Global de-risking/deleveraging made The Critical Leap from the “periphery” to the “core” – perhaps decisively. Weaker U.S. economic data, disappointing July Non-Farm Payrolls in particular, will be held more responsible than deserved. Having gained momentum throughout the week, crisis dynamics only needed a nudge.
A freshly hawkish Bank of Japan surprised markets Wednesday by raising rates and reducing bond purchases. The yen gained 1.7% Wednesday and was already up 3.2% week-to-date versus the dollar heading into Friday’s employment report – only to jump another 1.7% to end the week 4.93% higher.
The unwind of levered yen “carry trades” gained momentum. For the week, the Japanese yen significantly added to recent gains against key EM “carry trade” currencies - including the Mexican peso 8.3%, the Colombian peso 7.2%, Brazilian real 5.9%, Hungarian forint 5.8%, Turkish lira 5.5%, Argentine peso 5.1%, Peruvian sol 4.9%, and Indian rupee 4.7%.
After trading to 161.76 on July 11th, the yen has rallied 10.35% to 146.53 to the dollar. Over this period, the Mexican peso is down 15.7% versus the yen, the Brazilian real 14.3%, the Chilean peso 13.1%, the Colombian peso 12.9%, the Argentine peso 10.8%, the Turkish lira 10.4%, the South African rand 10.1%, the Hungarian forint 9.6% and the Indian rupee 9.6%. Huge leveraged speculating community “carry trade” losses continue to mount.
It’s easily lost in a dizzying week that U.S. markets rallied strongly Wednesday on a “dovish hold” FOMC meeting. “Stocks Storm Back on Fed Day as Nvidia Surges 13%.” The Semiconductor Index rallied 7.0%, the Nasdaq100 3.0%, and the S&P500 1.6%. It quickly became an unforgiving head fake, ruthlessly punishing the over-confident buy-the-dip crowd.
The Semiconductors reversed 7% lower on Thursday, with the Nasdaq100 down 2.4%. Nvidia sank 6.7% Thursday, with Micron down 7.6% (and another 8% lower in evening trading). Amazon.com was also down post-earnings Thursday evening, with Intel crushed 20%.
Thursday’s failed tech rally sparked risk aversion, with the AI Bubble mania in serious trouble. Interestingly, investment-grade spreads (to Treasuries) widened five to 98 bps – the largest daily risk premium increase back to banking crisis March 13th, 2023. High yield spreads widened 11 Thursday to 325 bps – the largest move in six months.
Bank CDS also came to life Thursday – at home and abroad. European subordinated bank debt CDS jumped eight Thursday (to 120bps), the largest daily gain since June’s French election earthquake. Bank of America CDS jumped four (to 56bps) and Citigroup three (55bps) – both the largest one-day gains since October 2023 (Israel/Hamas war). The KBW Bank Index was slammed 3.0% in Thursday trading, with Europe’s STOXX 600 Bank Index sinking 4.5%.
EM CDS rose five (174bps) Thursday, as the Brazilian real declined another 2.1% against the yen, the Mexican peso 1.7%, and the Chilean peso 1.6%. Sniffing out trouble, two-year Treasury yields sank another 11 bps - following Wednesday’s 10 bps decline - to a 14-month low of 4.15%.
Quickly gathering momentum, global de-risking/deleveraging was at the cusp of triggering disorderly Treasury market (“core”) trading – a market these days dominated by levered speculation and derivatives hedging strategies. Friday, 8:30 am Eastern: 114,000 payrolls added in July, down from June’s revised lower 179,000, and badly missing the consensus estimate of 175,000. Worse yet, the Unemployment Rate unexpectedly rose two-tenths to 4.3%, while Average Hourly Earnings missed by a tenth at 0.2% (3.6% y-o-y). Disorder, coiled and ready, unleashed.
Markets quickly began to dislocate. Ten-year Treasury ended the session 19 bps lower at 3.79% - with yields down a stunning 40 bps for the week. Two-year Treasury yields dropped 27 Friday and 50 bps for the week – the largest weekly yield collapse since the March 2023 banking crisis.
August 2 – Bloomberg (Catarina Saraiva and Ananya Chag): “Federal Reserve Bank of Chicago President Austan Goolsbee emphasized the central bank will not overreact to any one report, adding policymakers will get a lot of data prior to the Fed’s next meeting. Goolsbee… said it’s the Fed’s job to figure out the ‘through line’ of the data and move in a ‘steady’ way. Still, he noted if rates stay restrictive too long, policymakers have to think about the employment side of the mandate. ‘We’d never want to overreact to any one month’s numbers,’ Goolsbee said… But ‘if unemployment is going to go up higher than the neutral rate, that is exactly the kind of pinching on the other side of the mandate that the law says the Fed has to think about and respond to.’”
August 2 – Bloomberg (Craig Torres): “Federal Reserve Bank of Richmond President Thomas Barkin said the US economy is in good shape, though it’s unclear whether the labor market is getting back to normal rates of hiring or more seriously deteriorating… ‘We’ve been through two years, two-and-a-half years of very frothy labor markets,’ Barkin said… ‘The question is, of course, are we normalizing or are we weakening?’ The difference is meaningful, he said, adding, ‘It gets to the question of whether we’re going to plateau or whether unemployment’s going to rise from here.’”
August 2 – Bloomberg (Ye Xie): “Wall Street banks are calling for aggressive interest-rate cuts by the Federal Reserve based on the latest evidence that the labor market is cooling. Economists at Bank of America..., Barclays Plc, Citigroup Inc., Goldman Sachs… and JPMorgan… revamped their forecasts for US monetary policy Friday after data showed the US unemployment rate rose again in July. All are calling for earlier, bigger or more interest-rate cuts. Citigroup economists said they expect half-point rate cuts in September and November and a quarter-point cut in December… JPMorgan economist Michael Feroli went a step further. While he also predicted half-point rate cuts in September and November, followed by quarter-point reductions at every subsequent meeting, Feroli said there’s ‘a strong case to act’ before the next meeting on Sept. 18.”
“…The Beige Book is great. What’s even greater is hearing the Reserve Bank presidents come in and talk about their conversations with businesses, and business leaders and workers, and people in the nonprofit sector in their districts. But I’ll tell you, it’s a pretty, the picture is not one of a slowing or a really bad economy, it’s one of there are spots of weakness and there are regions where growth is stronger than other regions, but overall, it’s again, look at the aggregate data. Aggregate data is, particularly… Private Domestic Final Purchases, is 2.6% and that’s a good indicator of private demand.” Chair Powell, July 31, 2024
Having read the FOMC statement and listened carefully to Chair Powell’s press conference, there was nothing indicating sensitivity to unfolding de-risking/deleveraging. Any suggestion at Wednesday’s FOMC meeting of two 50 bps cuts by year-end would surely have been met with chuckles and sneers.
While some data suggest an unfolding slowdown, the notion of an economy currently falling off a cliff is not credible. But that doesn’t mean I dismiss the calls for aggressive rate cuts from BofA, Barclays, Goldman, and JPMorgan. They are, after all, in the catbird’s seat monitoring de-risking/deleveraging – a dynamic that this week turned serious. And a serious market deleveraging would certainly awaken the Fed into action – rate cuts and, I would not be surprised, an abrupt expansion of the Fed’s balance sheet. Recall the March 2023 banking crisis provoked a $700 billion Fed/FHLB liquidity response.
“The Fed is behind the curve.” “Federal Reserve Under Fire as Slowing Jobs Market Fans Fears of Recession.” “Warren Tells Fed Chair Powell to 'Cancel His Summer Vacation' and Cut Rates Now.” And there’s a chorus of “I told you so” from those that have been pushing rate cuts.
Yet, the crucial issue is neither a cooling labor market nor a weakening economy. We’re staring at what could prove the start of downfalls for the greatest Bubbles in human history. I began the December 15th CBB, “Guard Down, Towel Tossed” with, “History will be the judge. This period will be examined, analyzed, discussed, and debated for at least the next century.” Powell had succumbed, he pivoted dovish at the December 13th FOMC meeting and press conference.
Between that fateful Fed meeting and July 10th peak highs, the Semiconductors inflated 50%. Nvidia ballooned 183% to surpass $3 TN in market cap. The Nasdaq returned 27% and the S&P500 22%. The Fed pivoted despite loose market financial conditions and historic speculative excess. We can assume seven months of enormous growth in leverage throughout equities and related derivatives, especially in big tech. I suspect speculative leverage also expanded aggressively in “carry trades,” “basis trades,” and throughout corporate Credit – at home and globally. A true debacle of perilous speculation.
The Fed and Bank of Japan needed to have been mindful that Bubbles typically conclude with destabilizing speculative blow-offs. They failed to tighten sufficiently to thwart perilous asset inflation and market melt-ups. There was no recognition of the great systemic damage inflicted during “Terminal Phase Excess.”
The unfolding crisis will be deeper and more painful due to seven additional months of crazy late-cycle excess – not because the Fed was slow to cut rates. Inflated markets and unbalanced maladjusted economies are today only more vulnerable to de-risking/deleveraging and an associated abrupt tightening of financial conditions.
True, markets have repeatedly recovered from incipient de-risking. Friday looked different. Investment-grade CDS jumped 3.7 to 58.3 bps in Friday trading, the largest one-day gain since September 20, 2023 (Powell’s not well-received higher for longer press conference). High yield CDS posted the largest one-day (22bps), two-day (39bps), and one-week (38bps) gains since the March 2023 banking crisis. For the week, investment-grade spreads (to Treasuries) widened 12 to 105 bps - the largest weekly increase since the week of March 17, 2023. High yield spreads surged 53 bps this week – the largest gain since the March ’23 banking crisis’ 59 bps spike.
Citigroup and Bank of America CDS posted their largest daily and weekly gains since October. The KBW Bank Index sank 7.8% this week, with the Broker/Dealers falling 6.8%. MBS yields dropped 29 bps Friday, the largest one-day decline since December 13th, 2023. The 51 bps decline for the week was the most since November, 2022.
Importantly, the unfolding crisis is global. Europe’s STOXX Bank Index sank 7.8% this week, with Italian bank stocks down 8.6%. Japan’s TOPIX Bank Index dropped 6.8%. UK 10-year yields dropped 27 bps, and German bund yields fell 23 bps to a six-month low of 2.17%. European periphery bond risk premiums rose. Italian yield spreads to German bunds widened 10, Greece nine, and France eight bps (to 80bps). European subordinated bank debt CDS jumped 18 bps, second only to June’s 32 bps French election surge for data back to the March 2023 U.S. banking crisis. European high yield CDS jumped 37 to 332 bps. EM CDS jumped 16 to 183 bps – the largest weekly gain since August 2023 – to the high since April.
The market closed Friday pricing a 4.14% year-end Fed policy rate (implying 119bps of rate cuts), down an extraordinary 36 bps for the day and 50 bps for the week. The one-year overnight swaps rate sank 49 bps this week to 4.255% – the largest weekly decline since March 2023. Friday’s 29 bps collapse was the biggest single-session decline since March 17th, 2023.
The unfolding de-risking/deleveraging will pose a greater challenge for the Fed than the March 2023 bank liquidity crunch. New bank liquidity facilities will not ameliorate cross-market and global speculative deleveraging. And recalling the March 2020 experience (panic hedge fund deleveraging), it required the Fed to massively ratchet up QE announcements to begin quelling the liquidations.
I don’t expect the Fed to be quick to open the QE floodgates. And we’re now 94 days from what will be an incredibly contentious - and likely close - election. For what has already been inconceivable political drama, a market crisis somehow seems fitting. And the Fed thinks it can stay out of the political fray. Meanwhile, Iran and Hezbollah plot revenge attacks against Israel – with the U.S. moving additional military firepower to the region.
Manias are incredibly adept at fixating, obsessing, and imagining, all the while disregarding myriad risks. But they always come back to bite. This is going to bite real hard.
A freshly hawkish Bank of Japan surprised markets Wednesday by raising rates and reducing bond purchases. The yen gained 1.7% Wednesday and was already up 3.2% week-to-date versus the dollar heading into Friday’s employment report – only to jump another 1.7% to end the week 4.93% higher.
The unwind of levered yen “carry trades” gained momentum. For the week, the Japanese yen significantly added to recent gains against key EM “carry trade” currencies - including the Mexican peso 8.3%, the Colombian peso 7.2%, Brazilian real 5.9%, Hungarian forint 5.8%, Turkish lira 5.5%, Argentine peso 5.1%, Peruvian sol 4.9%, and Indian rupee 4.7%.
After trading to 161.76 on July 11th, the yen has rallied 10.35% to 146.53 to the dollar. Over this period, the Mexican peso is down 15.7% versus the yen, the Brazilian real 14.3%, the Chilean peso 13.1%, the Colombian peso 12.9%, the Argentine peso 10.8%, the Turkish lira 10.4%, the South African rand 10.1%, the Hungarian forint 9.6% and the Indian rupee 9.6%. Huge leveraged speculating community “carry trade” losses continue to mount.
It’s easily lost in a dizzying week that U.S. markets rallied strongly Wednesday on a “dovish hold” FOMC meeting. “Stocks Storm Back on Fed Day as Nvidia Surges 13%.” The Semiconductor Index rallied 7.0%, the Nasdaq100 3.0%, and the S&P500 1.6%. It quickly became an unforgiving head fake, ruthlessly punishing the over-confident buy-the-dip crowd.
The Semiconductors reversed 7% lower on Thursday, with the Nasdaq100 down 2.4%. Nvidia sank 6.7% Thursday, with Micron down 7.6% (and another 8% lower in evening trading). Amazon.com was also down post-earnings Thursday evening, with Intel crushed 20%.
Thursday’s failed tech rally sparked risk aversion, with the AI Bubble mania in serious trouble. Interestingly, investment-grade spreads (to Treasuries) widened five to 98 bps – the largest daily risk premium increase back to banking crisis March 13th, 2023. High yield spreads widened 11 Thursday to 325 bps – the largest move in six months.
Bank CDS also came to life Thursday – at home and abroad. European subordinated bank debt CDS jumped eight Thursday (to 120bps), the largest daily gain since June’s French election earthquake. Bank of America CDS jumped four (to 56bps) and Citigroup three (55bps) – both the largest one-day gains since October 2023 (Israel/Hamas war). The KBW Bank Index was slammed 3.0% in Thursday trading, with Europe’s STOXX 600 Bank Index sinking 4.5%.
EM CDS rose five (174bps) Thursday, as the Brazilian real declined another 2.1% against the yen, the Mexican peso 1.7%, and the Chilean peso 1.6%. Sniffing out trouble, two-year Treasury yields sank another 11 bps - following Wednesday’s 10 bps decline - to a 14-month low of 4.15%.
Quickly gathering momentum, global de-risking/deleveraging was at the cusp of triggering disorderly Treasury market (“core”) trading – a market these days dominated by levered speculation and derivatives hedging strategies. Friday, 8:30 am Eastern: 114,000 payrolls added in July, down from June’s revised lower 179,000, and badly missing the consensus estimate of 175,000. Worse yet, the Unemployment Rate unexpectedly rose two-tenths to 4.3%, while Average Hourly Earnings missed by a tenth at 0.2% (3.6% y-o-y). Disorder, coiled and ready, unleashed.
Markets quickly began to dislocate. Ten-year Treasury ended the session 19 bps lower at 3.79% - with yields down a stunning 40 bps for the week. Two-year Treasury yields dropped 27 Friday and 50 bps for the week – the largest weekly yield collapse since the March 2023 banking crisis.
August 2 – Bloomberg (Catarina Saraiva and Ananya Chag): “Federal Reserve Bank of Chicago President Austan Goolsbee emphasized the central bank will not overreact to any one report, adding policymakers will get a lot of data prior to the Fed’s next meeting. Goolsbee… said it’s the Fed’s job to figure out the ‘through line’ of the data and move in a ‘steady’ way. Still, he noted if rates stay restrictive too long, policymakers have to think about the employment side of the mandate. ‘We’d never want to overreact to any one month’s numbers,’ Goolsbee said… But ‘if unemployment is going to go up higher than the neutral rate, that is exactly the kind of pinching on the other side of the mandate that the law says the Fed has to think about and respond to.’”
August 2 – Bloomberg (Craig Torres): “Federal Reserve Bank of Richmond President Thomas Barkin said the US economy is in good shape, though it’s unclear whether the labor market is getting back to normal rates of hiring or more seriously deteriorating… ‘We’ve been through two years, two-and-a-half years of very frothy labor markets,’ Barkin said… ‘The question is, of course, are we normalizing or are we weakening?’ The difference is meaningful, he said, adding, ‘It gets to the question of whether we’re going to plateau or whether unemployment’s going to rise from here.’”
August 2 – Bloomberg (Ye Xie): “Wall Street banks are calling for aggressive interest-rate cuts by the Federal Reserve based on the latest evidence that the labor market is cooling. Economists at Bank of America..., Barclays Plc, Citigroup Inc., Goldman Sachs… and JPMorgan… revamped their forecasts for US monetary policy Friday after data showed the US unemployment rate rose again in July. All are calling for earlier, bigger or more interest-rate cuts. Citigroup economists said they expect half-point rate cuts in September and November and a quarter-point cut in December… JPMorgan economist Michael Feroli went a step further. While he also predicted half-point rate cuts in September and November, followed by quarter-point reductions at every subsequent meeting, Feroli said there’s ‘a strong case to act’ before the next meeting on Sept. 18.”
“…The Beige Book is great. What’s even greater is hearing the Reserve Bank presidents come in and talk about their conversations with businesses, and business leaders and workers, and people in the nonprofit sector in their districts. But I’ll tell you, it’s a pretty, the picture is not one of a slowing or a really bad economy, it’s one of there are spots of weakness and there are regions where growth is stronger than other regions, but overall, it’s again, look at the aggregate data. Aggregate data is, particularly… Private Domestic Final Purchases, is 2.6% and that’s a good indicator of private demand.” Chair Powell, July 31, 2024
Having read the FOMC statement and listened carefully to Chair Powell’s press conference, there was nothing indicating sensitivity to unfolding de-risking/deleveraging. Any suggestion at Wednesday’s FOMC meeting of two 50 bps cuts by year-end would surely have been met with chuckles and sneers.
While some data suggest an unfolding slowdown, the notion of an economy currently falling off a cliff is not credible. But that doesn’t mean I dismiss the calls for aggressive rate cuts from BofA, Barclays, Goldman, and JPMorgan. They are, after all, in the catbird’s seat monitoring de-risking/deleveraging – a dynamic that this week turned serious. And a serious market deleveraging would certainly awaken the Fed into action – rate cuts and, I would not be surprised, an abrupt expansion of the Fed’s balance sheet. Recall the March 2023 banking crisis provoked a $700 billion Fed/FHLB liquidity response.
“The Fed is behind the curve.” “Federal Reserve Under Fire as Slowing Jobs Market Fans Fears of Recession.” “Warren Tells Fed Chair Powell to 'Cancel His Summer Vacation' and Cut Rates Now.” And there’s a chorus of “I told you so” from those that have been pushing rate cuts.
Yet, the crucial issue is neither a cooling labor market nor a weakening economy. We’re staring at what could prove the start of downfalls for the greatest Bubbles in human history. I began the December 15th CBB, “Guard Down, Towel Tossed” with, “History will be the judge. This period will be examined, analyzed, discussed, and debated for at least the next century.” Powell had succumbed, he pivoted dovish at the December 13th FOMC meeting and press conference.
Between that fateful Fed meeting and July 10th peak highs, the Semiconductors inflated 50%. Nvidia ballooned 183% to surpass $3 TN in market cap. The Nasdaq returned 27% and the S&P500 22%. The Fed pivoted despite loose market financial conditions and historic speculative excess. We can assume seven months of enormous growth in leverage throughout equities and related derivatives, especially in big tech. I suspect speculative leverage also expanded aggressively in “carry trades,” “basis trades,” and throughout corporate Credit – at home and globally. A true debacle of perilous speculation.
The Fed and Bank of Japan needed to have been mindful that Bubbles typically conclude with destabilizing speculative blow-offs. They failed to tighten sufficiently to thwart perilous asset inflation and market melt-ups. There was no recognition of the great systemic damage inflicted during “Terminal Phase Excess.”
The unfolding crisis will be deeper and more painful due to seven additional months of crazy late-cycle excess – not because the Fed was slow to cut rates. Inflated markets and unbalanced maladjusted economies are today only more vulnerable to de-risking/deleveraging and an associated abrupt tightening of financial conditions.
True, markets have repeatedly recovered from incipient de-risking. Friday looked different. Investment-grade CDS jumped 3.7 to 58.3 bps in Friday trading, the largest one-day gain since September 20, 2023 (Powell’s not well-received higher for longer press conference). High yield CDS posted the largest one-day (22bps), two-day (39bps), and one-week (38bps) gains since the March 2023 banking crisis. For the week, investment-grade spreads (to Treasuries) widened 12 to 105 bps - the largest weekly increase since the week of March 17, 2023. High yield spreads surged 53 bps this week – the largest gain since the March ’23 banking crisis’ 59 bps spike.
Citigroup and Bank of America CDS posted their largest daily and weekly gains since October. The KBW Bank Index sank 7.8% this week, with the Broker/Dealers falling 6.8%. MBS yields dropped 29 bps Friday, the largest one-day decline since December 13th, 2023. The 51 bps decline for the week was the most since November, 2022.
Importantly, the unfolding crisis is global. Europe’s STOXX Bank Index sank 7.8% this week, with Italian bank stocks down 8.6%. Japan’s TOPIX Bank Index dropped 6.8%. UK 10-year yields dropped 27 bps, and German bund yields fell 23 bps to a six-month low of 2.17%. European periphery bond risk premiums rose. Italian yield spreads to German bunds widened 10, Greece nine, and France eight bps (to 80bps). European subordinated bank debt CDS jumped 18 bps, second only to June’s 32 bps French election surge for data back to the March 2023 U.S. banking crisis. European high yield CDS jumped 37 to 332 bps. EM CDS jumped 16 to 183 bps – the largest weekly gain since August 2023 – to the high since April.
The market closed Friday pricing a 4.14% year-end Fed policy rate (implying 119bps of rate cuts), down an extraordinary 36 bps for the day and 50 bps for the week. The one-year overnight swaps rate sank 49 bps this week to 4.255% – the largest weekly decline since March 2023. Friday’s 29 bps collapse was the biggest single-session decline since March 17th, 2023.
The unfolding de-risking/deleveraging will pose a greater challenge for the Fed than the March 2023 bank liquidity crunch. New bank liquidity facilities will not ameliorate cross-market and global speculative deleveraging. And recalling the March 2020 experience (panic hedge fund deleveraging), it required the Fed to massively ratchet up QE announcements to begin quelling the liquidations.
I don’t expect the Fed to be quick to open the QE floodgates. And we’re now 94 days from what will be an incredibly contentious - and likely close - election. For what has already been inconceivable political drama, a market crisis somehow seems fitting. And the Fed thinks it can stay out of the political fray. Meanwhile, Iran and Hezbollah plot revenge attacks against Israel – with the U.S. moving additional military firepower to the region.
Manias are incredibly adept at fixating, obsessing, and imagining, all the while disregarding myriad risks. But they always come back to bite. This is going to bite real hard.
For the Week:
The S&P500 (up 12.1% y-t-d) and the Dow (up 5.4%) each dropped 2.1%. The Utilities rallied 4.7% (up 19.0%). The Banks sank 7.8% (up 10.8%), and the Broker/Dealers dropped 6.8% (up 10.9%). The Transports fell 3.4% (down 3.3%). The S&P 400 Midcaps lost 4.1% (up 6.0%), and the small cap Russell 2000 sank 6.7% (up 4.1%). The Nasdaq100 slumped 3.1% (up 9.6%). The Semiconductors sank 9.7% (up 10.4%). The Biotechs were little changed (up 5.2%). With bullion surging $56, the HUI gold index added 0.2% (up 20.5%).
Three-month Treasury bill rates ended the week at 5.0275%. Two-year government yields sank 50 bps this week to 3.88% (down 37bps y-t-d). Five-year T-note yields fell 46 bps to 3.62% (down 23bps). Ten-year Treasury yields slumped 40 bps to 3.79% (down 9bps). Long bond yields dropped 35 bps to 4.11% (up 8bps). Benchmark Fannie Mae MBS yields sank 52 bps to 5.04% (down 23bps).
Italian yields declined 13 bps to 3.63% (down 7bps y-t-d). Greek 10-year yields fell 14 bps to 3.30% (up 24bps). Spain's 10-year yields dropped 17 bps to 3.06% (up 7bps). German bund yields sank 23 bps to 2.17% (up 15bps). French yields declined 15 bps to 2.97% (up 41bps). The French to German 10-year bond spread widened eight to 80 bps. U.K. 10-year gilt yields dropped 27 bps to 3.83% (up 29bps). U.K.'s FTSE equities index declined 1.3% (up 5.7% y-t-d).
Japan's Nikkei Equities Index sank 4.7% (up 7.3% y-t-d). Japanese 10-year "JGB" yields fell 12 bps to 0.95% (up 34bps y-t-d). France's CAC40 slumped 3.5% (down 3.9%). The German DAX equities index dropped 4.1% (up 5.4%). Spain's IBEX 35 equities index fell 4.4% (up 5.7%). Italy's FTSE MIB index sank 5.3% (up 5.5%). EM equities were mostly lower. Brazil's Bovespa index declined 1.3% (down 6.2%), and Mexico's Bolsa index slipped 0.9% (down 9.0%). South Korea's Kospi index fell 2.0% (up 0.8%). India's Sensex equities index slipped 0.4% (up 12.1%). China's Shanghai Exchange Index recovered 0.5% (down 2.3%). Turkey's Borsa Istanbul National 100 index dropped 3.8% (up 40.2%).
Federal Reserve Credit declined $20.3 billion last week to $7.146 TN. Fed Credit was down $1.744 TN from the June 22, 2022, peak. Over the past 255 weeks, Fed Credit expanded $3.419 TN, or 92%. Fed Credit inflated $4.335 TN, or 154%, over the past 612 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $9.5bn last week to a 16-month low of $3.301 TN. "Custody holdings" were down $144 billion y-o-y, or 4.2%.
Total money market fund assets declined $10.7 billion to $6.135 TN. Money funds were up $248 billion y-t-d and $619 billion, or 11.2%, y-o-y.
Total Commercial Paper sank $68.6 billion to $1.239 TN. CP was up $73bn, or 6.3%, over the past year.
Freddie Mac 30-year fixed mortgage rates declined five bps to a 25-week low 6.73% (down 19bps y-o-y). Fifteen-year rates fell eight bps to 5.99% (down 32bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 22 bps to a six-month low 7.04% (down 37bps).
Currency Watch:
July 31 – Bloomberg (Erica Yokoyama): “Japan’s currency intervention to support the yen in the past month was worth ¥5.5 trillion ($36.6bn), as the government showed its willingness to counter speculators betting against the yen… The July intervention followed similar actions in April and May, underscoring the government’s commitment to keeping speculators on the back foot.”
For the week, the U.S. Dollar Index declined 1.1% to 103.208 (up 1.9% y-t-d). For the week on the upside, the Japanese yen increased 4.9%, the Swiss franc 2.9%, the Swedish krona 2.3%, the South Korean won 1.7%, the Singapore dollar 1.2%, the New Zealand dollar 1.2%, the Norwegian krone 0.7%, the euro 0.5%, and the South African rand 0.1%. On the downside, the Mexican peso declined 3.7%, the Brazilian real 1.3%, the Australian dollar 0.6%, the British pound 0.5%, and the Canadian dollar 0.3%. The Chinese (onshore) renminbi increased 1.09% versus the dollar (down 1.01% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index declined 1.3% (down 4.0% y-t-d). Spot Gold jumped 2.3% to $2,443 (up 18.4%). Silver rallied 2.3% to $28.5598 (up 20%). WTI crude slumped $3.64, or 4.7%, to $73.52 (up 3%). Gasoline sank 5.8% (up 10%), and Natural Gas declined 1.9% to $1.967 (down 22%). Copper slipped 0.5% (up 6%). Wheat rallied 3.0% (down 14%), while Corn fell 2.0% (down 18%). Bitcoin sank $6,100, or 9.0%, to $61,780 (up 45%).
Middle East War Watch:
July 31 – Financial Times (Andrew England): “Israeli Prime Minister Benjamin Netanyahu has just taken a huge gamble. In a matter of hours, Israeli forces launched an air strike in Beirut targeting a senior commander of Hizbollah, the Lebanese militant movement, and have been accused by Hamas and Iran of assassinating the Palestinian group’s political leader in an attack in Tehran. Israel said it killed Fuad Shukr, a Hizbollah commander considered close to the group’s leader, Hassan Nasrallah… Netanyahu is no doubt betting the strikes will send a message of deterrence to his country’s enemies, while rallying Israelis after months of political turmoil. But it is a high-stakes bet that risks triggering the all-out Middle East war the region has feared since Hamas’s October 7 attack and Israel’s subsequent offensive in Gaza.”
July 31 – Wall Street Journal (Summer Said, Rory Jones and Carrie Keller-Lynn): “Iran had planned to use this week’s inauguration of its new president to show off its powerful collection of militias. Representatives of Hamas, Palestinian Islamic Jihad, Yemen’s Houthis and Lebanon’s Hezbollah all gathered in Tehran, where Hamas political leader Ismail Haniyeh hugged new Iranian President Masoud Pezeshkian amid chants of ‘Death to Israel.’ But before the next day dawned, it was Haniyeh who was dead, in a mysterious strike in the Iranian capital... It came just hours after the Israeli military said it had killed a top Hezbollah official with an airstrike in Beirut. The pair of provocative killings dealt an embarrassing blow to Iran and its self-proclaimed Axis of Resistance… ‘We are on the verge of a large, large-scale escalation,’ said Danny Citrinowicz, who served as head of the Iran branch for Israeli military intelligence and is now a fellow with the Tel Aviv-based Institute for National Security Studies. ‘Iran is leading the axis, and they cannot protect one of the leaders of the axis coming for Pezeshkian’s inauguration.’”
July 31 – Financial Times (Andrew England, Raya Jalabi and Najmeh Bozorgmehr): “Iran has accused Israel of assassinating Hamas’s political leader Ismail Haniyeh in a strike in Tehran and vowed to avenge his death as the attack dramatically raised the risk of a further escalation of regional hostilities. Haniyeh was killed in a strike on his residence in Tehran in the early hours of Wednesday morning… Haniyeh… had been living in exile in Qatar but often travelled to Iran… He had attended the inauguration of Iran’s new president Masoud Pezeshkian on Tuesday and met him earlier in the day. Iran’s supreme leader Ayatollah Ali Khamenei threatened Israel with a call to ‘avenge [Haniyeh’s] blood’, saying it was a ‘duty’ for Iran because the incident ‘occurred within the territory of the Islamic republic’. He added: ‘The criminal and terrorist Zionist regime martyred our dear guest in our home and caused us grief, but it has also paved the way for severe punishment for itself.’”
August 1 – Reuters (Parisa Hafezi, Ahmed Rasheed and Laila Bassam): “Top Iranian officials will meet the representatives of Iran's regional allies from Lebanon, Iraq and Yemen on Thursday to discuss potential retaliation against Israel after the killing of the Hamas leader in Tehran, five sources told Reuters. The region faces a risk of widened conflict between Israel, Iran and its proxies after Ismail Haniyeh's assassination in Tehran… and the killing of Hezbollah's senior commander… on the outskirts of the Lebanese capital Beirut.”
August 1 – Associated Press (Abby Sewell and Kareem Chehayeb): “Hezbollah’s leader warned Thursday that the conflict with Israel has entered a ‘new phase,’ as he addressed mourners at the funeral of a commander from the group who was killed by an Israeli airstrike… Meanwhile in Tehran, Iran’s supreme leader prayed over the body of Hamas’ political leader, who was killed in a presumed Israeli assassination… In a speech via video link to mourners gathered with Shukur’s coffin at an auditorium in a Beirut suburb, …Hassan Nasrallah said, ‘We … have entered a new phase that is different from the previous period.’ ‘Do they expect that Hajj Ismail Haniyeh will be killed in Iran and Iran will remain silent?’ he said of the Israelis. Addressing Israelis who celebrated the two killings, he said, ‘Laugh a bit and you will cry a lot.’”
August 1 – Reuters (Tom Perry): “Fuad Shukr, the top Hezbollah commander killed by Israel on Tuesday, was a founding member of the Iran-backed group who helped oversee its expansion from a shadowy Lebanese civil war militia to a major force in the Middle East. His killing was the heaviest blow to Hezbollah's command since the 2008 assassination of Imad Mughniyeh, underlining the gravity of this week's escalation in the conflict, which has been rumbling across region since the Gaza war erupted.”
July 29 – Financial Times (James Shotter and Neri Zilber): “Far-right protesters have stormed two army bases in Israel after the military police detained nine soldiers as part of an investigation into the alleged ‘serious abuse’ of a Palestinian prisoner at the Sde Teiman prison camp. The unrest began on Monday after protesters broke into Sde Teiman after the military police arrived to detain the soldiers for questioning… Protesters then broke into a second base later on the same day in Beit Lid, home to the military courts, where the soldiers had been transferred for questioning, prompting the army to deploy additional soldiers to protect the facilities and restore order.”
July 28 – Reuters (Ece Toksabay): “President Tayyip Erdogan said… Turkey might enter Israel as it had done in the past in Libya and Nagorno-Karabakh, though he did not spell out what sort of intervention he was suggesting. Erdogan, who has been a fierce critic of Israel's offensive in Gaza, started discussing that war during a speech praising his country's defence industry. ‘We must be very strong so that Israel can't do these ridiculous things to Palestine. Just like we entered Karabakh, just like we entered Libya, we might do similar to them,’ Erdogan told a meeting of his ruling AK Party…”
Taiwan Watch:
July 29 – Financial Times (Sinyi Au): “The total onshore assets of Taiwan fund firms grew 24.8% to NT$8.41tn ($257.41bn) in just six months as issuers of domestic equities exchange traded funds continue to benefit from the unceasing flood of retail investors into the market.”
Market Instability Watch:
July 31 – Reuters (Alun John and Tom Westbrook): “The Bank of Japan’s move to raise interest rates to their highest in 15 years has jolted the yen to its strongest against the dollar since March and left it poised for further gains, as investors reassess carry trades, once the year's favoured play… Wednesday's rate hike was the largest since 2007 and came just months after the BOJ ended eight years of negative interest rates. Governor Kazuo Ueda, furthermore, did not rule out another hike this year and stressed the bank's readiness to keep raising borrowing costs to levels deemed neutral to the economy.”
July 29 – New York Times (Alan Rappeport): “America’s gross national debt topped $35 trillion for the first time on Monday, a reminder of the nation’s grim fiscal predicament as legislative fights over taxes and spending initiatives loom in Washington. The Treasury Department noted the milestone in its daily report detailing the nation’s balance sheet. The red ink is mounting in the United States more quickly than many economists had predicted as the costs of federal programs enacted in recent years have exceeded initial projections… The Congressional Budget Office said last month that the U.S. national debt is poised to top $56 trillion by 2034, as rising spending and interest expenses outpace tax revenue.”
July 30 – Financial Times (Robin Wigglesworth and Will Schmitt): “…Fixed income ETFs — now a $2tn asset class — are shaking up the old order in a shadowy but important pillar of finance that has long been ruled by big banks and investment groups. Even the assets under management chart above understates how powerful this trend is. After all, the past few years have not been kind to the bond market, depressing the value of most fixed income ETFs and obscuring huge inflows. Even in 2022 — one of the worst years in history for the asset class — bond ETFs attracted $245bn of investor money. They have taken in another $195bn so far this year… Just a decade ago, only one of the 20 biggest bond funds in the world was an ETF… Today, five of the 20 largest bond market vehicles are ETFs, and there are 18 in the top 50…”
July 29 – Reuters (Davide Barbuscia): “The longest and deepest U.S. Treasury yield curve inversion in history, a key bond market signal of an upcoming recession, could be nearing its end. While an inverted curve has typically preceded a recession, this time there is debate about the predictive power of the curve… Some indicators in recent weeks have pointed to a slowdown, but growth remains strong thanks to a resilient labor market… In recent weeks, that curve has steepened - meaning that the spread of two-year yields over 10-year (2/10 curve) has narrowed - amid signs of a cooling economy. On Wednesday, the curve hit minus-14.5 bps, the least inverted it has been since July 2022…”
July 30 – Bloomberg (Christopher Anstey): “The two US Treasury secretaries who navigated the nation through the global financial crisis said the next administration will inherit a vibrant economy with ‘dark’ challenges, calling on politicians to address the fiscal deficit and safeguard market competition. ‘The president’s also going to inherit some dark shadows — it’s a very dangerous, much more complicated world to navigate,’ Timothy Geithner said… His predecessor at the Treasury’s helm, Henry Paulson, said that government debt is a ‘dark cloud’ that, ‘if not checked, is ultimately going to destroy our prosperity.’”
Global Credit Bubble Watch:
July 29 – Bloomberg (Olivia Raimonde, Gowri Gurumurthy and Jeannine Amodeo): “Corporate borrowers are rushing to debt markets to raise cash before a series of central bank meetings kick off around the globe this week. Ten companies are selling new bond deals in the high-grade primary market Monday, while at least 14 new leveraged loan sales began alongside seven high-yield bond offerings… July’s issuance volume entered the week at $96.6 billion, the busiest since 2017.”
August 1 – Bloomberg (Alex Veiga): “Fixed-income ETFs took in a historic amount of cash last month as investors pile into the bond market, positioning for the start of a Federal Reserve rate-cutting cycle. Bond funds saw inflows of roughly $39 billion in July, the most on record, according to… Strategas. Investors are lavishing money across the fixed-income spectrum, from longer-duration government bonds and short-term obligations issued by Corporate America to muni ETFs.”
August 1 – Bloomberg (John Sage): “Private credit firms are looking to get their share of an estimated $178 trillion personal wealth market by offering individual investors what looks almost like a mutual fund. The product, called an interval fund, is being pitched to registered investment advisers as an easy-to-sell entry into direct lending. Interval funds are being offered in amounts as low as $1,000 and can be purchased online through brokerage accounts… KKR & Co. and Capital Group plan to launch hybrid public-private interval funds in 2025. Blackstone Inc. is considering launching an interval fund in the near term…”
AI Bubble Watch:
July 31 – Bloomberg (Brooke Sutherland, Naureen S Malik and Julie Fine): “One business may finally be getting too big for Texas: data centers, those whirring warehouses packed with the electricity-sucking computer servers that power the modern internet and the development of artificial intelligence. Up until now, the business-friendly state has welcomed their growth, which has been a boon for land values and property taxes. Texas offers vast tracts of land and a broad supply of cheap energy sources, including wind and solar. But the boom in data centers threatens to gobble up quite a bit of both… To keep up with Texas’ soaring energy needs, the state’s grid by 2030 will need to support 152 gigawatts of demand on peak days, almost double what it can currently handle, according to the Electric Reliability Council of Texas (Ercot). Data centers and crypto miners, which have also flocked to the state, account for a big chunk of that projected demand.”
July 30 – Bloomberg (Josh Saul): “A data center building boom across the US will boost the amount of electricity American Electric Power Co. plans to supply by 15 gigawatts — the output of 15 nuclear reactors — by 2030, company executives said… The additional power is equal to 42% of the AEP’s current peak load and comes as utilities worldwide struggle to supply new data centers, which require large amounts of electricity to run complex artificial intelligence operations. Electrified factories and battery-powered cars are also adding to the biggest growth in electricity demand utilities have seen in a generation… Most of the new data centers AEP will supply will be located in Ohio and Texas, executives said…”
July 29 – CNBC (Kif Leswing): “Apple said… that the artificial intelligence models underpinning Apple Intelligence, its AI system, were pretrained on processors designed by Google, a sign that Big Tech companies are looking for alternatives to Nvidia when it comes to the training of cutting-edge AI. Apple’s choice of Google’s homegrown Tensor Processing Unit (TPU) for training was detailed in a technical paper just published by the company.”
Bubble and Mania Watch:
July 31 – Bloomberg (Subrat Patnaik): “Nvidia Corp.’s wild ride this week is headed for the record books. The world’s most valuable company has added a record $329 billion in value — obliterating the single-day record that it has repeatedly set in the past few months. The 13% rally comes a day after a 7% rout wiped out more than $193 billion from the now $2.9 trillion company, continuing a run of volatility that makes even notoriously turbulent assets like Bitcoin look stolid. In July alone, the shares have endured routs that account for four of the eight biggest market cap wipe-outs…”
July 31 – Financial Times (Madison Hall): “The number of US households invested in mutual funds has grown…, according to the Investment Company Institute’s 2024 Investment Company Factbook. In total, 68.7mn households, or just over half of US households, were invested in mutual funds in 2023, up from 58.7mn households in 2020. Those households had $18.6tn invested in long-term mutual funds and $3.9tn in money market funds, which accounted for 88% of mutual fund total net assets, while the remainder came from institutional investors, which had $2tn invested in money market funds and $1tn invested in long-term mutual funds.”
July 29 – Reuters (Lewis Krauskopf): “A bruising selloff in U.S. stocks is putting a sharper focus on valuations of the tech names such as Nvidia and Microsoft that have driven markets higher for most of this year. Despite a recent pullback, the S&P 500 tech sector is trading at 29.5 times 12-month earnings estimates, near a two-decade high reached earlier this month. The overall market is also elevated historically, with the benchmark S&P 500 index trading at 20.7 times forward estimates, compared to its long-term average of 15.7…”
July 30 – Bloomberg (Neil Callanan): “Any hopes that falling borrowing costs would stem the pain from the US office downturn were swept away last week. Deutsche Bank AG set aside more money for souring US commercial real estate loans, while a Blackstone Inc. mortgage trust slashed its dividend. New York Community Bancorp’s shares then plunged the most since the last bout of CRE-related turmoil in March after provisions for losses came in at more than double the average expected by analysts. The announcements signal that lenders may not be able to just amend and extend loans in the hope that lower interest rates will ease borrowers’ pain and give property owners more time to refinance debt.”
July 29 – Bloomberg (Neil Callanan and Natalie Wong): “South Korean investors — eager for a slice of the biggest commercial property market in the world — bet big on riskier loans for office buildings from New York to Los Angeles. But now… more investors are trying to pull back from that mezzanine debt and taking a massive hit on their way out. In Times Square, South Korea’s IGIS Asset Management provided subordinated debt for 1551 Broadway… But the firm decided to cut its losses and sell at a hefty discount… In Los Angeles, South Korea-based Meritz Alternative Asset Management was a mezzanine lender on the Gas Company Tower, which has struggled after the owner defaulted on the building’s debt. It’s a rapid change for an investor set that piled into the US commercial real estate market when rates were lower and the market was booming.”
U.S./Russia/China/Europe Watch:
August 1 – Reuters (Andrew Osborn, Filipp Lebedev and Lucy Papachristou): “Jailed U.S. Wall Street Journal reporter Evan Gershkovich and ex-U.S. Marine Paul Whelan were among two dozen detainees from the United States, Russia and a number of their allies freed… in the biggest prisoner exchange since the Cold War. The White House said the U.S. had negotiated the complex trade with Russia and other countries. It said eight prisoners held in the West were being sent back to Russia.”
July 31 – Financial Times (Sam Jones): “Germany has blamed China for a ‘serious’ cyber attack in 2021 on its government agency for precision mapping, which potentially exposed sensitive information vital to protecting critical infrastructure. German interior minister Nancy Faeser… condemned the Chinese state actors responsible ‘in the strongest possible terms’. The German foreign office summoned the Chinese ambassador in Berlin for a formal complaint.”
De-globalization and Iron Curtain Watch:
July 27 – Bloomberg: “China’s manufacturing capacity is helping the world fight climate change and contain inflation, said Vice Finance Minister Liao Min, pushing back against US Treasury Secretary Janet Yellen’s latest criticism of the nation’s industrial excess. ‘For decades, China has been a force of disinflation for the world through its supply of manufactured products with good value for money,’ Liao said… ‘It is now also providing green goods for the world as countries try to achieve their carbon reduction goals by 2030,’ he said.”
Inflation Watch:
July 31 – Bloomberg (Stephan Kahl): “Natural catastrophes caused about $62 billion of insured losses in the first half of 2024 — roughly 70% above the 10-year average — as extreme wildfires, droughts and floods upend historical norms. The data, which were compiled by Munich Re, show that ‘weather catastrophes in the US’ dominated losses in the period, Tobias Grimm, the reinsurer’s head of climate advisory, said... Other developments of note include ‘floods in regions where they are very rare, such as Dubai,’ he said. ‘It is clear that climate change plays a role in this development,’ Grimm said. In all, natural catastrophes caused $120 billion of losses in the first six months, with little to indicate that the rest of 2024 will offer much respite.”
July 29 – Reuters (Disha Mishra): “U.S. home insurers suffered their worst underwriting loss this century in 2023, as a toxic mix of natural disasters, inflation and population growth in at-risk areas put a vital financial market under acute pressure, according to rating agency AM Best. Insurers providing policies to homeowners were hit with a $15.2 billion net underwriting loss last year, according to… AM Best, saying that the figure was the worst since at least 2000 and more than double the losses since the previous year.”
Biden Administration Watch:
The S&P500 (up 12.1% y-t-d) and the Dow (up 5.4%) each dropped 2.1%. The Utilities rallied 4.7% (up 19.0%). The Banks sank 7.8% (up 10.8%), and the Broker/Dealers dropped 6.8% (up 10.9%). The Transports fell 3.4% (down 3.3%). The S&P 400 Midcaps lost 4.1% (up 6.0%), and the small cap Russell 2000 sank 6.7% (up 4.1%). The Nasdaq100 slumped 3.1% (up 9.6%). The Semiconductors sank 9.7% (up 10.4%). The Biotechs were little changed (up 5.2%). With bullion surging $56, the HUI gold index added 0.2% (up 20.5%).
Three-month Treasury bill rates ended the week at 5.0275%. Two-year government yields sank 50 bps this week to 3.88% (down 37bps y-t-d). Five-year T-note yields fell 46 bps to 3.62% (down 23bps). Ten-year Treasury yields slumped 40 bps to 3.79% (down 9bps). Long bond yields dropped 35 bps to 4.11% (up 8bps). Benchmark Fannie Mae MBS yields sank 52 bps to 5.04% (down 23bps).
Italian yields declined 13 bps to 3.63% (down 7bps y-t-d). Greek 10-year yields fell 14 bps to 3.30% (up 24bps). Spain's 10-year yields dropped 17 bps to 3.06% (up 7bps). German bund yields sank 23 bps to 2.17% (up 15bps). French yields declined 15 bps to 2.97% (up 41bps). The French to German 10-year bond spread widened eight to 80 bps. U.K. 10-year gilt yields dropped 27 bps to 3.83% (up 29bps). U.K.'s FTSE equities index declined 1.3% (up 5.7% y-t-d).
Japan's Nikkei Equities Index sank 4.7% (up 7.3% y-t-d). Japanese 10-year "JGB" yields fell 12 bps to 0.95% (up 34bps y-t-d). France's CAC40 slumped 3.5% (down 3.9%). The German DAX equities index dropped 4.1% (up 5.4%). Spain's IBEX 35 equities index fell 4.4% (up 5.7%). Italy's FTSE MIB index sank 5.3% (up 5.5%). EM equities were mostly lower. Brazil's Bovespa index declined 1.3% (down 6.2%), and Mexico's Bolsa index slipped 0.9% (down 9.0%). South Korea's Kospi index fell 2.0% (up 0.8%). India's Sensex equities index slipped 0.4% (up 12.1%). China's Shanghai Exchange Index recovered 0.5% (down 2.3%). Turkey's Borsa Istanbul National 100 index dropped 3.8% (up 40.2%).
Federal Reserve Credit declined $20.3 billion last week to $7.146 TN. Fed Credit was down $1.744 TN from the June 22, 2022, peak. Over the past 255 weeks, Fed Credit expanded $3.419 TN, or 92%. Fed Credit inflated $4.335 TN, or 154%, over the past 612 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $9.5bn last week to a 16-month low of $3.301 TN. "Custody holdings" were down $144 billion y-o-y, or 4.2%.
Total money market fund assets declined $10.7 billion to $6.135 TN. Money funds were up $248 billion y-t-d and $619 billion, or 11.2%, y-o-y.
Total Commercial Paper sank $68.6 billion to $1.239 TN. CP was up $73bn, or 6.3%, over the past year.
Freddie Mac 30-year fixed mortgage rates declined five bps to a 25-week low 6.73% (down 19bps y-o-y). Fifteen-year rates fell eight bps to 5.99% (down 32bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 22 bps to a six-month low 7.04% (down 37bps).
Currency Watch:
July 31 – Bloomberg (Erica Yokoyama): “Japan’s currency intervention to support the yen in the past month was worth ¥5.5 trillion ($36.6bn), as the government showed its willingness to counter speculators betting against the yen… The July intervention followed similar actions in April and May, underscoring the government’s commitment to keeping speculators on the back foot.”
For the week, the U.S. Dollar Index declined 1.1% to 103.208 (up 1.9% y-t-d). For the week on the upside, the Japanese yen increased 4.9%, the Swiss franc 2.9%, the Swedish krona 2.3%, the South Korean won 1.7%, the Singapore dollar 1.2%, the New Zealand dollar 1.2%, the Norwegian krone 0.7%, the euro 0.5%, and the South African rand 0.1%. On the downside, the Mexican peso declined 3.7%, the Brazilian real 1.3%, the Australian dollar 0.6%, the British pound 0.5%, and the Canadian dollar 0.3%. The Chinese (onshore) renminbi increased 1.09% versus the dollar (down 1.01% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index declined 1.3% (down 4.0% y-t-d). Spot Gold jumped 2.3% to $2,443 (up 18.4%). Silver rallied 2.3% to $28.5598 (up 20%). WTI crude slumped $3.64, or 4.7%, to $73.52 (up 3%). Gasoline sank 5.8% (up 10%), and Natural Gas declined 1.9% to $1.967 (down 22%). Copper slipped 0.5% (up 6%). Wheat rallied 3.0% (down 14%), while Corn fell 2.0% (down 18%). Bitcoin sank $6,100, or 9.0%, to $61,780 (up 45%).
Middle East War Watch:
July 31 – Financial Times (Andrew England): “Israeli Prime Minister Benjamin Netanyahu has just taken a huge gamble. In a matter of hours, Israeli forces launched an air strike in Beirut targeting a senior commander of Hizbollah, the Lebanese militant movement, and have been accused by Hamas and Iran of assassinating the Palestinian group’s political leader in an attack in Tehran. Israel said it killed Fuad Shukr, a Hizbollah commander considered close to the group’s leader, Hassan Nasrallah… Netanyahu is no doubt betting the strikes will send a message of deterrence to his country’s enemies, while rallying Israelis after months of political turmoil. But it is a high-stakes bet that risks triggering the all-out Middle East war the region has feared since Hamas’s October 7 attack and Israel’s subsequent offensive in Gaza.”
July 31 – Wall Street Journal (Summer Said, Rory Jones and Carrie Keller-Lynn): “Iran had planned to use this week’s inauguration of its new president to show off its powerful collection of militias. Representatives of Hamas, Palestinian Islamic Jihad, Yemen’s Houthis and Lebanon’s Hezbollah all gathered in Tehran, where Hamas political leader Ismail Haniyeh hugged new Iranian President Masoud Pezeshkian amid chants of ‘Death to Israel.’ But before the next day dawned, it was Haniyeh who was dead, in a mysterious strike in the Iranian capital... It came just hours after the Israeli military said it had killed a top Hezbollah official with an airstrike in Beirut. The pair of provocative killings dealt an embarrassing blow to Iran and its self-proclaimed Axis of Resistance… ‘We are on the verge of a large, large-scale escalation,’ said Danny Citrinowicz, who served as head of the Iran branch for Israeli military intelligence and is now a fellow with the Tel Aviv-based Institute for National Security Studies. ‘Iran is leading the axis, and they cannot protect one of the leaders of the axis coming for Pezeshkian’s inauguration.’”
July 31 – Financial Times (Andrew England, Raya Jalabi and Najmeh Bozorgmehr): “Iran has accused Israel of assassinating Hamas’s political leader Ismail Haniyeh in a strike in Tehran and vowed to avenge his death as the attack dramatically raised the risk of a further escalation of regional hostilities. Haniyeh was killed in a strike on his residence in Tehran in the early hours of Wednesday morning… Haniyeh… had been living in exile in Qatar but often travelled to Iran… He had attended the inauguration of Iran’s new president Masoud Pezeshkian on Tuesday and met him earlier in the day. Iran’s supreme leader Ayatollah Ali Khamenei threatened Israel with a call to ‘avenge [Haniyeh’s] blood’, saying it was a ‘duty’ for Iran because the incident ‘occurred within the territory of the Islamic republic’. He added: ‘The criminal and terrorist Zionist regime martyred our dear guest in our home and caused us grief, but it has also paved the way for severe punishment for itself.’”
August 1 – Reuters (Parisa Hafezi, Ahmed Rasheed and Laila Bassam): “Top Iranian officials will meet the representatives of Iran's regional allies from Lebanon, Iraq and Yemen on Thursday to discuss potential retaliation against Israel after the killing of the Hamas leader in Tehran, five sources told Reuters. The region faces a risk of widened conflict between Israel, Iran and its proxies after Ismail Haniyeh's assassination in Tehran… and the killing of Hezbollah's senior commander… on the outskirts of the Lebanese capital Beirut.”
August 1 – Associated Press (Abby Sewell and Kareem Chehayeb): “Hezbollah’s leader warned Thursday that the conflict with Israel has entered a ‘new phase,’ as he addressed mourners at the funeral of a commander from the group who was killed by an Israeli airstrike… Meanwhile in Tehran, Iran’s supreme leader prayed over the body of Hamas’ political leader, who was killed in a presumed Israeli assassination… In a speech via video link to mourners gathered with Shukur’s coffin at an auditorium in a Beirut suburb, …Hassan Nasrallah said, ‘We … have entered a new phase that is different from the previous period.’ ‘Do they expect that Hajj Ismail Haniyeh will be killed in Iran and Iran will remain silent?’ he said of the Israelis. Addressing Israelis who celebrated the two killings, he said, ‘Laugh a bit and you will cry a lot.’”
August 1 – Reuters (Tom Perry): “Fuad Shukr, the top Hezbollah commander killed by Israel on Tuesday, was a founding member of the Iran-backed group who helped oversee its expansion from a shadowy Lebanese civil war militia to a major force in the Middle East. His killing was the heaviest blow to Hezbollah's command since the 2008 assassination of Imad Mughniyeh, underlining the gravity of this week's escalation in the conflict, which has been rumbling across region since the Gaza war erupted.”
July 29 – Financial Times (James Shotter and Neri Zilber): “Far-right protesters have stormed two army bases in Israel after the military police detained nine soldiers as part of an investigation into the alleged ‘serious abuse’ of a Palestinian prisoner at the Sde Teiman prison camp. The unrest began on Monday after protesters broke into Sde Teiman after the military police arrived to detain the soldiers for questioning… Protesters then broke into a second base later on the same day in Beit Lid, home to the military courts, where the soldiers had been transferred for questioning, prompting the army to deploy additional soldiers to protect the facilities and restore order.”
July 28 – Reuters (Ece Toksabay): “President Tayyip Erdogan said… Turkey might enter Israel as it had done in the past in Libya and Nagorno-Karabakh, though he did not spell out what sort of intervention he was suggesting. Erdogan, who has been a fierce critic of Israel's offensive in Gaza, started discussing that war during a speech praising his country's defence industry. ‘We must be very strong so that Israel can't do these ridiculous things to Palestine. Just like we entered Karabakh, just like we entered Libya, we might do similar to them,’ Erdogan told a meeting of his ruling AK Party…”
Taiwan Watch:
July 29 – Financial Times (Sinyi Au): “The total onshore assets of Taiwan fund firms grew 24.8% to NT$8.41tn ($257.41bn) in just six months as issuers of domestic equities exchange traded funds continue to benefit from the unceasing flood of retail investors into the market.”
Market Instability Watch:
July 31 – Reuters (Alun John and Tom Westbrook): “The Bank of Japan’s move to raise interest rates to their highest in 15 years has jolted the yen to its strongest against the dollar since March and left it poised for further gains, as investors reassess carry trades, once the year's favoured play… Wednesday's rate hike was the largest since 2007 and came just months after the BOJ ended eight years of negative interest rates. Governor Kazuo Ueda, furthermore, did not rule out another hike this year and stressed the bank's readiness to keep raising borrowing costs to levels deemed neutral to the economy.”
July 29 – New York Times (Alan Rappeport): “America’s gross national debt topped $35 trillion for the first time on Monday, a reminder of the nation’s grim fiscal predicament as legislative fights over taxes and spending initiatives loom in Washington. The Treasury Department noted the milestone in its daily report detailing the nation’s balance sheet. The red ink is mounting in the United States more quickly than many economists had predicted as the costs of federal programs enacted in recent years have exceeded initial projections… The Congressional Budget Office said last month that the U.S. national debt is poised to top $56 trillion by 2034, as rising spending and interest expenses outpace tax revenue.”
July 30 – Financial Times (Robin Wigglesworth and Will Schmitt): “…Fixed income ETFs — now a $2tn asset class — are shaking up the old order in a shadowy but important pillar of finance that has long been ruled by big banks and investment groups. Even the assets under management chart above understates how powerful this trend is. After all, the past few years have not been kind to the bond market, depressing the value of most fixed income ETFs and obscuring huge inflows. Even in 2022 — one of the worst years in history for the asset class — bond ETFs attracted $245bn of investor money. They have taken in another $195bn so far this year… Just a decade ago, only one of the 20 biggest bond funds in the world was an ETF… Today, five of the 20 largest bond market vehicles are ETFs, and there are 18 in the top 50…”
July 29 – Reuters (Davide Barbuscia): “The longest and deepest U.S. Treasury yield curve inversion in history, a key bond market signal of an upcoming recession, could be nearing its end. While an inverted curve has typically preceded a recession, this time there is debate about the predictive power of the curve… Some indicators in recent weeks have pointed to a slowdown, but growth remains strong thanks to a resilient labor market… In recent weeks, that curve has steepened - meaning that the spread of two-year yields over 10-year (2/10 curve) has narrowed - amid signs of a cooling economy. On Wednesday, the curve hit minus-14.5 bps, the least inverted it has been since July 2022…”
July 30 – Bloomberg (Christopher Anstey): “The two US Treasury secretaries who navigated the nation through the global financial crisis said the next administration will inherit a vibrant economy with ‘dark’ challenges, calling on politicians to address the fiscal deficit and safeguard market competition. ‘The president’s also going to inherit some dark shadows — it’s a very dangerous, much more complicated world to navigate,’ Timothy Geithner said… His predecessor at the Treasury’s helm, Henry Paulson, said that government debt is a ‘dark cloud’ that, ‘if not checked, is ultimately going to destroy our prosperity.’”
Global Credit Bubble Watch:
July 29 – Bloomberg (Olivia Raimonde, Gowri Gurumurthy and Jeannine Amodeo): “Corporate borrowers are rushing to debt markets to raise cash before a series of central bank meetings kick off around the globe this week. Ten companies are selling new bond deals in the high-grade primary market Monday, while at least 14 new leveraged loan sales began alongside seven high-yield bond offerings… July’s issuance volume entered the week at $96.6 billion, the busiest since 2017.”
August 1 – Bloomberg (Alex Veiga): “Fixed-income ETFs took in a historic amount of cash last month as investors pile into the bond market, positioning for the start of a Federal Reserve rate-cutting cycle. Bond funds saw inflows of roughly $39 billion in July, the most on record, according to… Strategas. Investors are lavishing money across the fixed-income spectrum, from longer-duration government bonds and short-term obligations issued by Corporate America to muni ETFs.”
August 1 – Bloomberg (John Sage): “Private credit firms are looking to get their share of an estimated $178 trillion personal wealth market by offering individual investors what looks almost like a mutual fund. The product, called an interval fund, is being pitched to registered investment advisers as an easy-to-sell entry into direct lending. Interval funds are being offered in amounts as low as $1,000 and can be purchased online through brokerage accounts… KKR & Co. and Capital Group plan to launch hybrid public-private interval funds in 2025. Blackstone Inc. is considering launching an interval fund in the near term…”
AI Bubble Watch:
July 31 – Bloomberg (Brooke Sutherland, Naureen S Malik and Julie Fine): “One business may finally be getting too big for Texas: data centers, those whirring warehouses packed with the electricity-sucking computer servers that power the modern internet and the development of artificial intelligence. Up until now, the business-friendly state has welcomed their growth, which has been a boon for land values and property taxes. Texas offers vast tracts of land and a broad supply of cheap energy sources, including wind and solar. But the boom in data centers threatens to gobble up quite a bit of both… To keep up with Texas’ soaring energy needs, the state’s grid by 2030 will need to support 152 gigawatts of demand on peak days, almost double what it can currently handle, according to the Electric Reliability Council of Texas (Ercot). Data centers and crypto miners, which have also flocked to the state, account for a big chunk of that projected demand.”
July 30 – Bloomberg (Josh Saul): “A data center building boom across the US will boost the amount of electricity American Electric Power Co. plans to supply by 15 gigawatts — the output of 15 nuclear reactors — by 2030, company executives said… The additional power is equal to 42% of the AEP’s current peak load and comes as utilities worldwide struggle to supply new data centers, which require large amounts of electricity to run complex artificial intelligence operations. Electrified factories and battery-powered cars are also adding to the biggest growth in electricity demand utilities have seen in a generation… Most of the new data centers AEP will supply will be located in Ohio and Texas, executives said…”
July 29 – CNBC (Kif Leswing): “Apple said… that the artificial intelligence models underpinning Apple Intelligence, its AI system, were pretrained on processors designed by Google, a sign that Big Tech companies are looking for alternatives to Nvidia when it comes to the training of cutting-edge AI. Apple’s choice of Google’s homegrown Tensor Processing Unit (TPU) for training was detailed in a technical paper just published by the company.”
Bubble and Mania Watch:
July 31 – Bloomberg (Subrat Patnaik): “Nvidia Corp.’s wild ride this week is headed for the record books. The world’s most valuable company has added a record $329 billion in value — obliterating the single-day record that it has repeatedly set in the past few months. The 13% rally comes a day after a 7% rout wiped out more than $193 billion from the now $2.9 trillion company, continuing a run of volatility that makes even notoriously turbulent assets like Bitcoin look stolid. In July alone, the shares have endured routs that account for four of the eight biggest market cap wipe-outs…”
July 31 – Financial Times (Madison Hall): “The number of US households invested in mutual funds has grown…, according to the Investment Company Institute’s 2024 Investment Company Factbook. In total, 68.7mn households, or just over half of US households, were invested in mutual funds in 2023, up from 58.7mn households in 2020. Those households had $18.6tn invested in long-term mutual funds and $3.9tn in money market funds, which accounted for 88% of mutual fund total net assets, while the remainder came from institutional investors, which had $2tn invested in money market funds and $1tn invested in long-term mutual funds.”
July 29 – Reuters (Lewis Krauskopf): “A bruising selloff in U.S. stocks is putting a sharper focus on valuations of the tech names such as Nvidia and Microsoft that have driven markets higher for most of this year. Despite a recent pullback, the S&P 500 tech sector is trading at 29.5 times 12-month earnings estimates, near a two-decade high reached earlier this month. The overall market is also elevated historically, with the benchmark S&P 500 index trading at 20.7 times forward estimates, compared to its long-term average of 15.7…”
July 30 – Bloomberg (Neil Callanan): “Any hopes that falling borrowing costs would stem the pain from the US office downturn were swept away last week. Deutsche Bank AG set aside more money for souring US commercial real estate loans, while a Blackstone Inc. mortgage trust slashed its dividend. New York Community Bancorp’s shares then plunged the most since the last bout of CRE-related turmoil in March after provisions for losses came in at more than double the average expected by analysts. The announcements signal that lenders may not be able to just amend and extend loans in the hope that lower interest rates will ease borrowers’ pain and give property owners more time to refinance debt.”
July 29 – Bloomberg (Neil Callanan and Natalie Wong): “South Korean investors — eager for a slice of the biggest commercial property market in the world — bet big on riskier loans for office buildings from New York to Los Angeles. But now… more investors are trying to pull back from that mezzanine debt and taking a massive hit on their way out. In Times Square, South Korea’s IGIS Asset Management provided subordinated debt for 1551 Broadway… But the firm decided to cut its losses and sell at a hefty discount… In Los Angeles, South Korea-based Meritz Alternative Asset Management was a mezzanine lender on the Gas Company Tower, which has struggled after the owner defaulted on the building’s debt. It’s a rapid change for an investor set that piled into the US commercial real estate market when rates were lower and the market was booming.”
U.S./Russia/China/Europe Watch:
August 1 – Reuters (Andrew Osborn, Filipp Lebedev and Lucy Papachristou): “Jailed U.S. Wall Street Journal reporter Evan Gershkovich and ex-U.S. Marine Paul Whelan were among two dozen detainees from the United States, Russia and a number of their allies freed… in the biggest prisoner exchange since the Cold War. The White House said the U.S. had negotiated the complex trade with Russia and other countries. It said eight prisoners held in the West were being sent back to Russia.”
July 31 – Financial Times (Sam Jones): “Germany has blamed China for a ‘serious’ cyber attack in 2021 on its government agency for precision mapping, which potentially exposed sensitive information vital to protecting critical infrastructure. German interior minister Nancy Faeser… condemned the Chinese state actors responsible ‘in the strongest possible terms’. The German foreign office summoned the Chinese ambassador in Berlin for a formal complaint.”
De-globalization and Iron Curtain Watch:
July 27 – Bloomberg: “China’s manufacturing capacity is helping the world fight climate change and contain inflation, said Vice Finance Minister Liao Min, pushing back against US Treasury Secretary Janet Yellen’s latest criticism of the nation’s industrial excess. ‘For decades, China has been a force of disinflation for the world through its supply of manufactured products with good value for money,’ Liao said… ‘It is now also providing green goods for the world as countries try to achieve their carbon reduction goals by 2030,’ he said.”
Inflation Watch:
July 31 – Bloomberg (Stephan Kahl): “Natural catastrophes caused about $62 billion of insured losses in the first half of 2024 — roughly 70% above the 10-year average — as extreme wildfires, droughts and floods upend historical norms. The data, which were compiled by Munich Re, show that ‘weather catastrophes in the US’ dominated losses in the period, Tobias Grimm, the reinsurer’s head of climate advisory, said... Other developments of note include ‘floods in regions where they are very rare, such as Dubai,’ he said. ‘It is clear that climate change plays a role in this development,’ Grimm said. In all, natural catastrophes caused $120 billion of losses in the first six months, with little to indicate that the rest of 2024 will offer much respite.”
July 29 – Reuters (Disha Mishra): “U.S. home insurers suffered their worst underwriting loss this century in 2023, as a toxic mix of natural disasters, inflation and population growth in at-risk areas put a vital financial market under acute pressure, according to rating agency AM Best. Insurers providing policies to homeowners were hit with a $15.2 billion net underwriting loss last year, according to… AM Best, saying that the figure was the worst since at least 2000 and more than double the losses since the previous year.”
Biden Administration Watch:
August 2 – Reuters (Andrew Osborn, Filipp Lebedev, Lucy Papachristou, Trevor Hunnicutt and Andrea Shalal): “U.S. journalist Evan Gershkovich and ex-U.S. Marine Paul Whelan returned to the United States on Thursday, hours after being freed from Russian detention in the biggest prisoner exchange between the two countries since the Cold War. The White House said it negotiated the trade with Russia, Germany and three other countries. The deal, worked on in secrecy for more than a year, involved 24 prisoners - 16 moving from Russia to the West and eight sent back to Russia from the West.”
Federal Reserve Watch:
Federal Reserve Watch:
July 31 – Wall Street Journal (Nick Timiraos): “By opening the door wider to an interest-rate cut in September, the Federal Reserve is on a crash course with the presidential election. For a central bank that judiciously aspires to stay above the fray of partisan politics, confronting a potential policy shift around election time amounts to a lose-lose. Delivering a rate cut ahead of the election could rile up Republicans and former President Donald Trump, but withholding a needed reduction could undermine the economy and upset Democrats.”
U.S. Economic Bubble Watch:
August 1 – Reuters (Lucia Mutikani): “A measure of U.S. manufacturing activity dropped to an eight-month low in July amid a slump in new orders, but that likely exaggerates the industry's struggles as production at factories rebounded sharply in the second quarter. The Institute for Supply Management (ISM) said… its manufacturing PMI dropped to 46.8 last month, the lowest reading since November, from 48.5 in June… The ISM survey's forward-looking new orders sub-index fell to 47.4 last month from 49.3 in June. Output continued to decline, with the production sub-index sliding to 45.9 from 48.5 in June. Despite subdued orders, manufacturers faced higher prices for inputs, likely reflecting soaring freight rates. The survey's measure of prices paid by manufacturers increased to 52.9 from 52.1 in June.”
July 31 – Reuters (Lucia Mutikani): “U.S. private payrolls increased far less than expected in July, but that likely is not a true reflection of a labor market that continues to moderate gradually. Private payrolls rose by 122,000 jobs this month after advancing by an upwardly revised 155,000 in June, the ADP National Employment Report showed... Economists polled… had forecast private employment would increase by 150,000 positions after a previously reported gain of 150,000.”
August 1 – Associated Press (Matt Ott): “The number of Americans filing for unemployment benefits jumped to its highest level in a year last week, even as the labor market remains surprisingly healthy in an era of high interest rates. Jobless claims for the week ending July 27 climbed by 14,000 to 249,000, from 235,000 the previous week… It’s the most since the first week of August last year and the 10th straight week that claims have come in above 220,000.”
July 30 – Bloomberg (Reid Joseph Champlin): “Home prices in the US rose in May, with buyers fighting over a slim supply of properties for sale. A national measure of prices increased 5.9% from a year earlier, according to… S&P CoreLogic Case-Shiller. While that was slower than the 6.4% gain in April, the deceleration likely had to do with performance in 2023 than recent trends, according to Brian Luke, head of commodities, real and digital assets at S&P Dow Jones Indices. Buyers have started to see more properties come up for sale, with listings of previously owned homes in June coming in at the highest level since October 2020… But inventory is still tight by historical standards, lingering below pre-pandemic levels. Diminished supply could keep prices elevated. The home price index has gained 4.1% so far this year, its fastest start in two years, according to Luke.”
August 1 – Associated Press (Alex Veiga): “The average rate on a 30-year mortgage fell this week to its lowest level since early February… The rate fell to 6.73% from 6.78% last week, mortgage buyer Freddie Mac said Thursday. A year ago, the rate averaged 6.9%.”
July 31 – Bloomberg (Michael Sasso): “A gauge of pending US existing-home sales rose in June for the first time in three months, as buyers looking to relocate or upgrade their houses braved elevated prices and borrowing costs. The index of contract signings from the National Association of Realtors increased 4.8% to 74.3 in June, reflecting increases in all four major regions… The gauge is coming off of a record low in data back to 2001 as the housing market tries to break out of a protracted slump.”
July 30 – Reuters (Lucia Mutikani): “U.S. consumer confidence unexpectedly rose in July, but remained in the tight range of the past two years amid lingering worries about inflation and higher borrowing costs. The Conference Board said… its consumer confidence index increased to 100.3 this month from a downwardly revised 97.8 in June. Economists… had forecast the index falling to 99.7 from the previously reported 100.4… Consumers' 12-month inflation expectations were steady at 5.4% in July. They peaked at 7.9% in 2022.”
August 1 – Reuters (Lucia Mutikani): “U.S. worker productivity growth accelerated in the second quarter, keeping the increase in labor costs in check… Nonfarm productivity… increased at a 2.3% annualized rate last quarter after rising at an upwardly revised 0.4% pace in the January-March period… Unit labor costs - the price of labor per single unit of output - rose at a 0.9% rate in the April-June quarter. Data for the first quarter was revised lower to show unit labor costs rising at a 3.8% rate instead of the previously reported 4.0% pace.”
July 31 – Reuters (Lucia Mutikani): “U.S. labor costs increased moderately in the second quarter as private sector wages grew at the slowest pace in 3-1/2 years... The employment cost index (ECI), the broadest measure of labor costs, increased 0.9% last quarter after rising by an unrevised 1.2% in the first quarter… Economists… had forecast the ECI would rise 1.0%. Labor costs advanced 4.1% in the 12 months through June, the smallest gain since the fourth quarter of 2021, after climbing 4.2% in the year through March. Annual labor cost growth has slowed from 4.5% in June 2023.”
Fixed-Income Bubble Watch:
July 31 – Bloomberg (Amy Or): “Convertible-bond investors predict a wave of new issuance ahead, according to a Bank of America Corp. poll that showed their expectations exceed the bank’s own estimates. Bank of America’s survey of 31 convertible-bond portfolio managers earlier this month showed they expect global volumes to reach $132 billion this year — roughly 67% higher than last year and above the estimate range of $100 billion to $110 billion that comes from the bank’s strategists.”
China Watch:
July 31 – Bloomberg: “President Xi Jinping’s government is facing growing pressure to address China’s consumer spending downswing, as it becomes one of the biggest threats to global economic growth. A key gauge of Chinese services activity that covers the retail industry was on the brink of contraction for the first time since last year... That was part of a disappointing snapshot of the economy offered in purchasing manager indexes for July, which revealed stubborn deflationary pressure even outside industries such as manufacturing.”
July 30 – Financial Times (Joe Leahy): “China’s President Xi Jinping has called for measures to boost domestic consumption to be speeded up as concerns mount that the world’s second-largest economy is falling short of growth targets. Citing ‘insufficient’ domestic demand, China’s leadership on Tuesday endorsed the acceleration of fiscal and monetary policies, including the use of government bonds to fund spending and stimulus programmes to upgrade industrial equipment and consumer goods. ‘The focus of economic policies should shift more towards benefiting the people and promoting consumption,’ the politburo, the Chinese Communist party’s senior leadership body headed by Xi, said at the conclusion of a meeting… ‘It is necessary to increase people’s income through multiple channels.’”
July 30 – Bloomberg (David Qu): “Activity in China appeared to slow in July after a short-lived rebound. Indicators of demand continued to show the most weakness, but supply-side signals also softened in the weeks through July 19… Deeper declines in new home sales exerted a major drag on the index. Sales of home appliances reverted to trend after e-commerce campaigns in June lifted purchases briefly. The boost from the government home-buying plan announced in May appeared to peter out in July. Sales of new homes in 50 major cities fell in the three weeks ending July 19 to a level below that of the same period in May, before the stimulus package. Sales of home appliances declined 44% versus the same three-week period in June — and were roughly 13% below the year-earlier level… Year-on-year declines in car sales also deepened compared to June.”
July 31 – Associated Press: “A closely watched measure of Chinese manufacturing activity remained negative in July as concern persists about the state of the world’s second largest economy. The Purchasing Managers’ Index, based on a survey of factory managers, slipped 0.1 points to 49.4… It was the third straight monthly reading below 50, a level that indicates a contraction of manufacturing activity. A parallel purchasing managers’ index for the service sector also fell 0.3 points, though it remained in positive territory at 50.2.”
August 1 – Bloomberg: “China’s residential real estate slump deepened again in July despite the country’s most forceful efforts yet to support the property market. The value of new-home sales from the 100 biggest real estate companies slumped 19.7% from a year earlier to about 279 billion yuan ($38.6bn), faster than the 17% decline in June, according to… China Real Estate Information Corp. Transactions dropped 36.4% from June, after showing a notable increase in April and May. The accelerating slide underscores how China’s recent rescue package is falling short of expectations.”
July 29 – Bloomberg (Dorothy Ma, Pearl Liu and Alice Huang): “Liquidators trying to recoup at least a fraction of creditors’ investments in defaulted Chinese builders are running into dead-ends. They have encountered a host of challenges, from trying to get paid to scouring for financial documents and elusive executives… Creditors in three cases, including Sinic Holdings Group Co. and Yango Justice International Ltd., haven’t seen any significant distribution, they said…”
July 31 – Reuters (Ellen Zhang and Ryan Woo): “China's sluggish manufacturing sector is poised for a ‘cruel summer’ with two sentiment surveys this week pointing to a new level of gloom among factory owners struggling with poor demand, signalling risks for economic growth in the second half of 2024. A private-sector survey of purchasing managers from 650 private and state-owned manufacturers… found that operating conditions in the sector deteriorated for the first time in nine months as new orders tumbled. The Caixin/S&P Global manufacturing Purchasing Managers' Index (PMI) dropped to 49.8 in July - below the 50-mark separating growth from contraction - from 51.8 the previous month. That was the lowest reading since October last year and missed analysts' forecasts of 51.5.”
July 30 – Bloomberg: “More Chinese solar manufacturers are falling into restructuring or bankruptcy, with a deepening oversupply and fierce price wars causing massive financial losses and threatening many smaller players’ survival. A subsidiary of Zhejiang Akcome New Energy Technology Co. was the latest to declare bankruptcy when it was ordered by a court to undertake a reorganizing process after a creditor said the manufacturer ‘was not able to pay debts’ and ‘clearly lacks solvency,’ according to a filing… China’s world-leading solar industry is grappling with a wave of company failures and consolidation as excessive capacity pushes prices below production costs.”
July 28 – Financial Times (Cheng Leng, Chan Ho-him and Tina Hu): “Chinese state-owned financial institutions are clawing back bonuses and cutting pay as Beijing broadens its scrutiny of the finance industry to include mutual funds and Hong Kong-based bankers. Some leading state-owned mutual fund managers on the mainland have been told to return the portion of their annual salary that exceeded a cap of Rmb2.9mn ($400,000)… The payment of this year’s bonuses had been delayed, one said. Hong Kong-based executives at units affiliated to state-owned Citic Group on mainland contracts have been told to return bonuses…”
July 29 – Bloomberg (Krystal Chia, Venus Feng and Lorretta Chen): “Some of Hong Kong’s wealthy families have been caught up in the city’s real estate slump after selling luxury homes and other properties at a loss to pay back loans. Just in the past month, one debt-laden family disposed of seven properties for $250 million in the prestigious Peak district, with some going for hefty discounts. In April, a family-run company sold its stake in the AIA Central building at a $20 million loss. Another clan that built its fortune in retail sold a shopfront at a 60% loss and had other properties seized by receivers. In the residential sector alone, about 75% of high-end property transactions — those worth more than $10 million each — in the first half of the year involved financially stressed sellers, according to… CBRE Group Inc. The sales are putting further pressure on Hong Kong’s real estate market…”
Central Banking Watch:
July 31 – Financial Times (Kana Inagaki and Leo Lewis): “The Bank of Japan has lifted its benchmark interest rate to 0.25% and outlined plans to halve its monthly bond purchases in a decisive move to tighten monetary policy. With the US Federal Reserve set to move in the opposite direction, the BoJ’s shift to tighter policy will narrow an interest rate gap that has driven record weakness in the yen, marking a big shift for global currency markets. The Japanese currency strengthened more than 1.7% following the decision on Wednesday to ¥150.15 against the dollar.”
August 1 – Bloomberg (Matt Ott): “The Bank of England voted 5-4 to cut interest rates for the first time since early 2020 and signaled further reductions ahead, offering some relief to households after a year of the UK’s highest borrowing costs for a generation. Governor Andrew Bailey’s casting vote clinched the quarter-point drop in the benchmark to 5%. The decision was ‘finely balanced’ for some of those supporting the move, and opposed by a minority of four on the nine-member Monetary Policy Committee…”
Europe Watch:
July 31 – Bloomberg (Marilen Martin): “Euro-area inflation unexpectedly quickened, an outcome that may make the European Central Bank warier about cutting interest rates further. Consumer prices rose 2.6% in July from a year earlier... That exceeded the 2.5% result in June, which was also the median estimate of analysts... Core inflation… held at 2.9% for a third month. Economists had forecast a slight deceleration.”
July 30 – Bloomberg (Alexander Weber): “German inflation accelerated in July, evidence that may add to the European Central Bank’s caution as it moves toward further interest-rate cuts. Consumer prices rose 2.6% from a year earlier in July, up from 2.5% the previous month.”
Japan Watch:
July 29 – New York Times (River Akira Davis): “As the rest of the world fought to keep inflation in check, one country welcomed it with open arms. In the past few years, Japan saw a burst of inflation… as a way to shake the economy out of a decades-long cycle of weak growth and pressure from deflation. So while major central banks like the U.S. Federal Reserve raised interest rates to rein in prices, the Bank of Japan kept rates low as inflation accelerated. The theory was that by sticking with rock-bottom rates, the central bank could harness the temporary spike in prices to foster the kind of inflation it had long sought… Businesses could cite their rising costs to justify price increases, leading to higher revenues that went toward higher wages for workers. With more money in their pockets, consumers could spend more, creating a positive economic cycle.”
July 29 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Conditions in Japan’s labor market stayed tight in June, a development likely to keep sustained upward pressure on wages as companies compete to hire and retain workers. The unemployment rate edged lower to 2.5% in June from 2.6% a month earlier… An aging and shrinking workforce in Japan has created chronic labor shortages that helped encourage companies to agree to the strongest wage gains in more than three decades in annual spring negotiations with unions. Workers secured pay rises exceeding 5%...”
Emerging Market Watch:
July 31 – Reuters (Deisy Buitrago and Mayela Armas): “Protesters took to the streets across Venezuela on Tuesday, demanding that President Nicolas Maduro acknowledge he lost Sunday's election to the opposition, as a major international observer concluded the vote was undemocratic. The protests, which the government denounced as an attempted ‘coup,’ began on Monday after the South American country's electoral authority declared that Maduro had won a third term with 51% of votes to extend a quarter-century of socialist rule. The opposition… says its candidate Edmundo Gonzalez had more than twice as many votes as Maduro based on the 90% of vote tallies it has been able to access.”
July 31 – Reuters (Deisy Buitrago and Maria Ramirez): “Shops and public transport across Venezuela shut down on Wednesday as tensions over a fiercely disputed presidential election and rumors of more opposition arrests and sporadic violence kept many people home. Socialist President Nicolas Maduro, who has ruled since 2013, was proclaimed the winner of the Sunday vote by the electoral council. But the opposition says its tally of about 90% of votes shows that its candidate, Edmundo Gonzalez, received more than double the support attracted by Maduro.”
July 31 – Bloomberg: “The US said the world should acknowledge that Venezuela’s opposition won last weekend’s election while President Nicolas Maduro doubled down on his claims of victory, saying his opponents should be jailed for decades… At a news conference, the socialist leader said they ‘should be behind bars’ for allegedly promoting post-election violence and seeking to destabilize his government. ‘Ms. Machado, where are you? Why don’t you show your face, after so much outrage and violence?’ Maduro said, building on top lawmaker Jorge RodrÃguez’s call for her arrest on Tuesday following demonstrations.”
Leveraged Speculation Watch:
July 30 – Reuters (Summer Zhen): “Global hedge funds made a massive retreat from their bearish bets on the Japanese yen during the currency's strong rise against the U.S. dollar over the last two weeks, a UBS note… said. Hedge funds covered nearly all the short yen positions built up over the last year, as the yen rallied by roughly 5% against the U.S. dollar since July 10, UBS said… ‘I think the Bank of Japan's goal is to convince investors not to bet against them and to push the market to deleverage the carry trade,’ Zhiwei Zhang, president at hedge fund Pinpoint Asset Management, said.”
July 30 – Bloomberg (Mark Burton): “Money managers have closed out more than $20 billion in bullish copper bets since mid-May, with mounting worries about Chinese demand helping to spark a rapid exodus from one of the most important industrial commodities. Copper spiked to a record above $11,100 a ton in May as investors embarked on an unprecedented buying spree, but prices have slumped by more than a fifth since then… The reversal comes as investors’ high-conviction bets on the bright long-term outlook for usage in data centers, renewables and electric vehicles has been tested by a historic bout of demand weakness in China.”
Social, Political, Environmental, Cybersecurity Instability Watch:
July 31 – Financial Times (Jamie Smyth): “US oil and gas facilities are pumping out four times more planet-warming methane gas than estimated by regulators, according to research underscoring the gulf between reality and compliance with new environmental rules. Data published by the Environmental Defense Fund… estimates leaks, flaring and venting of methane at US onshore oil and gas operations at 7.5mn tonnes per year — enough wasted gas to meet the annual energy needs of more than half of American homes. Emissions of the invisible gas, which is a large contributor to global warming, are about eight times higher than a voluntary target announced at last year’s UN climate summit by 50 of the biggest oil and gas companies, including BP, Shell and ExxonMobil.”
July 31 – Axios (Andrew Freedman): “A potentially deadly heat wave is expanding from the Central U.S. to both coasts, with nearly 180 million people under heat warnings and advisories on Thursday morning. Why it matters: The extreme heat poses an acute public health risk, particularly since it will last more than a week in some places. It will also cause an uptick in fire risks in the West, where large, fast-moving and deadly blazes are already burning.”
August 1 – Financial Times (Martha Muir): “Wildfires burning across the northern hemisphere in parts of Canada, Russia and the US since the start of the summer have led to a surge in carbon dioxide emissions and smoke trail as their intensity rises. Scientists at international agencies have been tracking emissions and monitoring a significant increase in daily total fire radiative power, which indicates the intensity of the fires. Western Canada is enduring an ‘extreme fire year’, said the Copernicus Atmosphere Monitoring Service (Cams), with estimated emissions at levels comparable with the previous highest years of the past two decades, only surpassed by the record set in 2023.”
Geopolitical Watch:
July 28 – Reuters (Kevin Yao and Neil Jerome Morales): “Chinese Foreign Minister Wang Yi has warned the Philippines over the U.S. intermediate-range missile deployment, saying such a move could fuel regional tensions and spark an arms race. The United States deployed its Typhon missile system to the Philippines as part of joint military drills earlier this year.”
