Saturday, July 17, 2021

Saturday's News Links

[CNBC] Funding for Biden’s infrastructure plan is still up in the air ahead of crucial tests

[Yahoo/Bloomberg] OPEC+ Calls Meeting for Sunday After Progress Toward Deal

[Reuters] Delta COVID variant now dominant strain worldwide, U.S. deaths surge -officials

[Reuters] U.S. consumer sentiment drops in early July on inflation fears

[Reuters] Cash-flush Americans lift U.S. retail sales; shortages depress auto purchases

[Yahoo/Bloomberg] California Faces Fire Threat This Weekend From ‘Dry Lightning’

[Reuters] Death toll in rises to 157 in Germany and Belgium floods

[Bloomberg] Record Stock Rally Stalls With Inflation Rising: Markets Wrap

[Bloomberg] How Derivatives Amp Up Already Heady Crypto Markets

[Bloomberg] MMT’s Kelton Says Temporary Inflation Sign of ‘Growing Pains’

[WSJ] Crypto ‘Yield Farmers’ Chase High Returns, but Risk Losing It All

[FT] ‘Strange’ bond reaction to US inflation data puzzles investors

[FT] US warns companies of risk of doing business in Hong Kong

[FT] Chinese companies face uncertainty as data security hawks gain power

Weekly Commentary: Under Fire

The week had an ominous feel. Ten-year Treasury yields dropped another seven bps to 1.29% - completely disregarding much stronger-than-expected reports on consumer and producer prices, along with inflation expectations.  German bund yields fell another six bps to a three-month low negative 0.35%. Equities were down for the week in Europe, but the notable equities weakness was posted by the broader U.S. market. The Midcaps dropped 3.3%, and the small cap Russell 2000 sank 5.1%. Risk aversion typically leaves its initial mark at the “Periphery.”

Treasury market notwithstanding, inflation has become a problem in more ways than one. Consumer Prices (CPI) jumped 0.9% in June, versus expectations of a 0.5% increase. Year-over-year CPI was up 5.4% (expectations 4.9%), the strongest jump since 2008. And for analysts with issues with year-over-year “base-effects”, consumer inflation was up 3.3% in only five months. Core CPI also gained 0.9% for the month, with a 4.5% y-o-y increase. Producer Prices rose a data series record 7.3% y-o-y. Import Prices jumped 1% for the month and 11.2% y-o-y. University of Michigan one-year Inflation Expectations rose to 4.8%, the high since the summer of 2008. Also, at 4.8%, the New York Fed’s survey of one-year inflation expectations jumped to the highest level in data back to 2013.

To this point, inflation has not been an issue for the markets. It has become a problem for millions of Americans. For the institution of the Federal Reserve, it’s a metastasizing malignancy.

I understand why each Fed official sticks tightly with the party line “inflation will be transitory.” They don’t want to rattle the markets with thoughts of a traditional tightening cycle. And I think I understand why they adopted their framework aiming for a period of above target inflation – and why they swore off responding to incipient inflationary pressures. Again, they sought to retain flexibility to maintain highly accommodative monetary policy, ensuring financial conditions would remain exceptionally loose (and markets high).

Now they’re in a pickle. Things are not proceeding according to plan, and many, including Washington politicians, have serious issues and questions. For starters, what does the Fed mean by transitory? When would heightened inflationary pressures move beyond transitory? And, regarding the new inflation framework, how much beyond target would be too much? And for how long? The Fed does not have answers for some pretty fundamental questions.

Our central bank is trudging into a mine field. I’m concerned about climate change, inequality and racial justice. But those are not within the Fed’s purview. The Federal Reserve has an incredibly important role in our society – to maintain sound money and price stability. It’s an exceptionally challenging responsibility. It’s no exaggeration to suggest the consequences of failure are calamity. The world was in the throes of momentous change, while finance was evolving. They needed to be razor fixated on financial stability, but lost their focus.

Once our “activist” central bank ventured into bolstering the securities markets and using unconventional measures to reflate the economy, it was going to be extremely difficult to refrain from venturing into all types of measures to support various groups and causes. Add QE to the toolkit, and it will become virtually impossible not to be compelled to allocate Fed money to satisfy political interests. After buying Trillions of Treasuries, supporting markets in MBS, muni bonds, corporate debt, ETFs and stocks was going to be inescapable.

The Fed basically risked everything. They thought the changing world meant no more worries of surging inflation and actual tightening measures. Keeping the markets elevated became their unstated priority. But they’re now on the wrong side of a losing bet, a predicament that became increasingly clear this week with Chair Powell’s beltway testimony. The Fed, understandably, is Under Fire for surging inflation.

The institution and its beloved QE have also ensured it today sits right in the middle of an epic political battle. Fiscal conservatism has awakened from a prolonged deep coma. The Republicans have a cause that will increasingly resonate. They see Fed QE financing the liberal agenda and inflation provides the Republicans with additional impetus to confront Federal Reserve policies and doctrine.

The Fed risked their credibility and independence. One can see their credibility erode in real time. Before this is over, their institutional independence will also be in tatters. This is especially distressing considering the collapsing trust in many of our principal institutions.

For posterity…

Pennsylvania Senator Pat Toomey: “The Fed's policy is especially troubling because the warning siren for problematic inflation is getting louder. Inflation is here, and it’s more severe than most, including the Fed itself, expected. And it is more than offsetting the wage gains, so leaving workers worse off despite their nominal wage increases.

For the third month in a row, the Consumer Price Index was higher than expectations. Core CPI… was up 4.5% in June; the highest reading in almost 30 years. And to be clear, this is beyond the so-called base effects. The two-year change in Core CPI was at a 25-year-high. And with housing prices absolutely soaring in many places to completely unaffordable levels, I have to ask why on Earth is the Fed still buying $40 billion in mortgage-backed bonds each month?

Now, the Fed assures us that this inflation is transitory, but its inflation projections over the last year have not inspired confidence. Last June, the Fed projected that PCE… would be 1.6% for the 12 months ending 2021. Then in the December the Fed raised that figure up to 1.8%. And how the Fed's most recent PCE forecast for 2021 year-end is 3.4%, more than double what the Fed thought inflation would be a year ago… I'm very concerned that the Fed's current paradigm almost guarantees that it will be behind the curve in inflation does become problematic and persistent, for several reasons.

First..., the Fed has consistently and systematically underestimated inflation over the last year. Second, the Fed has announced it will allow inflation to run above its 2% target level. Well, it’s already well above 2%. And third, the Fed insists that the inflation we’re experiencing now is transitory, despite the fact that recent unprecedented monetary accommodation has certainly driven the inflation that we’re witnessing. And since the Fed has proven unable to forecast the level of inflation, why should we be confident that the Fed can forecast the duration of inflation…?”

The Fed's current monetary approach seems based on the premise that it needs to prioritize maximum employment over price stability… And when the Fed subordinates its price stability mandate to try to maximize employment, the Fed runs the risk of failing on both fronts because you need stable prices in order to achieve a strong economy and maximize employment.

Lastly, I just want to acknowledge the unique and crucial role played by the Fed in our economy, and some of the responsibilities that attend to that. The ability to direct interest rates and control the money supply is of course an extraordinary power, and Congress has given the Fed a great deal of operational independence in order to isolate it from political interference. But Congress also gave the Fed a narrowly defined mission. I am troubled by the Fed… misusing this independence to wade into politically charged areas like global warming and racial justice. I'd suggest that instead of opining on issues that are clearly beyond the Fed's mission and expertise, it should focus on an issue that clearly is its mandate, controlling inflation. If it doesn't, the Fed will find that its credibility and independence may also have turned out to be transitory…

Let me turn to housing prices a bit. The Case-Shiller Home Price Index showed housing prices across the U.S. as a whole increased in May by more than 15% from the previous year… Fifteen percent, clearly, is making housing less affordable, more out of reach for more people. So, a number of voices within the Fed seem to be increasingly concerned about this. The St. Louis Fed president, James Bullard, said just this week that he is… ‘a little bit concerned that we’re feeding into an incipient housing bubble…’ Dallas Fed President Robert Kaplan said that the Fed should begin tapering to begin offsetting ‘some of these excesses and imbalances’… The Boston Fed president, Eric Rosengren, raised alarms that the Fed's mortgage-backed security purchases may be contributing to the current boom in real estate prices, citing the potential financial stability implications… I’ve been clear for a long time I’ve been very skeptical about the ongoing mortgage-backed purchases. Are you at all concerned about the unintended consequences that are associated with $40 billion worth of mortgage-backed security purchases that continue month after month?”


Chair Powell: “So, housing prices are going up, as you mentioned, around 15%. This is a very high rate of increase. A number of factors are contributing. Monetary policy is certainly one of those factors. There are also other factors. People have very strong balance sheets that they’re able to make down payments. There are also supply factors that are constraining the supply, at least temporarily.”

South Dakota Senator Mike Round: “I understand that clearly you’ve made it your mission to adhere to the guidance for the Fed, in which you work to maintaining 2% inflation over a period of time, as well as full employment. And when we talk about it, it’s always a combination of which one you’re more focused on and how you maintain that, while at the same time responding appropriately in a nonpolitical way to the actions of Congress and the administration.

I'm just curious, with regard to today’s position, we’re coming out of a pandemic. We’ve put a lot of fuel into the economy with direct payments and so forth, and people are trying to get back to work right now. And yet we’ve got inflation, which right now in this current state seems to be above a 2% rate. Can you talk a little bit about the measurement time period that you believe is appropriate for shooting for a 2% goal, and if there is a concern that you would express or that you follow-up with when we talk about overinflating or perhaps putting fuel in. What concerns you would have and how you would respond to congressional activity?”


Powell: “So, the inflation that we have today, what we’ve said is that if inflation runs below 2% for an extended period, we want inflation to run moderately above 2% for some time. This is not moderately above 2%, by any stretch. This is well above 2%, and we understand that. And it’s also not tied to the things that inflation is usually tied to, which is a tight labor market, a tight economy, that kind of thing. This is a shock going through the system associated with reopening of the economy, and it’s driven inflation well above 2%, and, of course, we’re not comfortable with that. In terms of the test that we articulate, we said we wanted inflation to average 2% over time. We didn’t tie ourselves to a formula. What we really want is inflation expectations to be anchored at 2%, because if they’re not, there’s not much reason to think that inflation will average 2%. So that’s really how we're thinking about it.

But the challenge we’re confronting is how to react to this inflation which is larger than we had expected, or that anybody had expected. And to the extent it is temporary, then it wouldn’t be appropriate to react to it. But to the extent it gets longer and longer, we’ll have to continue to reevaluate the risks that it would affect inflation expectations and will be of a longer duration. And that’s what we’re monitoring.”


Tennessee Senator Bill Hagerty: “Chairman Powell, this environment suggests to me that the emergency posture that I understand the Fed adopted back during the depths of the pandemic seriously needs to be reconsidered right now, and I’m very worried that the Fed’s continued level of asset purchases and balance sheet expansion is facilitating this runaway spending that the Democrats are imposing upon us, and adding to the inflationary pressures that these trillions of additional dollars are going to continue to add to our economy and continue to add to the debt that our children are going to continue to bear, and it’s amazing to me that not one Democrat in Congress is willing to speak out about this. So, Chairman Powell, why is the Fed maintaining its emergency monetary policy posture right now? And why do I understand that it may continue well into 2023?”

Powell: “We’re watching the evolution of the economy. We are noting that there’s still an elevated level of unemployment. We note that inflation is well above target, and we’ve discussed that. And we’ve said that we would begin to reduce our asset purchases when we feel that the economy has achieved substantial further progress measured from last December, so we’re in active consideration of that now. We had a full meeting last month to discuss that. We’ve got another meeting coming up in two weeks. So, we’ll be making that assessment, and as we assess the progress of the economy toward that goal, we will begin to reduce our asset purchases. We’ve set a separate test for raising interest rates, which is a higher test. And so that’s how we’re thinking about this today.”

North Carolina Senator Thom Tillis: “I’ve got to beat the inflation drum for just a minute here. The FOMC members insist inflation is transitory but it hasn’t inspired a lot of confidence in me. There were a couple of statements by President Mary Daly: In February, she declared ‘the pressures on inflation now are downward.’ In May, when inflation readings were at 3.9%, she said ‘the higher inflation readings would mean 2.4% to 2.6%.’ In June, she was predicting that inflation ‘could go above 3%.’ And despite months of relatively lowball projections, in response to Tuesday's high inflation readings, she confidently declared ‘we expect a pop in inflation like this.’ So I hope, from our perspective, you could see that we’re skeptical about some of the inflation projections. And I’ve spoken with a number of people in financial services industry, and when I ask them the question about transitory, I’m getting more of a response of ‘transitoryish’. So, can you give me a reason why you believe the Fed’s position on it being transitory, that it will snap back, why that’s still well-founded?”

Powell: “So let me start by saying that no one has any experience of what it is to reopen the economy after what we went through. And, so all of us are going to have to be guided by data and our views are going to have to be...”

Tillis: “Let me interrupt you for a second. I’d also like for you to answer that question in the context of the flow of money that’s been passed in the prior COVID relief packages. And we heard an announcement this week from the Speaker of the House and Senator Schumer that they have an agreement on another $3.5 trillion. I’m a part of a working group for infrastructure that could add about another $600 billion. So, answer the question in the context of how that future… How does that all fit into the credibility of future inflation projections?”

Powell: “So when we look at inflation, we look in the basket of things and we say ‘which of the hundred-plus things in the CPI basket are causing the inflation -- high inflation reading?’ And it comes down to really a handful of things, all of which are tied to the reopening – it’s used, rented and new cars, it’s airplane tickets, it’s hotel rooms and it’s a handful of other things, and they account for essentially all of the overshoot. And we think that those things are clearly temporary. We don’t know when they’ll end but they’ll go away. We don’t know when they’ll go away. We also don’t know whether there are other things that will come forward and take their place. What we don’t see now is broad inflation pressure showing up in a lot of categories. The concern would be if we did start to see that. We don’t see that now. We’ll be watching carefully, and we won’t have to wait a tremendously long time to know whether our basic understanding of this is right. We will know because we'll see if inflation is spreading more broadly, that’ll give us information...”

Alabama Senator Richard Shelby: “Chairman Powell, we’ve been talking about inflation, and it’s not going to go away, I think, for a while. So, we’re going to continue to talk about it, and you'll be concerned with it. In June, U.S. inflation accelerated at its fastest pace in 13 years. Consumer prices increased by 5.4% from a year ago. Americans are now paying higher prices for many of the goods and services that they cannot do without… Yet, in the midst of the increase in consumer prices…, the Biden administration is proposing trillions more in government spending. The Fed’s ability to maintain price stability is threatened, I believe by actual inflation or the expectation of inflation… When taking all this into consideration, which you have data that we probably don’t have, do you believe that our nation is facing a real problem with inflation? And if not, why not? How do you justify it?”

Powell: “I think we’re experiencing a big uptick in inflation; bigger than many expected; bigger than certainly I expected. And we’re trying to understand whether it’s something that will pass through fairly quickly. Or whether, in fact, we need to act one way or the other. We’re not going to be going into a period of high inflation for a long period of time, because of course, we have tools to address that. But we don’t want to use them in a way that is unnecessary or that interrupts the rebound of the economy. We want to put people back to work. And there are a lot of people who are not back to work yet. But let me say we’re very well aware of the risks from inflation and watching very carefully. And if we come to the view that or if we see inflation expectations or the path of inflation moving up in a way that’s troubling, then we will react appropriately.”

Shelby: “Are you concerned about all the things that I just related? All the price increases unprecedented in recent years. Or are you just putting that aside?

Powell: “No, I mean, we’re, of course, night and day, we’re all thinking about that... and really asking ourselves whether we have the right frame of reference, the right framework for understanding this.”


For the Week:

The S&P500 declined 1.0% (up 15.2% y-t-d), and the Dow slipped 0.5% (up 13.3%). The Utilities jumped 2.7% (up 5.4%). The Banks fell 2.4% (up 24.0%), and the Broker/Dealers lost 2.0% (up 20.3%). The Transports dropped 2.4% (up 15.9%). The S&P 400 Midcaps fell 3.3% (up 13.5%), and the small cap Russell 2000 sank 5.1% (up 9.5%). The Nasdaq100 declined 1.0% (up 13.9%). The Semiconductors sank 4.1% (up 12.5%). The Biotechs dropped 4.3% (down 1.4%). While bullion increased $4, the HUI gold index declined 1.4% (down 11.5%).

Three-month Treasury bill rates ended the week at 0.0425%. Two-year government yields added a basis point to 0.22% (up 10bps y-t-d). Five-year T-note yields slipped a basis point to 0.78% (up 41bps). Ten-year Treasury yields dropped seven bps to 1.29% (up 38bps). Long bond yields fell seven bps to 1.92% (up 27bps). Benchmark Fannie Mae MBS yields declined two bps to 1.75% (up 41bps).

Greek 10-year yields fell eight bps to 0.67% (up 23bps y-t-d). Ten-year Portuguese yields declined seven bps to 0.26% (up 23bps). Italian 10-year yields fell six bps to 0.71% (up 16bps). Spain's 10-year yields declined seven bps to 0.29% (up 24bps). German bund yields dropped six bps to negative 0.35% (up 22bps). French yields fell seven bps to negative 0.02% (up 32bps). The French to German 10-year bond spread narrowed one to 33 bps. U.K. 10-year gilt yields dipped three bps to 0.63% (up 43bps). U.K.'s FTSE equities index declined 1.6% (up 8.5% y-t-d).

Japan's Nikkei Equities Index recovered 0.2% (up 2.0% y-t-d). Japanese 10-year "JGB" yields declined one basis point to 0.025% (unchanged y-t-d). France's CAC40 declined 1.1% (up 16.4%). The German DAX equities index fell 0.9% (up 13.3%). Spain's IBEX 35 equities index dropped 3.1% (up 5.4%). Italy's FTSE MIB index declined 1.0% (up 11.5%). EM equities were mixed. Brazil's Bovespa index gained 0.4% (up 5.8%), and Mexico's Bolsa increased 0.8% (up 13.8%). South Korea's Kospi index rallied 1.8% (up 14.0%). India's Sensex equities index rose 1.4% (up 11.3%). China's Shanghai Exchange added 0.4% (up 1.9%). Turkey's Borsa Istanbul National 100 index fell 1.1% (down 7.7%). Russia's MICEX equities index slumped 2.2% (up 14.6%).

Investment-grade bond funds saw inflows of $4.408 billion, while junk bond funds posted outflows of $1.396 billion (from Lipper).

Federal Reserve Credit last week expanded $31.9bn to $8.080 TN. Over the past 96 weeks, Fed Credit expanded $4.353 TN, or 117%. Fed Credit inflated $5.269 Trillion, or 187%, over the past 453 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $10.0bn to $3.538 TN. "Custody holdings" were up $133bn, or 3.9%, y-o-y.

Total money market fund assets dropped $31.0bn to $4.480 TN. Total money funds declined $89bn y-o-y, or 1.9%.

Total Commercial Paper dipped $4.4bn to $1.130 TN. CP was up $104bn, or 10.1%, year-over-year.

Freddie Mac 30-year fixed mortgage rates slipped two bps to a five-month low 2.88% (down 10bps y-o-y). Fifteen-year rates increased two bps to 2.22% (down 26bps). Five-year hybrid ARM rates fell five bps to 2.47% (down 59bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 3.04% (down 15bps).

Currency Watch:

July 15 – CNBC (Kevin Stankiewicz): “DoubleLine Capital CEO Jeffrey Gundlach offered a dire long-term assessment on the U.S. dollar Thursday, telling CNBC… he thinks the greenback is ‘doomed.’ ‘Ultimately, the size of our deficits — both trade deficit, which has exploded post-pandemic, and the budget deficit, which is, obviously, completely off the charts — suggest that in the intermediate term — I don’t really think this year, exactly, but in the intermediate term — the dollar is going to fall pretty substantially,’ Gundlach said…”

For the week, the U.S. Dollar Index gained 0.6% to 92.69 (up 3.1% y-t-d). For the week on the upside, the Brazilian real increased 2.8%, the South Korean won 0.8% and the Japanese yen 0.1%. On the downside, the Norwegian krone declined 2.1%, the South African rand 1.5%, the Canadian dollar 1.3%, the Swedish krona 1.3%, the Australian dollar 1.2%, the British pound 1.0%, the euro 0.6%, the Swiss franc 0.5%, the Singapore dollar 0.4% and the Mexican peso 0.1%. The Chinese renminbi was little changed versus the dollar this week (up 0.74% y-t-d).

Commodities Watch:

July 12 – Bloomberg (Michael Hirtzer and Dominic Carey): “As drought conditions bake the upper reaches of the U.S. Plains, American farmers are now expected to harvest their smallest oats crop in records that go back to 1866. Heat and dry weather are sapping yield potential in key growing states.”

July 12 – Reuters (Julie Ingwersen and Karl Plume): “Farmers in the northern U.S. Plains are on track to harvest the smallest spring wheat crop in 33 years, reflecting the impact of severe drought in the key farming region, the U.S. Department of Agriculture (USDA) said… The shortfall in spring wheat… means tighter supplies of the variety used in bread and pizza dough, prized by millers for its quality and high protein content. Benchmark futures prices on the Minneapolis Grain Exchange surged more than 5% after the USDA slashed its 2021 spring wheat harvest outlook to 345 million bushels, down 41% from a year earlier and the smallest since 1988.”

July 13 – Wall Street Journal (Joe Wallace): “A scramble for natural gas is creating pockets of scarcity in the global market, boosting prices for the fuel and for the electricity generated by burning it. Rampant demand in China is sucking in chilled cargoes of gas from the U.S., after a year in which American energy companies throttled back production. A drought in Brazil has added to the competition by curtailing power output from hydroelectric dams. Searing heat in Canada and the Pacific Northwest has also lifted gas demand.”

The Bloomberg Commodities Index gained 1.0% (up 21.0% y-t-d). Spot Gold added 0.2% to $1,812 (down 4.6%). Silver fell 1.7% to $25.66 (down 2.8%). WTI crude dropped $2.75 to $71.81 (up 48%). Gasoline fell 1.7% (up 60%), while Natural Gas was unchanged (up 45%). Copper declined 0.5% (up 23%). Wheat surged 12.6% (up 8%). Corn jumped 6.8% (up 14%). Bitcoin sank $2,402 this week to $31,264 (up 7.5%).

Coronavirus Watch:

July 13 – Associated Press (Heather Hollingsworth and Josh Funk): “The COVID-19 curve in the U.S. is rising again after months of decline, with the number of new cases per day doubling over the past three weeks, driven by the fast-spreading delta variant, lagging vaccination rates and Fourth of July gatherings. Confirmed infections climbed to an average of about 23,600 a day on Monday, up from 11,300 on June 23… And all but two states — Maine and South Dakota — reported that case numbers have gone up over the past two weeks.”

July 14 – Associated Press (Heather Hollingsworth and Maria Cheng): “COVID-19 deaths and cases are on the rise again globally in a dispiriting setback that is triggering another round of restrictions and dampening hopes for a return to normal life. The World Health Organization reported… deaths climbed last week after nine straight weeks of decline… Cases rose 10% last week to nearly 3 million, with the highest numbers recorded in Brazil, India, Indonesia and Britain...”

Market Mania Watch:

July 15 – Financial Times (Michael Mackenzie and Chris Flood): “Investors are pouring money into exchange traded funds at a historic pace as equity and corporate bond markets rally to new peaks… Flows into ETFs are already on track to outpace a record 2020, totalling $659bn in the first six months of 2021 compared with $767bn for all of last year, according to ETFGI. Global equity-based ETFs have already eclipsed last year’s intake, attracting net flows of $459bn as of June 30, exceeding $366bn and $283bn for 2020 and 2019, respectively… Already a $9tn global market, the swift growth of the ETF universe is feeding a bullish view among big players, led by companies such as BlackRock, State Street and Invesco.”

July 13 – Financial Times (Jackie Noblett): “Fund shops have pumped out ETFs at a breakneck pace so far this year in an attempt to capture a share of the massive inflows into the products. Exactly 200 ETFs launched in the US during the first half of 2021, up from 131 during the same period last year and 100 between January and June 2019…”

July 14 – Financial Times (Michael Mackenzie): “‘In conversations with business leaders, they are seeing higher commodity prices and some are raising their prices and wages,’ Fink told the Financial Times. BlackRock announced the increase in base salary for all employees… alongside second-quarter earnings that comfortably beat analysts’ expectations… BlackRock’s assets under management surged to a record $9.5tn. Revenues climbed 32% to $4.8bn, exceeding expectations of $4.6bn…”

July 13 – CNBC (Ryan Browne): “In March last year, a top venture capital firm described Covid-19 as the ‘black swan of 2020.’ ‘Private financings could soften significantly, as happened in 2001 and 2009,’ Sequoia Capital told portfolio company founders and CEOs in a memo reminiscent of its ‘R.I.P. Good Times’ presentation in the 2008 crisis. Fast forward to July 2021, and tech investors are writing bigger checks than ever. According to CB Insights, start-ups have raised $292.4 billion globally so far this year, on track to beat the $302.6 billion raised throughout 2020… ‘This feels a lot like 1999 to me,’ Hussein Kanji, a partner at U.K. venture capital firm Hoxton Ventures, told CNBC. ‘You had so much supply, so much enthusiasm.’”

July 12 – CNBC (Tanaya Macheel): “Cryptocurrencies are in a summer slump as they navigate a two-month correction period following a string of negative stories. Trading volumes at the largest exchanges… fell more than 40% in June, according to… CryptoCompare, which cited lower prices and lower volatility as the reason for the drop.”

July 15 – Bloomberg (Joanna Ossinger): “Cathie Wood’s flagship ETF is showing many of the bubble-like traits seen in growth-based funds in 2000 and investors should consider betting against it with options, according to JPMorgan’s… Shawn Quigg. The derivatives strategist reckons a second-half increase in Treasury yields could trigger declines for the ARK Innovation exchange-traded fund (ticker ARKK), which is up about 19% since mid-May. ‘Enter the bull trap reversal,’ Quigg wrote…”

Market Instability Watch:

July 15 – Bloomberg (Mohamed El-Erian): “Developments this week have illustrated why we should be more worried about the increasing probability that a monetary policy mistake risks derailing a potentially strong and transformational U.S. economic recovery — assuming, that is, that market accidents don’t happen first, the probability of which is also increasing. The two big U.S. inflation measures… again came in hotter than consensus expectations. Such inflation data overshoots have become common worldwide, reflecting the extent to which both economists and policy makers are still playing catch-up with events on the ground. The fact that both CPI and PPI are running hot is consequential. It suggests that realized inflation is being accompanied by additional inflation in the pipeline. This goes against the Federal Reserve’s often repeated conviction that inflation is transitory, especially now that base effects have mostly played themselves out.”

July 14 – CNBC (Jeff Cox): “Junk bonds aren’t so junky anymore, with a strong fundamental backdrop helping to underpin what traditionally has been one of the riskiest sections of the financial markets. Yields in the $10.6 trillion space for the lowest-grade bonds in terms of quality are around historic lows after a tumultuous year… Most recently, the junk bond sector collectively was yielding 3.97%, according to the ICE Bank of America High-Yield index. That’s up from a record low of 3.89% on Monday. In March 2020, during the worst of the pandemic volatility, the yield was at 9.2%. This is the first time in history that the collective yield for junk has been below the rate of inflation as measured by the consumer price index, which rose 5.4% in June year over year.”

July 15 – Bloomberg (Claire Ballentine and Francesca Maglione): “U.S. money managers couldn’t stop the march toward exchange-traded funds, so they decided to join it instead. Now it’s more like a stampede. ETFs are on the brink of luring more money in seven months than in any calendar year on record. At $488.5 billion and counting, they’ll likely break the $497 billion full-year record set in 2020 in weeks, possibly days. Within that surge is a historic capitulation by the mutual fund industry.”

July 13 – Reuters (Noor Zainab Hussain and Matt Scuffham): “Goldman Sachs… executives said a record backlog of deals will help drive profits for the rest of the year after the bank smashed second-quarter estimates. Deals worth $1.5 trillion were announced in the three months to June 30 despite slowing activity among blank-check firms, more than any second quarter on record and up 13% from the record first quarter of the year… Goldman's Chief Executive Officer David Solomon expects the deal bonanza to continue as company bosses look to re-position their business for the post-pandemic world, he told analysts on a conference call.”

Inflation Watch:

July 13 – CNBC (Yun Li and Nate Rattner): “Price increases in used cars, car rentals — as well as a rebound in airfares, lodging and food — are behind the biggest inflation surge since 2008… The consumer price index jumped 5.4% from a year earlier, the largest increase since before the worst of the financial crisis… Excluding the volatile food and energy categories, inflation increased 4.5%, the largest move since September 1991. On a monthly basis, headline and core prices rose 0.9% against 0.5% Dow Jones estimates.”

July 14 – Associated Press (Martin Crutsinger): “Inflation at the wholesale level jumped 1% in June, pushing price gains over the past 12 months up by a record 7.3%. The… June increase in its producer price index… followed a gain of 0.8% in May and was the largest one-month increase since a 1.2% rise in January. For the 12 months ending in June, wholesale prices are up 7.3%, the largest 12-month increase since the government began the current series on wholesale prices in 2010.”

July 12 – CNBC (Jeff Cox): “Despite the Federal Reserve’s assurance that current inflation pressures won’t last, consumers see things differently, according to a survey… from the central bank’s New York district. The June Survey of Consumer Expectations showed that median inflation expectations over the next 12 months jumped to 4.8%, a 0.8 percentage point rise from May and the highest reading in history for a series that goes back to 2013.”

July 15 – CBS (Aimee Picchi): “The 69 million Americans who collect Social Security are on track to get the largest cost-of-living hike since 1983, with one advocacy group for senior citizens projecting a 6.1% increase to benefits due to surging inflation. The bad news: Recipients will have to wait for that bump because the Social Security Administration adjusts its payments only once a year, starting with December benefits that are paid in January.”

July 13 – Bloomberg: “The cost of feeding the world is the most expensive it’s been in years. The Food and Agriculture Organization’s food price index, which tracks a basket of grains, vegetable oils, meat, dairy and sugar, rose to its highest level in a decade in May. On the Chicago Mercantile Exchange, the prices of soybean oil is more than double what it was a year ago, while lean hogs and ethanol are up by about three-quarters. The same dynamic is affecting corn, palm oil, coffee, sugar and a host of other commodities. Even the price of moving food around the world is surging: The Baltic Handysize Index, which tracks freight rates on the ships used for hauling grains between continents, is at levels last seen in 2008.”

July 11 – Wall Street Journal (Gwynn Guilford and Anthony DeBarros): “Americans should brace themselves for several years of higher inflation than they’ve seen in decades, according to economists who expect the robust post-pandemic economic recovery to fuel brisk price increases for a while. Economists surveyed… by The Wall Street Journal raised their forecasts of how high inflation would go and for how long… The respondents on average now expect a widely followed measure of inflation, which excludes volatile food and energy components, to be up 3.2% in the fourth quarter of 2021 from a year before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and 2023.”

July 14 – Financial Times (Nick Timiraos): “BlackRock chief executive Larry Fink has warned that the US should brace itself for a period of higher inflation, as the world’s largest asset manager handed the majority of its employees an 8% pay rise. The forecast came a day after figures showed the US consumer price index rose in June at the fastest pace in more than a decade, fanning concerns the economy may be overheating. ‘We have been accustomed to sub-2% inflation,’ said Fink, who did not rule out inflation staying above 3%...”

July 12 – Wall Street Journal (Will Horner and Jeffrey T. Lewis): “Global coffee prices are climbing and threatening to drive up costs at the breakfast table as the world’s biggest coffee producer, Brazil, faces one of its worst droughts in almost a century. Prices for arabica coffee beans… hit their highest level since 2016 last month. New York-traded arabica futures have risen over 18% in the past three months to $1.51 a pound.”

July 13 – Bloomberg (John Authers): “Inflation in the U.S. is now an undeniable reality. June’s ‘headline’ consumer price index, including everything the government puts in its representative basket of products and services we buy, stands at 5.4%, the highest in 30 years barring one month in the summer of 2008 when oil reached nearly $150 per barrel. Exclude food and fuel, always variable, and inflation is 4.5% — its highest in three decades, by far. Exclude the most extreme movers both up and down, and inflation remains its worst since 1992 (barring a few months of very expensive oil). Exclude shelter and used cars, which have been massively inflated by the pandemic, and inflation is lower, at 3.6%. But it’s still far higher than it’s been at any time since 1993.”

July 11 – Reuters (Gavin Jones): “Former U.S. Treasury Secretary Lawrence Summers said technical factors were probably at play in the recent surge in bond markets and warned that markets may be underestimating the risk of inflation… Speaking on the sidelines of a meeting of finance ministers and central bank chiefs from the Group of 20…, Summers said markets do not have a great record in predicting future price rises. ‘At times when inflation has significantly accelerated in the past, such as in the 1960s, markets have lagged rather than anticipated developments,’ he said.”

July 13 – Bloomberg (Daniela Sirtori-Cortina and Elizabeth Elkin): “Eric Vanstrom stuck by his dairy cows through a recession, a trade war and a global pandemic that forced him to dump milk into manure pits. This year, though, he’s finally had enough. The thing that’s putting him over the edge: exorbitant grain prices. One weekend in early June, the… farmer and his wife loaded 46 milking cows into livestock trailers and sent them off to an auction house. Some went to other dairies. Others ended up at slaughterhouses, to be turned into ground beef. They were so expensive to feed and so unprofitable that he wasn’t even sad to see them go.”

Biden Administration Watch:

July 13 – Reuters (Richard Cowan and Susan Cornwell): “U.S. President Joe Biden's drive for big new infrastructure investment got a boost… when leading Senate Democrats agreed on a $3.5 trillion investment plan they aim to include in a budget resolution to be debated soon, Senate Majority Leader Chuck Schumer said. ‘We have come to an agreement,’ Schumer told reporters after more than two hours of closed-door talks that included Senate Budget Committee Democrats and White House officials. Republicans have not been part of these negotiations. ‘You add that to the $600 billion in a bipartisan plan and you get to $4.1 trillion, which is very, very close to what President Biden has asked us for,’ Schumer said.”

July 15 – Associated Press (Kevin Freking and Alan Fram): “Senate Majority Leader Chuck Schumer pressured lawmakers… to reach agreement by next week on a pair of massive domestic spending measures, signaling Democrats’ desire to push ahead aggressively on President Joe Biden’s multitrillion-dollar agenda… Senators from both parties, bargaining for weeks, have struggled to reach final agreement on a $1 trillion package of highway, water systems and other public works projects. Schumer said he also wanted Democratic senators to reach agreement among themselves by then on specific details of a separate 10-year budget blueprint that envisions $3.5 trillion in spending for climate change, education, an expansion of Medicare and more.”

July 14 – Reuters (Susan Cornwell and David Morgan): “President Joe Biden made the case for his sweeping, two-track infrastructure initiative on Capitol Hill…, a day after leading Senate Democrats agreed on a $3.5 trillion plan billed as the biggest boost in decades for U.S. families… ‘We're going to get this done,’ Biden said… Republicans voiced immediate objections to the plan's massive size, as did at least one key moderate Democrat whose support would be critical to passage.”

July 15 – Wall Street Journal (Catherine Lucey): “President Biden is heralding an economic boom he says will boost Americans as the nation exits from the Covid-19 pandemic. But Republicans have pointed to the accompanying surge in inflation to hammer the president’s party over higher prices for used cars, apparel and more. A burst of growth in the first quarter of this year put the U.S. economic output within 1% of its pre-pandemic peak… But inflation also is at the highest point in 13 years… Economists predict inflation will remain elevated for several years, though they expect it to come down some from current levels.”

July 15 – CNBC (Jeff Cox): “Treasury Secretary Janet Yellen cautioned… that prices could continue to rise for several more months, though she expects the recent startling inflation run to ease over time… The Cabinet official added that she worries about the problems inflation could pose for lower-income families looking to buy homes at a time when real estate values are surging. ‘We will have several more months of rapid inflation,’ Yellen told Sarah Eisen… ‘So I’m not saying that this is a one-month phenomenon. But I think over the medium term, we’ll see inflation decline back toward normal levels. But, of course, we have to keep a careful eye on it.’”

July 15 – Reuters (Jeff Mason and Andrea Shalal): “President Joe Biden and outgoing German Chancellor Angela Merkel… vowed to work together to defend against Russian aggression and stand up to anti-democratic actions by China…. ‘We stand together and will continue to stand together to defend our eastern flank allies at NATO against Russian aggression,’ Biden told a joint news conference with Merkel. He said both countries would stand up for democratic principles and universal rights when they saw China or any other country working to undermine a free and open society.”

Federal Reserve Watch:

July 14 – Bloomberg (Craig Torres): “Federal Reserve Chair Jerome Powell said it was still too soon to scale back the central bank’s aggressive support for the U.S. economy, while acknowledging that inflation has risen faster than expected. ‘At our June meeting, the committee discussed the economy’s progress toward our goals since we adopted our asset purchase guidance last December,’ Powell told the House Financial Services Committee... ‘While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue.’ Powell was peppered throughout the three-hour virtual hearing with questions from both Republicans and Democrats on rising prices… Powell stressed that while officials expect high inflation to be temporary, they would react if inflation turned out to be persistently and materially above their 2% target.”

July 15 – Reuters (Howard Schneider, Ann Saphir, and Jonnelle Marte): “U.S. Federal Reserve Chair Jerome Powell faced sharp questions about inflation and banking regulation in a hearing before the Senate Banking Committee…, issues likely at the forefront of his possible renomination to the top Fed post… Republicans on the panel… picked up where their House colleagues left off, challenging Powell on whether a sharp acceleration in inflation will, as the Fed expects, prove temporary or not. ‘The Fed’s current paradigm almost guarantees the Fed will be behind the curve,’ in keeping inflation anchored at the central bank’s 2% average target, said Pennsylvania Republican Pat Toomey. The central bank’s ongoing $120 billion in monthly bond purchases, particularly of mortgage-backed securities, ‘is puzzling,’ he added, at a time when house prices are rocketing higher.”

July 14 – Financial Times (James Politi and Colby Smith): “Jay Powell fended off a barrage of questions from testy Republicans and anxious Democrats in Congress… as he sought to ease concerns over the Federal Reserve’s response to surging US inflation. The Fed chair pushed back against suggestions that the central bank might be complacent about inflation risks during his appearance at the House financial services committee. Powell said the Fed was ready to act if needed to tame prices and that he sympathised with public concern over rising prices. ‘I know people are very worried about inflation… We hear that loud and clear from everybody… it is really going through the economy and through every business.’”

July 14 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chairman Jerome Powell said the central bank wouldn’t hesitate to raise interest rates to keep inflation under control but repeatedly emphasized he still expects price pressures to ease later this year. Inflation ‘has been higher than we’ve expected and a little bit more persistent,’ Mr. Powell said… to House lawmakers… Pandemic-related bottlenecks and other supply constraints created ‘just the perfect storm of high demand and low supply’ that led to rapid price increases for certain goods and services, he said. Higher inflation readings ‘should partially reverse as the effects of the bottlenecks unwind.’”

July 15 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said the central bank has met its goal of achieving ‘substantial further progress’ on both inflation and employment, urging policy makers to move forward in reducing stimulus. ‘I think we are in a situation where we can taper,’ Bullard said… ‘We don’t want to jar markets or anything – but I think it is time to end these emergency measures.’”

July 14 – Reuters (Howard Schneider and Lindsay Dunsmuir): “Federal Reserve Chair Jerome Powell… pledged ‘powerful support’ to complete the U.S. economic recovery from the coronavirus pandemic, but faced sharp questions from Republican lawmakers concerned about recent spikes in inflation. In testimony to the U.S. House of Representatives Financial Services Committee, Powell said he is confident recent price hikes are associated with the country's post-pandemic reopening and will fade, and that the Fed should stay focused on getting as many people back to work as possible. Any move to reduce support for the economy… is ‘still a ways off,’ Powell said, with 7.5 million jobs still missing from before the pandemic.”

July 13 – Wall Street Journal (Michael S. Derby): “Federal Reserve Bank of St. Louis President James Bullard is ready to start slowing the pace of central bank bond buying as soon as his colleagues are, worried in part that the purchases risk overheating the gangbusters housing market. ‘I think with the economy growing at 7% and the pandemic coming under better and better control, I think the time is right to pull back emergency measures,’ Mr. Bullard said… When it comes to the outlook for the Fed paring its purchases of Treasury and mortgage bonds, ‘we do want to do it gently and carefully, but I think we’re in a very good position to start a taper. I don’t need to get going tomorrow, but I think we’re—I think we’re in very good shape for this’ once the collective membership of the Federal Open Market Committee is ready to act, Mr. Bullard said.”

July 15 – Bloomberg (Matthew Boesler): “‘The upside potential for inflation isn’t quite as strong and sustainable as I would like,’ Chicago Fed President Charles Evans says. For items that are seeing their prices rebound, ‘they’re going to go the other way at some point,’ Evans tells reporters. ‘The risk is that inflation expectations are influenced by this, and so that lifts the ‘22, ‘23 inflation rate more than I’m thinking. But if it doesn’t show up in inflation expectations, I think we’re back to sort of the puzzle of the flat Phillips curve, and what is it that actually generates inflation, and how do you consistently get inflation above 2%.’ ‘I think the delay in my liftoff for the funds rate helps there.’ ‘I don’t think you can get 2.5% to 3% year after year on the basis of these relative price increases.’”

U.S. Bubble Watch:

July 13 – Associated Press (Martin Crutsinger): “The U.S. government’s deficit for the first nine months of this budget year hit $2.24 trillion, keeping the country on track for its second biggest shortfall in history… So far this fiscal year, government receipts have totaled $3.06 trillion, up 35.2% from the same period a year ago. The number for last year was pushed downward by the fact that various tax deadlines were delayed… Spending in the October-June period totaled $5.29 trillion, up 5.8% from the same period last year. For the month of June, the deficit totaled $174.2 billion…”

July 13 – Reuters (Evan Sully): “Confidence among small businesses in the United States improved slightly in June after declining in May, despite owners worrying about a labor shortage and inflation, according to a survey… The National Federation of Independent Business (NFIB) Optimism Index rose 2.9 points to a reading of 102.5 in June… ‘Small businesses' optimism is rising as the economy opens up, yet a record number of employers continue to report that there are few or no qualified applicants for open positions,’ NFIB Chief Economist Bill Dunkelberg said… ‘Owners are also having a hard time keeping their inventory stocks up with strong sales and supply chain problems…’ Businesses in the NFIB survey also flagged inflation as a worry, and a record 44% plan to increase prices in the next three months.”

July 15 – Bloomberg (Vince Golle and Olivia Rockeman): “A gauge of New York state manufacturing in July advanced to a record high, reflecting the strongest orders and shipments in 17 years, while a measure of selling prices advanced to an unprecedented level. The Federal Reserve Bank of New York’s general business conditions index climbed to 43 from 17.4 a month earlier… The median projection called for a reading of 18. The Fed bank’s gauge of prices received climbed 6.1 points to 39.4, while a measure of prices paid for materials eased to a still-elevated 76.8.”

July 16 – Reuters (Lucia Mutikani): “U.S. retail sales unexpectedly increased in June as demand for goods remained strong even as spending is shifting back to services, bolstering expectations that economic growth accelerated in the second quarter… ‘Many retailers are benefiting from increased traffic in stores as well as higher prices for items on the shelves, a much-needed bounce back for many service sector businesses,’ said Ben Ayers, senior economist at Nationwide… Retail sales rose 0.6% last month… Economists polled by Reuters had forecast retail sales dropping 0.4%.”

July 14 – Reuters (Howard Schneider): “A strengthening U.S. economy was spinning off broad-based job gains through early July that were particularly strong for lower-skilled occupations, the Federal Reserve reported… in its latest Beige Book… But prices were also strong, rising ‘at an above-average pace,’ the Fed said, with its business contacts apparently uncertain that higher inflation would fade soon. ‘While some contacts felt that pricing pressures were transitory, the majority expected further increases in input costs and selling prices in the coming months,’ the Fed reported…”

July 15 – Wall Street Journal (David Benoit and Ben Eisen): “Here’s what the biggest U.S. banks are telling us about the state of the economy. Consumer spending is returning to pre-pandemic levels, and borrowing appears poised to rise. Markets are cooling, but deal making is as hot as ever… Government-aid programs that kept many Americans afloat are about to expire. Americans are spending again, even more than they were pre-pandemic—booking trips and paying for restaurant meals with their credit cards. Flush with cash from government stimulus programs, they are paying down their card debt faster than they are spending. That could change as supply-chain bottlenecks ease for cars, refrigerators and other big-ticket items. ‘The pump is primed’ for more borrowing, said JPMorgan… CEO Jamie Dimon.”

July 15 – Bloomberg (Donald Moore): “House hunters looking to stand out in a crowded market are increasingly making cash offers for properties, often giving them an edge over buyers who need to rely on mortgages. An analysis of county records by real-estate broker and buyer Redfin Corp. found that 30% of U.S. home purchases in the first four months of this year were all cash, up from 25.3% last year.”

Fixed-Income Bubble Watch:

July 16 – Financial Times (Shubham Saharan): “Credit rating agencies are upgrading hundreds of billions of dollars of US corporate debt, in a partial reversal of the downgrades at the outset of the pandemic that reflects the strong rebound in profitability across much of corporate America. Roughly $361bn of higher-rated, investment grade bonds have been upgraded in the past two months, including a record $184bn in June, according to… Bank of America.”

July 12 – Bloomberg (Lisa Lee): “Companies borrowing in the $1.2 trillion leveraged loan market are taking advantage of fierce demand for the floating-rate asset class to weaken critical covenants that traditionally protect lenders. At the start of the year, new leveraged loans for private equity-backed firms didn’t allow immediate payment of unlimited dividends, or an investment binge, without a significant reduction in leverage. Six months later, 75% of such loans had nothing to stop them funneling cash to shareholders…”

July 16 – Financial Times (Steve Johnson): “Demand for exchange traded funds investing in senior loans has rocketed this year as investors hunt for respite from rising inflation. A net $7.3bn has been pumped into the sector so far this year, according to CFRA Research, almost doubling its asset base to $16bn.”

China Watch:

July 13 – Bloomberg: “The recent cut in the amount of money banks must keep in reserve doesn’t mean a change in the China’s monetary policy, the People’s Bank of China said. ‘The RRR cut is a standard liquidity operation after monetary policy returned to normal and the prudent monetary policy direction has not changed,’ Sun Guofeng, head of the central bank’s monetary policy department, said…”

July 15 – Bloomberg: “China’s economic rebound steadied in the second quarter and showed more balance as consumer spending picked up… Gross domestic product in the world’s second-largest economy expanded 7.9% from a year earlier… down from 18.3% in the previous quarter, with that slowdown largely reflecting base effects from last year’s pandemic. On a two-year average growth basis which strips out that effect, the economy grew 5.5% last quarter, slightly higher than in the previous three months.”

July 12 – Bloomberg: “China’s export growth unexpectedly picked up in June, shrugging off the impact of port disruptions in southern China… Export growth accelerated to 32.2% in dollar terms in June from a year earlier…, overturning economists expectations of a slowdown to 23%. Imports climbed 36.7%, also beating the median forecast of 29.5%. That left a trade surplus of $51.5 billion for the month, the highest since January.”

July 13 – Bloomberg: “Chinese builder Sichuan Languang Development Co. failed to repay a local bond, marking its first default in a domestic credit market grappling with rising debt failures. The company was not able to raise enough funds for the repayment on a 900 million yuan ($139 million) local bond that matured Sunday… Languang is the latest Chinese developer to miss a payment this year, with the sector driving a record surge of domestic corporate bond defaults as Beijing has moved to curtail borrowing in the debt-laden industry. The delinquency ‘will also trigger cross-defaults’ on local bonds and the firm’s offshore debt, said S&P Global Ratings. Languang has $1.05 billion of dollar bonds outstanding…”

July 14 – Bloomberg (Rebecca Choong Wilkins): “China Huarong Asset Management Co.’s local and dollar notes are dropping anew as investors wait for clarity over the bad-debt manager’s fate. The firm’s dollar bond due 2025 has fallen 5.9 cents on the dollar since the start of last week to 65.4 cents… The price is approaching its lowest since a dramatic selloff in April, when the firm spooked investors by failing to release annual results.”

July 15 – Reuters (Clare Jim): “Chinese regulators want property developers to disclose details of rapidly growing commercial paper issuance in their monthly reports…, as part of Beijing’s move to rein in ballooning debt in the property sector as the economy slows. Real estate developers in the world’s second largest economy are major issuers in the commercial paper market, which saw new issues worth 3.6 trillion yuan ($556bn) in 2020, up 20% from 2019. Commercial paper, which is not counted as interest-bearing debt, is commonly used in the property sector as a payable that promises construction suppliers a payment on a future fixed date…”

July 12 – Bloomberg (Steven Church): “China’s dollar debt market has gotten so big and so distressed in the last decade that it’s now the number one risk faced by high-yield investors, according to Bank of America Global Research. About 15% of the $425 billion in corporate bonds in China trade at distressed levels, Bank of America said. In 2011-2012, the rate was higher, but the total amount of dollar-denominated corporate bonds in China was a small fraction of what it is today.”

July 16 – Bloomberg: “China’s riskier local state-investment arms are selling fewer new bonds as measures to rein in leverage bite, adding to the credit polarization seen across the nation as growth slows. Local government financing vehicles in nine regions… either didn’t sell debt or raised less money than the domestic bonds that matured in the second quarter… That’s up from four regions in the prior three months. The fate of LGFVs, typically heavily indebted firms tasked to build infrastructure projects, is back under the spotlight after Beijing further tightened oversight of local finances in recent months. The increased funding difficulties faced by the weaker vehicles… reflect a broader trend of increased risk differentiation in the state sector as investors reassess the firmness of government backing.”

July 14 – Bloomberg: “Home-price growth in China moderated for the first time this year in June after authorities stepped up measures to cool the market with tougher mortgage borrowing. New home prices in 70 cities… rose 0.41% last month from May, when then gained 0.52%... Values in the secondary market, which faces less government intervention, climbed 0.28%. The residential market has slowed after the government embarked on a fresh wave of steps to curb surging prices. Some banks have halted offering loans to homebuyers since May as regulators tightened lenders’ real estate exposure, according to Beike Research Institute.”

July 14 – Reuters (Liangping Gao and Ryan Woo): “Real estate investment in China rose 15% in January-June from the same period a year earlier…, slowing from 18.3% growth in the first five months of the year. Property sales by floor area increased 27.7% in the first six months…, versus a rise of 36.3% in the first five months of the year. New construction starts measured by floor area rose 3.8% from a year earlier, compared with 6.9% growth in the first five months.”

July 10 – Bloomberg: “China proposed new rules that would require nearly all companies seeking to list in foreign countries to undergo a cybersecurity review, a move that would significantly tighten oversight over its internet giants. Companies holding data on more than 1 million users must now apply for cybersecurity approval when seeking listings in other nations…”

July 14 – Financial Times (Hudson Lockett): “Global holdings of Chinese stocks and bonds have surged about 40% to more than $800bn over the past year as investors bought assets at a record pace in spite of souring relations between Beijing and the international community. The drive into China’s markets by global investors has come despite tensions between Beijing and Washington…”

Global Bubble Watch:

July 12 – Wall Street Journal (Marcus Walker and Peter Landers): “The pandemic has pushed global government debt to the highest level since World War II, surpassing the world’s annual economic output. Governments, especially in rich countries, are borrowing still more, partly to erase the damage of Covid-19. Advocates say the spending, also encouraged by new economic thinking about debt, could usher in a period of robust global growth, reversing the malaise many wealthy countries have felt this century. But if those theories are off-base, the world could be saddled with debts that can be absorbed only via inflation, high taxes or even default… ‘The world has changed. The intellectual frameworks have evolved,’ said Paul Sheard, a research fellow at the Harvard Kennedy School and former chief economist at… S&P Global. ‘We don’t need to worry’ about debt.”

July 12 – Reuters (Gavin Jones and Leigh Thomas): “An upsurge in new coronavirus variants and poor access to vaccines in developing countries threaten the global economic recovery, finance ministers of the world's 20 largest economies warned… The G20 gathering… was the ministers' first face-to-face meeting since the start of the pandemic. Decisions include the endorsement of new rules aimed at stopping multinationals shifting profits to low-tax havens. That paves the way for G20 leaders to finalise a new global minimum corporate tax rate of 15% at a Rome summit in October, a move that could recoup hundreds of billions of dollars for public treasuries straining under the COVID-19 crisis.”

July 16 – Bloomberg: “The total market value of negative-yielding debt worldwide rose $732.1 billion to $15.2 trillion in the week to July 16, according to… Bloomberg.”

July 10 – Bloomberg (Enda Curran): “Surging house prices across much of the globe are emerging as a key test for central banks’ ability to rein in their crisis support. Withdrawing stimulus too slowly risks inflating real estate further and worsening financial stability concerns in the longer term. Pulling back too hard means unsettling markets and sending property prices lower, threatening the economic recovery from the Covid-19 pandemic.”

July 12 – Reuters (Darya Korsunskaya): “Countries maintaining economic stimulus measures amid high inflation poses risks to the global economy, Russian Finance Minister Anton Siluanov said…, warning of market volatility and slower economic growth. Siluanov, speaking during G20 meetings…, warned of risks that the global economy could overheat and urged countries to normalise monetary and fiscal policy as fast as possible.”

Central Banker Watch:

July 14 – Reuters (William Schomberg and Kate Holton): “Bank of England Deputy Governor Dave Ramsden said the BoE might start to think about reversing its huge monetary stimulus sooner than he previously expected due to growing inflation pressures as Britain's economy bounces back from its COVID slump. In a speech that suggested growing concerns at the top of the central bank about price pressures, Ramsden said British inflation might rise as high as 4% ‘for a period later this year’ - double the BoE's target - and the factors driving it up might take some time to ease off.”

July 15 – Bloomberg (Andrew Atkinson, Libby Cherry and William Shaw): “An unexpected surge in U.K. inflation and a record hiring spree are starting to convince some Bank of England policy makers that the time to step off the stimulus pedal is fast approaching -- potentially as soon as next month… Two members of the central bank’s rate-setting committee said stimulus measures may have to be trimmed back. That prompted traders to bet on the BOE raising interest rates almost a year ahead of an expected lift-off by the U.S. Federal Reserve.”

July 15 – Financial Times (Valentina Romei): “The Bank of England needs to provide a better justification for believing the rise in inflation is temporary, according to an influential parliamentary committee, which also queried the need for continued quantitative easing. The House of Lords economic affairs committee… said on Friday that the BoE had failed to justify its flagship QE policy — the practice by which central banks seek to stimulate spending by creating money and pumping it into the economy by purchasing assets.”

July 14 – Bloomberg (Shelly Hagan): “The Bank of Canada took another big step to rein in emergency levels of stimulus, once again tapering its bond purchases in a sign of optimism about the speed of the recovery. Policy makers… said… they would reduce their weekly purchases of government debt by one-third to C$2 billion ($1.6bn). Officials held the benchmark overnight interest rate at 0.25%, while indicating they don’t expect any hikes before at least the second half of next year…”

July 13 – Bloomberg (Tracy Withers): “New Zealand’s central bank said it will reduce monetary stimulus by ceasing quantitative easing, a surprise move that sent the currency higher as traders priced in an interest-rate increase as early as August. The Reserve Bank’s Monetary Policy Committee… held the official cash rate at 0.25%, but said it will halt bond buying… The statement omitted a previous reference to the need for considerable time and patience to achieve its inflation and employment goals. ‘Members agreed that the major downside risks of deflation and high unemployment have receded,’ the RBNZ said.”

July 15 – Bloomberg (Matthew Brockett): “New Zealand inflation surged in the second quarter, breaching the central bank’s target range for the first time in 10 years and fueling bets it will start raising interest rates as soon as next month. The annual inflation rate jumped to 3.3%, more than double its first-quarter reading of 1.5% and the fastest pace since 2011…”

July 14 – Reuters (Fabian Cambero): “Chile's central bank raised its benchmark interest rate to 0.75% from 0.5%... The bank had kept its interest rate steady since successive cuts up until late March, when it warned of a ‘severe’ economic contraction as a result of the virus. ‘In a context of gradual normalization, monetary policy will continue to accompany the recovery of the economy,’ the bank said…”

Europe Watch:

July 13 – Bloomberg (Carolynn Look): “The European Central Bank is about to take the next step in reinventing the region’s money as it marches toward the creation of a digital euro. Policy makers will decide on Wednesday whether to move to an exploratory phase… Ultimately, euro-zone citizens could be holding a virtual central-bank currency by the middle of this decade. ‘It will touch people’s life in a very intimate way,’ Lagarde told Bloomberg… ‘What we’ve heard from the people is that they want privacy to be protected. But at the same time we need to make sure that it’s not accelerating money laundering or the financing of terrorism, so on each and every aspect we have to strike the right balance.’”

EM Watch:

July 13 – Reuters (Alexander Winning and Wendell Roelf): “Crowds clashed with police and ransacked or set ablaze shopping malls in cities across South Africa on Tuesday, with dozens of people reported killed, as grievances unleashed by the jailing of ex-president Jacob Zuma boiled over into the worst violence in years. Protests that followed Zuma's arrest last week for failing to appear at a corruption inquiry have widened into looting and an outpouring of general anger over the hardship and inequality that persist 27 years after the end of apartheid.”

July 15 – Reuters (Nqobile Dludla and Alexander Winning): “South Africans counted the cost… of arson and looting that has destroyed hundreds of businesses and killed at least 117 people, as the spasm of violence began to ebb and the government doubled its troop deployment to 10,000. Pockets of unrest remained, notably in the port city of Durban, where looters pillaged shops and racial tensions flared. But in the main commercial city Johannesburg, shopkeepers and other residents sifted through debris, cleared up trash and assessed what remained of their ruined enterprises. The rioting broke out in response to the jailing of ex-President Jacob Zuma last week for his failure to appear at a corruption inquiry.”

July 13 – Reuters (Sarah Marsh and Elizabeth Culliford): “Cuba has restricted access to social media and messaging platforms including Facebook and WhatsApp…, in the wake of the biggest anti-government protests in decades. Thousands of Cubans joined demonstrations throughout the Communist-run country on Sunday to protest against a deep economic crisis that has seen shortages of basic goods and power outages. They were also protesting against the government's handling of the coronavirus pandemic and curbs on civil liberties.”

July 12 – Wall Street Journal (Kejal Vyas): “Nearly half of the population on this island nation is facing acute hunger, while gang members block fuel distribution routes to the capital and scare away tourists from pristine beaches. In contrast to neighboring countries, Haiti has yet to administer a single vaccine against Covid-19. A country that for much of its history has been stifled by poverty and strife is now mired in its worst crisis in a generation after President Jovenel Mo├»se was assassinated in his home last week…”

July 12 – Bloomberg (Sydney Maki): “The first cracks are appearing in the recovery play for emerging markets, with investors taking money out of exchange traded funds that invest in EM stocks and bonds for the first time in 36 weeks. Money managers yanked $54.4 million out of U.S.-listed ETFs that invest across developing nations…”

Japan Watch:

July 11 – Reuters (Leika Kihara): “Japanese wholesale prices continued to surge in June as import costs spiked at the fastest pace on record…, a sign rising raw material costs were weighing on corporate profits. Households may also start to feel the pinch... The corporate goods price index (CGPI)… rose 5.0% in June from a year earlier…, beating a median market forecast for a 4.7% gain.”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 11 – Associated Press (Christopher Weber): “Firefighters working in searing heat struggled to contain the largest wildfire in California this year while state power operators urged people to conserve energy after a huge wildfire in neighboring Oregon disrupted the flow of electricity from three major transmission lines. A large swath of the West baked during the weekend in triple-digit temperatures that were expected to continue into the start of the work week… California and other parts of the West are sinking deeper into drought and that has sent fire danger sky high in many areas.”

July 13 – Bloomberg (David R. Baker, Brian K. Sullivan and Mark Chediak): “Californians once greeted hot summers by blasting the air conditioners and filling the pool. No longer. Battered by drought and heat waves that are straining the power grid, the Golden State is asking residents to make do with less water and electricity, just when they really want to use both. It’s an uncomfortable new normal for a state that used to celebrate summer. Power grid managers have sent urgent pleas on three of the past four days, begging residents to cut their electricity use to stave off blackouts.”

Geopolitical Watch:

July 15 – Financial Times (Demetri Sevastopulo): “Beijing has snubbed the US by refusing to grant Wendy Sherman, deputy secretary of state, a meeting with her counterpart during a proposed visit to China that would have been the first top-level engagement since acrimonious talks in Alaska. The US halted plans for Sherman to travel to Tianjin after China refused to agree to a meeting with Le Yucheng, her counterpart…”

July 15 – Bloomberg: “Any foreign military planes landing in Taiwan need China’s approval, Chinese defense ministry says… on the landing of a U.S. government plane at Taipei airport Thursday. Foreign planes’ entering into China’s space without its approval will lead to ‘serious consequences,’ the ministry says. China warns the U.S. to stop ‘playing with fire’ and not to worsen tensions in the Taiwan strait. The Chinese military are on high alert; will take all necessary actions against attempts seeking Taiwan independence.”

July 12 – Reuters (Ryan Woo and Jay Ereno): “China's military said it ‘drove away’ a U.S. warship that illegally entered Chinese waters near the Paracel Islands on Monday, the anniversary of an international court ruling that held Beijing had no claim over the South China Sea… The U.S. Navy destroyer Benfold entered the waters without China's approval, seriously violating its sovereignty and undermining the stability of the South China Sea, the southern theatre command of the People's Liberation Army said. ‘We urge the United States to immediately stop such provocative actions,’ it said…”

July 14 – Bloomberg (Iain Marlow and Kari Lindberg): “China accused the U.S. of waging a ‘sinister’ campaign to halt its rise… Chinese state media… dismissed a possible U.S.-led digital trade agreement as a bid to defend American power in the Asia-Pacific region… ‘The U.S. confuses black and white and right and wrong, wantonly discredits the national security law and Hong Kong’s business environment, and attempts to mislead American and international businesses in Hong Kong,’ the ministry’s Hong Kong branch said... ‘Its sinister intention of playing the ‘Hong Kong card’ to curb China’s development is clear.’”

July 11 – Reuters (Arshad Mohammed): “The United States… repeated a warning to China that an attack on Philippine armed forces in the South China Sea would trigger a 1951 U.S.-Philippines mutual defense treaty. Secretary of State Antony Blinken made the comment in a written statement marking the fifth anniversary of a ruling by an arbitration tribunal repudiating China's vast territorial claims in the South China Sea.”

July 13 – Reuters (Tim Kelly): “Growing military tension around Taiwan as well as economic and technological rivalry between China and the United States raises the prospect of crisis in the region as the power balance shifts in China's favour, Japan said in its annual defence white paper. China rejected Japan's conclusions about what it said was normal military activity, calling them irresponsible. The Japanese defence review, which was approved by Prime Minister Yoshihide Suga's government on Tuesday, points to China as Japan's main national security concern. ‘It is necessary that we pay close attention to the situation with a sense of crisis more than ever,’ the paper said…”

July 11 – Associated Press: “China… said it will take ‘necessary measures’ to respond to the U.S. blacklisting of Chinese companies over their alleged role in abuses of Uyghur people and other Muslim ethnic minorities. The Commerce Ministry said the U.S. move constituted an ‘unreasonable suppression of Chinese enterprises and a serious breach of international economic and trade rules.’ China will ‘take necessary measures to firmly safeguard Chinese companies’ legitimate rights and interests,’ the ministry’s statement said.”

July 13 – Bloomberg: “Chinese state media outlets have criticized the U.S. over discussions for a digital trade agreement among Indo-Pacific economies, calling them a bid to protect American hegemony and the profits of tech companies. Agreements signed by the U.S. ‘invariably serve the U.S.’ bid to defend its hegemony -- a magic word incorporating security, values and interests -- while to the signatory countries, these U.S.-dominated agreements are more like shackles restricting trade and their freedom of cooperation,’ China Daily said…”

July 10 – Reuters (Josh Smith): “The leaders of North Korea and China traded messages vowing to strengthen cooperation on the anniversary of their treaty of friendship, cooperation and mutual assistance between the two countries… In a message to China's Xi Jinping, North Korean leader Kim Jong Un said their relationship is vital in the face of hostile foreign forces, while Xi promised to bring cooperation ‘to a new stage’, KCNA said.”