Benchmark MBS yields are down 38 bps so far in September (9 sessions) – and 120 bps since July 1st (to a 19-month low). Two-year Treasury yields have dropped 34 bps in nine sessions – and 117 bps so far in Q3. The implied rate for the December 2025 policy rate has dropped 30 bps in nine sessions to 2.84%.
Quarter-to-date, the yen has gained 14.2% versus the dollar, with the Swiss franc up 5.9%, the Singapore dollar 4.5%, the British pound 3.8%, the Swedish krona 3.6%, and the euro 3.4%.
Before our deep dive into data from the Fed’s Q2 Z.1 “flow of funds” report, I wanted to provide some color on the extraordinarily unstable market environment. The Fed will cut rates at next week’s meeting. Market pricing has even odds on 25 or 50 bps. Wall Street is cheerleading hard for a big cut.
Ahead of forecasts yet again, $38 billion of investment-grade corporate bonds were issued this week - following last week’s blockbuster $80 billion. The corporate debt market is overheated. August daily Treasury trading volume surged 19% month-over-month to a record $1.01 TN (from Bloomberg Intelligence’s Brian Meehan).
September 13 – Bloomberg (Catherine Bosley and Katia Dmitrieva): “Former Federal Reserve Bank of New York President William Dudley said there’s scope for a half-point rate cut at the central bank’s meeting next week. ‘I think there’s a strong case for 50,’ Dudley said… ‘I know what I’d be pushing for…' The former Fed member cited a slowing US labor market, with risks to jobs greater than lingering challenges to inflation in supporting his call for a half-point reduction.”
Let the record show that Gold surged $80, or 3.2%, this week to a record high $2,578 – boosting 2024 gains to 25%. Silver spiked 10% to $30.719, with y-t-d gains of 29.1%. Platinum rose 8.0% this week, with Copper rallying 4.0%, Palladium 16.9%, Zinc 6.9%, and Aluminum 5.5%. The S&P500 has returned 19% y-t-d.
The case for 50 is weak. I’d be pushing for no cut. Financial conditions are dangerously loose for an extraordinarily speculative market environment. The risk of stoking Bubble excess outweighs immediate economic risks, especially with lower market yields and loose conditions likely in the near-term to support economic activity. The unemployment rate is only 4.2%, while weekly unemployment claims remain depressed historically. Ongoing strikes (i.e., Boeing) and labor settlements (i.e., AMR and Amazon) point to labor bargaining power and persistent wage pressures. Services PMI (55.7) and ISM (51.5) data indicate ongoing expansion. The Atlanta Fed GDPNow forecast has ticked up to 2.47%. With 30-year mortgage rates down 120 bps in four months – to a 19-month low – we should expect a boost to housing activity (Homebuilding ETF up 25% y-t-d).
There are two discordant perspectives for viewing the Q2 Z.1 report. Non-Financial Debt (NFD) expanded at a 4.73% rate during Q2, up from Q1’s 4.49%, but below 2023’s 5.12%. Household debt expanded at a 3.15% pace (up from Q1’s 2.76%), Corporate 4.56% (vs. 5.09%), and the Federal Government 6.31% (vs. 6.20%). Business as usual. Nothing to see here.
From the Bubble perspective, there’s a lot to see – that is, if you’re looking in the right places. Unrelenting growth in government debt, intermediated through “repos,” the money market fund complex, the Securities Broker/Dealers, and the Rest of World (ROW). Unprecedented speculative leverage that creates both demand for securities and liquidity for asset inflation and history’s greatest Bubble. A historic Bubble in government debt issuance that has fueled asset Bubbles and resulting massive inflation in perceived household wealth, along with ongoing elevated incomes and spending.
On a seasonally-adjusted and annual basis (SAAR), Non-Financial Debt (NFD) expanded $3.522 TN, up from Q1’s $3.311 TN – and compared to 2023’s $3.590 TN. For perspective, prior to 2000’s record $6.796 TN, 2007’s $2.534 TN had held the record for annual growth in NFD for years.
Treasury Securities expanded SAAR $1.640 TN during Q2. Also SAAR for the quarter, the Household sector purchased Treasuries to the tune of $1.041 TN, Rest of World $408 billion, Money Market Funds $248 billion, and Insurance Companies $306 billion. Buying power everywhere. Meanwhile, the Fed liquidated its Treasury holdings SAAR $664 billion.
Treasury Securities inflated (nominal) $2.131 TN over the past year to a record $26.903 TN. Treasury Securities inflated $3.650 TN (15.7%) over two years and $10.274 TN, or 61.8%, over 18 quarters - in one of history’s great debt inflations. Over 18 months, Treasury Securities-to-GDP rose from 76% to 94%. For comparison, this ratio ended the nineties at 33% and 2007 at 31%.
Agency Securities gained $84 billion during Q2 to a record $12.058 TN. Agency Securities inflated $1.047 TN (9.6%) over two years and $2.628 TN, or 27.9%, over 18 quarters. Combined Treasury and Agency Securities expanded $12.902 TN, or 49.5%, over 18 quarters in a historic inflation of government finance (rising to 136% of GDP).
Q2 Federal Receipts inflated 10.7% y-o-y to $5.084 TN, with Federal Expenditures up 6.9% y-o-y to $6.684 TN. Compared to Q2 2019, Receipts were up 37.2% and Expenditures 41.1%. State & Local Receipts were 4.1% higher y-o-y to $3.702 TN, with expenditures 5.3% higher to $3.928 TN. S&L Receipts were 33.5% higher than Q2 2019, with expenditures 33.3% greater.
Money Market Fund Assets (MMFA) gained another $107 billion during the quarter, to a record $6.547 TN. MMFA inflated $630 billion, or 10.6%, over the past year, and a blistering $2.545 TN, or 53.4%, over 18 quarters.
MMF “repo” (repurchase agreements) holdings surged $232 billion during the quarter to $2.614 TN. Holdings of Treasuries declined $114 billion to $2.450 TN. Fed data categorize money funds as “government” ($5.226 TN), “prime” ($1.188 TN), or “tax exempt” ($133bn). “Government” MMFA rose $312 billion during the quarter and $629, or 13.7%, over the past year. This growth has corresponded with even stronger growth in “repo” holdings. Over 18 quarters, “government” MMFA inflated $2.443 TN, or 65%. It’s worth noting that growth has accelerated so far in Q3, with MMFA expanding more than $200 billion over the past 10 weeks.
Broker/Dealer Assets expanded $26.4 billion during Q2 to $5.185 TN, the highest level since fateful Q3 2008. The composition of growth is notable. Debt Securities declined $10.8 billion (Agencies down $17.1bn) to $531 billion, and Misc. Assets contracted $33.6 billion to $1.790 TN. Meanwhile, “Repo” Assets jumped $48.4 billion (11.7% annualized) to $1.709 TN (high since Q3 2008). On the Liability side, “Repo” borrowings surged $98.8 billion (17.3% annualized), with notable one-year growth of $325 billion, or 15.8%. Repo borrowings ended the quarter at $2.380 TN, also the high back to Q3 2008.
Total system “Repo” (“Federal Funds and Security Repurchase Agreements”) Assets surged $272.5 billion during the quarter to $6.982 TN. Repo Assets inflated $2.164 TN, or 44.9%, over the past 18 quarters. The Fed established a “repo” program to accept financial flows from non-bank entities (chiefly money market funds). After ending 2022 at a record $2.890 TN, the Fed’s “Repo” Asset was down to $1.053 TN by the end of June (up $76bn for the quarter).
To get a cleaner look at the growth dynamics of conventional system “Repo,” I subtract the Fed’s position from Total “Repo”. “Repo – Ex-Fed” jumped $194 billion (15.6% annualized) during Q2 to a record $5.157 TN. “Repo Ex-Fed” expanded $606 billion, or 13.3%, over the past year – and $1.170 TN, or 29.3%, since the Fed announced the restart of QE in the summer of 2019.
Rest of World (ROW) is an important piece of the puzzle. ROW holdings of US Financial Assets inflated $1.401 TN during Q2 to a record $53.663 TN – with one-year growth of $7.231 TN, or 15.6%. ROW holdings ballooned $14.947 TN, or 38.6%, over the past 15 quarters. It’s worth noting that ROW holdings inflated from Q4 2003’s $10.088 TN to a mortgage financial Bubble peak $17.466 TN to end March 2008. Over this period, “Repo” Assets surged from $494 billion to Q2 2007’s Bubble peak $1.237 TN – as global banks became key players in financing U.S. leveraged speculation.
And while ROW “Repo” Assets have inflated to a record $1.373 TN, “Repo” Liabilities have ballooned to an unprecedented $1.644 TN. Repo Liabilities increased $37 billion (9.1% annualized) during Q2, with one-year expansion of $223 billion (15.7%) and 15-quarter growth of $438 billion, or 36.3%. It’s worth noting that ROW “Repo” Assets inflated $513 billion, or 59.6%, over 15 quarters.
Total Debt Securities increased $850 billion during Q2 and $3.065 TN over the past year – to a record $60.261 TN. Debt Securities inflated $16.231 TN, or 37.1%, over 18 quarters. Equities Securities inflated $6.437 TN during the quarter, with one-year growth of $15.172 TN, or 22.1%. Equities ballooned $33.181 TN, or 65.4%, over 18 quarters. Total (Debt and Equities) Securities inflated $7.287 TN during the quarter and $18.237 TN over the past year – to a record $145.992 TN. Total Securities rose to 510% of GDP. This compares to previous cycle peaks 375% (Q3 2007) and 357% (Q1 2000). In a key Bubble dynamic, Total Securities inflated $49.411 TN, or 52.3%, over 18 quarters. Total Securities were at 439% of GDP before the Fed restarted QE in Q3 2019.
Household Total Assets jumped $2.938 TN for the quarter to a record $184.526 TN, with one-year growth of $11.403 TN. Household Assets ended 2019 at $133.309 TN. Household Liabilities increased $177 billion during Q2 to a record $20.729 TN, with one-year growth of $591 billion. For the quarter, Household Net Worth (assets minus liabilities) surged $2.760 TN to a record $163.797 TN, with four-quarter growth of $10.812 TN. Household Net Worth has inflated $46.586 TN, or 40%, since the end of 2019 (18 quarters). Net Worth ended June at 572% of GDP, up from 2019’s 535% and previous cycle peaks 488% (Q1 2007) and 444% (Q1 2000).
Household Real Estate holdings inflated $1.752 TN during the quarter to a record $52.319 TN (one-year growth $3.007 TN). Real Estate ended June at 183% of GDP, up from the end of 2019’s 153% - and now only moderately below the mortgage finance Bubble peak's 190% (Q3 2006).
Household Financial Asset holdings inflated another $1.134 TN to a record $123.238 TN, with one-year growth of $8.180 TN. Financial holdings ended 2019 at $93.937 TN. Financial Holdings ended the quarter at 430% of GDP, versus previous cycle peaks of 373% (Q3 2007) and 354% (Q1 2000).
Household Debt Securities holdings jumped $276 billion to a record $6.199 TN. Debt Securities rose $693.5 billion (12.6%) over the past year and $2.983 TN, or 93%, over three years. Treasuries increased $104 billion (one-year $359bn) to a record $2.748 TN, and Agencies gained $127 billion ($205bn) to a record $1.401 TN. Over three years, Treasury holdings surged $2.220 TN, or 421%, with Agencies up $865 TN, or 161%. Meanwhile, Total Deposits declined $141 billion during Q2 to $14.259 TN (up $40bn y-o-y).
Total Equities (Equities & Mutual Funds) inflated $512 billion (one-year $5.529 TN) to a record $45.989 TN. Total Equities inflated $14.665 TN, or 47%, since the end of 2019. Total Household Equities holdings-to-GDP ended June at 161%, versus previous cycle peaks 105% (Q2 2007) and 115% (Q1 2000). Money Market Fund holdings increased $68 billion to a record $4.128 TN, with one-year growth of $503 billion. Money Fund holdings inflated $1.359 TN, or 49%, over the past 12 quarters. Household holdings of Deposits, Treasuries, Agencies, and Money Market Funds inflated $6.895 TN, or 44.1%, over 18 quarters.
Virtually a sideshow, Bank (“Private Depository Institutions”) Assets declined $137 billion from Q1’s record level to $27.717 TN, with most of the decline explained by a reduction in “Interbank Assets.” Loans expanded by a notable $176 billion (4.9% annualized) to a record $14.621 TN, the largest gain since Q4 2022. Consumer Credit rose $33 billion (4.8% annualized) to a record $2.739 TN. On the Liability side, Total Deposits declined $91 billion to $13.576 TN. Meanwhile, “Repo” Liabilities rose $52 billion to $871 billion (high since Q2 2009).
Credit Union Assets contracted $5 billion to $2.310 TN – with one-year growth of $87 billion, or 3.9%. Finance Companies Assets increased $17 billion over the quarter and $180 billion, or 7.3%, over the past year – to $2.655 TN. Credit Union and Finance Companies Assets inflated 50.6% and 73% over 18 quarters.
It’s a precarious backdrop for the Fed to begin aggressively slashing rates. The bond market is demonstrating speculative melt-up dynamics, surely fueled by rapid expansion of “basis trade” and “carry trade” leverage. At the same time, it’s not unreasonable that the Fed would prefer to get out ahead of mounting financial instability. The dollar/yen closed the week at 140.85, as the yen rally surpassed August 5th levels. Yen “carry trade” vulnerability persists, while the AI/tech Bubble teeters.
Whether the Fed cuts 50 or 25, acute global instability seems to suggest markets are moving toward some type of accident. And by the action of Treasuries, MBS, Gold and Silver, markets seem to buy into the analysis that the Fed and central bank community are trapped by Bubble fragilities – with more QE inevitable.
For the Week:
The S&P500 rallied 4.0% (up 18.0% y-t-d), and the Dow rose 2.6% (up 9.8%). The Utilities jumped 3.4% (up 24.7%). The Banks added 0.2% (up 14.4%), and the Broker/Dealers recovered 2.4% (up 20.6%). The Transports advanced 2.0% (down 1.1%). The S&P 400 Midcaps jumped 3.2% (up 9.1%), and the small cap Russell 2000 surged 4.4% (up 7.7%). The Nasdaq100 rallied 5.9% (up 16.0%). The Semiconductors recovered 10.0% (up 19.3%). The Biotechs rose 3.9% (up 8.5%). With bullion jumping $80, the HUI gold index surged 12.0% (up 35.1%).
Three-month Treasury bill rates ended the week at 4.7575%. Two-year government yields declined six bps to 3.58% (down 67bps y-t-d). Five-year T-note yields fell five bps to 3.43% (down 42bps). Ten-year Treasury yields declined six bps to 3.65% (down 23bps). Long bond yields slipped four bps to 3.98% (down 5bps). Benchmark Fannie Mae MBS yields dropped 13 bps to 4.79% (down 48bps).
Italian yields dropped 11 bps to 3.51% (down 19bps y-t-d). Greek 10-year yields fell 10 bps to 3.11% (up 6bps). Spain's 10-year yields declined six bps to 2.94% (down five bps). German bund yields slipped two bps to 2.15% (up 12bps). French yields declined four bps to 2.84% (up 28bps). The French to German 10-year bond spread narrowed two to 69 bps. U.K. 10-year gilt yields fell 12 bps to 3.77% (up 23bps). U.K.'s FTSE equities index rallied 1.1% (up 7.0% y-t-d).
Japan's Nikkei Equities Index increased 0.5% (up 9.3% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.85% (up 23bps y-t-d). France's CAC40 gained 1.5% (down 1.0%). The German DAX equities index rallied 2.2% (up 11.6%). Spain's IBEX 35 equities index jumped 3.3% (up 14.2%). Italy's FTSE MIB index increased 0.8% (up 10.3%). EM equities were mixed. Brazil's Bovespa index increased 0.2% (up 0.5%), and Mexico's Bolsa index recovered 1.8% (down 9.4%). South Korea's Kospi index was up 1.2% (down 3.0%). India's Sensex equities index gained 2.1% (up 14.7%). China's Shanghai Exchange Index dropped 2.2% (down 9.1%). Turkey's Borsa Istanbul National 100 index declined 0.9% (up 29.7%).
Federal Reserve Credit declined $6.6 billion last week to $7.072 TN. Fed Credit was down $1.817 TN from the June 22, 2022, peak. Over the past 261 weeks, Fed Credit expanded $3.346 TN, or 90%. Fed Credit inflated $4.261 TN, or 152%, over the past 618 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.2 billion last week to $3.314 TN. "Custody holdings" were down $120 billion y-o-y, or 3.0%.
Total money market fund assets rose another $23.4 billion to a record $6.324 TN. Money funds were up $437 billion y-t-d, or 10.4% annualized, and $699 billion, or 12.4%, y-o-y.
Total Commercial Paper declined $9.4 billion to $1.237 TN. CP was up $76 billion, or 6.6%, over the past year.
Freddie Mac 30-year fixed mortgage rates dropped 15 bps to a 15-month low 6.20% (down 104bps y-o-y). Fifteen-year rates sank 20 bps to 5.27% (down 148bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps to 6.72% (down 81bps).
Currency Watch:
For the week, the U.S. Dollar Index was little changed at 101.114 (down 0.2% y-t-d). For the week on the upside, the Mexican peso increased 4.0%, the Japanese yen 1.0%, the South African rand 0.7%, the Swedish krona 0.7%, the Brazilian real 0.6%, the Australian dollar 0.5%, the Norwegian krone 0.5%, the Singapore dollar 0.4%, and the South Korean won 0.1%. On the downside, the Swiss franc declined 0.7%, the New Zealand dollar 0.3%, the Canadian dollar 0.1%, the euro 0.1%, and the British pound 0.1%. The Chinese (onshore) renminbi was about unchanged versus the dollar (up 0.04% y-t-d).
Commodities Watch:
September 13 – Reuters (Anushree Ashish Mukherjee and Anjana Anil): “Gold market bulls are locking in bullion prices surging to fresh records, with a milestone of $3,000 per ounce coming into focus, fired up by monetary easing by major central banks and a tight U.S. presidential election race. Spot gold reached a historic high of $2,572.81 an ounce on Friday and is on track for its strongest annual performance since 2020, with a rise of over 24% driven by safe-haven demand, due to geopolitical and economic uncertainty, and robust central bank buying.”
The Bloomberg Commodities Index rallied 2.6% (down 2.5% y-t-d). Spot Gold jumped 3.2% to a record $2,578 (up 25.0%). Silver surged 10.0% to $30.719 (up 29.1%). WTI crude recovered 98 cents, or 1.4%, to $68.65 (down 4%). Gasoline rallied 1.8% (down 8%), and Natural Gas gained 1.3% to $2.305 (down 8%). Copper recovered 4.0% (up 9%). Wheat jumped 3.3% (down 9%), and Corn gained 1.8% (down 17%). Bitcoin recovered $6,500, or 12.1%, to $60,540 (up 42.4%).
Ukraine War Watch:
September 10 – Bloomberg (Courtney McBride, Ellen Milligan, and Alex Wickham): “Secretary of State Antony Blinken signaled the US would hold talks on Ukraine’s use of Western long-range weapons against Russia, after confirming Moscow had received shipments of ballistic missiles from Iran. ‘We’re going to look and to listen’ to Ukraine’s request to lift restrictions on its use of long-range missiles, Blinken said… at a press conference with UK Foreign Secretary David Lammy in London, signaling the US is open to altering its position… Blinken said Iran had transferred a shipment of its Fath-360 missiles to Russia, defying months of warnings from the US and its allies not to do so. The transfer represents a deepening involvement by Tehran in Russia’s war in Ukraine. The governments of France, Germany and the UK issued a joint statement condemning Iran’s move as a ‘direct threat to European security.’”
September 12 – Reuters (Andrew Osborn and Guy Faulconbridge): “President Vladimir Putin said… the West would be directly fighting with Russia if it allowed Ukraine to strike Russian territory with Western-made long-range missiles, a move he said would alter the nature and scope of the conflict. Ukrainian President Volodymyr Zelenskiy has been pleading with Kyiv's allies for months to let Ukraine fire Western missiles including long-range U.S. ATACMS and British Storm Shadows deep into Russian territory to limit Moscow's ability to launch attacks… ‘So this is not a question of allowing the Ukrainian regime to strike Russia with these weapons or not. It is a question of deciding whether or not NATO countries are directly involved in a military conflict,’ Putin told Russian state TV.”
September 11 – Reuters (Dmitry Antonov and Andrew Osborn): “The Kremlin told the West… that any decision to allow Ukraine to strike Russia with long-range Western missiles would deepen what it called the direct involvement of the U.S. and Europe in the war and would trigger a response from Moscow. The warning came as senior Ukrainian government officials pressed U.S. Secretary of State Antony Blinken and British foreign minister David Lammy, on a joint visit to Kyiv, to allow Ukraine to fire long-range U.S. ATACMS missiles and British Storm Shadow cruise missiles at targets deep inside Russia.”
September 10 – Reuters (Lidia Kelly): “Ukraine targeted the Russian capital… in its biggest drone attack so far, killing at least one and wrecking dozens of homes in the Moscow region and forcing around 50 flights to be diverted from airports around Moscow. Russia, the world's biggest nuclear power, said it had destroyed at least 20 Ukrainian attack drones as they swarmed over the Moscow region, which has a population of more than 21 million, and 124 more over eight other regions.”
Taiwan Watch:
September 11 – Financial Times (Demetri Sevastopulo): “Seal Team 6, the clandestine US Navy commando unit that killed Osama bin Laden in 2011, has been training for missions to help Taiwan if it is invaded by China, according to people familiar... The elite Navy special forces team, which is tasked with some of the military’s most sensitive and difficult missions, has been planning and training for a Taiwan conflict for more than a year at Dam Neck, its headquarters at Virginia Beach... The secret training underlines the increased US focus on deterring China from attacking Taiwan, while stepping up preparations for such an event. The preparations have only grown since Phil Davidson, the US Indo-Pacific commander at the time, warned in 2021 that China could attack Taiwan within six years.”
Election Watch:
September 12 – Bloomberg (Gregory Korte): “Republican Donald Trump ruled out appearing at another debate with Democrat Kamala Harris two days after he delivered an uneven performance at their first showdown of the election cycle. ‘THERE WILL BE NO THIRD DEBATE!,’ Trump posted…, insisting that he won the lone showdown with Harris and didn’t need to debate again. ‘When a prizefighter loses a fight, the first words out of his mouth are, ‘I WANT A REMATCH,’’ Trump wrote.”
Market Instability Watch:
September 13 – Financial Times (Mary McDougall, Harriet Clarfelt and Colby Smith): “Investors have sharply increased their bets on a half-percentage-point interest rate cut by the Federal Reserve next week, as the US central bank prepares to lower borrowing costs for the first time in more than four years. Traders in swaps markets are currently pricing in a 47% chance that the Fed will opt for a bumper cut in a bid to prevent high rates from damaging the economy. On Thursday, they had priced in just a 15% chance. Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said a half-point cut was now ‘very much in play’ after having been ‘almost entirely priced out’ at one point on Thursday.”
September 12 – Bloomberg (Denitsa Tsekova and Lu Wang): “After weeks of stomach-churning volatility, Wall Street pundits are blaming a burgeoning leveraged investment strategy for exacerbating stock-market moves, particularly right before the end of the trading day. Funds that use derivatives to offer juiced-up or inverse returns of individual companies and indexes sold about $15 billion of stocks on Sept. 3 — when the Nasdaq 100 plunged 3% — according to JPMorgan... That was the cohort’s biggest selling wave from rebalancing since the onset of the pandemic. The activity also put pressure, per Nomura Holdings Inc., on S&P 500 futures… Last Tuesday wasn’t an anomaly. These days, leveraged ETFs may be exerting their biggest ever influence on the broader marketplace, according to Morgan Stanley’s quantitative and derivatives sales team…”
September 9 – Wall Street Journal (Alexander Osipovich): “A popular, fast-paced trade has boosted the options market to record volumes in recent years. Now, Wall Street is looking to push it even further. Zero-day-to-expiry options let investors bet on whether a particular stock-market index will rise or fall by the end of the day. They have drawn an enthusiastic following among amateur investors, even as skeptics call them a form of gambling. They are sometimes known by the hashtag #0dte. So far, the #0dte boom has been limited to options tied to indexes such as the S&P 500 or Nasdaq-100. The next frontier could be options on stocks such as Tesla or Nvidia. Currently, options tied to individual stocks expire weekly, on Fridays. To bring #0dte to single-stock options, exchanges would need to add new expirations for Monday through Thursday.”
Global Credit Bubble Watch:
September 8 – Bloomberg (Selcuk Gokoluk): “Borrowers in the developing world are shoring up their defenses against volatility that could shake their biggest markets in the US and derail refinancing plans. In just the first five days of the month, they’ve sold more bonds than at the outset of any previous September. Issuance by governments and companies hit $28 billion through Friday... In the same period last year $12 billion of deals were closed.”
September 9 – Bloomberg (Jill R. Shah and Jessica Nix): “A flood of issuance is continuing in the market for junk-rated debt and borrowers are taking advantage of a starved investor base to bring riskier deals, including for dividends and leveraged buyouts. Roughly $53.9 billion of deals have launched in the leveraged loan market so far this month, with 15 coming on Monday... The high-yield bond market has also priced $7.6 billion of issuance so far this month.”
AI Bubble Watch:
September 8 – Wall Street Journal (Dave Michaels and Asa Fitch): “U.S. antitrust enforcers are intervening early to examine whether a handful of big tech companies such as Nvidia are using their leverage to establish dominance over the burgeoning artificial-intelligence market. The Justice Department’s antitrust division has already contacted Nvidia, whose AI chip market share is estimated at over 80%, to ask questions about the terms of its contracts and partnerships, according to people familiar with the matter. The investigation is at an early phase… The department could issue a subpoena in the coming months if it determines a fuller-fledged investigation is needed, the people said.”
Bubble and Mania Watch:
September 10 – Financial Times (Steve Johnson): “Global inflows into exchange traded funds are on course to surge to new record highs this year, as market volatility and a summer lull failed to damp buying in August. Investors poured a net $129.7bn into ETFs in August, according to… BlackRock. This was below July’s record high of $198bn but still above 2024’s monthly average, despite August traditionally being a quiet month for fund flows and despite market ructions at the beginning of the month, when the S&P 500 stock index plunged 6% in three trading days. Net inflows for the first eight months of the year now stand at $969bn, comfortably ahead of the $848bn at this stage of the year in 2021, when the record full-year tally of $1.3tn was chalked up.”
September 9 – New York Times (David McCabe): “For years, Google has faced complaints about how it dominates the online advertising market. Many of the concerns stem from the internet giant’s suite of software known as Google Ad Manager, which websites around the world use to sell ads on their sites. The technology conducts split-second auctions to place ads each time a user loads a page. The dominance of that technology has landed Google in federal court. On Monday, Judge Leonie Brinkema of the U.S. District Court for the Eastern District of Virginia will preside over the start of a trial in which the Department of Justice accuses the company of abusing control of its ad technology and violating antitrust law.”
September 10 – CNBC (Robert Frank): “Sales of ultra-luxury homes surged in New York, Miami and Palm Beach, Florida, in the second quarter, even as they fell in much of the rest of the world… The number of homes that sold for $10 million or more in the second quarter jumped 44% in Palm Beach, 27% in Miami and 16% in New York, according to… Knight Frank. New York led the U.S. in $10 million-plus sales, with 72, its highest total in two years, according to the report. Miami came in second with 55, followed by Los Angeles with 42 and Palm Beach with 36.”
U.S./Russia/China/Europe Watch:
September 10 – Financial Times (Henry Foy, Polina Ivanova, Kathrin Hille and Demetri Sevastopulo): “The US has accused China of providing Russia with direct support for its ‘war machine’ for the first time, as part of an intensified campaign to urge Europe to join Washington in ratcheting up pressure on Beijing. US deputy secretary of state Kurt Campbell told reporters… China was supplying Moscow with items that were directly helping the Russian military as it prosecutes its war of aggression in Ukraine… ‘These are not dual-use capabilities,’ Campbell said... ‘These are component pieces of a very substantial effort on the part of China to help sustain, build and diversify various elements of the Russian war machine.’”
September 13 – Reuters (Andrew Osborn): “Russia's FSB security service said… it had revoked the accreditation of six British diplomats in Moscow after accusing them of spying and sabotage work, signalling the Kremlin's anger at what it sees as London's vital role in helping Ukraine. Britain described the accusations as ‘completely baseless’, saying it was a tit-for-tat action after the UK expelled the Russian defence attache and removed diplomatic status from several Russian properties in May.”
September 13 – Bloomberg (Jon Herskovitz): “Russian Security Council Secretary Sergei Shoigu held talks in Pyongyang with North Korean leader Kim Jong Un during a visit likely to stir concerns about arms transfers to aid the Kremlin’s war on Ukraine. Shoigu and Kim discussed a wide range of bilateral and international topics when they met Friday… The meeting is aimed at facilitating a Comprehensive Strategic Partnership treaty that Kim signed with Russian President Vladimir Putin in June, it said.”
The S&P500 rallied 4.0% (up 18.0% y-t-d), and the Dow rose 2.6% (up 9.8%). The Utilities jumped 3.4% (up 24.7%). The Banks added 0.2% (up 14.4%), and the Broker/Dealers recovered 2.4% (up 20.6%). The Transports advanced 2.0% (down 1.1%). The S&P 400 Midcaps jumped 3.2% (up 9.1%), and the small cap Russell 2000 surged 4.4% (up 7.7%). The Nasdaq100 rallied 5.9% (up 16.0%). The Semiconductors recovered 10.0% (up 19.3%). The Biotechs rose 3.9% (up 8.5%). With bullion jumping $80, the HUI gold index surged 12.0% (up 35.1%).
Three-month Treasury bill rates ended the week at 4.7575%. Two-year government yields declined six bps to 3.58% (down 67bps y-t-d). Five-year T-note yields fell five bps to 3.43% (down 42bps). Ten-year Treasury yields declined six bps to 3.65% (down 23bps). Long bond yields slipped four bps to 3.98% (down 5bps). Benchmark Fannie Mae MBS yields dropped 13 bps to 4.79% (down 48bps).
Italian yields dropped 11 bps to 3.51% (down 19bps y-t-d). Greek 10-year yields fell 10 bps to 3.11% (up 6bps). Spain's 10-year yields declined six bps to 2.94% (down five bps). German bund yields slipped two bps to 2.15% (up 12bps). French yields declined four bps to 2.84% (up 28bps). The French to German 10-year bond spread narrowed two to 69 bps. U.K. 10-year gilt yields fell 12 bps to 3.77% (up 23bps). U.K.'s FTSE equities index rallied 1.1% (up 7.0% y-t-d).
Japan's Nikkei Equities Index increased 0.5% (up 9.3% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.85% (up 23bps y-t-d). France's CAC40 gained 1.5% (down 1.0%). The German DAX equities index rallied 2.2% (up 11.6%). Spain's IBEX 35 equities index jumped 3.3% (up 14.2%). Italy's FTSE MIB index increased 0.8% (up 10.3%). EM equities were mixed. Brazil's Bovespa index increased 0.2% (up 0.5%), and Mexico's Bolsa index recovered 1.8% (down 9.4%). South Korea's Kospi index was up 1.2% (down 3.0%). India's Sensex equities index gained 2.1% (up 14.7%). China's Shanghai Exchange Index dropped 2.2% (down 9.1%). Turkey's Borsa Istanbul National 100 index declined 0.9% (up 29.7%).
Federal Reserve Credit declined $6.6 billion last week to $7.072 TN. Fed Credit was down $1.817 TN from the June 22, 2022, peak. Over the past 261 weeks, Fed Credit expanded $3.346 TN, or 90%. Fed Credit inflated $4.261 TN, or 152%, over the past 618 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.2 billion last week to $3.314 TN. "Custody holdings" were down $120 billion y-o-y, or 3.0%.
Total money market fund assets rose another $23.4 billion to a record $6.324 TN. Money funds were up $437 billion y-t-d, or 10.4% annualized, and $699 billion, or 12.4%, y-o-y.
Total Commercial Paper declined $9.4 billion to $1.237 TN. CP was up $76 billion, or 6.6%, over the past year.
Freddie Mac 30-year fixed mortgage rates dropped 15 bps to a 15-month low 6.20% (down 104bps y-o-y). Fifteen-year rates sank 20 bps to 5.27% (down 148bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 11 bps to 6.72% (down 81bps).
Currency Watch:
For the week, the U.S. Dollar Index was little changed at 101.114 (down 0.2% y-t-d). For the week on the upside, the Mexican peso increased 4.0%, the Japanese yen 1.0%, the South African rand 0.7%, the Swedish krona 0.7%, the Brazilian real 0.6%, the Australian dollar 0.5%, the Norwegian krone 0.5%, the Singapore dollar 0.4%, and the South Korean won 0.1%. On the downside, the Swiss franc declined 0.7%, the New Zealand dollar 0.3%, the Canadian dollar 0.1%, the euro 0.1%, and the British pound 0.1%. The Chinese (onshore) renminbi was about unchanged versus the dollar (up 0.04% y-t-d).
Commodities Watch:
September 13 – Reuters (Anushree Ashish Mukherjee and Anjana Anil): “Gold market bulls are locking in bullion prices surging to fresh records, with a milestone of $3,000 per ounce coming into focus, fired up by monetary easing by major central banks and a tight U.S. presidential election race. Spot gold reached a historic high of $2,572.81 an ounce on Friday and is on track for its strongest annual performance since 2020, with a rise of over 24% driven by safe-haven demand, due to geopolitical and economic uncertainty, and robust central bank buying.”
The Bloomberg Commodities Index rallied 2.6% (down 2.5% y-t-d). Spot Gold jumped 3.2% to a record $2,578 (up 25.0%). Silver surged 10.0% to $30.719 (up 29.1%). WTI crude recovered 98 cents, or 1.4%, to $68.65 (down 4%). Gasoline rallied 1.8% (down 8%), and Natural Gas gained 1.3% to $2.305 (down 8%). Copper recovered 4.0% (up 9%). Wheat jumped 3.3% (down 9%), and Corn gained 1.8% (down 17%). Bitcoin recovered $6,500, or 12.1%, to $60,540 (up 42.4%).
Ukraine War Watch:
September 10 – Bloomberg (Courtney McBride, Ellen Milligan, and Alex Wickham): “Secretary of State Antony Blinken signaled the US would hold talks on Ukraine’s use of Western long-range weapons against Russia, after confirming Moscow had received shipments of ballistic missiles from Iran. ‘We’re going to look and to listen’ to Ukraine’s request to lift restrictions on its use of long-range missiles, Blinken said… at a press conference with UK Foreign Secretary David Lammy in London, signaling the US is open to altering its position… Blinken said Iran had transferred a shipment of its Fath-360 missiles to Russia, defying months of warnings from the US and its allies not to do so. The transfer represents a deepening involvement by Tehran in Russia’s war in Ukraine. The governments of France, Germany and the UK issued a joint statement condemning Iran’s move as a ‘direct threat to European security.’”
September 12 – Reuters (Andrew Osborn and Guy Faulconbridge): “President Vladimir Putin said… the West would be directly fighting with Russia if it allowed Ukraine to strike Russian territory with Western-made long-range missiles, a move he said would alter the nature and scope of the conflict. Ukrainian President Volodymyr Zelenskiy has been pleading with Kyiv's allies for months to let Ukraine fire Western missiles including long-range U.S. ATACMS and British Storm Shadows deep into Russian territory to limit Moscow's ability to launch attacks… ‘So this is not a question of allowing the Ukrainian regime to strike Russia with these weapons or not. It is a question of deciding whether or not NATO countries are directly involved in a military conflict,’ Putin told Russian state TV.”
September 11 – Reuters (Dmitry Antonov and Andrew Osborn): “The Kremlin told the West… that any decision to allow Ukraine to strike Russia with long-range Western missiles would deepen what it called the direct involvement of the U.S. and Europe in the war and would trigger a response from Moscow. The warning came as senior Ukrainian government officials pressed U.S. Secretary of State Antony Blinken and British foreign minister David Lammy, on a joint visit to Kyiv, to allow Ukraine to fire long-range U.S. ATACMS missiles and British Storm Shadow cruise missiles at targets deep inside Russia.”
September 10 – Reuters (Lidia Kelly): “Ukraine targeted the Russian capital… in its biggest drone attack so far, killing at least one and wrecking dozens of homes in the Moscow region and forcing around 50 flights to be diverted from airports around Moscow. Russia, the world's biggest nuclear power, said it had destroyed at least 20 Ukrainian attack drones as they swarmed over the Moscow region, which has a population of more than 21 million, and 124 more over eight other regions.”
Taiwan Watch:
September 11 – Financial Times (Demetri Sevastopulo): “Seal Team 6, the clandestine US Navy commando unit that killed Osama bin Laden in 2011, has been training for missions to help Taiwan if it is invaded by China, according to people familiar... The elite Navy special forces team, which is tasked with some of the military’s most sensitive and difficult missions, has been planning and training for a Taiwan conflict for more than a year at Dam Neck, its headquarters at Virginia Beach... The secret training underlines the increased US focus on deterring China from attacking Taiwan, while stepping up preparations for such an event. The preparations have only grown since Phil Davidson, the US Indo-Pacific commander at the time, warned in 2021 that China could attack Taiwan within six years.”
Election Watch:
September 12 – Bloomberg (Gregory Korte): “Republican Donald Trump ruled out appearing at another debate with Democrat Kamala Harris two days after he delivered an uneven performance at their first showdown of the election cycle. ‘THERE WILL BE NO THIRD DEBATE!,’ Trump posted…, insisting that he won the lone showdown with Harris and didn’t need to debate again. ‘When a prizefighter loses a fight, the first words out of his mouth are, ‘I WANT A REMATCH,’’ Trump wrote.”
Market Instability Watch:
September 13 – Financial Times (Mary McDougall, Harriet Clarfelt and Colby Smith): “Investors have sharply increased their bets on a half-percentage-point interest rate cut by the Federal Reserve next week, as the US central bank prepares to lower borrowing costs for the first time in more than four years. Traders in swaps markets are currently pricing in a 47% chance that the Fed will opt for a bumper cut in a bid to prevent high rates from damaging the economy. On Thursday, they had priced in just a 15% chance. Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said a half-point cut was now ‘very much in play’ after having been ‘almost entirely priced out’ at one point on Thursday.”
September 12 – Bloomberg (Denitsa Tsekova and Lu Wang): “After weeks of stomach-churning volatility, Wall Street pundits are blaming a burgeoning leveraged investment strategy for exacerbating stock-market moves, particularly right before the end of the trading day. Funds that use derivatives to offer juiced-up or inverse returns of individual companies and indexes sold about $15 billion of stocks on Sept. 3 — when the Nasdaq 100 plunged 3% — according to JPMorgan... That was the cohort’s biggest selling wave from rebalancing since the onset of the pandemic. The activity also put pressure, per Nomura Holdings Inc., on S&P 500 futures… Last Tuesday wasn’t an anomaly. These days, leveraged ETFs may be exerting their biggest ever influence on the broader marketplace, according to Morgan Stanley’s quantitative and derivatives sales team…”
September 9 – Wall Street Journal (Alexander Osipovich): “A popular, fast-paced trade has boosted the options market to record volumes in recent years. Now, Wall Street is looking to push it even further. Zero-day-to-expiry options let investors bet on whether a particular stock-market index will rise or fall by the end of the day. They have drawn an enthusiastic following among amateur investors, even as skeptics call them a form of gambling. They are sometimes known by the hashtag #0dte. So far, the #0dte boom has been limited to options tied to indexes such as the S&P 500 or Nasdaq-100. The next frontier could be options on stocks such as Tesla or Nvidia. Currently, options tied to individual stocks expire weekly, on Fridays. To bring #0dte to single-stock options, exchanges would need to add new expirations for Monday through Thursday.”
Global Credit Bubble Watch:
September 8 – Bloomberg (Selcuk Gokoluk): “Borrowers in the developing world are shoring up their defenses against volatility that could shake their biggest markets in the US and derail refinancing plans. In just the first five days of the month, they’ve sold more bonds than at the outset of any previous September. Issuance by governments and companies hit $28 billion through Friday... In the same period last year $12 billion of deals were closed.”
September 9 – Bloomberg (Jill R. Shah and Jessica Nix): “A flood of issuance is continuing in the market for junk-rated debt and borrowers are taking advantage of a starved investor base to bring riskier deals, including for dividends and leveraged buyouts. Roughly $53.9 billion of deals have launched in the leveraged loan market so far this month, with 15 coming on Monday... The high-yield bond market has also priced $7.6 billion of issuance so far this month.”
AI Bubble Watch:
September 8 – Wall Street Journal (Dave Michaels and Asa Fitch): “U.S. antitrust enforcers are intervening early to examine whether a handful of big tech companies such as Nvidia are using their leverage to establish dominance over the burgeoning artificial-intelligence market. The Justice Department’s antitrust division has already contacted Nvidia, whose AI chip market share is estimated at over 80%, to ask questions about the terms of its contracts and partnerships, according to people familiar with the matter. The investigation is at an early phase… The department could issue a subpoena in the coming months if it determines a fuller-fledged investigation is needed, the people said.”
Bubble and Mania Watch:
September 10 – Financial Times (Steve Johnson): “Global inflows into exchange traded funds are on course to surge to new record highs this year, as market volatility and a summer lull failed to damp buying in August. Investors poured a net $129.7bn into ETFs in August, according to… BlackRock. This was below July’s record high of $198bn but still above 2024’s monthly average, despite August traditionally being a quiet month for fund flows and despite market ructions at the beginning of the month, when the S&P 500 stock index plunged 6% in three trading days. Net inflows for the first eight months of the year now stand at $969bn, comfortably ahead of the $848bn at this stage of the year in 2021, when the record full-year tally of $1.3tn was chalked up.”
September 9 – New York Times (David McCabe): “For years, Google has faced complaints about how it dominates the online advertising market. Many of the concerns stem from the internet giant’s suite of software known as Google Ad Manager, which websites around the world use to sell ads on their sites. The technology conducts split-second auctions to place ads each time a user loads a page. The dominance of that technology has landed Google in federal court. On Monday, Judge Leonie Brinkema of the U.S. District Court for the Eastern District of Virginia will preside over the start of a trial in which the Department of Justice accuses the company of abusing control of its ad technology and violating antitrust law.”
September 10 – CNBC (Robert Frank): “Sales of ultra-luxury homes surged in New York, Miami and Palm Beach, Florida, in the second quarter, even as they fell in much of the rest of the world… The number of homes that sold for $10 million or more in the second quarter jumped 44% in Palm Beach, 27% in Miami and 16% in New York, according to… Knight Frank. New York led the U.S. in $10 million-plus sales, with 72, its highest total in two years, according to the report. Miami came in second with 55, followed by Los Angeles with 42 and Palm Beach with 36.”
U.S./Russia/China/Europe Watch:
September 10 – Financial Times (Henry Foy, Polina Ivanova, Kathrin Hille and Demetri Sevastopulo): “The US has accused China of providing Russia with direct support for its ‘war machine’ for the first time, as part of an intensified campaign to urge Europe to join Washington in ratcheting up pressure on Beijing. US deputy secretary of state Kurt Campbell told reporters… China was supplying Moscow with items that were directly helping the Russian military as it prosecutes its war of aggression in Ukraine… ‘These are not dual-use capabilities,’ Campbell said... ‘These are component pieces of a very substantial effort on the part of China to help sustain, build and diversify various elements of the Russian war machine.’”
September 13 – Reuters (Andrew Osborn): “Russia's FSB security service said… it had revoked the accreditation of six British diplomats in Moscow after accusing them of spying and sabotage work, signalling the Kremlin's anger at what it sees as London's vital role in helping Ukraine. Britain described the accusations as ‘completely baseless’, saying it was a tit-for-tat action after the UK expelled the Russian defence attache and removed diplomatic status from several Russian properties in May.”
September 13 – Bloomberg (Jon Herskovitz): “Russian Security Council Secretary Sergei Shoigu held talks in Pyongyang with North Korean leader Kim Jong Un during a visit likely to stir concerns about arms transfers to aid the Kremlin’s war on Ukraine. Shoigu and Kim discussed a wide range of bilateral and international topics when they met Friday… The meeting is aimed at facilitating a Comprehensive Strategic Partnership treaty that Kim signed with Russian President Vladimir Putin in June, it said.”
September 10 – Bloomberg: “The Russian Navy started major drills that are planned to involve more than 400 vessels in multiple locations and showcase its cooperation with the Chinese military. Russian President Vladimir Putin plans to join the exercises, known as Ocean 2024, via videolink from the Kremlin on Tuesday… The ‘Ocean’ codename is the same one as that used in the 1970s and 1980s for the biggest combat drills carried out by the Soviet Union’s navy in the period after World War II, according to Russia’s Defense Ministry.”
De-globalization and Iron Curtain Watch:
September 13 – Reuters (David Lawder): “The Biden administration… locked in steep tariff hikes on Chinese imports, including a 100% duty on electric vehicles, to strengthen protections for strategic domestic industries from China's state-driven excess production capacity. The U.S. Trade Representative's said that many of the tariffs, including a 100% duty on Chinese EVs, 50% on solar cells and 25% on steel, aluminum, EV batteries and key minerals, would go into effect on Sept. 27. The USTR determination… showed a 50% duty on Chinese semiconductors, which now include two new categories - polysilicon used in solar panels and silicon wafers - are due to start in 2025.”
September 11 – Bloomberg: “Russian President Vladimir Putin asked the government to consider if it makes sense to limit exports of some commodities like nickel, titanium and uranium in retaliation for western sanctions. ‘Russia is the leader in strategic raw materials reserves like uranium, titanium, nickel,’ Putin said during the meeting with the government, shown on TV. Since western sanctions limit exports of some Russian commodities like diamonds, ‘maybe we should also think about restrictions,’ he said. Such limits should not harm Russia, he said.”
September 10 – Reuters (Joe Cash and Ethan Wang): “China's exports grew at their fastest pace in nearly 1-1/2 years in August, suggesting manufacturers are rushing out orders ahead of tariffs expected from a growing number of trade partners, while imports disappointed amid weak domestic demand… Outbound shipments from the world's second-largest economy grew 8.7% year-on-year in value last month, the quickest since March 2023…, beating a forecast 6.5% increase… and a 7% rise in July. But imports increased by just 0.5%, missing expectations for a 2% boost and down from the 7.2% growth a month prior.”
Inflation Watch:
September 12 – CNBC (Jeff Cox): “Wholesale prices rose in August about in line with expectations… The producer price index… increased 0.2% on the month… Excluding food and energy, PPI increased 0.3%, slightly hotter than the 0.2% consensus estimate. The core increase was the same when excluding trade services. On a 12-month basis, headline PPI rose 1.7%. Excluding food, energy and trade, the annual rate was 3.3%.”
September 9 – Reuters (Michael S. Derby): “The U.S. public's outlook for inflationary pressures was little changed last month amid an ongoing retreat in current price pressures, according to… the New York Federal Reserve. In its latest Survey of Consumer Expectations, the regional Fed bank found that in August respondents saw inflation a year and five years from now at 3% and 2.8%, respectively, unchanged from July. Three years from now, survey respondents expected inflation to be 2.5%, from 2.3% in July.”
September 12 – Bloomberg (Matt Day): “Amazon.com Inc. plans to spend an additional $2.1 billion on its contract delivery program, including safety programs, training and additional pay for the contracting firms. The company says it expects the outlays to raise average pay for drivers, who pilot Amazon-branded vans but technically work for independent companies that Amazon calls Delivery Service Partners, to almost $22 an hour, up 7% from a year earlier. Contractors and their teams ‘go to great lengths to take care of Amazon customers, and that’s why we want to support DSPs with our biggest investment yet,’ Beryl Tomay, an Amazon vice president, said…”
September 12 – Bloomberg (Mary Schlangenstein): “American Airlines Group Inc. flight attendants approved a contract that will immediately raise wages as much as 20% and increase pay and benefits by $4.2 billion over the deal’s five-year term. The contract was accepted by 87% of those casting ballots…”
Federal Reserve Watch:
September 10 – Wall Street Journal (Alexander Saeedy): “The Federal Reserve is walking back a plan to raise the amount of capital America’s biggest banks are required to hold, after intense pushback from the banking industry. The regulator plans to require big banks to increase the reserves they hold against losses by 9%, the Fed’s Vice Chair, Michael Barr, said... Earlier proposals, which came after three major banks collapsed last year, would have increased them by an estimated 20%. Banks holding less than $250 billion in assets—meaning most banks in the country outside of the very biggest—won’t be subject to most of the new capital rules… An additional capital charge for the biggest banks because of their size and systemic importance would also be recalibrated... Barr said that based on industry feedback, capital increases for traditional loans such as mortgages and credit cards would also be scaled back.”
September 10 – Financial Times (Colby Smith, Martin Arnold, Joshua Franklin and Stephen Gandel): “Just months after the shocking unravelling of Silicon Valley Bank and First Republic Bank last year, Michael Barr unveiled a new set of guardrails for the US’s biggest lenders and an uncompromising defence of why they were needed. ‘Some industry representatives claim that inadequate capital had nothing to do with those bank failures,’ the Federal Reserve’s vice-chair for supervision said in July 2023, one year into his tenure as Wall Street’s top regulator. ‘I disagree.’ Fourteen months later, Barr has walked back the landmark proposal that sought to apply more stringent rules on major US lenders such as JPMorgan… and Goldman Sachs, after one of the fiercest opposition campaigns from the banking lobby and a bipartisan group of US lawmakers. ‘Life gives you ample opportunity to learn and relearn the lesson of humility,’ he said…”
U.S. Economic Bubble Watch:
September 12 – Bloomberg (Viktoria Dendrinou): “The US federal budget deficit surged in August with one month to go until the end of the fiscal year as higher interest costs continued to weigh on the overall balance. The $1.9 trillion gap for the 11 months through August was up 24% from the same period last year… For the month of August alone, the deficit was $380 billion, compared with a surplus in August 2023 when adjusting for calendar differences. Much of the monthly variance was due to accounting for a rollback of student-debt forgiveness. The interest burden on outstanding US debt remains a major drag on the budget. Interest costs in the first 11 months of the fiscal year totaled $1.05 trillion, up 30% from 2023. Interest costs have never exceeded $1 trillion a year before now…”
September 12 – Reuters (Lucia Mutikani): “The number of Americans filing new applications for unemployment benefits increased marginally last week, suggesting that layoffs remained low even as the labor market is slowing… Initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 230,000 for the week ended Sept. 7.”
September 9 – Bloomberg (Vince Golle): “US consumer borrowing increased in July by the most since November 2022, reflecting jumps in non-revolving debt and credit-card balances. Total credit outstanding increased $25.5 billion… The gain exceeded all forecasts… Revolving debt outstanding, which includes credit cards, increased $10.6 billion, the most in five months. Non-revolving credit, such as loans for vehicle purchases and school tuition, surged $14.8 billion in more than a year. The increase in borrowing helped fuel the biggest jump in retail sales during the month since early 2023.”
September 10 – Wall Street Journal (Jon Kamp and Paul Overberg): “Household incomes rose last year for the first time since the Covid-19 pandemic began, reflecting the effects of easing inflation and a strong job market. The new data from the U.S. Census Bureau… signaled an improvement in 2023 after inflation that spiked to a 40-year-high the prior year swallowed up household income gains. Inflation-adjusted median household income was $80,610 in 2023, up 4% from the 2022 estimate of $77,540… This move returned incomes to about where they were in 2019, the peak that was hit just before the pandemic.”
September 10 – Reuters (Lucia Mutikani): “U.S. small-business confidence fell in August, reversing the prior month's jump amid growing uncertainty ahead of the Nov. 5 presidential election and expectations of weak sales. The National Federation of Independent Business (NFIB) said… its Small Business Optimism Index dropped 2.5 points to 91.2 last month. The index had surged in July to the highest reading since February 2022. The survey's Uncertainty Index increased 2 points to 92, the highest since October 2020… ‘Clearly, 'uncertainty' has been on the rise,’ said NFIB Chief Economist Bill Dunkelberg… Though business owners continued to worry about inflation, the share ticked down and fewer reported raising average selling prices. But labor shortages remain a challenge for small businesses, even as job openings in the nation have declined, resulting in a rise in the share of owners planning to raise compensation in the next three months.”
September 12 – Bloomberg (Emma Sanchez): “Blue-chip companies are spending more money on US dollar bond interest payments, and even Federal Reserve rate cuts this year won’t immediately reverse the trend. High-grade issuers are poised to pay around $420 billion in coupons this year, up 18% from last year, according to a note by JPMorgan... That increase is three times the rate of revenue growth for companies in the S&P 500 Index during the second quarter — suggesting the trend is weighing on profit growth for many companies.”
September 12 – Reuters (Lucia Mutikani): “U.S. mortgage rates dropped this week on expectations that the Federal Reserve would start cutting interest rates next Wednesday… The average rate on the popular 30-year fixed-rate mortgage fell to 6.20%, the lowest since February 2023, from 6.35% last week… It averaged 7.18% during the same period a year ago.”
September 13 – Reuters (Joe Brock and David Shepardson): “Boeing's U.S. West Coast factory workers walked off the job on Friday after overwhelmingly rejecting a contract deal, halting production of the planemaker's strongest-selling and sending shares down over 2%. The first strike since 2008 comes as the planemaker is under heavy scrutiny from U.S. regulators and customers after a door panel blew off a 737 MAX jet mid-air in January.”
September 9 – Bloomberg (Shruti Date Singh): “Chicago is freezing hiring and curbing other expenses to help close more than $1 billion in budget shortfalls through next year for the nation’s third-largest city. Effective Monday, Chicago is limiting non-essential travel and overtime expenses outside of public safety spending, budget director Annette Guzman said… Chicago is staring down an estimated $222.9 million deficit this year and another $982.4 million projected gap next year.”
September 9 – Bloomberg (Alex Tanzi): “Millions of Americans are falling behind on student loan payments a year after the pandemic freeze ended – and soon that will start hurting their credit scores. In a report released last month, the Government Accountability Office estimated that about 10 million borrowers – more than one-quarter of the total – were behind on payments as of the end of January. About two-thirds of them were more than three months late, meaning they’d normally be classified as seriously delinquent.”
Fixed Income Watch:
September 11 – Bloomberg (Sri Taylor): “High-end real estate developments are tapping the municipal-bond market, leading to a slew of so-called luxury dirt deals and fueling returns for investors willing to take on the risk. This year, state and local debt buyers have helped finance a vacation-home golf enclave in Florida, a resort near Zion National Park and a $4.2 billion redevelopment in Atlanta’s downtown. The deals — all high-yield and sold exclusively to sophisticated investors — represent a niche corner of a market that typically raises money to build schools, roads and bridges. Some of these offerings have been oversubscribed and repriced tighter, helping to boost returns for junk-rated muni-bonds to a 7.2% gain this year, outpacing their investment-grade counterparts by more than 5 percentage points…”
September 7 – Bloomberg (Immanual John Milton): “Investors in the riskiest portions of collateralized loan obligations are seeing their returns get juiced thanks to the biggest wave of resetting on record. Resets, a form of refinancing for CLOs, surged to a US record of more than $26 billion in August… That’s a huge jump from the previous record for a month set in June, when they exceeded $20 billion for the first time. Sales of new CLOs may soon come under pressure because there are too few loans to package into the securities. Even so, investors are eager to buy CLOs, which has helped bring spreads, or risk premiums, on the bonds to near their tightest level in more than two years.”
China Watch:
September 11 – Reuters (Robyn Mak): “China’s financial sector has serious heartburn. For decades, Beijing has leaned on its state-controlled banks to turbo-charge growth by extending credit. But lenders are now clogged with risky assets. The result is something like indigestion: not critical, but painful for the $17 trillion economy. On paper, the country's banks look remarkably healthy given 2020's twin shocks of the pandemic and a burst property bubble. Official data show them sitting on 3.3 trillion yuan, roughly $460 billion, of non-performing loans. Add in another $670 billion of less-problematic-but-still-pesky ‘special mention’ loans, which include credit extended to struggling property developers and cash-strapped local governments, and it doesn’t even reach 4% of their aggregate lending. The problem is, asking China’s official data collectors about bad debt is like asking a dyspeptic patient how much junk food they really eat. Other sources take a gloomier view. Bad loans in the property sector today alone could be over $1 trillion, reckons research firm GavekalDragonomics.”
September 13 – Bloomberg: “China’s central bank indicated it will step up its fight against deflation and prepare additional policies to revive the economy, after credit data showed private confidence remained weak despite previous interest-rate cuts. Aggregate financing, a broad measure of credit, increased less in August than in the same month a year earlier, while new loans extended by financial institutions undershot economist forecasts…”
September 13 – Reuters (Kevin Yao and Ella Cao): “New bank lending in China jumped less than expected in August after hitting a 15-year low in July, as the central bank keeps policy accommodative and pledges to roll out more supportive measures to bolster a fragile economic recovery. Chinese banks extended 900 billion yuan ($126.86bn) in new yuan loans in August, up 246% from July but short of analyst expectations… Outstanding yuan loans were up 8.5% year on year in August, down from 8.7% in July. Analysts had expected 8.6% growth. Annual growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, slowed to 8.1% in August from 8.2% in July.”
September 9 – Bloomberg (Qiaoyi Li and Ryan Woo): “China's consumer inflation accelerated in August to the fastest pace in half a year but the uptick was due more to higher food costs from weather disruptions than a recovery in domestic demand… The consumer price index (CPI) rose 0.6% from a year earlier last month, versus a 0.5% rise in July…, but less than a 0.7% increase forecast… Food prices jumped 2.8% on year in August from an unchanged outcome in July, while non-food inflation was 0.2%, easing from 0.7% in July.”
September 8 – Financial Times (Joe Leahy): “China’s producer prices slid in August as concerns grow that deflationary forces are taking root in the world’s second-largest economy. Industrial producer prices fell 1.8% year on year, the most in four months, dragged down by steel, agriculture and other sectors. This compares with a decline of 0.8% in July and analysts’ expectations of a 1.4% fall… The latest readings suggest many of China’s manufacturers, food processors and other industries are suffering the consequences of lacklustre demand across the economy.”
September 9 – Bloomberg: “Deflation stalking China since last year is now showing signs of spiraling, threatening to worsen the outlook for the world’s second-largest economy and raising calls for immediate policy action. Data… confirmed that apart from food costs, consumer price growth barely registered in large swathes of the economy at a time when incomes are sagging… ‘We are definitely in deflation and probably going through the second stage of deflation,’ said Robin Xing, chief China economist at Morgan Stanley, citing evidence from wage decreases. ‘Experience from Japan suggests that the longer deflation drags on, the more stimulus China will eventually need to break the debt-deflation challenge.’”
September 9 – Financial Times (Joe Leahy and Thomas Hale): “China needs to spend up to Rmb10tn ($1.4tn) over two years in stimulus funds to reflate its economy and return it to sustainable growth, investment bank economists said, as concerns grow that deflationary pressures are becoming entrenched. The stimulus, which would be up to 2.5 times the ‘bazooka’ package China enacted after the global financial crisis in 2008, would need to directly target households through social welfare spending rather than investment and infrastructure, they said. They warned that the matter was becoming more urgent — the more embedded deflation became, the more it would cost to dispel it through stimulus measures. Their estimates underline the scale of Chinese policymakers’ challenge as they try to reinvigorate growth in the world’s second-biggest economy. ‘The longer that deflation stays, the bigger the ask in terms of reflation,’ said Robin Xing, chief China economist at Morgan Stanley.”
September 9 – Reuters (Qiaoyi Li, Zhang Yan and Kevin Krolicki): “Passenger vehicle sales in China fell in August for the fifth straight month…, though sales of all-electric and plug-in hybrid models rose, helped by subsidies for drivers trading in more polluting vehicles. Sales fell 1.1% from the same month a year earlier to 1.92 million vehicles… That compared with a 3.1% decline in July. New energy vehicle (NEV) sales, however, jumped 43.2% to account for a record 53.5% of total car sales… Car exports increased 24% after a 20% rise in July.”
September 9 – Bloomberg (David Hall and Wei Zhou): “Some of China’s most closely watched property developers slid by the most in months, after home sales data underscored a worsening real estate slump. China Vanke Co.’s 3.5% dollar bond due 2029 was down about 5 cents on the dollar on Tuesday at 42.4 cents, the steepest daily decline since March 4. Other developers also saw deep slumps… Chinese builders are facing relentless pressure from continued declines in property sales and growing worries about their liquidity. Vanke’s contracted sales slid 24% in August from a year earlier, worsening from a 13% drop in July.”
September 10 – Bloomberg: “Shares of some Chinese developers dropped in Hong Kong after they were made inaccessible to investors in the mainland, marking another setback for the beleaguered sector. Shimao Group Holdings Ltd.’s stock shed as much as 30% on Tuesday, the most in more than a year, after it was scrapped from the Stock Connect program that links the Shanghai and Shenzhen bourses to the Hong Kong exchange. CIFI Holdings Group Co. and Sino-Ocean Group Holding Ltd. each sank more than 20%, while a Bloomberg Intelligence gauge of Chinese developers declined as much as 5.4% to the lowest since April.”
September 12 – Bloomberg: “China is poised to cut interest rates on more than $5 trillion of outstanding mortgages as early as this month, according to people familiar…, as it accelerates a move to reduce the borrowing costs for millions of families to spur consumption. Some banks are making final preparations to get ready for the upcoming adjustments on mortgage rates… Some homeowners may enjoy up to 50 bps of immediate rate reduction…”
September 7 – Reuters: “China's foreign exchange reserves rose to the highest level in more than 8-1/2 years in August…, thanks largely to a broadly weaker U.S. dollar. The country's foreign exchange reserves - the world's largest - grew by $31.8 billion to $3.288 trillion last month… But it slightly missed a $3.289 trillion forecast in a Reuters poll...”
September 11 – Bloomberg: “China is turning up the heat on its army of 8,700 investment bankers. After being forced to take big pay cuts and adhere to other belt-tightening measures under President Xi Jinping’s years-long common prosperity campaign, the country’s dealmakers are now in the crosshairs of the nation’s top graft buster. At least three top investment bankers from different securities firms have been detained by Chinese authorities since August, sending a chill through the industry. One of them, who used to oversee dealmaking at Haitong Securities Co., fled the country and was arrested overseas about two weeks ago, before being repatriated back to China in an incident widely publicized on state media. Haitong and other state-backed brokerages recently asked many of their investment bankers to hand in their passports and seek permission for all business and personal travel plans…”
September 12 – Associated Press: “American companies in China are seeing record-low profits, with business confidence at an all-time low amid U.S.-China tensions and a slowing Chinese economy… Out of 306 companies polled, a record-low 66% were profitable in 2023, according to the China business report published by the American Chamber of Commerce in Shanghai. The report also found that only 47% of respondents were optimistic about their business outlook in China over the next five years, the lowest in the survey’s history of more than two decades.”
September 8 – Bloomberg: “Japanese companies are increasingly abandoning an approach to business in China that once seemed immune to politics, a stark shift after years when they were the biggest single investors in their neighbor’s economy. In an era defined by geopolitical risks and worry over China’s faltering growth, the economic math no longer adds up for the likes of Nippon Steel Corp., which said in July it was exiting its joint venture in China. Mitsubishi Motors Corp. suspended its local operations indefinitely last year… Almost half of Japanese firms in China polled in a recent survey said they won’t spend more or will cut investment this year. Companies listed rising wages, falling prices and geopolitics as the biggest issues they faced.”
September 11 – Wall Street Journal (Yoko Kubota and Liza Lin): “Many global businesses are pushing China down on their list of investment destinations and consolidating operations in the country, citing slower growth and diminishing profits. The gloomy investment trend was the focus of twin reports this week from the European Union Chamber of Commerce in China and the American Chamber of Commerce in Shanghai. ‘The risk of doing business in China has gone up in the past few years and at the same time the market is slowing down,’ said Eric Zheng, president of the U.S. group. A poll by the U.S. chamber found the percentage of respondents ranking China as their headquarters’ top investment destination fell to the lowest level since the annual survey began 25 years ago.”
September 11 – Reuters: “Zhongzhi Enterprise Group, a former leader of China's shadow banking sector that declared insolvency last year, used aggressive and potentially illegal sales practices to sustain its operations as it lurched toward collapse, according to records reviewed by Reuters and eight people with direct knowledge of the matter. China's years-long property boom had propelled Beijing-headquartered Zhongzhi to the top of the country's $18 trillion asset-management industry and made it a key player in a shadow banking sector the size of the French economy. Asset managers such as Zhongzhi sell wealth-management products to investors. The proceeds are then channeled by licensed trust firms like its Zhongrong unit to developers and other companies that cannot tap bank funding directly because of poor creditworthiness or other reasons.”
September 9 – Bloomberg: “In the go-go years when China minted a billionaire every two days, banking rainmaker Bao Fan almost reached that milestone himself. His skill in advising tech giants like Alibaba Group Holding Ltd. made him one of the country’s most sought-after financiers, helping him amass a fortune worth more than $800 million through his ownership stake in China Renaissance Holdings Ltd. Bao’s career came crashing down last year when he vanished from public view after being detained by authorities amid a broader crackdown. The extent of his financial freefall was revealed Monday when Renaissance shares tumbled after a 17-month halt. His stake is now worth $55 million, down 93% from its peak in February 2021…”
Central Banking Watch:
September 12 – Bloomberg (Anchalee Worrachate, Alice Atkins and Andrew Langley): “Clues on when the European Central Bank will next cut interest rates were in short supply on Thursday, with President Christine Lagarde and colleagues awaiting data on how drastically the economy is deteriorating — and how that will shift inflation. In lowering its key deposit rate by a quarter-point for the second time this year — as expected — the ECB reaffirmed that it won’t commit to a particular course for borrowing costs.”
Global Bubble Watch:
September 10 – Reuters (Jihoon Lee): “South Korea's household borrowing rose in August by the biggest amount in more than three years, led by a record jump in mortgage demand… Household borrowing from banks stood at 1,130.0 trillion won ($840.52bn) at the end of August, up 9.3 trillion won over the month, the biggest monthly increase since July, 2021. Mortgage loans rose 8.2 trillion won, the biggest increase since the data release started in 2004, according to the Bank of Korea (BOK).”
Europe Watch:
September 9 – Bloomberg (Jorge Valero and Andrea Palasciano): “Former European Central Bank President Mario Draghi called on the EU to invest as much as €800 billion ($884bn) extra a year and commit to the regular issuance of common bonds to make the bloc more competitive with China and the US. In his long-awaited report on European Union competitiveness, Draghi urged the bloc to develop its advanced technologies, create a plan to meet its climate targets and boost defense and security of critical raw materials, labeling the task ‘an existential challenge.’ Draghi said that Europe will need to boost investment by about 5 percentage points of the bloc’s GDP — a level not seen in more than 50 years…”
September 10 – Bloomberg (Jana Randow, Mark Schroers and Kamil Kowalcze): “Joint debt just isn’t on Germany’s agenda — irrespective of Mario Draghi’s warning that it’s the only way to make the European Union more competitive with China and the US. The former Italian premier had barely finished presenting his long-awaited report… about how to fix Europe’s ailing economy — with its centerpiece of common bond issuance — when Finance Minister Christian Lindner retorted that such an approach won’t solve the region’s structural problems. ‘I am very skeptical about Mr. Draghi’s approach to debt,’ the German politician told N-TV in one of a series of swift reactions. ‘That can be summarized briefly: Germany should pay for others. That can’t be a master plan.’”
Japan Watch:
September 11 – Reuters (Leika Kihara and Takahiko Wada): “The Bank of Japan will continue to raise interest rates if inflation moves in line with its forecast, policymaker Junko Nakagawa said, signalling that last month's market rout has not derailed the bank's plan to hike borrowing costs steadily. But the central bank must take into account the impact that such market moves could have on the outlook for the economy and prices when considering whether to raise rates, she added… ‘Given real interest rates are currently very low, we will adjust the degree of monetary support, from the standpoint of sustainably and stably achieving our 2% inflation target, if our economic and price forecasts are met,’ Nakagawa said…”
September 12 – Reuters (Leika Kihara): “The Bank of Japan must raise interest rates to at least 1% as soon as the second half of next fiscal year, hawkish policymaker Naoki Tamura said…, reinforcing the bank's resolve to persist with steady monetary tightening. It was the first time a BOJ policymaker publicly specified a level the central bank should eventually target in pushing up short-term borrowing costs.”
Leveraged Speculation Watch:
September 9 – Financial Times (Costas Mourselas): “The hottest sector in the hedge fund industry has suffered outflows for the first time in seven years, in a sign that investors who once raced to get access to so-called multi-manager funds may finally be losing interest. Pioneered by firms such as Ken Griffin’s Citadel and Izzy Englander’s Millennium, multi-manager hedge funds house tens if not hundreds of trading teams, known as ‘pods’, which run a variety of trading strategies across equities, commodities, foreign exchange, credit and other markets. These funds have pulled in tens of billions of dollars from big investors in recent years thanks to strict risk controls and consistent returns, even in equity bear markets such as 2022.”
Social, Political, Environmental, Cybersecurity Instability Watch:
September 9 – Reuters (Daniela Desantis and Lucinda Elliott): “South America's Paraguay River, a key thoroughfare for grains, has hit a record low in Paraguay's capital Asuncion, with water levels depleted by a severe drought upriver in Brazil that has hindered navigation along waterways in the Amazon. The depth of the Paraguay River… has dropped below minus 0.82 meter, breaking the previous record low in October 2021…The body expects the river will keep falling with no rain forecast.”
Geopolitical Watch:
September 10 – Reuters (Joyce Lee and Hyunsu Yim): “North Korean leader Kim Jong Un said the country is now implementing a nuclear force construction policy to increase the number of nuclear weapons ‘exponentially’, state media KCNA reported… Kim said the country must more thoroughly prepare its ‘nuclear capability and its readiness to use it properly at any given time in ensuring the security rights of the state’, said KCNA.”
September 10 – Wall Street Journal (Angus Berwick and Ben Foldy): “A giant unregulated currency is undermining America’s fight against arms dealers, sanctions busters and scammers. Almost as much money flowed through its network last year as through Visa cards. And it has recently minted more profit than BlackRock… Its name: tether. The cryptocurrency has grown into an important cog in the global financial system, with as much as $190 billion changing hands daily. In essence, tether is a digital U.S. dollar—though one privately controlled in the British Virgin Islands by a secretive crew of owners… But it has spread deep into the financial underworld, enabling a parallel economy that operates beyond the reach of U.S. law enforcement. Wherever the U.S. government has restricted access to the dollar financial system—Iran, Venezuela, Russia—tether thrives as a sort of incognito dollar used to move money across borders.”
De-globalization and Iron Curtain Watch:
September 13 – Reuters (David Lawder): “The Biden administration… locked in steep tariff hikes on Chinese imports, including a 100% duty on electric vehicles, to strengthen protections for strategic domestic industries from China's state-driven excess production capacity. The U.S. Trade Representative's said that many of the tariffs, including a 100% duty on Chinese EVs, 50% on solar cells and 25% on steel, aluminum, EV batteries and key minerals, would go into effect on Sept. 27. The USTR determination… showed a 50% duty on Chinese semiconductors, which now include two new categories - polysilicon used in solar panels and silicon wafers - are due to start in 2025.”
September 11 – Bloomberg: “Russian President Vladimir Putin asked the government to consider if it makes sense to limit exports of some commodities like nickel, titanium and uranium in retaliation for western sanctions. ‘Russia is the leader in strategic raw materials reserves like uranium, titanium, nickel,’ Putin said during the meeting with the government, shown on TV. Since western sanctions limit exports of some Russian commodities like diamonds, ‘maybe we should also think about restrictions,’ he said. Such limits should not harm Russia, he said.”
September 10 – Reuters (Joe Cash and Ethan Wang): “China's exports grew at their fastest pace in nearly 1-1/2 years in August, suggesting manufacturers are rushing out orders ahead of tariffs expected from a growing number of trade partners, while imports disappointed amid weak domestic demand… Outbound shipments from the world's second-largest economy grew 8.7% year-on-year in value last month, the quickest since March 2023…, beating a forecast 6.5% increase… and a 7% rise in July. But imports increased by just 0.5%, missing expectations for a 2% boost and down from the 7.2% growth a month prior.”
Inflation Watch:
September 12 – CNBC (Jeff Cox): “Wholesale prices rose in August about in line with expectations… The producer price index… increased 0.2% on the month… Excluding food and energy, PPI increased 0.3%, slightly hotter than the 0.2% consensus estimate. The core increase was the same when excluding trade services. On a 12-month basis, headline PPI rose 1.7%. Excluding food, energy and trade, the annual rate was 3.3%.”
September 9 – Reuters (Michael S. Derby): “The U.S. public's outlook for inflationary pressures was little changed last month amid an ongoing retreat in current price pressures, according to… the New York Federal Reserve. In its latest Survey of Consumer Expectations, the regional Fed bank found that in August respondents saw inflation a year and five years from now at 3% and 2.8%, respectively, unchanged from July. Three years from now, survey respondents expected inflation to be 2.5%, from 2.3% in July.”
September 12 – Bloomberg (Matt Day): “Amazon.com Inc. plans to spend an additional $2.1 billion on its contract delivery program, including safety programs, training and additional pay for the contracting firms. The company says it expects the outlays to raise average pay for drivers, who pilot Amazon-branded vans but technically work for independent companies that Amazon calls Delivery Service Partners, to almost $22 an hour, up 7% from a year earlier. Contractors and their teams ‘go to great lengths to take care of Amazon customers, and that’s why we want to support DSPs with our biggest investment yet,’ Beryl Tomay, an Amazon vice president, said…”
September 12 – Bloomberg (Mary Schlangenstein): “American Airlines Group Inc. flight attendants approved a contract that will immediately raise wages as much as 20% and increase pay and benefits by $4.2 billion over the deal’s five-year term. The contract was accepted by 87% of those casting ballots…”
Federal Reserve Watch:
September 10 – Wall Street Journal (Alexander Saeedy): “The Federal Reserve is walking back a plan to raise the amount of capital America’s biggest banks are required to hold, after intense pushback from the banking industry. The regulator plans to require big banks to increase the reserves they hold against losses by 9%, the Fed’s Vice Chair, Michael Barr, said... Earlier proposals, which came after three major banks collapsed last year, would have increased them by an estimated 20%. Banks holding less than $250 billion in assets—meaning most banks in the country outside of the very biggest—won’t be subject to most of the new capital rules… An additional capital charge for the biggest banks because of their size and systemic importance would also be recalibrated... Barr said that based on industry feedback, capital increases for traditional loans such as mortgages and credit cards would also be scaled back.”
September 10 – Financial Times (Colby Smith, Martin Arnold, Joshua Franklin and Stephen Gandel): “Just months after the shocking unravelling of Silicon Valley Bank and First Republic Bank last year, Michael Barr unveiled a new set of guardrails for the US’s biggest lenders and an uncompromising defence of why they were needed. ‘Some industry representatives claim that inadequate capital had nothing to do with those bank failures,’ the Federal Reserve’s vice-chair for supervision said in July 2023, one year into his tenure as Wall Street’s top regulator. ‘I disagree.’ Fourteen months later, Barr has walked back the landmark proposal that sought to apply more stringent rules on major US lenders such as JPMorgan… and Goldman Sachs, after one of the fiercest opposition campaigns from the banking lobby and a bipartisan group of US lawmakers. ‘Life gives you ample opportunity to learn and relearn the lesson of humility,’ he said…”
U.S. Economic Bubble Watch:
September 12 – Bloomberg (Viktoria Dendrinou): “The US federal budget deficit surged in August with one month to go until the end of the fiscal year as higher interest costs continued to weigh on the overall balance. The $1.9 trillion gap for the 11 months through August was up 24% from the same period last year… For the month of August alone, the deficit was $380 billion, compared with a surplus in August 2023 when adjusting for calendar differences. Much of the monthly variance was due to accounting for a rollback of student-debt forgiveness. The interest burden on outstanding US debt remains a major drag on the budget. Interest costs in the first 11 months of the fiscal year totaled $1.05 trillion, up 30% from 2023. Interest costs have never exceeded $1 trillion a year before now…”
September 12 – Reuters (Lucia Mutikani): “The number of Americans filing new applications for unemployment benefits increased marginally last week, suggesting that layoffs remained low even as the labor market is slowing… Initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 230,000 for the week ended Sept. 7.”
September 9 – Bloomberg (Vince Golle): “US consumer borrowing increased in July by the most since November 2022, reflecting jumps in non-revolving debt and credit-card balances. Total credit outstanding increased $25.5 billion… The gain exceeded all forecasts… Revolving debt outstanding, which includes credit cards, increased $10.6 billion, the most in five months. Non-revolving credit, such as loans for vehicle purchases and school tuition, surged $14.8 billion in more than a year. The increase in borrowing helped fuel the biggest jump in retail sales during the month since early 2023.”
September 10 – Wall Street Journal (Jon Kamp and Paul Overberg): “Household incomes rose last year for the first time since the Covid-19 pandemic began, reflecting the effects of easing inflation and a strong job market. The new data from the U.S. Census Bureau… signaled an improvement in 2023 after inflation that spiked to a 40-year-high the prior year swallowed up household income gains. Inflation-adjusted median household income was $80,610 in 2023, up 4% from the 2022 estimate of $77,540… This move returned incomes to about where they were in 2019, the peak that was hit just before the pandemic.”
September 10 – Reuters (Lucia Mutikani): “U.S. small-business confidence fell in August, reversing the prior month's jump amid growing uncertainty ahead of the Nov. 5 presidential election and expectations of weak sales. The National Federation of Independent Business (NFIB) said… its Small Business Optimism Index dropped 2.5 points to 91.2 last month. The index had surged in July to the highest reading since February 2022. The survey's Uncertainty Index increased 2 points to 92, the highest since October 2020… ‘Clearly, 'uncertainty' has been on the rise,’ said NFIB Chief Economist Bill Dunkelberg… Though business owners continued to worry about inflation, the share ticked down and fewer reported raising average selling prices. But labor shortages remain a challenge for small businesses, even as job openings in the nation have declined, resulting in a rise in the share of owners planning to raise compensation in the next three months.”
September 12 – Bloomberg (Emma Sanchez): “Blue-chip companies are spending more money on US dollar bond interest payments, and even Federal Reserve rate cuts this year won’t immediately reverse the trend. High-grade issuers are poised to pay around $420 billion in coupons this year, up 18% from last year, according to a note by JPMorgan... That increase is three times the rate of revenue growth for companies in the S&P 500 Index during the second quarter — suggesting the trend is weighing on profit growth for many companies.”
September 12 – Reuters (Lucia Mutikani): “U.S. mortgage rates dropped this week on expectations that the Federal Reserve would start cutting interest rates next Wednesday… The average rate on the popular 30-year fixed-rate mortgage fell to 6.20%, the lowest since February 2023, from 6.35% last week… It averaged 7.18% during the same period a year ago.”
September 13 – Reuters (Joe Brock and David Shepardson): “Boeing's U.S. West Coast factory workers walked off the job on Friday after overwhelmingly rejecting a contract deal, halting production of the planemaker's strongest-selling and sending shares down over 2%. The first strike since 2008 comes as the planemaker is under heavy scrutiny from U.S. regulators and customers after a door panel blew off a 737 MAX jet mid-air in January.”
September 9 – Bloomberg (Shruti Date Singh): “Chicago is freezing hiring and curbing other expenses to help close more than $1 billion in budget shortfalls through next year for the nation’s third-largest city. Effective Monday, Chicago is limiting non-essential travel and overtime expenses outside of public safety spending, budget director Annette Guzman said… Chicago is staring down an estimated $222.9 million deficit this year and another $982.4 million projected gap next year.”
September 9 – Bloomberg (Alex Tanzi): “Millions of Americans are falling behind on student loan payments a year after the pandemic freeze ended – and soon that will start hurting their credit scores. In a report released last month, the Government Accountability Office estimated that about 10 million borrowers – more than one-quarter of the total – were behind on payments as of the end of January. About two-thirds of them were more than three months late, meaning they’d normally be classified as seriously delinquent.”
Fixed Income Watch:
September 11 – Bloomberg (Sri Taylor): “High-end real estate developments are tapping the municipal-bond market, leading to a slew of so-called luxury dirt deals and fueling returns for investors willing to take on the risk. This year, state and local debt buyers have helped finance a vacation-home golf enclave in Florida, a resort near Zion National Park and a $4.2 billion redevelopment in Atlanta’s downtown. The deals — all high-yield and sold exclusively to sophisticated investors — represent a niche corner of a market that typically raises money to build schools, roads and bridges. Some of these offerings have been oversubscribed and repriced tighter, helping to boost returns for junk-rated muni-bonds to a 7.2% gain this year, outpacing their investment-grade counterparts by more than 5 percentage points…”
September 7 – Bloomberg (Immanual John Milton): “Investors in the riskiest portions of collateralized loan obligations are seeing their returns get juiced thanks to the biggest wave of resetting on record. Resets, a form of refinancing for CLOs, surged to a US record of more than $26 billion in August… That’s a huge jump from the previous record for a month set in June, when they exceeded $20 billion for the first time. Sales of new CLOs may soon come under pressure because there are too few loans to package into the securities. Even so, investors are eager to buy CLOs, which has helped bring spreads, or risk premiums, on the bonds to near their tightest level in more than two years.”
China Watch:
September 11 – Reuters (Robyn Mak): “China’s financial sector has serious heartburn. For decades, Beijing has leaned on its state-controlled banks to turbo-charge growth by extending credit. But lenders are now clogged with risky assets. The result is something like indigestion: not critical, but painful for the $17 trillion economy. On paper, the country's banks look remarkably healthy given 2020's twin shocks of the pandemic and a burst property bubble. Official data show them sitting on 3.3 trillion yuan, roughly $460 billion, of non-performing loans. Add in another $670 billion of less-problematic-but-still-pesky ‘special mention’ loans, which include credit extended to struggling property developers and cash-strapped local governments, and it doesn’t even reach 4% of their aggregate lending. The problem is, asking China’s official data collectors about bad debt is like asking a dyspeptic patient how much junk food they really eat. Other sources take a gloomier view. Bad loans in the property sector today alone could be over $1 trillion, reckons research firm GavekalDragonomics.”
September 13 – Bloomberg: “China’s central bank indicated it will step up its fight against deflation and prepare additional policies to revive the economy, after credit data showed private confidence remained weak despite previous interest-rate cuts. Aggregate financing, a broad measure of credit, increased less in August than in the same month a year earlier, while new loans extended by financial institutions undershot economist forecasts…”
September 13 – Reuters (Kevin Yao and Ella Cao): “New bank lending in China jumped less than expected in August after hitting a 15-year low in July, as the central bank keeps policy accommodative and pledges to roll out more supportive measures to bolster a fragile economic recovery. Chinese banks extended 900 billion yuan ($126.86bn) in new yuan loans in August, up 246% from July but short of analyst expectations… Outstanding yuan loans were up 8.5% year on year in August, down from 8.7% in July. Analysts had expected 8.6% growth. Annual growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, slowed to 8.1% in August from 8.2% in July.”
September 9 – Bloomberg (Qiaoyi Li and Ryan Woo): “China's consumer inflation accelerated in August to the fastest pace in half a year but the uptick was due more to higher food costs from weather disruptions than a recovery in domestic demand… The consumer price index (CPI) rose 0.6% from a year earlier last month, versus a 0.5% rise in July…, but less than a 0.7% increase forecast… Food prices jumped 2.8% on year in August from an unchanged outcome in July, while non-food inflation was 0.2%, easing from 0.7% in July.”
September 8 – Financial Times (Joe Leahy): “China’s producer prices slid in August as concerns grow that deflationary forces are taking root in the world’s second-largest economy. Industrial producer prices fell 1.8% year on year, the most in four months, dragged down by steel, agriculture and other sectors. This compares with a decline of 0.8% in July and analysts’ expectations of a 1.4% fall… The latest readings suggest many of China’s manufacturers, food processors and other industries are suffering the consequences of lacklustre demand across the economy.”
September 9 – Bloomberg: “Deflation stalking China since last year is now showing signs of spiraling, threatening to worsen the outlook for the world’s second-largest economy and raising calls for immediate policy action. Data… confirmed that apart from food costs, consumer price growth barely registered in large swathes of the economy at a time when incomes are sagging… ‘We are definitely in deflation and probably going through the second stage of deflation,’ said Robin Xing, chief China economist at Morgan Stanley, citing evidence from wage decreases. ‘Experience from Japan suggests that the longer deflation drags on, the more stimulus China will eventually need to break the debt-deflation challenge.’”
September 9 – Financial Times (Joe Leahy and Thomas Hale): “China needs to spend up to Rmb10tn ($1.4tn) over two years in stimulus funds to reflate its economy and return it to sustainable growth, investment bank economists said, as concerns grow that deflationary pressures are becoming entrenched. The stimulus, which would be up to 2.5 times the ‘bazooka’ package China enacted after the global financial crisis in 2008, would need to directly target households through social welfare spending rather than investment and infrastructure, they said. They warned that the matter was becoming more urgent — the more embedded deflation became, the more it would cost to dispel it through stimulus measures. Their estimates underline the scale of Chinese policymakers’ challenge as they try to reinvigorate growth in the world’s second-biggest economy. ‘The longer that deflation stays, the bigger the ask in terms of reflation,’ said Robin Xing, chief China economist at Morgan Stanley.”
September 9 – Reuters (Qiaoyi Li, Zhang Yan and Kevin Krolicki): “Passenger vehicle sales in China fell in August for the fifth straight month…, though sales of all-electric and plug-in hybrid models rose, helped by subsidies for drivers trading in more polluting vehicles. Sales fell 1.1% from the same month a year earlier to 1.92 million vehicles… That compared with a 3.1% decline in July. New energy vehicle (NEV) sales, however, jumped 43.2% to account for a record 53.5% of total car sales… Car exports increased 24% after a 20% rise in July.”
September 9 – Bloomberg (David Hall and Wei Zhou): “Some of China’s most closely watched property developers slid by the most in months, after home sales data underscored a worsening real estate slump. China Vanke Co.’s 3.5% dollar bond due 2029 was down about 5 cents on the dollar on Tuesday at 42.4 cents, the steepest daily decline since March 4. Other developers also saw deep slumps… Chinese builders are facing relentless pressure from continued declines in property sales and growing worries about their liquidity. Vanke’s contracted sales slid 24% in August from a year earlier, worsening from a 13% drop in July.”
September 10 – Bloomberg: “Shares of some Chinese developers dropped in Hong Kong after they were made inaccessible to investors in the mainland, marking another setback for the beleaguered sector. Shimao Group Holdings Ltd.’s stock shed as much as 30% on Tuesday, the most in more than a year, after it was scrapped from the Stock Connect program that links the Shanghai and Shenzhen bourses to the Hong Kong exchange. CIFI Holdings Group Co. and Sino-Ocean Group Holding Ltd. each sank more than 20%, while a Bloomberg Intelligence gauge of Chinese developers declined as much as 5.4% to the lowest since April.”
September 12 – Bloomberg: “China is poised to cut interest rates on more than $5 trillion of outstanding mortgages as early as this month, according to people familiar…, as it accelerates a move to reduce the borrowing costs for millions of families to spur consumption. Some banks are making final preparations to get ready for the upcoming adjustments on mortgage rates… Some homeowners may enjoy up to 50 bps of immediate rate reduction…”
September 7 – Reuters: “China's foreign exchange reserves rose to the highest level in more than 8-1/2 years in August…, thanks largely to a broadly weaker U.S. dollar. The country's foreign exchange reserves - the world's largest - grew by $31.8 billion to $3.288 trillion last month… But it slightly missed a $3.289 trillion forecast in a Reuters poll...”
September 11 – Bloomberg: “China is turning up the heat on its army of 8,700 investment bankers. After being forced to take big pay cuts and adhere to other belt-tightening measures under President Xi Jinping’s years-long common prosperity campaign, the country’s dealmakers are now in the crosshairs of the nation’s top graft buster. At least three top investment bankers from different securities firms have been detained by Chinese authorities since August, sending a chill through the industry. One of them, who used to oversee dealmaking at Haitong Securities Co., fled the country and was arrested overseas about two weeks ago, before being repatriated back to China in an incident widely publicized on state media. Haitong and other state-backed brokerages recently asked many of their investment bankers to hand in their passports and seek permission for all business and personal travel plans…”
September 12 – Associated Press: “American companies in China are seeing record-low profits, with business confidence at an all-time low amid U.S.-China tensions and a slowing Chinese economy… Out of 306 companies polled, a record-low 66% were profitable in 2023, according to the China business report published by the American Chamber of Commerce in Shanghai. The report also found that only 47% of respondents were optimistic about their business outlook in China over the next five years, the lowest in the survey’s history of more than two decades.”
September 8 – Bloomberg: “Japanese companies are increasingly abandoning an approach to business in China that once seemed immune to politics, a stark shift after years when they were the biggest single investors in their neighbor’s economy. In an era defined by geopolitical risks and worry over China’s faltering growth, the economic math no longer adds up for the likes of Nippon Steel Corp., which said in July it was exiting its joint venture in China. Mitsubishi Motors Corp. suspended its local operations indefinitely last year… Almost half of Japanese firms in China polled in a recent survey said they won’t spend more or will cut investment this year. Companies listed rising wages, falling prices and geopolitics as the biggest issues they faced.”
September 11 – Wall Street Journal (Yoko Kubota and Liza Lin): “Many global businesses are pushing China down on their list of investment destinations and consolidating operations in the country, citing slower growth and diminishing profits. The gloomy investment trend was the focus of twin reports this week from the European Union Chamber of Commerce in China and the American Chamber of Commerce in Shanghai. ‘The risk of doing business in China has gone up in the past few years and at the same time the market is slowing down,’ said Eric Zheng, president of the U.S. group. A poll by the U.S. chamber found the percentage of respondents ranking China as their headquarters’ top investment destination fell to the lowest level since the annual survey began 25 years ago.”
September 11 – Reuters: “Zhongzhi Enterprise Group, a former leader of China's shadow banking sector that declared insolvency last year, used aggressive and potentially illegal sales practices to sustain its operations as it lurched toward collapse, according to records reviewed by Reuters and eight people with direct knowledge of the matter. China's years-long property boom had propelled Beijing-headquartered Zhongzhi to the top of the country's $18 trillion asset-management industry and made it a key player in a shadow banking sector the size of the French economy. Asset managers such as Zhongzhi sell wealth-management products to investors. The proceeds are then channeled by licensed trust firms like its Zhongrong unit to developers and other companies that cannot tap bank funding directly because of poor creditworthiness or other reasons.”
September 9 – Bloomberg: “In the go-go years when China minted a billionaire every two days, banking rainmaker Bao Fan almost reached that milestone himself. His skill in advising tech giants like Alibaba Group Holding Ltd. made him one of the country’s most sought-after financiers, helping him amass a fortune worth more than $800 million through his ownership stake in China Renaissance Holdings Ltd. Bao’s career came crashing down last year when he vanished from public view after being detained by authorities amid a broader crackdown. The extent of his financial freefall was revealed Monday when Renaissance shares tumbled after a 17-month halt. His stake is now worth $55 million, down 93% from its peak in February 2021…”
Central Banking Watch:
September 12 – Bloomberg (Anchalee Worrachate, Alice Atkins and Andrew Langley): “Clues on when the European Central Bank will next cut interest rates were in short supply on Thursday, with President Christine Lagarde and colleagues awaiting data on how drastically the economy is deteriorating — and how that will shift inflation. In lowering its key deposit rate by a quarter-point for the second time this year — as expected — the ECB reaffirmed that it won’t commit to a particular course for borrowing costs.”
Global Bubble Watch:
September 10 – Reuters (Jihoon Lee): “South Korea's household borrowing rose in August by the biggest amount in more than three years, led by a record jump in mortgage demand… Household borrowing from banks stood at 1,130.0 trillion won ($840.52bn) at the end of August, up 9.3 trillion won over the month, the biggest monthly increase since July, 2021. Mortgage loans rose 8.2 trillion won, the biggest increase since the data release started in 2004, according to the Bank of Korea (BOK).”
Europe Watch:
September 9 – Bloomberg (Jorge Valero and Andrea Palasciano): “Former European Central Bank President Mario Draghi called on the EU to invest as much as €800 billion ($884bn) extra a year and commit to the regular issuance of common bonds to make the bloc more competitive with China and the US. In his long-awaited report on European Union competitiveness, Draghi urged the bloc to develop its advanced technologies, create a plan to meet its climate targets and boost defense and security of critical raw materials, labeling the task ‘an existential challenge.’ Draghi said that Europe will need to boost investment by about 5 percentage points of the bloc’s GDP — a level not seen in more than 50 years…”
September 10 – Bloomberg (Jana Randow, Mark Schroers and Kamil Kowalcze): “Joint debt just isn’t on Germany’s agenda — irrespective of Mario Draghi’s warning that it’s the only way to make the European Union more competitive with China and the US. The former Italian premier had barely finished presenting his long-awaited report… about how to fix Europe’s ailing economy — with its centerpiece of common bond issuance — when Finance Minister Christian Lindner retorted that such an approach won’t solve the region’s structural problems. ‘I am very skeptical about Mr. Draghi’s approach to debt,’ the German politician told N-TV in one of a series of swift reactions. ‘That can be summarized briefly: Germany should pay for others. That can’t be a master plan.’”
Japan Watch:
September 11 – Reuters (Leika Kihara and Takahiko Wada): “The Bank of Japan will continue to raise interest rates if inflation moves in line with its forecast, policymaker Junko Nakagawa said, signalling that last month's market rout has not derailed the bank's plan to hike borrowing costs steadily. But the central bank must take into account the impact that such market moves could have on the outlook for the economy and prices when considering whether to raise rates, she added… ‘Given real interest rates are currently very low, we will adjust the degree of monetary support, from the standpoint of sustainably and stably achieving our 2% inflation target, if our economic and price forecasts are met,’ Nakagawa said…”
September 12 – Reuters (Leika Kihara): “The Bank of Japan must raise interest rates to at least 1% as soon as the second half of next fiscal year, hawkish policymaker Naoki Tamura said…, reinforcing the bank's resolve to persist with steady monetary tightening. It was the first time a BOJ policymaker publicly specified a level the central bank should eventually target in pushing up short-term borrowing costs.”
Leveraged Speculation Watch:
September 9 – Financial Times (Costas Mourselas): “The hottest sector in the hedge fund industry has suffered outflows for the first time in seven years, in a sign that investors who once raced to get access to so-called multi-manager funds may finally be losing interest. Pioneered by firms such as Ken Griffin’s Citadel and Izzy Englander’s Millennium, multi-manager hedge funds house tens if not hundreds of trading teams, known as ‘pods’, which run a variety of trading strategies across equities, commodities, foreign exchange, credit and other markets. These funds have pulled in tens of billions of dollars from big investors in recent years thanks to strict risk controls and consistent returns, even in equity bear markets such as 2022.”
Social, Political, Environmental, Cybersecurity Instability Watch:
September 9 – Reuters (Daniela Desantis and Lucinda Elliott): “South America's Paraguay River, a key thoroughfare for grains, has hit a record low in Paraguay's capital Asuncion, with water levels depleted by a severe drought upriver in Brazil that has hindered navigation along waterways in the Amazon. The depth of the Paraguay River… has dropped below minus 0.82 meter, breaking the previous record low in October 2021…The body expects the river will keep falling with no rain forecast.”
Geopolitical Watch:
September 10 – Reuters (Joyce Lee and Hyunsu Yim): “North Korean leader Kim Jong Un said the country is now implementing a nuclear force construction policy to increase the number of nuclear weapons ‘exponentially’, state media KCNA reported… Kim said the country must more thoroughly prepare its ‘nuclear capability and its readiness to use it properly at any given time in ensuring the security rights of the state’, said KCNA.”
September 10 – Wall Street Journal (Angus Berwick and Ben Foldy): “A giant unregulated currency is undermining America’s fight against arms dealers, sanctions busters and scammers. Almost as much money flowed through its network last year as through Visa cards. And it has recently minted more profit than BlackRock… Its name: tether. The cryptocurrency has grown into an important cog in the global financial system, with as much as $190 billion changing hands daily. In essence, tether is a digital U.S. dollar—though one privately controlled in the British Virgin Islands by a secretive crew of owners… But it has spread deep into the financial underworld, enabling a parallel economy that operates beyond the reach of U.S. law enforcement. Wherever the U.S. government has restricted access to the dollar financial system—Iran, Venezuela, Russia—tether thrives as a sort of incognito dollar used to move money across borders.”
