Friday, September 3, 2021

Weekly Commentary: Easy Money Anesthesia

China’s historic Bubble has been integral to CBB analysis for two decades. I’ve on a weekly basis chronicled how interconnected Chinese and the U.S. Bubbles worked in harmony to inflate one epic global Bubble. Loose U.S. monetary policy and financial conditions were initially instrumental in stoking expansion of Chinese finance and economic output. As for China, it “recycled” massive trade surpluses with the U.S. back into American securities markets, helping sustain U.S. Bubble excess.

It was a symbiotic relationship of far-reaching historical significance. China was desperate for growth and development. The U.S. preferred to deindustrialize – while still enjoying access to cheap manufactured goods (lower CPI, greater monetary accommodation and higher asset prices). Rather than a fledgling competitor, China development was considered a potentially enormous economy determined to adopt free-market capitalism and integrate with the West. They aspired to be like us.

The booming Chinese economy essentially enjoyed unlimited cheap finance. And as dollars flooded in, their ballooning horde of international reserves bolstered China’s pegged currency regime. This stoked “hot money” inflows, while unleashing domestic Credit creation. There were essentially no restraints on Chinese bank lending, as China circumvented the type of currency vulnerability that would typically place constraints on EM Credit Bubble excess.

Bubbles are mechanisms of wealth redistribution and destruction. “Symbiotic relationships” – typified by cooperation and integration - are by their nature transitory phenomena, creatures of the early-Bubble notion of an expanding economic “pie.” Inevitably, late-cycle insecurities and fears of a shrinking pie spur disintegration and conflict.

The prolonged global Bubble period literally inflated China to superpower status, creating rival Bubbles without precedent. The newfound intensity of this rivalry was revealed during the Trump presidency, most conspicuously in fraught trade negotiations. Heated trade talks forced Beijing again to retreat from measures meant to rein in Bubble excess. Understandably, the perception solidified that Beijing wouldn’t dare risk piercing China’s colossal Bubble. The pandemic then incited the most outlandish stimulus measures and system Credit expansion imaginable.

Risks grow exponentially during the “Terminal Phase” of Bubble excess. I assumed Beijing would move decisively to rein in excess, particularly in lending and apartment speculation. But what is now unfolding goes way beyond measures to contain excess. China has begun a transitioning phase, with momentous yet uncertain consequences and ramifications. What began seemingly as a campaign to rein in apartment speculation and crack down on the big tech monopolies has speedily developed into something much more systemic and Draconian.

August 30 – Bloomberg: “Chinese President Xi Jinping chaired a high-level meeting that ‘reviewed and approved’ measures to fight monopolies, battle pollution and shore up strategic reserves, all areas that are crucial to his government’s push to improve the quality of life for the nation’s 1.4 billion people. Few details were released about the guidelines discussed on Monday at the meeting of the central committee for deepening overall reform, which includes some of China’s most powerful leaders and has wide powers to shape government policy. Xi in particular stressed the importance of strengthening anti-monopoly regulations, a push that has already cost tech giants hundreds of billions of dollars in market value over the past year.”

September 1 – Reuters (Kevin Yao): “President Xi Jinping has called for China to achieve ‘common prosperity’, seeking to narrow a yawning wealth gap that threatens the country’s economic ascent and the legitimacy of Communist Party rule. ‘Common prosperity’ as an idea is not new in China, but a sharp escalation in official rhetoric and a crackdown on excesses in industries including technology and private tuition has rattled investors in the world’s second-largest economy… ‘Common prosperity’ was first mentioned in the 1950s by Mao Zedong, founding leader of what was then an impoverished country, and repeated in the 1980s by Deng Xiaoping, who modernised an economy devastated by the Cultural Revolution.”

August 31 – Bloomberg (Daniel Taub): “China’s securities regulator said it plans to rein in the country’s private equity and venture capital funds, stop public offerings disguised as private placements and fight embezzlement of assets. The China Securities Regulatory Commission will work to root out ‘fake’ private equity funds that are actually sold to the general public instead of targeted investors… China’s financial regulators have become more assertive in recent months, cracking down in areas from online lending and insurance to initial public offerings and margin financing.”

August 30 – Reuters (Brenda Goh, Yingzhi Yang and Yilei Sun): “China's market regulator said… it would step up oversight of the so-called sharing economy, where consumers share access to goods and services often with the help of an online platform. The move by the State Administration of Market Regulation (SAMR) is the latest in a drive by Beijing to strengthen control over its society and key sectors of its economy, including tech, education and property.”

August 31 – Financial Times (Edward White): “A blogger’s tirade endorsed widely by Chinese state media has called for Beijing’s snowballing regulatory overhaul to target the high costs of housing, education and healthcare while also instituting deep reforms to finance and cultural industries. ‘This is a transformation from capital-centred to people-centred,’ the writer said, adding that those who sought to block the deep reform efforts would be ‘discarded’. The commentary… has been shared by China’s biggest state and party-controlled media outlets including Xinhua news agency, the People’s Daily and CCTV television network, indicating the broad degree of state support.”

August 30 – Reuters (Kevin Yao): “China’s move to curb disorderly expansion of capital has shown initial results, state media quoted a top-level meeting as saying… Since late 2020, Beijing has been advocating ‘the prevention of disorderly expansion of capital’, kicking off a clampdown on tech giants and private education firms. The campaign has been focused on preventing ‘savage growth’ of some platform companies in a bid to deal with their monopolistic and unfair competition behaviors... ‘Initial results have been achieved in preventing disorderly expansion of capital, and the fair market competition order has been steadily improving,’ state media quoted the meeting on deepening reforms, chaired by President Xi Jinping, as saying.”

Beijing has been bustling with activity. Communist leadership has clearly turned against Capitalism, though it’s difficult to fault their effort to curb the “disorderly expansion of capital.” Untethered finance has so corrupted today's Capitalism. Under the guise of “market reform,” Beijing is in the process of wresting ever-tighter control over the markets, the economy and society at large. I’ve long assumed Beijing would respond to a bursting Bubble with various forms of financial, economic and social repression, while casting blame on foreign governments (i.e. U.S. and Japan). It appears Chinese leadership has decided to begin executing some sort of plan.

Measures to rein in lending and speculative excess, while clamping down on increasingly powerful business and market interests, are of little surprise. A spate of other pronouncements is not so easily explained.

August 27 – Financial Times (Sun Yu): “A campaign to make children as young as 10 study President Xi Jinping’s political philosophy has been labelled by some parents as ‘disgusting’ and evoked memories of Mao Zedong’s personality cult. More than a dozen parents across the country told the Financial Times they were uncomfortable with the rollout next month of classes on ‘Xi Jinping Thought’. The eponymous philosophy, which features a mixture of patriotic education and praise for the Chinese Communist party’s general secretary, will become part of the national curriculum from primary school to university next month… ‘This is disgusting,’ said a father… in central Henan province… He hoped his daughter would ‘forget about everything after she is done with the exam’. The backlash highlighted the difficulty the party faced in making Xi’s philosophy the nation’s ruling ideology for generations to come.”

August 31 – Reuters (Brenda Goh): “China has forbidden under-18s from playing video games for more than three hours a week, a stringent social intervention that it said was needed to pull the plug on a growing addiction to what it once described as ‘spiritual opium’. The new rules… are part of a major shift by Beijing to strengthen control over its society and key sectors of its economy, including tech, education and property, after years of runaway growth. The restrictions… are a body blow to a global gaming industry that caters to tens of millions of young players in the world's most lucrative market. They limit under-18s to playing for one hour a day - 8 p.m. to 9 p.m. - on only Fridays, Saturdays and Sundays… They can also play for an hour, at the same time, on public holidays.”

September 2 – Reuters (Josh Horwitz and Brenda Goh): “Authorities told broadcasters… to shun artists with what they called incorrect political positions and effeminate styles, to strictly enforce pay caps for actors and guests as well as to cultivate a ‘patriotic atmosphere’ for the industry. It marked the expansion of a campaign that has targeted what authorities have described as a ‘chaotic’ celebrity fan culture. Last month, China barred platforms from publishing popularity lists and regulated the sale of fan merchandise in August after a series of controversies involving performers.”

August 30 – South China Morning Post (Jamie Tarabay): “Chinese officials have been warned by President Xi Jinping to ‘discard their illusions’ about having an easy life and ‘dare to struggle’ to protect the country’s sovereignty and security. ‘The great rejuvenation of the Chinese nation has entered a key phase, and risks and challenges we face are conspicuously increasing,’ Xi said… ‘It’s unrealistic to always expect easy days and not want to struggle.’ He told an event on Wednesday to mark the new semester at the Central Party School… that: ‘[We] must not yield an inch on issues of principle, and defend national sovereignty, security and development interests with an unprecedented quality of mind.’ His remarks to hundreds of mid-level cadres from around the country did not elaborate on the need to struggle but were made amid growing tension with the United States on a range of fronts, including geopolitics, the economy and technology.”

They’re battening down the hatches. The broad scope of reform measures, the tone, the heavy-handedness and the apparent urgency. Beijing is preparing for something - but what? Is their focus unfolding domestic hardship, geopolitical or a combination? A bursting China Bubble will be fraught with destabilizing economic and social upheaval. And it would be understandable – even constructive – to begin preparing society for unfolding challenges. Perhaps Chinese leadership even subscribes to the global Bubble thesis - and they’re enacting Draconian measures to ensure China is better prepared for crisis dynamics than its adversaries (employing a similar zero-tolerance mindset adopted with their war against covid).

September 1 – Bloomberg: “The world is undergoing profound changes that are unseen in a century and are evolving more quickly, the official Xinhua News Agency cites Chinese President Xi Jinping as saying in a speech at the central party school in Beijing… China ‘must not yield an inch of ground’ on matters of principles and uphold China’s sovereignty, security and development interests with unprecedented resolve: Xi. It’s not realistic to hope for peaceful days and refuse to struggle: Xi”

I think it’s about Bubbles, but I can’t shake the unsettling feeling Taiwan is playing a role. For years, I’ve worried how Beijing might respond to a bursting Bubble. A move on Taiwan would stoke nationalism, while diverting attention away from Beijing’s gross mismanagement of its financial and economic systems (they’re not alone in this regard). “Xi Jinping Thought” and cultivating a “patriotic atmosphere,” while repressing “effeminate” TV personalities and video games. Crazy, alarming stuff – that might be expected from a regime contemplating international conflict.

September 1 – Reuters (Kevin Yao): “China will boost financing support for small firms by increasing annual relending quotas by 300 billion yuan ($46.39bn), the cabinet said… China will step up support for small- and medium-sized firms to help stabilise economic growth and employment, as rising commodity prices push up production costs and receivables, the cabinet said… The central bank will provide support via rediscount instruments to help ease financing burdens of small firms, while financial institutions will conduct bill discount financing for small firms, the cabinet said. The government will strengthen its policy reserves and improve cross-cyclical adjustments, state media said, adding that local government special bonds will help drive effective investment.”

August 30 – Reuters (Xu Jing, Ryan Woo and Winni Zhou): “China's currency regulator has been conducting a rare survey of banks and companies to ask about their risk management processes and ability to handle volatility in the yuan, three banking and policy sources told Reuters. The State Administration of Foreign Exchange (SAFE) surveyed ‘how companies in different sectors managed their FX exposure and how they used hedging tools’, said one of the sources, who was directly involved in the survey. The SAFE did not give a reason for the survey…”

September 3 – Bloomberg: “China’s various industry crackdowns from technology to education mean monetary and fiscal policies will likely remain loose on the margin to offset the drag on economic growth, economists at Goldman Sachs... said. The economy is in a ‘micro takes and macro gives’ environment, where regulatory tightening in specific sectors will likely be accompanied by supportive policy from monetary and fiscal authorities, Goldman’s chief China economist Hui Shan and others wrote in a note.”

We certainly observe the dynamic at play in U.S. equities: virtually any risk is today viewed constructively, as it ensures a more protracted period of zero rates and massive QE. So risk is disregarded. Momentous changes are afoot in China, which are difficult not to regard as alarming developments. Yet apparently all that matters is that Beijing will maintain loose fiscal and monetary policies. We’ll see how long the Easy Money Anesthesia continues to work its magic.

For the Week:

The S&P500 added 0.6% (up 20.7% y-t-d), while the Dow slipped 0.2% (up %). The Utilities gained 1.4% (up 10.2%). The volatile Banks sank 3.8% (up 29.4%), and the Broker/Dealers fell 1.4% (up 28.4%). The Transports declined 1.0% (up 17.9%). The S&P 400 Midcaps slipped 0.2% (up 19.7%), while the small cap Russell 2000 gained 0.7% (up 16.1%). The Nasdaq100 advanced 1.4% (up 21.5%). The Semiconductors dipped 0.2% (up 22.7%). The Biotechs rose 1.0% (up 4.5%). With bullion increasing $10, the HUI gold index gained 1.4% (down 13.9%).

Three-month Treasury bill rates ended the week at 0.0325%. Two-year government yields slipped a basis point to 0.21% (up 9bps y-t-d). Five-year T-note yields declined two bps to 0.78% (up 42bps). Ten-year Treasury yields gained two bps to 1.32% (up 41bps). Long bond yields rose two bps to 1.94% (up 30bps). Benchmark Fannie Mae MBS yields increased two bps to 1.79% (up 45bps).

Greek 10-year yields jumped nine bps to 0.78% (up 16bps y-t-d). Ten-year Portuguese yields gained five bps to 0.22% (up 19bps). Italian 10-year yields rose seven bps to 0.71% (up 16bps). Spain's 10-year yields increased four bps to 0.34% (up 29bps). German bund yields rose six bps to negative 0.36% (up 21bps). French yields rose five bps to negative 0.02% (up 32bps). The French to German 10-year bond spread narrowed two to 34 bps. U.K. 10-year gilt yields surged 14 bps to 0.72% (up 52bps). U.K.'s FTSE equities index was little changed (up 10.5% y-t-d).

Japan's Nikkei Equities Index surged 5.4% (up 6.1% y-t-d). Japanese 10-year "JGB" yields gained about two bps to 0.04% (up 2bp y-t-d). France's CAC40 was about unchanged (up 20.5%). The German DAX equities index declined 0.4% (up 15.0%). Spain's IBEX 35 equities index declined 0.7% (up 9.8%). Italy's FTSE MIB index added 0.2% (up 17.2%). EM equities were mixed. Brazil's Bovespa index dropped 3.1% (down 1.8%), and Mexico's Bolsa fell 1.1% (up 17.6%). South Korea's Kospi index advanced 2.1% (up 11.4%). India's Sensex equities index surged 3.6% (up 21.7%). China's Shanghai Exchange gained 1.7% (up 3.1%). Turkey's Borsa Istanbul National 100 index increased 0.7% (down 0.5%). Russia's MICEX equities index jumped 2.9% (up 21.7%).

Investment-grade bond funds saw inflows of $2.033 billion, and junk bond funds posted positive flows of $1.050 billion (from Lipper).

Federal Reserve Credit last week declined $16.9bn to $8.307 TN. Over the past 103 weeks, Fed Credit expanded $4.580 TN, or 123%. Fed Credit inflated $5.496 Trillion, or 196%, over the past 460 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week sank $19.7bn to a nine-month low $3.482 TN. "Custody holdings" were up $80.3bn, or 2.4%, y-o-y.

Total money market fund assets dropped $17.2bn to $4.510 TN. Total money funds increased $14.8bn y-o-y, or 0.3%.

Total Commercial Paper gained $7.1bn to $1.157 TN. CP was up $160bn, or 16.1%, year-over-year.

Freddie Mac 30-year fixed mortgage rates were unchanged at 2.87% (down 6bps y-o-y). Fifteen-year rates rose four bps to 2.18% (down 24bps). Five-year hybrid ARM rates added a basis point to 2.43% (down 50bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 3.04% (down 8bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 0.7% to 92.04 (up 2.4% y-t-d). For the week on the upside, the South African rand increased 2.9%, the New Zealand dollar 2.1%, the Australian dollar 2.0%, the Mexican peso 1.4%, the Swedish krona 1.1%, the South Korean won 1.0%, the British pound 0.8%, the Canadian dollar 0.8%, the euro 0.7%, the Norwegian krone 0.5%, the Singapore dollar 0.4%, the Brazilian real 0.2% and the Japanese yen 0.1%. For the week on the downside, the Swiss franc declined 0.2%. The Chinese renminbi increased 0.23% versus the dollar (up 1.12% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index increased 0.8% (up 24.4% y-t-d). Spot Gold gained $10 to $1,828 (down 3.7%). Silver jumped 2.9% to $24.72 (down 6.4%). WTI crude added 55 cents to $69.29 (up 43%). Gasoline dropped 5.3% (up 53%), while Natural Gas jumped 7.4% (up 86%). Copper was unchanged (up 23%). Wheat declined 0.9% (up 13.4%). Corn sank 5.4% (up 8%). Bitcoin rose $886 this week to $49,824 (up 71%).

Coronavirus Watch:

August 30 – Bloomberg (Antony Sguazzin): “South African scientists said they identified a new coronavirus variant that has a concerning number of mutations. The so-called C.1.2. variant was first identified in May in the South African provinces of Mpumalanga and Gauteng… The mutations on the virus ‘are associated with increased transmissibility’ and an increased ability to evade antibodies, the scientists said. ‘It is important to highlight this lineage given its concerning constellation of mutations.’”

Market Mania Watch:

September 2 – Associated Press (Ken Sweet): “Americans have become obsessed with collectibles, bidding up prices for trading cards, video games and other mementos of their youth. The frenzy has brought small fortunes to some, but a deep frustration for those who still love to play games or trade cards as a hobby. Among the items most sought after — and even fought over — are the relics of millennials’ childhoods. These include copies of trading cards such as Pokemon’s Charizard and Magic: The Gathering’s Black Lotus as well as Nintendo’s Super Mario Bros. game cartridges. Some cards are selling for hundreds of thousands of dollars and an unopened Super Mario game recently sold for an astonishing $2 million. This is more than a case of opportunistic collectors looking to cash in on a burst of nostalgia triggered by the pandemic. Everyone seemingly is angling for a piece of the pie.”

Market Instability Watch:

August 30 – Financial Times (Eric Platt and Joe Rennison): “Investors are increasingly turning to derivatives strategies to guard against a slowdown in the $51tn US equity market, suspecting that the white-hot rally this year is starting to run out of steam. Large institutional money managers have already shown a cautious tilt in recent weeks, opting for funds likely to do well in tougher economic or market environments. Now they are trying to protect some of their double-digit gains this year while still staying invested in the market, as concerns over the spread of the Delta coronavirus variant and slowing global growth have tempered expectations for further stellar returns from stocks. ‘Investors need and want equity market exposure and yet don’t want to take full-on risk with markets already at all-time highs,’ said Paul Stewart, a portfolio manager at Gateway Investment Advisers.”

September 1 – Bloomberg (Tracy Alloway): “There's a seismic shift underway in money markets, the equivalent of going from famine to feast. For years, the premium paid for dollars over the euro, Japanese yen and so on in the cross-currency markets has been negative, indicating rampant demand for greenbacks. Now, these so-called cross-currency basis swaps are on the verge of turning positive in a major shift for money markets. ‘Things that haven't happened before are now happening,’ says Credit Suisse AG strategist Zoltan Pozsar… He points out that cross-currency basis swaps are ‘something that we are used to as being very negative. There's always an excess demand for dollars, and that excess demand for dollars is gone.’”

September 1 – Financial Times (Kate Duguid): “The supply of the safest US government bonds has been cut this month after federal spending limits were reinstated, driving prices higher and reigniting problems for the money market fund industry — which has already been bailed out by the Federal Reserve once this year. Treasury bills… were already scant this year after the US lengthened the average duration of its new debt issues. Supply then took another hit after Congress failed to pass legislation in July that would have allowed the Treasury department to issue new debt — known as raising the debt ceiling. Analysts estimate issuance of new Treasury bills has been cut by roughly $900bn so far this year. That limited supply has driven prices higher and yields — the premium investors are paid to hold the debt — down to levels just above zero.”

September 1 – Financial Times (Tommy Stubbington and Martin Arnold): “Eurozone government bonds are showing signs that investors think the European Central Bank may begin to wind down its emergency bond-buying programme as soon as this month. ECB policymakers meet next week in the shadow of the highest inflation rate for more than a decade, after data this week showed a 3% annual rise in eurozone consumer prices in August… The inflationary burst has pushed a number of ECB rate-setters to suggest the central bank’s debt purchases could be scaled back earlier than previously thought. ‘We are seeing investors pricing in some risk of a taper at the September meeting,’ said Mohammed Kazmi, a portfolio manager at Union Bancaire PrivĂ©e. ‘Up until now the market had been pretty comfortable that they would keep going at the current pace to the end of the year.”

August 30 – Bloomberg (Abhishek Vishnoi and Ranjeetha Pakiam): “Veteran investor Mark Mobius said investors should have 10% of a portfolio in gold as currencies will be devalued following the unprecedented stimulus rolled out to fight the coronavirus pandemic.”

Inflation Watch:

August 31 – CNBC (Jeff Cox): “…The Conference Board reported that consumer inflation expectations ticked higher again, with respondents to the survey now seeing the metric running at 6.8% 12 months from now. That’s up a full percentage point from a year ago, or 17.2% on a relative basis.”

August 31 – Wall Street Journal (Will Parker): “Would-be home buyers priced out of the sales market are finding little consolation when they turn instead to the single-family rental market. Prices are soaring there as well. Asking rents for houses rose nearly 13% for the year to date through July, the highest annual increase in the past five years as tracked by… Yardi Matrix, which analyzed professionally managed properties… Apartment asking rents also have risen, but at a slower pace: 8.3% for the year to date through July, Yardi Matrix said. The difference partly reflects weaker demand in downtowns that lost population…”

August 27 – Wall Street Journal (Kate Davidson): “The White House more than doubled its forecast for annual inflation in new projections…, as supply-chain disruptions stemming from the Covid-19 pandemic continue to put upward pressure on prices. The Office of Management and Budget said it expected consumer prices would rise 4.8% in the fourth quarter from a year earlier, up sharply from the 2% rise that the Biden administration forecast in May.”

September 2 – Bloomberg (Jonathan Roeder): “Walmart Inc. said it will raise wages for a swath of its U.S. workforce, bringing its average hourly wage to $16.40 as the big-box retailer competes for employees amid a labor shortage. The raise of at least $1 per hour will start on Sept. 25 and cover more than 565,000 workers, Walmart U.S. Chief Executive Officer John Furner said… Furner said it’s the third pay rise for store workers over the past year.”

August 30 – Wall Street Journal (Joe Wallace and Hardika Singh): “Aluminum prices are reaching 10-year highs, as buyers far from storage centers in Asia compete to line up shipments for use in beverage cans, airplanes and construction. Aluminum forwards on the London Metal Exchange have climbed by a third this year to about $2,650 a metric ton. Prices are around 80% higher than at their low point in May 2020…”

September 3 – Wall Street Journal (Joe Wallace): “Sugar prices shot to four-year highs after a frost in Brazil cut the size of the cane crop in the world’s biggest producer, and hedge funds are adding to the market’s momentum. Prices for raw sugar futures have jumped 10% over the past month to trade at about 20 cents a pound in New York. Sugar prices haven’t been that high since early 2017 and have climbed more than 60% over the past year.”

Biden Administration Watch:

September 2 – Associated Press (Lisa Mascaro): “Centrist Sen. Joe Manchin said… Congress should take a ‘strategic pause’ on more spending, warning that he does not support President Joe Biden’s plans for a sweeping $3.5 trillion effort to rebuild and reshape the economy. The West Virginia Democrat’s pointed opposition was stronger than his past statements and taps into a grab-bag of arguments over inflation, national security and other concerns to deny Biden and his party a crucial vote on the emerging package. The timing of his comments comes as lawmakers are laboring behind the scenes to draft the legislation ahead of this month’s deadlines. ‘Instead of rushing to spend trillions on new government programs and additional stimulus funding, Congress should hit a strategic pause on the budget-reconciliation legislation,’ Manchin wrote…”

September 2 – Wall Street Journal (Kristina Peterson and Kate Davidson): “Democrats’ efforts to pass trillions of dollars in new spending by the end of September are colliding with a pair of other looming deadlines: keeping the government funded and raising the federal borrowing limit to avoid defaulting on debt payments. Time is running short against a backdrop of deep partisan disagreements over President Biden’s agenda, complicating the path forward on Capitol Hill. With most of Democrats’ focus turned to crafting an expansive $3.5 trillion package of healthcare, education and climate provisions, lawmakers and congressional aides said they would almost certainly have to prevent a partial government shutdown Oct. 1 by passing a short-term extension of its current funding, known as a continuing resolution, or CR.”

Federal Reserve Watch:

August 30 – Bloomberg (Alister Bull): “Federal Reserve Chair Jerome Powell risks inflation getting out of control and his assurance that the central bank can keep it in check neglects to mention this would require traumatic surgery, said former Richmond Fed President Jeffrey Lacker. ‘I think the Fed’s in a tough spot,’ Lacker said… ‘The danger that they face from this inflation surge -- we have inflation on a six-month basis higher than it’s been since 1983 -- the danger is that that persists…’ Lacker… said he was glad Powell had used part of his speech… to the Fed’s annual Jackson Hole symposium to assure Americans that the central bank had the tools to tackle persistently too-high inflation. But that’s like ‘a doctor telling you that you have gangrene in your leg and don’t worry we have the tools to deal with it, but the tools are the amputation kit and they include a big saw,’ he said.”

August 30 – Bloomberg (Michelle Jamrisko): “One of the leading global critics of the Federal Reserve’s 2013 ‘taper tantrum’ episode is now worried that the central bank could fall behind the curve as it gradually removes Covid-era monetary stimulus. ‘The Fed thinks it has time’ to slow-walk the tightening process, especially given longer-term disinflationary forces like aging, automation and globalization, Raghuram Rajan said… But compared to the aftermath of the Global Financial Crisis, ‘there’s one big difference post-pandemic, which is the enormous amount of fiscal spending,’ said the University of Chicago economist and former governor of the Reserve Bank of India. ‘My worry is that if they don’t fully account for these new forces, they may be behind the curve,’ Rajan said. ‘And that may, as everyone says, necessitate stronger tightening down the line.’”

August 27 – CNBC (Jeff Cox): “Federal Reserve Chairman Jerome Powell’s conviction that the inflation winds whipping through the U.S. economy this year soon will subside is not universally shared. In fact, a growing contingent within the Fed’s virtual halls is raising concern that the supply chain disruptions, burgeoning demand and shortages of labor and supplies could push the current trend well into 2022 and beyond. Patrick Harker, the president of the Philadelphia Fed, said as much… in a CNBC interview… The Fed not only has achieved the inflation part of its mandate by keeping the level at well above 2% for a period of time, but it also faces the challenge that those price pressures don’t seem to be fading, Harker said. ‘There’s also some evidence that they may not be so transitory, and that’s a risk I’m worried about,’ the central bank official said…”

August 29 – Bloomberg (Mohamed El-Erian): “Federal Reserve Chair Jerome Powell’s speech Friday at the annual Jackson Hole forum was consistent with his very gradual and highly measured approach to policy changes – an approach that financial markets love as it implies a longer period of very loose liquidity that fuels ever higher asset prices. The real question, however, is whether the speech will end up being out of touch with actual economic and financial developments as they unfold over the remainder of this year and beyond. By refraining from breaking new ground or providing operational details of any evolution in policy, both of which would have inevitably tilted more hawkish at this point, Powell gave investors more reason to take stocks and bonds higher.”

August 30 – Reuters (Jonnelle Marte): “Cleveland Federal Reserve Bank President Loretta Mester said… the U.S. economy is recovering strongly but she is not yet convinced that recent inflation readings will be enough to satisfy the price stability goal the U.S. central bank revamped a year ago. The policymaker said there were upside risks to inflation and that officials need to pay close attention to price changes, but that she expects some inflation metrics will come down after some of the supply chain disruptions caused by the pandemic are resolved. ‘I'd like to see a little more data before I can arrive and conclude that...we're at 2% and on the way above 2% for some time,’ Mester said…”

September 1 – Bloomberg (Craig Torres): “Federal Reserve officials are moving on to their next big policy debate: defining their ‘broad and inclusive’ maximum-employment goal that they have pledged to reach before raising interest rates. With Chair Jerome Powell and colleagues paving the way to slowing their massive asset-purchase program this year, attention will turn to when they will hike rates for the first time since 2018. Seven of 18 policy makers wanted to raise in 2022 and that number could grow when the Fed releases updated economic forecasts next month. The discussion could be an even more heated argument than discord over scaling back bond purchases. That’s because the Fed’s overhaul of monetary policy last year didn’t spell out a numeric definition for the minority unemployment rates that would meet their new goal.”

U.S. Bubble Watch:

September 3 – Bloomberg (Reade Pickert and Olivia Rockeman): “U.S. hiring downshifted abruptly in August with the smallest jobs gain in seven months, complicating a potential decision by the Federal Reserve to begin scaling back monetary support by year end. Nonfarm payrolls increased 235,000 last month, trailing all forecasts, after an upwardly revised 1.05 million gain in July… Employment in leisure and hospitality, which has posted strong gains recently, was flat amid the spreading delta variant and persistent hiring challenges. The unemployment rate fell to 5.2% from 5.4%.”

September 1 – Bloomberg (Olivia Rockeman): “U.S. manufacturing expanded at a stronger-than-expected pace in August, reflecting faster orders and production growth as well as rising backlogs consistent with global supply chain challenges. The Institute for Supply Management’s gauge of factory activity rose to 59.9 from 59.5 in the prior month… The ISM’s index of backlogs rose to 68.2, matching the second-highest reading in data back to 1993, while the group’s measure of employment fell to 49, the lowest since November. The gauge of new orders advanced to 66.7. ‘Companies and suppliers continue to struggle at unprecedented levels to meet increasing demand,’ Timothy Fiore, chair of ISM’s Manufacturing Business Survey Committee, said…”

September 1 – Reuters (Jonnelle Marte): “Childcare centers across the country are struggling to find enough qualified educators to be fully staffed for back-to-school season, an obstacle that has some schools reducing planned enrollment and cutting back hours. Owners of childcare centers say more workers are quitting and fewer people than usual are applying for open positions. The staffing crunch is further limiting childcare options here for parents eager to get back to work… Without reliable childcare, it will become more difficult for those parents to return to steady work schedules, economists say, potentially slowing a labor market recovery that many had hoped would get a jolt as schools reopened this fall and which becomes even more critical as enhanced jobless benefits expire in September.”

August 31 – Associated Press (Christopher Rugaber): “U.S. home prices jumped by a record amount in June as homebuyers competed for a limited supply of available houses, the latest evidence that the housing market remains red-hot. The S&P CoreLogic Case-Shiller 20-city home price index soared 19.1% in June compared with a year earlier, the largest increase on records dating back to 2000. The annual price gains in June were higher in all 20 cities than they were in May. Prices are now at record highs in 19 of the 20 cities, with the exception of Chicago. ‘The last several months have been extraordinary not only in the level of price gains, but in the consistency of gains across the country,’ said Craig Lazzara, managing director of index investment strategy at S&P DJI.”

September 2 – Reuters (Lucia Mutikani): “The U.S. trade deficit narrowed more than expected in July as imports declined likely because of shortages and a shift in domestic spending from goods to services. The… trade gap fell 4.3% to $70.1 billion… Exports increased 1.3% to $212.8 billion in July. Goods exports shot up 1.8% to $148.6 billion.”

September 2 – Bloomberg (Vince Golle): “A record share of U.S. small-business owners said they had vacant positions in August, and an unprecedented number boosted wages to lure workers, the National Federation of Independent Business said… Fifty percent of firms had job openings they could not fill last month, up 1 percentage point from July and the largest share in monthly data back to 1986… A record 41% of small-business owners said they raised compensation. ‘Owners are raising compensation in an attempt to attract workers and these costs are being passed on to consumers through price hikes for goods and services, creating inflation pressures,’ Bill Dunkelberg, NFIB’s chief economist, said… A record 32% of small businesses said they intend to add to payrolls in the next few months, while the number planning to raise worker pay remained near a series high. Job skills remain problematic for companies, with 91% of those hiring or trying to hire indicating there were few or no qualified applicants for open positions…”

September 2 – Bloomberg (Mary Schlangenstein): “Missing workers are turning out to be as big a headache for airlines as missing luggage. U.S. carriers hoping to build out flight schedules face headwinds from unfilled jobs and, in the case of Southwest Airlines Co., a surprising spike in staffing no-shows. The industry is hiring thousands pilots and flight attendants more than a year after trimming jobs as travel collapsed with the coronavirus pandemic. Reservation agents also are high in demand. But the need -- and the challenge – is greatest for entry-level jobs like baggage handlers, ticket counter and gate agents, cabin cleaners, aircraft fuelers and folks who restock galleys.”

August 31 – Wall Street Journal (Kate Davidson): “The severe economic downturn caused by the Covid-19 pandemic last year weighed on the financial health of Social Security, but not nearly as much as many forecasters originally feared, according to new projections of the program’s finances. Trustees for the Social Security trust fund in an annual report released Tuesday said the program is expected to pay benefits that exceed its income in 2021, the same as it anticipated last year at the outset of the pandemic.”

China Watch:

August 31 – Reuters (Gabriel Crossley): “China's factory activity slipped into contraction in August for the first time in nearly 1-1/2 years as COVID-19 containment measures, supply bottlenecks and high raw material prices weighed on output in a blow to the economy. The slowdown in the manufacturing sector underscores the fragility of the ongoing economic recovery and the impact of strict coronavirus curbs in the country, backing expectations Beijing will roll out more support measures to revitalise growth. Two separate official surveys released on Tuesday showed China's factory activity grew at a slower pace, while the services sector slumped into contraction. The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) fell to 49.2 last month, from 50.3 in July, breaching the 50-mark that separates growth from contraction.”

September 2 – Reuters (Gabriel Crossley): “Activity in China's services sector slumped into sharp contraction in August, a private survey showed on Friday… The Caixin/Markit services Purchasing Managers' Index (PMI) fell to 46.7 in August from 54.9 in July, plunging to the lowest level since the pandemic's first wave in April 2020. The 50-point mark separates growth from contraction on a monthly basis.”

August 28 – Bloomberg: “China kicked off a two-month campaign to crack down on commercial platforms and social media accounts that post finance-related information that’s deemed harmful to its economy. The initiative will focus on rectifying violations including those that ‘maliciously’ bad-mouth China’s financial markets and falsely interpret domestic policies and economic data, the Cyberspace Administration of China said... Those who republish foreign media reports or commentaries that falsely interpret domestic financial topics ‘without taking a stance or making a judgment’ will also be targeted, it added.”

August 31 – Bloomberg: “China unveiled plans to keep a lid on home rents in cities and preserve older properties, its latest move to ease price pressures in the residential market and promote urban renewal. The housing ministry aims to control growth in urban rents to no more than 5% per year… The announcement underscores one of the top priorities for President Xi Jinping in his pursuit of ‘common prosperity.’ Regulators are ratcheting up efforts to tame land and home prices that have fueled China’s runaway property industry.”

September 2 – Associated Press (Joe McDonald): “China’s government banned effeminate men on TV and told broadcasters Thursday to promote ‘revolutionary culture,’ broadening a campaign to tighten control over business and society and enforce official morality. President Xi Jinping has called for a ‘national rejuvenation,’ with tighter Communist Party control of business, education, culture and religion. Companies and the public are under increasing pressure to align with its vision for a more powerful China and healthier society.”

September 3 – Bloomberg: “Beijing’s municipal government has proposed an investment in Didi Global Inc. that would give state-run firms control of the world’s largest ride-hailing company… Under the preliminary proposal, Shouqi Group -- part of the influential Beijing Tourism Group -- and other firms based in the capital would acquire a stake in Didi… Scenarios under consideration include the consortium taking a so-called “golden share” with veto power and a board seat, they added.”

September 3 – Bloomberg (Kevin Kingsbury): “A worsening selloff in dollar bonds for developers such as China Evergrande Group and Guangzhou R&F Properties Co. has sent the yields on Chinese junk-rated notes back near July’s highest levels this week. The group’s yield climbed 29 bps for a second straight day on Thursday, putting it at 12.6%... The gauge’s spread versus investment-grade notes in China is just short of this year’s summer peak, when concerns over Evergrande’s liquidity crisis and Beijing’s clampdown on a swathe of industries rattled the offshore credit market.”

August 31 – Financial Times (Thomas Hale): “Evergrande has warned it risks defaulting on its debt if it fails to raise cash, as China’s most heavily indebted property developer battles to stave off an unfolding liquidity crisis. The unusually stark wording from the company came in an interim earnings statement… ‘The group has risks of defaults on borrowings and cases of litigation outside of its normal course of business,’ Evergrande said, adding that it would pursue further asset sales, control costs and seek to attract new investors.”

September 1 – Bloomberg: “On the face of it, China Evergrande Group made progress cutting its debt load in the first half of the year. On closer examination, paying its dues got even harder. The developer’s borrowings, or interest-bearing debt, fell to a five-year low as of June 30… But its overall liabilities rose to a near-record 1.97 trillion yuan ($305bn), thanks mainly to swelling bills to suppliers. Cash and cash equivalents plunged to a six-year low. The upshot: Evergrande will need to accelerate asset sales and continue to aggressively discount apartment prices to generate enough cash to meet its obligations. Bonds tumbled after the world’s most indebted developer said it risks defaulting on borrowings if its all-out effort falls short. ‘Now it’s at a critical point,’ said Chuanyi Zhou, a credit analyst at Lucror Analytics. ‘If asset sales and introduction of new investors don’t progress well and meet the government’s expectation, a default is likely to happen, possibly followed by an out-of-court arrangement with creditors.’”

September 2 – Bloomberg: “At least two of China Evergrande Group’s largest non-bank creditors have demanded immediate repayment of some loans, according to people familiar with the matter, adding to liquidity strains at the world’s most indebted developer. The two creditors are trust companies, which pool money from wealthy individual investors and are a major source of financing for Evergrande and other Chinese developers.”

September 1 – Dow Jones (Xie Yu): “Cash-strapped China Evergrande Group said work has been suspended on some of its real-estate projects after it delayed payments to its suppliers and contractors, showing how the developer's financial troubles have spilled over into its business operations. The highly indebted company… also warned for the first time that it may default on its borrowings if it can't resolve its liquidity problems. Evergrande, one of China's largest residential developers, said it has been selling assets and apartment units to raise cash. The group also said that ‘with the coordination and support of the government,’ it is actively negotiating with suppliers and construction companies to try to get them to resume work on its properties. ‘The group will do its utmost to continue its operations and endeavor to deliver properties to customers as scheduled,’ Hong Kong-listed Evergrande said…”

September 3 – Financial Times (Thomas Hale): “Trading in some debt issued by China Evergrande was temporarily halted on Friday, as the under-pressure property developer’s bonds tumbled to new lows on fears of a deepening liquidity crisis. Investors were briefly unable to buy and sell the company’s debt in Shenzhen… after prices fell more than a daily limit of 20%... The yield on a renminbi-denominated bond maturing in 2023 was about 49% prior to the trading suspension… A separate bond on Shanghai’s stock exchange was halted because of ‘abnormal volatility’… before trading resumed.”

August 30 – Financial Times (Hudson Lockett and Thomas Hale): “A string of stresses at indebted property developer China Evergrande has left a mark on investor confidence for the country’s riskiest borrowers in the international bond markets. Interest rates on Chinese high-yield bonds issued offshore were 13.3% last week, according to an index from ICE and Bank of America, up from less than 10% in June and close to levels when the onset of the coronavirus pandemic dragged down bond prices at the start of 2020. The recent peak in late July was more than 14%. The higher yields indicate that Evergrande’s woes have sparked broader concerns about the health of the property sector, which is responsible for about half of China’s offshore bond issuance but is under pressure from Beijing to reduce leverage.”

August 31 – Bloomberg: “The numbers circulating through official Beijing were even worse than feared. This was looking like one of the biggest single money-losers in modern Chinese history. But who, if anyone, would be willing to clean up the mess at China Huarong Asset Management Co., the nation’s teetering ‘bad bank?’ Its long-delayed financial results -- at the time, still unknown to the wider world -- reached Chinese officialdom in mid-July. The figures were so dire that regulators were hesitant to sign off on them. They feared any association with Huarong might hurt their careers. The Ministry of Finance, which has controlled Huarong since its creation, was eager to hand over the keys -- fast. Part of China’s sovereign wealth fund considered making a play but then, after going through the books, wanted money from the mighty People’s Bank of China first. The idea was shot down. Finally, eyes turned to another rich and powerful state enterprise, Citic Group – and the people there began to sweat.”

August 30 – Bloomberg: “China Huarong Asset Management Co.’s long-delayed 2020 results showed a record loss, with leverage hitting 1,333 times and capital buffers far short of the regulatory minimum, emphasizing the difficult task ahead for the bad-debt manager that recently secured a government bailout. Huarong reported a 102.9 billion yuan ($15.9bn) loss for all of last year, slashing shareholder equity by nearly 85%...”

September 2 – Bloomberg (Jonas Bergman): “China Huarong Asset Management Co. is marketing 380 billion yuan ($58.8bn) in bad assets for sale as the firm moves to shore up its finances after record losses. The assets involve more than 7,000 borrowers, the… firm said… It’s the largest size ever for a Huarong online marketing of bad assets…”

August 30 – Reuters (Engen Tham, Zhang Yan and Kane Wu): “China's banking and insurance sector regulator is probing Ping An Insurance Group Co of China Ltd's investments in the property market, two people with knowledge of the matter said, after the firm took a big profit hit from a soured bet. The China Banking and Insurance Regulatory Commission (CBIRC) has also ordered the insurer to stop selling alternative investment products, which are typically tied to the property market, said the people…”

August 31 – Bloomberg: “China should guard against the risk of falling property prices and a potential crisis if home values start dropping below mortgages, a prominent state-linked economist warned. Some Chinese cities have already set a floor for property prices in addition to price caps, and the vacancy rate in some regions have topped 10%, Li Yang, chairman of the National Institution for Finance & Development, was cited as saying… The institution is a think tank that advises the government under the state-run Chinese Academy of Social Sciences. ‘If one day the value of houses plunged below the mortgage value, people won’t even be able to repay their debt by selling the houses, and that would be a real crisis for the property market,’ Li was cited as saying…”

August 30 – Reuters (David Stanway): “China's crackdown on celebrity culture and its moves to rein in giant internet firms are a sign of ‘profound’ political changes under way in the country, a prominent blogger said in a post widely circulated across state media. The Chinese government has recently taken action against what it has described as ‘chaotic’ online fan club culture, and has also punished celebrities for tax evasion and other offences. In a wide-ranging series of interventions in the economy, it has also promised to tackle inequality, ‘excessively high’ incomes, soaring property prices and profit-seeking education institutions. ‘This is a transformation from the capital at the centre to people at the centre,’ nationalist author Li Guangman wrote in an essay…”

August 31 – Reuters (Yingzhi Yang and Brenda Goh): “Young Chinese gamers took to social media to express their outrage at new rules that limit their gaming time to just three hours per week, while investors fretted about the long-term impact on the industry. Authorities argue the restrictions are necessary to stop growing gaming addiction and the People's Daily… said the government had to be ‘ruthless’ as online games impair normal study life and the physical and mental health of teens. The curbs are part of Beijing's efforts to promote the primacy of socialism and strengthen controls over society it now views as having become too lax after years of laissez-faire growth for the tech sector and other industries.”

Central Banker Watch:

September 1 – Reuters (Balazs Koranyi): “Euro zone inflation is at risk of overshooting the European Central Bank’s projections as the temporary factors behind its recent spike could seep into underlying price growth, Bundesbank President Jens Weidmann said… Euro zone inflation hit 3% last month and policymakers expect it to move higher in the coming months before falling back below the ECB’s 2% target early next year… ‘Upside risks currently predominate, in my opinion,’ Weidmann, one of the ECB’s most conservative policymakers said... ‘If these temporary factors lead to higher inflation expectations and accelerated wage growth, the inflation rate can rise noticeably in the longer term.’”

August 31 – Bloomberg (Jana Randow, Carolynn Look and Marton Eder): “The European Central Bank should discuss at its upcoming meeting how it will transition from emergency stimulus provided during the coronavirus crisis to monetary support that will help it meet its inflation goal, Governing Council member Robert Holzmann says… ‘We are now in a situation where we can think about how to reduce the pandemic special programs. I think that’s an assessment we share.’ ‘At our September meeting, we have the opportunity to discuss how do we close the pandemic part and focus on the inflation part.’ Slowdown of PEPP purchase pace in fourth quarter ‘definitely’ a discussion to take place next week.”

August 31 – Bloomberg (Carolynn Look and Marton Eder): “The euro zone’s inflation outlook may have improved markedly enough to justify an immediate slowdown in European Central Bank stimulus, an end to its pandemic emergency bond program in March, and then a return to pre-crisis discipline, according to policy maker Klaas Knot. ‘I would expect a decision that should not be incompatible’ with terminating the debt-buying plan in March, the Dutch governor said…, discussing the options for next week’s Governing Council meeting. ‘That would imply a reduction in the purchase pace.’”

Global Bubble Watch:

September 2 – Bloomberg (Elizabeth Elkin, Mai Ngoc Chau and Agnieszka de Sousa): “Across the world, a dearth of workers is shaking up food supply chains. In Vietnam, the army is assisting with the rice harvest. In the U.K., farmers are dumping milk because there are no truckers to collect it. Brazil’s robusta coffee beans took 120 days to reap this year, rather than the usual 90. And American meatpackers are trying to lure new employees with Apple Watches while fast-food chains raise the prices of burgers and burritos. Whether it’s fruit pickers, slaughterhouse workers, truckers, warehouse operators, chefs or waiters, the global food ecosystem is buckling due to a shortage of staff. Supplies are getting hit and some employers are forced to raise wages at a double-digit pace. That’s threatening to push food prices — already heated by soaring commodities and freight costs — even higher. Prices in August were up 33% from the same month last year…”

August 31 – Reuters (Jonathan Cable and Leika Kihara): “Global factory activity lost momentum in August as the ongoing coronavirus pandemic-disrupted supply chains, raising concerns faltering manufacturing would add to economic woes caused by slumping consumption, surveys showed… Many firms reported logistical troubles, product shortages and a labour crunch which have made it a sellers’ market of the goods factories need, driving up prices. While factory activity remained strong in the euro zone, IHS Markit’s final manufacturing Purchasing Managers’ Index (PMI) fell to 61.4 in August from July’s 62.8, below an initial 61.5 ‘flash’ estimate. ‘Despite the strong PMI figures, we think that lingering supply-side issues and related producer price pressures might take longer to resolve than previously expected, increasing the downside risk to our forecast,’ said Mateusz Urban at Oxford Economics. In Britain, where factories also faced disruptions, manufacturing output grew in August at the weakest rate for six months.”

September 2 – CNBC (Weizhen Tan): “Housing prices have shot up across cities in Asia-Pacific this year, fueled by record low interest rates amid the pandemic. Optimism has also gained steam as vaccination rates gain pace… As companies move to a hybrid work model… demand for larger homes has also picked up, analysts say. The overheating in property markets across some Asian cities has led to wide expectations that governments will intervene through housing curbs or other measures such as fiscal or monetary policy.”

EM Watch:

September 1 – Reuters (Gabriel Stargardter and Lisandra Paraguassu): “Brazilian Vice President Hamilton Mourao said… a severe drought could lead to energy rationing in Brazil, contradicting other officials who have said that such a step would not be necessary. Brazil, one of the world's agricultural superpowers, is suffering from one of its worst droughts in a century. The lack of rainfall has emptied hydroelectric reservoirs, fanned inflation and hurt farmers. The government has given incentives to use less energy but says rationing is not expected. ‘There may have to be some rationing,’ Mourao told reporters in Brasilia, although he said the government had taken necessary measures to prevent blackouts.”

September 1 – Bloomberg (Matthew Malinowski and Valentina Fuentes): “Chile’s central bank raised its 2021 growth and inflation forecasts as the economy runs hot, a day after policy makers delivered the biggest interest rate increase in two decades. The economy will expand between 10.5% and 11.5%, up from the prior estimate of 8.5% to 9.5%... Annual inflation will speed up to 5.7% in December, nearly double the 3% target. Policy makers led by Mario Marcel lifted the overnight rate by 75 bps to 1.5% late Tuesday, surprising all analysts…”

September 1 – Reuters (Kanishka Singh): “Rating agency Moody’s… downgraded Peru’s rating to ‘Baa1’ on Wednesday, citing a ‘continuously polarized and fractured political environment,’ which it says has increased political risk and ‘materially weakened policymaking capacity.’”

Europe Watch:

August 30 – Bloomberg (Jana Randow): “German inflation jumped to its highest level since 2008… Consumer prices rose 3.4% in August, significantly faster than the 2% the European Central Bank aims to achieve sustainably for the euro area. Earlier on Monday, Spain reported a rate of 3.3%. So far, policy makers have argued that the current inflation surge is temporary and largely reflects one-off effects. Yet an aggravating supply squeeze is prompting more and more firms to raise charges, a trend that could produce more permanent price pressures.”

August 31 – Reuters (Balazs Koranyi): “Euro zone inflation surged to a 10-year-high in August with further rises likely, challenging the European Central Bank's benign view on price growth and its commitment to look past what it deems a temporary increase. Consumer inflation in the 19 countries sharing the single currency accelerated to 3% this month from 2.2% in July, far above expectations for 2.7% and moving well clear of the ECB's 2% target.”

September 1 – Bloomberg (Carolynn Look): “The euro-area economy’s rebound and a dramatic inflation surge has reignited the sparring among European Central Bank policy makers about when to shift the institution away from its crisis mode. While euro-area central bankers were mostly united behind the measures taken to guide the economy through the Covid-19 recession, the return toward normality is fraying that consensus. Two hawkish Governing Council members, Austria’s Robert Holzmann and Klaas Knot of the Netherlands, kicked off a public exchange of views this week when they said that the inflation outlook now warrants stepping back stimulus. The comments in separate interviews with Bloomberg coincided with data showing inflation in the euro region jumped to 3%, well above the ECB’s goal.”

August 29 – Reuters (Emma Thomasson and Alexander Ratz): “The conservative candidate to succeed German Chancellor Angela Merkel failed to revive his campaign in a heated debate with his two main rivals…, according to a snap poll, as surveys show his party falling behind the centre-left Social Democrats (SPD).”

Japan Watch:

September 3 – Bloomberg (Isabel Reynolds): “Japanese Prime Minister Yoshihide Suga announced plans to resign after failing to control the country’s coronavirus surge, with two former foreign ministers seen as leading the pack to take over, weeks before a general election. In a surprise announcement, Suga told reporters Friday he couldn’t campaign for re-election as leader of the Liberal Democratic Party this month while battling the virus, ending his premiership almost exactly a year after it started. Whoever becomes the next LDP leader is virtually assured of becoming prime minister due to the party’s dominance in parliament.”

Social, Political, Environmental, Cybersecurity Instability Watch:

September 1 – Bloomberg (Sergio Chapa and Will Wade): “Hurricane Ida has passed by, but New Orleans remains mostly powerless. Electricity went out across the city Sunday, and while one neighborhood flickered back early Wednesday, there’s no word about when the rest of the lights will be back. Gasoline is scarce, most grocery stores are closed, tap water is iffy and officials are telling people who fled not to come home. It’s a challenge just to care for those who are there: More than half the population rode out the storm, and about 200,000 are enduring the smothering August heat and trying to put food on the table without electricity.”

September 2 – Reuters (Barbara Goldberg and Maria Caspani): “Flooding killed at least 14 people, swept away cars, submerged subway lines and temporarily grounded flights in New York and New Jersey as the remnants of Hurricane Ida brought torrential rains to the area. New York City Mayor Bill de Blasio told a… news conference there were nine confirmed fatalities in New York caused by what he had described as a ‘historic weather event.’ Countless rescues were made overnight of motorists and subway riders who became stranded in the flood waters, de Blasio said. ‘So many lives were saved because of the fast, courageous, response of our first responders,’ he said.”

August 31 – Associated Press (Kevin McGill, Chevel Johnson and Melinda Deslatte): “Hundreds of thousands of Louisianans sweltered in the aftermath of Hurricane Ida… with no electricity, no tap water, precious little gasoline and no clear idea of when things might improve. Long lines that wrapped around the block formed at the few gas stations that had fuel and generator power to pump it. People cleared rotting food out of refrigerators. Neighbors shared generators and borrowed buckets of swimming pool water to bathe or to flush toilets. ‘We have a lot of work ahead of us and no one is under the illusion that this is going to be a short process,’ Gov. John Bel Edwards said…”

August 30 – Wall Street Journal (Katherine Blunt and Jennifer Hiller): “Entergy Corp.’s challenge in restoring power after Hurricane Ida extends well beyond New Orleans as it repairs widespread wind damage to much of its transmission system. Rod West, Entergy’s group president of utility operations, said Monday that 207 transmission lines traversing more than 2,000 miles are out of service in Louisiana and Mississippi. About 900,000 customers are without power, and the company expects the number to increase as the storm moves through Mississippi.”

September 1 – Bloomberg (Amanda Little): “As drought continues to punish food producers throughout the American West, Hurricane Ida has reminded us that the very opposite problem — raging storms and floods — not only imperils crop production but can devastate global food distribution networks. Centralized shipping networks are vulnerable to disruption — one storm in Louisiana can paralyze 60% of U.S. grain exports to the rest of the world. It’s the same lesson we learned from the devastating impacts of Covid-19 and cyberattacks on major meat processing facilities, which showed that consolidation has made the U.S. meat industry unacceptably fragile.”

August 30 – Associated Press (Same Metz and Janie Har): “A popular vacation haven normally filled with tens of thousands of summer tourists was clogged with fleeing vehicles Monday after the entire resort city of South Lake Tahoe was ordered to leave as a ferocious wildfire raced toward Lake Tahoe, a sparkling gem on the California-Nevada state line.”

September 2 – CNBC (Emily DeCiccio): “The extreme weather across the U.S., from the devastating Caldor Fire scorching the West Coast to the deadly flooding and tornadoes slamming the East Coast, could pale in comparison to future weather events, warned climate scientist Andrew Dessler on CNBC… ‘This is climate change, and it’s just a small preview of what’s going to happen if we don’t start, stopping emitting greenhouse gases into the atmosphere,’ said Dessler, a professor of atmospheric sciences at Texas A&M University. ‘We really need to do that, or we’re going to look back on this as the good ol’ days.’”

Leveraged Speculation Watch:

September 3 – New York Times (Matthew Goldstein and Kate Kelly): “The agreement ends a longstanding tax dispute involving a decade’s worth of transactions at Renaissance Technologies, one of the world’s biggest and best-connected hedge funds. A yearslong dispute between a pioneering hedge fund and the Internal Revenue Service ended Thursday with an enormous bill for taxes and penalties: as much as $7 billion. James Simons, a mathematician whose algorithmic approach has been adopted by many other investment funds, and some of his former colleagues at Renaissance Technologies have settled a decade-long dispute with the government over the tax treatment of some of their investments, the firm said in a letter to investors.”

Geopolitical Watch:

September 1 – Reuters (Yimou Lee): “China's armed forces can ‘paralyse’ Taiwan's defences and are able to fully monitor its deployments, the island's defence ministry said, offering a stark assessment of the rising threat posed by its giant neighbour. Beijing is stepping up military activities around the island… It has never renounced the use of force to bring democratic Taiwan under its control. In its annual report to parliament on China's military…, Taiwan's Defence Ministry presented a far graver view than it did last year, when the report said China still lacked the capability to launch a full assault on Taiwan. This year's report said that China can launch what it termed ‘soft and hard electronic attacks’, including blocking communications across the western part of the first island chain, the string of islands that run from the Japanese archipelago, through Taiwan and down to the Philippines.”

September 1 – Reuters (Josh Horwitz): “Chinese state-backed tabloid the Global Times called U.S. efforts to block cross-border acquisitions of tech companies a ‘red flag’ that impedes China’s tech sector and disrupts the growth of the global tech sector. The outlet, which is published by the People’s Daily, China’s official newspaper for the ruling Communist Party, argued a recent attempt to block a Chinese purchase of a Korean chip company ‘represents a dangerous precedent for the industry as a whole.’ ‘If the US succeeds in blocking the deal this time, it could set a very bad precedent for global high-tech mergers and acquisitions, further consolidating the industrial concentration in the US,’ the op-ed read.”

September 2 – Bloomberg (Isabel Reynolds and Emi Nobuhiro): “The Taiwan Strait may be the next major diplomatic problem after China’s clampdown on Hong Kong, according to former Japanese Foreign Minister Fumio Kishida, one of at least two candidates likely to vie to become the next premier. Speaking in an interview… just before Prime Minister Yoshihide Suga made a surprise announcement that he was stepping down, Kishida said Japan should seek to cooperate with Taiwan and countries that share its values of freedom, democracy and the rule of law, as authoritarian countries wield more power.”

August 30 – Bloomberg (Jamie Tarabay): “A few days after Prime Minister Scott Morrison called for an independent international probe into the origins of the coronavirus, Chinese bots swarmed on to Australian government networks. It was April 2020. The bots ran hundreds of thousands of scans, apparently looking for vulnerabilities that could later be exploited. It was a massive and noisy attack with little effort made to hide the bots’ presence, said Robert Potter, chief executive officer of Internet 2.0, an Australian cybersecurity firm that works extensively with the federal government.”

August 30 – Reuters (Francois Murphy and Josh Smith): “North Korea appears to have restarted a nuclear reactor that is widely believed to have produced plutonium for nuclear weapons, the U.N. atomic watchdog said…, highlighting the isolated nation's efforts to expand its arsenal.”

September 3 – Bloomberg (Jonathan Tirone): “U.S. and European efforts to coax Iran back into nuclear negotiations as soon as this month are being blunted by support the Islamic Republic’s already emboldened leaders are receiving from China and Russia. The result is that three years after former President Donald Trump imposed his ‘maximum pressure’ policy, Iran has enriched uranium close to weapons grade while its economy is showing some signs of stabilizing with the help of Beijing and Moscow, even as crucial oil exports remain heavily sanctioned.”

Friday Evening Links

[Yahoo/Bloomberg] Gold Gains as Jobs Data Eases Taper Concerns; Base Metals Rally

[CNBC] Democrats consider new taxes aimed at CEO pay, stock buybacks for $3.5 trillion budget plan

[CNBC] U.S. heads into Labor Day with Covid vaccines but a substantially worse outbreak than this time last year

[AP] Searches, sorrow in wake of Ida’s destructive, deadly floods