest risk-parity exchange-traded fund is down 12%.”
October 9 – Financial Times (Costas Mourselas, Harriet Agnew and Laurence Fletcher): “Pelham Capital, once one of the biggest names in London’s equity hedge fund sector, has lost more than three-quarters of its assets in the past three years amid poor performance, investor withdrawals and team departures. Assets at equities specialist Pelham… have dropped from $4.5bn in October 2020 to about $1bn today… The flagship fund was down 11.8% in 2021 and dropped 29% last year… Pelham’s declining fortunes reflect how ‘long/short’ equity hedge funds — a strategy betting on rises or falls in individual stocks — have fallen out of favour with investors.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 11 – Bloomberg (Ben Sharples and Anuradha Raghu): “El Niño has started to cause some concerns in Asia, and it’s a strained rice market that’s facing the first test from the weather phenomenon. The market has already been upended by export restrictions from top shipper India and drier weather from the event threatens to cause more chaos. Any loss of production risks tightening global supply, and could prompt a renewed rally in prices which have cooled recently from the highest in almost 15 years. Across Asia, nations are warning about the impact.”
Geopolitical Watch:
October 11 – Reuters (Anne Kauranen and Benoit Van Overstraeten): “NATO will discuss damage to a gas pipeline and data cable running between member states Finland and Estonia, and will mount a ‘determined’ response if a deliberate attack is proven, NATO Secretary General Jens Stoltenberg said… Damage to the Balticconnector pipeline and telecommunications cable was confirmed on Tuesday… Helsinki, which is investigating, has said the damage was probably caused by ‘outside activity’. That has stoked concern over regional energy security and pushed gas prices higher.”
October 11 – Reuters (Hyonhee Shin): “North Korea leader Kim Jong Un exchanged letters with Russian President Vladimir Putin on Thursday, vowing to advance their ties and wishing him victory over what he called hegemony and pressure from imperialists… The letters mark the 75th anniversary of bilateral relations, and came about a month after Kim's rare trip to Russia during which he and Putin discussed military cooperation, including over North Korea's satellite programme, and the war in Ukraine.”
October 13 – Associated Press (Hyung-Jin Kim): “North Korea lashed out Friday at the arrival of a U.S. aircraft carrier battle group in South Korea, calling it a provocation and again raising the specter of using nuclear weapons to defend itself. Emboldened by its advancing nuclear arsenal, North Korea has increasingly issued threats to use such weapons preemptively.”
October 8 – Reuters (Greg Torode): “A submarine arms race is intensifying as China embarks on production of a new generation of nuclear-armed submarines that for the first time are expected to pose a challenge to growing U.S. and allied efforts to track them. Analysts and regional defence attaches say evidence is mounting that China is on track to have its Type 096 ballistic missile submarine operational before the end of the decade, with breakthroughs in its quietness aided in part by Russian technology.”
The S&P500 added 0.4% (up 12.7% y-t-d), and the Dow increased 0.8% (up 1.6%). The Utilities rallied 3.6% (down 17.7%). The Banks were little changed (down 24.5%), while the Broker/Dealers fell 1.7% (up 5.8%). The Transports dipped 0.7% (up 9.8%). The S&P 400 Midcaps declined 0.5% (up 0.5%), and the small cap Russell 2000 fell 1.5% (down 2.4%). The Nasdaq100 was about unchanged (up 37.1%). The Semiconductors declined 0.6% (up 36.4%). The Biotechs lost 1.5% (down 5.8%). With bullion rallying $100, the HUI gold equities index surged 8.6% (down 2.7%).
Three-month Treasury bill rates ended the week at 5.325%. Two-year government yields slipped three bps this week to 5.05% (up 62bps y-t-d). Five-year T-note yields dropped 12 bps to 4.64% (up 63bps). Ten-year Treasury yields sank 19 bps to 4.61% (up 74bps). Long bond yields dropped 22 bps to 4.75% (up 79bps). Benchmark Fannie Mae MBS yields declined seven bps to 6.49% (up 110bps).
Greek 10-year yields fell nine bps to 4.29% (down 28bps y-t-d). Italian yields dropped 14 bps to 4.78% (up 8bps). Spain's 10-year yields fell 13 bps to 3.88% (up 37bps). German bund yields dropped 15 bps to 2.74% (up 29bps). French yields declined 11 bps to 3.37% (up 39bps). The French to German 10-year bond spread widened four to 63 bps. U.K. 10-year gilt yields dropped 19 bps to 4.39% (up 71bps). U.K.'s FTSE equities index rallied 1.4% (up 2.0% y-t-d).
Japan's Nikkei Equities Index rallied 4.3% (up 23.8% y-t-d). Japanese 10-year "JGB" yields declined four bps to 0.76% (up 34bps y-t-d). France's CAC40 declined 0.8% (up 8.2%). The German DAX equities index slipped 0.3% (up 9.1%). Spain's IBEX 35 equities index was unchanged (up 12.2%). Italy's FTSE MIB index recovered 1.5% (up 19.1%). EM equities were mixed. Brazil's Bovespa index gained 1.4% (up 5.5%), while Mexico's Bolsa index slipped 0.6% (up 1.90%). South Korea's Kospi index rallied 2.0% (up 9.8%). India's Sensex equities index added 0.4% (up 8.9%). China's Shanghai Exchange Index declined 0.7% (unchanged). Turkey's Borsa Istanbul National 100 index sank 4.2% (up 47.3%). Russia's MICEX equities index gained 1.5% (up 48.2%).
Federal Reserve Credit declined $29.8bn last week to $7.915 TN. Fed Credit was down $986bn from the June 22nd, 2022, peak. Over the past 212 weeks, Fed Credit expanded $4.188 TN, or 112%. Fed Credit inflated $5.104 TN, or 182%, over the past 570 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $0.9bn last week to $3.425 TN. "Custody holdings" were up $100bn, or 3.0%, y-o-y.
Total money market fund assets were little changed at $5.706 TN, with a 31-week gain of $813bn (28% annualized). Total money funds were up $1.118 TN, or 24.4%, y-o-y.
Total Commercial Paper rose gained $7.9bn to $1.210 TN. CP was down $46bn, or 3.7%, over the past year.
Freddie Mac 30-year fixed mortgage rates rose bps to 7.63% (up 71bps y-o-y) - the high since November 2000. Fifteen-year rates jumped 12 bps to 7.01% (up 92bps) - the high since December 2000. Five-year hybrid ARM rates gained 13 bps to 7.27% (up 146bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down seven bps to 7.81% (up 64bps).
Currency Watch:
October 12 – Reuters (Selena Li and Summer Zhen): “China has for the first time issued a notice prohibiting domestic brokerages and their overseas units from taking on new mainland clients for offshore trading… New investments by existing mainland clients are also to be ‘strictly monitored’ to prevent investors from bypassing China's foreign exchange controls, said the notice… The actions, which will restrict capital outflows, come as faltering growth for the world's second-largest economy has spurred investment overseas, weighing on the yuan and prompting authorities to ramp up efforts to stabilise the currency.”
For the week, the U.S. Dollar Index increased 0.5% to 106.65 (up 3.0% y-t-d). For the week on the upside, the South African rand increased 1.6%, the Brazilian real 1.3%, the Swiss franc 0.9%, and the Mexican peso 0.4%. On the downside, the New Zealand dollar declined 1.8%, the Australian dollar 1.4%, the British pound 0.8%, the euro 0.7%, the Swedish krona 0.6%, the Singapore dollar 0.3%, the Norwegian krone 0.3%, and the Japanese yen 0.2%. The Chinese (onshore) renminbi declined 0.10% versus the dollar (down 5.56%).
Commodities Watch:
October 8 – Bloomberg (Sybilla Gross): “Gold in China jumped to trade at the second-highest premium on record against the international benchmark, as mainland markets reopened following the Golden Week holiday. The Shanghai spot price was more than $112 an ounce higher than levels seen in London on Monday… The gap between the two markets has only been wider one other time, when Chinese prices last month blew out to trade at a premium of more than $120 over London as Beijing restricted shipments in a move that squeezed the market.”
The Bloomberg Commodities Index rallied 2.6% (down 6.7% y-t-d). Spot Gold surged 5.4% to $1,933 (up 6.0%). Silver jumped 5.2% to $22.72 (down 5.2%). WTI crude rallied $4.83, or 5.8%, to $87.69 (up 9%). Gasoline recovered 3.5% (down 8%), while Natural Gas fell 2.8% to $3.24 (down 28%). Copper dropped 1.7% (down 6%). Wheat gained 1.9% (down 27%), while Corn was little changed (down 26%). Bitcoin dropped $1,055, or 3.8%, to $26,930 (up 63%).
Middle East War Watch:
October 12 – Wall Street Journal (Dion Nissenbaum and Ari Flanzraich): “Israeli infantry and artillery units are digging in along the country’s northern border with Lebanon, reinforcing a stretch of frontier that could become a dangerous second front if Iran-backed Hezbollah militants launch broader attacks. Deadly, but so far sporadic, clashes with Hezbollah have already erupted in the area… If Hezbollah—which is designated a terrorist group by the U.S. and is closely linked to Iran—enters the conflict in a concerted way, it would stretch Israel’s army and strain the country’s air defenses, given Hezbollah’s arsenal of missiles capable of striking Tel Aviv.”
October 12 – Reuters (Henriette Chacar, Nidal Al-Mughrabi and Humeyra Pamuk): “Israel said on Thursday there would be no pause in its siege of the Gaza Strip for aid or evacuations until all its hostages were freed, as Washington urged it to protect civilians and the Red Cross warned of a humanitarian catastrophe in the enclave. U.S. Secretary of State Antony Blinken… told Prime Minister Benjamin Netanyahu that America would always be by Israel's side and give security assistance, but he urged Israel to show restraint ‘even when it’s difficult’.”
October 13 – CNN (Helen Regan, Caitlin Hu, Mohammed Tawfeeq, Akanksha Sharma, Nadeen Ebrahim and Sophie Tanno): “Israel’s military is telling 1.1 million people in northern Gaza to evacuate their homes immediately, as it appears to prepare to ramp up retaliation for Hamas’ October 7 terror attacks. Israeli warplanes continued on Friday to bombard the cramped coastal enclave, which Hamas controls. Civilians in Gaza crammed possessions into cars, taxis and pickup trucks in a mass rush toward the south. Those without other options walked, carrying what they could. Images on social media Friday showed the Israel Defense Forces dropping leaflets from planes telling Gazans to south or risk further danger.”
October 12 – Reuters (Nidal Al-Mughrabi and Jonathan Saul): “An Israeli invasion of Gaza will face an enemy that has built a formidable armoury with Iran's help, dug a vast tunnel network to evade attackers and has shown in past ground wars it can exact a heavier toll on Israeli troops each time. As Israel masses tanks on Gaza's border and ministers suggest the start of an invasion is a matter of when not if, Israel's generals will look to lessons learned from past ground offensives in 2008 and 2014 that also aimed to smash the Palestinian Islamist group Hamas, an Israeli security source and experts said.”
October 12 – Financial Times (Andrew England and Samer Al-Atrush): “As Israelis mourned their dead and struggled to come to terms with the darkest day in the Jewish state’s history, Arab social media was buzzing with variations of its own take on Hamas’s deadly attack: ‘Prison Break’. Across different platforms, posts displayed images ranging from the broken Israeli security barrier that hems in Gaza… to a clenched fist in the colours of the Palestinian flag breaking out of Israeli shackles. The viral posts reflect how many across the Arab world have been ambivalent or openly supportive of the brutal Hamas attack, seizing the moment to express their solidarity with the Palestinian cause.”
October 11 – Wall Street Journal (Warren P. Strobel and Michael R. Gordon): “Tehran likely knew Hamas was planning operations against Israel but didn’t know the precise timing or scope of the surprise attack the group mounted last week, according to a preliminary unclassified assessment by U.S. intelligence agencies. The judgment by the American intelligence community represents an initial effort to determine what role Iran might have played in an attack… The assessment also notes that U.S. intelligence agencies haven’t reached a definitive conclusion and will be looking in coming weeks at whether some in the regime might have had knowledge of what was being planned or helped direct the attacks.”
October 12 – Bloomberg (Dana Khraiche): “Israel fired missiles at Syria’s Damascus and Aleppo airports, putting both out of service…, the first such attack on the country since Hamas attacked Israel at the weekend. Israel carried out simultaneous airstrikes…, targeting the Damascus and Aleppo airports and damaging their runways… Iranian Foreign Minister Hossein Amirabdollahian is set to visit Damascus, part of a tour to Syria, Iraq and Lebanon. Syria said the attacks were part of Israel’s ‘efforts to divert attention from its crimes in Gaza.’”
October 11 – Reuters: “Iranian President Ebrahim Raisi and Saudi Crown Prince Mohammed bin Salman discussed the Palestinian-Israeli conflict on Wednesday, in the first telephone call between the two leaders since a China-brokered deal between Tehran and Riyadh to resume ties. The two leaders' call came as Israel carried out air strikes in the Gaza Strip in retaliation for a deadly attack by Palestinian Hamas militants in Israel. Raisi and the Saudi crown prince discussed the ‘need to end war crimes against Palestine,’ Iranian state media said. The Saudi crown prince… ‘affirmed that the Kingdom is making all possible efforts in communicating with all international and regional parties to stop the ongoing escalation,’ Saudi state news agency SPA said. He also reiterated Saudi Arabia's rejection of targeting civilians in any way…”
Market Instability Watch:
October 8 – Wall Street Journal (Eric Wallerstein): “The autumn bond rout is challenging Wall Street’s longstanding belief that the U.S. government can’t sell too many Treasurys. Ever since the Federal Reserve broke the inflation scare of the 1980s, Wall Street and Washington have shrugged off multitrillion-dollar deficits, counting on America’s global standing to provide perpetual demand for its debt that could finance the spending. Now, the steep declines in prices of Treasurys… are forcing markets to confront the possibility that the rates required to place all this debt will be higher than anyone expected.”
October 11 – Reuters (David Lawder): “The U.S. and China will both need to make major changes to put their medium-term debt and deficit on a sustainable path, International Monetary Fund Fiscal Affairs Director Vitor Gaspar said… Continuing along their projected fiscal paths will ultimately cause difficulties for the world's two largest economies, Gaspar told Reuters... ‘If you look at what is exactly driving the U.S. and China, you would say it’s large and persistent budget deficits on the order of 6% to 7% of GDP throughout the period up to 2028,’ Gaspar said. ‘Growth has slowed and the medium-term prospects are the weakest in some time’ for both countries.”
October 11 – Bloomberg (Rich Miller): “The forces underlying the Treasury debt market are extremely adverse as the US is on an unsustainable fiscal path, a senior International Monetary Fund official said. ‘US deficits are elevated and they’re projected to be persistent,’ said Vitor Gaspar, director of the IMF’s Fiscal Affairs Department. ‘Under unchanged policies, debt dynamics in the US are very unfavorable.’ Yields on Treasury securities have surged in recent weeks to the highest in more than 15 years, partly on concerns about burgeoning budget shortfalls… The US is forecast to post a fiscal deficit of around 6% of gross domestic product this year, even though the economy is expanding and unemployment is low.”
October 10 – Financial Times (Colby Smith and Sam Fleming): “The IMF has urged regulators to sharpen their scrutiny of threats from rising bond yields, as a continuing surge in global borrowing costs triggers ‘heightened risk’ in financial markets. ‘When you see large moves that are very fast, it has more potential to trigger instability, because market participants have to reposition and there are these accelerators in the system that could kick in,’ Tobias Adrian, director of the fund’s monetary and capital markets department told the Financial Times. ‘Hopefully, calm will prevail at some point, but there is certainly heightened risk [now].’”
October 12 – Bloomberg (Michael Tobin): “US speculative-grade companies are facing heightened refinancing and default risks amid higher-for-longer interest rates and limited credit market access, according to Moody’s... Junk-rated firms have $1.87 trillion of debt maturing between 2024 and 2028… That marks a 27% jump from the $1.47 trillion anticipated between 2023 and 2027 in last year’s study, wrote analysts including Botir Sharipov. ‘The increase – reflecting higher maturities for revolving credit facilities, loans and bonds – comes amid weak macroeconomic and credit conditions, raising companies’ refinancing and default risk,’ noted the analysts.”
October 12 – Bloomberg (Alice Atkins and Jenny Surane): “For signs of where the action is in the $7.5 trillion-a-day currency trading market, look no further than Apple Inc.’s balance sheet. The technology giant is sitting on $135 billion in foreign exchange derivatives, some of which are used to hedge against currency fluctuations across its many markets. Alphabet Inc. has about another $60 billion of these contracts… Revenue in corporate currency business at the world’s five biggest banks has jumped about 30% in the past five years, according to data firm Vali Analytics. For the top 50 banks, it’s now accounts on average for more than half of all currency revenue.”
Bubble and Mania Watch:
October 10 – Bloomberg (Ye Xie): “The global government bond market has hit a turning point: junk-rated debt now exceeds top-rated debt for the first time, following Fitch Ratings’ August move to strip the US off its AAA credit grade. Fitch’s downgrade of the $33 trillion US debt to AA+ means only $5 trillion of government debt globally is still rated AAA, leaving it as a smaller group than sub-investment-grade debt… The share of top-rated government bonds have fallen to just 6% of total debt outstanding, from more than 40%.”
October 9 – Wall Street Journal (Konrad Putzier): “America’s highest office vacancies aren’t in the East and West Coast cities that have been shedding population and workers. They are in Texas, a thriving Sunbelt state that has been luring companies away from the big coastal cities. Houston, Dallas and Austin top the list of major U.S. cities with the highest office-vacancy rates, according to Moody’s Analytics. About 25% of their office space wasn’t leased as of the third quarter. That was more than double New York’s vacancy rate of 12% and well above San Francisco’s vacancy rate of 17%.”
October 12 – Bloomberg (Katie Greifeld): “All year, Wall Street pros have been sinking record sums of cash into the world’s largest Treasury ETF in a high-conviction bet that interest rates have peaked. All year they’ve been wrong, with an estimated $10 billion loss — yet that’s not stopping a cohort of dip buyers braving the worst market drawdown in decades. The big reason: Even a modest rebound in long-dated government debt would spark bumper returns.”
October 12 – Bloomberg (John Sage, Ellen Schneider and Paula Seligson): “Private credit managers are quietly providing record loans to existing borrowers seeking small acquisitions, stealthily building the value of their lending portfolios while adding more concentrated risks. So-called add-on transactions are on the rise in the $1.5 trillion private credit market partly because a dramatic decline in large-scale leveraged buyouts has left lenders with excess cash and encouraged private equity firms to pursue smaller deals that can be tucked into existing portfolio companies.”
Banking Crisis Watch:
October 11 – Bloomberg (Shelly Hagan): “The biggest US banks are poised to write off more bad loans than they have since the early days of the pandemic as higher-for-longer interest rates and a potential economic downturn are putting borrowers in a bind. JPMorgan..., Citigroup Inc. and Wells Fargo & Co., which report third-quarter results Friday, will join Bank of America Corp. — which comes Tuesday — in posting roughly $5.3 billion in combined third-quarter net charge-offs, the highest for the group since the second quarter of 2020, according to data compiled by Bloomberg.”
October 8 – Financial Times (Stephen Gandel, Eric Platt, Harriet Clarfelt and Antoine Gara): “Bank of America, Barclays and other large banks that got stuck holding billions of dollars of leveraged loans in 2022 are sitting on the sidelines this year even as the buyout market revives. The group has become more reluctant to lead the financing for riskier buyouts, worried that the loans could get stuck on their balance sheets… Several were burnt last year when they struggled to find investors willing to purchase debt linked to Elon Musk’s purchase of Twitter and other deals for technology company Citrix, television ratings provider Nielsen and auto parts maker Tenneco.”
Ukraine War Watch:
October 12 – New York Times (Matthew Mpoke Bigg): “Since the attacks by Hamas on Israel last weekend, Ukraine has sought to position itself as a friend of Israel, while asserting that Moscow would try to use the conflict to drive a wedge between Ukraine and the countries that support it. Russia, for its part, has said that Israel’s war in Gaza shows the failure of the West and in particular U.S. policy in the region. The trading of accusations illustrates how, nearly two years into Russia’s full-scale invasion of Ukraine, the two countries are seeking to nurture their diplomatic alliances and influence opinion to bolster their respective military causes.”
U.S./Russia/China/Europe Watch:
October 12 – Reuters (Jonathan Landay): “The United States must prepare for possible simultaneous wars with Russia and China by expanding its conventional forces, strengthening alliances and enhancing its nuclear weapons modernization program, a congressionally appointed bipartisan panel said… The report from the Strategic Posture Commission comes amid tensions with China over Taiwan and other issues and worsening frictions with Russia over its invasion of Ukraine… ‘We worry ... there may be ultimate coordination between them in some way, which gets us to this two-war construct,’ the official said on condition of anonymity.”
October 12 – Financial Times (Demetri Sevastopulo): “The US must expand or restructure its nuclear arsenal to tackle the ‘existential challenge’ posed by the growing nuclear threat from China and existing risk from Russia, a new report by a congressionally mandated commission has said. The bipartisan Congressional Commission on the Strategic Posture of the US, which is tasked with examining American strategic policy, warned that Washington was ‘ill-prepared’ to tackle the challenge posed by having two peer nuclear adversaries for the first time. ‘The new global environment is fundamentally different than anything experienced in the past, even in the darkest days of the cold war,’ the panel warned… ‘The US is on the cusp of having not one, but two nuclear peer adversaries, each with ambitions to change the international status quo, by force, if necessary,’ it said.”
De-globalization and Iron Curtain Watch:
October 12 – Financial Times (Gillian Tett): “This week, the world is confronting the horrific human cost of conflict. But as more hellish headlines emerge from the Middle East and Ukraine, economists are also trying to tally the financial cost of this geopolitical fracture. Take the IMF… It has just released its latest World Economic Outlook, with the usual analysis of future trajectories for debt, growth and inflation. One novel feature of this year’s WEO is that the word ‘fragmentation’ is cited no less than 172 times; five years ago it was mentioned just once… ‘The splintering of countries into blocs that trade exclusively with one another… could reduce annual global GDP by up to 7%’… Indeed, in a striking reflection of this slide towards a cold war-style mentality, the IMF’s models of the costs of splintering alliances are based on the voting blocs that emerged in the UN after Russia’s invasion of Ukraine — a world in which China and Russia are allied against the west.”
October 12 – Bloomberg: “Russia’s government is reimposing tougher capital controls over the objections of the central bank…, acting to keep a closer grip on the ruble as Vladimir Putin prepares for presidential elections. The surprise announcement late on Wednesday imposed measures that will extend over the next six months… They will force 43 groups of exporter companies, including the country’s main oil producers, to sell their earnings from sales abroad on the domestic market for rubles to ensure a supply of foreign exchange.”
Inflation Watch:
October 12 – CNBC (Jeff Cox): “Prices that consumers pay for a wide variety of goods and services increased at a slightly faster-than-expected pace in September, keeping inflation in the spotlight for policymakers. The consumer price index… increased 0.4% on the month and 3.7% from a year ago… That compared with respective Dow Jones estimates of 0.3% and 3.6%... Excluding volatile food and energy prices, the so-called core CPI increased 0.3% on the month and 4.1% on a 12-month basis… Core inflation also increased 0.3% in August, when it was up 4.3% from the previous 12 months.”
October 11 – CNBC (Jeff Cox): “A measure of wholesale prices rose more than expected in September, indicating simmering inflation pressures for the U.S. economy. The producer price index… increased 0.5% for the month, against the… estimate for a 0.3% rise… That was less than the 0.7% increase in August. Excluding food and energy, the core PPI was up 0.3%, versus the forecast for 0.2%. Excluding food, energy and trade services, the index rose 0.2%, in line with the estimate.”
October 12 – Yahoo Finance (Dani Romero): “Housing is still propping up inflation more than the Federal Reserve wants. The shelter component of the Consumer Price Index (CPI) — one of the government’s main gauges of inflation — rose 0.6% over the last month and 7.1% on a yearly basis in September. It once again was the largest contributor to the monthly increase in inflation for all items, accounting for more than half of the increase.”
October 11 – Bloomberg (Reade Pickert and Rich Miller): “The rapid descent of US inflation over the last few months is likely too good to last. New upside risks in categories that have played an outsize role in the recent deceleration — like used cars and airfares — are raising the question: Can price pressures in services components like housing slow enough in coming months to sustain the downward trend?”
October 12 – Associated Press (Fatima Hussein): “Millions of Social Security recipients will get a 3.2% increase in their benefits in 2024, far less than this year’s historic boost and reflecting moderating consumer prices. The cost-of-living adjustment, or COLA, means the average recipient will receive more than $50 more every month beginning in January…”
October 11 – Bloomberg (Thomas Buckley): “Walt Disney Co. is raising ticket prices at its Disneyland resort by up to 9% and lifting annual pass prices at Walt Disney World by as much as 10%. The new prices take effect immediately, the company said…”
October 9 – Dow Jones: “A major Wall Street bank is warning about the risk that inflation expectations could become unanchored in a fashion similar to the 1970s stagflation era. Weekend attacks on Israel by Hamas illustrate how geopolitical risks can suddenly return -- adding to the surprise shocks of the current decade, such as the COVID-19 pandemic and Russia's invasion of Ukraine, said macro strategist Henry Allen and research analyst Cassidy Ainsworth-Grace of… Deutsche Bank.”
Biden Administration Watch:
October 11 – Bloomberg (Christopher Condon): “US Treasury Secretary Janet Yellen said the Biden administration hasn’t ruled out new sanctions against Iran in relation to renewed conflict in the Middle East, but no decisions have been made. ‘I wouldn’t take anything off the table in terms of future possible actions, but I certainly don’t want to get ahead of where we are now,’ Yellen said…”
Federal Reserve Watch:
October 11 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials were split over whether they would need to raise interest rates again this year when they decided last month to hold their benchmark policy rate steady. ‘A majority of participants judged that one more increase in the target federal-funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted,’ said the minutes from the Fed’s Sept. 19-20 policy meeting… Officials most recently raised their benchmark federal-funds rate in July to a range between 5.25% and 5.5%, a 22-year high.”
October 10 – Bloomberg (Craig Torres): “Federal Reserve Governor Christopher Waller said the US central bank is determined to bring inflation back to its 2% target... ‘We have reaffirmed this numerical goal repeatedly since 2012, and, in tightening monetary policy since early last year, we’ve made clear that we’re determined to bring inflation down to 2%,’ Waller said… ‘This is why we have taken forceful steps aimed at reducing inflation — and why we will stay on the job to achieve our objective.’”
October 11 – Bloomberg (Amanda Albright): “Federal Reserve Governor Christopher Waller said the US central bank can watch and see what happens before taking further action with interest rates as financial markets tighten. ‘The real side of the economy seems to be doing well. The nominal side is going in the direction we want. So we’re in this position where we kind of watch and see what happens on rates,’ Waller said… ‘Financial markets are tightening up and they are going to do some of the work for us,’ he said…”
October 10 – Reuters (Ann Saphir): “It’s ‘possible’ that the recent rise in yields on longer-term Treasuries means the Federal Reserve need not raise interest rates as much as otherwise, but it’s hard to know definitively, Minneapolis Fed President Neel Kashkari said… ‘It's certainly possible that higher long-term yields may do some of the work for us in terms of bringing inflation back down,’ Kashkari said... ‘But if those higher long-term yields are higher because their expectations about what we're going to do has changed, then we might actually need to follow through in their expectations in order to maintain those yields.’”
October 11 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic said the US central bank doesn’t need to keep raising interest rates unless inflation’s descent starts to stall. ‘Today, I don’t think we need to do anything more in terms of interest rates,’ Bostic said… If inflation stalls out or goes in the other direction, that would be a clear sign we need to do more, he said.”
U.S. Bubble Watch:
October 12 – Reuters (Joseph White, Abhirup Roy and David Shepardson): “The United Auto Workers' (UAW) snap strike on Wednesday at Ford's largest and most profitable factory is raising pressure on Stellantis NV and General Motors as negotiators resumed contract talks on Thursday. UAW negotiators are turning their attention on Thursday to talks with Chrysler-parent Stellantis, union President Shawn Fain said... ‘Here’s to hoping talks at Stellantis today are more productive than Ford yesterday,’ Fain wrote on social media.”
October 8 – New York Times (Noam Scheiber): “The list of gains that the Hollywood writers secured to end a nearly five-month strike with studios once seemed ludicrously ambitious: not just wage increases, but also minimum staffing levels for shows, new royalties on successful series and restrictions on outsourcing… to artificial intelligence. Yet far from an anomaly, the writers’ deal was the latest high-profile labor standoff that seemed to produce substantial gains for workers, and to suggest that they have more leverage than in the past. United Parcel Service employees won large pay increases for part-timers by pushing the company to the brink of a strike, while the lowest-paid academic student employees at the University of California won salary increases of more than 50% after a monthlong strike affected thousands of students.”
October 10 – Reuters (Amina Niasse): “U.S. small business sentiment declined slightly again in September on continued concern over inflation and persistent labor shortages, a survey… showed. The Small Business Optimism Index fell half a point last month to 90.8, according to the National Federation of Independent Business (NFIB)… ‘Owners remain pessimistic about future business conditions, which has contributed to the low optimism they have regarding the economy,’ said Bill Dunkelberg, the NFIB’s chief economist. ‘Sales growth among small businesses has slowed and the bottom line is being squeezed, leaving owners few options beyond raising selling prices for financial relief.’”
October 11 – Bloomberg (Augusta Saraiva): “US mortgage rates advanced last week to the highest level since 2000, keeping a lid on home-buying activity. The contract rate on a 30-year fixed mortgage rose by 14 basis points to 7.67% in the week ended Oct. 6, according to Mortgage Bankers Association data... That marked the fifth straight weekly increase.”
October 9 – Reuters (Howard Schneider): “The richest Americans are emerging from the coronavirus pandemic with their share of wealth and income on the rise again… Recent data from the Federal Reserve shows the top 1% of households by income held roughly 26.5% of household net worth at the end of June, up about 1.5 percentage points since 2019… New estimates from the U.S. Census Bureau, similarly, show the share of income going to the top 5% grew from 2019 through 2022 - to 23.5% from 23% - extending a trend dating from the 1980s that has given the highest earners greater fodder to build even more wealth.”
October 8 – Financial Times (Stephen Gandel and Colby Smith): “A drop in credit card spending is raising concerns about the financial health of the US consumer and the outlook for holiday sales as cardholders face record-high interest charges. The fall in card spending comes as consumers’ finances are being strained by both higher interest rates and debt loads… This debt has been rising in the past year and recently topped $1tn for all Americans for the first time. ‘Credit card spending was soft in September, and what was notable was that softness was across all sectors,’ said Citigroup economist Robert Sockin.”
Fixed Income Watch:
October 11 – Wall Street Journal (Heather Gillers): “Some municipal-bond funds are suffering their worst stretch since the 2008-09 financial crisis, an acute example of how two years of rising interest rates have slammed investors’ portfolios. Closed-end municipal-bond funds have been particularly hard-hit because they often use borrowed money to invest in fixed-rate, long-term bonds sold by state and local governments. The leverage helps boost the returns from debt that is ultrasafe, but pays relatively little interest.”
October 11 – Financial Times (Emma Boyde): “Investment grade corporate bond exchange traded funds suffered their second-highest monthly outflows on record in September, even as investors poured money into the large companies that issued the debt. Analysis from BlackRock shows net outflows of $4.1bn from investment grade credit ETFs… That number has only been exceeded once since BlackRock’s records began, in March 2020 when outflows from investment grade ETFs hit $5.1bn.”
China Watch:
October 8 – Bloomberg: “Chinese consumers traveled and spent less over the Golden Week holiday than the government had hoped, while lukewarm home sales stirred concerns about whether more support will be needed to bolster economic growth… ‘The National Day Golden Week tourism data suggest the services recovery has decelerated but continues,’ economists at Goldman Sachs Group Inc. wrote… ‘We believe additional policy easing will be necessary for further recovery in consumption and services, especially given the continued property downturn and still-dampened confidence.’”
October 8 – Bloomberg: “Tepid data on China home sales during the key vacation season raised doubts over whether Beijing’s steps to prop up the property market are ample to revive the sector this year. In the new-home market, daily sales during the eight-day Golden Week holiday declined 17% from last year, according to data on 35 major cities tracked by China Index Holdings Ltd. Daily sales of existing properties slid 8% over the period, separate data by China Real Estate Information Corp.’s tally on eight major cities showed.”
October 10 – Bloomberg (Pearl Liu and Wei Zhou): “Chinese developer Country Garden Holdings Co. offered the strongest indication yet that it’s set for a maiden default and debt restructuring, in the latest sign that authorities’ rescue efforts are far from enough to stop the nation’s property crisis from worsening. China’s former top builder warned in a stock exchange filing… that it will not be able to meet all of its future offshore payment obligations, including dollar bonds. Such non-payment may lead to relevant creditors demanding acceleration of payment or pursuing enforcement action…”
October 9 – Wall Street Journal (Frances Yoon and Rebecca Feng): “China Evergrande’s 11th-hour cancellation of a restructuring affecting more than $19 billion of its international bonds could lead to a messy collapse and have ‘a catastrophic effect’ on other troubled companies in the sector, its bond investors said… The Chinese property giant abandoned a bond restructuring deal late last month, after spending almost two years in discussions with its investors. Evergrande said regulators had barred it from issuing new securities—a key feature of the restructuring—because its main onshore real estate subsidiary was being investigated.”
October 9 – Financial Times (Thomas Hale): “Advisers to international bondholders in Evergrande, the Chinese property developer that defaulted on its debts in 2021, have warned about a potential liquidation after its restructuring plan was unexpectedly derailed last month. Investors were on the brink of a critical vote on the plan in late September when the developer revealed in a Hong Kong stock exchange filing that it could not proceed, citing domestic regulators and an unspecified investigation into the company.”
October 11 – Reuters (Clare Jim, Xie Yu and Davide Barbuscia): “As more Chinese property developers move towards restructuring billions of dollars of debt, their offshore creditors are expected to face another setback - the prospects of revamp terms being tightened due to a worsening outlook for the county's real estate sector. So far, developers accounting for 40% of Chinese home sales have defaulted on their debt obligations since 2021, according to JPMorgan. Those defaulted companies, mostly private, have issued around $110 billion worth of high-yield offshore bonds.”
October 11 – Bloomberg (Jacob Gu): “Chinese households remain cautious over the housing outlook despite Beijing’s slew of property easing measures, according to Morgan Stanley. More than 80% of surveyed households remain unwilling to enter the market or unsure about doing so when asked about their property purchase plans, Morgan Stanley said in a… note, citing a recent poll of around 2,000 consumers.”
October 8 – Bloomberg (Alfred Cang): “Executives at one of China’s largest copper trading houses have lost contact with the company’s founder and believe that he has been detained by police for questioning… He Jinbi founded and built Maike Metals International Co. into China’s biggest importer of refined copper before a liquidity crisis last year brought the company to its knees. Colleagues haven’t heard from him for at least a day, and have been informed that he was taken away by police…”
October 12 – Reuters (Ethan Wang, Albee Zhang and Bernard Orr): “The number of births in China tumbled 10% last year to hit their lowest level on record - a drop that comes despite a slew of government efforts to support parents and amid increasing alarm that the country become demographically imbalanced. China had just 9.56 million births in 2022… It was the lowest figure since records began in 1949.”
Global Bubble Watch:
October 11 – Financial Times (Colby Smith and Sam Fleming): “Governments around the world must take more meaningful steps to rein in public spending and raise revenues or risk hindering central banks’ efforts to tame inflation, an IMF official has warned. Vitor Gaspar, head of the fiscal affairs department…, urged policymakers to tighten fiscal policy at a time when it was becoming ‘increasingly difficult for most countries around the world to balance public finances’… ‘Timing matters, and the sooner [this] can be done in many countries the better, from the viewpoint of consistency between monetary and fiscal policy.”
October 10 – New York Times (Alan Rappeport and Patricia Cohen): “The International Monetary Fund said… the pace of the global economic recovery is slowing, a warning that came as a new war in the Middle East threatened to upend a world economy already reeling from several years of overlapping crises. The eruption of fighting between Israel and Hamas over the weekend… reflects how challenging it has become to shield economies from increasingly frequent and unpredictable global shocks. The conflict has cast a cloud over a gathering of top economic policymakers in Morocco for the annual meetings of the I.M.F. and the World Bank. Officials who planned to grapple with the lingering economic effects of the pandemic and Russia’s war in Ukraine now face a new crisis.”
October 11 – Financial Times (Delphine Strauss): “Employment rose to a record high across developed economies in the second quarter despite the growing pressures of high inflation and rising interest rates… The share of the working-age population in employment in the OECD’s 38 member countries rose above 70% for the first time in records going back to 2005… This reflected record highs in more than two-thirds of countries, as well as in the EU and eurozone overall. Workforce participation also rose to its highest level in records stretching back to 2008, among both men and women, with 73.7% of the working-age population either in work or seeking work. Even Italy… registered its best performance yet on both measures, as did France, Germany and Japan.”
October 9 – Financial Times (Akila Quinio): “Demand for office space has slumped further, with vacancies reaching at least 20-year highs in the US and London, as people continue to work from home despite companies’ attempts to get staff back in the office after the height of the Covid-19 pandemic. Vacancy rates have risen to fresh highs and investment in offices fell sharply in the third quarter this year compared with the same period in 2022 in London, New York and San Francisco, according to… CoStar… The sustained slowdown in the office market comes as higher borrowing costs and low occupancy are compressing building valuations…”
Europe Watch:
October 12 – Bloomberg (Stephen Stapczynski, Anna Shiryaevskaya and Ruth Liao): “Mounting threats to gas supply are sending most global fuel prices higher as fear takes hold of the market just ahead of the first signs of winter. Natural gas in Asia and Europe jumped this week, with the latter surging to the highest level in eight months, driven by the Israel-Hamas war, potential strikes at key export plants and infrastructure vulnerabilities, including a leak in a Baltic Sea pipeline where sabotage is suspected. The US stands apart, and price swings there have been much more muted thanks to ample domestic production.”
Japan Watch:
October 11 – Bloomberg (Yoshiaki Nohara): “The pace of gains in Japan’s producer prices decelerated more than expected in September, falling below the latest consumer inflation reading for the first time since early 2021… The measure of input prices for Japanese firms rose 2% from a year earlier, the slowest reading since March 2021… The data compared with economists’ expectations of a 2.4% gain. From the prior month, prices fell 0.3%, versus the consensus for a 0.1% gain.”
October 12 – Reuters (Tetsushi Kajimoto and Takahiko Wada): “There is no pressing need for the Bank of Japan to alter its yield control settings as it has room left for manouevre before the 10-year bond yield hits its ceiling, a central bank board member said… Pursuing a reflationary strategy to boost growth and break free of decades of debilitating deflation, the BOJ operates a yield curve control (YCC) policy, with a -0.1% target for short-term interest rates and 0% for the 10-year bond yield… But, with inflation exceeding its target for more than a year, market speculation is rife that the BOJ could make further adjustments to its tolerance band. Asahi Noguchi, a BOJ board member known for his reflationary stance, poured cold water over such speculation…”
EM Watch:
October 8 – Bloomberg (Selcuk Gokoluk): “Rapidly rising Treasury yields have brought back fears of a potential wave of defaults across emerging markets, with investors questioning which countries struggling with heavy debt loads will miss payments or be forced to restructure first. A total of 21 emerging-market nations have sovereign dollar debt trading near distressed levels, as measured by their sovereign dollar bonds trading around a 1,000 bps premium to Treasuries…”
October 8 – Reuters (Andrea Shalal): “Rising debt levels among ‘seemingly healthy’ countries in Asia could drag growth in the region below currently forecast levels, World Bank Chief Economist Indermit Gill told Reutes… Gill said he remained critical of the slow pace of debt restructurings under the Group of 20 Common Framework for restructuring the debt of the poorest countries… But he said surprisingly high debt levels in Asia were also a concern, noting that increased government borrowing from domestic markets would limit the level of credit available to private firms… ‘We have a simultaneous problems: too much debt and too little investment,’ he said. ‘There’s a lot of government consumption and private consumption being financed through debt. There is not a lot of investment being financed through credit, and that's not great.’”
October 8 – Reuters (Libby George and Sarah Morland): “Some of the world’s poorest countries face budget cuts topping $220 billion over the coming five years due to a debt crisis that has pushed dozens to the brink of default, according to an Oxfam International report… Oxfam’s report… also found that on current terms, low- and lower-middle income countries face nearly half a billion dollars a day in interest and debt repayments through 2029. A record number of developing nations are in debt distress as rising global interest rates, soaring inflation and a series of economic shocks following the COVID-19 pandemic hammer state finances. Ratings agency Fitch said that as of March, there have been 14 separate default events since 2020 across nine different sovereigns.”
Leveraged Speculation Watch:
October 9 – Bloomberg (Katie Greifeld and Emily Graffeo): “Even as stocks rallied back during the monetary panic last week, big disruptions in the world of Treasuries threaten fresh pain for a host of hedging strategies on Wall Street. Benchmark bonds capped their worst weekly selloff of the year Friday, with yields touching the highest in 15 years. For portfolios that rely on the world’s largest bond market to mitigate volatility elsewhere, the selloff has proved particularly troublesome. A Bloomberg gauge of the popular 60/40 model has slumped roughly 6% since the July peak, while the largest risk-parity exchange-traded fund is down 12%.”
October 9 – Financial Times (Costas Mourselas, Harriet Agnew and Laurence Fletcher): “Pelham Capital, once one of the biggest names in London’s equity hedge fund sector, has lost more than three-quarters of its assets in the past three years amid poor performance, investor withdrawals and team departures. Assets at equities specialist Pelham… have dropped from $4.5bn in October 2020 to about $1bn today… The flagship fund was down 11.8% in 2021 and dropped 29% last year… Pelham’s declining fortunes reflect how ‘long/short’ equity hedge funds — a strategy betting on rises or falls in individual stocks — have fallen out of favour with investors.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 11 – Bloomberg (Ben Sharples and Anuradha Raghu): “El Niño has started to cause some concerns in Asia, and it’s a strained rice market that’s facing the first test from the weather phenomenon. The market has already been upended by export restrictions from top shipper India and drier weather from the event threatens to cause more chaos. Any loss of production risks tightening global supply, and could prompt a renewed rally in prices which have cooled recently from the highest in almost 15 years. Across Asia, nations are warning about the impact.”
Geopolitical Watch:
October 11 – Reuters (Anne Kauranen and Benoit Van Overstraeten): “NATO will discuss damage to a gas pipeline and data cable running between member states Finland and Estonia, and will mount a ‘determined’ response if a deliberate attack is proven, NATO Secretary General Jens Stoltenberg said… Damage to the Balticconnector pipeline and telecommunications cable was confirmed on Tuesday… Helsinki, which is investigating, has said the damage was probably caused by ‘outside activity’. That has stoked concern over regional energy security and pushed gas prices higher.”
October 11 – Reuters (Hyonhee Shin): “North Korea leader Kim Jong Un exchanged letters with Russian President Vladimir Putin on Thursday, vowing to advance their ties and wishing him victory over what he called hegemony and pressure from imperialists… The letters mark the 75th anniversary of bilateral relations, and came about a month after Kim's rare trip to Russia during which he and Putin discussed military cooperation, including over North Korea's satellite programme, and the war in Ukraine.”
October 13 – Associated Press (Hyung-Jin Kim): “North Korea lashed out Friday at the arrival of a U.S. aircraft carrier battle group in South Korea, calling it a provocation and again raising the specter of using nuclear weapons to defend itself. Emboldened by its advancing nuclear arsenal, North Korea has increasingly issued threats to use such weapons preemptively.”
October 8 – Reuters (Greg Torode): “A submarine arms race is intensifying as China embarks on production of a new generation of nuclear-armed submarines that for the first time are expected to pose a challenge to growing U.S. and allied efforts to track them. Analysts and regional defence attaches say evidence is mounting that China is on track to have its Type 096 ballistic missile submarine operational before the end of the decade, with breakthroughs in its quietness aided in part by Russian technology.”