Weekly Commentary: Instability

The Japanese yen (dollar/yen) traded Monday to 160.17, the first time above 160 since April 1990. The yen rallied to 154.54 after purported intervention. The Japanese currency had weakened back to 157.94 by Wednesday, before a second round of intervention pushed the dollar/yen down to 153. It was back above 156 on Thursday, before reversing lower to end the week at 153.05. From high to low, it was a range of 5%.

The Nasdaq100 (NDX) traded up to 17,800 in Monday trading – then dropped 2.9% to Wednesday morning lows. The index spiked 2% on dovish Powell, only to sink 2% into Wednesday’s close. And from Thursday lows (17,291), the NDX rallied 3.7% to 17,927 – and closed the week at 17,891.

Two-year Treasury yields traded to a high of 5.04% on Tuesday afternoon. The intraday low of 4.71% occurred immediately upon Friday morning’s release of weaker-than-expected payrolls data (2-yr yields down 18bps for the week to 4.82%). Ten-year Treasury yields traded in a range of 4.69% to 4.45% - ending the week down 16 bps to 4.51%. MBS yields traded in a 34 bps range (6.23% - 5.89%) – closing the week down 22 bps to 5.93%.

At Tuesday’s close, the market was pricing a 5.05% Fed funds rate for the December 18th meeting (28 bps of rate reduction). By Friday’s close, this rate was down to 4.87% (46bps of reduction). Basically, the market shifted from one cut in December to two starting by November.

Powell is a dove. That was likely settled for good Wednesday. There was justification for market expectations of a more hawkish FOMC and Chair. Inflation has been sticky, and the current trajectory unclear. It’s a leap of faith today to believe inflation is moving to the Fed’s 2% target.

Powell should not have surprised us. He may play dumb when financial conditions loosen, but his November 1st press conference made it clear that he is astutely aware when conditions are tightening. It would have been out of character for Powell to pivot hawkish Wednesday, not with global yields rising, the yen in trouble, currencies unstable, and stock Bubbles wobbly.

Any pushback to fledgling tightening these days ensures excessively loose financial conditions. The Goldman Sachs short index surged 8.6% this week. The yen jumped 3.5%. Two-year Treasury yields dropped 18 bps, and MBS yields sank 22 bps. A mini “everything squeeze” certainly helps loosen things up. Investment-grade spreads to Treasuries declined one this week to 86 bps, the narrowest spread since November 2021.

Difficult to see inflation cooperating so long as financial conditions remain this loose. Loose reinforces tight labor. And I worry that loose conditions will continue to fuel bubbles (i.e., stocks, tech, AI) until a disorderly tightening has things all crashing down. Stocks appear incapable of an orderly correction, as is expected from a speculative Bubble.

We won’t know until the end of the month how much intervention has set back Japan’s Ministry of Finance. I see Japan as a good test case for the scope of intervention required to corral (post-Covid stimulus) super-sized speculative market Bubbles. It took decades of hard work for Japan to accumulate its $1.15 TN international reserve position. There’s going to be understandable angst watching national wealth frittered away buying yen.

And things are turning fascinating in the bond market. The Fed has turned a blind eye to mounting inflation risk. Beijing appears ready to crank up stimulus, with potential to give the global economy – and inflation – a shot in the arm. Washington has gotten too used to its blank checkbook, ensuring massive issuance until that fateful day the market imposes some discipline.

Another interesting week supports the heightened Instability thesis.

Below is an excerpt from Thursday’s McAlvany Wealth Management Tactical Short Q1 recap conference call (Doug Noland and David McAlvany), “Dovish Pivot to Melt-Up to Instability.”

We’ve been hearing a lot lately about “American exceptionalism.” Unfortunately, I fear future historians will view this catchphrase in a similar light to Irving Fisher’s pre-crash 1929 “permanent plateau of prosperity.”

To subscribe to the bullish narrative today is to believe that unprecedented money and credit creation, interest-rate manipulation, and repeated market bailouts are healthy promoters of true economic wealth and system stability. If our system were sound, why then have we been running unprecedented peace-time federal deficits - and why is the Fed’s balance sheet still at $7 TN? Why is there so much stress within society and enmity in geopolitics?

Does a sound system embolden unprecedented leveraged speculation – massive “repo” borrowings, “carry trades,” “basis trades,” margin debt and hundreds of trillions of derivatives? Is it healthy to have tens of millions actively gambling on stocks and options?

Answers to these questions seem rather obvious. Is this how Capitalism is supposed to operate, or has something gone horribly astray? The bottom line is that the U.S. – and, really, the world – has been suffering from acute and prolonged monetary disorder. The runaway expansions of central bank balance sheets and speculative leverage have created tens of trillions of pernicious “money” – liquidity fueling historic asset bubbles, inequality, inflation, and all sorts of maladies. There’s been nothing similar for almost a century.

There are indeed many alarming parallels between the current cycle and the “Roaring Twenties.” Both were spectacular boom cycles fueled by a confluence of transformative new technologies and financial excess – bubbles repeatedly resuscitated by central bank stimulus measures.

After all, recurring government interventions and bailouts emboldened speculators, bankers, corporate executives, consumers, and risk-takers more generally. Perverted incentives and distorted risk perceptions set the stage for what I refer to as “Terminal Phase” excesses, which conclude the cycle. New York Fed president Benjamin Strong administered a fateful “coup de whiskey” in 1927 that unleashed catastrophic speculative leveraging - culminating in 1929’s melt-up and subsequent panic and crash.

Similar dynamics were unleashed from egregious pandemic stimulus - excess provided an additional shot of adrenaline from March 2023 banking crisis stimulus, including $700 billion of Fed and FHLB liquidity injections, along with what amounted to blanket deposit guarantees.

Financial conditions loosened following bank bailout measures, even as the Fed raised rates. At mid-month last September, most of my financial conditions indicators signaled that the so-called Fed “tightening” cycle had thus far imposed little system tightening. Conditions, however, began to tighten meaningfully in October, with a booming economy and heightened geopolitical risks weighing on market sentiment. Importantly, with global yields spiking, there were indications that a de-risking/deleveraging dynamic was starting to take hold.

And right on cue, an abruptly less hawkish Powell at his November 1st press conference asked rhetorically: “The question we’re asking is: Should we hike more?”

The Fed Chair triggered nothing less than a historic short squeeze – in stocks, Treasuries, fixed income, currencies and EM – the global so-called “everything squeeze.” Market sentiment had turned bearish, with considerable shorting and derivatives hedging. Powell lit the “melt-up” match. The Nasdaq100 jumped almost 11% in November. Between November 1st and December 12th, the day before the next FOMC meeting, the Nasdaq100 returned almost 14%, and the Goldman Sachs Short Index 18%. The Semiconductor Index spiked 22%. Nvidia and Micron rose 17%, while AMD was up 40%.

Financial conditions had loosened dramatically. For example, high yield corporate bond spreads versus Treasuries closed December 12th at 363 bps – down from 438 bps on November 1st – to the low back to April 2022 – shortly after the Fed’s initial rate increase.

I believe the FOMC’s December 13th meeting will be debated for decades. Following a conspicuously speculative market rally, a major loosening of financial conditions, and a 4.9% Q3 GDP print, the Fed nonetheless telegraphed a “dovish pivot.” So much for traditional “lean against the wind” policy caution. And never mind William McChesney Martin’s celebrated insight that the job of the Fed is “to take away the punch bowl just as the party gets going.” Well, the crowd was intoxicated and increasingly irrational. The Fed spiked the punch anyway. From my analytical framework, which heavily leans on financial conditions and bubble dynamics, it was reckless monetary mismanagement.

It certainly stoked a market melt-up for the history books. From October 26th lows to March highs, the Semiconductors rallied 65%, the KBW Bank Index 47%, the NYSE Computer Technology Index 39%, the small cap Russell 2000 31%, the Nasdaq100 30%, and the S&P500 28%. Bitcoin ended March up 159% from October lows, trading at a record high of $73,798 on March 14th.

Loose conditions turned much looser. From an October high of 5.00%, 10-year Treasury yields were down to 3.8% in late-December. By mid-January, the market was pricing more than six 2024 rate cuts. Investment-grade spreads to Treasuries traded down to 88 bps late in the first quarter, the narrowest risk premium since November 2021 – and within only seven bps of the low back to 2005. Corporate debt issuance was phenomenal, with Q1’s $530 billion of investment-grade sales 11% ahead of 2020’s first quarter record. M&A volumes were up 59% y-o-y to $432 billion.

Such “terminal phase excess” has major consequences. For one, the period of late-cycle credit excess was further extended.

From Federal Reserve data, we know that Non-Financial Debt – or NFD - expanded at an annualized rate of $3.5 TN during the fourth quarter. This put 2023 NFD growth at $3.63 TN, down only slightly from 2022. To put this enormous credit expansion into perspective, 2023 NFD growth was almost 50% higher than pre-pandemic 2019’s $2.47 TN – with 2019’s expansion the strongest since 2007’s then record $2.53 TN.

Federal borrowings last year increased $2.62 TN. But it’s not just the Federal government, which partakes in late-cycle borrowing excess. So-called “private credit” – which is essentially subprime corporate lending – continues its phenomenal boom. Subprime lending has also become a fixture in consumer finance, driven by “buy now pay later,” soaring credit card balances, and myriad new age lending platforms.

We’re sure hearing a lot of “soft landing” rhetoric. But our economy is today in a credit and asset inflation-induced boom. It’s a bubble economy acutely vulnerable to any tightening of financial conditions. The situation is highly unstable, instability made only more acute by market speculative melt-ups. It will have a “soft landing” appearance only while credit, market and economic booms continue. But don’t for a minute believe that credit, business and market cycles have been relegated to history. When bubbles inevitably start bursting, a hard landing will be unavoidable.

You might have heard some talk about the so-called “neutral rate” – referred to as “r-star” by the economics community. It is a hypothetical rate at which monetary policy is neither contractionary nor expansionary – an equilibrium rate, if you will. Most economists believe this rate is between two and three percent, with the latest Fed “dot plot” placing the longer-term rate at 2.5%. But with a current policy rate double that level failing to restrain the boom, some analysts now argue the neutral rate must be higher.

By neglecting bubble analysis, the entire neutral rate debate is flawed. After all, an identical policy rate in an environment where bubble inflation maintains momentum will have different impacts compared to during a bubble deflation. The primary analytical focus should be on the effects rate policy are having on system financial conditions. And keep in mind that bubbles are creatures of loose conditions. Moreover, bubbles possess incredible capacity to sustain easy conditions. Bubble dynamics perpetuate credit and speculative excess, processes that generate self-reinforcing liquidity abundance.

The Fed “tightening” cycle failed to contain bubble excess specifically because policy rates didn’t impose tighter conditions. This is such a critical point. Powell and Fed officials have repeatedly spoken of significantly restrictive policy, when a litany of indicators – including credit availability and expansion, spending and GDP growth, equities and asset prices, and the precious metals – all provide evidence of quite loose conditions.

An important question: Why is the system proving so immune to policy tightening – to rate increases and QT? Let’s start, as sound analysis dictates, with credit. Our federal government has been impervious to rising market yields. Politicians certainly haven’t tempered borrowing and spending plans in response to higher policy rates. Washington borrowed more last year than what the entire economy – government, business, and household sectors - borrowed in the pre-pandemic years.

Importantly, there remains insatiable demand for government securities. In my nomenclature, government debt retains the critical attribute of “moneyness” despite now uncontrolled over-issuance. The legacy of Fed QE and market intervention is fundamental to bullish perceptions of enduring liquid and safe securities markets. Indeed, the view holds stronger than ever that the Fed will guarantee Treasury market liquidity. It has become fundamental to contemporary monetary policy doctrine that central banks are committed to open-ended government bond buying necessary to safeguard robust markets.

The Fed liquidity backstop has been instrumental in the ballooning of levered speculation, including a massive “basis trade.” Here, hedge funds borrow in the “repo” market to establish highly levered Treasury positions, while offsetting interest-rate risk by shorting Treasury futures. This enormous securities leveraging operation has generated critical bubble-sustaining liquidity.

It was back in February 2009 that I began warning of an unfolding global government finance bubble. Over the years, I’ve referred to this as the “granddaddy of all bubbles.” The adoption of QE and massive deficit spending were fundamental to fanatical reflationary policymaking. This marked the full abandonment of traditional restraints and guardrails. Washington and governments around the globe unleashed virulent bubble dynamics that would prove impossible to control.

The sordid history of inflationary policymaking is replete with examples of stopgap money printing sliding into deeply entrenched and eventually out-of-control monetary inflation. And with contemporary “money” and credit merely debit and credit entries in this colossal globalized electronic general ledger, there is today no need for wheelbarrows.

All the “American exceptionalism” and AI hype - and irrepressible market bubble excess – corroborate out-of-control bubble blow-off phase dynamics. I’ll highlight a few recent examples.

A headline from last week: “Micron Clinches Up to $13.6 Billion in US Grants, Loans.” This was part of Micron’s commitment to investing $125 billion in four new U.S. semiconductor fab plants. This money was provided by the 2022 Chips and Science Act. Intel will receive $8.5 billion, and Samsung $6.5 billion.

Investment in new semiconductor manufacturing is part of the massive unfolding spending boom in all things AI-related. This is a case study in late-cycle craziness – powered by perceptions of unlimited finance, perpetual bull markets, and permanent prosperity.

Things have regressed into a perilous global government-driven arms race. The Financial Times ran an interesting article last week reporting on South Korea’s incredible semiconductor spending boom, described by the country’s President as a “semiconductor war.” I’ll quote from the article: “The 1,000-acre site, a $91bn investment by chipmaker SK Hynix, will itself only be one part of a $471bn ‘mega cluster’ at Yongin that will include an investment of $220bn by Samsung Electronics. The development is being overseen by the government amid growing anxiety that the country’s leading export industry will be usurped by rivals across Asia and the west.”

As astounding as tech arms race spending is in the U.S., South Korea, and many countries, it is surely paltry compared to what has been unfolding with government-directed investment in China. The accelerating deflation of China’s historic apartment bubble has Beijing doubling down on state-directed spending in semiconductors, AI, EVs, renewable energy, and myriad cutting-edge technologies - for domestic consumption and export.

And last week, China’s Ministry of Finance vowed support for People’s Bank of China government bond purchases, a policy shift endorsed in a recent book compiling Xi Jinping’s pronouncements on finance and economics. Well, it wasn’t long ago that Beijing was denouncing Western QE policies. Perhaps Beijing has realized there are limits to how far it can push its bloated state-directed banking sector. It’s worth adding that China’s sovereign wealth fund bought $43 billion of ETFs during Q1, part of huge “national team” government stock market support. China is today demonstrating ultimate “terminal phase” government finance bubble dynamics.

Things have turned only crazier in China, as a somewhat different strain of crazy afflicts Japan. At last Friday’s meeting, the Bank of Japan upgraded its inflation forecast from 2.4% to 2.8%, for an economy with a 2.6% unemployment rate. Yet the BOJ held firmly with its near-zero rate policy, while reaffirming its bond buying program. The yen was slammed 1.7%, sinking to the low versus the dollar all the way back to May 1990. Reports have Japan spending upwards of $30 to $40 billion Monday to defend its currency, and perhaps more in Wednesday evening’s second round.

The BOJ is predictably trapped by its misguided experiment with hyper-monetary stimulus. Years of negative rates and bond market manipulation have left a legacy of epic market distortions and deep financial structural maladjustment. Amazingly, the BOJ now owns over half of the Japanese government bond market. Backing away from bond-buying risks a destabilizing spike in yields and massive losses – in the marketplace and within its own balance sheet.

Meanwhile, the yen suffers the effects of zero rates and ongoing outflows – outflows from yield-seeking domestic sources, as well as from levered speculators capitalizing on free funding from a weak currency - cheap financing used to lever higher-yielding securities around the globe.

Yen trading has turned disorderly. The Ministry of Finance was understandably reluctant to start a fight with the markets that will be quite expensive and challenging to win.

I believe global markets have commenced a period of heightened instability, with the currencies increasingly at the epicenter of destabilizing volatility. And unstable currencies create a predicament for levered “carry trades” and leveraged speculation more generally.

It is today reasonable to contemplate the unsustainability and deepening fragility associated with global government finance bubble “terminal phase” excesses. For starters, ongoing global credit and spending excess ensure persistent inflationary pressures. I’m fond of repeating the quip, “that which does not destroy a bubble only makes it stronger.” The Fed’s failure to tighten conditions further energized bubble dynamics. We’ve watched commodity prices gain momentum, while global yields have surged back to highs since last November. “Higher for longer” applies to central banks around the world. And elevated borrowing costs are a major problem for a highly over-indebted world. They’re a pressing issue for vulnerable debt markets and increasingly fragile currency markets.

In a notable development, Indonesia’s central bank last week surprised the markets by raising rates to support the weak rupiah. Who’s next? What countries lack the wherewithal to stabilize their currencies? Where is the “hot money” most exposed? This is an environment where contagion can become an urgent issue.

Today’s backdrop is particularly precarious for heavyweights Japan and China. A rapidly devaluing currency risks unleashing inflation and a bond market crash in Japan. A BOJ forced to accelerate policy “normalization” risks unmasking epic financial imbalances at home and abroad. I’m assuming so-called yen “carry trade” levered speculation mushroomed into the trillions, while creating demand and liquidity abundance in about every nook and cranny of global debt markets – certainly including the U.S., peripheral Europe, China, and the emerging markets.

Leveraged speculation has profited handsomely from zero rates, yen devaluation, and telegraphed assurances of ongoing accommodation. All bets are off when Japan belatedly recognizes the imperative of major policy tightening to stabilize the yen.

I believe China’s predicament is even more precarious. The renminbi currency trading band has essentially turned into a hard peg to the U.S. dollar, as an apprehensive Beijing is compelled to tighten control. But “higher for longer” and booming U.S. markets, along with a sickly yen, have propelled dollar gains. China’s currency appreciated 10% versus the yen over the past year, with more moderate gains versus other Asian currencies. This has placed China’s export sector at a competitive disadvantage, right as Beijing presses its bet on booming exports to counter their housing depression.

Beijing needs a weaker currency, and they recently attempted a couple tweaks in the currency band - hoping to orchestrate measured devaluation. But markets reckon band tweaks are only a prelude. Instability immediately forced Beijing to retreat to its hard peg.

For evidence of currency peg danger, one can look back to the 1995 Mexican “tequila crisis”, the devastating 1997 Asian Tiger domino collapses, the 1998 Russia/LTCM debacle, and the 2002 fiasco in Argentina.

China rapidly expanded to become the second largest global economy. Since 2008, the Chinese banking system has inflated from $8 TN to $58 TN – with bank assets surging a record $5.2 TN last year. Superpower ambitions and bitter rivalry with the U.S. ensure Beijing will work furiously to sustain credit and economic booms. Beijing is also determined to promote the renminbi as a leading global currency. Increasingly, China’s credit and growth objectives are in direct conflict with a stable currency.

Despite its collapsing apartment bubble, China expanded credit a record $5.0 TN last year. We can assume that much of this credit was non-productive, financing uneconomic zombie enterprises and epic malinvestment – not to mention the impact of compounding debt service costs for risky borrowers.

There is also the nation’s deepening relationship with the Russia, Iran, and North Korea anti-U.S. axis – along with Western business exodus from China. Add the intensifying global backlash against Chinese trade policies, and China is left with troubling currency prospects.

The renminbi has been underpinned by China’s $3.2 TN of international reserves, ongoing trade surpluses, and, importantly, the perception that Beijing would never tolerate a disorderly currency devaluation.

The marketplace has good reason today to question both the true size of liquid international holdings and China’s trade prospects. Estimates have China suffering monthly outflows of $40 to $50 billion dollars. Beijing now regularly calls upon its major state-directed banks to sell dollars and establish derivatives positions to support China’s currency peg. There are indications that Beijing is leaning heavily on derivatives, rather than burning through international holdings.

I’ve in the past repeatedly witnessed how such measures and subterfuge promote mounting fragilities. In the case of currency pegs, increasingly desperate measures to sustain the peg ensure banking system and derivatives vulnerability to market dislocation and crisis dynamics. Meanwhile, the growing perception of an unsustainable peg encourages only more aggressive capital outflows, speculative bets, and one-sided derivatives exposures, along with a shrinking reserve position. At some point, it becomes clear that the cost of maintaining the peg is too heavy. There comes a fateful moment when confidence that a disorderly devaluation will never be tolerated turns to fear that it is likely unavoidable.

I fear we’re approaching such a critical juncture with China’s currency peg. Devaluation seems inescapable. Of course, Beijing would prefer a nice and gradual process. But any small devaluation will spur outflows keen to avoid further depreciation. But a big devaluation risks unleashing major instability, as banks, derivatives operators, and leveraged speculators recoil from losses. Any meaningful devaluation would trigger a wave of derivatives-related selling and disorderly trading. Typically, a central bank is forced to respond to currency dislocation with higher policy rates and tighter credit policies. Surging bond yields and faltering financial markets then induce abrupt system tightening and economic turmoil.

Gold and silver have recently made powerful upside moves. Commodities generally show signs of life. Having taken a backseat during the financial asset melt-up, hard assets are beginning to show their safe haven mettle. And analysts are increasingly pondering whether these markets are portending currency crisis.

To conclude, let me offer a brief summary. The world’s most powerful central bank signaled a shift to rate cuts despite exceptionally loose financial conditions, quite strong credit growth, and an acutely speculative stock market. Already vulnerable global bubbles became only more inflated and fragile. The second largest global economy, suffering the collapse of its historic apartment bubble, is pushing only harder with enormous government-directed lending and investment to meet GDP targets. And the central bank of the fourth largest economy maintains zero rates and government debt purchases despite a sinking currency and rising inflation. No one has been willing to make the tough decisions necessary to rein in precarious excess. All are at heightened risk of losing control.

According to the Institute of International Finance, global debt last year rose to a record $313 TN – a gain of over $100 TN since the start of the pandemic. There is no doubt that we’re witnessing the greatest bubble ever. As a bubble fueled by government finance, guarantees and market liquidity backstops, this super bubble has inflated much greater and for much longer than previous bubbles. This global bubble – at the very foundation of money and credit – has been uniquely powerful, unpredictable, and perilous. And bubbles inevitably burst. This global bubble will burst with momentous consequences. Ongoing “terminal phase” excess ensures global systemic risk continues its parabolic rise until the bubble falters.

I believe inflationary policies from all the major central banks – and governments more generally – have unleashed a period of acute instability. Unfolding currency volatility foreshadows global market instability. The stage is set for a highly disruptive global de-risking/deleveraging episode. Myriad bubbles, certainly including the AI phenomenon, are acutely vulnerable to tightening conditions. And with elevated inflation risk and rising global yields, central banks are rapidly losing room to maneuver.


For the Week:

The S&P500 increased 0.5% (up 7.5% y-t-d), and the Dow rose 1.1% (up 2.6%). The Utilities surged 3.4% (up 9.0%). The Banks added 0.5% (up 7.5%), and the Broker/Dealers jumped 2.0% (up 9.8%). The Transports advanced 1.2% (down 3.5%). The S&P 400 Midcaps gained 1.2% (up 5.3%), and the small cap Russell 2000 jumped 1.7% (up 0.4%). The Nasdaq100 rose 1.0% (up 6.3%). The Semiconductors dipped 0.4% (up 12.9%). The Biotechs jumped 3.2% (down 6.0%). With bullion down $36, the HUI gold index fell 3.2% (up 7.1%).

Three-month Treasury bill rates ended the week at 5.23%. Two-year government yields dropped 18 bps this week to 4.82% (up 57bps y-t-d). Five-year T-note yields sank 19 bps to 4.50% (up 65bps). Ten-year Treasury yields fell 16 bps to 4.51% (up 63bps). Long bond yields declined 11 bps to 4.67% (up 64bps). Benchmark Fannie Mae MBS yields dropped 22 bps to 5.93% (up 65bps).

Italian yields fell 11 bps to 3.81% (up 11bps y-t-d). Greek 10-year yields dropped 12 bps to 3.47% (up 42bps). Spain's 10-year yields declined nine bps to 3.27% (up 27bps). German bund yields fell eight bps to 2.50% (up 47bps). French yields dropped nine bps to 2.97% (up 41bps). The French to German 10-year bond spread narrowed one to 47 bps. U.K. 10-year gilt yields fell 10 bps to 4.22% (up 69bps). U.K.'s FTSE equities index added 0.9% (up 6.2% y-t-d).

Japan's Nikkei Equities Index increased 0.8% (up 14.3% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.90% (up 29bps y-t-d). France's CAC40 fell 1.6% (up 5.5%). The German DAX equities index declined 0.9% (up 7.5%). Spain's IBEX 35 equities index slumped 2.7% (up 7.4%). Italy's FTSE MIB index dropped 1.8% (up 10.8%). EM equities were mixed. Brazil's Bovespa index gained 1.6% (down 4.2%), while Mexico's Bolsa index fell 1.2% (down 0.4%). South Korea's Kospi index rose 0.8% (up 0.8%). India's Sensex equities index added 0.2% (up 2.3%). China's Shanghai Exchange Index increased 0.5% (up 4.4%). Turkey's Borsa Istanbul National 100 index jumped 3.6% (up 37.6%). Russia's MICEX equities index slipped 0.2% (up 11.1%).

Federal Reserve Credit declined $24.4bn last week to $7.343 TN. Fed Credit was down $1.546 TN from the June 22nd, 2022, peak. Over the past 242 weeks, Fed Credit expanded $3.617 TN, or 97%. Fed Credit inflated $4.533 TN, or 161%, over the past 599 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt was little changed last week at $3.355 TN. "Custody holdings" were down $18.1 billion y-o-y, or 0.5%.

Total money market fund assets jumped $23.6bn to $6.001 TN. Money funds were up $739 billion, or 14.0%, y-o-y.

Total Commercial Paper gained $11.1bn to $1.321 TN. CP was up $177bn, or 15.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose five bps to a five-month high 7.22% (up 73bps y-o-y). Fifteen-year rates added three bps to a 21-week high 6.47% (up 62bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 15 bps to 7.47% (up 59bps).

Currency Watch:

May 2 – Bloomberg (Natalia Kniazhevich): “Japan’s top currency official declined to say if authorities stepped into the foreign exchange market early Thursday as Tokyo stuck to its tactic of leaving investors in the dark over its intervention strategy. ‘I have nothing to say now on whether we intervened in the foreign currency market,’ Masato Kanda, vice minister for international affairs, told Bloomberg... ‘We will disclose intervention data at the end of this month.’”

For the week, the U.S. Dollar Index declined 0.9% to 105.03 (up 3.6% y-t-d). For the week on the upside, the Japanese yen increased 3.5%, the South African rand 1.6%, the Norwegian krone 1.4%, the New Zealand dollar 1.2%, the Australian dollar 1.2%, the Mexican peso 1.1%, the Swedish krona 1.0%, the Singapore dollar 1.0%, the Swiss franc 1.0%, the South Korean won 0.9%, the Brazilian real 0.9%, the euro 0.6%, and the British pound 0.4%. On the downside, the Canadian dollar declined 0.1%. The Chinese (onshore) renminbi increased 0.07% versus the dollar (down 1.95% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 1.5% (up 2.7% y-t-d). Spot Gold retreated 1.5% to $2,302 (up 11.6%). Silver dropped 2.4% to $26.56 (up 11.6%). WTI crude dropped $5.74, or 6.8%, to $78.11 (up 9%). Gasoline sank 7.6% (up 21%), while Natural Gas surged 11.4% to $2.14 (down 15%). Copper slipped 0.4% (up 17%). Wheat increased 0.5% (down 3.5%), and Corn gained 1.6% (down 5%). Bitcoin dropped $880, or 1.4%, to $62,875 (up 48%).

Middle East War Watch:

April 30 – Reuters (Ari Rabinovitch): “Israel will carry out an operation against Hamas in the southern Gaza city of Rafah regardless of whether or not a ceasefire and hostage release deal is reached, Prime Minister Benjamin Netanyahu said… ‘The idea that we will stop the war before achieving all its objectives is out of the question,’ Netanyahu said…”

May 3 – Wall Street Journal (Summer Said and Omar Abdel-Baqui): “Israel has given Hamas a week to agree to a cease-fire deal or it will begin a military operation in Rafah, Egyptian officials said…, as the militant group stalls for better terms that would ensure its survival. Egypt worked with Israel on a revised cease-fire proposal that it presented to Hamas last weekend… Hamas’s political leadership was expected to consult with its military wing in Gaza and revert to the proposal. But Yahya Sinwar, the group’s military leader in Gaza, who is believed to be hiding in tunnels in the enclave and makes the final decisions, hasn’t responded, the officials said.”

April 27 – Wall Street Journal (Jared Malsin): “Israel and Hezbollah are locked in an escalating cycle of violence that risks spiraling further in the aftermath of an unprecedented exchange of direct fire between Israel and Iran. Hezbollah… has engaged in a slow-burning conflict with Israel since the start of Israel’s war in Gaza following Hamas’s Oct. 7 attack on Israel, with the militia launching missiles and drones into Israel and Israeli forces countering with airstrikes, artillery and tank shells into Lebanon. Israel and Iran’s most powerful client militia have intensified their conflict in recent days, heightening fears that one or the other could miscalculate and trigger a more intense confrontation. Such a scenario could result in widespread death and destruction in both Lebanon and Israel.”

April 30 – Reuters (Andrew Macaskill): “Eli Harel was an Israeli soldier in his early thirties when he was sent into Lebanon in 2006 to battle fighters from the Iranian-backed group Hezbollah in a bloody, largely inconclusive month-long war. Now 50, Harel is ready to rejoin the army to fight the same group if shelling along Israel's northern border turns into a full-blown war... This time Israeli forces would face some of the most challenging fighting conditions imaginable, he said… Harel lives in Haifa, Israel's third biggest city, well within range of Hezbollah's weapons. Haifa's mayor recently urged residents to stockpile food and medicine because of the growing risk of all-out war. Israel and Hezbollah have been engaged in escalating daily cross-border strikes over the past six months - in parallel with the war in Gaza - and their increasing range and sophistication has spurred fears of a wider regional conflict.”

April 30 – Reuters (Nayera Abdallah and Enas Alashray): “Yemen's Houthis said… they targeted the MSC Orion container ship in a drone attack in the Indian Ocean as part of their ongoing campaign against international shipping in solidarity with Palestinians against Israel's military actions in Gaza. MSC Orion was sailing between the ports in Sines, Portugal and Salalah, Oman, according to LSEG data.”

May 3 – Bloomberg (Mohammed Hatem): “The Houthi group based in Yemen threatened to start trying to attack ships in the eastern Mediterranean as it steps up a campaign of anti-Israeli assaults. The Iran-backed militia has made similar threats before but, although it’s regularly hit vessels in the southern Red Sea and Gulf of Aden since November with drones and missiles, it’s shown little evidence it can do so beyond those waters.”

May 2 – Bloomberg (Firat Kozok, Selcan Hacaoglu and Galit Altstein): “Turkey stopped all trade with Israel…, according to two Turkish officials familiar with the matter, adding to already high-running tensions between the once-close allies over the war in Gaza. The move expands last month’s restriction on some Turkish exports to Israel, as President Recep Tayyip Erdogan steps up criticism of the Jewish state and tries to consolidate support among conservative voters at home.”

April 28 – Wall Street Journal (Laurence Norman): “Iran’s decision to launch more than 300 missiles and drones in its first direct attack on Israeli soil earlier this month showed an appetite for risk that is putting renewed focus on Tehran’s nuclear program and whether it will continue to refrain from developing a bomb. Close observers of Iran’s nuclear development have long believed the country’s top leaders have calculated that the costs of building a bomb outweigh the benefits. As a threshold nuclear power with weapon capabilities within reach, Iran already enjoys considerable deterrence power without risking the war that could come if an attempt to build a bomb is detected. But that thesis has been shaken this year. As tensions with Israel grew, top Iranian officials have made a string of statements hinting that Tehran is close to mastering the technicalities of building a bomb.”

Ukraine War Watch:

April 27 – Reuters (Olena Harmash and Tom Balmforth): “Russian missiles pounded power facilities in central and western Ukraine on Saturday, increasing pressure on the ailing energy system as the country faces a shortage of air defences despite a breakthrough in U.S. military aid. The air strike, carried out with long-range missiles, including cruise missiles fired by Russian strategic bombers based in the Arctic Circle, was the fourth large-scale aerial assault targeting the power system since March 22.”

April 30 – Reuters (Lidia Kelly): “Ukraine launched drones on several Russian regions in hours leading to Wednesday morning, Russian officials said, with unofficial Russian news outlets reporting a fire at the Ryazan oil refinery after the attack… Russian Telegram channel Baza, which is close to the security services, reported that the attack sparked a fire at the Ryazan oil refinery.”

Taiwan Watch:

May 1 – Reuters (Ben Blanchard): “Taiwan is on alert for China to carry out military exercises after the inauguration of President-elect Lai Ching-te this month, the island's top security official said…, adding China has already begun using unusual new tactics. China… has a strong dislike of Lai, believing him a dangerous separatist. China's government has rejected his repeated offers of talks, including one made last week.”

April 30 – Bloomberg (Betty Hou): “Taiwan’s economy expanded at the fastest pace in almost three years as global demand for artificial intelligence-related technologies fueled a boom in exports. Gross domestic product grew 6.51% year-on-year to NT$5.46 trillion in the first quarter…, the fastest pace since the second quarter of 2021.”

Market Instability Watch:

April 28 – Bloomberg (Tania Chen): “There is quiet yet mounting speculation in financial markets that China will need to take an extreme and highly controversial measure to support its moribund economy — devalue the yuan in a big-bang move. Supporters of a sharp currency depreciation say it would allow Beijing to boost exports and give the central bank room to cut interest rates. Doubters argue it would only lead to a feedback loop of capital outflows and further yuan declines with the potential to destabilize the global currency market. Though a minority view, it’s attracting attention as China digs deeper into its toolkit to stimulate an economy and win over investors disappointed by a piecemeal approach to monetary and fiscal support. It’s a controversial option that hasn’t been used since the shock devaluation in 2015, which hammered yuan assets and evolved into a crisis of confidence in China’s ability to control markets.”

April 30 – Newsweek (Micah McCartney): “China has been buying up commodities at a rapid clip, prompting analysts to wonder out loud whether Beijing is preparing to choose the economic ‘nuclear option.’ ‘China is preparing for something major. That seems increasingly obvious judging from the stockpiling of important resources. Could it be that they are preparing a major one-off devaluation of the CNY?’ Andreas Steno Larsen, CEO of Steno Research, wrote last week. Currency devaluation is widely described as a ‘nuclear option’ by economists due to the serious global repercussions it could trigger. By intentionally devaluing the yuan, for instance, China could boost exports by making its goods cheaper and more competitive—but not without serious repercussions such as riling trade partners and worsening the country's trade war with the United States.”

April 29 – Bloomberg (Anya Andrianova): “To Robin Brooks, the former chief currency strategist at Goldman Sachs…, Japan’s massive government debt — for now at least — is likely to doom any efforts to prop up the yen. That debt has swelled to the equivalent of more than 250% of the nation’s economy, more than any of its peers… And, he says, that’s given the Bank of Japan a strong incentive to keep interest rates low to hold down the government’s costs. The upshot: Barring a change in policy, that’s going to counteract any efforts to drive up the value of the yen, which is being dragged down by Japan’s adherence to the sort of rock-bottom interest rates that the US abandoned two years ago. ‘This is really about debt — too much debt and that is forcing Japan into a very tough situation, keeping interest rates low and therefore transferring that fiscal distress onto the yen,’ said Brooks, who is now a fellow at the Brookings Institution in Washington.”

May 2 – Wall Street Journal (David Uberti): “Pressure keeps building in the bond market. Stickier-than-expected inflation this year has boosted yields on U.S. debt enough to dent the stock-market rally. Soaring spending by Washington shows few signs of slowing. And the latest plan to finance it all promises a flood of Treasurys in the coming months that will need to find buyers. Those factors are forcing investors to ditch some of their optimism from early this year and reopen their playbooks for a world of higher yields. With the Federal Reserve… signaling it has the stomach to keep interest rates elevated to tame price pressures, many worry the pain will continue for some time.”

May 2 – Bloomberg (Matthew Burgess and Masaki Kondo): “Japan is threatening to derail one of the most profitable currency bets this year: carry trades borrowing the yen to invest in emerging-market currencies. A gauge of yen volatility jumped to the highest level since July this week as Japanese officials were suspected to have twice intervened to prop up the besieged currency. Yen-funded emerging-market carry trades are headed for a loss this week, with those targeting the Indian rupee and Colombian peso suffering among the biggest declines… The yen’s prolonged weakness and relatively low volatility have made it the premier source of borrowing this year: carry trades funded in the currency have generated positive returns versus every single emerging-market target. That may be about to end.”

May 1 – Bloomberg (Emily Graffeo and Denitsa Tsekova): “Over the last two years, Wall Street has convinced cautious equity investors to send billions of dollars into exchange-traded funds that use options to goose yields. A vocal chorus of analysts has been warning against this booming trade, to no avail. Assets in the derivatives-powered ETFs have quadrupled to $69 billion.”

Global Credit Bubble Watch:

April 29 – Reuters (Alden Bentley): “The U.S. Treasury said… it expects to borrow $243 billion in the second quarter, $41 billion more than the January estimate largely due to lower cash receipts, partially offset by a higher cash balance at the beginning of the quarter. The second-quarter financing estimate assumes a cash balance of $750 billion at the end of June, the Treasury said…”

May 2 – Bloomberg (Natalia Kniazhevich): “A couple of years ago Clive Cowdery had a problem. The large life insurer that he’d founded was amassing customer cash faster than it could find ways to put that hoard to work. As payments piled up at Resolution Life, two of every three dollars sat idle. The company decided it couldn’t hang around for its in-house crew to scour the globe for the bonds, mortgages and other assets in which insurers typically invest people’s money. So it turned to Blackstone Inc. Like fellow ‘alternative’ investment titans Apollo Global Management Inc. and KKR & Co., Blackstone has been eagerly driving the expansion of the booming multi-trillion dollar private-debt markets lately… Tapping the vast coffers of insurers is becoming crucial to that push. After sealing a partnership with Resolution… Blackstone is now a key asset manager for the firm, in charge of a cash pot that could hit $60 billion. A big part of its pitch went like this: Let us tie up your money in rarely traded private debt and you’ll nab better returns than plain-vanilla bonds.”

May 2 – Bloomberg (Miles Weiss): “KKR & Co.’s effort to reach the so-called mass affluent raised $1.78 billion from more than 12,000 investors in a single vehicle. KKR Infrastructure Conglomerate, which began raising money in June, is one of two companies KKR formed to attract capital from wealthy individuals who don’t necessarily meet the minimum investment threshold to invest in a traditional private fund. The other is KKR Private Equity Conglomerate.”

May 1 – Bloomberg (Carmen Arroyo and Katanga Johnson): “For years, Barclays Plc struggled with what to do about its US credit-card business. It was a cash generator, cranking out a steady stream of revenue, and yet it was costly to run because of the way regulators force banks to set aside capital as a buffer against losses. The British lender came up with a solution in February, by selling $1.1 billion of card assets to… Blackstone Inc. The transaction… allows Barclays to collect fees for servicing the loans, but not have to hold them on its books. In return, Blackstone gets to generate high yields for insurance clients. In essence, Barclays is renting Blackstone’s balance sheet. ‘Banks value the customers and the origination fees. We just want the assets,’ Blackstone Credit & Insurance Global Chief Investment Officer Michael Zawadzki said…”

Bubble and Mania Watch:

May 1 – Bloomberg (Isabelle Lee): “Prices of some of the biggest spot-Bitcoin exchange-traded funds closed Tuesday at their largest discounts to the value of their underlying assets since they were launched… The discounts appeared in closing data after the cryptocurrency sank to a two-month low on Tuesday, including a dip of about 2% between 3 p.m. and 4 p.m. New York time, which is the hour in which average prices are used to track the value of the ETFs’ Bitcoin. The $16 billion iShares Bitcoin Trust (ticker IBIT) on Tuesday closed about 1.7% below its net asset value… The $9 billion Fidelity Wise Origin Bitcoin Fund (FBTC) saw a 1.1% discount while the $2.5 billion ARK 21Shares Bitcoin ETF (ARKB) and the $2 billion Bitwise Bitcoin ETF (BITB) both closed with discounts of more than 1.4%, also the biggest on record for each.”

April 30 – Wall Street Journal (Peter Grant): “Defaults are reaching historic levels in the office market, as a growing number of owners capitulate to persistently high interest rates and weak demand. More than $38 billion of U.S. office buildings are threatened by defaults, foreclosures or other forms of distress, according to… MSCI. That is the highest amount since the fourth quarter of 2012 in the aftermath of the 2008-2009 financial crisis… As recently as 2021, more than 90% of office loans that were converted into commercial-mortgage-backed securities were paid off when they became due, according to Moody’s. Last year, that figure fell to 35%, the worst payoff rate in the history of the data, which goes back to 2007. ‘It’s a pretty stark change,’ said Matt Reidy, director of Moody’s commercial real estate economics.”

April 30 – Bloomberg (Katie Greifeld): “Investors are plowing into technology-tracking ETFs at a record clip as conviction builds that the market’s biggest stocks can thrive in almost any economic cycle. As fears of sticky inflation and climbing bond yields stalk markets, traders have been shoveling money into big tech all year… Tech exchange-traded funds have absorbed about $9.2 billion so far in 2024, the most of any other sector by a margin of nearly $7 billion.”

April 30 – Wall Street Journal (Libertina Brandt): “A waterfront teardown in Boca Raton, Fla., has sold for a record $40 million, according to listing agents… at Coldwell Banker Realty. The roughly 1.7-acre property was the longtime home of the late financial publisher Glen Parker and his wife, Sandy Parker… The recorded buyer, luxury home builder Steven Dingle, plans to tear down the 1990s home and guesthouse on the property and rebuild…”

AI Bubble Watch:

April 29 – Bloomberg (Seth Fiegerman and Matt Day): “Nearly 18 months into the generative AI frenzy, some of the biggest tech companies are proving that artificial intelligence can be a real revenue driver. But it’s also a huge money pit. Microsoft Corp. and Alphabet Inc.’s Google reported surging cloud revenue with their latest quarterly results… Meta Platforms… said its AI efforts have helped bolster user engagement and ad targeting. To achieve these early gains, the three companies have spent billions to develop AI — and they plan to ramp up those investments even more. On April 25, Microsoft said it spent $14 billion on capital expenditures in the most recent quarter and expects those costs to ‘increase materially,’ driven in part by AI infrastructure investments. That was a 79% increase from the year-earlier quarter. Alphabet said it spent $12 billion during the quarter, a 91% increase from a year earlier, and expects the rest of the year to be ‘at or above’ that level... Meta… raised its estimates for investments for the year and now believes capital expenditures will be $35 billion to $40 billion…”

April 27 – New York Times (Karen Weise): “If 2023 was the tech industry’s year of the A.I. chatbot, 2024 is turning out to be the year of A.I. plumbing. It may not sound as exciting, but tens of billions of dollars are quickly being spent on behind-the-scenes technology for the industry’s A.I. boom. Companies from Amazon to Meta are revamping their data centers to support artificial intelligence. They are investing in huge new facilities, while even places like Saudi Arabia are racing to build supercomputers to handle A.I. Nearly everyone with a foot in tech or giant piles of money, it seems, is jumping into a spending frenzy that some believe could last for years. Microsoft, Meta, and Google’s parent company, Alphabet, disclosed this week that they had spent more than $32 billion combined on data centers and other capital expenses in just the first three months of the year. The companies all said in calls with investors that they had no plans to slow down their A.I. spending.”

April 29 – New York Times (Cade Metz, Karen Weise and Tripp Mickle): “Call it the end of the beginning of the A.I. boom. Since mid-March, the financial pressure on several signature artificial intelligence start-ups has taken a toll. Inflection AI, which raised $1.5 billion but made almost no money, has folded its original business. Stability AI has laid off employees and parted ways with its chief executive. And Anthropic has raced to close the roughly $1.8 billion gap between its modest sales and enormous expenses. The A.I. revolution, it is becoming clear in Silicon Valley, is going to come with a very big price tag. And the tech companies that have bet their futures on it are scrambling to figure out how to close the gap between those expenses and the profits they hope to make somewhere down the line. This problem is particularly acute for a group of high-profile start-ups that have raised tens of billions of dollars for the development of generative A.I…. Some of them are already figuring out that competing head-on with giants like Google, Microsoft and Meta is going to take billions of dollars — and even that may not be enough.”

May 2 – Bloomberg (Josh Saul): “Data center developers in Northern Virginia are asking utility Dominion Energy Inc. for as much power as several nuclear reactors can generate, in the latest sign of how artificial intelligence is helping drive up electricity demand. Dominion regularly fields requests from developers whose planned data center campuses need as much as ‘several gigawatts’ of electricity, Chief Executive Officer Bob Blue said… A gigawatt is roughly the output of a nuclear reactor and can power 750,000 homes. Electric utilities are facing the biggest demand jump in a generation. Along with data centers to run AI computing, America’s grid is being strained by new factories and the electrification of everything from cars to home heating.”

May 1 – Financial Times (Ben Blanchard): “Microsoft has agreed to back an estimated $10bn in renewable electricity projects to be developed by Brookfield Asset Management, in a deal that underscores the race to meet clean-energy commitments while satisfying the voracious power demands of cloud computing and artificial intelligence. The ‘global framework agreement’ signed by the Seattle-based tech giant is a commitment to bring 10.5 gigawatts of generating capacity online, or enough to power the equivalent of about 1.8mn homes.”

April 29 – Wall Street Journal (Jennifer Hiller and Scott Patterson): “The cutting edge of technology is driving the power grid back to the 19th century. An explosion of so-called hyperscale data centers in places such as Northern Virginia has upended plans by electric utilities to cut the use of fossil fuels. In some areas, that means burning coal for longer than planned. These giant data centers will provide computing power needed for artificial intelligence. They are setting off a four-way battle among electric utilities trying to keep the lights on, tech companies that like to tout their climate credentials, consumers angry at rising electricity prices and regulators overseeing investments in the grid and trying to turn it green.”

Bank Watch:

April 26 – Reuters (Manas Mishra, Pritam Biswas, Nathan Gomes and Saeed Azhar): “U.S. regulators have seized Republic First Bancorp and agreed to sell it to Fulton Bank, underscoring the challenges facing regional banks a year after the collapse of three peers. Philadelphia-based Republic First, which had abandoned funding talks with a group of investors, was seized by the Pennsylvania Department of Banking and Securities.”

April 28 – Financial Times (Stephen Gandel): “Deposit costs at the largest US banks rose more than interest revenue last quarter for the first time since the Federal Reserve began raising rates two years ago, as savers demanded lenders share the benefits. Wells Fargo paid nearly $594mn more in fees to depositors in the first quarter of this year than it did in the previous three months. That was far more than the $1mn the bank took in additional interest from its loans and investments in the same period. JPMorgan Chase and Citi also paid out more to depositors than they took in additional interest last quarter — about $350mm each.”

U.S./Russia/China/Europe Watch:

May 3 – Bloomberg: “Russian President Vladimir Putin plans to visit China little more than a week after starting his new term in office, underscoring the growing importance of ties between the two countries. The visit is scheduled for May 15-16, a person familiar with the Kremlin’s plans said.”

May 2 – Bloomberg (Daniel Flatley): “US intelligence officials assess that Russia and China are working more closely together on military issues, including a potential invasion of Taiwan, prompting new planning across the government to counter a potential scenario in which the countries fight in coordination. ‘We see China and Russia, for the first time, exercising together in relation to Taiwan and recognizing that this is a place where China definitely wants Russia to be working with them, and we see no reason why they wouldn’t,’ Director of National Intelligence Avril Haines said… in testimony to Congress.”

April 28 – Financial Times (Demetri Sevastopulo): “The commander of US forces in the Indo-Pacific region has accused China of pursuing a ‘boiling frog’ strategy, raising tensions in the region with increasingly dangerous military activity. Admiral John ‘Lung’ Aquilino said that during his three years as US Indo-Pacific commander, China has increased its pace of military development and matched its growing capabilities with more destabilising behaviour. ‘It’s getting more aggressive, they’re getting more bold and it’s getting more dangerous,’ Aquilino told the Financial Times… Aquilino said China was stepping up its aggressive conduct through a ‘boiling frog’ strategy, in which it gradually raised the temperature so that the ultimate danger was under-appreciated until it was too late.”

April 28 – Reuters: “Russian officials threatened the West… with a ‘severe’ response in the event that frozen Russian assets are confiscated, promising ‘endless’ legal challenges and tit-for-tat measures. Russian Foreign Ministry spokeswoman Maria Zakharova said Russia would never cede territories seized from Ukraine in exchange for the return of frozen assets. ‘Our motherland is not for sale,’ Zakharova wrote…”

May 1 – Bloomberg: “Americans are increasingly viewing China as an enemy and most think that limiting Beijing’s power and influence should be a top foreign policy priority for the US, according to a survey by Pew Research Center. Some 42% of respondents labeled China as an enemy of the US — the largest share since the center started posing this question in 2021, and an increase of four percentage points from last year. Another 50% of Americans described China as a competitor… Only 6% say it’s a partner to the US…”

De-globalization and Iron Curtain Watch:

April 29 – Reuters (Laurie Chen): “China hinted on Monday that it could retaliate after U.S. President Joe Biden signed into law legislation to boost Taiwan's defences and seeks to get TikTok's Chinese owner to divest from the social media platform. Biden signed the legislation on a military aid package… He also signed a separate bill tied to the aid legislation that bans TikTok in the United States if its Chinese owner ByteDance fails to divest the app over the next nine months to a year.”

April 30 – Financial Times (Joe Leahy): “Visiting Beijing late last year, the EU’s chief diplomat Josep Borrell complained that China’s trade surplus with Europe was soaring even as its market became tougher for European companies to enter. ‘Either the Chinese economy opens more, or you may have a reaction from our side,’ Borrell warned. Last week, the response came. The EU wielded new anti-subsidy powers for the first time in a raid on the Warsaw and Rotterdam offices of Nuctech, a Chinese manufacturer of airport and port security scanners.”

April 29 – Bloomberg (Peter Martin and James Mayger): “When South Korea decided to host a US anti-ballistic missile system, the lucrative flow of tourists from neighboring China suddenly dried up. When Australia accused Beijing of meddling in its domestic politics and demanded answers over the origins of Covid-19, China stopped buying exports like coal, wine and beef. It wasn’t until Beijing tried to punish Lithuania for opening a liaison office with Taiwan in 2021 that Washington intervened. A key outcome from that episode was the creation of a team inside the US State Department to help when Beijing responds to political disputes with economic and trade weapons — what the US and its allies call economic coercion. Demand for that help has been strong, according to the US official in charge of the program.”

April 29 – Bloomberg (Jacob Gu): “China needs to further reduce its Treasuries holdings, in part to lessen the potential leverage of Washington over its Asian rival, according to a paper… by a Chinese state think tank. The vast American assets that China’s authorities hold are ‘increasingly becoming hostages — hindering us from safeguarding our national sovereignty,’ Di Dongsheng, vice-dean of Renmin University’s School of International Studies, wrote… Di also referenced President Xi Jinping’s emphasis on preserving ‘territorial integrity amid changes unseen in 100 years’ in the global backdrop. Di pointed to the US freezing of Russian assets following Moscow’s full-blown invasion of Ukraine in 2022 as part of a long pattern of American actions that pose challenges for foreign investors.”

Inflation Watch:

April 29 – New York Times (Jim Tankersley): “A crucial question is hanging over the American economy and the fall presidential election: Why are consumer prices still growing uncomfortably fast, even after a sustained campaign by the Federal Reserve to slow the economy by raising interest rates? Economists and policy experts have offered several explanations. Some are essentially quirks of the current economic moment, like a delayed, post-pandemic surge in the cost of home and auto insurance. Others are long-running structural issues, like a lack of affordable housing that has pushed up rents… But some economists, including top officials at the International Monetary Fund, said that the federal government bore some of the blame because it had continued to pump large amounts of borrowed money into the economy at a time when the economy did not need a fiscal boost.”

May 2 – Bloomberg (Molly Smith): “US labor costs increased in the first quarter by the most in a year as productivity gains slowed, potentially adding to risks inflation will remain elevated. Unit labor costs, or what a business pays employees to produce one unit of output after taking into account changes in productivity, climbed at a 4.7% annual rate. That marked a notable jump after muted gains in the second half of 2023. Productivity, or nonfarm employee output per hour, rose at a 0.3% annualized rate after an upwardly revised 3.5% gain in the prior period…”

April 28 – Financial Times (Rana Foroohar): “It’s no secret that there’s a housing crisis in America. Shelter has accounted for the bulk of core inflation over the past couple of years. But even if you can afford a home, you may not be able to insure it. The cost of homeowner’s insurance in the US rose 23% from January 2023 to February 2024, even as coverage in many places is decreasing. In hurricane-prone Louisiana, premiums were up 63%. States such as Florida are becoming uninsurable, as providers pull out of the market altogether. The obvious driver here is climate change and the risk of more severe weather events… But there are other factors in play too. These include the slow adoption of risk mitigation technologies, the failure of insurers, banks and public officials to come up with joint approaches to cost sharing and the huge opacity in the market...”

April 30 – CNBC (Diana Olick): “Strong demand and tight supply continue to push home values higher, even though mortgage rates are now moving higher again. Home prices in February jumped 6.4% year over year, another increase after the prior month’s annual gain of 6%, according to the S&P CoreLogic Case-Shiller national home price index... It was the fastest rate of price growth since November 2022. The 10-city composite rose 8%, up from a 7.4% increase in the previous month. The 20-city composite saw an annual gain of 7.3%, up from a 6.6% advance in January. ‘Following last year’s decline, U.S. home prices are at or near all-time highs,’ said Brian Luke, head of commodities, real and digital assets at S&P Dow Jones Indices. ‘For the third consecutive month, all cities reported increases in annual prices, with four currently at all-time highs: San Diego, Los Angeles, Washington, D.C., and New York.’”

April 28 – Wall Street Journal (Heather Haddon): “Restaurants for months have said menu prices in California would rise as the state raised the minimum wage for fast-food workers. Now they are following through. Consumers picking up burgers, burritos and chicken sandwiches at chains in the Golden State are grappling with prices that for months have been rising at a faster clip than in other states, according to… Datassential. Since September, when California moved to require large fast-food chains to bump up their minimum hourly pay to $20 in April, fast-food and fast-casual restaurants in California have increased prices by 10% overall, outpacing all other states…”

April 27 – Bloomberg (Naureen S. Malik): “A surge in Texas power prices for August suggests another summer of heavy electricity demand — and potential grid strain — to meet air-conditioning needs. Traders start looking at prices months in advance to gauge the outlook for demand. Already in mid-April, August power prices for Dallas soared to $168.70 a megawatt-hour, which was the highest level in five years for this time of the year… Prices were still hovering around that level on Friday, an 82% premium versus a year earlier.”

May 2 – CNBC (Sam Meredith): “Spain’s Deoleo, the world’s largest olive oil producer, says the industry needs to undergo a ‘profound transformation’ as it grapples with one of the most challenging moments in its history. A perfect storm of climate change, soaring prices, high interest rates and robust inflation has taken its toll throughout the olive oil value chain in recent months. Two consecutive years of scorching heat in Spain have limited olive harvests, culminating in an unprecedented price rally… Spain accounts for more than 40% of the world’s olive oil production, making it a global reference for prices. ‘We are facing one of the most difficult moments in the history of the sector,’ Miguel Angel Guzman, chief sales officer at Deoleo, told CNBC… ‘Strong inflation along with high interest rates and unfavourable olive oil harvest forecasts (in terms of quantity and quality due to the drought cycle) has caused prices to increase considerably,’ Guzman said.”

Federal Reserve Watch:

May 1 – Bloomberg (Craig Torres): “The Federal Reserve signaled fresh concerns about inflation while indicating it was likely to keep borrowing costs elevated for longer rather than raising them again. Officials unanimously decided… to leave the target range for the benchmark federal funds rate at 5.25% to 5.5% — where it’s been since July — following a slew of data that pointed to lingering price pressures in the US economy. They also reaffirmed the need for more evidence that price gains are cooling before cutting interest rates from a two-decade high. ‘So far this year, the data have not given us that greater confidence in particular’ that rate cuts are appropriate, Chair Jerome Powell said… ‘Readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected.’”

May 1 – Wall Street Journal (Nick Timiraos): “The Federal Reserve acknowledged a recent setback in its inflation fight but said it was more likely to keep interest rates at their current level for longer than to raise them again… Fed Chair Jerome Powell indicated that the bar to cut interest rates had gone up, but that the bar to hike rates was even higher. ‘It’s likely to take longer for us to gain confidence that we are on a sustainable path’ to lower inflation, Powell said. He said he expected inflation would resume its decline this year, but added, ‘my confidence in that is lower than it was.’”

May 1 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chair Jerome Powell tried to keep the central bank’s options open Wednesday by sticking with his view that interest rates are restrictive and that inflation was likely to resume its decline. But a string of disappointing readings on price and wage pressures have led investors to put less weight on the central bank’s outlook and more attention on how the economic data unfold. ‘Powell can say whatever he wants, but ultimately the inflation numbers will dictate what happens,’ said Neil Dutta, head of economic research at Renaissance Macro Research.”

Biden Administration Watch:

April 30 – Wall Street Journal (Matt Pottinger): “President Biden warned China two years ago not to provide ‘material support’ for Russia’s war in Ukraine. On Friday, Secretary of State Antony Blinken conceded that Xi Jinping ignored that warning. China, Mr. Blinken said, was ‘overwhelmingly the No. 1 supplier’ of Russia’s military industrial base, with the ‘material effect’ of having fundamentally changed the course of the war. Whatever Mr. Biden chooses to do next will be momentous for global security and stability. Mr. Biden can either enforce his red line through sanctions or other means, or he can signal a collapse of American resolve by applying merely symbolic penalties. Beijing and its strategic partners in Moscow, Tehran, Pyongyang and Caracas would surely interpret half-hearted enforcement as a green light to deepen their campaign of global chaos. Mr. Xi sees a historic opportunity here to undermine the West.”

U.S. Economic Bubble Watch:

May 3 – Bloomberg (Augusta Saraiva): “US employers scaled back hiring in April and the unemployment rate unexpectedly rose, suggesting some cooling is underway in the labor market after a strong start to the year. Nonfarm payrolls advanced 175,000 last month, the smallest gain in six months… The unemployment rate ticked up to 3.9% and wage gains slowed… Average hourly earnings climbed 0.2% from March and 3.9% from a year ago, the slowest pace since June 2021.”

May 1 – CNBC (Jeff Cox): “Private payrolls increased at a faster-than-expected pace in April, indicating there are still plenty of tail winds for the U.S. labor market, according to ADP… The payrolls processing firm reported… that companies added 192,000 workers for the month, better than the… consensus outlook for 183,000 though a slight step down from the upwardly revised 208,000 in March. At the same time, the firm’s wage measure showed worker pay up 5% from a year ago…”

May 2 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits held steady at a low level last week, pointing to a still fairly tight labor market that should continue to underpin the economy in the second quarter… Initial claims for state unemployment benefits were unchanged at… 208,000 for the week ended April 27… The number of people receiving benefits after an initial week of aid, a proxy for hiring, was also unchanged at a seasonally adjusted 1.774 million during the week ending April 20…”

April 30 – New York Times (Jeanna Smialek): “More than two years after the Federal Reserve started lifting interest rates to restrain growth and weigh on inflation, businesses continue to hire, consumers continue to spend and policymakers are questioning why their increases haven’t had a more aggressive bite. The answer probably lies in part in a simple reality: High interest rates are not really pinching Americans who own assets like houses and stocks… Some people clearly are feeling the squeeze of Fed policy. Credit card rates have skyrocketed, and rising delinquencies on auto loans suggest that people with lower incomes are struggling under their weight. But for many people in middle and upper income groups… this is a fairly sunny economic moment. Their house values are mostly holding up in spite of higher rates, stock indexes are hovering near record highs, and they can make meaningful interest on their savings for the first time in decades.”

May 2 – Dow Jones (Jeffry Bartash): “The trade deficit was flat in March at a nearly one-year high… The deficit totaled $69.4 billion in March, virtually the same as the $69.5 billion reading in February... The trade gap widened in early 2024 after falling in the prior year to the lowest level since before the pandemic. The deficit in February was the highest since April 2023.”

May 3 – Reuters (Augusta Saraiva): “The U.S. services sector contracted in March, while a measure of prices paid by businesses for inputs jumped, a worrisome sign for the outlook on inflation. The Institute for Supply Management (ISM)… its non-manufacturing PMI fell to 49.4 last month from 51.4 in March, the lowest reading since December 2022… A measure of new orders received by services businesses dipped to 52.2 last month from 54.4 in March, the lowest reading since last September. Production also faltered, with a gauge of business activity dropping to 50.9 from 57.4 in the prior month… Despite demand slowing, services inflation appears to have picked up again. The survey's measure of prices paid for inputs by businesses jumped to 59.2 from 53.4 in March.”

May 1 – Bloomberg (Mark Niquette): “US factory activity contracted in April on declining demand while input prices rose at the fastest pace since inflation peaked in 2022. The Institute for Supply Management’s manufacturing gauge fell 1.1 points to 49.2, after expanding a month earlier for the first time since 2022... A measure of costs for materials and other inputs rose for the second straight month, suggesting stubborn inflationary pressures. The group’s gauge of prices paid increased by 5.1 points to 60.9, the highest since June 2022.”

April 30 – Reuters (Lucia Mutikani): “U.S. consumer confidence deteriorated in April, falling to its lowest level in more than 1-1/2 years amid worries about the labor market and income… The Conference Board said that its consumer confidence index fell to 97.0 this month, the lowest level since July 2022, from a downwardly revised 103.1 in March… ‘Confidence retreated further in April as consumers became less positive about the current labor market situation, and more concerned about future business conditions, job availability, and income,’ said Dana Peterson, chief economist at the Conference Board… ‘According to April's write-in responses, elevated price levels, especially for food and gas, dominated consumer’s concerns, with politics and global conflicts as distant runners-up.’”

April 28 – Financial Times (Patrick Temple-West): “The median pay for S&P 500 chief executives jumped 9% to $15.7mn in the year to April 15, widening the gulf in remuneration between US and UK bosses. The rises came despite the underperformance of some US companies last year, according to analysis by ISS-Corporate…”

April 30 – CNBC (Kamaron McNair): “Millennials may have ditched their ‘broke generation’ stereotype. Household wealth among Americans under age 40 — which includes most millennials, who are currently ages 28 to 43, and some Gen Zers, who are currently in their teens and up to age 27 — grew by a whopping 49% between 2019 and 2023, according to a Center for American Progress analysis of Federal Reserve data. The inflation-adjusted average net worth of households headed by someone age 40 or under was around $174,000 at the end of 2019. That number grew by $85,000 to hit $259,000 by the end of 2023, CAP found.”

Fixed Income Watch:

May 2 – Wall Street Journal (Heather Gillers): “Cities and states are likely to borrow more this year than they did in 2023a boon to investors hungry for tax-exempt debt. Close to 90% of municipal-bond analysts expect at least $400 billion of muni debt to be issued this year, a survey by Hilltop Securities found. Total issuance was $380 billion last year.”

May 1 – Bloomberg (Katie Greifeld): “Fixed-income mutual funds are doing something rare: Attracting new money — and besting their tax-efficient ETF brethren. Nearly $110 billion has flowed into mutual funds so far this year, with the bulk of the cash gravitating towards active managers… It breaks two straight years of net outflows that saw the industry bleed more than half a trillion dollars. Investors are pouring into both mutual funds and exchange-traded products to lock in lofty yields across the fixed-income landscape…”

April 29 – Bloomberg (Brian Smith): “Boeing has gathered orders of about $77 billion for its dollar bond sale to raise funds for general purposes, according to people with knowledge of the matter. The company is said to be targeting around $8 billion for the sale.”

China Watch:

April 30 – Bloomberg: “China’s ruling Communist Party vowed to explore new measures to tackle a protracted housing crisis, which remains the biggest drag on the nation’s economy, and hinted at possible rate cuts ahead. Officials will research ways to deal with unsold properties, as well as ‘make flexible use’ of tools to support the economy and lower overall borrowing costs, a meeting led by Chinese President Xi Jinping agreed… Those tools outlined by the 24-man Politburo included interest rates and the reserve requirement ratio, which determines the amount of cash banks must set in reserve. That was the first time a readout from the elite group had mentioned either policy tool since April 2020…”

April 30 – Reuters (Ellen Zhang and Kevin Yao): “China will step up support for the economy with prudent monetary and proactive fiscal policies, including interest rates and bank reserve requirement ratios (RRR), the Politburo of the Communist Party was quoted… as saying… The party's top decision-making body said it would be flexible with policies in the world's second-biggest economy, which grew faster than anticipated in the first quarter but is still facing headwinds… ‘The sustained recovery and improvement of the economy still face many challenges,’ the Politburo said…”

April 30 – Reuters (Ellen Zhang and Ryan Woo): “Growth slowed in China's manufacturing and services sectors in April…, suggesting a loss of momentum for the world's second-biggest economy at the start of the second quarter. Signs of cooling activity after sizable gains in March highlights erratic demand and underlines the challenges facing policymakers, even though a solid first quarter GDP data has reduced some of the urgency to ramp up stimulus measures.”

April 28 – Bloomberg: “China Vanke Co. made a rare response to Moody’s downgrade last week, citing support from financial institutions and its biggest shareholder. Vanke said… it ‘firmly opposes’ the decision by Moody’s, arguing that shareholder Shenzhen SOE has made material support continuously, while Vanke’s property sales remain among the highest in the industry.”

May 1 – Bloomberg (Li Liu): “China bans regions with home stockpiles sales of which would require more than 36 months from new land sales, according to a statement from the Ministry of Natural Resources… Cities that would need more than 36 months to clear the buildup of unsold homes are required to step up their sales efforts to reduce the time period to less than three years…”

May 2 – Wall Street Journal (Miho Inada): “Last year, China native Tomo Hayashi, the owner of a metals-trading firm, moved to Tokyo. He quickly adopted a Japanese name, spent the equivalent of about $650,000 on a luxury waterfront condo and, in March, brought his family to join him. The 45-year-old… is one of the many wealthy Chinese driving a boom in high-end Tokyo properties and reshaping the city. Frustrations with Beijing’s autocratic political system, which flared during abrupt pandemic-era lockdowns and have only grown since then, have helped drive the wave…”

Europe Watch:

May 3 – Wall Street Journal (Ed Frankl): “The eurozone’s unemployment level held steady at a record low in March, a sign of the robustness of the bloc’s jobs market that might keep European Central Bank policymakers on their toes amid concerns over sticky wage growth. Joblessness stood at 6.5% in the 20-member bloc…, the same as in every month since November…”

April 28 – Financial Times (Paola Tamma and Andy Bounds): “Eleven EU countries including France and Italy are set to be reprimanded by the European Commission over excessive government spending once new fiscal rules enter into force this year. These countries last year ran budget deficits larger than the 3% of GDP threshold allowed under EU rules… Countries in the eurozone could face fines if they don’t course-correct, while the non-euro countries face reputational risks. France, Italy and Belgium, whose deficits are in excess of 3% and do not plan to return to compliance over the next few years, are almost guaranteed to be sanctioned.”

Japan Watch:

May 1 – Financial Times (Leo Lewis): “April was a testy month for Japan. The yen tumbled to a 34-year low before the government appeared to barge in with over $35bn worth of currency support. A prominent think-tank warned that well over a third of the country’s municipalities may vanish. A key industrial policy committee warned of chronic threats to national prosperity. Japan — out of deflation, out of monetary policy sync with the rest of the developed world and, increasingly, out of people — has been plausibly described for more than a year now as being at a historic turning point. April, and the yen show in particular, have made its destination considerably less clear. Among the various possible paths throughout 2024 and into its mid-term future, there is one that Japan affects to fear most: a notional descent into the disorder, disparities and dysfunction it associates with emerging economy status.”

May 1 – Bloomberg (Tsuyoshi Inajima, Yuki Furukawa, Akemi Terukina and Shoko Oda): “Japan’s companies are expressing unusual discomfort with the weak yen, just as the country’s government appears to be stepping in to prop up its tumbling currency. The yen briefly crossed the 160 to the dollar level earlier this week. It has since gained to 156.22 yen after suspected intervention. Traditionally, exporters welcome a weaker yen as it boosts income from exports paid for in dollars and other foreign currencies… ‘The benefits of a weaker yen are less obvious than in the past,” said Canon Inc.’s Senior Managing Director Minoru Asada... ‘This is an extremely rare situation.’”

April 28 – Bloomberg (Eddy Duan, Min Jeong Lee and Yasutaka Tamura): “Japan’s oldest venture capital firm is closing in on a target to triple the value of its investment, a sign of resurgence in the country’s startup ecosystem. Jafco Group Co. expects its newest SV7 fund’s total value to surpass paid-in capital by 2.5 times, as more portfolio companies go abroad, fetching higher valuations. The early-stage investor… is pushing to lift the fund’s performance to a 200% return or more…”

Leveraged Speculation Watch:

April 29 – Bloomberg (Natalia Kniazhevich): “The risk-on momentum in technology stocks last week wasn’t lost on hedge funds, who scooped up the sector’s companies at the fastest clip in more than a year. Technology stocks saw the largest net buying since December 2022 last week by the group, driven by an increase in long positions and short-covering… Goldman Sachs… prime brokerage show. Hedge funds were net buyers of the sector for a fourth straight week…”

April 29 – Bloomberg (Srinivasan Sivabalan): “For decades, carry traders have borrowed US dollars at low interest rates and invested in higher-yielding emerging-market currencies. But that flow is now getting turned on its head. The Federal Reserve’s tight monetary stance has extended for so long that some emerging economies are struggling to keep their yields competitive, making them the target of a so-called reverse carry trade. That trade is paying off. Borrowing in emerging-market currencies and buying the dollar has produced returns of as much as 9% this year. The Chinese yuan, Thai baht, Malaysian ringgit and even Czech koruna are some of the currencies being used. That’s not to say the traditional carry trade is dead: it’s still being used to invest in high-yielding currencies such as the Mexican peso, Turkish lira and Egyptian pound, but even those trades are increasingly being funded by the Japanese yen, Swiss franc or other EM currencies, rather than the dollar.”

May 2 – Bloomberg (Natalia Kniazhevich): “Hedge funds are turning increasingly defensive as uncertainty around geopolitics and the path of interest rates, as well as the stock market’s April swoon, has investing pros spooked. Positioning data shows that hedge fund added defensive equity positions to their portfolio in April at the fastest pace in eight months, while still being net sellers of global stocks, according to figures compiled by Goldman Sachs… prime brokerage desk.”

Social, Political, Environmental, Cybersecurity Instability Watch:

May 1 – Reuters (Christy Santhosh): “The outbreak of H5N1 bird flu virus has spread to dairy cows for the first time in the United States, raising concerns about it spreading to humans through the nation's milk supply. Since 2022, bird flu in the United States has infected over 90 million chickens, more than 9,000 wild birds, 34 dairy herds, one person in Texas who came in close contact with infected cattle and another after exposure to poultry.”

April 28 – Bloomberg (Jack Wittels): “Ships seeking to avoid ongoing attacks by Houthi rebels in the Red Sea area are emitting millions of additional tons of carbon, making it tougher for companies using ocean freight to reduce pollution across their supply chains. Instead of passing through Egypt’s Suez Canal, hundreds of vessels since mid-December are sailing around South Africa’s Cape of Good Hope… The additional fuel burned has led to approximately an extra 13.6 million tons of CO2 emissions over the past four months — equivalent to the pollution of about 9 million cars over that same period, according to a report from consultancy INVERTO, a subsidiary of Boston Consulting Group Inc.”

Geopolitical Watch:

May 1 – Reuters (Mikhail Flores): “The Philippines… accused China's coast guard of elevating tensions in the South China Sea after two vessels suffered damage from water cannon use by Beijing, an official said. Philippine officials have said a coast guard ship and a fisheries vessel were damaged when Chinese coast guard vessels fired water cannons at them while on their way to the disputed Scarborough shoal… to help Filipino fishermen at sea.”

April 28 – Reuters (Liz Lee and Junko Fujita): “China's coast guard confronted Japanese lawmakers in waters claimed by both countries in the East China Sea, China’s embassy in Tokyo and Japanese media said…, the latest in a series of maritime disputes involving China and its neighbours. Chinese vessels took unspecified law enforcement measures, the embassy said in a statement, adding that it had lodged solemn representations for what it called ‘infringement and provocation’ by Japan near tiny, uninhabited islands that Beijing calls the Diaoyu and Tokyo calls the Senkaku.”