Markets are certainly Unstable.
After trading at a record high of 42,427 on July 11th, Japan’s Nikkei 225 Index was 26.6% lower at August 5th lows. The Nikkei sank 19.5% in just three sessions, only to recover 20.0% in eight sessions. The Nikkei surged 9.3% this week.
From the July 10th closing high to August 5th intraday lows, the Semiconductor (SOX) Index sank 25% - before rallying almost 21% in nine sessions. The SOX was up 9.8% this week. Over this period, Nvidia slumped 33% - only to rally 35%. Nvidia was up 18.9% this week. From the July 10th high to the August 5th low, the Nasdaq100 (NDX) dropped 15.7% before rallying 12.2%. The NDX was up 5.4% this week, with the S&P500 3.9% higher.
The yen rallied 14% versus the dollar in 18 sessions – and has retreated 5% over nine sessions. Over this period, the Mexican peso sank 22% against the Japanese yen (at August 5th lows) and has since rallied about 13%. At August 5th highs, EM CDS had spiked 29 in three sessions to a nine-month high 197 bps – and has since retreated 29 bps.
The “core” has matched “periphery” instability. Ten-year Treasury yields traded at 4.29% on July 24th, and then were down 62 bps to 3.69% at August 5th lows. Ten-year yields were back above 4% on August 8th, only to sink back to 3.80% on the 14th – before closing this week at 3.88%. Two-year Treasury yields were at 4.54% on July 22nd, before sinking 89 bps to 3.65% on August 5th lows. The two-year yield ended the week unchanged at 4.05%.
At August 5th lows, the market was pricing 148 bps of Fed rate cuts by year-end. The market ended this week expecting 96 bps of cuts. In the Monday, August 5th panic, the market priced as much as 70 bps of rate reduction by next month’s meeting. The market ended the week expecting 33 bps.
It’s been notably wild at the periphery of the “core.” High yield CDS traded at 330 bps on August 1st, only to surge 73 to trade to 403 bps in early Monday, August 5th trading. High yield CDS sank 32 this week to 330 bps. High yield spreads to Treasuries spiked 73 bps – then retreated 62 bps. High yield spreads narrowed 20 this week to 319 bps.
I appreciate the Friday evening Bloomberg headline, “Wall Street Whiplash Schools Traders on Fragile Modern Markets.”
August 16 – Bloomberg (Denitsa Tsekova and Isabelle Lee): “Greed has overcome fear on Wall Street — and the market cataclysm that shook up the world in recent weeks may well prove a mere blip on long-term price charts. Yet the summer rout will also go down as a particularly extreme example of a trend that’s shaped modern finance for years now: Increasingly frequent shocks blowing up with little warning. As fast as volatility erupted, it has calmed, with the S&P 500 posting its biggest weekly gain since November, junk bonds scoring a week of gains and Treasury yields stabilizing… The VIX Index, Wall Street’s ‘fear gauge,’ has just broken two records: the fastest-ever spike of 25 points or more, and the fastest comeback from the spike… The reversals are a nightmare for anyone trying to attach sensible explanations to the motion of markets.”I don’t know about sensible, but I’ll have a go at an explanation. Years of Bubble excess have forged epic market distortions and associated acute fragility. The proliferation of levered strategies and speculation generally ensures instability is ready to erupt at any point. And to have an intense bout of de-risking just ahead of monthly options expiration makes for some interesting dynamics. Moreover, two key readings on inflation hit during expiration week. Many would have specifically hedged around these potentially market-moving data points.
I believe the unwind of yen “carry trade” leverage is a harbinger of things to come – the first serious crack in the global speculative Bubble. But I also appreciate that a bout of intense “risk off” hedging/shorting/bearish speculation creates dry tinder for the unwinding of hedges and brutal squeezes – and that these disorderly squeeze rallies have tended to take on lives of their own.
This is a Bubble unlike anything experienced in our lifetimes. It seems utterly determined to suck in every last person. There will be no easy profits betting on the timing of its demise. And it’s just refusing to cooperate with all these strategies – sophisticated and otherwise – aiming to hedge various market risks. Market dynamics will make it extremely difficult to be out of harm’s way when things finally unravel. There is today way too much speculative finance, while there’s also way too much hedging activity. This ensures extremely potent “risk on” and “risk off” – with each bout of de-risking innately boosting the likelihood of a precarious “risk on” reverberation. Fragility mounts.
Things get interesting here if “risk on” gathers momentum. All the talk of an economy falling into recession and of emergency Fed rate cuts seems even sillier after this week’s data. Weekly Unemployment Claims declining to a five-week low of 227,000 is not indicative of a labor market falling off a cliff.
And consumption, while not booming as before, has certainly not succumbed to a downward spiral. At 1.0%, growth in July Retail Sales was stronger-than-expected (0.4%). Sales excluding automobiles and gas increased 0.4%. Retail Sales were up 4.0% y-o-y, with sales excluding auto and gas 4.6% higher y-o-y. University of Michigan Consumer Expectations jumped 3.3 points to a stronger-than-expected 72.1 – a four-month high.
August 15 – Bloomberg (Jaewon Kang): “Walmart Inc. raised its sales guidance for the full year, buoyed by consumers buying necessities and seeking deals even as they curtail spending elsewhere. The… company said it now expects net sales to rise as much as 4.75% for the year, versus previous guidance for a gain of as much as 4%. It also raised its targets for operating income and profits. ‘We are seeing that the consumer continues to be discerning, choiceful, value-seeking’ and focusing on essentials, Chief Financial Officer John David Rainey said... ‘We are not seeing any incremental fraying of our customers’ financial health.’”NFIB Small Business Optimism rose 2.2 points to a stronger-than-expected 93.7 – the high all the way back to February 2022. The “Expect Better Economy” component jumped to the strongest reading (-7) since November 2020. “Plan to Hire” was unchanged at the high (15) since December.
And while Housing Starts and Building Permits were both weak, this data don't really dovetail with the Wall Street bullish narrative. Our nation is short of housing stock, and this shortage is a key factor (along with inflating compensation) in ongoing rent and housing inflation. Housing affordability is a serious issue. It’s worth noting that the CPI component “shelter costs” rose a stronger-than-expected 0.4% during July.
The U.S. economy is neither weak nor robust. It is, as Bubble Economy’s invariably become, maladjusted and highly unbalanced. Not coincidently, the global Bubble Economy is similarly maladjusted and unbalanced. China’s historic Bubble is deflating. Despite myriad stimulus measures and ongoing elevated Credit growth, the Chinese economy has yet to achieve a self-sustaining recovery. Recent data and developments indicate mounting downside risks.
August 13 – Bloomberg: “China’s bank loans to the real economy contracted for the first time in 19 years, a grim milestone that underscores why weak domestic demand has emerged as a major hurdle to the economy’s growth and recovery. Yuan-denominated bank loans that exclude those extended to financial institutions shrank by 77 billion yuan ($10.7bn) at the end of July from a month ago… That marked the first drop since July 2005, as more debt was repaid than taken out. Chinese households and businesses are rushing to repay debt as investment returns dwindle and real borrowing costs — adjusted for falling prices across the economy — remain elevated.”China’s July Credit data suggest economic stagnation, though July is typically a seasonally slow month (following the usual strong end to Q2). Total Aggregate Financing expanded $108 billion (to $55.3 TN), down huge from June’s $461 billion - but ahead of July 2023’s $75 billion. At $2.635 TN, y-t-d growth in Aggregate Financing is 14.6% below comparable 2023. Aggregate Financing expanded $4.521 TN, or 8.2%, over the past year.
Total Loans increased only $37 billion (to $35.1 TN), down from June’s $297 billion and below July ‘23’s $48 billion. At $1.889 TN, y-t-d Loan growth is 20% below comparable 2023. One must go back to 2017 for weaker lending.
Years of double-digit year-over-year Consumer Loan growth ended in 2022. Growth contracted ($30 billion) in July for the third contraction in six months. Year-to-date loan growth of $176 billion is only a third of comparable 2023 and a quarter of comparable 2021. Consumer Loans expanded only 3.8% over the past year, a far cry from the heady 15% level in 2021 and the 25% growth back in 2017.
With China’s great apartment Bubble now deflating, weak consumer borrowing is no surprise. But weakened corporate lending – in the face of myriad economic stimulus measures – should be cause for concern. Corporate Loans expanded only $18 billion in July, down from June’s $227 billion to the weakest reading back to 2019. At $1.552 TN, y-t-d Corporate Loan growth is running 15% below comparable 2023 – with the weakest expansion back to 2021. One-year growth remains elevated at 10.6% - but has decelerated sharply from the heady 14% y-o-y rate from last July.
But one category of Credit continues its rapid expansion. Government Bonds gained $96 billion during the month (to $10.3 TN), up from July 2023’s $57 billion. At $563 billion, y-t-d growth is 6% ahead of the year ago level.
A favorite Bubble maxim: When major Bubbles burst, things invariably turn out worse than even the most bearish analysts had expected. I have closely monitored China’s Bubble for years. I’ve referred to their apartment Bubble as the history’s greatest speculative Bubble – an unmitigated disaster. I’m seeing evidence that things are worse than I thought.
August 14 – Bloomberg: “At least 48 million homes in China have been sold before construction has been completed, suggesting the country’s property crisis won’t be resolved anytime soon, according to a report from Bloomberg Intelligence. The figure, based on pre-sales data from 2015 through the first half of this year, is bigger than Germany’s total housing stock in 2021. It presents a direct threat to developers’ revenue because people could start avoiding pre-sales of new developments and instead buy completed or second-hand housing, analysts Kristy Hung and Monica Si wrote.”Estimates have as many as 100 million unoccupied apartment units throughout China. Add to that another 48 million apartments sold but not yet delivered. With scores of developers lacking the resources to complete construction, millions of Chinese families fear their apartments will never be built and they will sacrifice their significant down payments. And with confidence shaken, along with an enormous inventory of previously sold units, buyers now avoid the developers. The death spiral continues for developers, apartment prices, and consumer confidence.
August 10 – Financial Times: “Multinational groups from Volkswagen to AB InBev and L'Oréal have sounded the alarm about demand in China, with the effects of a slowing economy exacerbated by shrinking appetite for foreign brands and intensifying domestic competition. In results this week WPP, the… advertising giant, cited a near one-quarter drop in Chinese sales in the past three months… ‘People expected China to turn a sharper corner after Covid than it has,’ said WPP chief executive Mark Read. Weak demand in China has been a feature of half-year earnings across much of the global consumer goods sector.”August 14 – Bloomberg: “The world’s biggest steel producer sounded the alarm about an industry crisis in China that carries the potential to ripple around the globe and plunge the sector into a deeper downturn. Conditions in China’s steel sector are like a ‘harsh winter’ that will be ‘longer, colder and more difficult to endure than we expected,’ China Baowu Steel Group Corp. chairman Hu Wangming told staff at the company’s half-year meeting, warning of a worse challenge than major traumas in 2008 and 2015.”Comments out of Beijing this week suggest additional stimulus will be forthcoming. Perhaps this helps explain this week’s pop in industrial metals prices. Whether Chinese officials realize it yet or not, holding financial and economic collapse at bay will require massive inflation of government debt and PBOC holdings. Other countries share a similar fate. Little wonder Gold closed Friday trading at a record $2,508.
I noted at the top the recent roundtrip moves in equities, CDS prices and many risk indicators. Bond yields are the glaring exception (the yen’s pullback is only somewhat less glaring). Ten-year Treasury yields traded at 4.46% in early July and were at 4.29% on July 24th. Yields closed panic-day August 5th at 3.79%. They ended this week down six bps to 3.88%.
I think I understand why Treasury yields are so low – and why the market is still pricing almost 100 bps of cuts by the December 18th FOMC meeting – three cuts (one 50bps) in four months, all around a historic election. And it’s not because of imminent recession. These markets are a big problem. Market structure is a critical issue. In short, speculative markets lack the capacity to adjust and correct. This only increases the risk of dislocations and crashes – as we saw inklings of on August 5th.
If “risk on” has legs, I ponder the stimulative impact of loose conditions, lower market yields, and rising equities prices on the U.S. Bubble Economy. I can imagine Chair Powell rewriting a few paragraphs for his Jackson Hole speech. Does he really want to throw fuel on this rally?
For the Week:
The S&P500 surged 3.9% (up 16.4% y-t-d), and the Dow rose 2.9% (up 7.9%). The Utilities added 0.8% (up 18.5%). The Banks jumped 3.9% (up 15.3%), and the Broker/Dealers surged 5.1% (up 19.2%). The Transports advanced 2.2% (down 1.4%). The S&P 400 Midcaps rose 2.6% (up 8.3%), and the small cap Russell 2000 jumped 2.9% (up 5.7%). The Nasdaq100 surged 5.4% (up 15.9%). The Semiconductors spiked 9.8% higher (up 23.8%). The Biotechs gained 1.7% (up 6.4%). With bullion jumping $77, the HUI gold index surged 8.7% (up 28.3%).
Three-month Treasury bill rates ended the week at 5.075%. Two-year government yields were unchanged this week at 4.05% (down 20bps y-t-d). Five-year T-note yields declined four bps to 3.76% (down 9bps). Ten-year Treasury yields fell six bps to 3.88% (unchanged). Long bond yields dropped eight bps to 4.14% (up 11bps). Benchmark Fannie Mae MBS yields fell nine bps to 5.22% (down 5bps).
Italian yields slipped a basis point to 3.63% (down 7bps y-t-d). Greek 10-year yields were unchanged at 3.32% (up 26bps). Spain's 10-year yields were little changed at 3.09% (up 10bps). German bund yields added two bps to 2.25% (up 22bps). French yields increased a basis point to 2.98% (up 42bps). The French to German 10-year bond spread narrowed one to 73 bps. U.K. 10-year gilt yields declined two bps to 3.93% (up 39bps). U.K.'s FTSE equities index rallied 1.8% (up 7.5% y-t-d).
Japan's Nikkei Equities Index surged 8.7% (up 13.7% y-t-d). Japanese 10-year "JGB" yields gained two bps to 0.88% (up 26bps y-t-d). France's CAC40 rose 2.5% (down 1.2%). The German DAX equities index surged 3.4% (up 9.4%). Spain's IBEX 35 equities index advanced 2.9% (up 8.4%). Italy's FTSE MIB index surged 4.0% (up 8.9%). EM equities were mostly higher. Brazil's Bovespa index jumped 2.6% (down 0.2%), and Mexico's Bolsa index gained 1.9% (down 5.8%). South Korea's Kospi index rallied 4.2% (up 1.6%). India's Sensex equities index added 0.9% (up 11.3%). China's Shanghai Exchange Index increased 0.6% (down 3.2%). Turkey's Borsa Istanbul National 100 index slipped 0.9% (up 31.5%).
Federal Reserve Credit was little changed last week at $7.135 TN. Fed Credit was down $1.755 TN from the June 22, 2022, peak. Over the past 257 weeks, Fed Credit expanded $3.408 TN, or 91%. Fed Credit inflated $4.324 TN, or 154%, over the past 614 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $17.5 billion last week to $3.296 TN - the low back to March 2023. "Custody holdings" were down $154 billion y-o-y, or 4.5%.
Total money market fund assets jumped $28.4 billion to a record $6.216 TN. Money funds were up $329 billion y-t-d and $646 billion, or 11.6%, y-o-y.
Total Commercial Paper fell $10.2 billion to $1.242 TN. CP was up $76 billion, or 6.5%, over the past year.
Freddie Mac 30-year fixed mortgage rates increased two bps off a 15-month low to 6.49% (down 73bps y-o-y). Fifteen-year rates rose three bps to 5.66% (down 99bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 7.06% (down 52bps).
Currency Watch:
For the week, the U.S. Dollar Index declined 0.7% to 102.463 (up 1.1% y-t-d). For the week on the upside, the South African rand increased 2.6%, the British pound 1.4%, the Australian dollar 1.4%, the Norwegian krone 1.2%, the Mexican peso 1.0%, the euro 1.0%, the South Korean won 1.0%, the New Zealand dollar 0.9%, the Swedish krona 0.7%, the Brazilian real 0.7%, the Singapore dollar 0.6% and the Canadian dollar 0.4%. On the downside, the Japanese yen declined 0.7%, and the Swiss franc slipped 0.1%. The Chinese (onshore) renminbi increased 0.13% versus the dollar (down 0.83% y-t-d).
Commodities Watch:
August 15 – Bloomberg (Jake Lloyd-Smith): “Iron ore hit the lowest level since 2022 on concern that global supply is running ahead of demand, with China’s steelmakers mired in a crisis and cutting output just as major miners boost exports. Futures sank for a fourth day in Singapore, falling below $94 a ton, as data from China showed mills… 9% lower than a year earlier. The country is the largest importer of seaborne iron ore, and sets the tone in the global market. Iron ore is one of the year’s biggest losers in commodities, with benchmark prices down by about a third.”
The Bloomberg Commodities Index increased 0.2% (down 3.0% y-t-d). Spot Gold surged 3.2% to a record $2,508 (up 21.6%). Silver rallied 5.5% to $28.9792 (up 21.8%). WTI crude slipped 19 cents, or 0.2%, to $76.65 (up 7.0%). Gasoline dropped 3.4% (up 10%), and Natural Gas dipped 0.9% to $2.123 (down 16%). Copper recovered 4.7% (up 8%). Wheat fell 2.3% (down 16%), and Corn lost 1.7% (down 21%). Bitcoin dropped $1,430, or 2.4%, to $58,970 (up 39%).
Middle East War Watch:
August 16 – Associated Press (Ravi Nessman): “International diplomacy to prevent the war in Gaza from spreading into a wider regional conflict intensified Friday, with the British and French foreign ministers making a joint trip to Israel while internationally mediated cease-fire talks in Qatar were expected to enter their second day. The new push for an end to the Israel-Hamas war came as the Palestinian death toll in Gaza climbed past 40,000…, and fears remained high that Iran and Hezbollah militants in Lebanon would attack Israel in retaliation for the killings of top militant leaders. ‘This is a dangerous moment for the Middle East,’ British Foreign Secretary David Lammy said. ‘The risk of the situation spiraling out of control is rising. Any Iranian attack would have devastating consequences for the region.’”
August 15 – Bloomberg (Natalia Drozdiak, Courtney McBride, Dan Williams and Donato Paolo Mancini): “Two weeks after Iran vowed to retaliate for the killing of a senior Hamas leader, the biggest surprise has been that the attack still hasn’t happened. As they’ve been saying for days, officials believe an attack could come at any time, and take one of many forms, all with the goal of sending a clear message to Israeli Prime Minister Benjamin Netanyahu while avoiding a destructive regional war or scuttling negotiations that could bring an end to the war in the Gaza Strip. As time ticks on, officials are prepared to counter an attack by positioning forces in the region and tracking the movements of Iran’s proxy forces in Syria, Lebanon and Yemen.”
August 9 – Associated Press (Bassem Mroue): “Lebanon’s militant Hezbollah group launched one of its deepest strikes into Israel in mid-May, using an explosive drone that scored a direct hit on one of Israel’s most significant air force surveillance systems. This and other successful drone attacks have given the Iranian-backed militant group another deadly option for an expected retaliation against Israel… ‘It is a threat that has to be taken seriously,’ Fabian Hinz, a research fellow at the International Institute for Strategic Studies, said of Hezbollah’s drone capability. While Israel has built air defense systems, including the Iron Dome and David’s Sling to guard against Hezbollah’s rocket and missile arsenal, there has been less focus on the drone threat.”
August 12 – Associated Press (Lolita C. Baldor): “U.S. Defense Secretary Lloyd Austin has ordered a guided missile submarine to the Middle East and is telling the USS Abraham Lincoln aircraft carrier strike group to sail more quickly to the area, as the U.S…. said it believes Iran or its proxies may launch a strike against Israel as soon as this week. The moves… come as the U.S. and other allies push for Israel and Hamas to achieve a cease-fire agreement that could help calm soaring tensions in the region following the assassination of Hamas political leader Ismail Haniyeh in Tehran and a senior Hezbollah commander in Beirut.”
August 13 – Reuters (Parisa Hafezi and Laila Bassam): “Only a ceasefire deal in Gaza stemming from hoped-for talks this week would hold Iran back from direct retaliation against Israel for the assassination of Hamas leader Ismail Haniyeh on its soil, three senior Iranian officials said. Iran has vowed a severe response to Haniyeh's killing, which took place as he visited Tehran late last month and which it blamed on Israel. Israel has neither confirmed or denied its involvement. The U.S. Navy has deployed warships and a submarine to the Middle East to bolster Israeli defenses.”
Ukraine War Watch:
August 16 – Reuters (Guy Faulconbridge and Olzhas Auyezov): “An influential aide to Russian President Vladimir Putin said… the West and the U.S.-led NATO alliance had helped to plan Ukraine’s surprise attack on Russia's Kursk region… The lightning incursion, the biggest into Russia by a foreign power since World War Two, unfurled on Aug. 6 when thousands of Ukrainian troops crossed Russia's western border… But the United States and Western powers, eager to avoid direct military confrontation with Russia, said Ukraine had not given advance notice and that Washington was not involved… Influential veteran Kremlin hawk Nikolai Patrushev dismissed the Western assertions… ‘The operation in the Kursk region was also planned with the participation of NATO and Western special services,’ he was quoted as saying… ‘Without their participation and direct support, Kyiv would not have ventured into Russian territory.’”
August 15 – BBC (Ian Aikman and Jonathan Beale): “Ukraine has set up a military administrative office in Russia's western Kursk region, where its surprise incursion into Russian territory continues… Gen Oleksandr Syrsky said the office would ‘maintain law and order’ and ‘meet the immediate needs’ of the population in the area. In a video posted on social media, Gen Syrsky is seen telling a meeting chaired by Ukrainian President Volodymyr Zelensky that the office has been created ‘on the territories controlled by Ukraine’. Russian Defence Minister Andrei Belousov has said Moscow will send reinforcements to ‘safeguard’ the population in the region.”
Market Instability Watch:
August 12 – Reuters (Carolina Mandl): “Portfolio managers at hedge funds have retrenched from some of their riskier positions after a volatile week for markets. A brutal selloff and recovery in global markets in the past week was triggered by the unwinding of billions of dollars worth of yen-funded trades and worries the U.S. economy was heading to a recession… The market rout has been painful for a number of hedge funds. Global macro quantitative funds posted losses between 1.5% and 2.5% between Aug. 1 and Aug. 5., while hedge funds focused on the technology sector were down between 2.5% and 3.5%, according to… PivotalPath's exposure model. ‘We did see some degree of deleveraging,’ said Edoardo Rulli, chief investment officer at UBS Hedge Fund Solutions... ‘Not panicking, but portfolio managers reducing positions.’”
August 13 – Financial Times (Robin Harding): “There is a bubble in the Chinese government bond market — or so, at least, the People’s Bank of China would fervently like to believe. A bubble would be a worrying risk to financial stability. The existence of such a risk, however, is far more palatable than the plausible alternative: that bond markets are sending out an increasingly dire signal of concern about the prospects for China’s economy… Over the past few weeks, the PBoC has been engaged in a strange mirror image of the quantitative easing campaigns conducted by many global central banks. Where others tried to push down long-term bond yields to stimulate their economies, the PBoC is battling to hold them up.”
August 10 – Financial Times (Harriet Clarfelt): “US junk loan funds suffered their biggest outflows since early 2020 during the recent plunge in global financial markets, as investors fretted about the impact of a potential economic slowdown on highly indebted companies. Investors pulled $2.5bn out of funds that invest in junk, or leveraged, loans during the week to August 7, according to… EPFR, with the withdrawals concentrated in exchange traded funds.”
August 15 – Bloomberg (Gowri Gurumurthy): “US junk bonds clinched gains for the seventh session in a row, driving yields down to a year-to-date low of 7.56% as US inflation eased for the fourth month on a year-over-year basis, reinforcing bets that the Federal Reserve will begin cutting rates in September.”
Global Credit Bubble Watch:
August 12 – Bloomberg (Abhinav Ramnarayan and Kat Hidalgo): “First the private credit firms came for the banking industry’s lucrative corporate loan business. Now they’re grabbing a chunk of their consumer-lending work. The pressing question for this thriving multi-trillion dollar industry is whether it has timed its latest incursion badly. The likes of Fortress Investment Group, KKR & Co. and Carlyle Group Inc. have all been hoovering up packages of consumer loans in Europe and the US over the past year… Private credit rose to prominence over the past decade by gobbling up much of the company financing traditionally provided by Wall Street, but its success has attracted a horde of new market entrants and the extra competition has pushed down its once stellar returns. As a result, firms have been foraging in new areas to try to put their vast pots of client cash to profitable use.”
August 12 – Bloomberg (Nic Querolo): “The challenging economics of higher education in the US are squeezing the finances of colleges and universities, driving more of them to struggle to pay their debt. Fifteen institutions have disclosed new technical or payment defaults this year, according to data from Municipal Market Analytics. That’s already just shy of last year’s total of 17, the largest number of impairments — as such events are called — since at least 2009, coming in at more than twice the previous record. The strains highlight the widening gap between the sector’s haves and have-nots…”
August 16 – Bloomberg (Katherine Doherty and Todd Gillespie): “A wealthy client at Bank of America Corp. put up his fine-art collection so he could borrow enough to buy a sports franchise. Another posted his cache of 19th century American landscapes to renovate his estate. Such is the burgeoning world of art lending — where pieces are used to secure loans, allowing their affluent owners to tap their collections for cash without having to part with prized possessions... ‘If you’re an owner and need liquidity now, you pause on selling, and instead borrow against your art, waiting for better market conditions,’ said Adriano Picinati di Torcello, global art and finance coordinator for Deloitte.”
AI Bubble Watch:
August 16 – Wall Street Journal (Ashley Cai): “After 15 years of relatively flat power demand, projections of electricity use are surging. Companies are extending aging fossil-fuel plants to accommodate the expected hike in demand, which is undermining U.S. goals to cut carbon emissions. Most power companies raised their demand forecast in 2023, and some have indicated higher revisions are expected. Artificial-intelligence data centers, manufacturing, and broader electrification are the primary drivers behind this projected increase, with data centers accounting for 30% of the expected growth, according to a Goldman Sachs report... Energy companies have long been expecting a rise in demand from the electrification of the U.S. economy, but they have been caught off guard by the demand surge from the sudden rise of AI, said Michelle Solomon, a senior policy analyst at Energy Innovation. ‘Utilities around the country are kind of going into panic mode,’ she said.”
August 12 – Wall Street Journal (Jinjoo Lee): “The AI-driven, energy-hungry data-center boom was bound to bring up uncomfortable questions: Will it raise energy bills and, if so, who will shoulder the costs? America’s largest wholesale power market is starting to see the results. Rapid data-center build-out is increasing power demand just as a wave of older power-plant retirements is reducing supply in PJM Interconnection, the independent system operator that manages the wholesale power market spanning 13 states including Virginia, Pennsylvania and Illinois. It said two weeks ago that its latest capacity auction yielded prices of $269.92 per megawatt-day for most of its footprint, about nine times the clearing price a year ago.”
August 12 – Financial Times (June Yoon): “When will artificial intelligence start to replace human workers in a more significant way? This is a question that has become the subject of much speculation... But long before we need to worry about that happening, a human worker shortage may turn out to be the biggest obstacle to the AI industry… The problem is that making a chip factory is not as simple as setting up a new factory that assembles smartphones in another country… Chip plants require highly skilled employees, with master’s and doctoral degrees in science and engineering, to run them. Even the construction of a chip fabrication plant itself requires specialist workers. The large investment and subsequent build out of the US chip sector means more than 160,000 new job openings in engineering and technician support alongside additional openings in related construction craft jobs, according to McKinsey... Yet just around 1,500 engineers join the chip industry each year. For chip technicians, that figure is even lower with just about 1,000... In the next five years, the demand for these workers is forecast to reach 75,000. Meanwhile, the US chip manufacturing workforce has fallen 43% from its peak in 2000... At the current rate, the shortage of engineers and technicians could reach as high as 146,000 workers by 2029.”
Bubble and Mania Watch:
August 13 – Bloomberg (Michael Sasso): “The median home price in Silicon Valley topped $2 million in the second quarter, the first time a US metropolitan area has exceeded that threshold and a symptom of the nation’s persistent affordability challenge. Prices for existing single-family houses in the San Jose-Sunnyvale-Santa Clara area rose 11.6% in the second quarter from a year earlier to $2.08 million… Neighboring San Francisco ranked second among most expensive metro areas, with the median home price climbing 8.5% over the past year to about $1.45 million. Seven of the top 10 priciest markets were in California. The steep home-price appreciation in the Golden State reflects a broader problem with affordability. Across the US, annual home-price growth for existing one-family houses rose 4.9% to $422,100 in the second quarter, compared with a 5% year-over-year advance in the prior period.”
August 10 – Yahoo Finance (Dani Romero): “The price tag of a starter home is now over $1 million in more than 100 cities and towns across the country, according to… Zillow, another sign of the ongoing affordability challenges in the housing market. ‘When affordability gets strained, people want the cheapest thing,’ Orphe Divounguy, a senior economist at Zillow, told Yahoo Finance... ‘And as people wanted more and more starter homes, the growth rates in the price of starter homes basically skyrocketed.’ According to Zillow, the average starter home nationwide is priced at $196,611, within reach for a median-income household. Zillow defines starter homes as those in the lowest third of home values in a given region. However, starter home prices have soared 54.1% over the past five years, exceeding the 49.1% rise in the price of all homes during the same timeframe.”
August 16 – Wall Street Journal (Katherine Clarke): “It was once a price threshold associated only with luxury properties, conjuring images of pools, tennis courts and other high-end amenities. Now, 8.5% of U.S. homes have an estimated value of $1 million or more, a record high, according to a new analysis by brokerage Redfin… That is up from 7.6% a year ago and more than double the 4% recorded before the pandemic.”
August 16 – Bloomberg (Jennifer Epstein): “A $115 million purchase of a duplex high above New York’s Central Park in June ended a nearly two-year drought for the city’s ultra-luxury real estate market. The closing was ultimately a turning point. Less than a month later, a nearby five-story penthouse went for $135 million. With more than four months of the year still to go, home sales of $100 million or more are on pace to set a new record in the city. Billionaires globally have seen their wealth boom, generating momentum for major home purchases… Nationwide, there have been six deals at $100 million or above this year through the end of July, just three shy of a record set in 2021.”
August 12 – New York Times (Maureen Farrell): “Given the opportunity to park money with the world’s largest private equity firms, ordinary investors rushed in. Getting out might not be so easy. The private equity firms began to seek out smaller investors almost a decade ago. It was a major shift for firms like Blackstone, Starwood Capital Group and KKR that had previously been funded by enormous pensions, endowments and sovereign wealth funds. But it was also a way for the big fund managers to grow their assets and rake in ever larger fees. For the individual investors, who were directed to the new private funds by their wealth managers, the chance to invest with Wall Street’s elite was too good to pass up — even if it came with rules, like limits on withdrawals that would mean that getting money back in tough times might be a challenge.”
August 15 – Bloomberg (Lu Wang): “Count corporate America as one of the big dip-buyers last week as US stocks fell into their worst correction since October. As the S&P 500 headed for its fourth straight weekly decline…, Goldman Sachs Group Inc.’s unit that executes share buybacks for clients saw record orders, with volume spiking to 2.1 times last year’s daily average. A buying spree also occurred with Bank of America Corp.’s corporate clients, whose share repurchases picked up speed and stayed above seasonal levels for 22 weeks in a row… Companies’ willingness to scoop up their own shares during market stress underscores how reliable a source of support they can be at a time when angst over economic growth and equity valuations is resurfacing.”
August 15 – Bloomberg (Anders Melin): “The chief executive officer switch atop Starbucks Corp. is poised to cost the coffee chain at least $120 million, and possibly more, as the board bets on a change of leadership to turn the business around. Brian Niccol will start next month with a pay package worth $113 million, a large part of which is equity to replace awards from his prior employer that he’ll have to relinquish… The package will likely make him one of the highest-paid CEOs in the US…”
August 15 – Bloomberg (Lu Wang): “As sports gambling takes off in the US, turning quickly into a multi-billion dollar business, a worrisome trend is starting to emerge: Americans appear to be yanking money out of their stock-brokerage accounts to fund their online betting. This is the key finding laid out in a recent working paper titled Gambling Away Stability: Sports Betting’s Impact on Vulnerable Households. It claims to find evidence that for every dollar spent on the recreational activity… net investments in stocks and other financial instruments dropped by just over $2. The phenomenon is most acute among the most financially strained households, potentially the same ones attracted to get-rich-quick schemes in financial markets like meme stocks and speculative options.”
August 11 – Wall Street Journal (Neil Mehta): “San Francisco’s hospitality business imploded during the pandemic. Now, its hotel owners are drowning in bad debt as never before. In the city’s metropolitan area, the delinquency rate among commercial mortgage-backed security loans for the lodging sector skyrocketed to 41.6% in June from 5.7% in June 2023, according to… Trepp. It is the largest increase across the country’s 25 largest metro areas. The sharp drop-off in visitors since before the pandemic is squeezing the city’s hospitality sector. Weekend hotel occupancy in June, a rough proxy for leisure travel, is down around 22% since 2019…”
De-globalization and Iron Curtain Watch:
August 13 – Bloomberg: “Tighter US sanctions have curbed the flow of yuan to Russia, forcing local lenders to borrow the currency at a higher rate from the central bank. China became Russia’s main trade partner after the Kremlin was severed from Western markets by penalties unleashed in response to the 2022 invasion of Ukraine. Amid Moscow and Beijing’s ‘no-limits friendship,’ around $240 billion of imports and exports are now priced almost entirely in yuan. But there’s growing evidence Chinese banks are afraid of being penalized for indirectly funding Russia’s war machine under the latest, expanded US sanctions... Payment issues were at the top of the agenda when Russia President Vladimir Putin met with Chinese President Xi Jinping.”
Inflation Watch:
August 14 – CNBC (Jeff Cox): “Inflation rose as expected in July, driven by higher housing-related costs… The consumer price index… increased 0.2% for the month, putting the 12-month inflation rate at 2.9%. Economists… had been looking for respective readings of 0.2% and 3%. Excluding food and energy, the core CPI came in at a 0.2% monthly increase and a 3.2% annual rate, meeting expectations. The annual rate is the lowest since March 2021, while the core is the lowest since April 2021… Headline inflation was 3% in June. A 0.4% rise in shelter costs was responsible for 90% of the all-items inflation increase. Food prices climbed 0.2% while energy was flat.”
August 14 – Yahoo Finance (Dani Romero): “The latest Consumer Price Index (CPI) report revealed one category where inflation continues to be stubbornly sticky: housing costs… Shelter costs ticked up 0.4% month over month in July, higher than June’s 0.2% rise. Housing inflation accounted for nearly 90% of the monthly increase in CPI in July. ‘The most disappointing aspect of this report was the shelter data,’ Omair Sharif, founder of the research firm Inflation Insights, wrote… Rent and owners' equivalent rent each rose 0.5% and 0.4%, respectively, on a monthly basis in July, slightly higher than June’s 0.3%. Owners' equivalent rent is the hypothetical rent a homeowner would pay for the same property. ‘On the surface that’s not a good read because it calls into question the more recent string of lower readings,’ Sharif added.”
August 13 – CNBC (Jeff Cox): “A key measure of wholesale inflation rose less than expected in July… The producer price index… increased 0.1% on the month… Excluding volatile food and energy components, the core PPI was flat. Economists… had been looking for an increase of 0.2% on both the all-items and the core readings. A further core measure that also excludes trade services showed a rise of 0.3%. On a year-over-year basis, the headline PPI increased 2.2%, a sharp drop from the 2.7% reading in June.”
August 13 – Reuters (Timothy Aeppel): “James Kirsh expects the cost of the property and casualty insurance for his family-owned foundry in Wisconsin that makes cast iron parts for tractors and other equipment to at least double when it's up for renewal this fall. He’s been told it could triple. The problem is that his long-time insurer - Acuity - has told his insurance agent it no longer wants to cover factories like his... So they'll need to piece together coverage from multiple, higher-cost alternative providers. ‘It’s a mess for the whole industry,’ said Kirsh, the company’s president… The cost of insuring everything from homes to cars in the U.S. has surged in recent years, driven by factors including rising costs of car and home repairs and more storm damage amid climate change.”
August 12 – Wall Street Journal (Harriet Torry and Terell Wright): “Inflation is slowing. So why doesn’t it feel that way? After all, price increases for lots of items, like cable and shampoo, are indeed cooling. Prices for vehicles, gasoline, TVs and plane tickets have even dropped over the past year. And the overall pace of year-over-year inflation… was down to 3% in its most recent reading—much, much lower than the recent high of 9.1% that it clocked two years ago. But prices for many of the things that are hard to do without are still posting eye-watering increases. Rent and electricity bills are up 10% or more over the past two years, and car-insurance costs are up nearly 40%... Shoppers might be able to trade down from prime steak to cheaper cuts of meat at the supermarket, but they can’t really do the same thing with the water bill.”
August 15 – Bloomberg (Alex Tanzi): “New Yorkers are having trouble keeping up with debt payments as their incomes get squeezed by one of the country’s highest inflation rates, according to a new study. Consumer debt in the biggest US city has been growing faster than household earnings, and the cost of servicing that debt is increasingly weighing on residents, according to research… by the Office of the New York City Comptroller and the Federal Reserve Bank of New York.”
August 12 – Reuters (Dan Burns): “U.S. consumers' medium-term inflation expectations eased substantially in July even as their near- and longer-term outlooks for price pressures held steady, although households are increasingly worried about staying current on their debt, a Federal Reserve Bank of New York report showed... The median three-year inflation expectation dropped to 2.3% from 2.9% in June to register its lowest reading since the New York Fed launched the monthly Survey of Consumer Expectations in 2013. The one-year and five-year outlooks held steady at 3.0% and 2.8%...”
Federal Reserve Watch:
August 14 – Financial Times (Colby Smith): “A top Federal Reserve official has said he is ‘open’ to an interest rate cut in September as he warned that the US central bank can’t ‘afford to be late’ to ease monetary policy amid signs of cooling in the labour market. Atlanta Fed president Raphael Bostic… told the Financial Times that as price pressures eased officials also needed to be conscious of their mandate of maintaining full employment. ‘Now that inflation is coming into range, we have to look at the other side of the mandate, and there, we’ve seen the unemployment rate rise considerably off of its lows… But it does have me thinking about what the appropriate timing is, and so I’m open to something happening in terms of us moving before the fourth quarter.’”
U.S. Economic Bubble Watch:
August 12 – Reuters (Dan Burns): “The U.S. government recorded a $244 billion budget deficit for July, up 10% from a year earlier, but accounting for calendar differences, the gap would have been $45 billion narrower… Federal debt service costs… continue to rise. Interest on the debt was up 21% to $89 billion last month, and the weighted average interest rate was up 49 bps to 3.33%... For the first 10 months of the 2024 fiscal year, the U.S. deficit fell 6% to $1.517 trillion from $1.614 trillion in the same period of fiscal 2023… Year-to-date receipts were up 11% to $4.085 trillion, while outlays for the period were up 6% to $5.602 trillion…”
August 15 – CNBC (Jeff Cox): “Consumer spending held up even better than expected in July as inflation pressures showed more signs of easing… Advanced retail sales accelerated 1% on the month… Economists… had been looking for a 0.3% increase. June sales were revised to a decline of 0.2% after initially being reported as flat. Excluding auto-related items, sales increased 0.4%, also better than the 0.1% forecast… Gains in sales were propelled by increases at motor vehicle and parts dealers (3.6%), electronics and appliance stores (1.6%), and food and beverage outlets (0.9%). Miscellaneous retailers saw a plunge of 2.5% while gas stations saw receipts climb just 0.1% and clothing stores were down 0.1%.”
August 15 – Reuters (Lucia Mutikani): “The number of Americans filing new applications for unemployment benefits dropped to a one month-low last week…, dashing financial market hopes that the Federal Reserve could cut interest rates by 50 bps next month… Initial claims for state unemployment benefits dropped 7,000 to a seasonally adjusted 227,000… Economists… had forecast 235,000 claims for the latest week.”
August 13 – Reuters (Lucia Mutikani): “U.S. small-business confidence jumped to the highest level in nearly 2-1/2 years in July… The National Federation of Independent Business (NFIB) said… its Small Business Optimism Index rose 2.2 points to 93.7 last month, the highest reading since February 2022… The report joined a survey last week from the Institute for Supply Management showing a rebound in its nonmanufacturing PMI in easing concerns that the economy was either in recession or on the cusp of a downturn…”
August 13 – Associated Press (Mae Anderson): “Consumers spent more at small businesses in July, a rebound fueled by strong sales of general merchandise and health and personal care products. The Fiserv Small Business Index rose 1 point to 141 after a 4 point decline in June. The figure is derived from point-of-sale transaction data, including card, cash, and check transactions in-store and online across about 2 million U.S. small businesses. ‘Following modest declines in June, consumer spending rebounded nicely in July to help many small businesses start the second half of the year strong,’ said Jennifer LaClair, head of merchant solutions at Fiserv. Compared with July of last year, sales rose 3.5% and number of transactions rose 3.3%.”
August 15 – Financial Times (Sean Vanatta): “An odd thing happened earlier this month: US credit card debt declined. To be more precise, the Federal Reserve’s G-19 consumer credit series, released on August 7, showed a decrease from May to June in seasonally adjusted revolving consumer credit owned… The June fall was the sharpest in three years and these were the first two declines since 2021. For the sake of this hook, let’s just agree that credit card debt went down. This decline is remarkable because, for the past three years, credit card borrowing has been on a tear. From April 2021 to May 2024, revolving consumer debt jumped from $971bn to $1.35tn. That’s a 39% increase over just three years, the largest increase ever to the highest level ever.”
August 16 – Reuters (Lucia Mutikani): “U.S. single-family homebuilding fell sharply in July as higher mortgage rates and house prices kept prospective buyers on the sidelines… Single-family housing starts, which account for the bulk of homebuilding, tumbled 14.1% to a seasonally adjusted annual rate of 851,000 units last month... Homebuilding has now declined for five straight months. Single-family housing starts dropped 14.8% on a year-on-year basis in July… Residential investment, which includes home building, contracted in the second quarter after rising for three consecutive quarters. Permits for future construction of single-family homes slipped 0.1% to a rate of 938,000 units in July.”
August 14 – Bloomberg (Vince Golle): “US mortgage refinancing surged last week by the most since the early days of the pandemic as borrowing costs continued to drift lower. The Mortgage Bankers Association’s refinancing index jumped 34.5% to a more than two-year high of 889.3. Mortgage applications to purchase a home climbed 2.8% in the week ended Aug. 9, the largest advance since the first week of June.”
August 11 – Wall Street Journal (Nicole Friedman and Alana Pipe): “Today’s housing market is the most difficult in decades, a great frustration for millennials and Gen Zers looking for a starter home. Baby boomers can relate. Home-buying affordability dropped last fall to the lowest level since September 1985, and it fell near that level again in June. In 1985…, millions of Americans of the baby boomer generation were in their late 20s and early 30s, the prime first-time home-buying years. They also found themselves priced out of the market. But because buyers in the mid-1980s had much more housing supply available, homes became more affordable as mortgage rates fell in subsequent years. First-time home buyers these days have it considerably harder. While affordability is likely to improve by the end of the year if borrowing rates ease and inventory continues to grow, it won’t get significantly better for home buyers without a lot more home building, economists say.”
August 15 – Bloomberg (Scott Carpenter): “The average size of mortgages has increased substantially as part of a refinancing surge fueled by lower interest rates, according to Brean Capital. MBA data out Wednesday showed the average size of a conventional refi loan surging to $404k from $307k, strategist Scott Buchta wrote… That’s a ‘key indicator’ showing that many newer borrowers with larger loan sizes and fresher documentation have entered the market…”
Fixed-Income Bubble Watch:
August 14 – Reuters (Jeff Cox): “Leveraged loan deals are expected to pick back up after a stabilization in markets over the past week, although some investors say they are cautious about junk-rated loans if the economy weakens. Borrowers pulled back on leveraged loan deals last week... A total of six leveraged loans worth $3.3 billion sold last week, which falls well short of the $10 billion weekly average this year and is the worst week for issuance outside the holiday-shortened first week of July, according to PitchBook LCD data.”
China Watch:
August 16 – Reuters (Ellen Zhang and Ryan Woo): “China's Premier Li Qiang told a cabinet plenary session on Friday that great efforts must be made to boost the economy and the country will focus on stimulating consumption, state media reported. Li added that China will look at measures to boost household income in both rural and urban areas, and will make support appropriate to the needs of different groups of people, state media reported.”
August 15 – Bloomberg: “China’s central bank chief pledged further steps to support his nation’s economic recovery, while cautioning that it won’t be adopting ‘drastic’ measures. Chinese state media published a pair of interviews with People’s Bank of China Governor Pan Gongsheng… The PBOC will strengthen efforts to effectively implement monetary and financial policies that have been introduced this year, and further steps will be made in accordance with the requirements of the State Council, Pan said”
August 14 – Bloomberg: “China’s first bank loan contraction in nearly two decades has fanned fears the world’s No. 2 economy is careening toward a ‘balance sheet recession’ as Japan did decades ago. A plunge in new corporate borrowing combined with households preferring to repay debt saw bank loans shrink last month for the first time since July 2005. That deepened China’s years-long battle with weak credit demand, as a property slump spurs caution on buying homes and expanding investment.”
August 14 – Bloomberg: “China’s economic malaise extended into the third quarter, drawing renewed attention to the need for more fiscal stimulus as domestic demand falters under a prolonged housing downturn. A surprise slowdown in fixed-asset investment to 3.6% in the first seven months of the year was among the biggest takeaways from data released on Thursday. Retail sales beat expectations largely on a seasonal uptick… though they remained far below pre-pandemic growth. Industrial production softened slightly even as it continued to outpace consumption.”
August 14 – Bloomberg (Liangping Gao and Ryan Woo): “Chinese steelmakers slashed output last month as woeful demand forced steep cuts on an industry contending with a collapse in margins. Steel production in July plunged about 9% on both the month and the year to 82.94 million tons, the lowest figure reported in 2024… That leaves the total over the first seven months at 613.72 million tons, 2.2% off last year’s pace. The protracted downturn in the real estate market and shrinking factory activity have pushed domestic prices sharply lower, and inflamed trade tensions by unleashing a flood of Chinese metal onto world markets.”
August 15 – Reuters (Liangping Gao and Ryan Woo): “China's new home prices fell at their fastest pace in nine years in July, as a slew of support policies failed to stabilise prices and restore confidence in the struggling property sector. The prolonged housing market slump has weighed heavily on the world's second-largest economy and its consumers… New home prices fell 4.9% from a year earlier - the sharpest drop since June 2015 and deeper than a 4.5% slide in June…”
August 15 – Bloomberg: “Chinese cities saw an increase in the number of foreclosed homes in 1H, with second-tier cities seeing the biggest jump... The number of residential properties that were put up for auction via courts climbed to over 202,000 units in 1H, up 12% y/y... Cities of Zhengzhou, Xiamen, Fuzhou and Suzhou all saw the number of such homes put up for auction soar by over 40% y/y. Nationwide, 17% of homes put up for auction by courts were sold, down 7 percentage points from a year ago. Such homes were on average sold at a discount of 33%, 3 percentage points greater than the discount seen a year ago…”
August 16 – Bloomberg: “More Chinese solar manufacturers are facing insolvency as acute oversupply and a fierce price war forces companies to sell below cost. A unit of Zhejiang Bangjie Holding Group Co. is the latest firm to fall foul of creditors, after a local court was asked to put the firm into bankruptcy because it missed its debt repayments… The proceedings against Zhejiang Bangjie follow court orders last month against two other small solar makers… that will force the companies to restructure. China’s world-leading solar industry is going through a phase of brutal consolidation to rebalance supply and demand.”
August 11 – Bloomberg: “Foreign investors pulled a record amount of money from China last quarter, likely reflecting deep pessimism about the world’s second-largest economy. China’s direct investment liabilities in its balance of payments dropped almost $15 billion in the April-June period, marking only the second time this figure has turned negative… It was down about $5 billion for the first six months. Should the decline continue for the rest of the year, it would be the first annual net outflow since at least 1990, when comparable data begins. Foreign investment into China has slumped in recent years after hitting a record $344 billion in 2021.”
August 12 – Bloomberg: “Share transactions in China shrank to their lowest level in over four years, as a local bond rally hit fever pitch in a weakening economy. Turnover on the Shanghai and Shenzhen bourses fell to a combined 496 billion yuan ($69.1bn) on Monday, the thinnest since May 2020. That was also the lowest versus China’s entire market capitalization since late 2019. As the world’s second-largest stock market is on track for its fourth consecutive year of losses, an unprecedented housing crisis has further limited investors’ options, prompting surging demand for government bonds that has alarmed regulators.”
August 16 – Bloomberg: “Jimmy Yang believed he was making a boring but safe investment when he bought convertible bonds of China Grand Automotive Services Group Co. in May. The country’s 801 billion yuan ($119bn) convertible debt market was long an oasis of small but sound returns, providing shelter even during last year’s brutal market downturn. But by mid-July, the 38-year-old lost half of his 1 million yuan investment… ‘I’d told myself it’s safe because it had an AA+ rating,’ said Yang, a finance director at a manufacturing company…, adding that he’d been emboldened by past investment successes. He is one of many investors hit by a downturn in China’s equity-linked bonds, a market now gripped by fears of default. This week alone, Bluedon Information Security Technologies Co. and LingNan Eco & Culture-Tourism Co. announced defaults on their convertible bonds.”
August 12 – Bloomberg (Shawna Kwan and Jinshan Hong): “Hong Kong’s real estate slump is choking off one of the financial hub’s most important sources of government revenue. For decades, the city’s government generated massive income from auctioning off land to cash-rich developers as prices soared. That helped enable Hong Kong’s low-tax system, which has been crucial to its business hub status. The arrangement largely worked — until recently. A protracted property downturn is now undermining the model. Falling home prices and rising office vacancies over the past few years have caused developers to either stop bidding for sites, or offer exceptionally low prices for plots in public tenders.”
Central Banking Watch:
August 13 – Reuters (Lucy Craymer): “New Zealand's central bank slashed its benchmark rate for the first time since March 2020 and flagged more cuts over coming months, saying inflation was nearing its 1% to 3% target in a sharp dovish tilt that sparked a sell-off in the kiwi dollar. The decision to reduce rates by 25 bps to 5.25% came almost a year ahead of the Reserve Bank of New Zealand's (RBNZ) own projections, taking some market players by surprise…”
August 14 – Financial Times (Olaf Storbeck): “Wages in the Eurozone’s largest economy are rising at their fastest rate this century, fuelling disquiet among some economists about next month’s expected interest rate cut from the European Central Bank. Negotiated wages in Germany are expected to shoot up by 5.6% in 2024, based on deals agreed between January and June, according to… WSI, a trade union think-tank. The pay increase, in real terms, will be the fastest since their records began in 2000… The ECB’s calm in the face of higher pay pressure comes from a belief that workers are still ‘catching up’ after their purchasing power was eroded by inflation.”
Europe Watch:
August 12 – Reuters (Michel Rose and Elizabeth Pineau): “The Paris Olympics delivered a dazzling summertime success that charmed the world and reaffirmed French national pride. But the hangover will be tough. With Sunday's closing ceremony over, President Emmanuel Macron must now deal with a self-created political crisis that he had swept under the carpet until the Games were over. Talks over government jobs and budget cuts loom, with voter anger sure to follow. ‘Now we have to wake up from this beautiful dream,’ said Christine Frant… ‘Such a shame we’re going to return to our day-to-day routine, with no government, squabbles in parliament, while here it was all about joy, sharing.’”
August 14 – Bloomberg (Eamon Akil Farhat and Paul Tugwell): “Extreme heat in parts of Spain and France is giving way to storms and flood warnings, while Greece is bracing for more blazes after the huge wildfire near Athens was brought under control. Orange alerts are in place for a swath of Europe from southeast Spain to the Swiss Alps as thunderstorms bring the risk of flash floods. Parts of the French Pyrenees could see 4 inches of rain on Wednesday. Climate change is increasing the frequency and intensity of extreme weather events, including heat waves, violent storms and wildfires.”
Japan Watch:
August 14 – Reuters (Tim Kelly and Sakura Murakami): “Japan's Prime Minister Fumio Kishida said… he would step down next month, succumbing to public disaffection over political scandals and rising living costs that marred his three-year term, and setting off a scramble to replace him. ‘Politics cannot function without public trust,’ he told a press conference… ‘I made this heavy decision thinking of the public, with the strong will to push political reform forward.’ The LDP will hold a contest in September to replace him as president of the party, and, by extension, as prime minister.”
August 13 – Bloomberg (Yoshiaki Nohara and Takashi Umekawa): “Bank of Japan Governor Kazuo Ueda will be called to parliament on Aug. 23 to answer questions on monetary policy, likely facing questions related to a July 31 rate hike amid criticism that his hawkish tone last month contributed to recent market turmoil… Finance Minister Shunichi Suzuki will also attend the session. The two are set to appear later at an upper house committee on the same day… The move was initiated by the main opposition party, which criticized the BOJ for last month’s rate increase on grounds that it contributed to the yen’s surge and a rout in stocks.”
August 15 – Reuters (Makiko Yamazaki and Satoshi Sugiyama): “Japan's economy expanded by a much faster-than-expected annualised 3.1% in the second quarter, rebounding from a slump at the start of the year thanks to a strong rise in consumption and backing the case for another near-term interest rate hike. The Bank of Japan had forecast that a solid economic recovery will help inflation sustainably hit its 2% target, and justify raising interest rates further after it hiked them last month in its continued quest to exit years of massive monetary stimulus. The increase… compared with a median market forecast for a 2.1% gain, and followed an upwardly revised 2.3% contraction in the first quarter…”
August 12 – Reuters (Kentaro Sugiyama and Makiko Yamazaki): “Japan's wholesale inflation accelerated in July, with the pace of year-on-year growth the fastest in 11 months…, as a weak yen pushed up commodity import bills that were already high. The corporate goods price index (CGPI)… rose 3% in July from a year earlier…, matching a median market forecast. The index, at 123.1, hit a record high for the eighth straight month. It accelerated from June's 2.9% increase.”
August 14 – Reuters (Junko Fujita): “Trading using borrowed money, or margin trading, in Japan's stock market fell sharply last week as investors were forced to dump stocks during the Nikkei index's biggest fall in nearly 40 years. Margin trading… is popular among Japanese retail investors. Margin trading accounts for about 70% of retail trading value… The value of shares bought on margin fell by 907 billion yen ($6.15bn) to 4 trillion yen in the week ended Aug.9, from the previous week's 4.87 trillion yen…”
Leveraged Speculation Watch:
August 15 – Wall Street Journal (Peter Rudegeair): “Ken Griffin wants visitors to the offices of his $63 billion hedge-fund firm, Citadel, to have no doubt about its standing atop Wall Street. ‘#1 Most Profitable Hedge Fund Manager of All Time’ reads the message emblazoned on elevator doors at its Miami headquarters. It refers to an unofficial industry ranking Citadel scaled following a one-year record haul of $16 billion in 2022. Griffin is eager to tell the world about that, too. ‘We made more money than any firm has ever made in the history of capital markets,’ Griffin said of Citadel and a sister company, Citadel Securities. ‘This is where people come when they want to change the world of finance.’”
August 9 – Reuters (Karen Brettell): “Speculators raised their net short bets on five-year Treasuries to the largest on record in the latest week, while bearish bets on 10-year Treasury futures were the largest since February, according to… the Commodity Futures Trading Commission… Net short bets on five-year note futures grew to 1,688,076 contracts in the week ending August 6, up from 1,656,038 the previous week . Short bets on 10-year note futures rose to 776,208 contracts, from 728,470…”
Geopolitical Watch:
August 11 – Wall Street Journal (Editorial Board): “Iran is so close to a nuclear bomb that we need to rethink how we watch for it. That’s the conclusion of a new report by veteran nuclear inspector David Albright and fellow researcher Sarah Burkhard at the Institute for Science and International Security. Both are highly regarded and fact-based analysts. Even as Iran increased its enrichment of uranium, the stance of U.S. intelligence… had long been that weaponization has been paused. No longer. The Office of the Director of National Intelligence’s July report now says Iran has ‘undertaken activities that better position it to produce a nuclear device, if it chooses to do so.’ What kind of activities? How long would it take to produce that device? We aren’t told. If we were, Mr. Albright and Ms. Burkhard write, ‘some uncomfortable truths would come out: Iran can do it way too quickly, and initial activities to build the bomb could be difficult to detect and could predate any effort to enrich up to weapon-grade.’”
August 13 – Reuters (Karen Lema and Mikhail Flores): “The Philippines said… an arrangement with China to avoid confrontations during resupply missions to troops at a disputed shoal may be subject to future review, days after their latest flare-up elsewhere over the South China Sea. The two countries reached a ‘provisional agreement’ in July after repeated altercations near the Second Thomas Shoal, where China has been sharply criticised by western nations for aggression in blocking Philippine efforts to resupply troops aboard a navy ship it intentionally grounded 25 years ago.”
