Friday, September 24, 2021

Weekly Commentary: Bipolar and the Q2 2021 Z.1

It was a rather glaring warning. Yet it was, of course, taken as just another buying opportunity – a rather easy one at that. It seems to only get easier.

September 22 – Bloomberg: “China Evergrande Group injected a fresh dose of uncertainty into financial markets on Wednesday, issuing a vaguely worded statement on a bond interest payment that left analysts grasping for details. Evergrande’s onshore property unit said in an exchange filing that an interest payment due Sept. 23 on one of its yuan-denominated bonds ‘has been resolved via negotiations off the clearing house.’ While the comment helped trigger knee-jerk gains in some risky assets, Evergrande didn’t specify how much interest would be paid or when. That fueled speculation among some analysts that the developer struck a deal with local bondholders to postpone the payment without having to label the move a default.”

September 24 – Bloomberg (Chester Yung): “China’s central bank continued to pump liquidity into the financial system on Friday as policy makers sought to avoid contagion stemming from China Evergrande Group spreading to domestic markets. The People’s Bank of China has injected a net 460 billion yuan ($71bn) of short-term cash into the banking system in the past five working days, including 70 billion yuan on Friday. That’s helping ensure sufficient liquidity throughout the Evergrande crisis… The cost of borrowing overnight fell to 1.68%, the lowest level since late July, down from 2.28% last week.”

Of course Beijing has everything under control. Talk had it that Beijing was orchestrating a restructuring, one that would ensure Evergrande suppliers get paid and construction resumes on hundreds of thousands of apartments owed to buyers who have put down large deposits. Offshore bond holders will take big haircuts, but officials will ensure Evergrande doesn’t drag down the banks or Chinese economy. The more markets rallied, the louder the bulls scoffed at the notion of Evergrande impacting systemic stability.

And Wednesday from Chair Powell: “In terms of the [Evergrande] implications for us, there’s not a lot of direct United States exposure. The big Chinese banks are not tremendously exposed, but, you know, you would worry that it would affect global financial conditions through confidence channels and that kind of thing.”

Implications appeared more direct Monday: Global “risk off” sparked synchronized de-risking/deleveraging across markets – commodities, currencies, fixed-income, equities and derivatives. It is, after all, one gigantic, interconnected speculative Bubble. At Monday’s intraday lows, the S&P500 was down almost 2.9%.

September 20 – Bloomberg (Sam Potter): “The Monday stock swoon risks triggering forced deleveraging by volatility-linked funds, according to… Nomura Securities. As China’s real-estate crisis intensifies and infects global markets, the S&P 500 slumped as much as 1.7% at the New York open to test a key 50-day threshold. That intraday move breaks a level strategist Charlie McElligott warns will force selling from rules-based investors who allocate depending on how much stock prices swing around. A drop of that scale would spur between $15 billion and $40 billion of divestments from this breed of systematic fund, he said on Monday -- and more should the ‘volatility expansion’ endure.”

It's not difficult to envisage how selling could quickly overwhelm the marketplace – another self-reinforcing derivatives “Volmageddon,” an abrupt reversal of ETF flows, hedge funds dashing to the exits, online day trader panic, etc.

Back to Monday’s Warning. Risk premiums widened, notably across the board. Global Credit default swap (CDS) prices gapped higher, in what had all the makings of a destabilizing synchronized market dislocation. I’ll note two CDS moves in particular. China's sovereign CDS surged 11 to 47 bps, the high since October 2020 - and the largest one-day gain since the start of the pandemic. Thousands of miles away, U.S. investment-grade corporate CDS jumped eight to 54.5 bps, the high since March - and the largest one-day gain since the start of the pandemic.

The global Bubble comprises myriad individual Bubbles. Yet at its core, the “global government finance Bubble” is Bipolar – Beijing and Washington. Abruptly, Monday’s global “risk off” turned systemic, with gap move dislocations in Chinese sovereign and U.S. investment-grade CDS. Preparing for the FOMC meeting, Chair Powell likely didn’t have his eyes fixed on the Bloomberg terminal. At least for a few hours, market links between Evergrande and U.S. finance appeared distressingly direct.

September 20 – Bloomberg (Caleb Mutua): “Corporate America put the brakes on a month-long borrowing binge on Monday as growing concern about spillover effects from property developer China Evergrande Group roiled markets globally. At least eight blue-chip companies that had planned to sell bonds decided to stand down, underwriters said… A key barometer of high-yield investors’ risk aversion, the Markit CDX North American High Yield Index, weakened.”

From Monday’s trading lows to Friday’s close, the S&P500 rallied 3.5% (small caps surged over 5% at Thursday highs). Monday’s close call was quickly forgotten, with bullish imaginations concocting visions of uninterrupted Chinese growth, hundreds of billions of additional monetary inflation (PBOC and Fed), and endless market gains.

After trading down to 1.29% in Monday’s “risk off” session, 10-year Treasury yields surged to 1.46% in Friday trading. There was talk of the “hawkish” Fed “dot plot,” the approaching “taper,” and even the possibility of a rate increase late next year. I'm just not convinced Fed policy is driving U.S. or global bond yields.

The possibility of a bursting Chinese Bubble has pressured global yields lower, despite surging inflationary pressures. Beijing appears committed to reining in Credit and speculative excess, creating a precarious situation for China’s financial and economic systems grossly inflated from years of Credit excess (especially the past two years!). However, if Beijing gets cold feet and resorts again to reflationary measures – bonds have good reason to fear the type of massive monetary inflation necessary to hold China Bubble collapse at bay. Massive monetary inflation in an environment of already powerful inflationary forces should be unnerving to bond markets and us all.

And speaking of (Bipolar) massive monetary inflation, let’s take a look at the Fed’s Q2 2021 Z.1 “flow of funds” report.

Non-Financial Debt (NFD) increased another nominal $1.002 TN during Q2 to a record $63.254 TN. This would have been a pre-pandemic record expansion. On a seasonally adjusted annualized pace, NFD expanded $4.013 TN. For perspective, NFD on average gained $1.842 TN annually for the decade 2010-2019. NFD surged an unprecedented $8.755 TN over just the past six quarters ($1.459 TN quarterly average). While slightly below recent record highs, Q2’s 278% ratio of NFD to GDP compares to previous cycle peaks, 227% to end 2007 and 184% to conclude 1999.

Treasury borrowings continue to command system Credit growth. Outstanding Treasuries gained nominal $359 billion during Q2 to a record $24.302 TN. Treasuries surged $6.487 TN, or 36%, over the past two years. Treasuries to GDP slipped slightly during the quarter to 107%. This ratio ended 2007 at 41% and was up to 87% prior to the pandemic.

Agency (GSE) Securities gained another $181 billion during the quarter to a record $10.408 TN. At $663 billion, one-year growth was the strongest since 2007. Agency Securities jumped $1.144 TN over the past two years. Combined Treasury and Agency Securities swelled an unparalleled $7.631 TN over two years to a record $34,709 TN (153% of GDP).

Total Mortgage borrowings rose $308 billion during the quarter, more than double Q2 2020 growth to the largest increase since Q3 2006 ($343bn). Home Mortgages rose $238 billion during Q2 (strongest since Q3 ’06) and $687 billion for the year (largest since 2006).

Total Debt Securities (TDS) expanded $747 billion during the quarter to a record $54.539 TN. Debt Securities jumped $3.377 TN, or 6.6%, over the past year. Prior to the pandemic, 2007’s $2.671 TN was the largest annual increase in TDS. TDS swelled $8.794 TN, or 19.2%, over two years. At 240%, TDS to GDP compares to 201% to end 2007 and 158% to finish the nineties.

Total Equities surged $5.709 TN during Q2 to a record $75.392 TN. Total Equities were up $23.407 TN, or 45%, over the past year, and $24,624 TN, or 49%, over two years. For comparison, Total Equities peaked at $27.263 TN during Q3 2007 and $20.957 TN during Q1 2000. Ending Q2 at a record 332%, current Total Equities to GDP compares to previous cycle peaks 188% (Q3 ’07) and 210% (Q1 2000).

Total (Debt & Equities) Securities jumped $6.455 TN during the quarter to a record $129.931 TN, ending the quarter at a record 572% of GDP. Total Securities ended Q3 2007 at $56.192 TN (387% of GDP) and 1999 at $35.598 TN (360% of GDP). Total Securities surged $33.418 TN, or 35%, over the past two years.

As I’ve communicated on a quarterly basis, the Household Balance Sheet is a focal point of Credit Bubble analysis. Household Assets jumped $6.196 TN, or 16.2% annualize, during Q2 to a record $159.342 TN. Household Assets inflated $24.269 TN over the past year. Household Liabilities rose $347 billion during the quarter to $17.674 TN, the strongest growth since Q1 2006. Liabilities were up $1.093 TN over four quarters, the strongest annual growth since 2006.

Household Net Worth (Assets less Liabilities) jumped $5.849 TN to a record $141.668 TN. Net Worth surged $23.176 TN, or 19.6%, over the past four quarters. For perspective, Household Net Worth gained $4.501 TN and $3.960 TN in boom years 2006 and 1999. Household Net Worth to GDP ended Q2 at a record $623%, having increased from 537% to end 2019 (pre-pandemic). This compares to previous cycle peaks 491% (Q1 ’07) and 445% (Q1 2000).

House price inflation fueled a $1.218 TN (13% annualized) increase in Household Real Estate holdings during the quarter to a record $38.706 TN. Real Estate holdings jumped $3.901 TN, or 11.2%, over four quarters – surpassing 2006’s record $3.122 TN increase. At 171%, the ratio of Real Estate to GDP is up from cycle trough 125% (Q2 2012) - yet remains below the cycle peak 190% from Q3 2006.

Meanwhile, Household Financial Asset holdings are inflating wildly. Household Assets jumped $4.552 TN during the quarter to a record $113.149 TN, having more than doubled from 2009 trough $46.780 TN - as well as previous cycle peak $54.377 TN (Q3 ’07). Household Financial Assets to GDP ended Q2 at a record 498%, up from cycle peaks 374% (Q3 ‘07) and 354% (Q1 2000).

Household Equities (Equities & Mutual Funds) holdings ended Q2 at a record $42.780 TN, having increased $3.188 TN for the quarter and $13.239 TN, or 44.8%, over the past year. Equities holdings dropped to a cycle trough $7.768 TN during Q1 2009, following cycle peaks $15.023 TN (Q3 2007) and $11.532 TN (Q1 2000). Household Equities holdings ended Q2 at a record 188% of GDP – having risen from 142% to end 2019 – and up huge from previous cycle peaks 104% (Q2 ’07) and 115% (Q1 2000).

Banking (“Private Depository Institutions”) system Assets expanded $227 billion during the quarter, or 3.8% annualized. Loans expanded $48 billion, with Mortgage loans up $50 billion and Consumer Credit surging $84 billion (2nd strongest Q ever). Meanwhile, Loans (not elsewhere classified/business) sank $87 billion.

Why lend when it’s easier to simply own securities? Banking Debt Securities holdings surged $265 billion (17% annualized) during the quarter to a record $6.453 TN, with Agency/MBS up $125 billion (to $3.730 TN), Corporate bonds up $33 billion (to $833bn), and Treasuries up $93 billion (to $1.349 TN). Debt Securities holdings were up $1.224 TN, or 23%, over four quarters, led by an $809 billion jump in Agency Securities.

Banking’s Repurchase Agreement (“Repo”) Asset sank $295 billion during the quarter (to $577bn), as the marketplace shifted to the Fed’s repo facility.

On the Bank Liability side, Total Deposits expanded $232 billion during the quarter to a record $19.938 TN. Total Deposits were up a stunning $4.4 TN, or 28.4%, over six quarters.

Federal Reserve Assets jumped $489 billion during Q2, the largest expansion in a year, to a record $8.258 TN. Treasury holdings rose $323 billion (to $5.597 TN) and Agency Securities jumped $143 billion (to $2.414 TN). Fed Assets were up $894 billion y-o-y (Treasuries up $789bn and Agencies rising $378bn) and $4.248 TN over eight quarters (Treasuries $3.281 TN and Agencies $829bn). Fed Assets have gained $7.307 TN, or 768%, since mid-2008.

The Liability side of the Fed’s balance sheet has become intriguing. The Treasury’s account at the Fed (“Due to Federal Govt”) dropped $270 billion during the quarter and $877 billion through the first half. Meanwhile, the Fed's Security Repurchase Agreement (“Repo”) Liability surged $909 billion during the quarter (to $1.261 TN) and $1.045 TN during the first half. In simple terms, the Treasury has spent funds held at the Fed, “money” dispersed throughout the markets and economy only to be recirculated back into “Repos” held at the Fed. The Fed’s “Repo” facility has basically allowed Fed-created liquidity to be intermediated directly back through the Fed, bypassing the typical process of liquidity funneled to the banking system, where it would then be converted into bank “Reserves” held at the Fed.

Rest of World (ROW) holdings of U.S. Financial Assets surged $2.542 TN during Q2 to a record $43.592 TN. Amazingly, ROW holdings began year 2000 at $7.310 TN and first surpassed $10 TN in Q3 2004. ROW holdings to GDP ended Q2 at a record 192%, up from 161% to end 2019. This ratio was at 108% at the end of 2007 and 74% to conclude the nineties. ROW holdings of Treasuries ($7.202 TN), Agency Securities ($1.145 TN), Corporate bonds ($4.435 TN), and Total Equities ($13.321 TN) all ended Q2 at all-time records. In yet another incredible data point, ROW holdings of U.S. Financial Assets inflated $13.625 TN, or 46%, in just 10 quarters.

As always, Z.1 data are invaluable in shedding light on the historic U.S. Credit Bubble.

For the Week:

The S&P500 increased 0.5% (up 18.6% y-t-d), and the Dow rose 0.6% (up 13.7%). The Utilities fell 1.2% (up 3.8%). The Banks rallied 3.1% (up 32.9%), and the Broker/Dealers gained 2.0% (up 26.0%). The Transports added 0.5% (up 14.7%). The S&P 400 Midcaps rose 0.8% (up 17.0%), and the small cap Russell 2000 increased 0.5% (up 13.8%). The Nasdaq100 was little changed (up 18.9%). The Semiconductors added 1.0% (up 23.6%). The Biotechs declined 0.8% (up 3.0%). As bullion slipped $4, the HUI gold index sank 3.0% (down 23.1%).

Three-month Treasury bill rates ended the week at 0.025%. Two-year government yields rose five bps to 0.27% (up 15bps y-t-d). Five-year T-note yields jumped nine bps to 0.95% (up 59bps). Ten-year Treasury yields gained nine bps to 1.45% (up 54bps). Long bond yields rose eight bps to 1.99% (up 34bps). Benchmark Fannie Mae MBS yields jumped eight bps to 1.93% (up 59bps).

Greek 10-year yields were unchanged at 0.81% (up 19bps y-t-d). Ten-year Portuguese yields rose six bps to 0.32% (up 29bps). Italian 10-year yields jumped six bps to 0.78% (up 24bps). Spain's 10-year yield rose five bps to 0.41% (up 36bps). German bund yields gained five bps to negative 0.23% (up 34bps). French yields jumped six bps to 0.11% (up 45bps). The French to German 10-year bond spread widened about one to 34 bps. U.K. 10-year gilt yields rose eight bps to 0.93% (up 73bps). U.K.'s FTSE equities index rallied 1.3% (up 9.1% y-t-d).

Japan's Nikkei Equities Index declined 0.8% (up 10.2% y-t-d). Japanese 10-year "JGB" yields added one basis point to 0.06% (up 4bps y-t-d). France's CAC40 recovered 1.0% (up 19.6%). The German DAX equities index added 0.3% (up 13.2%). Spain's IBEX 35 equities index rallied 1.3% (up 9.9%). Italy's FTSE MIB index rose 1.0% (up 16.8%). EM equities were mixed. Brazil's Bovespa index recovered 1.7% (down 4.8%), and Mexico's Bolsa slipped 0.4% (up 16.0%). South Korea's Kospi index declined 0.5% (up 8.8%). India's Sensex equities index jumped 1.7% (up 25.8%). China's Shanghai Exchange was little changed (up 4.0%). Turkey's Borsa Istanbul National 100 index dropped 2.4% (down 6.2%). Russia's MICEX equities was little changed (up 22.8%).

Investment-grade bond funds saw inflows of $1.495 billion, and junk bond funds posted positive flows of $536 million (from Lipper).

Federal Reserve Credit last week surged $86.3bn to a record $8.438 TN. Over the past 106 weeks, Fed Credit expanded $4.712 TN, or 126%. Fed Credit inflated $5.628 Trillion, or 200%, over the past 463 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week jumped $13.2bn to $3.484 TN. "Custody holdings" were up $60bn, or 1.7%, y-o-y.

Total money market fund assets surged $50.1bn to $4.515 TN. Total money funds increased $100bn y-o-y, or 2.3%.

Total Commercial Paper gained $6.1bn to $1.188 TN. CP was up $203bn, or 20.5%, year-over-year.

Freddie Mac 30-year fixed mortgage rates added two bps to 2.88% (down 2bps y-o-y). Fifteen-year rates rose three bps to 2.15% (down 25bps). Five-year hybrid ARM rates dropped eight bps to 2.43% (down 47bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up two bps to 3.05% (up 2bps).

Currency Watch:

For the week, the U.S. Dollar Index was little changed at 93.33 (up 3.8% y-t-d). For the week on the upside, the Norwegian krone increased 1.5%, the Canadian dollar 0.9%, the Swiss franc 0.8% and the Swedish krona 0.4%. For the week on the downside, the South African rand declined 1.6%, the Brazilian real 0.8%, the Japanese yen 0.7%, the British pound 0.5%, the Singapore dollar 0.4%, the New Zealand dollar 0.4%, the Mexican peso 0.2%, and the South Korean won 0.1%. The Chinese renminbi was unchanged versus the dollar (up 0.94% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index rose 1.5% (up 26.8% y-t-d). Spot Gold slipped $4 to $1,750 (down 7.8%). Silver recovered 0.2% to $22.42 (down 15.1%). WTI crude jumped $2.01 to $73.98 (up 53%). Gasoline added 0.7% (up 55%), and Natural Gas gained 0.7% (up 102%). Copper recovered 0.9% (up 22%). Wheat rose 2.1% (up 13%). Corn was little changed (up 9%). Bitcoin sank $4,363, or 9.2%, this week to $42,918 (up 48%).

Coronavirus Watch:

September 21 – Associated Press (Carla K. Johnson): “COVID-19 has now killed about as many Americans as the 1918-19 Spanish flu pandemic did — approximately 675,000. The U.S. population a century ago was just one-third of what it is today… But the COVID-19 crisis is by any measure a colossal tragedy in its own right, especially given the incredible advances in scientific knowledge since then and the failure to take maximum advantage of the vaccines available this time.”

September 21 – Associated Press (Heather Holligsworth): “COVID-19 deaths in the U.S. have climbed to an average of more than 1,900 a day for the first time since early March, with experts saying the virus is preying largely on a distinct group: 71 million unvaccinated Americans. The increasingly lethal turn has filled hospitals, complicated the start of the school year, delayed the return to offices and demoralized health care workers.”

September 23 – CNBC (Nate Rattner and Robert Towey): “An average of more than 2,000 Americans are once again dying from Covid every day, a grim threshold that the country has not seen in more than six months. The seven-day average of reported U.S. Covid deaths stood at 2,031 as of Tuesday, according to… Johns Hopkins University.”

September 23 – Associated Press (Jocelyn Gecker): “One desperate California school district is sending flyers home in students’ lunchboxes, telling parents it’s ‘now hiring.’ Elsewhere, principals are filling in as crossing guards, teachers are being offered signing bonuses and schools are moving back to online learning. Now that schools have welcomed students back to classrooms, they face a new challenge: a shortage of teachers and staff the likes of which some districts say they have never seen. Public schools have struggled for years with teacher shortages, particularly in math, science, special education and languages. But the coronavirus pandemic has exacerbated the problem. The stress of teaching in the COVID-19 era has triggered a spike in retirements and resignations.”

Market Mania Watch:

September 20 – CNBC (Tanaya Macheel): “The price of bitcoin dropped sharply Monday as investors began shedding risk amid a global equity markets decline. Many people have argued that bitcoin is most useful as a safe-haven asset, but that narrative could be changing as people realize its price often goes down with broader declines in risk assets. Bitcoin’s rally this year has coincided with the risk-on rally and, much like stocks, the cryptocurrency is prone to sharp declines in September. Bitcoin lost as much as 10% on Monday morning.”

September 24 – Bloomberg: “The Chinese central bank says all cryptocurrency-related transactions are illegal, according to a Q&A statement published Friday on PBOC’s website about a joint government guidelines on cracking down on cryptocurrency trading and speculation risks. Online crytocurrency services to Chinese clients by overseas exchanges are also illegal, according to the guidelines. Banned transactions also include conversion between fiat currency and cryptocurrency, trading of the cryptocurrency as central counterparty, providing information and pricing services, initial coin offerings…”

September 19 – Wall Street Journal (Sebastian Pellejero): “The $3 trillion market for low-rated companies’ debt is having its best year ever… U.S. companies… have sold more than $786 billion of junk-rated bonds and loans so far in 2021, according to S&P Global Market Intelligence’s S&P. That tops the previous high for a full year in data going back to 2008.”

September 21 – Bloomberg (Richard Frost): “After a harrowing Monday that saw risky assets tumble globally on fears of a collapse in China Evergrande Group, some of the world’s biggest banks and money managers raced to assure investors that this is no Lehman moment. The message from firms including Citigroup Inc., Fidelity... and AllianceBernstein Holding LP: Evergrande may indeed default, but Chinese authorities will take steps to prevent the property giant’s crisis from destabilizing the financial system and the economy.”

Market Instability Watch:

September 20 – Reuters (Gertrude Chavez-dreyfuss): “Spreads on 10-year U.S. interest rate swaps over Treasuries hit their widest in more than six months due in part to worries about the potential fallout of Chinese property group Evergrande's financial troubles to the global economy. In another sign of concern brewing in money markets, analysts cited three-month Libor , which rose to 12.5 bps, a four-week peak, according to Refinitiv data, which may reflect some stress in the banking system.”

September 21 – Bloomberg (Justina Lee): “U.S. stocks that are booming thanks to ultra-low bond yields are now the most expensive since at least 1992, according to Sanford C. Bernstein. It’s a sign that money managers are defying inflationary threats to ride a crowded Wall Street trade. The warning comes just as Federal Reserve policy makers gather to flesh out a plan for tapering crisis stimulus in the coming months -- a move that could awaken Treasury markets from their slumber. With the tech corner of the equity landscape mounting a comeback in recent months, U.S. stocks that are most correlated to bonds are 30% more expensive than the market overall, Bernstein’s quant team said. ‘This poses a major risk for portfolio managers,’ strategists led by Sarah McCarthy wrote… ‘There are plenty of indicators that inflation may be more widespread and persistent than many originally anticipated.”

September 21 – Financial Times (Steve Johnson and Chris Flood): “Western investors are getting their fingers burnt after piling into exchange traded funds holding China Evergrande debt in an increasingly desperate hunt for yield. The world’s most indebted property developer is battling a severe liquidity crisis, which has sent shockwaves across China’s entire property sector and shaken equity markets across the world, particularly affecting a number of bond and equity ETFs. Evergrande’s share price has slumped 85% in the past three months… Some of Evergrande’s dollar bonds are trading below 30 cents on the dollar… Its paper is held by a dozen fixed income ETFs run by managers such as BlackRock, Van Eck, JPMorgan and Legal & General. Between them the 12 ETFs… have seen rapid growth in their assets this year, with combined net inflows of $13bn since December taking their aggregate assets to $25.8bn… The assets of BlackRock’s iShares USD Asia High Yield Bond ETF (O9P) quadrupled from $148m at the end of 2020 to $593m as of Monday.”

September 19 – CNBC (Tanaya Macheel): “China’s ‘highly distressed’ real estate companies are at risk of collapse as the country’s highly indebted developer Evergrande is on the brink of default, warns AllianceBernstein’s Jenny Zeng. Speaking with CNBC…, the co-head of Asia fixed income at AllianceBernstein warned of a ‘domino effect’ from a potential Evergrande collapse. ‘In the offshore dollar market, there is a considerable large portion of developers (who) are implied to be highly distressed,’ Zeng said. These developers ‘can’t survive much longer’ if the refinancing channel remains shut for a prolonged period, she added.”

September 23 – Financial Times (Thomas Hale and Hudson Lockett): “Deepening worries over Evergrande have ignited selling in a $428bn corner of the Asian debt market, underscoring how the crisis at the Chinese property developer is spreading to other assets as traders and investors brace for a crucial payment deadline on Thursday. The Evergrande bond on which the interest payment was due was trading at around $0.28 on the dollar… Yields on US dollar-denominated bonds issued by riskier Asian borrowers have soared to almost 12% this week, the highest level since a jump during the early stages of the coronavirus pandemic… The yields stood at 7% at the start of the year.”

Inflation Watch:

September 20 – Bloomberg (Alexandre Tanzi): “U.S. homeowners enjoying historic gains in the value of their property will likely face a hit next year through a higher tax bill. Property taxes -- up the most in 15 years in 2020… will likely see even sharper jumps this year. The median price of previously-owned, single-family homes set new highs last year, and have climbed even more in 2021, which could haunt homeowners when the bills come due and potentially force Americans to dig deeper into their savings.”

September 19 – Wall Street Journal (Ryan Dezember): “Natural-gas prices have surged, prompting worries about winter shortages and forecasts for the most expensive fuel since frackers flooded the market more than a decade ago. U.S. natural-gas futures ended Friday at $5.105 per million British thermal units. They were about half that six months ago and have leapt 17% this month.”

September 20 – Bloomberg (Gerson Freitas Jr and Sergio Chapa): “Natural gas futures have been soaring, and they’re set to get especially high in New England and California in the coming months. U.S. inventories are tight, to the point where a harsh winter could mean a supply crunch. Any shortages would have an outsized impact on New England, where limited pipeline capacity makes it harder to bring gas from Appalachia. Looking at gas for January delivery at the Algonquin City Gate, which includes Boston, the premium compared to benchmark Henry Hub futures has more than doubled from last year to about $13 per million British thermal units.”

September 21 – Financial Times (Chris Giles and Martin Arnold): “Inflation will continue to rise over the next two years, according to revised projections by the OECD, which expects price increases to be significantly higher in 2021 and in 2022 than it previously forecast for most G20 countries. Laurence Boone, OECD chief economist, said managing inflation would be ‘a very difficult balancing act’ for policymakers. As if on cue, the vice-president of the European Central Bank promised… to be ‘very vigilant’ for any signs that supply-side bottlenecks and higher wages were driving prices higher than expected. Luis de Guindos told a Financial Times online event that ‘there are risks of much more persistent pressures on inflation in the future’ especially if the recent jump in prices, fuelled in part by a surge in energy costs, feeds into higher wage demands.”

September 23 – Reuters (Stephen Nellis): “Nearly four in five electronics manufacturers say that it has become harder to find qualified workers, compounding problems from an ongoing chip shortage and causing delays in shipping products, a trade group representing them said… IPC, which represents contract manufacturers…, chipmakers…, circuit board makers and other industry players, said about 80% of respondents in its most recent survey said they were having trouble finding workers. More than two-thirds of the companies surveyed said that their labor costs were also rising.”

September 21 – Associated Press (Joseph Pisani): “FedEx is getting hurt by the tight job market. The package delivery company said… its costs are up $450 million in the most recent quarter, as it paid higher wages as it got harder to find new workers and demand for shipping increased. FedEx also cut its outlook for the year, saying earnings will be lower than it previously expected, partly due to the increased costs related to the tight labor market.”

September 23 – Wall Street Journal (Greg Ip): “All year the Federal Reserve’s message on inflation has been consistent: This year’s surge is transitory, and inflation will soon return close to the central bank’s 2% target. Yet look more closely, and it is clear officials are turning less sanguine… Last September, long before the supply bottlenecks emerged, the median forecast by Fed officials was for core inflation… in 2022 of 1.8%. Every few months since then they have nudged that up, and in the forecasts released Wednesday they see core inflation next year at 2.3%. While current-year forecasts get pushed around a lot by temporary factors such as a jump in oil prices, the next-year forecast reflects where inflation is expected to settle once temporary factors recede. The message from the Fed’s latest projections is that ‘transitory’ is lasting an awfully long time. Indeed, next year’s projected 2.3% is the highest next-year core inflation forecast since projections were first published in 2007…”

September 22 – Bloomberg (Michael Hirtzer and Dominic Carey): “The Covid-19 outbreak depleted America’s meat reserves, and new data from the U.S. shows they still haven’t recovered. Beef, pork and chicken in U.S. freezers took a plunge after thousands of slaughterhouse workers caught the virus in 2020 and forced plants to shut down. A labor crunch continues to hurt output. A U.S. report Wednesday showed beef reserves down 7.7% from a year ago in August. Poultry supplies slumped 20% and pork bellies, which are sliced into bacon, dropped 44% to the lowest levels since 2017.”

Biden Administration Watch:

September 22 – Bloomberg (Laura Davison and Christopher Anstey): “Democrats are pursuing an almost certainly doomed strategy to avert a government shutdown and stave off a federal default, raising the likelihood of financial-market stresses that will ultimately force U.S. lawmakers’ hands. While the House on Tuesday night approved a bill to keep the federal government funded past the end of the fiscal year on Sept. 30 and to suspend the debt limit for more than a year, blanket Republican opposition means it’s assured of failing in the Senate. Once that Senate rejection -- expected in coming days -- is complete, the clock will be ticking until the government runs out of authorization to keep many operations running past month-end.”

September 20 – Reuters (Susan Cornwell): “Democrats in the U.S. Congress were scrambling… to find another way to include immigration reform in a sweeping $3.5 trillion social spending bill after a Senate arbiter said their first proposal broke the chamber's rules. The ruling was the latest in a series of stumbling blocks President Joe Biden's party faces as it enters a critical few weeks before a Sept. 27 vote on a $1 trillion Senate-approved infrastructure bill. Also ahead is an Oct. 1 deadline to continue funding the federal government and the threat later in the month that the government will breach its borrowing cap, risking default on U.S. payment obligations.”

September 19 – Reuters (David Lawder): “U.S. Treasury Secretary Janet Yellen issued a fresh plea for Congress to raise the federal debt ceiling…, arguing a default on U.S. debt would trigger a historic financial crisis. In a Wall Street Journal opinion piece, Yellen said that the crisis triggered by a default would compound the damage from the continuing coronavirus pandemic, roiling markets and plunging the U.S. economy back into recession at the cost of millions of jobs and a lasting hike in interest rates. ‘We would emerge from this crisis a permanently weaker nation,’ Yellen said, noting that U.S. creditworthiness has been a strategic advantage.”

September 20 – Wall Street Journal (Courtney McBride, Matthew Dalton and David Winning): “France stepped up its opposition to a security agreement the U.S. crafted with Australia and the U.K., criticizing the Biden administration’s failure to keep its allies apprised of sweeping foreign policy initiatives after the pact led to the loss of a lucrative French submarine deal. On Sunday, French Foreign Minister Jean-Yves Le Drian discussed ‘the strategic consequences of the current crisis’ with its ambassadors from the U.S. and Australia who were recalled for consultations. French President Emmanuel Macron is also expected to speak in the coming days with President Biden…, in a sign of the depth of France’s frustration over the security pact.”

September 21 – Bloomberg (Kaustuv Basu): “Democratic Senator Bob Menendez of New Jersey said repealing the $10,000 cap on the federal deduction for state and local taxes for a few years could be a possibility as Congress wrestles with lawmakers’ demands to scrap it.”

Federal Reserve Watch:

September 22 – Bloomberg (Matthew Boesler and Steve Matthews): “Federal Reserve Chair Jerome Powell said the U.S. central bank could begin scaling back asset purchases in November and complete the process by mid-2022, after officials revealed a growing inclination to raise interest rates next year. Powell, explaining the U.S. central bank’s first steps toward withdrawing emergency pandemic support for the economy, told reporters… that tapering ‘could come as soon as the next meeting.’ That refers to the policy gathering on Nov. 2-3, though he left the door open to waiting longer if needed and stressed that tapering was not meant to start a countdown to liftoff from zero interest rates.”

September 22 – Bloomberg (Craig Torres): “Federal Reserve Chair Jerome Powell said there is little direct U.S. exposure to debt of the Chinese company Evergrande but said it could impact global financial conditions. ‘The Evergrande situation seems very particular to China, which has very high debt for an emerging economy,’ he told reporters…”

September 21 – Bloomberg (Steven T. Dennis): “The Senate Banking Committee’s top Republican sharply criticized Federal Reserve Chairman Jerome Powell… for tolerating what he considers to be the politicization of the nation’s central bank… Senator Pat Toomey of Pennsylvania… did not endorse Powell for another term as Fed chair… ‘I think he has tolerated a politicization of the Fed, generally, that is very detrimental to the Fed, and in the long run, jeopardizes the independence of the Fed, because people ask themselves, ‘Well, maybe they shouldn’t have this independence if they’re going to use it to become a political body,’ said Toomey, who has criticized the central bank for weighing in on issues like climate change or racial justice.”

September 22 – Reuters (Dan Burns, Howard Schneider, Lindsay Dunsmuir and Ann Saphir): “U.S. Federal Reserve Chair Jerome Powell said… he was displeased with the active investing carried out by two Fed regional bank presidents and pledged the central bank’s ethics rules will be tightened after a thorough review. ‘We need to make changes and we are going to do that,’ Powell said at a televised press conference…”

September 22 – CNBC (Silvia Amaro): “JPMorgan… CEO Jamie Dimon has warned investors that the Federal Reserve could still be forced into a sharp policy move next year — despite its best efforts to soothe concerns over inflation and interest rates. Fed Chairman Jerome Powell has already suggested that the central bank could start to dial back on its pandemic-era monetary stimulus before the end of this year… Speaking to CNBC…, Dimon said that if the U.S. continues to see inflation running hot over the next few months then the central bank could be forced to act quickly.”

U.S. Bubble Watch:

September 21 – Reuters (Lucia Mutikani): “The U.S. current account deficit increased to a 14-year high in the second quarter as businesses boosted imports to replenish depleted inventories amid robust consumer spending. The… current account deficit, which measures the flow of goods, services and investments into and out of the country, rose 0.5% to $190.3 billion last quarter. That was the largest shortfall since the second quarter of 2007.”

September 23 – CNBC (Jeff Cox): “First-time filings for unemployment benefits jumped last week, hitting the highest level in a month… Initial claims for the week ended Sept. 18 on a seasonally adjusted basis totaled 351,000, an increase from the previous week’s upwardly revised 335,000 and well ahead of the 320,000 Dow Jones estimate. The total was the highest since the week of Aug. 21.”

September 22 – Reuters (Lucia Mutikani): “U.S. home sales fell in August as supply remained tight… Existing home sales dropped 2.0% to a seasonally adjusted annual rate of 5.88 million units last month. Sales fell in all four regions, with the densely populated South posting a 3.0% decline… The median existing house price increased 14.9% from a year ago to $356,700 in August. That is a deceleration from a 23.6% jump in May. There were 1.29 million previously owned homes on the market last month, down 13.4% from a year ago. At August's sales pace, it would take 2.6 months to exhaust the current inventory, down from 3.0 months a year ago.”

September 21 – Reuters (Lucia Mutikani): “U.S. single-family homebuilding fell for a second straight month in August as builders continued to struggle with shortages of materials and labor, suggesting the housing market could remain a drag on economic growth in the third quarter. The… the number of houses authorized for construction but not yet started raced to a record high last month, a sign of reluctance by builders to take on new projects. Builders' inability to ramp up the production of single-family homes amid a massive housing shortage is driving up prices and keeping some first-time buyers from the market.”

September 20 – Associated Press (Alex Veiga): “Even in the hottest U.S. housing market in more than a decade, new home construction has turned into a frustratingly uncertain and costly proposition for many homebuilders. Rising costs and shortages of building materials and labor are rippling across the homebuilding industry… Construction delays are common, prompting many builders to pump the brakes on the number of new homes they put up for sale. As building a new home gets more expensive, some of those costs are passed along to buyers. Across the economy, prices having spiked this year amid shortages of manufactured goods and components, from cars and computer chips to paint and building materials.”

September 20 – Reuters (Sohini Podder): “Steve Mnuchin, a former Goldman Sachs executive who served as U.S. Treasury secretary during the Trump administration, has raised $2.5 billion at his private equity firm… Most of the money raised for Washington D.C.-based Liberty Strategic Capital came from sovereign wealth funds in the Middle East, including Saudi Arabia's Public Investment Fund…”

China Watch:

September 20 – Wall Street Journal (Lingling Wei): “Xi Jinping’s campaign against private enterprise, it is increasingly clear, is far more ambitious than meets the eye. The Chinese President is not just trying to rein in a few big tech and other companies and show who is boss in China. He is trying to roll back China’s decadeslong evolution toward Western-style capitalism and put the country on a different path entirely, a close examination of Mr. Xi’s writings and his discussions with party officials, and interviews with people involved in policy making, show. For most of the 40 years after Deng Xiaoping first unleashed economic reforms in China, Communist Party leaders gave market forces wider room to flourish. That opening helped lift hundreds of millions of people out of poverty and created trillions of dollars in wealth, but also led to rampant corruption and eroded the ideological basis for continued Communist rule. In Mr. Xi’s opinion, private capital now has been allowed to run amok, menacing the party’s legitimacy, officials familiar with his priorities say. The Wall Street Journal examination shows he is trying forcefully to get China back to the vision of Mao Zedong, who saw capitalism as a transitory phase on the road to socialism.”

September 23 – Bloomberg (Tian Chen): “China’s central bank net-injected the most short-term liquidity in eight months into the financial system, with markets roiled by concerns over China Evergrande Group’s debt crisis. The People’s Bank of China pumped in 110 billion yuan ($17bn) of cash with seven- and 14-day reverse repurchase agreements. That was the largest addition through open-market operations since late January, when a funding squeeze sent interbank rates soaring. Prior to Thursday, the PBOC had injected liquidity for three straight sessions, stoking bets that Beijing hopes to soothe market nerves over Evergrande.”

September 21 – Wall Street Journal (James Mackintosh): “Teetering Shenzhen property conglomerate China Evergrande is the Chinese economy in miniature. Both have operated for decades on the principle that it was worth borrowing to build, in Evergrande’s case mostly housing, in China’s case not just apartments, but roads, rail, airports and other infrastructure. Evergrande’s business has run out of credit, in large part due to policy shifts by the Chinese government. Investors have watched in horror as its bonds, and those of other wobbly property developers, collapsed. China’s economic model has also run out of road, and the process of putting it on a new track is likely to bring more Evergrande-like mistakes. We now have to contend with the short-term risks of spillovers from Evergrande while assessing the longer-term effects from the shift in China’s economic model. Both could have serious implications for the rest of the world.”

September 23 – Wall Street Journal (Keith Zhai): “Chinese authorities are asking local governments to prepare for the potential downfall of China Evergrande Group, according to officials familiar with the discussions, signaling a reluctance to bail out the debt-saddled property developer while bracing for any economic and social fallout from the company’s travails. The officials characterized the actions being ordered as ‘getting ready for the possible storm,’ saying that local-level government agencies and state-owned enterprises have been instructed to step in to handle the aftermath only at the last minute should Evergrande fail to manage its affairs in an orderly fashion. They said that local governments have been tasked with preventing unrest and mitigating the ripple effect on home buyers and the broader economy, for example by limiting job losses—scenarios that have grown in likelihood as Evergrande’s situation has worsened.”

September 24 – Bloomberg (Jan Dahinten and David Scanlan): “China’s housing regulator boosted oversight of China Evergrande Group’s bank accounts to protect funds earmarked for housing projects from being diverted to creditors. The developer’s funds must first be used for construction to ensure project delivery, according to people familiar with the plan. Holders of China Evergrande Group’s dollar bonds have been left on edge after several of them said they hadn’t received a coupon payment that was due Thursday. Meanwhile, staff at the firm’s electric vehicle business haven’t been paid, and European banks are trying to reassure investors that their exposure is limited.”

September 23 – Bloomberg: “Financial regulators in Beijing issued a broad set of instructions to China Evergrande Group, encouraging the embattled developer to take all measures possible to avoid a near-term default on dollar bonds while focusing on completing unfinished properties and repaying individual investors. In a recent meeting with Evergrande representatives, regulators said the company should communicate proactively with bondholders to avoid a default, but didn’t give more specific guidance, a person familiar with the matter said… There’s no indication that regulators offered financial support to Evergrande…”

September 22 – Reuters (Karen Pierog, Anshuman Daga, Andrew Galbraith and Samuel Shen): “Indebted property giant China Evergrande will make it a top priority to help wealth investors redeem their products, its chairman said, as investors await a key deadline for a dollar-bond coupon payment on Thursday. Hui Ka Yan said the company was striving to ensure quality delivery of properties and stressed the importance to resume construction on developments where building had been halted… Evergrande shares, which have plunged around 85% this year, jumped as much as 32% in resumed trade on Thursday after a public holiday, marking their biggest single-day percentage rise since its listing in 2009.”

September 21 – Reuters (Zhang Yan, Tony Munroe and Samuel Shen): “Lured by the promise of yields approaching 12%, gifts such as Dyson air purifiers and Gucci bags, and the guarantee of China's top-selling developer, tens of thousands of investors bought wealth management products through China Evergrande Group. Now, many fear they may never get their investments back after the cash-strapped property developer recently stopped repaying some investors and set off global alarm bells over its massive debt.”

September 19 – New York Times (Alexandra Stevenson and Cao Li): “When the troubled Chinese property giant Evergrande was starved for cash earlier this year, it turned to its own employees with a strong-arm pitch: Those who wanted to keep their bonuses would have to give Evergrande a short-term loan. Some workers tapped their friends and family for money to lend to the company. Others borrowed from the bank. Then, this month, Evergrande suddenly stopped paying back the loans, which had been packaged as high-interest investments. Now, hundreds of employees have joined panicked home buyers in demanding their money back from Evergrande, gathering outside the company’s offices across China to protest last week.”

September 21 – Financial Times (Sun Yu, Ryan McMorrow and Sherry Fei Ju): “Crisis-hit Chinese property developer Evergrande used billions of dollars raised by selling wealth management products to retail investors to plug funding gaps and even to pay back other wealth management investors, according to executives of the company... Evergrande financial advisers marketed the products widely, including to homeowners in its apartment blocks, while its managers persuaded subordinates to invest... One executive suggested the products were too high risk for ordinary retail investors and should not have been offered to them.”

September 20 – Financial Times (Thomas Hale and Sun Yu): “Until just a few weeks ago, sales at three residential developments in the eastern Chinese city of Jinan were booming. But in September, traditionally one of the busiest months for purchases of new homes, the mood has soured. Sales at the projects are flat or declining as authorities tighten access to mortgages, and developers are now offering discounts in an attempt to shift the units… ‘Government policy doesn’t support home purchases,’ said Zhou Miao, a property agent at the Jinan branch of PowerChina Real Estate Group. ‘Many people have put off their house purchase plans until next year in the hope the authority relaxes credit controls.’ The issues in Jinan, home to 9m people, are part of a nationwide chill sweeping across China’s real estate sector, which has for decades anchored the country’s economic growth but is now under pressure from Beijing as it seeks to rein in debt and bring prices under control.”

September 20 – Bloomberg: “Visitors to Byton Ltd.’s website are greeted with color-saturated images of shiny electric cars gliding along manicured streets. Those paying a visit to the automaker’s factory in Nanjing, eastern China may be less impressed. The plant is modern and huge, gleaming under the hot summer sun. But there’s total silence. Production has been suspended since the pandemic began and there’s no one around except for a lone security guard. It’s a similar situation across town at Bordrin Motors. Weeds dot the factory’s perimeter and there’s a court notice pasted to the main gate announcing the electric carmaker’s bankruptcy. Bordrin and Byton represent the flip side of China’s EV success. While home-grown stars like Nio Inc. and Xpeng Inc. have gone on to raise billions of dollars and are now selling cars in numbers that rival Tesla Inc., scores more have fallen by the wayside, unable to raise the crazy amounts of capital needed to make automobiles at scale.”

September 21 – Financial Times (James Kynge and Sun Yu): “A dramatic video filmed in the southwestern city of Kunming in August hints at the scale of China’s property bubble. Onlookers can be heard screaming in awe as 15 high-rise apartment blocks are demolished by 85,000 controlled explosions in less than a minute. The unfinished buildings, which formed a complex called Sunshine City II, had stood empty since 2013 after one developer ran out of money and another found defects in the construction work. ‘This urban scar that stood for nearly 10 years has at last taken a key step toward restoration,’ said an article in the official Kunming Daily… Such ‘urban scars’ are common all over China… Evergrande, for all of the high drama of its meltdown, is merely the symptom of a much bigger problem. China’s vast real estate sector, which contributes 29% of the country’s gross domestic product, is so overbuilt that it threatens to relinquish its longstanding role as a prime driver of Chinese economic growth and, instead, become a drag on it.”

September 21 – Bloomberg (Alice Huang): “The dollar bonds of Chinese developer Sinic Holdings Group Co. have come under intense selling pressure this week, following a plunge in the firm’s shares and a credit rating downgrade on concerns over its finances. Sinic’s $246 million bond due Oct. 18 was trading at around 25 cents to 28 cents on the dollar Tuesday…”

September 22 – Bloomberg (Jasmine Ng): “China once again warned of the impact of skyrocketing energy prices on fertilizer supplies and signaled concern that food security could be affected. The National Development and Reform Commission said fertilizers are important for agricultural production and maintaining food security, and urged authorities to ensure stable prices and prioritize the supply of raw materials and energy to chemical fertilizer companies…”

September 20 – Bloomberg: “In a low-cut midriff top, butt-hugging pants and a bold red lip, Beijing photographer Alain would be hard to miss even in the most crowded party. People stare, he said, and he loves it: ‘It’s totally a rebellion against conservative culture.’ That, for President Xi Jinping’s Communist Party, is the problem. Earlier this month, regulators explicitly targeted androgynous pop idols and anyone who, like Alain, doesn’t conform to Chinese gender norms, using a derogatory slur to warn media companies off men who express a more feminine style. The National Radio and Television Administration used the word ‘niangpao,’ which roughly translates to ‘sissy men,’ in guidance to TV companies, telling them to ‘strictly control the selection of program actors and guests.’ It’s the first time the government used the term, which is often used to insult or bully gay men…”

September 21 – Financial Times (Harriet Agnew): “Evergrande’s crisis could be ‘far worse’ for investors in China than a ‘Lehman-type situation’ because it points to the end of the property-driven growth model in the world’s second-largest economy, said short-seller Jim Chanos. ‘There’s lots of Evergrandes out there in China — Evergrande just happens to be one of the biggest,’ Chanos told the Financial Times… ‘But all the developers look like this. The whole Chinese property market is on stilts,” said the founder of… hedge fund Kynikos Associates…”

Central Banker Watch:

September 23 – Reuters (Tommy Wilkes, Saikat Chatterjee, Sujata Rao and Dhara Ranasinghe): “Norway has become the first major developed economy to lift interest rates as growth rebounds following a pandemic that unleashed extraordinary stimulus across the globe. As an economic recovery takes hold and inflationary pressures build, some central banks are confident that now is the time to head to the exit. Others are cautious given a still uncertain outlook, exacerbated by COVID-19 variants.”

September 21 – Bloomberg (William Horobin): “Global central banks need to set out clear strategies for coping with inflation risks as the world economy experiences faster-than-expected cost increases amid an uneven recovery from the pandemic, the OECD said… ‘Near-term inflation risks are on the upside, particularly if pent-up demand by consumers is stronger than anticipated, or if supply shortages take a long time to overcome,’ the OECD said in a report. ‘Accommodative monetary policy should be maintained, but clear guidance is needed about the horizon and extent to which any inflation overshooting will be tolerated.’”

September 21 – Bloomberg (Francesco Canepa and Balazs Koranyi): “European Central Bank policymakers still see the recent inflation surge as temporary but a growing number appear to be acknowledging the risk that price growth may exceed their relatively benign projections. Inflation hit 3% last month, well above the ECB's 2% target and could even climb to 3.5% by November, but the bank then sees a rapid drop that will drag price growth back below 2% for years to come. A surge in commodity prices, supply bottlenecks and growing signs of labour shortages are however challenging this ‘hump-shaped’ profile for consumer price growth.”

Global Bubble Watch:

September 21 – Bloomberg (Ari Altstedter): “Canadian Prime Minister Justin Trudeau won a historic third term with the promise of higher taxes, bigger deficits and more government spending -- a direction that brings angst to the country’s fiscally conservative business leaders. ‘If you believe that big government is a good thing then you’re dancing in the streets right now,’ said David Rosenberg, an economist who runs his own research firm after years with major investment banks and money managers… ‘If you have a semblance of free market capitalism then you’ve been put into the penalty box.’”

September 19 – Bloomberg (Alan Crawford): “Soaring property prices are forcing people all over the world to abandon all hope of owning a home. The fallout is shaking governments of all political persuasions. It’s a phenomenon given wings by the pandemic. And it’s not just buyers — rents are also soaring in many cities. The upshot is the perennial issue of housing costs has become one of acute housing inequality, and an entire generation is at risk of being left behind. ‘We’re witnessing sections of society being shut out of parts of our city because they can no longer afford apartments,’ Berlin Mayor Michael Mueller says. ‘That’s the case in London, in Paris, in Rome, and now unfortunately increasingly in Berlin’… That exclusion is rapidly making housing a new fault line in politics, one with unpredictable repercussions.”

September 23 – CNBC (Michael Wayland): “With no end in sight, the semiconductor chip shortage is now expected to cost the global automotive industry $210 billion in revenue in 2021, according to consulting firm AlixPartners. The forecast is almost double its previous projection of $110 billion in May. The… firm released an initial forecast of $60.6 billion in late January… ‘Of course, everyone had hoped that the chip crisis would have abated more by now, but unfortunate events such as the COVID-19 lockdowns in Malaysia and continued problems elsewhere have exacerbated things,’ said Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners…”

September 22 – Reuters (Bozorgmehr Sharafedin, Susanna Twidale and Roslan Khasawneh): “Global record high natural gas prices are pushing some energy-intensive companies to curtail production in a trend that is adding to disruptions to global supply chains in some sectors such as food and could result in higher costs being passed on to their customers. Some companies, including steel producers, fertiliser manufacturers and glass makers, have had to suspend or reduce production in Europe and Asia as a result of spiking energy prices. That includes two of the world’s largest fertiliser makers, which said they would cut production in Europe. The UK… said it agreed to provide state support to one of the companies to restart production of by-product carbon dioxide, which is used in food production, to avert a supply crunch.”

September 22 – Bloomberg (Jill Ward): “For years climate scientists have warned about the ferocious wildfires and hurricanes that are now overwhelming many communities. Today alarms are ringing about a related financial danger: risks lurking within government bonds, the biggest part of the global debt market. A growing number of investors, academics, policymakers, and regulators are questioning whether credit ratings… are accounting for the impact that extreme weather events and policy changes related to global warming will have on borrowers. Once those risks materialize, they threaten to trigger the kind of sudden, chaotic asset collapse described by the late economist Hyman Minsky.”

EM Watch:

September 23 – Reuters (Ali Kucukgocmen and Jonathan Spicer): “Turkey’s central bank unexpectedly cut its policy rate by 100 bps to 18%..., delivering stimulus long sought by President Tayyip Erdogan despite high inflation, and sending the lira to near a record low. The central bank was widely expected to hold interest rates steady at 19%, where they had been since March, given inflation reached 19.25% last month.”

September 23 – Bloomberg (Maria Eloisa Capurro): “Brazil’s central bank pledged to deliver a third consecutive interest-rate hike of 100 bps next month, saying such a pace of monetary tightening is convenient to bring inflation back to target. The bank on Wednesday lifted the Selic to 6.25% from 5.25%... Board members said that an even more restrictive monetary policy is needed to control inflation that’s nearing 10% amid pressures from services and goods, including food and fuels.”

Europe Watch:

September 22 – Financial Times (Guy Chazan): “With just three days till polling day, Germany’s election is wide open. Rarely has such a crucial democratic exercise been tinged by so much uncertainty. Never before have Germans faced such a broad spectrum of possible electoral outcomes. Angela Merkel is quitting the political battlefield and the army of voters the chancellor once commanded is now up for grabs. Her departure, after 16 years in power, has disrupted a system that once seemed the model of stability. ‘For so many people the primary loyalty was to Merkel — and now she’s going,’ says Andrea Römmele, professor… at the Hertie School in Berlin. As a result, ‘we have an extremely high volatility among voters — more than 50% of them are open in all directions.’”

September 21 – Financial Times (Helen Thompson): “With autumn having barely arrived, fears of a European gas crisis are palpable. Global gas prices are higher than they have been during any non-winter month since they were crashing down from their peak in June 2008. European countries have been hardest hit. Natural gas import prices for the EU are up 440% on a year ago. With gas still central to electricity generation in most European countries, the benchmark EU electricity contract hit a record this month. In the UK, several small British energy companies, which had banked upon the relatively low prices brought by the American shale gas boom as a permanent turn, have gone under. If a gas crisis is coming Europe’s way, it has been long in the making. Since natural gas took off as an energy source in the 1960s, internal European supply has largely come from Norway, the Netherlands, and Britain. Most European countries have long needed to import a significant supply from outside Europe.”

September 19 – Bloomberg (Catherine Bosley and Isis Almeida): “The deepening chaos in Europe’s energy markets risks undermining the region’s recovery and complicating policy for officials desperately trying to put the worst economic crisis in a generation behind them. Power and gas prices have rocketed in financial markets over the past few weeks as traders grapple with a shortage of supply for the coming winter. Many short-term prices are trading at multiples of their usual ranges and even longer-term markets for 2022 are sharply higher. While there’s a lag before the full impact hits households and consumers, politicians are already fretting about the effect on voters.”

September 23 – Bloomberg (Carolynn Look): “Business activity in the euro area ‘markedly’ lost momentum in September after demand peaked over the summer and supply chain bottlenecks hurt both services and manufacturers. Surveys of purchasing managers by IHS Markit showed growth in both sectors slowing more than expected, bringing overall activity to a five-month low. Input costs, meanwhile, surged to the highest in 21 years… ‘Firms have become increasingly frustrated by supply delays, shortages and ever-higher prices for inputs,’ said Chris Williamson, chief business economist at IHS Markit. ‘Businesses, most notably in manufacturing but also now in the service sector, are being constrained as a result, often losing sales and customers.’”

Japan Watch:

September 18 – Associated Press (Mari Yamaguchi): “Four candidates vying to lead Japan’s governing Liberal Democratic Party — and replacing outgoing Prime Minister Yoshihide Suga — held their first main debate on Saturday, discussing plans to tackle key issues such as China, the COVID-19 measures, the pandemic-hit economy and climate change and energy. The vote will be held on Sept. 29. The contenders include front-runner Vaccinations Minister Taro Kono, former Foreign Minister Fumio Kishida, as well as two female candidates — an ultra-conservative former Internal Affairs Minister Sanae Takaichi and former Gender Equality Minister Seiko Noda, a diversity supporter.”

September 21 – Reuters (Leika Kihara and Tetsushi Kajimoto): “The Bank of Japan… offered a bleaker view on exports and output as Asian factory shutdowns caused supply bottlenecks, but maintained its optimism that robust global growth will keep the economic recovery on track. Bank of Japan Governor Haruhiko Kuroda also brushed aside fears that the debt problems of China Evergrande Group could disrupt the global financial system, saying it was still ‘an individual company’s problem and that of China’s real estate sector.’ ‘We need to keep an eye out on whether this affects global markets. But for now, I don’t see this turning into a global, bigger problem,’ Kuroda told a briefing…”

Social, Political, Environmental, Cybersecurity Instability Watch:

September 24 – Bloomberg (Zachary R. Mider and Rachel Adams-Heard): “When researchers flew over an Energy Transfer LP facility in the Permian Basin of West Texas two months ago, a NASA-designed sensor on their airplane detected a colossal plume of methane pouring into the air. Over the next two weeks, they returned twice and found large amounts of the powerful greenhouse gas each time. It was just one of many persistent methane emitters discovered by an aerial survey conducted by the Environmental Defense Fund over the largest U.S. oil field in July and August. The invisible leak was later calculated at more than a ton per hour, with a short-term impact on the atmosphere equivalent to about 47,000 idling cars.”

September 17 – Reuters (Fred Greaves): “Fire crews in California have resorted to wrapping the bases of some giant sequoias in fire-resistant coverings in a desperate effort to save the towering specimens, including the General Sherman, the world’s largest tree, the National Park Service said…”

September 21 – Reuters (Valerie Volcovici, David Brunnstrom and Michelle Nichols): “Chinese leader Xi Jinping said… that China would not build new coal-fired power projects abroad, using his address at the United Nations General Assembly to add to pledges to deal with climate change. Xi provided no details, but depending on how the policy is implemented, the move could significantly limit the financing of coal plants in the developing world. China has been under heavy diplomatic pressure to put an end to its coal financing overseas…”

Geopolitical Watch:

September 20 – Associated Press (Edith M. Lederer): “Warning of a potential new Cold War, the head of the United Nations implored China and the United States to repair their ‘completely dysfunctional’ relationship before problems between the two large and deeply influential countries spill over even further into the rest of the planet… Guterres said the world’s two major economic powers should be cooperating on climate and negotiating more robustly on trade and technology even given persisting political fissures about human rights, economics, online security and sovereignty in the South China Sea. ‘Unfortunately, today we only have confrontation,’ Guterres said…”

September 23 – Reuters (Ben Blanchard): “Taiwan’s air force scrambled again on Thursday to warn off 19 Chinese aircraft that entered its air defence zone, Taiwan's defence ministry said, the latest uptick in tensions across the Taiwan Strait. The Chinese aircraft included 12 J-16 fighters and two nuclear-capable H-6 bombers…”

September 23 – Reuters (Anton Kolodyazhnyy): “Russia's navy practised firing at targets in the Black Sea off the coast of annexed Crimea using its Bastion coastal missile defence system, Russia's Defence Ministry said… as Ukraine held joint military drills with the United States. The exercises in Ukraine involving U.S. and other NATO troops are set to run until Oct. 1. They follow huge war games staged by neighbouring Russia and Belarus earlier this month that alarmed the West.”