Wednesday, June 30, 2021

Thursday's News Links

[Yahoo/Bloomberg] U.S. Stocks Rise on Cyclicals Strength; Oil Jumps: Markets Wrap

[CNBC] U.S. crude oil prices top $75 a barrel, the highest since 2018

[Reuters] Dollar hits 3-month high, eyes on payrolls

[CNBC] Weekly jobless claims total hits new pandemic-era low of 364,000

[Reuters] Analysis: Ghosts of crises past haunt policymakers and markets

[Yahoo/Bloomberg] Volatility Set for Revival as Stimulus Peaks, Virus Flares

[Yahoo/Bloomberg] Averting Inflation Crisis Turns on Something Fed Doesn’t Control

[Reuters] China June factory growth slows on COVID-19, supply chain snags - Caixin PMI

[Reuters] Asia factories see momentum weaken on rising costs, new COVID curbs

[Reuters] Euro zone factory growth, input costs rose at record pace in June -PMI

[Yahoo/Bloomberg] ECB to Hold Special Strategy Meeting Next Week, Omfif Says

[Reuters] Xi hails 'new world' as China marks Communist Party centenary

[Reuters] China's Xi pledges 'reunification' with Taiwan, gets stern rebuke

[CNBC] Xi at Communist Party anniversary: China won’t accept ‘sanctimonious preaching’ from others

[Bayside/FT] US, Japan hold war games amid escalating tensions between China and Taiwan

[Bloomberg] A Housing Frenzy Is Sparking Bidding Wars From New York to Shenzhen

[Bloomberg] Road Trippers Face Occasional Empty Pump And Pricey Gasoline

[Bloomberg] Australia’s Red Hot Housing Market Is Showing Signs of Cooling

[WSJ] Drought’s Toll on U.S. Agriculture Points to Even-Higher Food Prices

[WSJ] Propane Prices Are Cooking, Signaling Higher Winter Heating Bills for Many

[WSJ] Car Market Is Expected to Cool Amid Dearth of Vehicles on Lots

[WSJ] Russia’s Putin Challenges U.S. Leadership, Asserts Military Might

[FT] Record Skew Index shows nagging investor nerves on US stocks rally

[FT] China advances in challenge to dollar hegemony

[FT] Xi Jinping marks Chinese Communist party’s centenary with warning to rivals

[FT] Private equity breaks 40-year record with $500bn deals

Wednesday Evening Links

[Yahoo/Bloomberg] Asia Stocks Eye Cautious Start; Dollar Strengthens: Markets Wrap 

[CNBC] Stock futures are flat as S&P 500 sits at record, Wall Street set to kick off second half of 2021

[CNBC] Chip shortage causes Ford to slash vehicle production at several plants in July

[Reuters] Deaths surge in U.S. and Canada from worst heatwave on record

[Yahoo/Bloomberg] NYC Urges Power Conservation to Avoid Outages as Heat Peaks

[Reuters] Japan business mood rises fourth straight quarters led by exports - tankan

Wednesday Afternoon Links

[Yahoo/Bloomberg] U.S. Stocks Wobble at End of Historic First Half: Markets Wrap

[Reuters] S&P 500 hovers near record high as private payrolls jump

[CNBC] Lumber prices dive more than 40% in June, biggest monthly drop on record

[Reuters] Fed's Kaplan says he wants taper to start 'soon,' be gradual

[CNBC] Home sales rebounded last month to highest level since 2005, shocking even the Realtors

[Reuters] Analysis: Fast and furious first half of 2021 keeps financial markets at full throttle

Tuesday, June 29, 2021

Wednesday's News Links

[Yahoo/Bloomberg] US Stocks Steady as Europe Slips; Bonds Gain: Markets Wrap

[Yahoo/Bloomberg] Oil Set for Best Half Since 2009 as Demand Recovery Accelerates

[Reuters] U.S. private payrolls increase solidly in June- ADP

[CNBC] ‘Great Resignation’ gains steam as return-to-work plans take effect

[Reuters] The living's not easy for worker-hungry U.S. businesses this summertime

[CNBC] As housing boom begins to fizzle, weekly mortgage demand falls nearly 7%

[Reuters] China's factory activity expands at a slightly slower pace in June - official PMI

[Reuters] Growth in China's services sector slows in June - official PMI

[Yahoo/Bloomberg] China Industry Grinds to a Halt to Celebrate Communist Centenary

[Yahoo/Bloomberg] Global Regulators Try Again to Eliminate Money-Market Hazards

[Yahoo/Bloomberg] Eurodollar Spread Bets Heat Up Before Payrolls: Liquidity Watch

[Reuters] Taiwan tells U.S. it hopes to sign free trade deal

[Yahoo/Bloomberg] U.S. Commits to Regular Talks as Taiwan Pushes for Trade Deal

[Reuters] Key remarks from Russian President Putin's annual phone-in

[Bloomberg] Authers: Hot Property Markets Are a Real Inflation Risk

[Bloomberg] Haldane Says U.K. at ‘Dangerous Moment’ as Inflation Heads to 4%

[Bloomberg] China Evergrande Downgraded at Moody’s Despite Debt Progress

[NYT] Fed Unity Cracks as Inflation Rises and Officials Debate Future

[WSJ] Commercial Debt Backed by Lone Borrowers and Properties Rebounds

[WSJ] California’s Drought Leads to Cutbacks in Marin County but Not in San Diego

[FT] Rising China bond yields prompt fears over coming surge in defaults

[FT] El-Erian: The inherent instability of the Goldilocks market consensus

[FT] Worst yet to come for developing economies, BIS warns

Tuesday Evening Links

[Yahoo/Bloomberg] Asian Stocks Climb After U.S. Record; Oil Advances: Markets Wrap

[Reuters] Global shares edge lower on new COVID-19 outbreaks in Asia 

[Reuters] Fed's Waller: 2022 rate hike possible, wants MBS taper first

[Yahoo/Bloomberg] Northwest Heat Wave Triggers Blackouts and Buckles Highways

[Bloomberg] The Heat Dome Boiling Northwest U.S. Already Has Clear Climate Link

Tuesday Afternoon Links

[Yahoo/Bloomberg] Stocks Drift Sideways Amid Valuation, Virus Angst: Markets Wrap

[Reuters] Tech stocks propel S&P 500, Nasdaq to fresh highs

[AP] Consumer confidence up in June, highest level since pandemic

[Reuters] U.S. home prices rose in April at fastest pace in 15 years - S&P/Case-Shiller

[Reuters] U.S., European suppliers scramble to secure Christmas goods as cargo delays worsen

[Yahoo/Bloomberg] Wild Weather Plagues North America Grain Crops as Demand Surges

[FT] US home prices rise at fastest pace in more than 30 years

Monday, June 28, 2021

Tuesday's News Links

[Yahoo/Bloomberg] Stocks Mixed Amid Variant Fears; Dollar Climbs: Markets Wrap

[Reuters] Stock markets on edge over Delta virus variant, Fed policy

[Yahoo/Bloomberg] Oil Slides With Covid Concerns Resurfacing Ahead of OPEC+ Meet

[CNBC] Home prices surged in April at a ‘truly extraordinary’ rate, S&P Case-Shiller says

[Yahoo/Bloomberg] Stimulus ‘Pandexit’ Is Next Big Challenge as Recovery Quickens

[Politico] White House targets corporate giants in draft executive order

[CNBC] Top investment strategist David Roche warns the Fed could burst a market ‘bubble’

[CNBC] These charts show the dramatic increase in China’s debt

[Reuters] Pandemic boom drives UK house prices up by most since 2004

[Yahoo/Bloomberg] World Bank Warns South Asia Risks ‘Hidden Debt’ Financial Crises

[Yahoo/Bloomberg] Deadly Delta Variant Starts to Ripple Through Emerging Markets

[Reuters] Undeclared conflict? America's battles with Iran-backed militia escalate, again

[Bloomberg] Hubbard and Kohn: Our Financial Early Warning System Is Broken

[Bloomberg] Bank of Japan Cuts Some Bond Purchase Targets Over Next Quarter

[NYT] Boom Times for Lawyers as Washington Pursues Big Tech

[WSJ] Car Dealers Are Selling More Vehicles Above the Sticker Price

[WSJ] Archegos Is a Warning for Aggressive Financial Markets, Says BIS

[FT] Bundesbank boss calls on ECB to scale back bond purchases

[FT] Archegos revealed flaws of markets that still need to be tackled

[FT] Reflation trade unwind wrongfoots several big-name hedge funds

[FT] What’s fuelling China’s new online nationalists

[FT] Taiwan’s unity cracks under Chinese disinformation onslaught

Monday Evening Links

[Yahoo/Bloomberg] Asia Stocks Seen Mixed Amid Curbs, Treasuries Rise: Markets Wrap

[CNBC] Stock futures are flat after S&P 500 closes at a record

[Reuters] Oil falls 2% on rising COVID-19 cases, ahead of OPEC+ talks

[Reuters] McConnell ups pressure on Biden, Democrats over U.S. infrastructure

[Reuters] Fed's Barkin says U.S. has made "substantial further progress" on inflation goal

[Reuters] NY Fed's Williams says major questions need to addressed as digital currencies emerge

[Reuters] Pacific Northwest cities shatter heat records again, life grinds to a halt

[Reuters] U.S. troops come under fire in Syria after strikes against Iran-backed militias

[Bloomberg] Rubin Sees ‘Material Risk’ High U.S. Inflation Will Be Enduring

Monday Afternoon Links

[Reuters] Nasdaq at record high on a boost from tech stocks

[Reuters] Global shares flat, dollar eases ahead of U.S. jobs data

[Yahoo Finance] Hot housing market could threaten labor market recovery: Boston Fed's Rosengren

[Reuters] McConnell ups pressure on Biden, Democrats over infrastructure

[CNBC] El-Erian says the Fed is behind on inflation and risks another recession if it is forced to catch up

[Reuters] ECB hawks and doves spar as tapering debate fires up

[Yahoo/Bloomberg] U.S. Complicates Nuclear Talks by Hitting Iran-Backed Groups

[Bloomberg] New Water Wars Are Coming to the American West

Sunday, June 27, 2021

Monday's News Links

[Yahoo/Bloomberg] US Stocks Steady as Europe Drops; Dollar Gains: Markets Wrap

[Reuters] Global shares sink as COVID-19 cases spike

[Yahoo/Bloomberg] Oil Steady With OPEC+ Hike Expected to Lag Behind Demand Revival

[Reuters] Fed's Rosengren says U.S. can't afford housing market 'boom and bust' - FT

[Reuters] Stretched global supply chain means shortages on summer menus

[Reuters] Emergency ECB stimulus could end next March: Holzmann

[Reuters] U.S. shale industry tempers output even as oil price jumps

[AP] Unprecedented: Northwest heat wave builds, records fall

[Yahoo/Bloomberg] China Asks Citic Group to Examine Huarong’s Finances

[Yahoo/Bloomberg] Bank of Russia Considers Rate Increase of Up to 1 Percentage Point

[Reuters] Hong Kong police arrest former Apple Daily journalist at airport - media

[Reuters] U.S. warplanes strike Iran-backed militia in Iraq, Syria

[Reuters] Blinken: 'Untenable' for 10,000 IS fighters still to be held in Syria

[CNBC] China’s aggressive behavior on the global stage is an ‘immense danger,’ says analyst

[Bloomberg] By One Measure, March 2020 Was Worse Than the Financial Crisis

[Bloomberg] U.S. Job Market Begins a ‘Weird Summer,’ With Choppy Recovery

[Bloomberg] India Shifts 50,000 Troops to China Border in Historic Move

[WSJ] Fed Officials Debate Scaling Back Mortgage-Bond Purchases at Faster Clip

[FT] US cannot afford housing market ‘boom and bust’, warns Fed official

Sunday Evening Links

[CNBC] Stock futures rise as S&P 500 looks to add to record

[Yahoo/Bloomberg] Asia Stocks to Open Steady; Aussie Dollar Declines: Markets Wrap

[Yahoo Finance] June jobs report, Consumer confidence: What to know this week

[Yahoo/Bloomberg] Fed’s Rosengren Says 2022 Rate Hike in Play as Job Market Heals

[AP] Bipartisan infrastructure deal back on track after walk-back

[Reuters] Republicans Senate negotiators ready to move forward on infrastructure after Biden walkback

[Reuters] Indian commerce minister: 'Arrogant' U.S. ecommerce giants flout our laws

[Bloomberg] Record Stock Sales From Money-Losing Firms Ring the Alarm Bells

[Bloomberg] Brazil’s Bolsonaro Linked to Alleged Corruption in Covid Vaccine Buying

[WSJ] How Mutations Have Shaped the Covid-19 Pandemic

Sunday's News Links

[Yahoo/Bloomberg] Peak Central Bank Support Marks New Phase for Global Recovery

[Yahoo/Bloomberg] U.S. Jobs to Be Scrutinized for Signs of Faster Hiring: Eco Week

[Reuters] 'It's unbearable': U.S. Pacific Northwest swelters in heat wave

[Bloomberg] One in Five Young Adults Is Neither Working Nor Studying in U.S.

[Bloomberg] The Global IPO Market Has Never Been Hotter Than It Is Right Now

[WSJ] During Covid-19, Most Americans Got Richer—Especially the Rich

[WSJ] Far From Texas, Huge Gas Bills Stoke Anger After February Freeze

[FT] Top Republican warns Fed risks being ‘behind the curve’ on inflation

[FT] China tech listings drop sharply as Beijing cracks down on sector

[FT] US-Taiwan talks to focus on supply chains and digital trade

Friday, June 25, 2021

Weekly Commentary: Mester on Financial Stability

When I refer to financial stability, I mean a financial system that is resilient to shocks. That is, one in which banks and nonbank financial institutions not only remain solvent but also continue to lend to creditworthy businesses and households during a significant economic downturn, and one in which financial markets continue to intermediate in an orderly fashion during periods of stress.” Cleveland Fed President Loretta Mester, June 22, 2021

I read with keen interest Mester’s presentation, “Financial Stability and Monetary Policy in a Low-Interest-Rate Environment.” With rates locked a zero and the Fed’s balance sheet inflating $4.332 TN, or 115%, in 93 weeks to surpass $8.1 TN, there is no more pressing issue than the interplay of monetary policy and Financial Stability.

From one perspective, the March 2020 crisis showcased a financial system resilient to shocks. A well-capitalized banking system continued to lend, while there was little concern for financial institution solvency. Meanwhile, financial markets clearly did not “continue to intermediate in an orderly fashion.” When I refer to Financial Stability, for starters I mean a financial system that does not require monumental liquidity injections and bailouts that clearly come with dangerous unintended consequences. Speculative Bubbles are reflective of financial instability.

June 24 – New York Times (Jeanna Smialek): “As Federal Reserve Chair Jerome H. Powell and Treasury Secretary Steven Mnuchin scrambled to save faltering markets at the start of the pandemic last year, America’s top economic officials were in near-constant contact with a Wall Street executive whose firm stood to benefit financially from the rescue. Laurence D. Fink, the chief executive of BlackRock, the world’s largest asset manager, was in frequent touch with Mr. Mnuchin and Mr. Powell in the days before and after many of the Fed’s emergency rescue programs were announced in late March. Emails… along with public releases, underscore the extent to which Mr. Fink planned alongside the government for parts of a financial rescue that his firm referred to in one message as ‘the project’ that he and the Fed were ‘working on together.’”

Curiously, Mester’s discussion of the March 2020 instability episode fails to mention the dislocation that unfolded throughout the ETF complex. “ETF” or “exchanged-traded funds” cannot be found in her paper. “Bubble” not included. Nor was there a mention of the Fed’s hasty decision to purchase corporate debt and fixed-income ETF shares. Mester specifically addressed that “$125 billion flowed out of prime money market funds in March 2020.” Yet not a peep regarding the run on ETF shares, which risked a full-fledged collapse across the equities and fixed-income markets.

Mester: “The pandemic also revealed some structural issues in the U.S. Treasury market, one of the most important and most liquid markets in the global financial system. In March 2020, amid great uncertainty about the emerging global pandemic, many investors sought to move into cash and began liquidating their positions, even their positions in U.S. Treasuries, which are usually viewed as safe-haven assets. Pressure to sell was widespread and overwhelmed the dealers who play a central role in this market by intermediating between buyers and sellers. Stresses rose to a level that necessitated aggressive actions by the Fed, including purchasing large volumes of Treasury securities and agency mortgage-backed securities and conducting operations in the repo market.”

Again, the omissions are noteworthy: No mention of hedge funds, leveraged speculation or the derivatives industry. The most crucial market in the world was in complete disarray, revealing acute financial instability. What were the root causes? What role did monetary policy play? And what is the Fed doing to address market structural shortcomings? Mester: “While these actions were able to re-establish smooth functioning in the Treasury market, they did not address the underlying structural issues that propagated the stresses.”

I do Credit Mester for stating the obvious: “I would like to see financial stability considerations explicitly incorporated into the monetary policy framework, with an acknowledgment that nonconventional monetary policy has the potential to increase the risks to financial stability…”

Mester: “Given the limits on cyclical macroprudential tools in the U.S., focus is better placed on improving the resiliency of the financial system’s structure across the business and financial cycles.” “My second recommendation recognizes that much of our regulatory, supervisory, and macroprudential apparatus is focused on banks, yet financial activity is increasingly moving outside of the banking system.”

After the role the “shadow” non-banks played in the 2008 crisis, the lack of Fed focus is inexcusable.

Mester: “[Money market fund] outflows forced the funds to redeem their commercial paper holdings, thereby creating more stress in short-term funding markets. These runs were severe enough to require the Fed to intervene with emergency facilities. Reforms to the structure of these funds to reduce the risk of runs are now being considered by U.S. regulators.”

Arguably, the risk of a systemically destabilizing run is today greater for the ETF complex than with money market funds. Again, there's no mention of exchanged-traded funds. Apparently, no “reforms to the structure of these funds to reduce the risk of runs” are being contemplated.

The sordid process unfolded over the past few decades. These days, debt doesn’t matter, and deficits don’t matter. QE to the tune of $120 billion a month in the face of a booming economy and bubbling securities and housing markets is accepted as enlightened policy. Zero rates – and near-zero returns for savers – are perfectly acceptable. Stocks always go up. The Fed is prepared with its liquidity backstop to rescue the marketplace in the event of any trouble. QE is a proven commodity – no longer unconventional.

There is a monumental flaw in contemporary central banking doctrine, one not debated and seemingly not even recognized: it is perilous for central banks to manipulate the securities markets as their chief mechanism for managing financial conditions.

Traditionally, central banks adjusted short-term funding markets to, on the margin, either encourage or discourage bank lending. The banking system for generations was the key instrument for regulating system lending conditions and Credit availability, along with the overall monetary backdrop.

The Fed’s focus began to shift during the prolonged Greenspan era. Especially in response to early-nineties banking system impairment (post-eighties Bubbles), the Greenspan Fed started using “activist” monetary policy to achieve specific market outcomes. It orchestrated a steep yield curve to recapitalize the banking system. It employed lower interest-rates to bolster bond prices and, as such, market demand for Credit instruments. This loosening of financial conditions worked to promote bond issuance and, as such, Credit growth. The “Maestro” learned to wield incredible market power with small rate adjustments or, more often, with mere comments.

I found it confounding at the time that such a momentous change in monetary policy doctrine evolved without as much as a debate. The new regime proved a godsend for the leveraged speculating community. Speculative leverage ballooned, creating fragilities and repeated crises. This required ever-grander market bailouts. Each crisis backdrop afforded the Fed the opportunity to take another incremental “activist” leap. Of course, the markets beckoned for as much – and who would argue against Fed intervention with the markets and economy in distress? One of these days, our central bank will be held accountable.

The Fed was essentially pegging low interest rates, nurturing asset inflation and (with the help of the GSEs) backstopping marketplace liquidity. As one would expect, this stoked risk-taking and leveraging. It also momentously impacted the derivatives marketplace.

The new Fed policy regime allowed the derivatives complex to operate under the assumption of liquid and continuous markets, despite the reality of a long history of markets suffering recurring bouts of illiquidity and discontinuity. Basically, the Fed’s regime fundamentally altered pricing for market risk “insurance.” Think in terms of selling flood insurance with the Federal Reserve right there to safeguard against torrential rainfall. The availability of cheap market protection promoted risk-taking and leveraging, fundamentally altering market behavior and structure.

The upshot was a historic Bubble that burst in 2008 – providing a golden opportunity for the Fed to add QE to its expanding arsenal. It’s no exaggeration saying, “the world will never be the same.” At that point, the Fed was wedded to market intervention and manipulation to maintain the ultra-loose financial conditions necessary to hold Bubble collapse at bay. Not only did the Bernanke Fed expand Federal Reserve Credit by $1.0 TN, but the reflation strategy focused on coercing savers into the risk markets. While there was some protest within the economic community, consumer price inflation was at the time viewed as the major risk. It was not the time to fret prospective market excess and the inflation of historic Bubbles.

I warned of a “Moneyness of Risk Assets” dynamic, where activist Fed policymaking was distorting the perception of price and liquidity risks (equities and corporate Credit, in particular). Just as Greenspan was a godsend to the leveraged speculation community and derivatives players, Bernanke’s policy regime was tailor-made for the newest innovation in financial speculation: exchange-traded funds.

The Fed had one last chance to rein in the Bubble. It announced its non-conventional policy “exit” plan in 2011, with expectation to pare back some of its unprecedented balance sheet expansion. But instead of exiting, the Fed again doubled asset holdings over three years to $4.5 TN. And the policy evolution went beyond adding massive amounts of liquidity in a non-crisis environment. With essentially no fanfare, Bernanke sank deeper into activist policy quicksand in 2013: “If financial conditions were to tighten to the extent that they jeopardized the achievement of our inflation and employment objectives, then we would have to push back against that.”

Dr. Bernanke was essentially telegraphing the Fed would not tolerate the consequences of weak securities markets – let alone a correction or bear market. It was monumental. The Fed was no longer only backstopping the markets against crisis dynamics. Our central bank wanted loose financial conditions, and it was ready and willing to do "whatever it takes" to ensure inflating markets. Fed mandates could only be accomplished through robust securities markets. At that point, the Fed was managing financial conditions in name only. It directly orchestrated booming markets to accomplish its economic objectives.

It’s all been fairly predictable since then: escalating speculative excess, over-leveraging, Bubble Dynamics, and recurring market instability. And each bout of market turmoil ensured only more outlandish Fed market intervention: Powell’s “pivot,” the 2019 “insurance” stimulus in the face of booming stock markets and unemployment at multi-decade lows, and then the Monetary Fiasco unleashed in March 2020. The Fed’s balance sheet has about doubled in 15 months, while our central bank ventured into buying corporate bonds and ETFs. Importantly, it thoroughly convinced the marketplace that “whatever it takes” can be literally interpreted when it comes to sustaining Bubble markets. Manias were spawned in precarious “Terminal Phase Excess.”

Now what do they do? The Fed and global central bank community have inflated myriad historic Bubbles. They’ve irreparably distorted market prices and function. The upshot is momentous risk distortions throughout – with particular emphasis on unprecedented leveraged speculation, the derivatives complex and the ETF industry. The money market funds should be the least of the Fed’s concerns.

Goodhart’s (British economist Charles Goodhart) Law is germane: “When a measure becomes a target, it ceases to be a good measure.” The Fed’s overarching objective must be to ensure monetary stability. To focus on managing financial conditions through securities markets interventions is to propagate monetary instability. It only nurtures price distortions, speculative leverage, asset inflation, Bubbles, resource misallocation, and financial and economic instability. Moreover, such a policy course will favor a segment of the population and economy. It will spur inequality and put the Fed’s institutional credibility in jeopardy.

I appreciate Loretta Mester’s attention to the critical issue of Financial Stability. Unfortunately, these types of discussions are moot if they exclude the Fed’s now longstanding role in promoting market distortions and Bubbles. Speculative finance is inherently destabilizing. It is self-reinforcing on the upside and highly disruptive on the downside. Fed policy has evolved to the point of essentially guaranteeing loose financial conditions and, as such, promoting speculative finance and overheated Bubble markets. This flawed policy regime is anathema to Financial Stability.

For the Week:

The S&P500 rallied 2.7% (up 14.0% y-t-d), and the Dow surged 3.4% (up 12.5%). The Utilities added 0.6% (up 1.4%). The Banks recovered 6.9% (up 30.1%), and the Broker/Dealers rallied 4.6% (up 26.0%). The Transports rose 2.4% (up 19.7%). The S&P 400 Midcaps surged 4.4% (up 18.2%), and the small cap Russell 2000 jumped 4.3% (up 18.2%). The Nasdaq100 advanced 2.1% (up 11.3%). The Semiconductors jumped 2.8% (up 16.0%). The Biotechs increased 0.9% (up 3.9%). While bullion recovered $17, the HUI gold index slipped 0.8% (down 10.2%).

Three-month Treasury bill rates ended the week at 0.0425%. Two-year government yields added a basis point to 0.27% (up 15bps y-t-d). Five-year T-note yields rose five bps to 0.92% (up 56bps). Ten-year Treasury yields jumped nine bps to 1.53% (up 61bps). Long bond yields surged 14 bps to 2.15% (up 50bps). Benchmark Fannie Mae MBS yields added two bps to 1.90% (up 56bps).

Greek 10-year yields rose four bps to 0.85% (up 23bps y-t-d). Ten-year Portuguese yields increased three bps to 0.46% (up 43bps). Italian 10-year yields gained five bps to 0.92% (up 38bps). Spain's 10-year yields increased three bps to 0.48% (up 43bps). German bund yields rose five bps to negative 0.16% (up 41bps). French yields gained four bps to 0.20% (up 54bps). The French to German 10-year bond spread narrowed about one to 36 bps. U.K. 10-year gilt yields rose three bps to 0.78% (up 58bps). U.K.'s FTSE equities index rallied 1.7% (up 10.5% y-t-d).

Japan's Nikkei Equities Index increased 0.4% (up 5.9% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.05% (up 3bps y-t-d). France's CAC40 gained 0.8% (up 19.3%). The German DAX equities index recovered 1.0% (up 13.8%). Spain's IBEX 35 equities index advanced 0.7% (up 12.6%). Italy's FTSE MIB index recovered 1.2% (up 14.7%). EM equities were mostly higher. Brazil's Bovespa index declined 0.9% (up 6.9%), while Mexico's Bolsa increased 0.5% (up 14.7%). South Korea's Kospi index rose 1.1% (up 14.9%). India's Sensex equities index rallied 1.1% (up 10.8%). China's Shanghai Exchange jumped 2.3% (up 3.9%). Turkey's Borsa Istanbul National 100 index was little changed (down 5.7%). Russia's MICEX equities index advanced 0.8% (up 16.5%).

Investment-grade bond fund inflows slowed to $233 million, while junk bond funds posted positive flows of $189 million (from Lipper).

Federal Reserve Credit last week surged $86.3bn to a record $8.051 TN. Over the past 93 weeks, Fed Credit expanded $4.324 TN, or 116%. Fed Credit inflated $5.240 Trillion, or 186%, over the past 450 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week added $1.8bn to $3.540 TN. "Custody holdings" were up $110bn, or 3.2%, y-o-y.

Total money market fund assets dropped $31.4bn to $4.547 TN. Total money funds declined $136bn y-o-y, or 2.9%.

Total Commercial Paper fell $17.6bn to $1.163 TN. CP was up $135bn, or 13.1%, year-over-year.

Freddie Mac 30-year fixed mortgage rates jumped nine bps to a 10-week high 3.02% (down 11bps y-o-y). Fifteen-year rates surged 10 bps to 2.34% (down 25bps). Five-year hybrid ARM rates added a basis point to 2.53% (down 55bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down five bps to 3.14% (down 25bps).

Currency Watch:

June 21 – Bloomberg (Stephen Spratt and Masaki Kondo): “Hedge funds couldn’t have picked a worse time to be short the dollar while holding Treasury curve steepener positions. Leveraged funds boosted net dollar shorts by 21,347 contracts in the week ended June 15, the most since mid-January, according to… the Commodity Futures Trading Commission. A day later, Federal Reserve officials projected a faster-than-expected pace of tightening, propelling the Bloomberg Dollar Spot Index to its biggest weekly gain in over a year.”

For the week, the U.S. Dollar Index declined 0.4% to 91.85 (up 2.1% y-t-d). For the week on the upside, the Mexican peso increased 4.2%, the Brazilian real 3.2%, the Norwegian krone 2.0%, the New Zealand dollar 2.0%, the Australian dollar 1.5%, the South African rand 1.4%, the Swedish krona 1.4%, the Canadian dollar 1.4%, the euro 0.6%, the British pound 0.5%, the Swiss franc 0.5%, the South Korean won 0.4% and the Singapore dollar 0.2%. On the downside, the Japanese yen declined 0.5%. The Chinese renminbi slipped 0.05% versus the dollar this week (up 1.10% y-t-d).

Commodities Watch:

June 23 – Bloomberg: “Base metals rose in London after China’s state reserves bureau said it would sell only relatively small quantities in its first disclosed release of stockpiles in more than a decade. ‘The market had apparently expected a larger quantity and appears relieved, with the result that prices have actually risen again quickly,’ Daniel Briesemann, an analyst at Commerzbank AG, said… Copper prices climbed 2% on the London Metal Exchange, extending Tuesday’s gain after China’s reserve sales were announced. Other main base metals also rose.”

The Bloomberg Commodities Index rallied 1.7% (up 18.4% y-t-d). Spot Gold rallied 1.0% to $1,781 (down 6.2%). Silver recovered 1.2% to $26.10 (down 1.1%). WTI crude advanced $2.41 to $74.05 (up 53%). Gasoline surged 4.4% (up 61%), and Natural Gas jumped 8.7% (up 38%). Copper rallied 3.0% (up 22%). Wheat dropped 3.8% (unchanged). Corn sank 8.3% (up 7%). Bitcoin lost $3,180, or 8.9%, this week to $32,364 (up 11.3%).

Coronavirus Watch:

June 25 – Wall Street Journal (Dov Lieber): “About half of adults infected in an outbreak of the Delta variant of Covid-19 in Israel were fully inoculated with the Pfizer Inc. vaccine, prompting the government to reimpose an indoor mask requirement and other measures to contain the highly transmissible strain. Preliminary findings by Israeli health officials suggest about 90% of the new infections were caused by the Delta variant, according to Ran Balicer, who leads an expert advisory panel on Covid-19 for the government. Around half of the adults who were infected were fully vaccinated…”

June 25 – Wall Street Journal (Shan Li): “India is warning about new versions of the highly infectious Delta variant of the coronavirus that are spreading around the country, containing a mutation that the original didn’t have. Indian officials have dubbed new versions of the variant containing the mutation Delta Plus. Delta Plus—with the mutation causing concern designated K417N—has been detected in at least 11 countries, including the U.S., U.K. and Japan, according to government health agency Public Health England.”

June 23 – Financial Times (Nikou Asgari and John Burn-Murdoch): “The Delta variant of coronavirus that has swept across Europe is now gaining ground in the US, posing a particular threat to unvaccinated people and risking a surge in cases. The Delta strain, which was first identified in India, accounts for more than a third of new cases each day in the US…, up from 10% at the end of May.”

Market Mania Watch:

June 23 – New York Times (Erin Griffith): “All year, amateur investors, propelled by a social media frenzy and a bit of boredom, have poured money into risky forms of investments like meme stocks, SPACs and Bitcoin. With the pandemic easing in the United States and the country reopening, many market watchers expected the investment world to return to something resembling normalcy. That hasn’t happened. Over the last month, overlapping investment manias have become even more unpredictable. Special purpose acquisition companies, known as SPACs, a trendy way for companies to go public, have dried up. Investments in digital art — another pandemic favorite — have also slumped. Bitcoin has lost nearly 30% of its value in just the last week. But so-called meme stocks have soared.”

June 23 – CNBC (Megan Leonhardt): “The wealthiest 1% of Americans controlled about $41.52 trillion in the first quarter, according to Federal Reserve data... Yet the bottom 50% of Americans only controlled about $2.62 trillion collectively, which is roughly 16 times less than those in the top 1%.”

Market Instability Watch:

June 23 – Financial Times (Rishabh Bhandari): “Broad market liquidity — the ease with which investors can buy or sell a security without affecting its price — has been in a downward spiral for more than 10 years. Look, for example, at what has happened to trading in futures contracts on the S&P 500 index — typically the world’s most liquid equity index futures. Over the past decade their liquidity, as measured by market depth, has collapsed by around 90%. This pattern is repeated across asset classes and regions… The decline in liquidity coincides with a huge increase in the number and magnitude of ‘volatility shocks’ — defined as daily moves of more than 5 percentage points in the Vix Index which measures markets’ expectations of volatility. Between 1994 and 2007, there were nine. In the years since the 2008-09 financial crisis, there were 62.”

June 24 – Financial Times (Wenxin Du): “There is a love-hate relationship between the US Federal Reserve, regulators and money market funds, a $5tn industry at the heart of short-term funding, shadow banking, monetary policy, and the dollar-centric international financial system. Broadly speaking, there are two types of money market funds in the US: prime and government funds. Prime funds can lend to all sectors of the economy with or without collateral. Government funds are only allowed to hold Treasury securities or lend to other sectors against Treasury collateral. Prime funds have long been viewed as a source of vulnerability, while government funds have been viewed as a source of strength. But the bad kid might be getting too much blame and the good kid too much credit. Lately, prime funds are back on the regulatory hot seat and potentially face additional reforms for their role in the… turmoil of March 2020… Meanwhile, the largest money market funds, mostly government funds, now lend the Fed several hundred billion dollars daily ($790bn on Tuesday) to finance the central bank’s bond buying programme.”

June 21 – Bloomberg (Stephen Spratt, Livia Yap, and Jill Ward): “The pressure on long bond yields is going global, led by Treasuries and U.K. gilts, as investors reconsider reflation expectations and brace for an eventual pullback of central bank stimulus. The Treasury five- to 30-year yield spread, which reflects the balance between the interest-rate outlook and inflation expectations, narrowed to the smallest gap since August. Its U.K. counterpart narrowed the least since December. That compression was driven by 30-year yields’ decline to the lowest levels since February, before trading little changed at 2.03% in the U.S. and 1.2% in Britain…”

Inflation Watch:

June 25 – CNBC (Jeff Cox): “A key inflation indicator that the Federal Reserve uses to set policy rose 3.4% in May, the fastest increase since the early 1990s, the Commerce Department reported… Though the gain was the biggest since April 1992, it met the Dow Jones estimate and markets reacted little to the news… The core personal consumption expenditures price index increase reflects the rapid pace of economic expansion and resulting price pressures, and amplified how far the nation has come since the Covid pandemic-induced shutdown of 2020.”

June 24 – CNBC (Pia Singh): “Supply chain disruptions and inflated prices are not abating yet, National Association of Manufacturers CEO Jay Timmons told CNBC… ‘We’re seeing rising cost pressures’ due to workforce shortages and demand exceeding supply, Timmons said… ‘What that’s doing is it’s causing bottlenecks in a lot of the supply chain for manufacturers who make the finished goods.’ Timmons, whose… group is the largest manufacturers trade association in the U.S., said he’s hopeful that supply bottlenecks won’t be seen in the future as the economy continues to ramp up from the depths of the Covid pandemic. However, he added that ‘it is a problem right now and manufacturers are trying their best to deal with it.’”

June 20 – Wall Street Journal (Eric Morath and Greg Ip): “Low-wage workers found something unexpected in the economy’s recovery from the pandemic: leverage. Ballooning job openings in fields requiring minimal education…. combined with a shrinking labor force are giving low-wage workers perks previously reserved for white-collar employees. That often means bonuses, bigger raises and competing offers. Average weekly wages in leisure and hospitality, the sector that suffered the steepest job losses in 2020, were up 10.4% in May from February 2020… Pay for those with only high school diplomas is rising faster than for college graduates, according to the Federal Reserve Bank of Atlanta. ‘It’s a workers’ labor market right now and increasingly so for blue-collar workers,’ said Becky Frankiewicz, president of staffing firm ManpowerGroup Inc.’s North America operations. ‘We have plenty of demand and not enough workers.’”

June 22 – Wall Street Journal (Austen Hufford and Nora Naughton): “Pay for factory jobs has grown so slowly in the U.S. that manufacturers are having trouble competing with fast-food restaurants. Take Western Michigan, home to many office-furniture and car-parts factories as well as a growing tourism industry. Restaurants and hotels along Lake Michigan have been hiring rapidly as people, kept fairly stationary during the pandemic, start traveling again. The shift is making it harder for factories to staff their production lines, and the added demand has increased both openings and the rate at which workers leave their jobs.”

June 21 – Wall Street Journal (Asa Fitch): “The global chip shortage is pushing up prices of items such as laptops and printers and is threatening to do the same to other top-selling devices including smartphones. Price increases are snowballing their way through suppliers and key materials in chip making as the industry rushes to meet rising demand and plug supply holes. As a result, many of the world’s large chip makers are raising prices they charge to the brands that make PCs and other gadgets. Industry officials say the increases may continue. Consumers are starting to feel the pinch. Prices of popular models of some laptop computers have crept up over the past two months, among other electronics becoming more expensive at retailers.”

June 23 – Bloomberg (Olivia Rockeman, Leslie Patton and Michael Sasso): “U.S. restaurants, faced with higher food and labor costs, are raising menu prices at a much faster pace than historical rates, insistent on preserving profits after an arduous year. From local restaurants to national chains like Chipotle Mexican Grill Inc., owners have boosted prices by as much as 5% in the past few weeks alone. Even at fast-food companies that were locked in price wars just a couple of years ago to win over cost-conscious consumers, increases aren’t taboo anymore. ‘We are going to be paying higher prices in restaurants,’ said David Henkes, senior principal at industry researcher Technomic. ‘Part of the calculus right now is there’s probably some appetite of consumers to pay whatever because they haven’t been out for a while.’”

June 23 – Reuters (Rajesh Kumar Singh): “In 2018, Whirlpool Corp swung to a loss after a tariff-fueled rally in U.S. steel prices drove up its raw-materials costs. This year, it is paying $1 billion for steel and other materials, but the West Michigan appliance maker is on track to post its highest profit in decades. The difference? Booming demand, spurred by nearly $6 trillion in pandemic stimulus from Washington - more than the country's World War Two budget - and consumers flush with savings. With so much money coursing through the economy at a time when the pandemic-induced disruptions have constrained supplies and prevented a buildup In inventories, companies are able to charge higher prices without hurting sales. Whirlpool has raised prices by as much as 12% this year in various markets to compensate for increased raw-material costs.”

June 25 – Reuters (Thyagaraju Adinarayan): “BofA expects U.S. inflation to remain elevated for two to four years, against a rising perception of it being transitory, and said that only a financial market crash would prevent central banks from tightening policy in the next six months. It was ‘fascinating so many deem inflation as transitory when stimulus, economic growth, asset/commodity/housing inflations (are) deemed permanent’, the investment bank's top strategist Michael Hartnett said… Hartnett thinks inflation will remain in the 2%-4% range over the next 2-4 years. U.S. inflation has averaged 3% in the past 100 years, 2% in the 2010s, and 1% in 2020, but it has been annualising at 8% so far in 2021…”

June 25 – Wall Street Journal (Joe Wallace): “Coal prices have climbed to their highest level in a decade, making the fuel a hot commodity in a year when governments are pledging reductions in carbon emissions. A shortfall of natural gas, rebounding electricity usage and scanty rainfall in China have lifted demand for thermal coal. Supplies have been crimped by a closed mine in Colombia, flooding in Indonesia and Australia and distorted trade flows caused by a Chinese ban on Australian coal.”

Biden Administration Watch:

June 24 – Reuters (David Morgan and Richard Cowan): “Hours after U.S. President Joe Biden declared ‘we have a deal’ to renew the nation’s infrastructure, the Senate’s top Republican lashed out at plans to follow the $1.2 trillion bipartisan bill with another measure addressing what Democrats call ‘human infrastructure.’ Biden and top congressional Democrats… had long signaled their plan to link the bipartisan deal with another measure including spending on home health care and child care in an infrastructure bill. The second measure would be passed through a Senate maneuver called reconciliation here, which would allow it to take effect without Republican votes. ‘I expect that in the coming months this summer, before the fiscal year is over, that we will have voted on this (bipartisan) bill - the infrastructure bill - as well as voted on the budget resolution,’ Biden told reporters... ‘But if only one comes to me, I’m not signing it. It’s in tandem.’ That drew a harsh response from Republican Senate Minority Leader Mitch McConnell.”

June 22 – Reuters (Trevor Hunnicutt): “Financial regulators assured President Joe Biden… that the U.S. financial system is in good shape and that financial risks are being mitigated by strong liquidity in the banking system, the White House said. White House officials said Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell, and acting Comptroller of the Currency Michael Hsu, as well as the heads of the Commodity Futures Trading Commission, Securities and Exchange Commission, and the Consumer Financial Protection Bureau, were among those who met Biden.”

June 23 – Bloomberg (Joe Light): “In one fell swoop, the Supreme Court crushed Fannie Mae and Freddie Mac shareholders and gave President Joe Biden carte blanche to rewrite the rules for the U.S.’s massive housing market. Left unanswered was the same question that’s befuddled Washington for more than a decade: Will anyone ever figure out what to do with Fannie and Freddie, which backstop a whopping $5.7 trillion of mortgages? The high court’s decision… largely shot down investors’ claims that Obama era regulators exceeded their authority when they decided to send nearly all of Fannie and Freddie’s profits to the U.S. Treasury... The justices also made clear that the president can remove the head of the Federal Housing Finance Agency, Fannie and Freddie’s overseer.”

June 23 – Associated Press (Marcy Gordon): “A House panel pushed ahead… with ambitious legislation that could curb the market power of tech giants Facebook, Google, Amazon and Apple and force them to sever their dominant platforms from their other lines of business. Conservative Republican lawmakers haggled over legislative language and pushed concerns of perceived anti-conservative bias in online platforms but couldn’t halt the bipartisan momentum behind the package. The drafting session and votes by the House Judiciary Committee are initial steps in what promises to be a strenuous slog through Congress. Many Republican lawmakers denounce the market dominance of Big Tech but don’t support a wholesale revamp of the antitrust laws.”

Federal Reserve Watch:

June 23 – Financial Times (James Politi and Colby Smith): “The Federal Reserve’s top officials have signalled that high hurdles remain for any monetary policy tightening, as chair Jay Powell and his inner circle seek to steady the central bank’s message after almost a week of market gyrations. In a series of interventions, senior Fed officials this week countered fears among some investors, and even lawmakers, that they were gearing up to raise interest rates more rapidly than expected in light of the fast-improving economic outlook. Instead, they stressed their belief that the current US inflation surge is temporary, their commitment to doggedly pursue full employment, and their caution in withdrawing support for the recovery. ‘We will not raise interest rates pre-emptively because we think employment is too high [or] because we fear the possible onset of inflation,’ Powell said… ‘Instead, we will wait for actual evidence of actual inflation or other imbalances.’”

June 22 – Wall Street Journal (Paul Kiernan): “Federal Reserve Chairman Jerome Powell said it’s highly unlikely that inflation will rise to levels seen in the 1970s but acknowledged significant uncertainty as the economy reopens. While the Fed anticipated that the end of the pandemic would temporarily push up inflation this year, Mr. Powell said Tuesday on Capitol Hill that the increases in prices have been larger than central bankers had expected and may prove more persistent. But he underscored his view that shortages… will fade over time, bringing inflation closer to the Fed’s 2% long-run target. ‘If you look behind the headline and look at the categories where these prices are really going up, you’ll see that it tends to be areas that are directly affected by the reopening,’ Mr. Powell said… ‘That’s something that we’ll go through over a period. It will then be over. And it should not leave much of a mark on the ongoing inflation process.’”

June 24 – Bloomberg (Matthew Boesler): “Federal Reserve Chair Jerome Powell has received the public backing of a majority of colleagues for his view that the recent inflation surge will fade, even as some policy makers question that stance and see the need for interest-rate hikes next year. Remarks by numerous officials since the U.S. central bank’s June 15-16 meeting show a debate over how long inflationary pressures will last. For now, the coalition around Powell’s position appears to have the upper hand.”

June 23 – Bloomberg (Catarina Saraiva): “The U.S. economy will likely meet the Federal Reserve’s threshold for tapering its asset purchases sooner than people think, said Dallas Fed President Robert Kaplan, who has penciled in an interest-rate increase next year. ‘As we make substantial further progress, which I think will happen sooner than people expect -- sooner rather than later -- and we’re weathering the pandemic, I think we’d be far better off, from a risk-management point of view, beginning to adjust these purchases of Treasuries and mortgage-backed securities,’ Kaplan said… Kaplan says he’s forecasting rate liftoff in 2022 from its current setting near zero, as inflation surpasses the central bank’s 2% goal this year and next and unemployment dips below 4%.”

June 21 – Bloomberg (Christopher Condon): “The Federal Reserve’s policy outlook needs to be more attuned to inflation risks, according to a number of influential voices who spoke Monday. Dallas Fed President Robert Kaplan said he favors starting the process of tapering the central bank’s ongoing bond purchases ‘sooner rather than later,’ while his counterpart from St. Louis, James Bullard called it ‘appropriate’ that policy makers last week opened the taper debate. ‘No one really knows how this is all going to unfold,’ Bullard said during… the Official Monetary and Financial Institutions Forum, where Kaplan also spoke. ‘We have to be ready for the idea that there is upside risk to inflation and for it to go higher.’ ‘I think we’d be healthier, as we’re making progress in weathering the pandemic and achieving our goals, to start adjusting these purchases -- Treasuries and mortgage-backed securities -- sooner rather than later,’ Kaplan said.”

June 23 – Bloomberg (Craig Torres): “Federal Reserve Bank of Boston President Eric Rosengren expects inflation to ease next year and return close to the central bank’s 2% target as supply shortages resolve. ‘The likelihood that we see persistent inflation at 3% -- as a modal forecast, I think it is not a particularly good forecast,’ Rosengren said…‘My expectation is that most of the price increases we are seeing this year will be reversed as we get into next year.’”

June 21 – Reuters (Howard Schneider): “The U.S. Federal Reserve’s carefully crafted move last year to a jobs-first monetary policy, touted as giving workers their best chance after the pandemic, is being tested by a potentially table-turning rebound of inflation and what’s become a relative rush of policymakers determined not to let it get out of hand. When the Fed unveiled its new framework just 10 months ago, with a view that employment could expand as much as possible as long as prices did not rise too fast, the language was kept vague on key points in order to maintain unanimous support. The limits to that ‘big tent’ approach are now becoming clear.”

June 22 – Reuters (Jonnelle Marte and Howard Schneider): “Cleveland Federal Reserve bank president Loretta Mester said… the Fed's new approach to monetary policy needed to more explicitly account for the risks to financial stability from ultra-low interest rates, ongoing asset purchases, and promises to keep borrowing conditions easy. Mester did not make a specific call in remarks at a Norwegian central bank seminar to tighten U.S. monetary policy now, or say that the Fed was already courting excessive financial risk with its current near-zero interest rates and ongoing $120 billion in monthly bond purchases. But her criticism of the new framework opens another set of arguments about whether the Fed needs a quicker exit from the crisis policies used during the pandemic…”

June 23 – Bloomberg (Steve Matthews): “Raphael Bostic said the central bank could decide to slow its asset purchases in the next few months and he favored lifting interest rates in 2022 in response to a faster-than expected recovery from Covid-19 pandemic. ‘Given the upside surprises in recent data points, I have pulled forward my projection for our first move to late 2022,’ Bostic told reporters… ‘I have two moves in 2023,’ he said. The Fed last week published economic projections showing 13 of 18 participants on the policy-setting Federal Open Market Committee thought it would probably be appropriate to begin raising interest rates from their current near-zero levels by the end of 2023.”

June 23 – Reuters (Howard Schneider): “A period of high inflation in the United States may last longer than anticipated, two U.S. Federal Reserve officials said…, prompting one to pull forward his views on when the central bank should start raising interest rates. Atlanta Fed President Raphael Bostic said with growth surging to an estimated 7% this year and inflation well above the Fed's 2% target, he now expects interest rates will need to rise in late 2022. ‘Given the upside surprise in recent data points I pulled forward my projection’ Bostic said, placing him among seven Fed policymakers who at the central bank's meeting last week projected the overnight policy rate may need to lift from the current near zero level sometime next year.”

June 18 – Reuters (Ann Saphir): “Minneapolis Federal Reserve President Neel Kashkari said… he wants to keep the U.S. central bank’s benchmark short-term interest rate near zero at least through the end of 2023 to allow the labor market to return to its pre-pandemic strength. ‘The vast majority of Americans want to work, and I am not ready to write them off – and I want to give them the chance to work,’ Kashkari told Reuters… ‘As long as inflation expectations remain anchored ... let's be patient and let’s really achieve maximum employment.’”

U.S. Bubble Watch:

June 20 – Wall Street Journal (Bob Kerrey and John C. Danforth): “President Clinton asked us in 1994 to chair the Bipartisan Commission on Entitlement and Tax Reform to study the future of Social Security, Medicare and Medicaid and recommend measures to assure their long-term viability. Reforms of these popular programs were so politically fraught that finding consensus on solutions proved impossible… But there was near unanimity within the commission on the scale of the problem. Entitlements were on an unsustainable trajectory. They consumed an ever-growing share of federal spending. In 1994 the budget deficit was $203 billion (2.8% of gross domestic product), and the national debt was $3.4 trillion (47.8% of GDP). The crisis we identified 27 years ago seems negligible given where the debt stands today. The nonpartisan Congressional Budget Office estimated in January 2020 that annual budget deficits will exceed $1 trillion, and that the debt—then hovering at $17.2 trillion—would more than double as a share of the economy over the next 30 years. These numbers don’t take into account $65 trillion of unfunded liabilities for Social Security and Medicare. The CBO now projects that, under current law, the deficit will reach $1.9 trillion in 10 years and the debt will skyrocket from 102% to 202% of GDP within 30 years.”

June 22 – CNBC (Diana Olick): “Sales of existing homes in May dropped for the fourth straight month due to a very low supply of homes on the market. Existing home sales fell 0.9% last month from April to a seasonally adjusted annualized rate of 5.8 million units… Just 1.23 million homes were for sale at the end of May, a 20.6% drop from a year earlier. At the current sales pace, that represents a 2½-month supply. Very low inventory amid high demand continues to fuel extraordinary price increases. The median price of an existing home in May was $350,300, a 23.6% increase compared with May 2020. That is not only the highest median price ever recorded but also the strongest annual appreciation ever.”

June 23 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes fell to a one-year low in May as the median price of newly built houses soared amid expensive raw materials, including framing lumber… New home sales dropped 5.9% to a seasonally adjusted annual rate of 769,000 units last month, the lowest level since May 2020. April's sales pace was revised down to 817,000 units from the previously reported 863,000 units. The median new house price jumped 18.1% from a year earlier to $374,400 in May.”

June 23 – Wall Street Journal (Justin Lahart): “Home builders can’t keep up with housing demand. Much of that is a matter of circumstance, but some of it could be a matter of design… There were 769,000 new single-family homes sold in May, at a seasonally adjusted, annual rate. That marked the fourth month in a row that the pace of sales slipped… Worse, April sales were revised down to 817,000 from 863,000. It isn’t that people aren’t looking to buy. To the contrary, the combination of pent-up demand, low interest rates, and remote work options, among other factors, has spurred a frenzy for homes. That is getting reflected in a surge in prices: The median sales price for a new home was $374,400 in May, up from April’s $365,300… Prices for previously owned homes topped $350,000 for the first time last month. The average existing home spent only 17 days on the market.”

June 23 – Reuters (Lucia Mutikani): “A measure of U.S. factory activity climbed to a record high in June, but manufacturers are still struggling to secure raw materials and qualified workers, substantially raising prices for both businesses and consumers. Data firm IHS Markit said… its flash U.S. manufacturing PMI rose to a reading of 62.6 this month. That was the highest since the survey was expanded to cover all manufacturing industries in October 2009… The survey's measure of prices paid by manufacturers rose to the highest level since the series started. It said ‘firms raised their selling prices at a quicker rate in an effort to pass on these higher costs.’”

June 24 – Reuters (Lucia Mutikani): “Fewer Americans filed new claims for unemployment benefits last week as the labor market recovery from the COVID-19 pandemic gains traction amid a reopening economy, but a dearth of willing workers could hinder faster job growth in the near term. Initial claims for state unemployment benefits fell 7,000 a seasonally adjusted 411,000 for the week…”

June 23 – CNBC (Diana Olick): “Mortgage rates rose last week, along with demand for refinances. That may sound counterintuitive, but it speaks to the larger picture of where mortgage rates are heading… Mortgage applications to purchase a home increased 1% from the previous week and were 14% lower than a year ago. Buyers are hitting an affordability wall, as home prices keep rising quickly.”

Fixed-Income Bubble Watch:

June 25 – Bloomberg (Lisa Lee): “Wall Street is packaging leveraged loans into bonds at a record pace, stretching bankers, lawyers and debt graders to the limit while showing no signs of slowing. Money managers that bundle and sell collateralized loan obligations are finding they have to make reservations with bond-rating firms months in advance to get a deal graded. Lawyers say they’re pulling all-nighters to keep up with the flood of documents needed to offer the securities to investors. And firms that arrange or buy the deals are trying to bolster their thinly-stretched staffs, creating a bidding war for talent amid an already limited pool of specialists. Fund managers have sold more than $200 billion of U.S. CLOs this year, including refinancings and resets, a breakneck pace that’s catapulting the market toward $1 trillion globally. It could get even more frenetic soon. Private equity firms are inking bigger and bigger buyout deals…”

China Watch:

June 23 – Bloomberg (Sofia Horta e Costa and Rebecca Choong Wilkins): “China’s campaign to cut leverage and instill corporate discipline is reshaping the nation’s $12 trillion credit market. One of China’s most prolific debt issuers hasn’t sold a single dollar bond in 17 months, the longest dry spell since 2013. An investment grade-rated conglomerate mostly owned by the government is facing a cash crunch in a test of state support. Analysts at UBS Group AG and Goldman Sachs Group Inc. now say the notion of ‘too big to fail’ no longer applies in China as defaults this year exceed $23 billion, a record pace. Beijing is taking advantage of a strengthening economy and stable financial markets to toughen up its corporate sector. The result is a repricing of risk that should discourage the kind of reckless debt-fueled expansion that inflated some companies to a dangerous size. The spawning of such bloated empires created a threat to the financial system as well as a challenge to President Xi Jinping’s grip on power.”

June 24 – Bloomberg (Tian Chen and Livia Yap): “China’s central bank increased its short-term cash injection for the first time since March as it moved to soothe market concerns about liquidity conditions ahead of the quarter-end. The injection of 30 billion yuan ($4.6bn) marked an end to the People’s Bank of China’s practice of adding 10 billion yuan each trading day for the past three months…. ‘The market now believes that they know the PBOC’s cards -- it will keep liquidity reasonable for the remainder of the year,’ said Wan Kelin, an analyst at Topsperity Securities. ‘Even though there may be some fluctuations throughout that course, the theme is the same.’”

June 22 – Bloomberg: “Concerns about China Evergrande Group’s financial health are mounting as the developer struggles to convince banks and ratings companies it can execute on an ambitious deleveraging plan. Bonds of the world’s most indebted real estate company slumped on Tuesday after Bloomberg reported several large Chinese banks are restricting credit to the firm and Fitch Ratings downgraded it deeper into junk territory. Evergrande’s struggles, along with those of China Huarong Asset Management Co., have raised fresh doubts about the decades-long assumption that Beijing will backstop major borrowers during times of stress. Three banks with a combined 46 billion yuan ($7.1bn) of credit exposure to Evergrande as of June 2020 have decided in recent months not to renew loans to the company when they mature this year…”

June 22 – Bloomberg (Ruby Nhan Duong): “Growing chances of default at China Evergrande Group are ringing alarm bells for investors, just as the prospect of tapering in the U.S. heightens the risk of a high-yield bond selloff. Evergrande bonds slumped after the regulator ordered banks to conduct stress tests on exposure to the world’s most indebted real estate company. Chinese property developers made up more than 20% of total defaulted securities last quarter… Evergrande’s default probability jumped with its $1.5 billion dollar bond maturing in June yielding 44%.”

June 23 – Bloomberg: “China Minsheng Banking Corp., one of the major creditors to China Evergrande Group, said it has cut its exposure to the embattled property developer over the past nine months. While Evergrande and its affiliates haven’t defaulted on any interest or principle payments, Minsheng Bank will closely monitor their business operations and financial health, and act if risks occur, the Beijing-based lender said… Concerns about Evergrande’s financial health are mounting as the developer struggles to convince banks and ratings companies it can execute on a deleveraging plan.”

June 21 – Wall Street Journal (Frances Yoon): “Yields on Chinese junk bonds have jumped to levels last hit during the tail end of last year’s market turbulence, signaling growing investor concern about defaults. Last week, the yield on an ICE BofA index of Chinese junk bonds in dollars topped 10% for the first time since May 2020.”

June 21 – Bloomberg: “China summoned officials from its biggest banks to a meeting to reiterate a ban on cryptocurrency services. Representatives from Industrial and Commercial Bank of China Ltd., Agricultural Bank of China Ltd. and payment service provider Alipay were reminded of rules that prohibit Chinese banks from engaging in crypto-related transactions… The latest development is a sign that China will do whatever it takes to close any loopholes left in crypto trading. In May, China’s State Council -- the country’s cabinet -- called for a renewed crackdown on Bitcoin mining and trading activities.”

June 25 – Bloomberg: “Chinese banks’ stockpile of foreign-currency deposits has surpassed $1 trillion for the first time, creating an opportunity for Beijing to allow greater freedom for capital to flow out of the country. The pool has been growing as surging demand for Chinese goods during the pandemic has beefed up foreign earnings of exporters, while the resilient economy and strengthening currency have lured overseas investors to sell dollars for yuan to buy Chinese stocks and bonds. Bank deposits in foreign currencies jumped more than $260 billion in the year through May, the most in data starting in 2002.”

June 22 – Reuters: “The vice mayor of Tianjin told financial institutions… he expected no additional state companies to default in the northern Chinese city and promised to maintain a healthy credit environment, three sources told Reuters. Since late 2020, several defaults by state firms… have eroded investor confidence, pushing up corporate funding costs. ‘Companies are not lacking in profitable projects, and the market is not lacking in capital,’ Tianjin’s vice mayor Kang Yi told a gathering of financial institutions…”

June 22 – Bloomberg: “China’s government is facing more calls to reduce its concerns about debt, with several influential economists arguing that authorities should follow the U.S. playbook and borrow more to spur the economy. Unlike in the U.S., where President Joe Biden is ramping up stimulus to avoid the mistakes of a too-slow recovery in the aftermath of the global financial crisis, Beijing is focusing on reining in government debt and curbing financial risks. China has set a modest economic growth target of ‘above 6%’ in 2021, is targeting a smaller fiscal deficit and has called on local governments to ‘tighten their belts.’ A number of economists and former advisers linked to China’s government say that focus is misplaced, given the shift in policy thinking globally since the Covid crisis as governments around the world pumped in record amounts of fiscal stimulus and central banks bought up the debt to keep interest rates low.”

Global Bubble Watch:

June 22 – Bloomberg (Eric Martin): “The International Monetary Fund is set to discuss a proposal to create a record $650 billion of new reserves for its members on Friday, bringing the plan to increase resources for nations struggling with the pandemic’s economic and health costs one step closer to approval. The executive board… typically meets several times a week and will vet the specific details of the proposal. The idea isn’t expected to prove controversial within the board, which in March gave broad support to draft it, according to two people familiar with its discussions, who asked not to be identified because they’re private.”

June 19 – Wall Street Journal (Jon Sindreu): “With consumer prices rising sharply, central bankers are having to work hard to resist the temptation to lift interest rates. A real-estate boom could make the job even tougher. Monetary policy is already being tightened. So far in 2021, there have been eight rate cuts and 19 increases... Stocks have taken a hit since Federal Reserve officials released projections Wednesday showing that rates could go up in 2023. Then, on Thursday, Norway’s central bank all but guaranteed it will increase borrowing costs in September, placing it far ahead of the Fed and even the Reserve Bank of New Zealand, which was the first to spook markets back in March.”

June 23 – Financial Times (Eva Szalay): “Central banks have intensified their criticism of cryptocurrencies as battle over the monetary system escalates, arguing that digital tokens such as bitcoin have few redeeming features and ‘work against the public good’. In a report…, the Bank for International Settlements, the global body for central banks, also dismissed stablecoins — a link between crypto and conventional assets — as an ‘appendage’ to traditional money. The strongly worded report was the clearest signal yet from central banks that they are ready to fight any effort to undermine their key role in the global financial system.”

Central Banker Watch:

June 24 – Bloomberg (Max de Haldevang, Sydney Maki and Maya Averbuch): “Mexico’s central bank surprised economists by switching to monetary tightening and delivering a small interest rate increase amid an inflation spike. Traders are taking a much more ardent view. After Banco de Mexico raised its key rate to 4.25% in a split decision, rates traders are now betting that more aggressive increases are coming, with around 115 bps of tightening priced in on top of the quarter-point hike the bank implemented Thursday.”

June 22 – Reuters (Jamie Mcgeever): “Brazil's central bank discussed raising interest rates last week by more than 75 bps, minutes from its last policy meeting showed…, raising the chances of a more aggressive hike at its next meeting to keep inflation in check. The minutes of the June 15-16 meeting, where the bank's rate-setting committee known as Copom raised rates to 4.25%, showed policymakers believe a full normalization of policy is now appropriate… With inflationary pressures ‘more intense than expected’, a faster pace of policy tightening at the next meeting may be required, the minutes said.”

June 23 – Bloomberg (Peter Laca and Krystof Chamonikolas): “The Czech Republic raised borrowing costs for the first time since before the coronavirus pandemic, becoming the second country in the European Union’s east to embark on rapid monetary tightening against the potential risk of spiraling inflation… The central bank raised its benchmark by a quarter-point to 0.5%..., as expected… The move came one day after policy makers in Hungary became the first in the EU’s eastern wing to increase interest rates to curb the bloc’s fastest price growth.”

June 22 – Reuters (Francesco Canepa and Balazs Koranyi): “European Central Bank (ECB) policymakers are still some way apart on their new inflation strategy but hope to reach an agreement before debating the future of their pandemic-fighting programme in September… ECB rate setters agreed on some side issues at a retreat last weekend… But there were still some differences when it came to the core of the ECB's strategy review: the definition of price stability and how to achieve it, the sources added.”

June 23 – Bloomberg (Anchalee Worrachate): “The first $500 billion in assets took the European ETF market about 16 years to grow. The second $500 billion took more than three years. Eighteen months later, the next milestone is already in sight. A deluge of inflows has swelled assets in the region’s exchange-traded product industry to $1.475 trillion… If this year’s rate of growth is sustained, the market should top $1.5 trillion in August.”

June 24 – Bloomberg (Reed Landberg and Lizzy Burden): “The Bank of England pushed back against speculation that a surge in U.K. inflation means it’s preparing to boost interest rates, saying the economy still needs support to recover from the pandemic. The central bank warned against ‘premature tightening,’ toughening its language on the need to maintain stimulus. The remarks contrasted with a sharp increase in the bank’s outlook for inflation, which officials now see peaking at 3%, a half point higher than their forecast just six weeks ago. The BOE’s sanguine view follows heightened anxiety among investors and economists that consumer price increases may prove sticky.”

Europe Watch:

June 23 – Bloomberg (Alexander Weber and Andrew Atkinson): “Europe’s private-sector economy is booming, accompanied by mounting inflation pressures as coronavirus restrictions loosen across the region. Surveys of purchasing managers by IHS Markit showed euro-area activity growing at the fastest pace in 15 years, with companies struggling to keep up with demand and prices surging. The equivalent U.K. index was only slightly below May’s record, with firms hiring staff quicker than at any time since it began collecting data in 1998… ‘Europe is recovering fast,’ Holger Schmieding, chief economist at Berenberg… said... ‘The euro zone is following the U.K. which, from a lower base, started to bounce back in March after getting the pandemic under control with harsh lockdowns and a rapid vaccination campaign.’”

June 22 – Associated Press (Kelvin Chan): “European Union regulators have launched a fresh antitrust investigation of Google, this time over whether the U.S. tech giant is stifling competition in digital advertising technology. The European Commission said… it has opened a formal investigation into whether Google violated the bloc’s competition rules by favoring its own online display advertising technology services at the expense of rival publishers, advertisers and advertising technology services. The investigation underscores European concerns about Google’s dominance in the online advertising industry and whether it’s exploiting its data advantage to cement its position in the display ad market…”

June 23 – Financial Times (Bethan Staton): “Inflationary pressures hit record highs in June as UK businesses continued to rebound, according to a closely watched survey… The IHS Markit/Cips interim composite purchasing managers’ index was 61.7 in June, down slightly from a record high of 62.9 on the final reading in May, and matching some of the highest readings since the survey began in 1998. But while economists said the fallback suggested the reopening boom may have passed its peak, intensifying inflationary pressures highlighted the danger of prices rising rapidly as businesses expanded.”

EM Watch:

June 23 – Bloomberg (Matthew Malinowski): “A shift toward tighter monetary policy is quickly taking shape across Latin America, with Chile signaling it is ready to raise its benchmark interest rate from a record low as soon as July. Chilean policy makers considered lifting borrowing costs by 25 bps this month as the economic recovery gains steam… Brazil said this week it may opt for quicker monetary tightening going forward, while faster inflation in Mexico and Colombia are raising prospects their central banks may also pare stimulus. Latin America’s central banks are facing pressure for rate hikes as both global and domestic factors revive inflation.”

Japan Watch:

June 24 – Bloomberg (Isabel Reynolds and Emi Nobuhiro): “Japanese Defense Minister Nobuo Kishi said the security of Taiwan was directly linked with that of Japan, as tensions around the island build up and its defenses are increasingly overshadowed by China’s military might. The comments from a cabinet minister known for his close ties to Taipei came a week after China sent 28 warplanes near Taiwan… ‘The peace and stability of Taiwan are directly connected to Japan and we are closely monitoring ties between China and Taiwan, as well as Chinese military activity,’ Kishi said… ‘As China strengthens its military, its balance with Taiwan is tipping heavily to the Chinese side,’ he said…”

Leveraged Speculation Watch:

June 25 – Financial Times (Laurence Fletcher and Madison Darbyshire): “GameStop after this year’s “meme stock” bonanza left the industry nursing billions of dollars of losses in just six months. Huge gains in the price of companies favoured by day traders who assemble on message boards such as Reddit caught out some short sellers badly in late January. In recent weeks, these stocks have staged a second rally, with a rise in stocks including cinema chain AMC inflicting yet more pain. Hedge fund losses since the start of the year from betting against just GameStop, AMC and Bed Bath & Beyond total more than $12bn…, while bets against a number of others have each run up additional losses of hundreds of millions of dollars. More than half short sellers’ $5.1bn of losses betting against AMC this year have come in June.”

June 23 – Bloomberg (Greg Stohr and Joe Light): “The U.S. Supreme Court dealt a punishing blow to Fannie Mae and Freddie Mac investors in their challenge to the government’s collection of more than $100 billion in profits from the government-sponsored enterprises. The justices threw out a core part of the investors’ lawsuit, rejecting claims that the Federal Housing Finance Agency exceeded its authority under federal law. Fannie and Freddie cratered, each plunging the most in intraday trading since 2013.”

June 22 – Financial Times (Laurence Fletcher): “A London-based hedge fund that suffered losses betting against US retailer GameStop during the first meme stock rally in January is shutting its doors. White Square Capital, run by former Paulson & Co trader Florian Kronawitter, told investors that it would shut its main fund and return capital this month… White Square, which at its peak managed about $440m in assets, had bet against GameStop…”

Social, Political, Environmental, Cybersecurity Instability Watch:

June 19 – Financial Times (Bryan Harris and Carolina Pulice): “The worst drought in almost a century has left millions of Brazilians facing water shortages and the risk of power blackouts… The agricultural centres in São Paulo state and Mato Grosso do Sul have been worse affected, after the November-March rainy season produced the lowest level of rainfall in 20 years. Water levels in the Cantareira system of reservoirs, which serves about 7.5m people in São Paulo city, dropped to below one-tenth of its capacity this year. Brazil’s mines and energy ministry has called it country’s worst drought in 91 years.”

Geopolitical Watch:

June 22 – Reuters (Ben Blanchard): “China condemned the United States… as the region's greatest security ‘risk creator’ after a U.S. warship again sailed through the sensitive waterway that separates Taiwan from China. The U.S. Navy's 7th Fleet said the Arleigh Burke-class guided missile destroyer USS Curtis Wilbur conducted a ‘routine Taiwan Strait transit’ on Tuesday in accordance with international law. ‘The ship's transit through the Taiwan Strait demonstrates the U.S. commitment to a free and open Indo-Pacific.’”

June 24 – Bloomberg (Alex Wayne): “U.S. President Joe Biden demanded that Beijing end its crackdown on independent journalists in Hong Kong after news outlet Apple Daily ceased publishing this week under pressure from China. ‘It is a sad day for media freedom in Hong Kong and around the world,’ Biden said… ‘Through arrests, threats, and forcing through a national security law that penalizes free speech, Beijing has insisted on wielding its power to suppress independent media and silence dissenting views.’”

June 25 – Financial Times (Helen Warrell in London and Michael Peel): “Nato’s most senior military officer has highlighted the ‘shocking’ speed of China’s military modernisation and warned of its growing diplomatic presence overseas, as the alliance prepares to take a more assertive stance towards Beijing. The comments from air chief marshal Sir Stuart Peach highlight the broad array of security challenges posed by China as members of the alliance struggle to progress beyond a diagnosis of the threat to an agreed plan of action. ‘It is quite shocking how quickly China has built ships, how much China has modernised its air force, how much it has invested in cyber and other forms of information management, not least facial recognition,’ said Peach…”

June 24 – Bloomberg: “China sued Australia over anti-dumping measures on some Chinese goods, further ratcheting up tensions between the two nations. China filed a lawsuit at the World Trade Organization over Australian anti-dumping and anti-subsidy measures on Chinese exports of railway wheels, wind towers and stainless steel sinks… This would be the third recent WTO case between the two countries, after Australia sued over Chinese tariffs on wine and barley. Relations between the sides have steadily worsened since 2018, when Australia barred Huawei Technologies Co. from building its 5G network, and went into freefall last year as Prime Minister Scott Morrison led calls for an independent probe into the origins of the coronavirus…”

June 24 – Reuters (Guy Faulconbridge and Katya Golubkova): “Russia warned Britain… it would bomb British naval vessels in the Black Sea if there were any further provocative actions by the British navy off the coast of Russia-annexed Crimea. Russia summoned the British ambassador in Moscow for a formal diplomatic scolding after the warship breached what the Kremlin says are its territorial waters but which Britain and most of the world say belong to Ukraine.”

June 25 – Reuters (Gabrielle Tétrault-farber): “Russia warned Britain and the United States on Friday against ‘tempting fate’ by sending warships to the Black Sea, and said it would defend its borders using all possible means including military force. In a statement broadcast on state television, the Defence Ministry said it was ill-advised for British and U.S. vessels to approach the coast of Crimea, a peninsula Moscow annexed from Ukraine in 2014. ‘We call on the Pentagon and the British navy, which are sending their warships into the Black Sea, not to tempt fate in vain,’ Major General Igor Konashenkov… said.”

June 24 – Reuters (William James): “Britain said… it would not accept unlawful interference with innocent passage at sea, and that its navy would uphold international law, in a written statement to parliament following a warship confrontation with Russia. ‘The Royal Navy will always uphold international law and will not accept unlawful interference with innocent passage,’ defence minister Ben Wallace said…”

June 22 – Associated Press (Isabel Debre and Jon Gambrell): “Iran’s president-elect staked out a hard-line position… in his first remarks since his landslide election victory, rejecting the possibility of meeting with President Joe Biden or negotiating Tehran’s ballistic missile program and support of regional militias. The comments by Ebrahim Raisi offered a blunt preview of how Iran might deal with the wider world in the next four years as it enters a new stage in negotiations to resurrect its now-tattered 2015 nuclear deal with global powers.”

June 23 – Reuters (Sharon Abratique and Pak Yiu): “U.N. human rights chief Michelle Bachelet took aim… at the ‘negative consequences’ she said Apple Daily owner Jimmy Lai faced for exercising his rights, criticising the tycoon's detention as his pro-democracy tabloid printed its last edition. Apple Daily closed down on Thursday, forced to end a 26-year run amid a national security crackdown that froze the company's funds. Its closure prompted snaking queues of hundreds of loyal readers at news stands across the city. Lai, its owner and staunch Beijing critic, has been in jail since December over unauthorised rallies during Hong Kong's mass pro-democracy protests in 2019 and faces national security charges.”

June 23 – Wall Street Journal (Thomas Grove): “Melting ice in the Arctic Ocean is bringing a centuries-old dream closer to reality for Russia: a shipping passage through its northern waters that could put it at the center of a new global trade shipping route. After one of the warmest years on record, the Kremlin is near to realizing its controversial plans for a global shipping route in its high north—plans that have put Moscow at odds with the U.S. and could create friction with China, two countries that also have designs on the Arctic. Warming in the Arctic is happening twice as fast as the rest of the planet. Last year, ice coverage reached some of the lowest levels ever recorded… That is pushing Moscow to build infrastructure along the route, which can cut the distance of trips between Europe and Asia by a third… This year’s shipping season on the passage, which spans Russia’s expansive Arctic coast, started earlier than ever before, in February…”