Credit Bubble Bulletin : 06/30/24

Sunday, June 30, 2024

Weekly Commentary: Just the Facts - June 30, 2024

For the Week:

The S&P500 (up 14.5% y-t-d) and the Dow (up 3.8%) were little changed. The Utilities fell 1.3% (up 8.2%). The Banks rallied 2.5% (up 8.8%), and the Broker/Dealers rose 1.5% (up 13.3%). The Transports advanced 2.0% (down 3.0%). The S&P 400 Midcaps were little changed (up 5.3%), while the small cap Russell 2000 rallied 1.3% (up 1.0%). The Nasdaq100 was about unchanged (up 17.0%). The Semiconductors retreated 1.2% (up 31.1%). The Biotechs gained 0.7% (down 2.4%). With bullion up $5, the HUI gold index added 0.2% (up 10.1%).

Three-month Treasury bill rates ended the week at 5.205%. Two-year government yields added a basis point this week to 4.74% (up 49bps y-t-d). Five-year T-note yields rose nine bps to 4.37% (up 52bps). Ten-year Treasury yields jumped 14 bps to 4.39% (up 52bps). Long bond yields rose16 bps to 4.56% (up 53bps). Benchmark Fannie Mae MBS yields surged 19 bps to 5.89% (up 61bps).

Italian yields jumped 13 bps to 4.07% (up 37bps y-t-d). Greek 10-year yields rose 11 bps to 3.74% (up 69bps). Spain's 10-year yields surged 13 bps to 3.12% (up 43bps). German bund yields rose nine bps to 2.50% (up 48bps). French yields gained nine bps to 3.30% (up 74bps). The French to German 10-year bond spread was unchanged at 80 bps. U.K. 10-year gilt yields jumped nine bps to 4.17% (up 64bps). U.K.'s FTSE equities index declined 0.9% (up 5.6% y-t-d).

Japan's Nikkei Equities Index surged 2.9% (up 18.6% y-t-d). Japanese 10-year "JGB" yields surged 12 bps to 1.08% (up 46bps y-t-d). France's CAC40 fell 2.0% (down 0.8%). The German DAX equities index added 0.4% (up 8.9%). Spain's IBEX 35 equities index declined 0.8% (up 8.3%). Italy's FTSE MIB index slipped 0.5% (up 9.2%). EM equities were mixed. Brazil's Bovespa index gained 2.1% (down 7.7%), while Mexico's Bolsa index declined 0.7% (down 8.6%). South Korea's Kospi index increased 0.5% (up 5.4%). India's Sensex equities index jumped 2.4% (up 9.4%). China's Shanghai Exchange Index fell 1.0% (down 0.3%). Turkey's Borsa Istanbul National 100 index declined 1.1% (up 42.5%). Russia's MICEX equities index was unchanged (up 0.8%).

Federal Reserve Credit declined $13.2 billion last week to $7.208 TN. Fed Credit was down $1.682 TN from the June 22, 2022, peak. Over the past 250 weeks, Fed Credit expanded $3.481 TN, or 93%. Fed Credit inflated $4.397 TN, or 156%, over the past 607 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $4.5bn last week to $3.314 TN. "Custody holdings" were down $118 billion y-o-y, or 3.4%.

Total money market fund assets added $4.3 billion to $6.103 TN. Money funds were up $669 billion, or 12.3%, y-o-y.

Total Commercial Paper added $1.1 billion to $1.290 TN. CP was up $127bn, or 10.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates slipped one basis point to an 11-week low 6.86% (up 16bps y-o-y). Fifteen-year rates gained three bps to 6.16% (up 5bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps 7.32% (up 12bps).

Currency Watch:

June 26 – Reuters (Gertrude Chavez-Dreyfuss): “The yen sank to its lowest against the U.S. dollar in nearly 38 years on Wednesday, as wide interest rate differentials between the two economies in favor of the greenback continued to pummel the Japanese unit, keeping traders on alert for any sign of intervention from Japan to boost its currency. The U.S. dollar rose to as high 160.82, its strongest level since December 1986.”

June 18 – Nikkei Asia (Pak Yiu): “China saw the world’s biggest outflow of high-net-worth individuals last year and is expected to see a record exodus of 15,200 in 2024, dealing a further blow to its economy, a new report says. Uncertainty over China's economic trajectory and geopolitical tensions are top of mind for many Chinese millionaires, in dollar terms, who choose to leave their country, according to… investment migration firm Henley & Partners. The U.S., China's international archrival, stands out as the top destination… China last year saw 13,800 high-net-worth individuals depart, mostly to the U.S., Canada and Singapore, the firm found. Such individuals, abbreviated as HNWIs, are defined as those with at least $1 million in assets.”

June 23 – Reuters (Winni Zhou and Ankur Banerjee): “A sliding yuan and extensive outflows of cash from the mainland into Hong Kong show China's domestic investors are shelving expectations for any immediate recovery in their home markets and fleeing to the closest better-yielding assets. The yuan has dropped to seven-month lows this week, alongside a reversal in equity investment flows into China. Analysts said Hong Kong's stockpile of yuan deposits has also grown as mainland investors use their limited offshore investment channels to seek higher yields and companies prepare to pay annual dividends, adding to the pressure on the currency.”

June 22 – Financial Times (Mary McDougall and Joseph Cotterill): “Emerging market currencies are on track for their worst first half of the year since 2020, pushed lower by an unexpectedly strong dollar and an unwind in a popular trading strategy across Latin American markets. JPMorgan’s emerging markets foreign exchange index has fallen 4.4% so far this year, a drop more than twice as large as the same period in the three previous years.”

For the week, the U.S. Dollar Index was little changed at 105.87 (up 4.5% y-t-d). For the week on the upside, the South Korean won increased 0.9%, the Australian dollar 0.4%, the euro 0.2%, and the Canadian dollar 0.1%. On the downside, the Brazilian real declined 2.9%, the South African rand 1.2%, the Mexican peso 1.1%, the Norwegian krone 1.0%, the Swedish krone 0.8%, the Japanese yen 0.7%, the Swiss franc 0.6%, the New Zealand dollar 0.4%, and the Singapore dollar 0.1%. The Chinese (onshore) renminbi declined 0.09% versus the dollar (down 2.31% y-t-d).

Commodities Watch:

June 28 – Reuters (Rahul Paswan): “Gold prices steadied on Friday and were headed for a third straight quarterly gain after a key U.S. inflation report was broadly in line with expectations, boosting hopes that the Federal Reserve could cut interest rates by September. Spot gold was steady at $2,326.47 per ounce... Prices have gained over 4% for the quarter.”

The Bloomberg Commodities Index declined 0.7% (up 2.4% y-t-d). Spot Gold added 0.2% to $2,327 (up 12.8%). Silver dropped 1.4% $29.143 (up 22.5%). WTI crude gained 81 cents, or 1.0%, to $81.54 (up 13.8%). Gasoline added 0.2% (up 3.5%), while Natural Gas dropped 8.3% to $2.601 (up 4%). Copper declined 0.8% (up 13%). Wheat fell 1.4% (down 12%), and Corn sank 8.7% (down 16%). Bitcoin slumped $4,042, or 6.3%, to $60,118 (up 41.4%).

Middle East War Watch:

June 27 – Politico (Erin Banco): “A large-scale confrontation between Israel and Hezbollah is likely to break out in the next several weeks if Jerusalem and Hamas fail to reach a cease-fire deal in Gaza, U.S. intelligence indicates. U.S. officials are trying to convince both sides to deescalate — a task that would be significantly easier with a cease-fire in place in Gaza. But that agreement is in tense negotiations and U.S. officials are not confident Israel and Hamas will agree to the deal on the table in the near future. Meanwhile, the Israel Defense Forces and Hezbollah have drafted battle plans and are in the process of trying to procure additional weapons, according to two senior U.S. officials briefed on the intelligence.”

June 28 – Bloomberg (Ethan Bronner): “North Israel is a series of ghost towns — abandoned houses and scorched forests from Hezbollah missiles. Parts of south Lebanon have been hit so hard by Israeli bombs that they’ve been reduced to rubble. Tens of thousands of residents have been driven from homes on both sides. A steady, if ugly, tit-for-tat between Israel and Hezbollah since the October outbreak of the Gaza war has been shifting into something more alarming. Record numbers of Hezbollah projectiles — some 900 — have hit Israel this month and its chief says he’s overwhelmed by volunteers ready to fight Israel ‘without any rules, restraints or ceiling.’ Israel, meanwhile, is carrying out deeper and more destructive attacks in Lebanon and its northern military command has just approved a battle plan for the country.”

June 23 – BBC: “A number of Iraq’s leading Shia militias have pledged their allegiance and vowed to fight alongside Lebanon’s Hezbollah movement if Israel enters into a full-scale war against the group, according to a leading Lebanese newspaper. The pro-Iran Al-Akhbar newspaper published a report… saying that its Al-Nujaba Movement and Kataib Hezbollah faction (Hezbollah Brigades) had ‘announced their readiness to participate, if [Lebanese] Hezbollah agrees, in confronting any possible Israeli aggression against Lebanon’.”

June 24 – Wall Street Journal (Paul Berger and Costas Paris): “Ship backups that plagued seaports during the Covid pandemic are making a comeback, as vessel diversions because of attacks in the Red Sea trigger gridlock and soaring costs at the start of the peak shipping season. Flotillas of containerships and bulk carriers are growing off the coasts of Singapore, Malaysia, South Korea and China while ports in Spain and other parts of Europe look to dig out from container piles… The snags are complicating logistics for retail and manufactured goods, but importers and exporters say they are most concerned that the backups could expand as demand picks up in the coming months... That could drive already-resurgent freight rates close to levels seen during the pandemic…”

Ukraine War Watch:

June 23 – Reuters (Guy Faulconbridge and Filipp Lebedev): “Russia said… the United States was responsible for a Ukrainian attack on the Russian-annexed Crimean peninsula with five U.S.-supplied missiles that killed four people, including two children, and injured 151 more. The Russian Defence Ministry said four of the U.S.-delivered Army Tactical Missile System (ATACMS) missiles, equipped with cluster warheads, were shot down by air defence systems and the ammunition of a fifth had detonated in mid-air… ‘Responsibility for the deliberate missile attack on the civilians of Sevastopol is borne above all by Washington, which supplied these weapons to Ukraine, and by the Kyiv regime…’ the ministry said.”

France Instability Watch:

June 24 – Financial Times (Gideon Rachman): “‘Our Europe is mortal, it can die,’ warned Emmanuel Macron in late April. Who knew that just a few weeks later France’s president would set about proving his point… At present, global attention is focused on the immediate political dramas in France. The first round of voting will take place on June 30… At best, a parliament dominated by the political extremes would plunge France into a period of prolonged instability. At worst, it would lead to the adoption of spendthrift and nationalistic policies that would swiftly provoke an economic and social crisis in France. A French meltdown would rapidly become the EU’s problem. There would be two main transmission mechanisms. The first is fiscal. The second is diplomatic. France is in a financial mess.”

June 24 – Politico (Clea Caulcutt): “French President Emmanuel Macron warned Monday that a victory for the far left or the far right in this month’s snap election could spark ‘civil war.’ Macron said the far-left France Unbowed and Marine Le Pen’s far-right National Rally both pursued divisive policies that stoked tensions between communities. The far right’s answer to insecurity ‘reduces people to their religion or their origin’ and therefore ‘pushes people towards civil war,’ he said…”

June 25 – Bloomberg (Alice Atkins): “French officials must reassure foreign investors that the nation’s finances are in order or risk a fresh blowout in bond spreads, according to Allianz Global Investors’ multi-asset chief investment officer. Overseas investors own a much larger share of French government debt than they do elsewhere, and some fear the current political turmoil could trigger a European debt crisis to rival the one seen over a decade ago, said Gregor Hirt, whose division has €156 billion ($168bn) of assets under management. ‘Any reminder of the European sovereign debt crisis is a red flag for many international investors,’ he said.”

June 28 – Bloomberg (Valentine Baldassari and Ania Nussbaum): “President Emmanuel Macron’s approval rating fell to the lowest level in three months, delivering a boost to Marine Le Pen’s far-right National Rally party just two days before voting starts in France’s legislative election. Support for Macron dropped six points to 36%, the worst showing since March, according to a Toluna-Harris Interactive poll for LCI TV published on Friday.”

Taiwan Watch:

June 24 – Reuters (Ben Blanchard): “Democracy is not a crime and autocracy is the real ‘evil’, Taiwan President Lai Ching-te said… after China threatened to impose the death penalty in extreme cases for ‘diehard’ Taiwan independence separatists… On Friday, China ramped up its pressure on Taiwan by issuing new legal guidelines to punish those it says support the island's formal independence, though Chinese courts have no jurisdiction on the democratically governed island.”

June 22 – Reuters (Ben Blanchard): “Taiwan's annual war games this year will be as close as possible to actual combat, no longer just putting on a show to score points but aiming to simulate real fighting given a rapidly rising ‘enemy threat’ from China, a senior official said… A senior Taiwan defence official… said there was an urgent need to rethink how the drills were conducted. ‘In recent years, the enemy threat has changed rapidly,’ the official said. ‘Our defence combat plan must also be continuously revised on a rolling basis, and the urgency of comprehensive combat training is becoming more and more important.’”

Market Instability Watch:

June 24 – Bloomberg (Alexandra Harris): “US fiscal deficits are projected to grow over the next decade, likely pushing the government to increasingly rely on Treasury bills and healthy demand to plug the holes. The nonpartisan Congressional Budget Office last week upped its deficit estimate for 2024 to almost $2 trillion from about $1.6 trillion in February… Total deficits are expected to equal or exceed 5.5% of GDP in every year from 2024 to 2034... Those latest projections sounded the alarm on Wall Street, prompting analysts to revise trajectories for bill sales.”

June 27 – Financial Times (Claire Jones): “The IMF has urged the US to ‘urgently’ address its mounting fiscal burden, as it took aim at the tax plans of both presidential candidates just hours before their first electoral debate. The fund said projects from its annual Article IV health check of the US economy showed the debt-to-GDP ratio hitting 140% by 2032 — much higher than its current level of 120.7%. The surge, off the back of successive projected fiscal deficits in the coming years, would leave the debt burden in excess of previous highs in the aftermath of the second world war. ‘Such high deficits and debt create a growing risk to the US and global economy, potentially feeding into higher fiscal financing costs and a growing risk to the smooth rollover of maturing obligations,’ the fund said in its Article IV consultation. ‘These chronic fiscal deficits represent a significant and persistent policy misalignment that needs to be urgently addressed.’”

June 26 – Bloomberg (Iris Ouyang and Shulun Huang): “The yield on China’s benchmark bond fell to a more than two decade low as investors continued to flock to the notes amid lingering concerns about the domestic economy and expectations for further stimulus. The onshore 10-year government yield slipped to 2.22%, the lowest since 2002. Yields on the 20- and 50- year bonds have been trading at their historic lows for months.”

Global Credit Bubble Watch:

June 28 – Bloomberg (Samantha Stewart): “US leveraged loan pricings this quarter have reached $370 billion, the most since Bloomberg began tracking broadly syndicated loan data in 2013. The fresh high beats the prior of $339 billion set in the first quarter of 2017 during a repricing wave…”

June 28 – Bloomberg (Harry Suhartono and Ameya Karve): “Asian credit markets are suddenly standing out, even in a world awash in debt deals. Total corporate bond issuance in the region across all currencies has surged to $1.3 trillion this year… Sales of local-currency debt by companies has hit a record for the first half, while this week alone saw the biggest weekly dollar bond issuance for 17 months… The surge in debt sales has come as the region’s borrowers face nearly $2 trillion of maturing bonds next year and the similar amount in 2026… Total company bond issuance in the first half has climbed 18% to an all-time high... Sales of dollar-denominated debt… jumped to $22 billion this week, the most since the start of 2023, as spreads for regional issuers have remained tighter than for their US peers.”

June 27 – Financial Times (Ortenca Aliaj): “Defaults on loans to risky borrowers, a lifeline for companies owned by private equity, have leapt 250%, the Bank of England said as it warned that the sector was ‘facing challenges in the higher rate environment’. Global defaults on leveraged loans jumped 5 percentage points, from about 2% in early 2022 to about 7%, the BoE said… About 73% of these types of loans are extended to companies backed by private equity, according to the central bank. There is still some way to go before defaults on leveraged loans reach the peak of 12% hit during the financial crisis, it added.”

AI Bubble Watch:

June 28 – Wall Street Journal (Karen Langley): “The AI fervor powering the stock market shows no sign of cooling down. Much as in 2023, investors piled into bets in the first half of this year that the artificial intelligence boom is just getting started. They sent Nvidia shares soaring 149%, propelling the graphics-chip maker’s market value above $3 trillion and briefly making it the most valuable company in the world. Nvidia’s ascent is a big reason the S&P 500 has climbed 14% this year… even as a series of hot inflation readings damped investors’ hopes that the Federal Reserve would soon begin to cut interest rates.”

June 25 – Bloomberg (Carmen Arroyo and Immanual John Milton): “The AI revolution is increasingly being funded in a little-watched part of the debt market. Artificial intelligence products need vast troves of information and processing power to turn facts into something approximating human thought. Across the world, companies are pouring billions of dollars into building data centers to store and process this information, and fiber-optic cables to connect computers to these sites and one another… Global spending on data center construction is likely to top $55 billion by 2030, according to Synergy Research Group. The companies building data centers are often thinly capitalized, forcing them to raise at least some of that money in the asset-backed securities market, where they can get financing based on the revenue they expect to generate from the properties, at cheaper prices than they might otherwise find.”

June 28 – Yahoo Finance (Hamza Shaban): “Shareholders getting in on the AI power trade stand to gain from the immense energy demands of AI technology. But those same demands will have challenging ramifications for the sustainability goals of technology companies — and put a massive new strain on the power grid. Already this month, the major heat wave in parts of the Northeast, mid-Atlantic, and Midwest flashed an early preview of a potentially stifling summer that pushed the power grid's load. Those demands pile onto the nationwide boom in data center development that's leading to a surge in long-term demand for electricity, which has done the impossible — made the utilities trade look hot. With power-hungry AI systems, the energy trade is now the AI trade.”

June 25 – Financial Times (Martin Arnold): “Central banks urgently need to ‘raise their game’ to tackle the challenges and opportunities of artificial intelligence, as it transforms economies and the financial system, according to the Bank for International Settlements. The BIS conclusions… underline the awareness of global financial authorities that they need to keep pace with the wave of innovation being released by generative AI, including large language models such as ChatGPT. The organization… has carried out several experiments using the technology. It said AI was likely to be ‘a game changer for many activities and have a profound impact’ on the broader economy and financial system.”

Bubble and Mania Watch:

June 28 – Reuters (Marc Jones and Rodrigo Campos): “The unstoppable march of the mega caps, sloth-like central bank pivots, political palpitations aplenty and M&A is back - the first half of 2024 has been another whirlwind in world markets. Forecasts for a global interest-rate-cutting frenzy may not have materialized, but Nvidia and the rest of the Magnificent 7 soared another $3.6 trillion in market value. MSCI's 47-country world stocks index has clocked up a punchy 11% since January. Good yes, but nowhere near the 30% leap of team tech, or the frankly eye-popping 150% gain of chip champ Nvidia.”

June 27 – Financial Times (George Steer): “Banks including Goldman Sachs, Citigroup and UBS this month upgraded their end-of-year forecasts for the S&P 500 index, which has hit successive record highs during its surge of about 15% so far this year, driven by a small group of soaring AI stocks. Faced with a growing number of investors convinced that the rally will continue, the few remaining bearish strategists say their contrarian views are proving an increasingly difficult sell. ‘This rally has been tough and we’re having a hard time convincing [clients] to be bearish,’ said Barry Bannister, chief equity strategist at Stifel. ‘There’s a wall of money that’s willing to buy the market at any price and embrace fanatical thinking. People are bubbled up right now, they think the sky is the limit,’ added Bannister…”

June 27 – Financial Times (Hugo Cox): “Three weeks ago, Charlie Jenkins was approached by a couple who, after 18 months of searching for the right holiday home in the Mediterranean, had finally found the perfect place: now they needed to buy it before anyone else could. Arranging a mortgage would take too long, they figured... Could Jenkins, head of asset finance at SPF Private Clients, find them a £1.5mn loan, as soon as possible? Among their possessions was a valuable art collection, worth roughly £5mn. After a few calls, Jenkins had an offer of the full amount secured against some of the paintings… In recent years, as the value of many collectable assets has risen, the industry for lending against them has grown. From fine art, luxury watches, and investment portfolios to yachts, jets and classic cars, the very rich are taking a close look at trophy assets as a means to raise cash. ‘The most common lending is against an investment portfolio,” says Hina Bhudia, of Knight Frank Finance’s private office in London.”

Global Banking Watch:

June 26 – Wall Street Journal (Andrew Ackerman): “Big U.S. banks passed their latest annual stress test, with the Federal Reserve finding they would be able to continue lending to households and businesses in a severe recession, even while suffering steeper losses than last year’s tests. This year’s exercise measured the 31 biggest banks’ ability to maintain strong capital levels in a hypothetical recession marked by double-digit unemployment and a severe stock-market decline. The banks would collectively lose nearly $685 billion in the Fed’s imaginary worst-case recession... That would be more than last year, but all the banks would still remain above their minimum capital requirements.”

June 24 – New York Times (Matthew Goldstein): “Some Wall Street banks, worried that landlords of vacant and struggling office buildings won’t be able to pay off their mortgages, have begun offloading their portfolios of commercial real estate loans hoping to cut their losses. It’s an early but telling sign of the broader distress brewing in the commercial real estate market, which is hurting from the twin punches of high interest rates, which make it harder to refinance loans, and low occupancy rates for office buildings — an outcome of the pandemic.”

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

June 27 – Reuters (Guy Faulconbridge): “Russia is considering a possible downgrading of relations with the West due to the deeper involvement of the United States and its allies in the Ukraine war, but no decision had yet been taken, the Kremlin said… A downgrading of relations - or even breaking them off - would illustrate the gravity of the confrontation between Russia and the West over Ukraine after an escalation in tensions over the war in recent months.”

June 28 – Reuters (Ethan Wang, Ella Cao and Bernard Orr): “China urged the United States on Friday to stop tolerating and supporting ‘provocations’ by the Philippines, after Deputy Secretary of State Kurt Campbell expressed concern about Beijing's ‘destabilizing actions in the South China Sea’. China and the Philippines have recently traded accusations over ‘dangerous and illegal maneuvers’ affecting their respective vessels in the area around the Second Thomas Shoal, a disputed atoll in the busy waterway.”

De-globalization and Iron Curtain Watch:

June 28 – Bloomberg: “Chinese leader Xi Jinping called for the Global South to have a greater say in international affairs, stepping up his efforts to challenge US influence around the world. Developing nations should ‘be at the forefront of promoting the building of a community with a shared future for mankind,’ Xi said… The countries ‘need to work together to be a stabilizing force for peace’ and contribute to resolving conflicts around the world… In a veiled swipe at the US, Xi said the world ‘should never be allowed to listen to whoever has a strong arm.’”

June 25 – Financial Times (Madeleine Speed and Susannah Savage): “The world is headed for ‘food wars’ as geopolitical tensions and climate change push countries into conflict over waning supplies, said one of the world’s largest agricultural commodity traders. ‘We have fought many wars over oil. We will fight bigger wars over food and water,’ said Sunny Verghese, chief executive of Olam Agri, a Singapore-based agricultural trading house. Speaking at the Redburn Atlantic and Rothschild consumer conference last week, Verghese warned that trade barriers imposed by governments seeking to shore up domestic food stocks had exacerbated food inflation.”

Inflation Watch:

June 28 – CNBC (Jeff Cox): “An important economic measure for the Federal Reserve showed… inflation during May slowed to its lowest annual rate in more than three years. The core personal consumption expenditures price index increased just a seasonally adjusted 0.1% for the month and was up 2.6% from a year ago, the latter number down 0.2 percentage point from the April level… May marked the lowest annual rate since March 2021, which was the first time in this economic cycle that inflation topped the Fed’s 2% target. Including food and energy, headline inflation was flat on the month and also up 2.6% on an annual basis.”

June 27 – Reuters (Renee Hickman): “The price of a July Fourth cookout will be 5% higher in 2024 than the previous year, according to a survey from the U.S. Farm Bureau… The farmer and rancher organization said an Independence Day cookout for 10 people will cost an average of $71.22 this year versus $67.73 in 2023.”

June 25 – Bloomberg (Swati Pandey): “Australia’s inflation accelerated faster than expected for a third straight month in May, sending the currency higher as traders boosted bets that the Reserve Bank will resume raising interest rates at its next meeting. The monthly consumer price indicator climbed 4% from a year earlier, exceeding economists’ estimate of 3.8%... The trimmed mean core measure… advanced to 4.4% versus 4.1% a month earlier.”

Biden Administration Watch:

June 30 - New York Times (Katie Rogers and Peter Baker): “President Biden is trying to figure out how to tamp down Democratic anxiety after last week’s disastrous debate performance. President Biden’s family is urging him to stay in the race and keep fighting despite last week’s disastrous debate performance, even as some members of his clan privately expressed exasperation at how he was prepared for the event by his staff… Mr. Biden huddled with his wife, children and grandchildren at Camp David while he tried to figure out how to tamp down Democratic anxiety. While his relatives were acutely aware of how poorly he did against former President Donald J. Trump, they argued that he could still show the country that he remains capable of serving for another four years.”

June 27 – Wall Street Journal (Michael R. Gordon): “A Biden administration push to curtail worsening border clashes between Israel and Hezbollah in southern Lebanon is running into major headwinds because of the difficulty the U.S. faces in arranging a cease-fire in Gaza, U.S. officials say. The connections between the two fronts underscore the diplomatic conundrum facing the White House as it seeks to prevent a full-scale war that could draw in Iran and broaden the fighting well beyond Gaza. The White House insists that de-escalation along Israel’s northern frontier can’t be conditional on an elusive cease-fire in Gaza and is mounting a major diplomatic effort to defuse tensions in the north after weeks of unsuccessful pressure on Hamas to agree to a halt in the fighting in the south.”

Federal Reserve Watch:

June 28 – Bloomberg (Craig Torres and William Horobin): “Federal Reserve Bank of Richmond President Thomas Barkin said the inflation battle still hasn’t been won, and the US economy is likely to remain resilient as long as unemployment remains low and asset valuations high. ‘The US economy, particularly its consumer, has been much more resilient to rate increases than most expected and is likely to stay so as long as valuations remain elevated, and unemployment remains low,’ Barkin said…”

June 25 – Financial Times (Claire Jones): “A top Federal Reserve official has backed more interest rate rises if inflation sticks at its current level, saying immigration and aggressive fiscal stimulus are likely to keep US prices rising more quickly than in other rich economies. Michelle Bowman, one of the Fed’s governors and a voter on its rate-setting Federal Open Market Committee, said she remained ‘willing to raise’ borrowing costs again ‘should progress on inflation stall or even reverse’.”

June 25 – Bloomberg (Amara Omeokwe): “Federal Reserve Governor Michelle Bowman said she sees a number of upside risks to the inflation outlook, and reiterated the need to keep borrowing costs elevated for some time. ‘We are still not yet at the point where it is appropriate to lower the policy rate,’ Bowman said… ‘Given the risks and uncertainties regarding my economic outlook, I will remain cautious in my approach to considering future changes in the stance of policy.’ In a moderated discussion following her speech, the Fed governor said she doesn’t project any interest-rate cuts this year…”

U.S. Economic Bubble Watch:

June 28 – Wall Street Journal (Carol Ryan): “If you locked in a dirt-cheap mortgage when interest rates were low, congratulations for being one of the winners in America’s skewed housing market. Renters, realtors and recruiters are among those getting the raw end of the deal. High interest rates have had an unexpected impact on U.S. housing. Instead of triggering a fall in home prices, as happened with commercial real estate, costlier mortgages have pushed residential values higher. The value of the median existing home rose to a record $419,300 in May… Before the pandemic, it was $270,000. Blame the ‘lock-in’ effect of ultracheap mortgages secured when interest rates were low, which are trapping owners in their homes. It is an unforeseen consequence of years of easy money. Two-thirds of outstanding U.S. mortgages have a rate below 4%, according to Morgan Stanley’s housing strategist Jim Egan.”

June 28 – Wall Street Journal (Margot Amouyal): “More people are set to fly in the U.S. this Friday than ever before. That was also true on Sunday. And in late May. Over three million should make their way through airport security Friday to kick off a stretch of record-breaking travel around the July 4 holiday, according to the Transportation Security Administration. Seven of the 10 busiest air-travel days in the history of the TSA happened between May 23 and June 27. Fliers reset the record again last Sunday, when just under three million passed through U.S. airports. The numbers are still climbing. More than 32 million people are projected to fly between Thursday and July 8, a 5.4% rise over last year’s Independence Day holiday…”

June 25 – CNBC (Diana Olick): “Home prices set another record in April, even as mortgage rates rose and the supply of homes for sale increased. Usually, under those circumstances, prices would weaken, but today’s housing market is unlike any other in recent history. Prices in April rose 6.3% compared with the year-earlier month, according to the S&P CoreLogic Case-Shiller National Home Price Index. It marks the second straight month that the national index jumped at least 1% over its previous all-time high… It feeds into what is now one of the least affordable housing markets in U.S. history for both homeownership and renting… Home prices are now 47% higher than they were in early 2020, with the median sale price now five times the median household income...”

June 26 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes dropped to a six-month low in May as a jump in mortgage rates weighed on demand, offering more evidence that the housing market recovery was faltering… Supply was the highest in more than 16 years… New home sales declined 11.3% to a seasonally adjusted annual rate of 619,000 units last month, the lowest level since November... The percentage-based drop was the biggest since September 2022. The sales pace for April was revised up to 698,000 units, a nine-month high, from a previously reported 634,000 units.”

Fixed-Income Watch:

June 26 – Financial Times (Harriet Clarfelt and Antoine Gara): “US companies have been able to reprice almost $400bn of debt at lower interest rates this year due to booming investor appetite for junk loans, in an easing of financing conditions for corporate America. Even before the Federal Reserve cuts interest rates from a 23-year high, a number of borrowers in the US leveraged loan market have benefited from the equivalent of two quarter-point Fed cuts, according to strategists at Goldman Sachs. The $391bn of so-called repricing deals is the highest ever at this point in the year, according to… PitchBook LCD going back to 2002, equal to more than a quarter of the $1.34tn leveraged loan market.”

China Watch:

June 25 – Financial Times (Chen Long): “China’s real estate recession is three years old, and many investors are wondering when it will bottom out. By many measures, we have witnessed one of the greatest housing market corrections in economic history… On a rolling 12-month basis, China’s new home sales have fallen to 850mn square metres, or roughly 8.5mn apartment units… That is half the level of three years ago. The floor space of construction starts has fallen to 620mn sq m, two-thirds below the peak in early 2021. The share of real estate and construction activities has shrunk to 12.9% of GDP in 2023, the lowest since 2009, from 15.2% in 2020… On average, prices have come down by about 20% across China over the past three years, according to official and third-party data.”

June 23 – Wall Street Journal: “China’s foreign direct investment fell further in May, extending a streak of declines for the 12th straight month… China attracted 412.51 billion yuan ($56.81bn) worth of foreign direct investment in the January to May period, down 28.2% from the same period last year… That widened from the 27.9% drop recorded for the first four months of the year. The metric has been falling since June 2023.”

June 24 – Bloomberg: “China’s fiscal revenue shrank at the fastest pace in more than a year, fueling expectations that the government could make another rare mid-year budget revision to aid an economic recovery. Total revenues… fell 4.1% during January-May from last year to 11.36 trillion yuan ($1.6 trillion). That’s the steepest drop since February 2023…”

June 27 – Bloomberg: “The era of big paychecks for Chinese financiers is fast coming to an end as some of the industry’s biggest companies impose strict new limits to comply with President Xi Jinping’s ‘common prosperity’ campaign. The nation’s largest financial conglomerates have asked senior staff to forgo deferred bonuses and in some cases return pay from previous years to comply with a pre-tax cap of 2.9 million yuan ($400,000)… Vilified by Beijing as ‘hedonists’ over their lavish lifestyles, top-earning finance workers including investment bankers and fund managers have been among the hardest hit by Xi’s push for a more equal distribution of wealth. The $66 trillion financial industry has fallen under tighter Communist Party control, with banks and brokerages slashing pay and other perks.”

June 25 – Bloomberg (Shawna Kwan and Low De Wei): “In many parts of China, the warehouses and industrial parks that used to be a magnet for international investors are grappling with a surprising slowdown in business activity. Logistics hubs that were built in anticipation of a long-lasting boom in e-commerce, manufacturing and food storage are losing tenants, forcing building owners to slash rents and shorten lease terms… Average vacancy rates at logistics properties in east and north China are approaching 20%, the highest in years, according to real estate consultancies. More warehouses are being built, which is making the problem worse. ‘We are looking at a supply glut in logistics and industrial properties in China,’ said Xavier Lee, an equity analyst at Morningstar…”

June 26 – Reuters (Qiaoyi Li and Ryan Woo): “China's industrial profits rose at a sharply slower pace in May, official data showed on Thursday, underlining the struggles faced by the world's second-largest economy as weak domestic demand crimps overall growth. Earnings rose 0.7% year-on-year last month after a 4% increase in April while gains over the first five months also eased to 3.4% from 4.3% in the January-April period…”

June 24 – Bloomberg (Dorothy Ma and Pearl Liu): “A Hong Kong court has given Chinese developer Kaisa Group Holdings Ltd. seven more weeks to work on its debt restructuring plan in order to avoid being liquidated, but also warned this might be the company’s last chance. The amount of debt being restructured amounts to nearly $13 Billion…”

June 27 – Reuters: “China's treasury futures leapt to fresh highs on Thursday, while long-dated yields skirted record lows, as investors continued to plough money into bonds, shrugging off repeated warnings about risk from the central bank. Assets of Chinese bond mutual funds ballooned to a record 6.5 trillion yuan ($894.3bn) in May, up 40% from a year earlier… The rise reflects how lower deposit rates are steering savings into fixed income products amid stock market volatility.”

Central Bank Watch:

June 27 – Bloomberg (Daniel Hornak): “European Central Bank Governing Council member Peter Kazimir said one more reduction in borrowing costs is likely in 2024. ‘I think we could expect one more interest-rate cut this year,” the Slovak official said... ‘I still see a significant risk of rising inflation, which may not fully align with our expectations. I expect this pressure of possible price increases mainly from wage growth.’”

June 29 – Bloomberg (Zoe Schneeweiss): “European Central Bank Governing Council member Robert Holzmann warned that inflation’s tenacity is being miscalculated… ‘I truly believe that it’s being underestimated how sticky inflation is,’ he was cited as saying. The hawkish Austrian central banker was the sole dissenter against the ECB’s June interest-rate cut, something Holzman has since justified by saying that a data-dependent policy stance must adhere to signals from incoming economic data.”

Global Bubble Watch:

June 27 – Reuters (Lisa Barrington and Jeslyn Lerh): “Congestion at Singapore's container port is at its worst since the COVID-19 pandemic, a sign of how prolonged vessel re-routing to avoid Red Sea attacks has disrupted global ocean shipping - with bottlenecks also appearing in other Asian and European ports. Retailers, manufacturers and other industries that rely on massive box ships are again battling surging rates, port backups and shortages of empty containers, even as many consumer-oriented firms look to build inventories heading into the peak year-end shopping season. Global port congestion has reached an 18-month high, with 60% of ships waiting at anchor located in Asia, maritime data firm Linerlytica said...”

June 26 – New York Times (Patricia Cohen and Keith Bradsher): “The immediate trigger for the raging protest that gripped Kenya’s capital on Tuesday was a raft of proposed tax increases — additional shillings that ordinary citizens would owe their government. The underlying cause, though, are the billions of dollars their government owes its creditors. Kenya has the fastest growing economy in Africa and a vibrant business center. But its government is desperate to stave off default. The country’s staggering $80 billion in domestic and foreign public debt accounts for nearly three-quarters of Kenya’s entire economic output…”

Europe Watch:

June 25 – Bloomberg (Jorge Valero and Michael Nienaber): “The German government and its allies are succeeding in their efforts to block plans for new joint borrowing to finance critical European Union projects like defense. So-called defense bonds are likely to be off the table when European leaders gather Thursday to discuss their top priorities for the next five years… The push to shut down debate on shared debt has been helped by the turmoil in France, said the officials…”

Japan Watch:

June 25 – Reuters (Leika Kihara): “The Bank of Japan is dropping signals its quantitative tightening (QT) plan in July could be bigger than markets think, and may even be accompanied by an interest rate hike, as it steps up a steady retreat from its still-huge monetary stimulus. Hawkish hints delivered over the past week highlight the pressure the central bank faces in the wake of renewed yen falls, which could push inflation well above its 2% target by raising import costs.”

June 27 – Bloomberg (Erica Yokoyama): “Inflation in Tokyo picked up in June on the back of higher energy prices and industrial output rose more than expected in May, likely keeping the Bank of Japan on track to consider an interest rate hike as early as July. Consumer prices excluding fresh food rose 2.1% in the capital, accelerating from 1.9% in May… Tokyo’s figures are leading indicators of the national data to be released in July. In a separate set of data, Japan’s factory output rose 2.8% in May from April, beating the consensus call for 2% growth…”

June 27 – Reuters (Yoshifumi Takemoto): “Japanese retail sales rose 3.0% in May from a year earlier… That was above the median market forecast for a 2.0% rise.”

Emerging Market Watch:

June 28 – Bloomberg (Srinivasan Sivabalan, Carolina Wilson and Leda Alvim): “Latin America has flipped from emerging-market investors’ most-favored region to their least loved in just six weeks. Volatility began to creep back into foreign exchange markets in mid-May, leading them to question favorites like the Mexican peso and Brazilian real. Now, those positions have all but fallen apart, with the region leading global losses. The main issue is politics. Leaders have floated policy changes that investors worry will lead to overspending, scuppering the stability that drew many to the area.”

June 24 – Bloomberg (Maya Averbuch): “Mexico’s inflation accelerated more than expected in early June to move further above the central bank’s target… Consumer prices rose 4.78% in the first two weeks of the month from a year earlier, above the 4.73% median estimate…”

June 27 – Reuters (Daniel Ramos): “Bolivian armed forces pulled back from the presidential palace in La Paz on Wednesday evening and a general was arrested after President Luis Arce slammed a ‘coup’ attempt against the government and called for international support. Earlier in the day, military units led by General Juan Jose Zuniga, recently stripped of his military command, had gathered in the central Plaza Murillo square, home to the presidential palace and Congress. A Reuters witness saw an armored vehicle ram a door of the presidential palace and soldiers rush in.”

Leveraged Speculation Watch:

June 27 – Bloomberg (Michael Msika): “In a month when Nvidia Corp. briefly became the world’s largest company, hedge funds were ‘aggressively’ selling tech stocks, according to analysis from Goldman Sachs... This month’s net selling in the US tech sector is on track to be the largest on record going back in data since 2017, according to Goldman’s prime brokerage data. Semiconductor and semiconductor equipment stocks were the ones offloaded the most by hedge funds, followed by software and internet stocks.”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 25 – Axios (Andrew Freedman): “Extreme wildfire events during the past two decades more than doubled in frequency and magnitude globally, with the six worst seasons occurring during the past seven years, a new study found. Why it matters: Intense wildfires — as measured by satellites — are more difficult to fight, emit vast quantities of greenhouse gases and noxious smoke, and can cause disastrous consequences for communities… The new study, published… in the journal Nature Ecology and Evolution, found that the biggest upward trends in extreme wildfires are in temperate conifer biomes, such as in the western U.S., along with the boreal forests that ring the Arctic region.”

Geopolitical Watch:

June 25 – Financial Times (Editorial Board): “For years, China has asserted its claims over the South China Sea — a quest for control that is an affront to neighbours’ security, to global commerce and, according to a tribunal in The Hague, to international law. Yet Beijing has been adroit: using ‘salami-slicing’ tactics to expand its influence by incrementally building military installations, but never doing so at a pace that would force Washington to take military action. Recent spats with the Philippines, however, suggest that opposition to Beijing is rising. President Ferdinand Marcos Jr has directed his navy to better secure the Second Thomas Shoal, a contested reef that is far closer to the Philippines than to China… Beijing has, in turn, become more aggressive. Its paramilitary vessels have rammed Philippine ships and sprayed them with water cannons. Its coast guard has threatened Manila’s boats with knives and hatchets.”

June 25 – Financial Times (Demetri Sevastopulo): “The Philippine ambassador to Washington has warned that a conflict with China over a contested reef in the South China Sea could engulf countries across the Indo-Pacific, raising the spectre of a possible nuclear war. Jose Manuel Romualdez said the dispute with China over the Second Thomas Shoal had created an incendiary situation. In recent months, the Chinese coast guard has violently blocked Philippine boats from carrying out supply missions to marines stationed on the Sierra Madre, a marooned ship on the reef. ‘It’s the most dangerous time… weapons of mass destruction are very real,’ Romualdez told the Financial Times... ‘You have several countries, major powers that have large arsenals of nuclear power.’”

June 27 – Reuters (Neil Jerome Morales and Mikhail Flores): “The Philippines needs to do more than protest China's ‘illegal action’ against its navy during a routine resupply mission in the South China Sea last week, President Ferdinand Marcos Jr said… A Philippine sailor was injured on June 17 after what the Southeast Asian nation's military called ‘intentional-high speed ramming’ by the Chinese Coast Guard, an assertion China has disputed, saying the actions were lawful.”

June 28 – Reuters (Neil Jerome Morales and Mikhail Flores): “Japan and the Philippines' foreign and defence ministers will meet in Manila next month for talks that could include a breakthrough defence pact that would allow their military forces to visit each other's soil. Japanese foreign minister Yoko Kamikawa and Defence Minister Minoru Kihara will meet their Philippine counterparts on July 8 for a 2+2 meeting, Manila's foreign ministry said…”

June 29 – Reuters (Parisa Hafezi): “A moderate lawmaker will face Iran supreme leader’s protege in a run-off presidential election on July 5 after… no candidate secured enough votes in the first round of voting. Friday's vote to replace Ebrahim Raisi after his death in a helicopter crash came down to a tight race between a low-profile lawmaker Massoud Pezeshkian, the sole moderate in a field of four candidates, and former Revolutionary Guards member Saeed Jalili.”