“But I take the two of them [January and February CPI] together, and I think they haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road toward two percent. I don’t think that story has changed.”
“…The story is really essentially the same, and that is of inflation coming down gradually toward two percent on a sometimes bumpy path.”
“We’ve got nine months of 2-1/2% inflation now, and we’ve had two months of kind of bumpy inflation.”
Powell’s dovish mindset was not limited to the inflation backdrop.
The NYT’s Jeanna Smialek: “But so strong hiring in and of itself would not be a reason to hold off on rate cuts?”
Powell: “No, not all by itself no… You saw last year very strong hiring and inflation coming down quickly. We now have a better sense that a big part of that was supply side healing, particularly with growth in the labor force. So, in and of itself, strong job growth is not a reason for us to be concerned about inflation.”
Powell: “We don’t think that the inflation was not originally caused, we think, I don’t think, by mostly by wages. That wasn’t really the story.”
It’s a challenge to have confidence that Powell and the Fed have a sound understanding of the nature of second round inflation effects.
Markets rallied immediately on Chair Powell’s opening statement. In a passage started verbatim from the January 31st statement, Powell followed, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably down toward 2%,” with the market pleasing, “Of course, we are committed to both sides of our dual mandate, and an unexpected weakening in the labor market could also warrant a policy response.”
With market exuberance running sky high, it’s not the optimal environment for reinforcing the notion of a Fed cocked and ready to unleash easier monetary policy. In a team meeting after the January 31st meeting, I made the comment, “Powell is not that good at this.” He repeatedly made what I viewed as gaffes, providing highly speculative markets pretext for believing Powell was more dovish than he actually was. No more benefit of the doubt.
Powell and the Fed surely recognize the backdrop, yet they continue to deliver the music Bubble markets are eager to dance to: No more rate increases. The path to 2% inflation remains on track. The committee prefers to get going on rate cuts. Ongoing economic growth and tight labor markets are not impediments to easing. And its assessment of the balance of risks has shifted away from inflation to potential labor market weakness.
Markets today are convinced the Fed will respond hastily to fledgling risks, albeit in the financial markets, softening labor or economic weakness. Moreover, no degree of market excess will factor into Fed policy. Market financial conditions matter profoundly to the Fed when they tighten, but hardly matter at all when they’re loose.
There was a telling exchange on Bloomberg Television between the release of the Fed Statement and Powell’s press conference (documented for posterity):
Bloomberg’s Jonathan Ferro: “The biggest risk based on what we know so far? What is the biggest risk? Waiting too long to cut or cutting too soon?
Mohamed El-Erian: “The biggest risk it faces is being overly tight – and pushing this economy into recession when there’s no reason for it to go into recession.”
Ferro: “So, holding too long. How would you define holding too long? Going beyond June? Going later this year?”
El-Erian: “Going later and not doing two to three cuts. Being hawkish. It’s a different Fed. Entering into this inflation shock that they got, they tended always to be on the dovish side. The inflation shock that they got has reminded them of the seventies. And that’s something they do not want to repeat. So, the balance of risk if they are wrong is that they’re too tight rather than too loose.”
Ferro: “You’re all [the panel] making me feel a little uncomfortable, because you all agree with each other… There’s going to be a lot of people watching this that just think, ‘hang on a minute.’ There’s a huge contradiction in all of this. You’ve [the Fed] revised higher inflation. Revised lower unemployment. You’re looking for a faster economy. And your projection for rates stays unchanged. That sounds super dovish – and, I would say, displays a real tolerance for above-target inflation, with equities at all-time highs and Credit spreads very, very tight. Why are we wrong when people come on this program and say, ‘we are sufficiently restrictive.’ In fact, some people come on this program and say significantly so. Where is the evidence of that, based on what we’re seeing this afternoon? Where is the evidence, Mohamed?”
El-Erian: “So, the evidence was given to you earlier by Kathy [Charles Schwab’s Kathy Jones], which is if you just look at one price, which is where the policy rate is relative to where core PCE is, that’s where you get restrictive. But I agree with you, if you look at financial conditions as a whole, these are very loose financial conditions.”
Mohamed El-Erian is one of the preeminent market and economic commentators of this era. Having closely followed his analysis for years, I don’t recall a period where I had such issues with the substance of his views. He is today part of this consensus Wall Street narrative that lacks coherence.
How can one assert that the Fed is “sufficiently restrictive,” when financial conditions remain extraordinarily loose? What is the basis today for stating that the biggest risk is the Fed not cutting rates two or three times this year?
With “everything Bubble” speculative excess at this stage of the cycle posing momentous systemic risk, there’s a notable lack of “straight talk” from the Wall Street punditry. It is today’s most pressing issue, and they’ve had ample time to craft a response. Explanations – from Wall Street and the Fed – why policy is today restrictive are feeble at best.
Axios’ Neil Irwin: “How do you assess the state of financial conditions right now and, in particular, do you view the kind of easing financial conditions since the fall is consistent and compatible with what you’re trying to achieve on the inflation mandate?”
Powell: “So we think there are many different financial conditions indicators, and you can kind of see different answers to that question. But ultimately, we do think that financial conditions are weighing on economic activity, and we think… a great place to see it is in the labor market where you’ve seen demand cooling off a little bit from the extremely high levels, and there I would point to job openings, quits, surveys, the hiring rate, things like that are really demand. There are also supply-side things happening, but I think those are demand side things happening. We saw, that’s been a question for a while, we did see progress on inflation last year, significant progress despite financial conditions sometimes being tighter, sometimes looser.”
Could there be a more telling response? The most pressing issue of the day for the Fed and global central bank community - and subject matter Powell knew would be top of mind at the press conference. Markets going nuts, and that’s the best he’s got: cooling (“a little bit from extremely high levels”) demand for labor? It all just lacks credibility, turning uncomfortably reminiscent of Alan Greenspan’s artful dodging.
Bloomberg: “All-Tolerant Powell Sends Wall Street Bulls Into a Buying Frenzy.” The S&P500 jumped almost 1% on Powell’s press conference, with the Nasdaq100 rising 1.4%. Gold surged $29 in Wednesday trading – and traded first thing Thursday above $2,200 for the first time. Trading below 61,000 early Wednesday, Bitcoin shot to 67,000 on Powell. It’s gone beyond dovish. FT: “Bullish Jay Powell Sticks to Federal Reserve’s Rate-Cutting Script.”
“The story is really essentially the same…” “I don’t think that story has changed.” Powell might as well have said, “That’s our story, and we’re sticking to it.”
Yet the “story” has changed. Since the Fed’s December “dovish pivot,” the S&P500 has jumped 17.2%. The Semiconductor Index surged 25.3%, and the NYSE Arca Computer Technology Index 19.0%. Nvidia has almost doubled (98%), with Meta up 52%, Micron 41%, and Netflix 36%.
Investment-grade spreads (to Treasuries) dropped from 1.04 to 0.88 – outside of a couple of months in 2021, the narrowest since March 2007 (20-year avg. 1.49). High yield spreads collapsed from 3.63 to 2.92 – that, excluding the six months beginning in June 2021, are the narrowest since July 2007 (20-yr avg. 4.93). “The tightest spreads on AA bonds since 2005” and “Single B Spread Index Makes New 16 year Low.”
March 20 – Bloomberg (Michael Gambale): “There are no companies looking to sell debt in the US high-grade bond market on Federal Reserve decision day…, after sales broke $500 billion on Tuesday. Bond sales reached $501 billion, the fastest pace ever, according to… Bloomberg…, well ahead of the $342 billion average over the last five years.”
Gold prices have rallied $185, or 9.4%, since the dovish pivot to $2,165 – trading this week to an all-time high $2,221.
It was a big week for central bank meetings. Notable decisions included the Swiss National Bank’s surprise rate cut, and a dovish pivot by the Bank of England. And finally, for the first time since 2016, there’s a positive policy rate in Japan.
March 19 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan scrapped the world’s last negative interest rate, ending the most aggressive monetary stimulus program in modern history, while also indicating that financial conditions will stay accommodative for now. The bank’s board voted 7-2 to set a new policy rate range of between 0% and 0.1%, shifting from a -0.1% short-term interest rate… The BOJ also scrapped its complex yield curve control program while pledging to continue buying long-term government bonds as needed, and ended purchases of exchange-traded funds.”
It's entertaining to ponder why the Fed has its head stuck in the sand (disregarding loose conditions). Some speculate it might be because of the massive federal debt load and spiraling debt service costs. I tend to believe the Fed is petrified by the specter of repo and money market instability and associated risks of disorderly deleveraging. Could the Fed and global central bank community fear potential ramifications of Bank of Japan monetary policy normalization? Might the Fed be worried by the stress rising Treasury yields and the dollar place on a highly indebted world and levered global bond markets?
Tuesday’s BOJ shift (almost) went off without a hitch. It was one historic nothingburger. A mere 10 bps increase, with talk that a second mini-baby-step might have to wait until this fall. And while the BOJ may have announced the end of yield curve control (YCC), the central bank explicitly stated its bond-buying program would be ongoing. The yen suffered a 1.1% Tuesday smack-down, right back to near 33-year lows.
It wouldn’t be surprising if the Ueda BOJ had waited diffidently for the Fed and global central bank community to have begun pivoting toward policy easing, believing such a backdrop would help mitigate “normalization” risks. They outdid their central bank brethren in waiting way too long to get started.
March 20 – Reuters (Rae Wee and Tom Westbrook): “Japan’s era of negative rates may be over, but some investors are convinced that low rates are not, meaning bets against the yen are back despite the Bank of Japan's first hike in 17 years. While the BOJ move… marked a monumental shift, it stuck to its dovish tones and said it expects to maintain ‘accommodative financial conditions’. That sent traders scurrying back into popular yen 'carry trades', driving an already battered yen yet lower. ‘Japan still remains the lowest interest rate among the G10,’ said Shafali Sachdev… at BNP Paribas Wealth Management. ‘So, with event risk out of the way this is almost seen as an opportunity to re-enter carry positions.’ In a carry trade, an investor borrows in a currency with low interest rates and invests the proceeds in a higher-yielding currency.”
Mini-baby-step rate increases every few months aren’t going to cut it. They won’t anytime soon meaningfully narrow today’s extraordinarily wide – and alluring - interest-rate differentials. Meanwhile, higher for longer Fed policy isn’t offering the battered yen any help either. And I recognize why the BOJ, fearful of a destabilizing spike in JGB yields, would telegraph ongoing bond purchases. But that only ensures liquidity excess and heightened risk of disorderly currency devaluation. It all adds up to a problematic backdrop for the Japanese currency.
Perhaps the Fed was hoping its dovish pivot would take pressure off the likes of the yen, renminbi, and levered EM bond markets. But signaling rates cuts in an environment of such loose financial conditions could easily backfire. For one, loose conditions extend late-cycle “Terminal Phase” excess. Surging asset prices, spending, and investment - with attendant labor tightness and pricing pressures - boost odds of the Fed holding pat through 2024.
A dovish pivot with markets in the throes of a stock market and AI mania is also problematic. At the epicenter of the AI boom, policy promoting Bubble excess benefits the U.S. currency. Similarly, booming U.S. corporate debt markets are a magnet for speculation and global flows – again bolstering the dollar.
I’ve long assumed global government finance Bubble excess would end with turbulent currencies. After all, irresponsible governments and central banks eventually confront global currency market retribution. Unhinged Treasury debt growth, massive Fed monetization, and destabilizing market backstops and interventions put dollar stability at risk. Reckless Beijing-directed Credit growth, banking system ballooning, a historic apartment bubble, and epic structural maladjustment create a perilous backdrop for the renminbi. And Japan’s negligent monetary experiment with negative rates, massive BOJ monetization, and market manipulation risks a yen collapse.
I question whether the BOJ appreciates today’s realities. A refusal to narrow interest-rate differentials while imposing artificially low bond yields is a recipe for currency crisis. And the same week that the yen suffers a 1.6% drop, China’s renminbi posts its largest loss (0.45%) in ten weeks.
March 22 – Bloomberg: “China’s tentative loosening of its vise-like grip on the yuan unleashed a slide in the currency and pulled down its Asian peers along the way. The onshore yuan dropped the most in more than two months after the authorities set a weaker-than-expected daily fixing, fueling speculation they would tolerate further losses.”
For the past two months, Beijing has tightly pegged the renminbi to the dollar. Currency pegs are generally not indicative of underlying strength and stability, and this tight peg succumbed Friday. Busted currency pegs are known to unleash uncertainty and instability. With ongoing massive Credit growth and a banking system increasingly at risk from a deflating apartment Bubble, China’s currency is vulnerable. It would not be surprising to see yen and renminbi fragility feeding off each other, with resulting dollar strength triggering contagious EM currency weakness.
March 20 – Reuters (Roushni Nair): “The Bank of Japan is expected to hike the interest rate in either July or October, though an October hike is considered more likely, as it would give the BOJ around half a year to evaluate the impact, Nikkei newspaper reported… Additional hikes are of course on the table,’ a BOJ source told Nikkei. An October hike would give the BOJ more time to evaluate how ending negative rates affects prices and the economy, the newspaper reported.”
I don’t expect the currency market to grant the BOJ a six-month grace period to figure things out.
To not let this CBB get further out of hand, I’m including a few news excerpts worthy of contemplation (with the briefest of comments).
March 19 – Reuters (Yoruk Bahceli, Nell Mackenzie, Harry Robertson and Dhara Ranasinghe): “Hedge funds are piling into the euro zone's $10 trillion government bond market, scenting opportunities as funding needs surge and the European Central Bank retreats. The funds are buying a large share of government debt sales, providing a source of much-needed capital, traders and officials say. Yet the lightly-regulated investors often load their bets with bank debt, tying their fortunes to lenders… Interviews with more than a dozen sources, including senior traders and treasury officials… show that hedge funds have become increasingly entrenched in the bloc's debt market. Hedge funds accounted for a record 55% of European government bond trading volume on Tradeweb last year, up from 36% in 2020, displacing other financial firms to become the dominant players for the first time… Three traders estimated that hedge funds have been buying between 20% to more than 50% of auctions in some instances. Another trader, who requested anonymity, said hedge funds buy around 35% at auctions on average, up from roughly 20% five years ago.”
Historic leveraged speculation is a global phenomenon, raising the odds of an inevitable global de-risking/deleveraging episode.
March 16 – Financial Times (Kate Duguid): “When hedge fund billionaire Ken Griffin told an industry conference this week that the US bond market was due some discipline, he was voicing the concerns of many investors about the impact of the government’s huge spending and debt issuance plans. US government spending ‘is out of control’, he told the Futures Industry Association’s gathering... ‘And unfortunately, when the sovereign market starts to put the hammer down in terms of discipline, that can be pretty brutal.’ But while there may be good reasons for so-called bond vigilantes — hedge funds and other traders that punish free-spending nations by betting against their debt or simply refusing to buy it — to turn their attention to the Treasury market, analysts say they have so far failed to materialise.”
Drug dealer decrying the lack of enforcement of drug laws.
March 20 – Reuters (Stephen Nellis): “Intel is planning a $100-billion spending spree across four U.S. states to build and expand factories after securing $19.5 billion in federal grants and loans - and hopes to secure another $25 billion in tax breaks. The centerpiece of Intel's five-year spending plan is turning empty fields near Columbus, Ohio, into what CEO Pat Gelsinger described… as ‘the largest AI chip manufacturing site in the world’, starting as soon as 2027… The funds provided by Biden’s plan for a broader chipmaking renaissance will go a long way to help Intel mend its wounded business model.”
Ultra-loose conditions coupled with historic AI/semiconductor/home shoring booms, along with major renewable energy and power grid investment and strong housing construction – and one has the ingredients for economic overheating.
For the Week:
The S&P500 gained 2.3% (up 9.7% y-t-d), and the Dow rose 2.0% (up 4.7%). The Utilities rallied 1.5% (up 1.4%). The Banks surged 3.7% (up 5.9%), and the Broker/Dealers gained 1.8% (up 8.0%). The Transports recovered 3.3% (up 0.7%). The S&P 400 Midcaps rose 2.3% (up 7.5%), and the small cap Russell 2000 gained 1.6% (up 2.2%). The Nasdaq100 advanced 3.0% (up 9.0%). The Semiconductors rallied 3.2% (up 17.5%). The Biotechs increased 1.2% (down 2.8%). While bullion rose $10, the HUI gold index declined 0.9% (down 5.2%).
Three-month Treasury bill rates ended the week at 5.2075%. Two-year government yields fell 14 bps this week to 4.59% (up 34bps y-t-d). Five-year T-note yields dropped 14 bps to 4.18% (up 34bps). Ten-year Treasury yields declined 11 bps to 4.20% (up 32bps). Long bond yields dipped five bps to 4.38% (up 35bps). Benchmark Fannie Mae MBS yields sank 21 bps to 5.61% (up 34bps).
Italian yields declined six bps to 3.64% (down 6 bps y-t-d). Greek 10-year yields fell six bps to 3.36% (up 31bps). Spain's 10-year yields dropped nine bps to 3.16% (up 17bps). German bund yields fell 12 bps to 2.32% (up 30bps). French yields declined eight bps to 2.80% (up 24bps). The French to German 10-year bond spread widened four to 48 bps. U.K. 10-year gilt yields sank 17 bps to 3.93% (up 39bps). U.K.'s FTSE equities index jumped 2.6% (up 2.6% y-t-d).
Japan's Nikkei Equities Index surged 5.6% (up 22.2% y-t-d). Japanese 10-year "JGB" yields declined five bps to 0.74% (up 13bps y-t-d). France's CAC40 slipped 0.2% (up 8.1%). The German DAX equities index rose 1.5% (up 8.7%). Spain's IBEX 35 equities index jumped 3.3% (up 8.3%). Italy's FTSE MIB index gained 1.2% (up 13.2%). EM equities were mixed. Brazil's Bovespa index increased 0.3% (down 5.3%), and Mexico's Bolsa index gained 0.8% (down 1.4%). South Korea's Kospi index rallied 3.1% (up 3.5%). India's Sensex equities index increased 0.3% (up 0.8%). China's Shanghai Exchange Index slipped 0.2% (up 2.5%). Turkey's Borsa Istanbul National 100 index jumped 3.2% (up 22.0%). Russia's MICEX equities index declined 0.8% (up 5.6%).
Federal Reserve Credit declined $12.4bn last week to $7.493 TN. Fed Credit was down $1.396 TN from the June 22nd, 2022, peak. Over the past 236 weeks, Fed Credit expanded $3.767 TN, or 101%. Fed Credit inflated $4.683 TN, or 167%, over the past 593 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $1.7bn last week to $3.349 TN. "Custody holdings" were up $39.9 billion y-o-y, or 1.2%.
Total money market fund assets dropped $61.9bn to $6.046 TN. Money funds were up $1.032 TN, or 20.6%, y-o-y.
Total Commercial Paper surged another $35.9bn to an almost 15-year high $1.329 TN. CP was up $211bn, or 18.9%, over the past year.
Freddie Mac 30-year fixed mortgage rates jumped 13 bps to 6.87% (up 48bps y-o-y). Fifteen-year rates gained five bps to 6.21% (up 59bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up nine bps to 7.19% (up 31bps).
Currency Watch:
March 20 – Bloomberg (Carter Johnson, Anya Andrianova and Naomi Tajitsu): “The yen is at risk of sliding back to three-decade lows against the dollar after the Bank of Japan ended negative interest rates without clear guidance on further hikes — leaving the Federal Reserve the key to near-term moves. The currency continued to slide Wednesday in the wake of the BOJ’s highly anticipated shift, which had minimal impact on the yawning gap between policy rates in Japan and the US. Any narrowing of the gulf looks to be months away, with traders now focused on forecasts from the Fed later in the day for more clues.”
For the week, the U.S. Dollar Index gained 1.0% to 104.43 (up 3.1% y-t-d). For the week on the downside, the Swedish krona declined 1.9%, the Japanese yen 1.6%, the New Zealand dollar 1.5%, the Swiss franc 1.5%, the South African rand 1.4%, the Norwegian krone 1.3%, the British pound 1.1%, the Singapore dollar 0.8%, the euro 0.7%, the Australian dollar 0.7%, the South Korean won 0.6%, the Canadian dollar 0.5%, the Mexican peso 0.3%, and the Brazilian real 0.1%. The Chinese (onshore) renminbi declined 0.45% versus the dollar (down 1.79% y-t-d).
Commodities Watch:
March 15 – Bloomberg: “With China’s deflation at its worst in 15 years, a volatile stock market and bank interest rates too low for her liking, 18-year-old Tina Hong is placing her financial security in gold beans. Weighing as little as one gram, the beans — and other forms of gold jewelry — are increasingly viewed as the safest investment bet for young Chinese in an era of economic uncertainty. It’s part of a larger consumer trend for all things gold — from bullion to beans and bracelets — that has gripped the mainland. ‘It’s basically impossible to lose money from buying gold,’ reasoned Hong, a college freshman studying computer science in Fujian province…”
March 18 – Reuters (Arathy Somasekhar): “U.S. crude oil stockpiles in the Strategic Petroleum Reserve (SPR) at year-end will be at or exceeding the level prior to a massive 180 million barrel sale two years ago, U.S. Energy Secretary Jennifer Granholm said… The U.S. is replenishing the SPR, after President Joe Biden's administration announced a sale of 180 million barrels of oil over six months from the reserve, the largest ever SPR sale, in an attempt to lower gasoline prices after Russia invaded Ukraine.”
March 17 – Bloomberg (Archie Hunter): “The commodity trading industry reaped its second-best year ever in terms of profits, banking over $100 billion and building up a mountain of cash to spend on assets and breaking into new markets. While earnings fell from 2022’s blockbuster records, profits across the sector still easily eclipsed prior highlights such as in 2008-2009, according to analysis from consultancy Oliver Wyman LLC. ‘We saw pretty good margins overall and that is practically because things continue to be a little bit tight on the supply-demand side,’ consultant Adam Perkins said…”
The Bloomberg Commodities Index slipped 0.5% (up 0.1% y-t-d). Spot Gold added 0.4% to $2,165 (up 5.0%). Silver fell 2.0% to $24.67 (up 3.7%). WTI crude dipped 41 cents, or 0.5%, to $80.63 (up 13%). Gasoline added 0.7% (up 30%), and Natural Gas increased 0.2% to $1.66 (down 34%). Copper retreated 2.0% (up 4%). Wheat rallied 5.0% (down 12%), and Corn increased 0.6% (down 7%). Bitcoin sank $6,250, or 9.0%, to $63,350 (up 49%).
Ukraine War Watch:
March 17 – Reuters (Tom Balmforth): “Long-range Ukrainian attack drones launched by the SBU domestic security service have hit 12 Russian oil refineries during the war so far, a Ukrainian intelligence source told Reuters... Officials in the southern Russian region of Krasnodar said Ukrainian drones had attacked the Slavyansk oil refinery, 70km (45 miles) north of the regional capital, overnight. The Ukrainian source said the refinery, which processes about 4.5 million metric tons of crude a year and produces fuel mainly for exports, had been attacked in an operation staged by the SBU security service and other Ukrainian forces.”
March 20 – Bloomberg: “Deadly attacks on Russian regions bordering Ukraine are increasingly bringing home the costs of Vladimir Putin’s invasion. That doesn’t yet mean people are turning on the Russian president over the war. Regions including Belgorod and Kursk have faced drone and missile attacks in recent weeks as Ukraine mounts a campaign targeting infrastructure and industrial facilities including oil installations to try to undermine Russia’s war machine.”
March 18 – Reuters: “The Kremlin said… the only way to protect Russian territory from Ukrainian attacks was to create a buffer zone that would put Russian regions beyond the range of Ukrainian fire. The Kremlin was commenting after President Vladimir Putin raised the possibility of setting up such a zone in a speech after winning re-election on Sunday. In a call with reporters, Kremlin spokesman Dmitry Peskov said: ‘Against the backdrop of (Ukrainian) drone attacks and the shelling of our territory: public facilities, residential buildings, measures must be taken to secure these territories. They can only be secured by creating some kind of buffer zone...’ After winning re-election, Putin said he did not rule out setting up such a buffer zone. ‘I do not exclude that, bearing in mind the tragic events taking place today, that we will be forced at some point, when we deem it appropriate, to create a certain 'sanitary zone' in the territories today under the Kyiv regime,’ Putin said.”
March 21 – Reuters (Olena Harmash and Ivan Lyubysh-Kirdey): “Russia staged its largest missile attack in weeks on Kyiv and the surrounding region on Thursday, injuring at least 17 people and damaging schools, residential buildings and industrial facilities... The air force said its defences shot down all the inbound missiles that were fired after a 44-day pause in such attacks on the Ukrainian capital. ‘Every day and every night there is such terror. The world's unity can stop it when it helps us with air defence systems. Now we need this defence here in Ukraine,’ President Volodymyr Zelenskiy said…”
March 20 – Reuters (Idrees Ali and Phil Stewart): “U.S. Defense Secretary Lloyd Austin… warned that Ukraine's survival was in danger and sought to convince allies that the United States was committed to Kyiv, even as Washington has essentially run out of money to keep arming Ukrainian forces. Republican House of Representatives Speaker Mike Johnson is refusing to call a vote on a bill that would provide $60 billion more for Ukraine and the White House is scrambling to find ways to send assistance to Kyiv, which has been battling Russian forces for more than two years.”
Taiwan Watch:
March 21 – Bloomberg (Jacob Gu): “Chinese fighter jets, unmanned aerial vehicles and other military aircraft have been conducting joint combat patrols around Taiwan since 7:30 pm local time Thursday… People’s Liberation Army aircraft crossed the median line of the Taiwan Strait and entered the island’s self-declared air-defense zone from the north, central and south… In response, Taiwan’s military deployed aircraft, naval vessels and land-based missile systems. Separately, 32 PLA aircraft and 5 naval vessels operating around Taiwan were detected…”
Market Instability Watch:
March 18 – Bloomberg (Alice Atkins): “Betting against volatility has become a profit-minting machine in currency markets. So much so that Wall Street firms say clients are giving up on wagers that go in the opposite direction. That’s a seismic shift in the $7.5 trillion-a-day foreign exchange market. The fluctuations that traders historically used to play with have largely vanished as a new breed of algorithmic traders bet markets will remain calm. To the heads of currency derivatives at Bank of America Corp., NatWest Group Plc and UBS Group AG, it’s creating a cycle that keeps feeding profits to anyone in favor of ever-smaller swings. It’s emblematic of a short-volatility trend reshaping markets from stocks to commodities… Of course, the risk is that the computer-driven funds are wrong and the next market flare up is just around the corner. ‘The emergence and dominance of systematic volatility selling funds is a bit self-fulfilling,’ said Henry Drysdale, head of currency options trading at NatWest Markets... ‘If the strategy is successful, more enter the space and it gets quite crowded, with more and more participants selling volatility at lower and lower levels.’”
March 20 – Financial Times (George Steer): “We’re late to this, but JPMorgan last week published an interesting note that subtly apportions some of the blame for low levels of market volatility on an options fund run by… JPMorgan Asset Management. The bank’s burst of friendly fire comes just a few weeks after the Bank for International Settlements became the latest to flag that the explosion of option-based investment funds may be contributing to the mysterious compression of the Vix, which for months has held below its historical norm. Per JPMorgan’s Marko Kolanovic and team: ‘Call overwriting ETFs have become a large source of volatility supply that has been increasingly weighing on market volatility levels, in our view. These ETFs are suppressing both short-dated implied volatility (via option supply) and realized volatility (as dealers hedge the resulting long gamma positions).’”
March 16 – Bloomberg (Tasos Vossos and Ronan Martin): “Bond fund managers have so much cash they’re turning to the derivatives market to put it to work, pushing down the cost of protection against defaults close to levels that prevailed when central banks were just starting to raise interest rates. The bets on tightening credit-default swap spreads are the latest sign of the overarching optimism that’s enveloped markets, where credit investors flush with cash have been buying up large amounts of new debt and pushing back the so-called maturity wall that was a major source of concern just six months ago… ‘CDX is a liquid way to get credit risk when cash bonds are harder to find,’ said Scott Kimball, CIO at Loop Capital Asset Management. ‘A significant amount of the recent tightening is institutions looking to put more money to work than there are bonds available.’”
March 16 – Financial Times (George Steer): “A closely-watched gauge of stock market sentiment has hit its most extreme level since 2008, as options traders increasingly focus on capturing further gains in soaring indices rather than worrying about a potential sell-off. An almost 25% rise for Wall Street’s benchmark S&P 500 index since the start of November has wrongfooted traders who had expected high interest rates to trigger a recession. Many are now snapping up options tied to the S&P that profit if the market keeps on rising.”
March 21 – Reuters (Davide Barbuscia): “A key bond market signal of an upcoming recession has flashed red continuously for the longest time ever, even if the U.S. economy is far from showing signs of a growth contraction. The part of the Treasury yield curve that plots two-year and 10-year yields has been continuously inverted - meaning that short-term bonds yield more than longer ones - since early July 2022. That exceeds a record 624 day inversion in 1978, Deutsche Bank said…”
March 19 – Bloomberg (Iris Ouyang): “A recent bull run in China’s government bonds is making a comeback after a one-week break, a sign that traders are getting over policymakers’ implicit guidance that the rally has gone too far. The yield on 30-year government bonds slipped for a third straight day to approach the lowest level since 2005…”
Global Credit Bubble Watch:
March 19 – Bloomberg (James Crombie): “Blue-chip US borrowers are having another big day and remain on track to set a first-quarter bond issuance record. The tightest spreads on AA bonds since 2005 and minimal new issue concessions highlight rock-solid demand for yield that will keep the sales spree going.”
March 19 – Financial Times (Josephine Cumbo): “Calpers, the US’s biggest public pension plan, is to increase its holdings in private markets by more than $30bn and reduce its allocation to stock markets and bonds in an effort to improve returns. A proposal to increase the $483bn fund’s positions in assets such as private equity and private credit from 33% of the plan to 40% was approved on Monday… The formal approval comes two years after Calpers admitted that a decision to put its private equity programme on hold for 10 years had cost it up to $18bn in returns.”
March 21 – Reuters (Lisa Lee): “The dangers of private credit firms overvaluing their own assets has become one of the booming $1.7 trillion industry’s most contentious topics in recent weeks. New data on how much money they expect to get back from defaulting borrowers will only add fuel to that fire… Looking at loans to companies that defaulted over the past year, the data shows that those made by private credit firms were valued at an average of 48 cents in the aftermath of the default, showing how much they’d expect to recover on each dollar lent. That’s worse than loans by bank-led syndicates, where the average value was 55 cents a month after default.”
March 20 – Wall Street Journa (Spencer Jakab): “Buying U.S. Treasury bonds used to be cumbersome not to mention pretty boring. Thanks to financial innovation, though, investors don’t have to worry about things like clipping coupons. And they can earn almost Nvidia-like returns if they get the timing of sentiment about Fed rate cuts just right. Retail investors might not be able to whip out a slide rule and calculate Macaulay duration the way a bond geek can, but it is pretty common knowledge that the most bang for your buck comes from owning the longest-dated bonds. Enter TLT, the ticker symbol for BlackRocks iShares 20+ Year Treasury Bond Exchange Traded Fund. The ETFs assets recently ballooned to more than $50 Billion…”
AI Bubble Watch:
March 19 – Reuters (Suzanne McGee): “The fervor around artificial intelligence has sparked a gold rush into AI-themed ETFs, as investors seek fresh ways to play the burgeoning technology following breathtaking rallies in market darlings such as Nvidia. The funds run the gamut from those offering a bouquet of the biggest AI winners to more esoteric themes such as robotics and sound generation. All told, the universe of AI-themed ETFs traded in the United States has soared to $6.88 billion as of the end of February from $2.55 billion a year earlier…”
March 20 – Reuters (Suzanne McGee): “Asset management companies seeking to offer investors still more ways to play the boom in U.S. mega-cap technology stocks are rolling out new exchange-traded funds (ETFs). GraniteShares on Monday launched three new leveraged ETFs designed to generate twice the daily return of Microsoft, Amazon.com, and Advanced Micro Devices. In the 15 months since the firm launched its 2x leveraged Nvidia ETF, its assets have soared to $2 billion.”
March 19 – New York Times (Maureen Farrell and Rob Copeland): “The Middle Eastern country is creating a gigantic fund to invest in A.I. technology, potentially becoming the largest player in the hot market. The government of Saudi Arabia plans to create a fund of about $40 billion to invest in artificial intelligence, according to three people briefed… — the latest sign of the gold rush toward a technology that has already begun reshaping how people live and work.”
Bubble and Mania Watch:
March 22 – Reuters (Roshan Abraham and Siddarth S): “U.S. companies' purchases of domestic equities through more stock buybacks and corporate acquisitions will hit a six-year high of $625 billion this year…, Goldman Sachs said. ‘A surge in share buybacks and continued growth in cash mergers and acquisitions (M&A) will be the primary drivers of corporate equity demand,’ Cormac Conners, U.S. equity strategist at Goldman, said…”
March 21 – Financial Times (Harriet Clarfelt): “A record amount of money has flooded into US corporate bond markets this year, as investors rush to lock in the highest yields in years ahead of an anticipated series of interest rate cuts by the Federal Reserve. Inflows into corporate bond funds have reached $22.8bn so far in 2024, according to fund tracker EPFR, the first positive start to a year since 2019, when $22.4bn had flowed in by this point.”
March 19 – Associated Press (Suzanne McGee): “The average Wall Street bonus fell slightly last year to $176,500, as the industry added employees and took a ‘more cautious approach’ to compensation, New York state’s comptroller reported… The average bonus for employees in New York City’s securities industry was down 2% from $180,000 in 2022. The slight dip came even as Wall Street profits were up 1.8% last year, according to the annual estimate from Thomas DiNapoli, the state’s comptroller.”
March 19 – Bloomberg (Nacha Cattan): “Kat Cohen has been fielding a high volume of calls in recent weeks from desperate parents looking to book SAT tutors for their teenagers at up to $500 an hour. The founder of a test prep and admissions counselor service on Manhattan’s Madison Avenue says tutoring demand has jumped since some of the most selective universities in the nation reversed their four-year hiatus on requiring standardized testing.”
U.S./Russia/China/Europe Watch:
March 18 – Bloomberg: “A defiant Vladimir Putin said Russia won’t be stopped from pursuing its goals after a presidential election whose outcome was pre-determined and which handed him a record level of support. ‘No matter how much anybody wanted to suppress us, our will, our consciousness, nobody in history has ever succeeded, they have not succeeded now and they will never succeed,’ Putin told supporters… All the major ‘and in some areas grandiose plans’ that he set out before the election ‘will certainly be achieved,’ he said.”
March 17 – Reuters (Guy Faulconbridge): “Russian President Vladimir Putin warned the West… that a direct conflict between Russia and the U.S.-led NATO military alliance would mean the planet was one step away from World War Three but said hardly anyone wanted such a scenario. The Ukraine war has triggered the deepest crisis in Moscow's relations with the West since the 1962 Cuban Missile Crisis. Putin has often warned of the risks of nuclear war but says he has never felt the need to use nuclear weapons in Ukraine. French President Emmanuel Macron last month said he could not rule out the deployment of ground troops in Ukraine in the future… Asked by Reuters about the Macron remarks and the risks and possibility of a conflict between Russia and NATO, Putin quipped: ‘everything is possible in the modern world.’”
March 17 – Financial Times (The Editorial Board): “Some 24 years after Vladimir Putin was elected to his first term as Russia’s president in an election that was still broadly free, this weekend’s electoral procession to anoint him to a fifth term is emblematic of how much damage the former KGB man has done inside his country, and beyond. He has squashed political competition at home and brought large-scale war back to the European continent — with the dead or wounded well into six figures. All this is a tragedy, above all, for the peoples of Ukraine, and Russia. But a fifth term for Putin is a threat to Europe, and the world. Not for the first time in Russia’s history, repression at home is running hand in hand with a more belligerent policy abroad. The latest election has been even more of a sham than its predecessors since most real rivals are exiled, imprisoned or dead.”
March 19 – Reuters (Laurie Chen, Yew Lun Tian and Guy Faulconbridge): “Russian President Vladimir Putin will travel to China in May for talks with Xi Jinping, in what could be the Kremlin chief's first overseas trip of his new presidential term, according to five sources… Western governments… condemned Putin's re-election as unfair and undemocratic. But China, India and North Korea congratulated the veteran leader on extending his rule by a further six years, highlighting geopolitical fault lines that have widened since Russia's 2022 invasion of Ukraine.”
De-globalization and Iron Curtain Watch:
March 18 – Reuters (Jack Kim): “U.S. Secretary of State Antony Blinken said… technology should be employed to sustain democratic values in the face of efforts by authoritarian and repressive regimes to deploy technology to undermine democracy and human rights. Like-minded governments and their people were working together to promote free and fair elections, Blinken said, noting safeguarding democracy was a collective effort. ‘As authoritarian and repressive regimes deploy technologies to undermine democracy and human rights, we need to ensure that technology sustains and supports democratic values and norms,’ he said…”
March 19 – Wall Street Journal (Benoit Faucon, Costas Paris and Joe Wallace): “When the U.S. and Europe tried to sever Russia from the Western financial system, Moscow found workarounds. Key among them: banks in the Gulf and Europe that maintained ties with Russia. Now, Washington’s efforts to close these loopholes appear to be paying off. Dubai’s main state-owned bank has shut some accounts held by Russian oligarchs and traders of Russian oil. Turkish lenders are growing wary of handling Russia-related business. The U.S. has also put bankers in Vienna, another important financial hub, on notice… In late December, the White House gave the Treasury Department greater sanctions power, enabling it to penalize foreign banks for dealings involving Russia’s military-industrial base.”
March 15 – Financial Times (Demetri Sevastopulo, James Fontanella-Khan, and Tabby Kinder): “The day after American lawmakers voted overwhelmingly to force the Chinese owner of TikTok to sell the video-sharing app, its chief executive Shou Zi Chew expressed confusion. ‘There’s a lot of noise,’ Chew exclaimed… ‘But I haven’t heard exactly what we’ve done that is wrong.’ It was a strange comment because lawmakers have been explicit about their concerns that a Chinese company, ByteDance, owns what has become the social media site of choice for America’s teens and young adults. The FBI and US intelligence agencies are worried about everything, from China obtaining Americans’ personal data to using the app’s algorithm to help spread disinformation and meddle in US elections.”
Inflation Watch:
March 16 – Bloomberg (Pras Subramanian): “As car prices moderate from a pandemic-era surge, insurance has pushed the cost of car ownership to the brink for many Americans. New data out this week showed auto insurance costs rose 20.6% from the prior year in February, matching January's increase as the most since December 1976, when costs rose 22.4% over the prior year. On an annual basis, motor vehicle insurance costs rose 17.4% in 2023, the most since a 28.7% increase in 1976…”
March 19 – Reuters (Promit Mukherjee and Ismail Shakil): “Canada’s inflation rate surprisingly cooled in February to its slowest pace since June… Annual headline inflation cooled to 2.8% last month, beating analyst expectations for a 3.1% rise, and below 2.9% increase in January. On the month, the consumer price index rose 0.3%... Money markets increased their bets for a first 25 bps rate cut in June to more than 75%, from 50% before the inflation data. The bets for an April rate cut increased to over 28% from 18%...”
March 21 – Associated Press (Seth Borenstein): “Food prices and overall inflation will rise as temperatures climb with climate change, a new study by an environmental scientist and the European Central Bank found. Looking at monthly price tags of food and other goods, temperatures and other climate factors in 121 nations since 1996, researchers calculate that ‘weather and climate shocks’ will cause the cost of food to rise 1.5 to 1.8 percentage points annually within a decade or so, even higher in already hot places…”
Federal Reserve Watch:
March 20 – Reuters (Michael S. Derby): “U.S. Federal Reserve Chair Jerome Powell said… the day is swiftly approaching when the central bank will slow the pace of its balance sheet run-off, and in moving toward a taper of the drawdown, it may allow the central bank to ultimately shed more bonds than it once expected. ‘It will be appropriate to slow the pace of run-off fairly soon,’ Powell said... But he did not offer a specific time frame for the decision, saying only that officials are now debating the issue… In his press conference, Powell said slowing the drawdown from its current pace may allow the central bank to compress the size of its holdings by a greater degree. ‘We may actually be able to get to a lower level because we would avoid the kind of frictions’ that might happen by shedding bonds too quickly, he said.”
Biden Administration Watch:
March 20 – Bloomberg (Ari Natter): “The Biden administration is warning states to be on guard for cyberattacks against water systems, citing ongoing threats from hackers linked to the governments of Iran and China. ‘Disabling cyberattacks are striking water and wastewater systems throughout the United States,’ Environmental Protection Agency Administrator Michael Regan and National Security Advisor Jake Sullivan wrote in a letter to governors... ‘These attacks have the potential to disrupt the critical lifeline of clean and safe drinking water, as well as impose significant costs on affected communities.’ Hackers affiliated with the Iranian Government Islamic Revolutionary Guard Corps have attacked drinking water systems, while a People’s Republic of China state-sponsored group, Volt Typhoon, has compromised information technology of drinking water and other critical infrastructure systems, the letter warned.”
March 21 – CNBC (Kif Leswing and Rohan Goswami): “The Department of Justice sued Apple…, saying its iPhone ecosystem is a monopoly that drove its ‘astronomical valuation’ at the expense of consumers, developers and rival phone makers. The lawsuit claims Apple’s anti-competitive practices extend beyond the iPhone and Apple Watch businesses, citing Apple’s advertising, browser, FaceTime and news offerings. ‘Each step in Apple’s course of conduct built and reinforced the moat around its smartphone monopoly,’ according to the suit, filed by the DOJ and 16 attorneys general...”
March 20 – Axios (Shauneen Miranda): “Millions of older Americans are at risk of losing some of their Social Security benefits after defaulting on student loans, Democratic lawmakers said in a letter urging the Biden administration to act. Why it matters: Seniors are one of the highest risk categories with reports showing nearly 40% of borrowers aged 65 or older in default. Federal programs that claw those funds back mean seniors lose as much as $2,500 in Social Security benefits annually.”
U.S. Bubble Watch:
March 21 – Reuters (Lucia Mutikani): “The U.S. current account deficit narrowed in the fourth quarter to the lowest level in nearly three years amid an increase in secondary income... The… current account deficit, which measures the flow of goods, services and investments into and out of the country, contracted $1.6 billion, or 0.8%, to $194.8 billion last quarter. That was the lowest level since the first quarter of 2021.”
March 21 – Reuters (Lucia Mutikani): “Initial claims for state unemployment benefits dropped 2,000 to a seasonally adjusted 210,000 for the week ended March 16… ‘Companies are not laying off workers and the labor market remains relatively strong,’ said Christopher Rupkey, chief economist at FWDBONDS… ‘And now there are signs of life for existing home sales. This makes easing monetary policy at this juncture more problematic.’”
March 19 – Reuters (Lucia Mutikani): “U.S. single-family homebuilding rebounded sharply in February, hitting the highest level in nearly two years, boosted by mild temperatures and a persistent shortage of previously owned houses on the market. Despite the hurdle created for many first-time buyers by higher mortgage rates, builders are cutting prices and offering other incentives to increase sales. They are also reducing the size of the homes being built to manage higher material costs. The report… also showed permits for the future construction of single-family housing units rose to more than a 1-1/2-year high last month… Single-family housing starts, which account for the bulk of homebuilding, surged 11.6% to a seasonally adjusted annual rate of 1.129 million units last month… That was the highest level since April 2022… Overall housing starts increased 10.7% to a rate of 1.521 million units in February… Overall housing completions soared 19.7% to a rate of 1.729 million units, the highest level since January 2007…”
March 21 – CNBC (Diana Olick): “Sales of existing homes surged 9.5% in February from January to 4.38 million units, on a seasonally adjusted annualized basis… Higher demand continued to push the median price higher, up 5.7% from the year before to $384,500 — the eighth straight month of annual gains. Competition was stiff, with 20% of homes selling above list price… First-time buyers, however, did not surge with overall sales. They represented just 26% of buyers in February, down from 28% in January. Roughly 40% is the historical norm. All-cash sales were at 33%, up from 28% the year before. ‘The stock market, maybe that is helping, or the record-high home prices. People from expensive states like California are going to more affordable markets like Florida or Georgia and paying all cash,’ [NAR’s chief economist Lawrence] Yun said…”
March 19 – Yahoo Finance (Dani Romero): “New homes are a rare bright spot in the housing market right now. Case in point: The SPDR S&P Homebuilders ETF (XHB) is up about 10% so far this year… ‘Right now, 80% of people that have a mortgage on their house are below 5%, which is well below the 6.75% rate that's out there right now,’ Rafe Jadrosich, senior homebuilders analyst at Bank of America Securities, told Yahoo... ‘The disincentive for people to sell their house is very high.’ This has translated to newly built homes playing a much bigger role in housing supply today than is the norm. ‘Historically new homes are about 10% to 15% of the total active listings,’ Jadrosich said. Right now, he said, they compose about 30%.”
March 20 – CNBC (Diana Olick): “Mortgage interest rates rose last week for the first time in three weeks. As a result, total mortgage application volume dropped 1.6% compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index… Applications for a mortgage to purchase a home fell 1% for the week and were 14% lower than the same week one year ago.”
March 18 – Bloomberg (Michael Sasso): “Sentiment among US homebuilders climbed to an eight-month high in March as a limited number of existing homes for sale and mortgage rates that are down from their peak spurred demand. The National Association of Home Builders/Wells Fargo index of housing market conditions increased by 3 points to 51… The median estimate… called for a reading of 48. Builder sentiment has been improving so far this year… A measure of expected sales in the next six months rose to 62, the highest since June. Gauges of prospective buyer traffic and current sales advanced to seven-month highs…”
March 21 – Bloomberg (Davide Barbuscia): “US manufacturing activity expanded by the most since mid-2022 as production and factory employment growth accelerated along with measures of inflation. The S&P Global flash March factory purchasing managers index edged up 0.3 point to 52.5, marking the third straight month above a level of 50 that indicates expansion… ‘The steep jump in prices from the recent low seen in January hints at unwelcome upward pressure on consumer prices in the coming months,’ Chris Williamson, chief business economist at S&P Global Market Intelligence, said… S&P Global’s measure of prices charged by manufacturers climbed to a more than one-year high, while an index of prices received by service providers rose to the highest since July.”
March 18 – Bloomberg (Alex Tanzi): “Americans increasingly doubt they’ll get approved for a loan to buy a car or refinance a mortgage, according to a survey conducted by the Federal Reserve Bank of New York. About a third of respondents expect they’d be rejected to refinance their mortgage in the next year, while the share for auto loans rose to 31.8% — a record in data over the past decade, according to the February survey. Actual rejection rates aren’t that high, but some are rising — crucially at a time when applications for credit broadly are the highest since October 2022, the New York Fed said.”
Fixed Income Watch:
March 19 – Bloomberg (Scott Carpenter): “An obscure investment product used to finance risky real estate projects is facing unprecedented stress as borrowers struggle to repay loans tied to commercial property ventures. Known as commercial real estate collateralized loan obligations, or CRE CLOs, they bundle debt that would usually be seen as too speculative for conventional mortgage-backed securities into bonds of varying risk and return. In just the last seven months the share of troubled assets held by these niche products has surged four-fold, by one measure, to more than 7.4%.”
China Watch:
March 17 – Bloomberg: “Slogans matter in China. From ‘socialism with Chinese characteristics’ to ‘common prosperity’ the adoption of new catchphrases can herald profound shifts in policy. So, when ‘new productive forces’ was listed as the top task in the government’s annual statement of priorities published March 5, it set off a scramble to decode what the elevation of the phrase – coined by President Xi Jinping last September — meant. Since 2014, there’s only been one other occasion where an industrial policy slogan has taken top billing. Typically, that slot has gone to pledges about macroeconomic policy. State media tried to explain how the concept fits in with Karl Marx’s theories on production, while stock investors pounced on the idea that the catchphrase signaled a greater emphasis on the manufacturing of intelligent tools and machines.”
March 21 – Wall Street Journal: “China’s policymakers are growing concerned that intensified monetary policy support has led to excessive liquidity in the banking system that isn’t being funneled into the real economy. Chinese lenders have been flush with cash since early last year when Beijing started to cut banks’ reserve requirements and guide down lending rates to aid the country’s faltering economy. But weak demand for loans from businesses and consumers means vast cash deposits sit idle in banks, eroding the effectiveness of policies meant to stimulate growth... Senior Chinese government officials have in recent months raised alarms over idle funds. Premier Li Qiang warned earlier this month that cash shouldn’t be circulating in the system for no good reason, while China’s top lawmakers noted in November that cash was moving between banks, or between banks and large companies, thus squeezing out funding for smaller enterprises.”
March 21 – Bloomberg: “China’s central bank signaled a potential boost to liquidity for banks while expressing caution on cutting interest rates, after the world’s second-largest economy reported an upbeat start to 2024. There is still room to lower the reserve requirement ratio for banks, which is an important tool to adjust liquidity, People’s Bank of China Deputy Governor Xuan Changneng said... Interest rate policy in the country can become more ‘autonomous’ as deposit rates trend lower and other major global economies move toward easing, he added… ‘China’s monetary policy space is ample and the policy toolbox is abundant,’ Xuan said. ‘Financial support to the economy is still solid.’”
March 22 – Bloomberg: “China’s central government accelerated spending at the start of the year, a sign it’s taking on more financing responsibility to support the economy and to avoid worsening local government debt risks. Its general public expenditure jumped 14% from a year earlier to 482.8 billion yuan ($66.8bn) in January and February combined, the fastest pace for the period in five years…”
March 17 – Wall Street Journal (Jason Douglas): “China’s economy has a new problem: Rising unemployment. Joblessness in China rose for the third straight month… At 5.3%, the official jobless rate is back to where it was in July after increases in December and January reversed almost half a year of steady progress.”
March 19 – Bloomberg (Eric Zhu): “China’s first set of official housing indicators this year are out — and we see little indication the property crunch will end anytime soon… Property sales by floor space tumbled 20.5% year on year in the January-February period, more than a 12.7% drop in December (sales contracted 8.5% for the full year of 2023). Sales tend to pick up in March after the Lunar New Year holidays. That was the case last year, and the strong rebound in spring 2023 means the year-on-year comparisons will become more challenging in coming months. High-frequency data in early March showed sharper falls in sales — likely a taste of what’s to come. Supply-side data also indicated more weakness. After a 20.4% fall in 2023, new home starts plummeted 29.7% from year-earlier levels in January-February, the sharpest drop since June 2023.”
March 18 – Reuters (Liangping Gao and Ryan Woo): “China’s fragile housing market opened this year with slower declines in property investment and sales, buoyed by government efforts to arrest a protracted downturn in the sector, however, analysts were wary of calling an end to the downturn just yet. Property investment in China fell 9.0% year-on-year in the first two months of 2024, compared with a 24.0% fall in December 2023…”
March 18 – Reuters (Ellen Zhang and Joe Cash): “China's factory output and retail sales beat expectations in the January-February period, marking a solid start for 2024 and offering some relief to policymakers even as weakness in the property sector remains a drag on the economy and confidence… Industrial output rose 7.0% in the first two months of the year…, above expectations for a 5.0% increase… Retail sales, a gauge of consumption, rose 5.5%, slowing from a 7.4% increase in December but beating an expected 5.2% gain.”
March 20 – Bloomberg: “Chinese developer Radiance Holdings Group Co. defaulted on a $300 million bond after it missed a payment due Wednesday, dealing a shock to investors who bet on a timely repayment over the past few days.”
March 21 – Wall Street Journal (Elaine Yu and Selina Cheng): “As China wraps its authoritarian rule more tightly around this once-boisterous metropolis, no corner of society has been left untouched. Bookstores are closing, shows have been canceled and opposition to the government—once a rallying force—is now mostly whispered between friends behind closed doors. The massive crowds that took to the streets to demand democracy in 2019 are long gone, but the government’s effort to quell dissent in the name of national security has marched on. The latest installment is a law coming into effect Saturday that mandates tougher sentences for offenses such as sedition and creates new crimes around state secrets and foreign interference. The law… has sparked debates over whether people could get into trouble for transgressions as minor as having old copies of pro-democracy newspapers lying around at home.”
March 18 – CNN (Chris Lau): “Hong Kong’s legislature unanimously passed sweeping new powers… that critics and analysts warned would align the financial hub’s national security laws more closely with those used on the Chinese mainland and deepen an ongoing crackdown on dissent. The lengthy national security bill – the first draft ran to 212 pages – was rushed through the city’s opposition-less Legislative Council with unusual haste at the request of city leader John Lee and debated over just 11 days. Coming into effect on Saturday, the law introduces 39 new national security crimes, adding to an already powerful national security law that was directly imposed by Beijing on Hong Kong in 2020 after huge and sometimes violent pro-democracy protests the year before.”
Global Bubble Watch:
March 20 – Bloomberg (Swati Pandey): “Australian employment soared last month and the jobless rate declined, highlighting the ongoing resilience of the nation’s labor market to restrictive monetary policy. Traders pared back expectations for an August interest-rate cut after… data… showed the economy added 116,500 roles, almost three times the 40,000 gain forecast. Unemployment fell to 3.7% in February from 4.1% in the prior month.”
Central Banker Watch:
March 19 – Financial Times (Valentina Romei): “Central bankers are increasingly confident that inflation can be vanquished without driving up unemployment sharply, as economists forecast ‘immaculate disinflation’. Analysts polled by Consensus Economics see inflation easing from multi-decade highs to about 2% this year in most advanced economies including the US, Germany, France, UK, Italy and eurozone. Victories over inflation have traditionally come at a heavy cost, as harsh monetary policy measures lead economies into recession and push up jobless rates. UK and US unemployment rates doubled in the 1980s as borrowing costs rose to tackle high inflation triggered by oil price shocks. But this inflationary cycle is seen as taking a different course. Michael Saunders, economist at Oxford Economics, noted that inflation was forecast to return to target with only a limited increase in unemployment in the US and eurozone. ‘Immaculate disinflation, whereby inflation returns sustainably to target without a significant rise in unemployment, has become the base case,’ he said.”
March 20 – Bloomberg (Tom Rees and Irina Anghel): “The Bank of England took another step toward cutting interest rates in the coming months after two of its most ardent hawks dropped their demands for hikes. Catherine Mann and Jonathan Haskel joined an 8-1 majority on the Monetary Policy Committee to keep rates at a 16-year high of 5.25%, the latest sign that the BOE was edging toward easing policy later this year… In a further signal that the bank was setting the stage for a shift, the minutes contained new language recognizing that policy might remain restrictive, even if rates were cut.”
March 18 – Bloomberg (Swati Pandey): “Australia’s central bank signaled it’s done tightening monetary policy after leaving interest rates at a 12-year high, sparking a selloff in the currency and a rally in bonds. The Reserve Bank held its cash rate at 4.35% for a third straight meeting on Tuesday and scrapped any reference to possible further increases.”
March 21 – Reuters (John Revill): “The Swiss National Bank cut its main interest rate by 25 bps to 1.50%..., a surprise move which made it the first major central bank to dial back tighter monetary policy aimed at tackling inflation. The central bank… also cut its interest rate on sight deposits to 1.50%. The SNB's decision, its first rate cut in nine years, kicked off a busy day for central banks in Europe, with the Bank of England and Norwegian central bank also announcing their latest policy decisions.”
March 20 – Financial Times (Martin Arnold): “Christine Lagarde has said the European Central Bank will be unable to commit to a particular path of interest rate cuts once it starts to ease monetary policy… The ECB president’s comments indicate that even if it starts to cut borrowing costs in June… it is likely to keep markets guessing on the timing and scale of potential rate cuts. Lagarde told a conference of ECB watchers… that continued high wage growth and weak productivity in the eurozone meant services inflation was expected ‘to remain elevated for most of this year’. This meant it would need to continue checking that ‘incoming data supports our inflation outlook’, she said.”
Europe Watch:
March 21 – Wall Street Journal (Joshua Kirby): “The eurozone is edging closer to a rebound in private-sector activity despite continued weakness in the bloc’s manufacturing sector… The HCOB Flash Eurozone Composite PMI Output Index—a gauge of activity in the manufacturing and services sectors across the 20 nations that use the euro—rose to 49.9 in March from 49.2 in February, just shy of the 50 reading that marks the hinge between contraction and expansion.”
March 20 – Bloomberg (Andrew Langley): “Euro-area consumer confidence improved a little in March to reach its highest level since February 2022, signaling a slow recovery for the struggling 20-nation economy. The reading of -14.9 — up from -15.5 in February — compares with a median estimate of -15 in a Bloomberg survey of economists. The European Commission said in a statement that ‘consumer confidence still scores well below long-term average.’”
Japan Watch:
March 19 – Wall Street Journal (Peter Landers and Megumi Fujikawa): “The world’s nearly 12-year experiment with negative interest rates is over now that the last holdout, the Bank of Japan, has moved its key policy rate back to at least zero. Of the many unusual measures central bankers took over the past decade and a half, among the most controversial, with uncertain benefits and potential risks, were negative interest rates, when depositors pay to store money at a bank instead of being paid. The experiment’s bottom line: Negative rates weren’t enough by themselves to pull economies out of a funk or lift inflation toward central banks’ 2% targets. It took the Covid-19 pandemic and war in Ukraine to accomplish that.”
March 19 – Bloomberg (Masaki Kondo, Yasufumi Saito and Ruth Carson): “The Bank of Japan finally ended an eight-year experiment with negative interest rates that has left more than $4 trillion in funds hunting for higher returns abroad. What comes next threatens to shake up money flows in Japan and across the world. One of the biggest questions is what happens to that big ball of money stashed overseas in assets including US government bonds, European power stations and Singapore equities.”
March 20 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Bank of Japan Governor Kazuo Ueda on Thursday vowed to keep supporting the economy with ultra-loose monetary policy but signalled confidence inflation was gaining momentum, as markets look for clues on the next interest rate hike timing. He also said the central bank would eventually scale back its huge balance sheet, signalling that the BOJ would move slowly but steadily towards normalising monetary policy… ‘As we exit our massive stimulus programme, we will gradually shrink the size of our balance sheet and at some point reduce the size of our government bond buying,’ Ueda said.”
March 20 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Kazuo Ueda said the central bank scrapped its massive easing program this week partly to avoid the need for aggressive action later, a comment that may help market players judge his next moves… ‘The possibility would have strengthened for very rapid and large rate hikes after the end of large-scale monetary easing,’ Ueda said. ‘We made our decision after weighing those risks.’”
March 20 – Reuters (Tetsushi Kajimoto): “Japan's exports grew for a third straight month in February demand improved in the U.S., China and the European Union… Exports rose 7.8% in February from the same month a year ago…, faster than the 5.3% gain expected by economists…”
Emerging Market Watch:
March 21 – Reuters (Ezgi Erkoyun and Daren Butler): “Turkey's central bank unexpectedly hiked interest rates by 500 bps to 50% on Thursday, citing a deteriorating inflation outlook and pledging to tighten even further if it expects the price situation to worsen significantly. The hawkish surprise came 10 days before nationwide local elections and was seen by analysts as a signal that the central bank was independent from any political constraints, and determined to tackle inflation that is soaring toward 70%.”
Leveraged Speculation Watch:
March 18 – Financial Times (Kate Duguid and Stefania Palma): “Three hedge fund industry groups are suing the US Securities and Exchange Commission over new rules for the $27tn Treasury market, arguing the measures will unfairly subject their members to regulation as ‘dealers’. The lawsuit… takes aim at a requirement for more large traders to register with the SEC as dealers in the US government bond market, or firms that regularly provide liquidity. Dealer status requires holding additional capital and reporting more trades in the market. The hedge fund groups said the SEC lacked legal authority to adopt its dealer definition and was engaged in ‘arbitrary and capricious decision making’ by failing to consider the economic consequences of its action.”
Social, Political, Environmental, Cybersecurity Instability Watch:
March 20 – Reuters (Emma Farge): “Every major global climate record was broken last year and 2024 could be worse, the World Meteorological Organization (WMO) said…, with its chief voicing particular concern about ocean heat and shrinking sea ice. The U.N. weather agency said in its annual State of the Global Climate report that average temperatures hit the highest level in 174 years of record-keeping by a clear margin, reaching 1.45 degrees Celsius above pre-industrial levels. Ocean temperatures also reached the warmest in 65 years of data with over 90% of the seas having experienced heatwave conditions during the year… ‘The WMO community is sounding the Red Alert to the world,’ said WMO Secretary-General Celeste Saulo… ‘What we witnessed in 2023, especially with the unprecedented ocean warmth, glacier retreat and Antarctic sea ice loss, is cause for particular concern.’
March 17 – Financial Times (Jana Tauschinski and Emiliya Mychasuk): “Oceans marked 365 straight days of record-breaking global sea surface temperatures this week, fuelling concerns among international scientists that climate change could push marine ecosystems beyond a tipping point. The consistent climb in temperatures reached a peak on Wednesday when the new all-time high was set for the past 12 months, at 21.2C. The world’s seas have yet to show any signs of dropping to typical, seasonal temperatures, with daily records consecutively broken since they first went off the charts in mid-March last year, according to… the US National Atmospheric and Oceanic Administration and the Climate Reanalyzer research collaboration.”
March 16 – Bloomberg (Naureen S Malik): “More than 7,000 people are headed to Houston next week to attend CERAWeek by S&P Global with a key question in mind: How to meet increasing demand for power amid the transition to clean energy. Daniel Yergin, vice chairman of S&P Global, offers a window into that future… ‘The surge in electricity demand that’s coming with aspects of the energy transition, and not only the energy transition but data centers, AI. Is the capacity going to be there? That used to be a developing world question. Now it’s also a developed world question. It’s the capacity to move electricity from where it’s generated to where it’s needed, but also inflation and supply chain issues have affected some of the rollout of renewables even though the scale continues to grow. We saw last year coal consumption increased globally. A big question is the role of natural gas in terms of a complement to wind and solar.’”
March 18 – Bloomberg (Naureen S. Malik): “The biggest US wind and solar farm developer expects the growth rate of the demand for electricity to soar to keep up with artificial intelligence, electrification, cloud capacity and chip factories. ‘What you have today is electric demand that has been relatively flat for years now all of the sudden looking at an 81% increase’ in the growth rate forecast over the next five years, John Ketchum, chief executive officer of renewables giant NextEra Energy Inc., said… About a year ago, the US Energy Information Administration estimated the annual growth rate in electricity demand at less than 1% in its long-term annual outlook. NextEra’s estimate would accelerate that to about 1.8%. The sharp increase in growth rate risks adding further stress to power grids already strained by extreme temperatures and the effects of climate change.”
Geopolitical Watch:
March 18 – Bloomberg (Cliff Venzon): “Philippines President Ferdinand Marcos Jr. said the threat to his nation from China’s sweeping claims in the South China Sea is growing but argued that his government’s efforts to assert sovereignty over disputed areas aren’t meant to start a conflict by ‘poking the bear.’ ‘We are trying to keep things on an even keel,’ Marcos said… The challenge, he added, is that ‘since the threat has grown, we must do more to defend our territory.’ Along with Taiwan, the standoff between the Philippines and China over a series of contested reefs and islands has become a critical flashpoint in the region.”
March 21 – Reuters (Giulia Paravicini, Jonathan Saul and Abdiqani Hassan): “As a speed boat carrying more than a dozen Somali pirates bore down on their position in the western Indian Ocean, the crew of a Bangladeshi-owned bulk carrier sent out a distress signal and called an emergency hotline. No one reached them in time. The pirates clambered aboard the Abdullah, firing warning shots and taking the captain and second officer hostage… A week later, the Abdullah is anchored off the coast of Somalia, the latest victim of a resurgence of piracy that international navies thought they had brought under control. The raids are piling risks and costs onto shipping companies also contending with repeated drone and missile strikes by Yemen's Houthi militia...”
The S&P500 gained 2.3% (up 9.7% y-t-d), and the Dow rose 2.0% (up 4.7%). The Utilities rallied 1.5% (up 1.4%). The Banks surged 3.7% (up 5.9%), and the Broker/Dealers gained 1.8% (up 8.0%). The Transports recovered 3.3% (up 0.7%). The S&P 400 Midcaps rose 2.3% (up 7.5%), and the small cap Russell 2000 gained 1.6% (up 2.2%). The Nasdaq100 advanced 3.0% (up 9.0%). The Semiconductors rallied 3.2% (up 17.5%). The Biotechs increased 1.2% (down 2.8%). While bullion rose $10, the HUI gold index declined 0.9% (down 5.2%).
Three-month Treasury bill rates ended the week at 5.2075%. Two-year government yields fell 14 bps this week to 4.59% (up 34bps y-t-d). Five-year T-note yields dropped 14 bps to 4.18% (up 34bps). Ten-year Treasury yields declined 11 bps to 4.20% (up 32bps). Long bond yields dipped five bps to 4.38% (up 35bps). Benchmark Fannie Mae MBS yields sank 21 bps to 5.61% (up 34bps).
Italian yields declined six bps to 3.64% (down 6 bps y-t-d). Greek 10-year yields fell six bps to 3.36% (up 31bps). Spain's 10-year yields dropped nine bps to 3.16% (up 17bps). German bund yields fell 12 bps to 2.32% (up 30bps). French yields declined eight bps to 2.80% (up 24bps). The French to German 10-year bond spread widened four to 48 bps. U.K. 10-year gilt yields sank 17 bps to 3.93% (up 39bps). U.K.'s FTSE equities index jumped 2.6% (up 2.6% y-t-d).
Japan's Nikkei Equities Index surged 5.6% (up 22.2% y-t-d). Japanese 10-year "JGB" yields declined five bps to 0.74% (up 13bps y-t-d). France's CAC40 slipped 0.2% (up 8.1%). The German DAX equities index rose 1.5% (up 8.7%). Spain's IBEX 35 equities index jumped 3.3% (up 8.3%). Italy's FTSE MIB index gained 1.2% (up 13.2%). EM equities were mixed. Brazil's Bovespa index increased 0.3% (down 5.3%), and Mexico's Bolsa index gained 0.8% (down 1.4%). South Korea's Kospi index rallied 3.1% (up 3.5%). India's Sensex equities index increased 0.3% (up 0.8%). China's Shanghai Exchange Index slipped 0.2% (up 2.5%). Turkey's Borsa Istanbul National 100 index jumped 3.2% (up 22.0%). Russia's MICEX equities index declined 0.8% (up 5.6%).
Federal Reserve Credit declined $12.4bn last week to $7.493 TN. Fed Credit was down $1.396 TN from the June 22nd, 2022, peak. Over the past 236 weeks, Fed Credit expanded $3.767 TN, or 101%. Fed Credit inflated $4.683 TN, or 167%, over the past 593 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $1.7bn last week to $3.349 TN. "Custody holdings" were up $39.9 billion y-o-y, or 1.2%.
Total money market fund assets dropped $61.9bn to $6.046 TN. Money funds were up $1.032 TN, or 20.6%, y-o-y.
Total Commercial Paper surged another $35.9bn to an almost 15-year high $1.329 TN. CP was up $211bn, or 18.9%, over the past year.
Freddie Mac 30-year fixed mortgage rates jumped 13 bps to 6.87% (up 48bps y-o-y). Fifteen-year rates gained five bps to 6.21% (up 59bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up nine bps to 7.19% (up 31bps).
Currency Watch:
March 20 – Bloomberg (Carter Johnson, Anya Andrianova and Naomi Tajitsu): “The yen is at risk of sliding back to three-decade lows against the dollar after the Bank of Japan ended negative interest rates without clear guidance on further hikes — leaving the Federal Reserve the key to near-term moves. The currency continued to slide Wednesday in the wake of the BOJ’s highly anticipated shift, which had minimal impact on the yawning gap between policy rates in Japan and the US. Any narrowing of the gulf looks to be months away, with traders now focused on forecasts from the Fed later in the day for more clues.”
For the week, the U.S. Dollar Index gained 1.0% to 104.43 (up 3.1% y-t-d). For the week on the downside, the Swedish krona declined 1.9%, the Japanese yen 1.6%, the New Zealand dollar 1.5%, the Swiss franc 1.5%, the South African rand 1.4%, the Norwegian krone 1.3%, the British pound 1.1%, the Singapore dollar 0.8%, the euro 0.7%, the Australian dollar 0.7%, the South Korean won 0.6%, the Canadian dollar 0.5%, the Mexican peso 0.3%, and the Brazilian real 0.1%. The Chinese (onshore) renminbi declined 0.45% versus the dollar (down 1.79% y-t-d).
Commodities Watch:
March 15 – Bloomberg: “With China’s deflation at its worst in 15 years, a volatile stock market and bank interest rates too low for her liking, 18-year-old Tina Hong is placing her financial security in gold beans. Weighing as little as one gram, the beans — and other forms of gold jewelry — are increasingly viewed as the safest investment bet for young Chinese in an era of economic uncertainty. It’s part of a larger consumer trend for all things gold — from bullion to beans and bracelets — that has gripped the mainland. ‘It’s basically impossible to lose money from buying gold,’ reasoned Hong, a college freshman studying computer science in Fujian province…”
March 18 – Reuters (Arathy Somasekhar): “U.S. crude oil stockpiles in the Strategic Petroleum Reserve (SPR) at year-end will be at or exceeding the level prior to a massive 180 million barrel sale two years ago, U.S. Energy Secretary Jennifer Granholm said… The U.S. is replenishing the SPR, after President Joe Biden's administration announced a sale of 180 million barrels of oil over six months from the reserve, the largest ever SPR sale, in an attempt to lower gasoline prices after Russia invaded Ukraine.”
March 17 – Bloomberg (Archie Hunter): “The commodity trading industry reaped its second-best year ever in terms of profits, banking over $100 billion and building up a mountain of cash to spend on assets and breaking into new markets. While earnings fell from 2022’s blockbuster records, profits across the sector still easily eclipsed prior highlights such as in 2008-2009, according to analysis from consultancy Oliver Wyman LLC. ‘We saw pretty good margins overall and that is practically because things continue to be a little bit tight on the supply-demand side,’ consultant Adam Perkins said…”
The Bloomberg Commodities Index slipped 0.5% (up 0.1% y-t-d). Spot Gold added 0.4% to $2,165 (up 5.0%). Silver fell 2.0% to $24.67 (up 3.7%). WTI crude dipped 41 cents, or 0.5%, to $80.63 (up 13%). Gasoline added 0.7% (up 30%), and Natural Gas increased 0.2% to $1.66 (down 34%). Copper retreated 2.0% (up 4%). Wheat rallied 5.0% (down 12%), and Corn increased 0.6% (down 7%). Bitcoin sank $6,250, or 9.0%, to $63,350 (up 49%).
Ukraine War Watch:
March 17 – Reuters (Tom Balmforth): “Long-range Ukrainian attack drones launched by the SBU domestic security service have hit 12 Russian oil refineries during the war so far, a Ukrainian intelligence source told Reuters... Officials in the southern Russian region of Krasnodar said Ukrainian drones had attacked the Slavyansk oil refinery, 70km (45 miles) north of the regional capital, overnight. The Ukrainian source said the refinery, which processes about 4.5 million metric tons of crude a year and produces fuel mainly for exports, had been attacked in an operation staged by the SBU security service and other Ukrainian forces.”
March 20 – Bloomberg: “Deadly attacks on Russian regions bordering Ukraine are increasingly bringing home the costs of Vladimir Putin’s invasion. That doesn’t yet mean people are turning on the Russian president over the war. Regions including Belgorod and Kursk have faced drone and missile attacks in recent weeks as Ukraine mounts a campaign targeting infrastructure and industrial facilities including oil installations to try to undermine Russia’s war machine.”
March 18 – Reuters: “The Kremlin said… the only way to protect Russian territory from Ukrainian attacks was to create a buffer zone that would put Russian regions beyond the range of Ukrainian fire. The Kremlin was commenting after President Vladimir Putin raised the possibility of setting up such a zone in a speech after winning re-election on Sunday. In a call with reporters, Kremlin spokesman Dmitry Peskov said: ‘Against the backdrop of (Ukrainian) drone attacks and the shelling of our territory: public facilities, residential buildings, measures must be taken to secure these territories. They can only be secured by creating some kind of buffer zone...’ After winning re-election, Putin said he did not rule out setting up such a buffer zone. ‘I do not exclude that, bearing in mind the tragic events taking place today, that we will be forced at some point, when we deem it appropriate, to create a certain 'sanitary zone' in the territories today under the Kyiv regime,’ Putin said.”
March 21 – Reuters (Olena Harmash and Ivan Lyubysh-Kirdey): “Russia staged its largest missile attack in weeks on Kyiv and the surrounding region on Thursday, injuring at least 17 people and damaging schools, residential buildings and industrial facilities... The air force said its defences shot down all the inbound missiles that were fired after a 44-day pause in such attacks on the Ukrainian capital. ‘Every day and every night there is such terror. The world's unity can stop it when it helps us with air defence systems. Now we need this defence here in Ukraine,’ President Volodymyr Zelenskiy said…”
March 20 – Reuters (Idrees Ali and Phil Stewart): “U.S. Defense Secretary Lloyd Austin… warned that Ukraine's survival was in danger and sought to convince allies that the United States was committed to Kyiv, even as Washington has essentially run out of money to keep arming Ukrainian forces. Republican House of Representatives Speaker Mike Johnson is refusing to call a vote on a bill that would provide $60 billion more for Ukraine and the White House is scrambling to find ways to send assistance to Kyiv, which has been battling Russian forces for more than two years.”
Taiwan Watch:
March 21 – Bloomberg (Jacob Gu): “Chinese fighter jets, unmanned aerial vehicles and other military aircraft have been conducting joint combat patrols around Taiwan since 7:30 pm local time Thursday… People’s Liberation Army aircraft crossed the median line of the Taiwan Strait and entered the island’s self-declared air-defense zone from the north, central and south… In response, Taiwan’s military deployed aircraft, naval vessels and land-based missile systems. Separately, 32 PLA aircraft and 5 naval vessels operating around Taiwan were detected…”
Market Instability Watch:
March 18 – Bloomberg (Alice Atkins): “Betting against volatility has become a profit-minting machine in currency markets. So much so that Wall Street firms say clients are giving up on wagers that go in the opposite direction. That’s a seismic shift in the $7.5 trillion-a-day foreign exchange market. The fluctuations that traders historically used to play with have largely vanished as a new breed of algorithmic traders bet markets will remain calm. To the heads of currency derivatives at Bank of America Corp., NatWest Group Plc and UBS Group AG, it’s creating a cycle that keeps feeding profits to anyone in favor of ever-smaller swings. It’s emblematic of a short-volatility trend reshaping markets from stocks to commodities… Of course, the risk is that the computer-driven funds are wrong and the next market flare up is just around the corner. ‘The emergence and dominance of systematic volatility selling funds is a bit self-fulfilling,’ said Henry Drysdale, head of currency options trading at NatWest Markets... ‘If the strategy is successful, more enter the space and it gets quite crowded, with more and more participants selling volatility at lower and lower levels.’”
March 20 – Financial Times (George Steer): “We’re late to this, but JPMorgan last week published an interesting note that subtly apportions some of the blame for low levels of market volatility on an options fund run by… JPMorgan Asset Management. The bank’s burst of friendly fire comes just a few weeks after the Bank for International Settlements became the latest to flag that the explosion of option-based investment funds may be contributing to the mysterious compression of the Vix, which for months has held below its historical norm. Per JPMorgan’s Marko Kolanovic and team: ‘Call overwriting ETFs have become a large source of volatility supply that has been increasingly weighing on market volatility levels, in our view. These ETFs are suppressing both short-dated implied volatility (via option supply) and realized volatility (as dealers hedge the resulting long gamma positions).’”
March 16 – Bloomberg (Tasos Vossos and Ronan Martin): “Bond fund managers have so much cash they’re turning to the derivatives market to put it to work, pushing down the cost of protection against defaults close to levels that prevailed when central banks were just starting to raise interest rates. The bets on tightening credit-default swap spreads are the latest sign of the overarching optimism that’s enveloped markets, where credit investors flush with cash have been buying up large amounts of new debt and pushing back the so-called maturity wall that was a major source of concern just six months ago… ‘CDX is a liquid way to get credit risk when cash bonds are harder to find,’ said Scott Kimball, CIO at Loop Capital Asset Management. ‘A significant amount of the recent tightening is institutions looking to put more money to work than there are bonds available.’”
March 16 – Financial Times (George Steer): “A closely-watched gauge of stock market sentiment has hit its most extreme level since 2008, as options traders increasingly focus on capturing further gains in soaring indices rather than worrying about a potential sell-off. An almost 25% rise for Wall Street’s benchmark S&P 500 index since the start of November has wrongfooted traders who had expected high interest rates to trigger a recession. Many are now snapping up options tied to the S&P that profit if the market keeps on rising.”
March 21 – Reuters (Davide Barbuscia): “A key bond market signal of an upcoming recession has flashed red continuously for the longest time ever, even if the U.S. economy is far from showing signs of a growth contraction. The part of the Treasury yield curve that plots two-year and 10-year yields has been continuously inverted - meaning that short-term bonds yield more than longer ones - since early July 2022. That exceeds a record 624 day inversion in 1978, Deutsche Bank said…”
March 19 – Bloomberg (Iris Ouyang): “A recent bull run in China’s government bonds is making a comeback after a one-week break, a sign that traders are getting over policymakers’ implicit guidance that the rally has gone too far. The yield on 30-year government bonds slipped for a third straight day to approach the lowest level since 2005…”
Global Credit Bubble Watch:
March 19 – Bloomberg (James Crombie): “Blue-chip US borrowers are having another big day and remain on track to set a first-quarter bond issuance record. The tightest spreads on AA bonds since 2005 and minimal new issue concessions highlight rock-solid demand for yield that will keep the sales spree going.”
March 19 – Financial Times (Josephine Cumbo): “Calpers, the US’s biggest public pension plan, is to increase its holdings in private markets by more than $30bn and reduce its allocation to stock markets and bonds in an effort to improve returns. A proposal to increase the $483bn fund’s positions in assets such as private equity and private credit from 33% of the plan to 40% was approved on Monday… The formal approval comes two years after Calpers admitted that a decision to put its private equity programme on hold for 10 years had cost it up to $18bn in returns.”
March 21 – Reuters (Lisa Lee): “The dangers of private credit firms overvaluing their own assets has become one of the booming $1.7 trillion industry’s most contentious topics in recent weeks. New data on how much money they expect to get back from defaulting borrowers will only add fuel to that fire… Looking at loans to companies that defaulted over the past year, the data shows that those made by private credit firms were valued at an average of 48 cents in the aftermath of the default, showing how much they’d expect to recover on each dollar lent. That’s worse than loans by bank-led syndicates, where the average value was 55 cents a month after default.”
March 20 – Wall Street Journa (Spencer Jakab): “Buying U.S. Treasury bonds used to be cumbersome not to mention pretty boring. Thanks to financial innovation, though, investors don’t have to worry about things like clipping coupons. And they can earn almost Nvidia-like returns if they get the timing of sentiment about Fed rate cuts just right. Retail investors might not be able to whip out a slide rule and calculate Macaulay duration the way a bond geek can, but it is pretty common knowledge that the most bang for your buck comes from owning the longest-dated bonds. Enter TLT, the ticker symbol for BlackRocks iShares 20+ Year Treasury Bond Exchange Traded Fund. The ETFs assets recently ballooned to more than $50 Billion…”
AI Bubble Watch:
March 19 – Reuters (Suzanne McGee): “The fervor around artificial intelligence has sparked a gold rush into AI-themed ETFs, as investors seek fresh ways to play the burgeoning technology following breathtaking rallies in market darlings such as Nvidia. The funds run the gamut from those offering a bouquet of the biggest AI winners to more esoteric themes such as robotics and sound generation. All told, the universe of AI-themed ETFs traded in the United States has soared to $6.88 billion as of the end of February from $2.55 billion a year earlier…”
March 20 – Reuters (Suzanne McGee): “Asset management companies seeking to offer investors still more ways to play the boom in U.S. mega-cap technology stocks are rolling out new exchange-traded funds (ETFs). GraniteShares on Monday launched three new leveraged ETFs designed to generate twice the daily return of Microsoft, Amazon.com, and Advanced Micro Devices. In the 15 months since the firm launched its 2x leveraged Nvidia ETF, its assets have soared to $2 billion.”
March 19 – New York Times (Maureen Farrell and Rob Copeland): “The Middle Eastern country is creating a gigantic fund to invest in A.I. technology, potentially becoming the largest player in the hot market. The government of Saudi Arabia plans to create a fund of about $40 billion to invest in artificial intelligence, according to three people briefed… — the latest sign of the gold rush toward a technology that has already begun reshaping how people live and work.”
Bubble and Mania Watch:
March 22 – Reuters (Roshan Abraham and Siddarth S): “U.S. companies' purchases of domestic equities through more stock buybacks and corporate acquisitions will hit a six-year high of $625 billion this year…, Goldman Sachs said. ‘A surge in share buybacks and continued growth in cash mergers and acquisitions (M&A) will be the primary drivers of corporate equity demand,’ Cormac Conners, U.S. equity strategist at Goldman, said…”
March 21 – Financial Times (Harriet Clarfelt): “A record amount of money has flooded into US corporate bond markets this year, as investors rush to lock in the highest yields in years ahead of an anticipated series of interest rate cuts by the Federal Reserve. Inflows into corporate bond funds have reached $22.8bn so far in 2024, according to fund tracker EPFR, the first positive start to a year since 2019, when $22.4bn had flowed in by this point.”
March 19 – Associated Press (Suzanne McGee): “The average Wall Street bonus fell slightly last year to $176,500, as the industry added employees and took a ‘more cautious approach’ to compensation, New York state’s comptroller reported… The average bonus for employees in New York City’s securities industry was down 2% from $180,000 in 2022. The slight dip came even as Wall Street profits were up 1.8% last year, according to the annual estimate from Thomas DiNapoli, the state’s comptroller.”
March 19 – Bloomberg (Nacha Cattan): “Kat Cohen has been fielding a high volume of calls in recent weeks from desperate parents looking to book SAT tutors for their teenagers at up to $500 an hour. The founder of a test prep and admissions counselor service on Manhattan’s Madison Avenue says tutoring demand has jumped since some of the most selective universities in the nation reversed their four-year hiatus on requiring standardized testing.”
U.S./Russia/China/Europe Watch:
March 18 – Bloomberg: “A defiant Vladimir Putin said Russia won’t be stopped from pursuing its goals after a presidential election whose outcome was pre-determined and which handed him a record level of support. ‘No matter how much anybody wanted to suppress us, our will, our consciousness, nobody in history has ever succeeded, they have not succeeded now and they will never succeed,’ Putin told supporters… All the major ‘and in some areas grandiose plans’ that he set out before the election ‘will certainly be achieved,’ he said.”
March 17 – Reuters (Guy Faulconbridge): “Russian President Vladimir Putin warned the West… that a direct conflict between Russia and the U.S.-led NATO military alliance would mean the planet was one step away from World War Three but said hardly anyone wanted such a scenario. The Ukraine war has triggered the deepest crisis in Moscow's relations with the West since the 1962 Cuban Missile Crisis. Putin has often warned of the risks of nuclear war but says he has never felt the need to use nuclear weapons in Ukraine. French President Emmanuel Macron last month said he could not rule out the deployment of ground troops in Ukraine in the future… Asked by Reuters about the Macron remarks and the risks and possibility of a conflict between Russia and NATO, Putin quipped: ‘everything is possible in the modern world.’”
March 17 – Financial Times (The Editorial Board): “Some 24 years after Vladimir Putin was elected to his first term as Russia’s president in an election that was still broadly free, this weekend’s electoral procession to anoint him to a fifth term is emblematic of how much damage the former KGB man has done inside his country, and beyond. He has squashed political competition at home and brought large-scale war back to the European continent — with the dead or wounded well into six figures. All this is a tragedy, above all, for the peoples of Ukraine, and Russia. But a fifth term for Putin is a threat to Europe, and the world. Not for the first time in Russia’s history, repression at home is running hand in hand with a more belligerent policy abroad. The latest election has been even more of a sham than its predecessors since most real rivals are exiled, imprisoned or dead.”
March 19 – Reuters (Laurie Chen, Yew Lun Tian and Guy Faulconbridge): “Russian President Vladimir Putin will travel to China in May for talks with Xi Jinping, in what could be the Kremlin chief's first overseas trip of his new presidential term, according to five sources… Western governments… condemned Putin's re-election as unfair and undemocratic. But China, India and North Korea congratulated the veteran leader on extending his rule by a further six years, highlighting geopolitical fault lines that have widened since Russia's 2022 invasion of Ukraine.”
De-globalization and Iron Curtain Watch:
March 18 – Reuters (Jack Kim): “U.S. Secretary of State Antony Blinken said… technology should be employed to sustain democratic values in the face of efforts by authoritarian and repressive regimes to deploy technology to undermine democracy and human rights. Like-minded governments and their people were working together to promote free and fair elections, Blinken said, noting safeguarding democracy was a collective effort. ‘As authoritarian and repressive regimes deploy technologies to undermine democracy and human rights, we need to ensure that technology sustains and supports democratic values and norms,’ he said…”
March 19 – Wall Street Journal (Benoit Faucon, Costas Paris and Joe Wallace): “When the U.S. and Europe tried to sever Russia from the Western financial system, Moscow found workarounds. Key among them: banks in the Gulf and Europe that maintained ties with Russia. Now, Washington’s efforts to close these loopholes appear to be paying off. Dubai’s main state-owned bank has shut some accounts held by Russian oligarchs and traders of Russian oil. Turkish lenders are growing wary of handling Russia-related business. The U.S. has also put bankers in Vienna, another important financial hub, on notice… In late December, the White House gave the Treasury Department greater sanctions power, enabling it to penalize foreign banks for dealings involving Russia’s military-industrial base.”
March 15 – Financial Times (Demetri Sevastopulo, James Fontanella-Khan, and Tabby Kinder): “The day after American lawmakers voted overwhelmingly to force the Chinese owner of TikTok to sell the video-sharing app, its chief executive Shou Zi Chew expressed confusion. ‘There’s a lot of noise,’ Chew exclaimed… ‘But I haven’t heard exactly what we’ve done that is wrong.’ It was a strange comment because lawmakers have been explicit about their concerns that a Chinese company, ByteDance, owns what has become the social media site of choice for America’s teens and young adults. The FBI and US intelligence agencies are worried about everything, from China obtaining Americans’ personal data to using the app’s algorithm to help spread disinformation and meddle in US elections.”
Inflation Watch:
March 16 – Bloomberg (Pras Subramanian): “As car prices moderate from a pandemic-era surge, insurance has pushed the cost of car ownership to the brink for many Americans. New data out this week showed auto insurance costs rose 20.6% from the prior year in February, matching January's increase as the most since December 1976, when costs rose 22.4% over the prior year. On an annual basis, motor vehicle insurance costs rose 17.4% in 2023, the most since a 28.7% increase in 1976…”
March 19 – Reuters (Promit Mukherjee and Ismail Shakil): “Canada’s inflation rate surprisingly cooled in February to its slowest pace since June… Annual headline inflation cooled to 2.8% last month, beating analyst expectations for a 3.1% rise, and below 2.9% increase in January. On the month, the consumer price index rose 0.3%... Money markets increased their bets for a first 25 bps rate cut in June to more than 75%, from 50% before the inflation data. The bets for an April rate cut increased to over 28% from 18%...”
March 21 – Associated Press (Seth Borenstein): “Food prices and overall inflation will rise as temperatures climb with climate change, a new study by an environmental scientist and the European Central Bank found. Looking at monthly price tags of food and other goods, temperatures and other climate factors in 121 nations since 1996, researchers calculate that ‘weather and climate shocks’ will cause the cost of food to rise 1.5 to 1.8 percentage points annually within a decade or so, even higher in already hot places…”
Federal Reserve Watch:
March 20 – Reuters (Michael S. Derby): “U.S. Federal Reserve Chair Jerome Powell said… the day is swiftly approaching when the central bank will slow the pace of its balance sheet run-off, and in moving toward a taper of the drawdown, it may allow the central bank to ultimately shed more bonds than it once expected. ‘It will be appropriate to slow the pace of run-off fairly soon,’ Powell said... But he did not offer a specific time frame for the decision, saying only that officials are now debating the issue… In his press conference, Powell said slowing the drawdown from its current pace may allow the central bank to compress the size of its holdings by a greater degree. ‘We may actually be able to get to a lower level because we would avoid the kind of frictions’ that might happen by shedding bonds too quickly, he said.”
Biden Administration Watch:
March 20 – Bloomberg (Ari Natter): “The Biden administration is warning states to be on guard for cyberattacks against water systems, citing ongoing threats from hackers linked to the governments of Iran and China. ‘Disabling cyberattacks are striking water and wastewater systems throughout the United States,’ Environmental Protection Agency Administrator Michael Regan and National Security Advisor Jake Sullivan wrote in a letter to governors... ‘These attacks have the potential to disrupt the critical lifeline of clean and safe drinking water, as well as impose significant costs on affected communities.’ Hackers affiliated with the Iranian Government Islamic Revolutionary Guard Corps have attacked drinking water systems, while a People’s Republic of China state-sponsored group, Volt Typhoon, has compromised information technology of drinking water and other critical infrastructure systems, the letter warned.”
March 21 – CNBC (Kif Leswing and Rohan Goswami): “The Department of Justice sued Apple…, saying its iPhone ecosystem is a monopoly that drove its ‘astronomical valuation’ at the expense of consumers, developers and rival phone makers. The lawsuit claims Apple’s anti-competitive practices extend beyond the iPhone and Apple Watch businesses, citing Apple’s advertising, browser, FaceTime and news offerings. ‘Each step in Apple’s course of conduct built and reinforced the moat around its smartphone monopoly,’ according to the suit, filed by the DOJ and 16 attorneys general...”
March 20 – Axios (Shauneen Miranda): “Millions of older Americans are at risk of losing some of their Social Security benefits after defaulting on student loans, Democratic lawmakers said in a letter urging the Biden administration to act. Why it matters: Seniors are one of the highest risk categories with reports showing nearly 40% of borrowers aged 65 or older in default. Federal programs that claw those funds back mean seniors lose as much as $2,500 in Social Security benefits annually.”
U.S. Bubble Watch:
March 21 – Reuters (Lucia Mutikani): “The U.S. current account deficit narrowed in the fourth quarter to the lowest level in nearly three years amid an increase in secondary income... The… current account deficit, which measures the flow of goods, services and investments into and out of the country, contracted $1.6 billion, or 0.8%, to $194.8 billion last quarter. That was the lowest level since the first quarter of 2021.”
March 21 – Reuters (Lucia Mutikani): “Initial claims for state unemployment benefits dropped 2,000 to a seasonally adjusted 210,000 for the week ended March 16… ‘Companies are not laying off workers and the labor market remains relatively strong,’ said Christopher Rupkey, chief economist at FWDBONDS… ‘And now there are signs of life for existing home sales. This makes easing monetary policy at this juncture more problematic.’”
March 19 – Reuters (Lucia Mutikani): “U.S. single-family homebuilding rebounded sharply in February, hitting the highest level in nearly two years, boosted by mild temperatures and a persistent shortage of previously owned houses on the market. Despite the hurdle created for many first-time buyers by higher mortgage rates, builders are cutting prices and offering other incentives to increase sales. They are also reducing the size of the homes being built to manage higher material costs. The report… also showed permits for the future construction of single-family housing units rose to more than a 1-1/2-year high last month… Single-family housing starts, which account for the bulk of homebuilding, surged 11.6% to a seasonally adjusted annual rate of 1.129 million units last month… That was the highest level since April 2022… Overall housing starts increased 10.7% to a rate of 1.521 million units in February… Overall housing completions soared 19.7% to a rate of 1.729 million units, the highest level since January 2007…”
March 21 – CNBC (Diana Olick): “Sales of existing homes surged 9.5% in February from January to 4.38 million units, on a seasonally adjusted annualized basis… Higher demand continued to push the median price higher, up 5.7% from the year before to $384,500 — the eighth straight month of annual gains. Competition was stiff, with 20% of homes selling above list price… First-time buyers, however, did not surge with overall sales. They represented just 26% of buyers in February, down from 28% in January. Roughly 40% is the historical norm. All-cash sales were at 33%, up from 28% the year before. ‘The stock market, maybe that is helping, or the record-high home prices. People from expensive states like California are going to more affordable markets like Florida or Georgia and paying all cash,’ [NAR’s chief economist Lawrence] Yun said…”
March 19 – Yahoo Finance (Dani Romero): “New homes are a rare bright spot in the housing market right now. Case in point: The SPDR S&P Homebuilders ETF (XHB) is up about 10% so far this year… ‘Right now, 80% of people that have a mortgage on their house are below 5%, which is well below the 6.75% rate that's out there right now,’ Rafe Jadrosich, senior homebuilders analyst at Bank of America Securities, told Yahoo... ‘The disincentive for people to sell their house is very high.’ This has translated to newly built homes playing a much bigger role in housing supply today than is the norm. ‘Historically new homes are about 10% to 15% of the total active listings,’ Jadrosich said. Right now, he said, they compose about 30%.”
March 20 – CNBC (Diana Olick): “Mortgage interest rates rose last week for the first time in three weeks. As a result, total mortgage application volume dropped 1.6% compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index… Applications for a mortgage to purchase a home fell 1% for the week and were 14% lower than the same week one year ago.”
March 18 – Bloomberg (Michael Sasso): “Sentiment among US homebuilders climbed to an eight-month high in March as a limited number of existing homes for sale and mortgage rates that are down from their peak spurred demand. The National Association of Home Builders/Wells Fargo index of housing market conditions increased by 3 points to 51… The median estimate… called for a reading of 48. Builder sentiment has been improving so far this year… A measure of expected sales in the next six months rose to 62, the highest since June. Gauges of prospective buyer traffic and current sales advanced to seven-month highs…”
March 21 – Bloomberg (Davide Barbuscia): “US manufacturing activity expanded by the most since mid-2022 as production and factory employment growth accelerated along with measures of inflation. The S&P Global flash March factory purchasing managers index edged up 0.3 point to 52.5, marking the third straight month above a level of 50 that indicates expansion… ‘The steep jump in prices from the recent low seen in January hints at unwelcome upward pressure on consumer prices in the coming months,’ Chris Williamson, chief business economist at S&P Global Market Intelligence, said… S&P Global’s measure of prices charged by manufacturers climbed to a more than one-year high, while an index of prices received by service providers rose to the highest since July.”
March 18 – Bloomberg (Alex Tanzi): “Americans increasingly doubt they’ll get approved for a loan to buy a car or refinance a mortgage, according to a survey conducted by the Federal Reserve Bank of New York. About a third of respondents expect they’d be rejected to refinance their mortgage in the next year, while the share for auto loans rose to 31.8% — a record in data over the past decade, according to the February survey. Actual rejection rates aren’t that high, but some are rising — crucially at a time when applications for credit broadly are the highest since October 2022, the New York Fed said.”
Fixed Income Watch:
March 19 – Bloomberg (Scott Carpenter): “An obscure investment product used to finance risky real estate projects is facing unprecedented stress as borrowers struggle to repay loans tied to commercial property ventures. Known as commercial real estate collateralized loan obligations, or CRE CLOs, they bundle debt that would usually be seen as too speculative for conventional mortgage-backed securities into bonds of varying risk and return. In just the last seven months the share of troubled assets held by these niche products has surged four-fold, by one measure, to more than 7.4%.”
China Watch:
March 17 – Bloomberg: “Slogans matter in China. From ‘socialism with Chinese characteristics’ to ‘common prosperity’ the adoption of new catchphrases can herald profound shifts in policy. So, when ‘new productive forces’ was listed as the top task in the government’s annual statement of priorities published March 5, it set off a scramble to decode what the elevation of the phrase – coined by President Xi Jinping last September — meant. Since 2014, there’s only been one other occasion where an industrial policy slogan has taken top billing. Typically, that slot has gone to pledges about macroeconomic policy. State media tried to explain how the concept fits in with Karl Marx’s theories on production, while stock investors pounced on the idea that the catchphrase signaled a greater emphasis on the manufacturing of intelligent tools and machines.”
March 21 – Wall Street Journal: “China’s policymakers are growing concerned that intensified monetary policy support has led to excessive liquidity in the banking system that isn’t being funneled into the real economy. Chinese lenders have been flush with cash since early last year when Beijing started to cut banks’ reserve requirements and guide down lending rates to aid the country’s faltering economy. But weak demand for loans from businesses and consumers means vast cash deposits sit idle in banks, eroding the effectiveness of policies meant to stimulate growth... Senior Chinese government officials have in recent months raised alarms over idle funds. Premier Li Qiang warned earlier this month that cash shouldn’t be circulating in the system for no good reason, while China’s top lawmakers noted in November that cash was moving between banks, or between banks and large companies, thus squeezing out funding for smaller enterprises.”
March 21 – Bloomberg: “China’s central bank signaled a potential boost to liquidity for banks while expressing caution on cutting interest rates, after the world’s second-largest economy reported an upbeat start to 2024. There is still room to lower the reserve requirement ratio for banks, which is an important tool to adjust liquidity, People’s Bank of China Deputy Governor Xuan Changneng said... Interest rate policy in the country can become more ‘autonomous’ as deposit rates trend lower and other major global economies move toward easing, he added… ‘China’s monetary policy space is ample and the policy toolbox is abundant,’ Xuan said. ‘Financial support to the economy is still solid.’”
March 22 – Bloomberg: “China’s central government accelerated spending at the start of the year, a sign it’s taking on more financing responsibility to support the economy and to avoid worsening local government debt risks. Its general public expenditure jumped 14% from a year earlier to 482.8 billion yuan ($66.8bn) in January and February combined, the fastest pace for the period in five years…”
March 17 – Wall Street Journal (Jason Douglas): “China’s economy has a new problem: Rising unemployment. Joblessness in China rose for the third straight month… At 5.3%, the official jobless rate is back to where it was in July after increases in December and January reversed almost half a year of steady progress.”
March 19 – Bloomberg (Eric Zhu): “China’s first set of official housing indicators this year are out — and we see little indication the property crunch will end anytime soon… Property sales by floor space tumbled 20.5% year on year in the January-February period, more than a 12.7% drop in December (sales contracted 8.5% for the full year of 2023). Sales tend to pick up in March after the Lunar New Year holidays. That was the case last year, and the strong rebound in spring 2023 means the year-on-year comparisons will become more challenging in coming months. High-frequency data in early March showed sharper falls in sales — likely a taste of what’s to come. Supply-side data also indicated more weakness. After a 20.4% fall in 2023, new home starts plummeted 29.7% from year-earlier levels in January-February, the sharpest drop since June 2023.”
March 18 – Reuters (Liangping Gao and Ryan Woo): “China’s fragile housing market opened this year with slower declines in property investment and sales, buoyed by government efforts to arrest a protracted downturn in the sector, however, analysts were wary of calling an end to the downturn just yet. Property investment in China fell 9.0% year-on-year in the first two months of 2024, compared with a 24.0% fall in December 2023…”
March 18 – Reuters (Ellen Zhang and Joe Cash): “China's factory output and retail sales beat expectations in the January-February period, marking a solid start for 2024 and offering some relief to policymakers even as weakness in the property sector remains a drag on the economy and confidence… Industrial output rose 7.0% in the first two months of the year…, above expectations for a 5.0% increase… Retail sales, a gauge of consumption, rose 5.5%, slowing from a 7.4% increase in December but beating an expected 5.2% gain.”
March 20 – Bloomberg: “Chinese developer Radiance Holdings Group Co. defaulted on a $300 million bond after it missed a payment due Wednesday, dealing a shock to investors who bet on a timely repayment over the past few days.”
March 21 – Wall Street Journal (Elaine Yu and Selina Cheng): “As China wraps its authoritarian rule more tightly around this once-boisterous metropolis, no corner of society has been left untouched. Bookstores are closing, shows have been canceled and opposition to the government—once a rallying force—is now mostly whispered between friends behind closed doors. The massive crowds that took to the streets to demand democracy in 2019 are long gone, but the government’s effort to quell dissent in the name of national security has marched on. The latest installment is a law coming into effect Saturday that mandates tougher sentences for offenses such as sedition and creates new crimes around state secrets and foreign interference. The law… has sparked debates over whether people could get into trouble for transgressions as minor as having old copies of pro-democracy newspapers lying around at home.”
March 18 – CNN (Chris Lau): “Hong Kong’s legislature unanimously passed sweeping new powers… that critics and analysts warned would align the financial hub’s national security laws more closely with those used on the Chinese mainland and deepen an ongoing crackdown on dissent. The lengthy national security bill – the first draft ran to 212 pages – was rushed through the city’s opposition-less Legislative Council with unusual haste at the request of city leader John Lee and debated over just 11 days. Coming into effect on Saturday, the law introduces 39 new national security crimes, adding to an already powerful national security law that was directly imposed by Beijing on Hong Kong in 2020 after huge and sometimes violent pro-democracy protests the year before.”
Global Bubble Watch:
March 20 – Bloomberg (Swati Pandey): “Australian employment soared last month and the jobless rate declined, highlighting the ongoing resilience of the nation’s labor market to restrictive monetary policy. Traders pared back expectations for an August interest-rate cut after… data… showed the economy added 116,500 roles, almost three times the 40,000 gain forecast. Unemployment fell to 3.7% in February from 4.1% in the prior month.”
Central Banker Watch:
March 19 – Financial Times (Valentina Romei): “Central bankers are increasingly confident that inflation can be vanquished without driving up unemployment sharply, as economists forecast ‘immaculate disinflation’. Analysts polled by Consensus Economics see inflation easing from multi-decade highs to about 2% this year in most advanced economies including the US, Germany, France, UK, Italy and eurozone. Victories over inflation have traditionally come at a heavy cost, as harsh monetary policy measures lead economies into recession and push up jobless rates. UK and US unemployment rates doubled in the 1980s as borrowing costs rose to tackle high inflation triggered by oil price shocks. But this inflationary cycle is seen as taking a different course. Michael Saunders, economist at Oxford Economics, noted that inflation was forecast to return to target with only a limited increase in unemployment in the US and eurozone. ‘Immaculate disinflation, whereby inflation returns sustainably to target without a significant rise in unemployment, has become the base case,’ he said.”
March 20 – Bloomberg (Tom Rees and Irina Anghel): “The Bank of England took another step toward cutting interest rates in the coming months after two of its most ardent hawks dropped their demands for hikes. Catherine Mann and Jonathan Haskel joined an 8-1 majority on the Monetary Policy Committee to keep rates at a 16-year high of 5.25%, the latest sign that the BOE was edging toward easing policy later this year… In a further signal that the bank was setting the stage for a shift, the minutes contained new language recognizing that policy might remain restrictive, even if rates were cut.”
March 18 – Bloomberg (Swati Pandey): “Australia’s central bank signaled it’s done tightening monetary policy after leaving interest rates at a 12-year high, sparking a selloff in the currency and a rally in bonds. The Reserve Bank held its cash rate at 4.35% for a third straight meeting on Tuesday and scrapped any reference to possible further increases.”
March 21 – Reuters (John Revill): “The Swiss National Bank cut its main interest rate by 25 bps to 1.50%..., a surprise move which made it the first major central bank to dial back tighter monetary policy aimed at tackling inflation. The central bank… also cut its interest rate on sight deposits to 1.50%. The SNB's decision, its first rate cut in nine years, kicked off a busy day for central banks in Europe, with the Bank of England and Norwegian central bank also announcing their latest policy decisions.”
March 20 – Financial Times (Martin Arnold): “Christine Lagarde has said the European Central Bank will be unable to commit to a particular path of interest rate cuts once it starts to ease monetary policy… The ECB president’s comments indicate that even if it starts to cut borrowing costs in June… it is likely to keep markets guessing on the timing and scale of potential rate cuts. Lagarde told a conference of ECB watchers… that continued high wage growth and weak productivity in the eurozone meant services inflation was expected ‘to remain elevated for most of this year’. This meant it would need to continue checking that ‘incoming data supports our inflation outlook’, she said.”
Europe Watch:
March 21 – Wall Street Journal (Joshua Kirby): “The eurozone is edging closer to a rebound in private-sector activity despite continued weakness in the bloc’s manufacturing sector… The HCOB Flash Eurozone Composite PMI Output Index—a gauge of activity in the manufacturing and services sectors across the 20 nations that use the euro—rose to 49.9 in March from 49.2 in February, just shy of the 50 reading that marks the hinge between contraction and expansion.”
March 20 – Bloomberg (Andrew Langley): “Euro-area consumer confidence improved a little in March to reach its highest level since February 2022, signaling a slow recovery for the struggling 20-nation economy. The reading of -14.9 — up from -15.5 in February — compares with a median estimate of -15 in a Bloomberg survey of economists. The European Commission said in a statement that ‘consumer confidence still scores well below long-term average.’”
Japan Watch:
March 19 – Wall Street Journal (Peter Landers and Megumi Fujikawa): “The world’s nearly 12-year experiment with negative interest rates is over now that the last holdout, the Bank of Japan, has moved its key policy rate back to at least zero. Of the many unusual measures central bankers took over the past decade and a half, among the most controversial, with uncertain benefits and potential risks, were negative interest rates, when depositors pay to store money at a bank instead of being paid. The experiment’s bottom line: Negative rates weren’t enough by themselves to pull economies out of a funk or lift inflation toward central banks’ 2% targets. It took the Covid-19 pandemic and war in Ukraine to accomplish that.”
March 19 – Bloomberg (Masaki Kondo, Yasufumi Saito and Ruth Carson): “The Bank of Japan finally ended an eight-year experiment with negative interest rates that has left more than $4 trillion in funds hunting for higher returns abroad. What comes next threatens to shake up money flows in Japan and across the world. One of the biggest questions is what happens to that big ball of money stashed overseas in assets including US government bonds, European power stations and Singapore equities.”
March 20 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Bank of Japan Governor Kazuo Ueda on Thursday vowed to keep supporting the economy with ultra-loose monetary policy but signalled confidence inflation was gaining momentum, as markets look for clues on the next interest rate hike timing. He also said the central bank would eventually scale back its huge balance sheet, signalling that the BOJ would move slowly but steadily towards normalising monetary policy… ‘As we exit our massive stimulus programme, we will gradually shrink the size of our balance sheet and at some point reduce the size of our government bond buying,’ Ueda said.”
March 20 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Kazuo Ueda said the central bank scrapped its massive easing program this week partly to avoid the need for aggressive action later, a comment that may help market players judge his next moves… ‘The possibility would have strengthened for very rapid and large rate hikes after the end of large-scale monetary easing,’ Ueda said. ‘We made our decision after weighing those risks.’”
March 20 – Reuters (Tetsushi Kajimoto): “Japan's exports grew for a third straight month in February demand improved in the U.S., China and the European Union… Exports rose 7.8% in February from the same month a year ago…, faster than the 5.3% gain expected by economists…”
Emerging Market Watch:
March 21 – Reuters (Ezgi Erkoyun and Daren Butler): “Turkey's central bank unexpectedly hiked interest rates by 500 bps to 50% on Thursday, citing a deteriorating inflation outlook and pledging to tighten even further if it expects the price situation to worsen significantly. The hawkish surprise came 10 days before nationwide local elections and was seen by analysts as a signal that the central bank was independent from any political constraints, and determined to tackle inflation that is soaring toward 70%.”
Leveraged Speculation Watch:
March 18 – Financial Times (Kate Duguid and Stefania Palma): “Three hedge fund industry groups are suing the US Securities and Exchange Commission over new rules for the $27tn Treasury market, arguing the measures will unfairly subject their members to regulation as ‘dealers’. The lawsuit… takes aim at a requirement for more large traders to register with the SEC as dealers in the US government bond market, or firms that regularly provide liquidity. Dealer status requires holding additional capital and reporting more trades in the market. The hedge fund groups said the SEC lacked legal authority to adopt its dealer definition and was engaged in ‘arbitrary and capricious decision making’ by failing to consider the economic consequences of its action.”
Social, Political, Environmental, Cybersecurity Instability Watch:
March 20 – Reuters (Emma Farge): “Every major global climate record was broken last year and 2024 could be worse, the World Meteorological Organization (WMO) said…, with its chief voicing particular concern about ocean heat and shrinking sea ice. The U.N. weather agency said in its annual State of the Global Climate report that average temperatures hit the highest level in 174 years of record-keeping by a clear margin, reaching 1.45 degrees Celsius above pre-industrial levels. Ocean temperatures also reached the warmest in 65 years of data with over 90% of the seas having experienced heatwave conditions during the year… ‘The WMO community is sounding the Red Alert to the world,’ said WMO Secretary-General Celeste Saulo… ‘What we witnessed in 2023, especially with the unprecedented ocean warmth, glacier retreat and Antarctic sea ice loss, is cause for particular concern.’
March 17 – Financial Times (Jana Tauschinski and Emiliya Mychasuk): “Oceans marked 365 straight days of record-breaking global sea surface temperatures this week, fuelling concerns among international scientists that climate change could push marine ecosystems beyond a tipping point. The consistent climb in temperatures reached a peak on Wednesday when the new all-time high was set for the past 12 months, at 21.2C. The world’s seas have yet to show any signs of dropping to typical, seasonal temperatures, with daily records consecutively broken since they first went off the charts in mid-March last year, according to… the US National Atmospheric and Oceanic Administration and the Climate Reanalyzer research collaboration.”
March 16 – Bloomberg (Naureen S Malik): “More than 7,000 people are headed to Houston next week to attend CERAWeek by S&P Global with a key question in mind: How to meet increasing demand for power amid the transition to clean energy. Daniel Yergin, vice chairman of S&P Global, offers a window into that future… ‘The surge in electricity demand that’s coming with aspects of the energy transition, and not only the energy transition but data centers, AI. Is the capacity going to be there? That used to be a developing world question. Now it’s also a developed world question. It’s the capacity to move electricity from where it’s generated to where it’s needed, but also inflation and supply chain issues have affected some of the rollout of renewables even though the scale continues to grow. We saw last year coal consumption increased globally. A big question is the role of natural gas in terms of a complement to wind and solar.’”
March 18 – Bloomberg (Naureen S. Malik): “The biggest US wind and solar farm developer expects the growth rate of the demand for electricity to soar to keep up with artificial intelligence, electrification, cloud capacity and chip factories. ‘What you have today is electric demand that has been relatively flat for years now all of the sudden looking at an 81% increase’ in the growth rate forecast over the next five years, John Ketchum, chief executive officer of renewables giant NextEra Energy Inc., said… About a year ago, the US Energy Information Administration estimated the annual growth rate in electricity demand at less than 1% in its long-term annual outlook. NextEra’s estimate would accelerate that to about 1.8%. The sharp increase in growth rate risks adding further stress to power grids already strained by extreme temperatures and the effects of climate change.”
Geopolitical Watch:
March 18 – Bloomberg (Cliff Venzon): “Philippines President Ferdinand Marcos Jr. said the threat to his nation from China’s sweeping claims in the South China Sea is growing but argued that his government’s efforts to assert sovereignty over disputed areas aren’t meant to start a conflict by ‘poking the bear.’ ‘We are trying to keep things on an even keel,’ Marcos said… The challenge, he added, is that ‘since the threat has grown, we must do more to defend our territory.’ Along with Taiwan, the standoff between the Philippines and China over a series of contested reefs and islands has become a critical flashpoint in the region.”
March 21 – Reuters (Giulia Paravicini, Jonathan Saul and Abdiqani Hassan): “As a speed boat carrying more than a dozen Somali pirates bore down on their position in the western Indian Ocean, the crew of a Bangladeshi-owned bulk carrier sent out a distress signal and called an emergency hotline. No one reached them in time. The pirates clambered aboard the Abdullah, firing warning shots and taking the captain and second officer hostage… A week later, the Abdullah is anchored off the coast of Somalia, the latest victim of a resurgence of piracy that international navies thought they had brought under control. The raids are piling risks and costs onto shipping companies also contending with repeated drone and missile strikes by Yemen's Houthi militia...”
