Friday, October 15, 2021

Weekly Commentary: Controllable

Now that was wild. Let’s start with the Chinese developers. Indicative of the more troubled companies, Kaisa Group bond yields surged to almost 51% in Wednesday trading, up from 36% to begin the week (20% to start the month). Yields closed the week at 44.7%. After beginning the week at 23.3% (October at 16.6%), Yuzhou Group bond yields surged to almost 38% in Thursday trading, before reversing sharply lower to end Friday’s session at 27.7%. China Aoyuan yields began the week at 16.6%, jumped to almost 20% on Thursday, but were back down to 17% by week’s end. Evergrande yields ended the week at 75%. Acute instability for bonds of a sector that, according to Nomura analysts, has accumulated a frightening $5 TN of debt.

An index of Chinese dollar developer bonds began the week with yields of 17.5%, up from 14.4% to begin the month and 10% back in July. Yields closed Thursday trading at a record 20%, before ending the week at 19.3%.

Ample volatility as well in the cost of insuring against default for the major Chinese banks. China Development Bank CDS surged 10 Monday to 77 bps, up from 43 bps points at the beginning of September to the highest level since the pandemic crisis. China Development Bank CDS then reversed sharply lower, ending the week down at 62 bps. Industrial and Commercial Bank of China CDS traded to 78 bps (high since April ’20), up from 48 on September 17, before closing out the week at 76 bps. China Construction Bank traded to a post-pandemic high 75 bps (ended week at 74), after beginning the year at 36 bps.

It’s been a wild ride for China’s sovereign CDS. After beginning October at 47, China CDS closed last week (10/8) at 52.5 bps. Prices spiked to above 60 early in the week (high since April ‘20), before reversing lower to close Friday at about 50. Indonesia CDS traded to an almost one-year high 96 bps Tuesday, before reversing sharply lower to end the week at 86. Malaysia CDS rose to a 15-month high 66 bps on Tuesday, before ending the week at 60 bps. India CDS jumped six to a six-month high 88.5 bps. Turkish bond yields surged almost 100 bps to 18.85%.

Global markets in the first half of the week traded with a problematic dynamic of high correlations, rising sovereign yields, widening Credit spreads, increasing CDS prices and sinking stock markets. Miraculously, yields, spreads and CDS prices reversed sharply lower, as stocks surged higher.

Italian yields traded to a five-month high 0.93% in early-Thursday trading, only to reverse abruptly with yields down to 0.83% by the afternoon (before closing the week at 0.87%). European “crossover” (high-yield) CDS jumped to a seven-month high 277 bps in Tuesday trading, only to reverse lower to end the week at 257 bps. After trading down to about 15,000 early Tuesday, Germany’s DAX equities index rallied almost 4% to close the week at 15,587.

The S&P500 rallied 3.3% off Wednesday’s trading lows to end the week with a gain of 1.8%. U.S. high-yield CDS prices jumped to a seven-month high 315 bps in Wednesday trading, only to reverse sharply lower to close the week at 300 bps. A similar story for investment-grade CDS, with a seven-month high 55 bps reduced to 52 bps by Friday. The VIX index traded to about 21 Tuesday, but was back below 16 on Friday.

Acute Chinese Credit stress and U.S. options expiration week made for a combustible mix. And once again, those hedging or attempting to time a market swoon were hammered by an abrupt reversal and rally into expiration. Equities again prove unable to adjust to a deteriorating backdrop – in true speculative Bubble form.

October 12 – Wall Street Journal (Stella Yifan Xie, Elaine Yu and Anniek Bao): “Home sales in China are seizing up as curbs on lending and worries about developers’ financial health deter house buyers, casting a pall over an industry that is central to the Chinese economy. In recent days, numerous big developers have reported lower sales figures for September, with many showing year-over-year declines of more than 20% or 30%... If sustained, the sharp downturn could have serious economic consequences. Real estate has played an outsize role in China’s economy in recent years, compared with its importance in many other countries, and Chinese families have much of their wealth tied up in homes and in investment properties. Slower sales could spill over into investment and construction, potentially hurting growth, employment and local government finances. Discounting to spur sales could hurt home prices and hit household wealth.”

October 13 – Reuters (Andrew Galbraith and Marc Jones): “The rumbling crisis at China Evergrande Group and other major homebuilders drove debt market risk premiums on weaker Chinese firms to a record high on Wednesday and triggered a fresh round of credit rating downgrades… The $5 trillion property sector accounts for around a quarter of the Chinese economy by some metrics. In the clearest sign yet that global investors' worries are growing, the spread - or risk premium - on investment grade Chinese firms… jumped to its widest in more than two months. The spread on the equivalent high-yield or 'junk'-rated index… surged to a new all-time high of 2,337 bps. That drove the yield… to an eyewatering 24%. ‘We see a risk that a disorderly correction in the property market could cause sharp price declines, hitting the personal wealth of homeowners,’ Kim Eng Tan, a credit analyst at S&P Ratings, said… ‘Such an event could also contribute to large-scale losses by investors in wealth management products, and the contractors and service firms that support the developers.’”

October 15 – Bloomberg: “China’s central bank broke its silence on the debt crisis at China Evergrande Group, saying risks to the financial system stemming from the developer’s struggles are ‘controllable’ and unlikely to spread. Authorities and local governments are resolving the situation based on ‘market-oriented and rule-of-law principles,’ People’s Bank of China official Zou Lan said… The central bank has asked lenders to keep credit to the real estate sector ‘stable and orderly,’ said Zou…”

Well, risks have been spreading – and rather briskly at that. The jury is out on “Controllable.” With developers discounting apartment units to generate precious liquidity, and millions of nervous apartment buyers fretting significant delays in the completion of their units, it would appear Beijing faces challenges convincing would-be purchasers that apartments remain a risk-free avenue to wealth accumulation.

October 15 – Bloomberg: “China’s inflation risks are ‘controllable’ and while rising costs may hurt small businesses, authorities have increased support for those types of firms, central bank officials said. Sun Guofeng, head of the monetary policy department, said… producer price inflation will remain elevated in the short term before falling toward the end of the year, though imported inflation and the impact of the global commodity boom is controllable.”

China’s inflation risks are “Controllable,” but at this point there’s a bit of a “in theory” caveat. At least in the near term, the Chinese economy faces potential multiple shocks - acute energy shortages, factory shutdowns and supply-chain bottlenecks, along with a spike in coal, energy and wholesale prices more generally.

October 13 – Bloomberg: “China’s factory-gate prices grew at the fastest pace in almost 26 years in September, potentially adding to global inflation pressure if local businesses start passing on higher costs to consumers. The producer price index climbed 10.7% from a year earlier, beating forecasts and reaching the highest since November 1995, as coal prices and other commodity costs soared… As the world’s largest exporter, Chinese prices are another risk factor for the global inflation outlook.”

October 13 – Reuters (Colin Qian): “China's export growth unexpectedly accelerated in September, as still solid global demand offset some of the pressures on factories from power shortages, supply bottlenecks and a resurgence of domestic COVID-19 cases. The world's second-largest economy has staged an impressive rebound from the pandemic but there are signs the recovery is losing steam. Resilient exports could provide a buffer against growing headwinds including weakening factory activity, persistently soft consumption and a slowing property sector. Outbound shipments in September jumped 28.1% from a year earlier, up from a 25.6% gain in August.”

Could China’s Bubble Economy possibly be more unbalanced? The export sector is on fire.  Manufacturers are struggling to keep up with orders, as supply-chain and transportation bottlenecks significantly push out delivery times. Meanwhile, the developers are losing access to new finance; apartment transactions have slowed markedly; and everything points to a major leak in China’s historic apartment Bubble.

Inflation is Controllable, so long as Beijing tightens liquidity and Credit growth. Risks to the financial system from a collapsing real estate Bubble would be in the near-term Controllable if Beijing floods the system with liquidity and directs the banking system to lend aggressively to the sector (with dire longer-term consequences). Of course, Beijing will attempt to thread the needle, ensuring ample liquidity and Credit expansion, while employing various measures to dampen inflationary effects.

The complexity of China’s economic system has grown exponentially over recent years. From ensuring local energy supplies to logistics to speculative impulses to household confidence – a control-focused Beijing has never faced such a litany of intricate challenges.

China’s Aggregate Financing (system Credit) increased $450 billion during September, about 5% below estimates. Six-month growth in Aggregate Financing was down 22% compared to 2020, with the y-t-d expansion 16% below last year. While slowing markedly, Chinese Credit growth remains formidable – certainly sufficient to fan inflationary fires. During the first nine months of 2021, Chinese Credit expanded $3.84 TN. Year-over-year growth slowed to 10%, the weakest reading in data back to 2017.

New Bank Loans were reported at $258 billion, about 8% below forecast. At $2.60 TN, y-t-d loan growth is at a record pace – running 2.8% ahead of comparable 2020 and almost 23% ahead of 2019. But New Loan growth over the past three months was 5% below comparable 2020 (flat with 2019).

I expected a more pronounced September Credit slowdown, in Household borrowings in particular. At $122 billion, Household (chiefly mortgages) Loan growth was the strongest since June (September is a seasonally strong month for lending). Boosted by a booming Q1, y-t-d Household Loan growth is running 3% above record 2020 levels. Over the past three months, however, growth is 31% below comparable 2020 (8% and 15% below comparable 2019 and 2018). Year-over-year growth slowed to 13.2%, down from March’s 16.3%, to the weakest reading since 2009. With apartment sales having slowed dramatically over recent weeks, expect much weaker consumer borrowing over the coming months.

Corporate Bank Loan growth remains robust. At $153 billion, growth was the strongest since June, and up 4% from September 2020. Y-t-d growth of $1.046 TN was 2.5% above comparable 2020 and 40% ahead of comparable 2019. Moreover, three-month growth was 18% ahead of Q3 2020. Corporate Loans expanded 11.3% over the past year, 25% over two, 39% over three and 67% over five years. Elsewhere, Corporate Bond issuance jumped to $67 billion in September, the strongest performance since pandemic crisis April 2020.

Government Bond issuance was also robust. At $152 billion, Government Bond growth was the strongest since September 2020. While y-t-d growth is running 34% below comparable 2020, it is 11% above a more “normal” 2019.

We have a generation of central bankers who are defining themselves by their wokeness. They’re defining themselves by how socially concerned they are. They’re defining themselves by how concerned they are about the environment. They’re defining themselves by how concerned they are about financial excess and business ethics. And they’ve grown up and had their whole experience shaped by a period when inflation was below target. And, so, it’s very hard to lose old habits… We’re in more danger than we’ve been during my career of losing control of inflation in the US… We’ve gone even further towards losing it in Britain and I think we’re at some risk in Europe.” Former Treasury Secretary Larry Summers, October 13, 2021.

Yet another noteworthy week in raging commodities markets. WTI crude jumped another 3.7% to $82.28, an eighth straight week of gains to a new seven-year high (up 70% y-t-d). Gasoline’s 5.1% rise pushed 2021 gains to 76%. Copper surged 10.6%, increasing y-t-d gains to 34%. Zinc prices rose 20.4%, with Aluminum up 6.9%, lead 5.3%, Nickel 4.2%, and Tin 2.9%. The London Metal Exchange benchmark index rose to an all-time high. Chinese thermal coal (Zhengzhou Commodity Exchange) prices surged 34% this week. Overall, the Bloomberg Commodities Index gained another 2.1%, increasing y-t-d gains to 34.2%.

Up 5.4% y-o-y in September, Consumer Price Inflation has not been stronger since 2008. The 5.9% Social Security cost of living adjustment is the largest since 1982. September Producer Prices inflated 8.6% y-o-y. Import Prices were up 9.2% y-o-y in September, with Export Prices surging 16.3%.

The five-year Treasury “breakeven inflation rate” jumped seven bps this week to 2.75%, nearing the high since 2005. University of Michigan’s consumer survey had One-year Inflation Expectations rising to 4.8%, the high since the 2008 crude-induced inflation spike. Ignoring May, June and July 2008, consumer inflation expectations have not been higher since 1982. It’s worth noting that 10-year Treasury yields traded up to 4.25% in the summer of 2008, were above 4.6% in November 2005, and sat at 14% in June 1982.

It’s never good for credibility when a central bank’s inflation view becomes a joke (even within the bank’s own organization!).

October 12 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic said this year’s inflation surge is lasting longer than policymakers expected, so it’s not appropriate to refer to such price increases as transitory. ‘Transitory is a dirty word,’ Bostic said… He spoke with a glass jar labeled ‘transitory’ at his side, depositing $1 each time he used the ‘swear word,’ as it’s become known to him and his staff over the past few months. ‘It is becoming increasingly clear that the feature of this episode that has animated price pressures — mainly the intense and widespread supply-chain disruptions — will not be brief,’ Bostic said. ‘By this definition, then, the forces are not transitory.’”

The Fed has made a mockery of its overarching responsibility for ensuring monetary stability. And even the heads of the Wall Street firms have begun prodding the Fed to reduce accommodation, increasingly concerned by the inflationary backdrop.

October 14 – Bloomberg (Sridhar Natarajan): “Morgan Stanley Chief Executive Officer James Gorman is girding for rate hikes, and he says markets are ready for them. ‘You’ve got to prick this bubble a little bit,’ Gorman said… ‘Money is a bit too free and available right now.’ Gorman pointed to wage increases, supply-chain bottlenecks and surging commodity prices driving inflation higher. Not all of that is a temporary phenomenon, forcing the Federal Reserve to move a little more aggressively than policy makers are predicting right now, according to Gorman.”

“Got to prick this Bubble a little bit.” “Money is a bit too free…” Things have turned so crazy that even Wall Street executives would prefer a little bit of air to come out of the Bubble. The world would prefer to see some come out of respective Bubbles. China clearly wants to see their Bubbles deflate - a bit. But everyone waited much too long to begin withdrawing stimulus. Everyone’s “behind the curve” like never before, making it difficult to envisage “a little bit” being germane to anything going forward.

Policymakers around the globe are coming to the realization that inflation has become a very serious issue, while asset markets remain dangerously speculative. And it’s not at all apparent that today’s extraordinary predicament – surging inflation and runaway asset Bubbles - is Controllable. And if I were a long-term bond, I’m not sure my anxiety would be Controllable. No one has even begun to contemplate a return to fiscal sanity. Meanwhile, central bankers clearly prioritize market-friendly liquidity abundance, ultra-low interest-rates and loose financial conditions. And they are at this point trapped by Acute Bubble Fragility.

Bullish equities pundits are fond of invoking “trillions of cash on the sidelines” as a key factor ensuring the historic equities price inflation will continue uninterrupted. But, at the same time, unprecedented cash balances and securities market wealth provide inflationary firepower throughout the real economy. The Fed somehow locked itself into a market-pleasing process, where months of elevated inflation have been allowed to take root before so much as commencing a reduction of its monthly $120 billion money-printing operation. The Fed is likely nine months away from its first little baby-step rate increase. And the way things look today, it would be years before our central bank reaches what would traditionally have been viewed as restrictive policies.

I specifically see today’s intense inflationary dynamics as Uncontrollable. Over the past three decades, the monetary management focus shifted to asset prices. Central banks managed rates to ensure ever-rising securities prices and, when they eventually had no further to go with rate cuts, resorted to money-printing and liquidity injections directly into the markets. Spurred by the pandemic, their reckless monetary inflation and attendant asset Bubbles became Uncontrollable. Moreover, inflationary dynamics jumped from the asset markets to engulf commodities, producer and consumer prices.

Policymakers would like to believe the situation is Controllable; they want to believe the system will return to the way it was. But the genie is out of the bottle, and inflationary dynamics will not be conveniently abandoning the real economy and heading back to the comfortable confines of asset prices.

There are major unknowns, of course. How long can Beijing hold Bubble collapse at bay? How aggressively do the Chinese implement infrastructure investment programs to help offset the deflating real estate sector? How cold will the northern hemisphere winter be, and how quickly can supplies of crude, natural gas, and coal be built and transported? Will additional weather disasters further complicate global shortages, supply-chain stress and transportation delays?

Maybe the world gets lucky. But inflationary risks have not been this elevated for decades. Meanwhile, global bond markets are priced for ongoing ultra-loose monetary policies – the policy backdrop required to hold the ugly downside of historic Credit, speculative and economic cycles at bay. Considering the unfolding inflationary backdrop, bond yields should be (at least) a couple percentage points higher to approach some semblance of reasonable valuation.

October 14 – Fox Business (Breck Dumas): “Deere & Co. and union representatives for as many as 10,000 of the company's employees represented by the United Auto Workers are on strike as of Thursday… The agricultural equipment manufacturer based out of Moline, Illinois, hasn't seen a workers' strike for 35 years. But with labor shortages across the country and Deere raking in record profits, workers feel now is the time to hold their ground and ask for more. ‘The whole nation’s going to be watching us,’ Deere employee Chris Laursen told the newspaper. ‘If we take a stand here for ourselves, our families, for basic human prosperity, it’s going to make a difference for the whole manufacturing industry. Let’s do it. Let’s not be intimidated.’”

For the Week:

In another volatile week, the S&P500 ended up 1.8% (up 19.0% y-t-d), and the Dow rose 1.6% (up 15.3%). The Utilities gained 1.4% (up 4.8%). The Banks added 0.5% (up 40.0%), and the Broker/Dealers increased 1.0% (up 30.7%). The Transports surged 3.8% (up 21.5%). The S&P 400 Midcaps jumped 2.2% (up 19.1%), and the small cap Russell 2000 gained 1.5% (up 14.7%). The Nasdaq100 advanced 2.2% (up 17.5%). The Semiconductors rose 2.1% (up 18.6%). The Biotechs added 0.6% (down 1.8%). With bullion gaining $10, the HUI gold index surged 6.2% (down 14.7%).

Three-month Treasury bill rates ended the week at 0.0425%. Two-year government yields jumped eight bps to 0.40% (up 27bps y-t-d). Five-year T-note yields rose six bps to 1.13% (up 76bps). Ten-year Treasury yields fell four bps to 1.57% (up 66bps). Long bond yields sank 12 bps to 2.04% (up 40bps). Benchmark Fannie Mae MBS yields declined three bps to 2.02% (up 68bps).

Greek 10-year yields increased two bps to 0.91% (up 29bps y-t-d). Ten-year Portuguese yields fell three bps to 0.35% (up 32bps). Italian 10-year yields slipped a basis point to 0.87% (up 33bps). Spain's 10-year yields fell three bps to 0.46% (up 41bps). German bund yields declined two bps to negative 0.17% (up 40bps). French yields fell two bps to 0.17% (up 51bps). The French to German 10-year bond spread was unchanged at 34 bps. U.K. 10-year gilt yields dropped five bps to 1.11% (up 91bps). U.K.'s FTSE equities index jumped 2.0% (up 12.0% y-t-d).

Japan's Nikkei Equities Index rallied 3.6% (up 5.9% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.08% (up 6bps y-t-d). France's CAC40 rose 2.6% (up 21.2%). The German DAX equities index jumped 2.5% (up 13.6%). Spain's IBEX 35 equities index added 0.5% (up 11.4%). Italy's FTSE MIB index gained 1.7% (up 19.1%). EM equities were mostly higher. Brazil's Bovespa index rallied 1.6% (down 3.7%), and Mexico's Bolsa surged 3.2% (up 19.8%). South Korea's Kospi index advanced 2.0% (up 4.9%). India's Sensex equities index rose 2.1% (up 28.4%). China's Shanghai Exchange slipped 0.6% (up 2.9%). Turkey's Borsa Istanbul National 100 index increased 0.8% (down 4.5%). Russia's MICEX equities added 0.6% (up 29.6%).

Investment-grade bond funds saw inflows of $882 million, while junk bond funds posted negative flows of $1.802 billion (from Lipper).

Federal Reserve Credit last week expanded $16.1bn to $8.432 TN. Over the past 109 weeks, Fed Credit expanded $4.705 TN, or 126%. Fed Credit inflated $5.621 Trillion, or 200%, over the past 466 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $4.9bn to $3.483 TN. "Custody holdings" were up $72bn, or 2.1%, y-o-y.

Total money market fund assets dipped $6.0bn to $4.525 TN. Total money funds increased $161bn y-o-y, or 3.7%.

Total Commercial Paper slipped $2.9bn to $1.173 TN. CP was up $210bn, or 21.8%, year-over-year.

Freddie Mac 30-year fixed mortgage rates rose six bps to a six-month high 3.05% (up 24bps y-o-y). Fifteen-year rates jumped seven bps to 2.30% (down 5bps). Five-year hybrid ARM rates added three bps to 2.55% (down 35bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates gaining six bps to a six-month high 3.21% (up 15bps).

Currency Watch:

For the week, the U.S. Dollar Index was little changed at 93.94 (up 4.5% y-t-d). For the week on the upside, the South African rand increased 2.2%, the New Zealand dollar 1.8%, the Mexican peso 1.8%, the Australian dollar 1.5%, the Swedish krona 1.4%, the Norwegian krone 1.4%, the South Korean won 1.1%, the British pound 1.0%, the Brazilian real 0.9%, the Canadian dollar 0.8%, the Swiss franc 0.5%, the Singapore dollar 0.5%, and the euro 0.3%. For the week on the downside, the yen declined 1.7%. The Chinese renminbi increased 0.13% versus the dollar (up 1.42% y-t-d).

Commodities Watch:

October 13 – CNBC (Pippa Stevens): “Energy prices around the world are at record highs as a power crunch hits Europe and Asia — and the International Energy Agency warned… volatility is here to stay. In its annual report, the… agency said the world is underinvesting now for future energy consumption, which will make the transition to net-zero emissions unstable. ‘There is a looming risk of more turbulence for global energy markets,’ Fatih Birol, IEA’s executive director, said... ‘We are not investing enough to meet... future energy needs, and the uncertainties are setting the stage for a volatile period ahead.’ The report pointed to policy and demand uncertainties, among other things, as reasons behind the current underinvestment.”

October 11 – Bloomberg (Krystal Chia): “Iron ore has suddenly gone from commodity laggard to a top performer, with resurgent prices further fanning inflation fears that are rippling across the world. Futures have climbed 50% in just three weeks, joining gains in aluminum to energy as rising demand, stalled supply lines and climate policy send an index of raw materials to the highest ever.”

The Bloomberg Commodities Index jumped 2.1% (up 34.2% y-t-d). Spot Gold gained $10 to $1,768 (down 6.9%). Silver rallied 2.8% to $23.31 (down 11.7%). WTI crude surged another $2.93 to $82.28 (up 70%). Gasoline jumped 5.1% (up 76%), while Natural Gas declined 2.8% (up 113%). Copper surged 10.6% (up 34%). Wheat was unchanged (up 15%), while Corn slipped 0.9% (up 9%). Bitcoin gained $7,145, or 13.2%, this week to $61,251 (up 111%).

Coronavirus Watch:

October 6 – Bloomberg (Jason Gale): “Heart damage from Covid-19 extends well beyond the disease’s initial stages, according to a study that found even people who were never sick enough to need hospitalization are in danger of developing heart failure and deadly blood clots a year later. Heart disease and stroke are already the leading causes of death worldwide. The increased likelihood of lethal heart complications in Covid survivors… will add to its devastation, according to the study… The aftereffects of Covid-19 are substantial,’ said Ziyad Al-Aly, director of the clinical epidemiology center at the Veterans Affairs St. Louis Health Care System in Missouri, who led the research. ‘Governments and health systems must wake up to the reality that Covid will cast a tall shadow in the form of long Covid, and has devastating consequences. I am concerned that we are not taking this seriously enough.’”

Market Mania Watch:

October 15 – Reuters (Elizabeth Dilts Marshall): “Big U.S. banks' wealth management businesses put in another stellar performance in the third quarter, buoyed by record levels of new money flowing into accounts and surging demand from clients to borrow against their investment portfolios. Morgan Stanley Inc, JPMorgan…, Bank of America Corp and Goldman Sachs… each reported double-digit growth in wealth management loan balances and revenues this week… Global financial wealth soared to a record high of $250 trillion in 2020, according to a June report by Boston Consulting Group.”

October 11 – Reuters (Echo Wang and Anirban Sen): “Weeks of stock market volatility have done little to dent the record-setting pace of U.S. initial public offerings, with capital market insiders forecasting a strong finish to the year and a robust pipeline of listings in 2022. More than 2,000 IPOs raised a combined $421 billion globally by the end of September, a record high, as private companies rushed to attain the soaring valuations of their publicly listed peers. That was more than double the proceeds raised during the same period last year, according to Refinitiv…. Four IPOs were withdrawn or postponed in the United States in the last three weeks…”

October 11 – Reuters (Elizabeth Dilts Marshall and David Henry): “Jamie Dimon, JPMorgan Chase… chief executive, said… that cryptocurrencies will be regulated by governments and that he personally thinks bitcoin is ‘worthless.’ ‘No matter what anyone thinks about it, government is going to regulate it. They are going to regulate it for (anti-money laundering) purposes, for (Bank Secrecy Act) purposes, for tax,’ Dimon said… Dimon, head of the largest U.S. bank, has been a vocal critic of the digital currency, once calling it a fraud and then later saying he regretted the statement.”

October 14 – Associated Press (Jill Lawless): “A work by British street artist Banksy that sensationally self-shredded just after it sold at auction three years ago fetched almost 18.6 million pounds ($25.4 million) on Thursday — a record for the artist, and close to 20 times its pre-shredded price. ‘Love is in the Bin’ was offered by Sotheby’s in London, with a presale estimate of 4 million pounds to 6 million pounds ($5.5 million to $8.2 million).”

Market Instability Watch:

October 12 – Bloomberg (Nikos Chrysoloras): “The U.S. Federal Reserve may not be so eager to rescue the stock market this time around, according to Bank of America Corp. strategists. ‘The Fed may be less willing to so easily deviate from tapering plans and talk the market back up as during the last cycle,’ BofA strategists including Riddhi Prasad and Benjamin Bowler said... As reasons for their skepticism they cite equity valuations and returns accelerating to ‘extremes,’ and ‘increasingly real’ risks of inflation overshooting.”

October 13 – Financial Times (Hudson Lockett and Thomas Hale): “International bond sales by Chinese developers have all but halted as the crisis at China Evergrande stokes fears of defaults across the country’s property sector, throttling a crucial driver of Asia’s high-yield debt market. Just one developer has managed to tap overseas bond investors since Evergrande… missed an $83.5m interest payment last month... Issuance of high-yield dollar debt is down 28% from a year ago, according to… Dealogic… An ICE index tracking Chinese corporate issuers in Asia’s high-yield bond market demonstrates the scale of market contagion. The effective yield on the index has shot up to 24% this week from 10% in June…”

October 12 – Bloomberg (Shen Hong): “Chinese property developers are responsible for about half of the world’s distressed dollar bonds, a fresh indication of the magnitude and global nature of the industry’s woes. Of the $139 billion of dollar-denominated bonds trading at distressed prices, 46% were issued by companies in China’s real estate sector, according to data compiled by Bloomberg on Oct. 12. That captured bonds trading at yield premiums of at least 10 percentage points above their benchmark rates…”

October 12 – Bloomberg (Lu Wang): “The recent synchronized selloff in equities and Treasuries was likely just the beginning of what’s to come for the popular 60/40 stock-bond portfolio strategy, a growing chorus of Wall Street strategists warn. Bank of America Corp. called it ‘the end to 60/40’ while Goldman Sachs… said losses from such portfolios could swell to 10%. Similar alarms also rang at Deutsche Bank AG, where strategists… said a shift in the stock-bond relationship may force money managers to adjust their thinking. Underpinning all these warnings is an economy that’s now facing mounting inflationary pressures after spending years warding off the threat of deflation.”

Inflation Watch:

October 13 – Associated Press (Ricardo Alonso-Zaldivar and Christopher Rugaber): “Millions of retirees on Social Security will get a 5.9% boost in benefits for 2022. The biggest cost-of-living adjustment in 39 years follows a burst in inflation as the economy struggles to shake off the drag of the coronavirus pandemic. The COLA, as it’s commonly called, amounts to $92 a month for the average retired worker… That marks an abrupt break from a long lull in inflation that saw cost-of-living adjustments averaging just 1.65% a year over the past 10 years.”

October 13 – Bloomberg (Reade Pickert): “Prices paid by U.S. consumers rose in September by more than forecast, resuming a faster pace of growth and underscoring the persistence of inflationary pressures in the economy. The consumer price index increased 0.4% from August… Compared with a year ago, the CPI rose 5.4%, matching the largest annual gain since 2008… A combination of unprecedented shipping challenges, materials shortages, high commodities prices and rising wages have sharply driven up costs for producers. Many have passed some portion of those costs along to consumers, leading to more persistent inflation than many economists -- including those at the Federal Reserve -- had originally anticipated.”

October 14 – Associated Press (Martin Crutsinger): “Inflation at the wholesale level rose 8.6% in September compared to a year ago, the largest advance since the 12-month change was first calculated in 2010. The Labor Department reported… that the monthly increase in its producer price index… was 0.5% for September compared to a 0.7% gain in August… Food costs at the wholesale level rose 2% in September while energy prices were up 2.8%, the biggest jump since a 5% surge in March.”

October 15 – Financial Times (Hudson Lockett and Thomas Hale): “Chinese coal futures delivered their biggest weekly rise on record, driven by a worsening energy crisis that threatens to pile further pressure on the country’s property developers as they grapple with looming debt payments. Thermal coal futures traded on the Zhengzhou Commodity Exchange rose 8% on Friday to Rmb1,692 ($263) a tonne, taking them 34% higher over the past five sessions and marking the largest weekly gain since they began trading… in 2013.”

October 11 – Reuters (Tom Polansek): “U.S. prices for organic soybeans used to feed livestock and manufacture soy milk have surged to record highs as imports that make up most of the country's supply have declined, triggering price increases for food including organically raised chicken. The costly soybeans and higher-priced organic products are fueling food inflation at a time consumers are eager to eat better and focus on health... The $56 billion U.S. organic food sector is also grappling with a shortage of shipping containers and a tight labor market as global food prices hit a 10-year high.”

October 15 – Wall Street Journal (Hardika Singh): “Drought has roiled power markets and lifted lumber prices. Now it is hitting breakfast. Oat futures have climbed to all-time highs thanks to the severe dry weather that has parched big growing regions… At around $6.30 a bushel on Thursday, oat futures are more than twice as expensive as they were this time last year and the year before. Much of the rise into record territory has come over the past three months… Higher prices could hit milk makers, bakers, breakfast eaters and farmers who need oats to cook or as feed for livestock and poultry.”

October 11 – Bloomberg (Mark Burton and Jack Farchy): “Aluminum jumped to the highest since 2008 as a deepening power crisis squeezes supplies of the energy-intensive metal that’s used in everything from beer cans to iPhones. Industry insiders like to joke that aluminum is basically ‘solid electricity.’ Each ton of metal takes about 14 megawatt hours of power to produce, enough to run an average U.K. home for more than three years. If the 65 million ton-a-year aluminum industry was a country, it would rank as the fifth-largest power consumer in the world.”

October 14 – Wall Street Journal (J.J. McCorvey): “Americans got a stark warning from the government this week: Expect higher heating bills this winter. According to the Energy Information Administration, nearly half of U.S. households that warm their homes with mainly natural gas can expect to spend an average of 30% more on their bills compared with last year. The agency added that bills would be 50% higher if the winter is 10% colder than average and 22% higher if the winter is 10% warmer than average.”

October 12 – Bloomberg (Katie Greifeld): “It’s taken just a few short months for stagflation to go from hobgoblin of cranks to a full-blown Wall Street obsession. Everyone seems worried about it. Bridgewater Associates co-Chief Investment Officer Greg Jensen says spiraling prices that choke off growth are a ‘real risk’ that many portfolios are massively overexposed to. A ‘fairly strong consensus’ of market professionals believe that some kind of stagflation is more likely than not, according to a Deutsche Bank AG survey. And while Goldman Sachs… urged investors to buy the dip, strategists said ‘stagflation’ was the most common topic in client conversations.”

October 14 – Bloomberg (Sridhar Natarajan): “Morgan Stanley Chief Executive Officer James Gorman is girding for rate hikes, and he says markets are ready for them. ‘You’ve got to prick this bubble a little bit,’ Gorman said… ‘Money is a bit too free and available right now.’ Gorman pointed to wage increases, supply-chain bottlenecks and surging commodity prices driving inflation higher. Not all of that is a temporary phenomenon, forcing the Federal Reserve to move a little more aggressively than policy makers are predicting right now, according to Gorman.”

October 13 – Bloomberg (Zijia Song): “Goldman Sachs… President John Waldron says inflation is the number one risk that he worries about right now. ‘It’s not transitory,’ Waldron said... ‘I’ve never seen a greater divergence between what’s defined as transitory and what’s being seen day in and day out.’ The executive flagged inflation as the biggest source of concern for short-term recovery and said it has potential to have a long-term impact on emerging markets. ‘Most CEOs I talk to today are very concerned about supply chain, very concerned about import costs, whether they’re materials, commodities and increasingly labor,’ he said…”

October 12 – Wall Street Journal (James Glynn): “Former U.S. Treasury Secretary Larry Summers has sounded alarm bells over risks of runaway inflation in the U.S., saying the Federal Reserve is moving glacially in its efforts to counter the threat. The Fed's traditional role is to ‘remove the punchbowl just before the party starts,’ Mr. Summers told a Citi investment conference… ‘Now the party's gotten great and the Fed's not removing the punchbowl until they've seen...conclusive evidence that everyone's going to get plastered,’ he said. Mr. Summers said record labor shortages, 20% housing inflation, the highest oil and gasoline prices in eight years and the government involved in a major fiscal stimulus program have all been warning signs of a costly rise in inflation and inflation expectations. Amid all of this the Fed is continuing a major monetary expansion by buying bonds, he said. ‘I don't think we are in a terribly rational or sound place. I think we are taking big risks,’ Mr. Summers said.”

Biden Administration Watch:

October 13 – Reuters (Alexandra Alper, Steve Holland and Nandita Bose): “President Joe Biden… urged the private sector to help ease supply chain blockages that are threatening to disrupt the U.S. holiday season and said the White House plans a nationwide overhaul of the clogged system. Biden said the Port of Los Angeles would join the Port of Long Beach, two of the country's busiest, in expanding round-the-clock operations to unload an estimated 500,000 containers waiting on cargo ships offshore. Walmart, Target and other big retailers would also expand their overnight operations at the ports to try to meet delivery needs, Biden said. It is a ‘big first step’ to revamping supply chains in the United States, the world's biggest consumer market, Biden said, adding the government would be heavily involved.”

October 8 – Reuters (Makini Brice): “One day after the Senate approved a temporary lift to the U.S. debt ceiling, Senate Republican Leader Mitch McConnell wrote in a letter to President Joe Biden that he would not aid Democrats again in raising the debt limit… Congress will need to find a longer-term solution in December. But McConnell has said the reprieve would give Democrats enough time to raise the debt ceiling through a procedural move known as reconciliation, which Democrats have rejected as an option for lifting the cap.”

Federal Reserve Watch:

October 13 – Reuters (Ann Saphir, Jonnelle Marte and Lindsay Dunsmuir): “The Federal Reserve signaled… it could start reducing its crisis-era support for the U.S. economy by the middle of next month, with a growing number of its policymakers worried that high inflation could persist longer than previously thought. Though no decision on a ‘taper’ of the U.S. central bank's $120 billion in monthly asset purchases was reached at its Sept. 21-22 policy meeting, ‘participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate,’ according to the minutes of that meeting.”

October 13 – Financial Times (Stephen Roach): “Echoes of an earlier, darker period of economic history are growing louder. When I warned in early 2020 of a 1970s-style stagflation, my concerns were primarily on the supply side. Today a full-blown global supply shock is at hand: energy and food prices are soaring, shipping lanes are clogged and labour shortages prevalent. One popular theory is that supply disruptions and price spikes are transitory glitches related to the pandemic that will ultimately self-heal. The inflationary build-up of the early 1970s was also presaged by a focus on transitory events: the Opec oil embargo and El Niño-related weather disturbances. Then, as now, central bankers preached the transitory inflation gospel. In the 1970s, US federal reserve chair Arthur Burns asked his research staff to purge transitory factors from popular price indices. Burns, convinced that the Fed should only respond to underlying inflation, kept taking more out of the core until there wasn’t much left. Only then, did he concede there was an inflation problem. I was part of the staff involved in that regrettable exercise to create the first measure of core inflation…”

October 13 – Bloomberg (Rich Miller): “Former Treasury Secretary Lawrence Summers castigated monetary policy makers in the U.S. and elsewhere for paying too much attention to social issues and not enough to the biggest risk to inflation since the 1970s. ‘We have a generation of central bankers who are defining themselves by their wokeness,’ Summers… said... ‘They’re defining themselves by how socially concerned they are.’ …Summers compared the arguments by the Federal Reserve and other central banks downplaying the risk of inflation to those made by former Fed chairs Arthur Burns and G. William Miller, who presided over the central bank in the 1970s when the annual pace of price rises often topped 10%. ‘We’re in more danger than we’ve been during my career of losing control of inflation in the U.S…. We’ve gone even further towards losing it in Britain and I think we’re at some risk in Europe.’”

October 12 – Reuters (Jeff Cox): “St. Louis Federal Reserve President James Bullard advocated… for the central bank to be aggressive as it starts winding down its monthly bond-buying program in case inflation becomes a larger problem… The Fed official said he thinks it’s a 50-50 chance that the current inflation pressures are transitory, so policymakers have to be ready. The Fed is largely expected to announce next month it will begin tapering minimum $120 billion a month asset purchase program, with a target date probably by mid-2022. Bullard said he’d like to see more faster action. ‘I’d support starting the taper in November… I’ve been advocating trying to get finished with the taper process by the end of the first quarter next year because I want to be in a position to react to possible upside risks to inflation next year as we try to move out of this pandemic.’ Fed officials say they’d prefer to have the tapering finished before rate hikes start.”

October 14 – Bloomberg (Craig Torres, Steve Matthews and Christopher Condon): “The Federal Reserve’s most embarrassing ethics scandal in years has cast a harsh spotlight on the world’s most powerful central bank and the arm’s-length governance of its 12 regional branches. Their chiefs are among America’s most influential public officials, helping to set borrowing costs for the $23 trillion economy. But the process of picking them, and assessing their performance in office, has long been shielded from public scrutiny and accountability -- something that’s now drawing mounting criticism.”

October 12 – Bloomberg (Matthew Boesler): “The U.S. isn’t headed for the kind of ‘stagflation’ that developed in the 1970s, when unemployment and inflation rose in tandem, Federal Reserve Vice Chair Richard Clarida said. ‘I actually lived through, as a college student, the ‘Great Stagflation’ of the 70s, and I think there are a lot of differences,’ Clarida said… ‘First and foremost, the 1970s were a decade of pretty substantial policy mistakes, in monetary policy. And I think central bankers learned their lesson, and I would not see a repeat of those policy mistakes.’”

October 12 – Politico (Victoria Guida): “The Federal Reserve announced… that Randal Quarles will no longer be in charge of regulating the country's financial system after his vice chairmanship expires Wednesday, a move that could mark the beginning of major leadership changes at the Fed. The announcement comes as Fed Chair Jerome Powell is awaiting word on whether he will be renominated by President Joe Biden to a second term. Some progressive groups have criticized Powell and Quarles — both appointed by President Donald Trump — for rolling back some of the rules imposed on banks in the wake of the 2008 financial crisis.”

U.S. Bubble Watch:

October 14 – Wall Street Journal (Josh Mitchell, Lauren Weber and Sarah Chaney Cambon): “Scarce labor is becoming a fixture of the U.S. economy, reshaping the workforce and prodding firms to adapt by raising wages, reinventing services and investing in automation. More than a year and a half into the pandemic, the U.S. is still missing around 4.3 million workers. That’s how much bigger the labor force would be if the participation rate… returned to its February 2020 level of 63.3%. In September, it stood at 61.6%. The absence comes as U.S. employers are struggling to fill more than 10 million job openings and meet soaring consumer demand. In another sign of just how tight the labor market is, jobless claims… fell to 293,000 last week, the first time since the pandemic began that they fell below 300,000… Workers are quitting at or near the highest rates on record in sectors such as manufacturing, retail, and trade, transportation and utilities, as well as professional and business services. Participation has fallen broadly across demographic groups and career fields, but has dropped particularly fast among women, workers without a college degree and those in low-paying service industries such as hotels, restaurants and child care.”

October 12 – CNBC (Jeff Cox): “Workers left their jobs at a record pace in August, with bar and restaurant employees as well as retail staff quitting in droves, the Labor Department reported… Quits hit a new series high going back to December 2000, as 4.3 million workers left their jobs. The quits rate rose to 2.9%, an increase of 242,000 from the previous month… The rate… is the highest in a data series that goes back to December 2000… A total of 892,000 workers in the food service and accommodation industries left their jobs, while 721,000 retail workers departed along with 534,000 in health care and social assistance.”

October 14 – Wall Street Journal (Jennifer Calfas): “Nearly 40% of U.S. households said they faced serious financial difficulties in recent months of the Covid-19 pandemic, citing problems such as paying utility bills or credit card debt… About one-fifth have depleted all of their savings. U.S. households are struggling in many ways over a year into the coronavirus pandemic, according to the poll conducted by the Harvard T.H. Chan School of Public Health, the Robert Wood Johnson Foundation and National Public Radio. Nearly 60% of households earning less than $50,000 a year reported facing serious financial challenges in recent months. Of those, 30% lost all of their savings, according to the poll.”

October 15 – Reuters (Lucia Mutikani): “U.S. retail sales unexpectedly rose in September, boosted in part by a jump in receipts at auto dealerships due to higher motor vehicle prices… Retail sales rose 0.7% last month... Data for August was revised higher to show retail sales increasing 0.9% instead of 0.7% as previously reported. Sales last month were partly lifted by higher prices, with inflation increasing solidly in September.”

October 12 – Reuters (Colin Qian, Stella Qiu and Gabriel Crossley): “China’s trade surplus with the United States stood at $42 billion in September…, up from $37.68 billion in August. For the first nine months of the year, the surplus was $280 billion, up from $237.99 billion during the first eight months of 2021. Last week, top trade officials from the United States and China reviewed the implementation of the U.S.-China Economic and Trade Agreement. The United States has been pressing China to hold its commitments under a ‘Phase 1’ trade deal which has eased a long running tariff war between the world’s two largest economies.”

October 11 – Yahoo Finance (Ines Ferré): “If you thought home prices couldn't go any higher, hold on to your hat: Goldman Sachs (GS) economists are forecasting even more price increases in the year ahead. ‘Our model now projects that home prices will grow a further 16% by the end of 2022,’ wrote a Goldman Sachs team of economists led by Jan Hatzius…. ‘Of all the shortages afflicting the U.S. economy, the housing shortage might last the longest,’ he said. Home prices are currently up 20% year-over-year.”

October 13 – CNBC (Diana Olick): “Mortgage rates continued their trudge higher last week, leaving most homeowners with little to no incentive to refinance. Homebuyers, already battling a pricey market, lost more purchasing power due to those higher rates. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.18% from 3.14%, with points rising to 0.37 from 0.35… for loans with a 20% down payment. That is the highest rate since June…”

October 13 – Bloomberg (Simone Silvan): “For many Americans, Covid lockdowns—with nowhere to go and nothing to do—were a time to save. But for almost 20% of U.S. households, the pandemic wiped out their entire financial cushion, a poll… finds. The share of respondents who said they lost all their savings jumped to 30% for those making less than $50,000 a year, the poll from NPR, the Robert Wood Johnson Foundation and the Harvard T.H. Chan School of Public Health finds.”

October 14 – Financial Times (Justin Jacobs in Houston and Derek Brower): “The supply bottlenecks and labour shortages felt across the US economy are driving up the cost of shale oil production, a trend that is helping to underpin the price of crude. Expenses including steel, wages and contracts to hire drilling rigs are on the increase. Cost inflation in the oil patch is likely to run at 10 to 15% next year, much faster than the broader US price indices, forecasts Artem Abramov, head of shale research at Rystad Energy.”

October 12 – Reuters (P.J. Huffstutter, Mark Weinraub and Dane Rhys): “Dale Hadden cannot find any spare tires for his combine harvester. So the Illinois farmer told his harvest crew to avoid driving on the sides of roads this autumn to avoid metal scraps that could shred tires. New Ag Supply in Kansas is pleading with customers to order parts now for spring planting. And in Iowa, farmer Cordt Holub is locking up his machinery inside his barn each night, after thieves stole hard-to-find tractor parts from a local… dealership… Manufacturing meltdowns are hitting the U.S. heartland, as the semiconductor shortages that have plagued equipment makers for months expand into other components. Supply chain woes now pose a threat to the U.S. food supply and farmers' ability to get crops out of fields.”

October 11 – Bloomberg (Elizabeth Dexheimer): “A key measure of lending continued to decline at the biggest U.S. banks, according to the latest Federal Reserve data. Loans as a percentage of total assets fell to 47.05% in the week ended Sept. 29 from 47.11% the prior period, the Fed data show. Banks’ cash piles rose. Total assets increased to $22.27 trillion from $22.19 trillion.”

October 13 – Reuters (Stephen Nellis): “Apple Inc is likely to slash production of its iPhone 13 by as many as 10 million units due to the global chip shortage… The company was expected to produce 90 million units of the new iPhone models by the end of this year… The report said Apple told its manufacturers that the number of units would be lower because chip suppliers including Broadcom Inc and Texas Instruments are struggling to deliver components.”

Fixed-Income Bubble Watch:

October 14 – Wall Street Journal (Sebastian Pellejero): “Investors are scoring big gains in the riskiest parts of the $3 trillion market for junk-rated corporate loans. The lowest-rated securities tied to what Wall Street calls collateralized loan obligations returned more than 29% this year through August…, according to… Citigroup. That beats a 21.5% return on the S&P 500 over the same period. CLOs are bundles of junk-rated loans, packaged into slices of securities, that pass on interest payments to investors in order of risk. Investors in the riskiest portions, known as CLO equity, get paid last but profit when loan prices rise. They may also receive monthly cash payments based on the difference between the interest earned from loans, management fees and payments to holders of higher-rated securities.”

China Watch:

October 12 – Reuters (Clare Jim and Andrew Galbraith, Marc Jones): “Debt-saddled Chinese property firms took heavy fire in bond markets on Tuesday, after the poster child of the sector's woes, Evergrande Group, missed its third round of bond payments… and others warned of defaults. A wave of developers face payment deadlines before the end of the year and with Evergrande's fate looking increasingly bleak, fears are mounting of a wider crisis… Refinitiv data shows there is at least $92.3 billion worth of Chinese property developers' bonds coming due next year.”

October 10 – Reuters (Samuel Shen and Andrew Galbraith): “Fundraising by Chinese property trust products tumbled over 40% in September from a month earlier…, as China Evergrande Group's troubles further dampen investor appetite toward the struggling sector. Newly-launched real estate trust products raised 16.2 billion yuan from investors in September, down 44.8% from the previous month… That follows a 24% decline in August, and a 25% fall in July… Chinese developers are already struggling amid government's lending curbs and surging cost of bond issuance. A rapidly shrinking market of property trust products could further squeeze funding channels of a sector suffering from slower home sales.”

October 12 – New York Times (Alexandra Stevenson and Joy Dong): “China is trying to cool its costly and dangerously debt-ridden housing market, where high prices and go-go levels of borrowing and spending are increasingly seen as a national threat. But as the troubles of a major property developer and its $300 billion mountain of debt drive a government effort to contain the peril, Beijing risks hurting a major driver of its crucial economic growth engine: home buyers like He Qiang. Mr. He was so optimistic about property in China that he bought an apartment from that property developer, China Evergrande Group, then became a real estate agent... ‘It was the peak of Evergrande’s glory,’ Mr. He said. He is much more pessimistic these days. Mr. He… has yet to move into his apartment because Evergrande has stopped construction. So many other people are nervous about buying homes, he said, that he’s considering going back to selling cars.”

October 11 – Bloomberg (Alice Huang and Rebecca Choong Wilkins): “Sinic Holdings Group Co. has become the latest Chinese real estate firm to warn of imminent default, as rising contagion risk leaves investors guessing on who else may face a credit crunch. The… developer said in a Hong Kong stock exchange filing it doesn’t expect to repay a $250 million dollar bond due Oct. 18 and that may trigger cross-default on its two other notes. The firm has $694 million in dollar bonds outstanding…”

October 14 – Bloomberg: “China is loosening restrictions on home loans at some of its largest banks, according to people familiar with the matter, adding to signs of growing concern by authorities about contagion from the debt crisis at China Evergrande Group. Financial regulators told some major banks late last month to accelerate approval of mortgages in the last quarter, said the people, asking not to be identified discussing a private matter. Lenders were also permitted to apply to sell securities backed by residential mortgages to free up loan quotas, easing a ban imposed early this year, the people said.”

October 14 – Reuters (Shivani Singh and Muyu Xu): “China coal prices held near record highs on Thursday as cold weather swept into the country's north and power plants stocked up on the fuel to ease an energy crunch that is fuelling unprecedented factory gate inflation. A widening power crisis in China, affecting at least 17 regions - caused by shortages of coal, record high fuel prices and booming post-pandemic industrial demand as it shifts to greener fuels - has led to production disruption at numerous factories… China's National Meteorological Center has forecast strong winds could knock the average temperature by as much as 14 degrees Celsius in large parts of the country this week. The three northeastern provinces of Jilin, Heilongjiang and Liaoning - among the worst hit by the power shortages last month - and several regions in northern China including Inner Mongolia and Gansu, have started winter heating, which is mainly fuelled by coal, to cope with the colder-than-normal weather.”

October 12 – Bloomberg (Serene Cheong, Javier Blas and Alfred Cang): “Offers for physical cargoes of thermal coal in China skyrocketed this week after reports of local outages and supply disruptions. Selling indications for so-called 5,500 NAR coal were pegged at above 2,000 yuan ($310) a ton on Monday… That compares with 1,600 to 1,700 yuan a ton before the nation’s Golden Week holiday that ended last Thursday…”

October 13 – Financial Times (Primrose Riordan and William Langley): “Chinese imports of coal and natural gas increased sharply in September, as Beijing raced to deal with a spiralling energy crisis that threatens economic growth. China imported 32.9m tonnes of coal in September, 76% more than it did during the same month last year… Natural gas imports rose 23% to 10.6m tonnes compared with the previous year.”

October 12 – Wall Street Journal (Nathaniel Taplin): “With China’s property sector reeling and ‘common prosperity’ the new watchword of Chinese capitalism, it was only a matter of time until the regulatory brouhaha reached finance. The latest dragnet… kicked off this month and includes 25 key financial institutions. Beijing believes that too-cozy relations between lenders, regulators and powerful private sector actors have contributed to Evergrande’s debt debacle and to what it views as the curiously expeditious listing process of tech firms like Didi Chuxing and Ant Group. These suspicions may very well be correct. Less clear, however, is whether Beijing has the right policies to guide its financial system overall in a more productive direction—particularly since its new focus on boosting competition in tech has no parallel in banking.”

October 12 – Reuters (Ryan Woo and Cheng Leng): “China’s ruling Community Party turned its sights on the country’s vast financial sector this month, kicking off a new round of a years-long campaign to uncover corruption and illegal dealings. The country’s top anti-graft watchdog has started a roughly two-month inspection of more than 20 institutions including the central bank, the banking and insurance regulator, stock exchanges, commercial banks and asset-management companies… Chinese President Xi Jinping is scrutinising the ties that state banks and other financial institutions have developed with big private companies… The inspections are a comprehensive ‘political examination’ of Party committees at the financial institutions and regulators, according to statements issued by the Central Commission for Discipline Inspection (CCDI)… CCDI inspectors will be looking for any violation of political discipline - a Party euphemism for corruption.”

October 12 – Financial Times (Tom Mitchell): “Chinese president Xi Jinping appears to be sailing into an economic storm of his own making, as one of China’s largest developers teeters on the edge of bankruptcy and manufacturers grapple with power shortages across the country. But aside from minor course corrections, analysts and government advisers expect Xi to take advantage of what he has termed a ‘window of opportunity’ to press ahead with difficult structural reforms. If successful, it will be the latest in a long series of bold political gambles — from the elimination of term limits on the presidency to his pursuit of ‘common prosperity’ — that have made him China’s most feared leader since Mao Zedong. It has also put him on the cusp of an unprecedented third term in power at the Chinese Communist party’s 20th congress late next year.”

Central Banker Watch:

October 14 – Bloomberg (Matthew Malinowski): “Chile’s central bank stunned economists with a bigger-than-expected interest rate hike for the second straight meeting and signaled it will remove stimulus even faster as inflation expectations soar above target. Policy makers… lifted the overnight rate by 1.25 percentage points to 2.75%..., surprising nearly all analysts in a Bloomberg survey who expected a smaller hike… Central banks across Latin America are raising borrowing costs quickly as industries reopen and inflation spikes. In Chile, consumer prices blew past estimates in September, surging by the most since 2008 on a month-on-month basis…”

October 11 – Bloomberg (Alaa Shahine): “Two Bank of England officials moved to reinforce signals of an imminent rise in U.K. interest rates to curb inflation, with one telling households to brace for a ‘significantly earlier’ increase than previously thought. Michael Saunders, one of the most hawkish members of the Monetary Policy Committee, suggested in remarks published Saturday that investors were right to bring forward bets on rate hikes. Hours earlier, Governor Andrew Bailey warned of a potentially ‘very damaging’ period of inflation unless policy makers take action. The comments ‘make it clear’ that upcoming rate-setting meetings starting November are ‘very much live,’ said Dan Hanson, senior economist at Bloomberg…”

October 11 – Bloomberg (Diederik Baazil and Jana Randow): “Investors must be careful not to underestimate inflation risks that could prompt the European Central Bank to tighten monetary policy, according to Governing Council member Klaas Knot. Risky behavior in financial markets has increased sharply since the start of the pandemic, making them vulnerable to a turnaround in sentiment, Knot told reporters... ‘This risky behavior is only sustainable at low inflation and interest rates,’ Knot said. While the current spike in consumer prices can still be seen as largely temporary, ‘from the perspective of healthy risk management, it is also important to take other scenarios into consideration.’”

Global Bubble Watch:

October 12 – Financial Times (Chris Giles in London and Colby Smith): “The global economy is entering a phase of inflationary risk, the IMF warned…, as it called on central banks to be ‘very, very vigilant’ and take early action to tighten monetary policy should price pressures prove persistent. The fund was highlighting the new risks in its twice-yearly World Economic Outlook…”

October 12 – Wall Street Journal (Yuka Hayashi): “Supply-chain disruptions and global health concerns spurred the International Monetary Fund to lower its 2021 growth forecast for the world economy, while the group raised its inflation outlook and warned of the risks of higher prices. In the IMF’s latest World Economic Outlook report… They stressed the importance for major economies to fulfill pledges to provide vaccines and financial support to international vaccination efforts before new variants knock a tenuous recovery off track. ‘Policy choices have become more difficult…with limited room to maneuver,’ the IMF economists said…”

October 12 – New York Times (Patricia Cohen and Alan Rappeport): “As the world economy struggles to find its footing, the resurgence of the coronavirus and supply chain chokeholds threaten to hold back the global recovery’s momentum, a closely watched report warned… The overall growth rate will remain near 6% this year, a historically high level after a recession, but the expansion reflects a vast divergence in the fortunes of rich and poor countries, the International Monetary Fund said in its latest World Economic Outlook report. Worldwide poverty, hunger and unmanageable debt are all on the upswing. Employment has fallen, especially for women, reversing many of the gains they made in recent years. Uneven access to vaccines and health care is at the heart of the economic disparities.”

October 12 – Reuters (Muyu Xu and Shivani Singh): “Authorities from Beijing to Delhi scrambled to fill a yawning power supply gap on Tuesday, triggering global stock and bond market wobbles on worries that rising energy costs will stoke inflation and curtail an economic recovery. Power prices have surged to record highs in recent weeks, driven by shortages in Asia and Europe… China on Tuesday took its boldest step in a decades-long power sector reform, saying it will allow coal-fired power plants to pass on the high costs of generation to some end-users via market-driven electricity prices. Pushing all industrial and commercial users to the power exchanges and allowing prices to be set by the market is expected to encourage loss-making generators to increase output.”

October 10 – Financial Times (David Sheppard): “If you live in continental Europe or the UK the natural gas that heats your home this October is costing at least five times more than it did a year ago. The reasons are varied: among them are earthquakes in the Netherlands, China’s attempt to clean up its air and Russian president Vladimir Putin’s power politics. But the impact is clear. The record prices being paid by suppliers in Europe and shortfalls in gas supply across the continent have stoked fears of an energy crisis should the weather be even marginally colder than normal. Households are already facing steeper bills while some energy intensive industries have started to slow production, denting the optimism around the post-pandemic economic recovery.”

October 11 – CNBC (Saheli Roy Choudhury): “China is not the only Asian giant grappling with an energy crunch — India is also teetering on the edge of a power crisis. Most of India’s coal-fired power plants have critically low levels of coal inventory at a time when the economy is picking up and fueling electricity demand. Coal accounts for around 70% of India’s electricity generation… Government data showed that as of Oct. 6, 80% of India’s 135 coal-powered plants had less than 8 days of supplies left — more than half of those had stocks worth two days or fewer. By comparison, over the last four years, the average coal inventory that power plants had was around 18 days worth of supply…”

October 13 – Yahoo Finance (Aarthi Swaminathan): “A shipping expert believes that the supply chain crisis may last well into 2023 given how global trade has been reshuffled to meet surging American demand. ‘We expect... strained supply chains to last until the early parts of 2023,’ Peter Sand, chief shipping analyst at Copenhagen-based BIMCO… ‘We are basically seeing a global all-but-breakdown of the supply chains from from end-to-end.’ In Sand's view, the ‘spectacular recovery’ in U.S. consumer demand the past 15 to 18 months has ‘completely biased shipping networks.’ According to Sand, trade volume between the Far East and North America is ‘rising so fast’ — at about 25% higher than 2019 levels.”

October 14 – CNBC (Arjun Kharpal): “The global chip shortage could persist for another two to three years before ending, the President of Hisense, one of China’s largest TV and household goods makers, told CNBC. Industries from consumer electronics companies to automakers are dealing with a shortage of semiconductors. This has led to shortage of products such as game consoles and manufacturers struggling to keep up with demand.”

October 11 – Reuters (Andrea Shalal): “The World Bank… warned of a significant 12% rise in the debt burden of the world's low-income countries to a record $860 billion in 2020 as a result of the COVID-19 pandemic, and called for urgent efforts to reduce debt levels. World Bank President David Malpass told reporters the bank's International Debt Statistics 2022 report showed a dramatic increase in the debt vulnerabilities facing low- and middle-income countries… ‘We need a comprehensive approach to the debt problem, including debt reduction, swifter restructuring and improved transparency,’ Malpass said…”

EM Watch:

October 14 – Reuters (Daren Butler, Nevzat Devranoglu and Orhan Coskun): “Turkish President Tayyip Erdogan dismissed three central bank policymakers on Thursday, two of whom were seen to oppose the last interest rate cut, clearing the way for more policy easing and sending the lira to a new all-time low. Analysts viewed the move… as fresh evidence of political interference by Erdogan, a self-described enemy of interest rates who frequently calls for monetary stimulus.”

October 13 – Bloomberg (Maya Averbuch): “Mexico’s consumer prices are rising at a phenomenal pace and might not peak until the end of 2021 or early 2022, requiring an appropriate response by policy makers, central bank deputy Governor Jonathan Heath said. Both internal and external supply shocks have led to an upward inflation trend, leaving no room for expansive monetary policy, Heath, one of the five Banco de Mexico board members, said… ‘It’s easy to see that prices are increasing, and they’re being transferred to consumer prices at a pace that’s really phenomenal,’ he said.”

October 12 – Reuters (Andrey Ostroukh and Darya Korsunskaya): “Russian President Vladimir Putin… ordered the government to come up with ways to support households as their purchasing power is affected by high inflation. Speaking to parliamentarians, Putin said the government should present a plan for new social support measures within a month. Earlier on Tuesday Russia’s economy minister said the country had raised its 2021 inflation forecast to 7.4% from 5.8%.”

October 13 – CNBC (Yen Nee Lee): “Singapore’s central bank tightened monetary policy in a surprise move on Thursday as the economy grew 6.5% in the third quarter compared with a year ago. The Monetary Authority of Singapore — the country’s central bank — said it raised the slope of its currency band “slightly” from the previous 0% rate of appreciation per annum.”

October 12 – Bloomberg (Colleen Goko): “Yields at 17-month highs weren’t enough to spur buying at South Africa’s weekly government bond auction, with demand at the lowest level in seven months.”

Europe Watch:

October 13 – Bloomberg (Olivia Konotey-Ahulu): “The risk of housing bubbles across Europe has accelerated as the pandemic sparked a global spending spree on larger living spaces that was turbocharged by central banks’ aggressive stimulus. With Frankfurt topping the list, European cities accounted for six out of nine of the world’s most imbalanced housing markets, according to UBS Group AG’s Global Real Estate Bubble Index... Bubble risk also accelerated in Toronto, Hong Kong and Vancouver... House prices rocketed around the world in the past year as the cost of borrowing slipped to rock bottom and buyers put a heightened premium on space and greenery… ‘On average, bubble risk has increased during the last year, as has the potential severity of a price correction in many cities tracked by the index,’ wrote the authors… ‘Worsening affordability, unsustainable mortgage lending, and a rising divergence between prices and rents have historically served as forerunners of housing crises.’”

Japan Watch:

October 11 – Reuters (Leika Kihara): “Japan's wholesale inflation hit a 13-year high in September as rising global commodity prices and a weak yen pushed up import costs, putting pressure on corporate margins and raising the risk of unwanted consumer price hikes… The corporate goods price index (CGPI), which measures the price companies charge each other for their goods and services, surged 6.3% in September from a year earlier, Bank of Japan data showed…, exceeding market forecasts for a 5.9% gain.”

Social, Political, Environmental, Cybersecurity Instability Watch:

October 14 – Bloomberg (Brian K. Sullivan): “A weather-roiling La Nina appears to have emerged across the equatorial Pacific, setting the stage for worsening droughts in California and South America, frigid winters in parts of the U.S. and Japan and greater risks for the world’s already strained energy and food supplies. The phenomenon—which begins when the atmosphere reacts to a cooler patch of water over the Pacific Ocean—will likely last through at least February, the U.S. Climate Prediction Center said Thursday. There is a 57% chance it be a moderate event, like the one that started last year, the center said. While scientists may need months to confirm whether La Nina has definitely returned, all the signs are indicating it’s here.”

October 10 – Associated Press (Michael Phillis): “After water levels at a California dam fell to historic lows this summer, the main hydropower plant it feeds was shut down. At the Hoover Dam in Nevada — one of the country’s biggest hydropower generators — production is down by 25%. If extreme drought persists, federal officials say a dam in Arizona could stop producing electricity in coming years. Severe drought across the West drained reservoirs this year, slashing hydropower production and further stressing the region’s power grids. And as extreme weather becomes more common with climate change, grid operators are adapting to swings in hydropower generation.”

Geopolitical Watch:

October 13 – Bloomberg (Ben Blanchard): “Taiwan's defence ministry warned China of strong countermeasures… if its forces got too close to the island,as Beijing defended its incursions into Taiwan's air defence zone as ‘just’ moves to protect peace and stability. Military tensions with China, which claims Taiwan as its own territory, are at their worst in more than 40 years, Taiwan's defence minister said last week, adding China will be capable of mounting a ‘full scale’ invasion by 2025. He was speaking after China mounted four straight days of mass air force incursions into Taiwan's air defence identification zone that began Oct. 1, part of a pattern of what Taipei views as stepped up military harassment by Beijing.”

October 11 – Reuters (Ben Blanchard and Yimou Lee): “Taiwan will keep bolstering its defences to ensure nobody can force them to accept the path China has laid down that offers neither freedom nor democracy, President Tsai Ing-wen said…, in a riposte to Beijing that its government denounced.”

October 12 – Financial Times (Kathrin Hille): “This autumn is a hot one in Asian waters: varying groups of countries mostly allied with the US are holding military exercises in an area that China views as its backyard. Two American and one British aircraft carrier held an exercise with 15 other warships from Japan, New Zealand, Canada and the Netherlands near Okinawa and in the Philippine Sea on October 2 to 3. Then the three carriers moved into the contested South China Sea, where they operated with Australian, Canadian, Japanese and New Zealand warships. By now, the vessels from the UK, Australia and New Zealand are holding drills with those from Singapore and Malaysia. The American and Japanese warships and some Australian ones are sailing in the South China Sea and the Bay of Bengal as part of Malabar, a drill started by India and the US but now combining the navies of all four Quad countries. The string of manoeuvres is a harbinger of the region’s future. As competition between China and liberal democracies intensifies, east and south-east Asia is becoming the world’s busiest staging ground for the two sides’ military rivalry.”

October 10 – Financial Times (Gideon Rachman): “Would America go to war over Taiwan? That question has seemed fairly abstract for decades. Now it is increasingly urgent. The Chinese air force sent around 150 jets into Taiwan’s air-defence identification zone in the space of just four days… Over the same period, the US and five other nations, including Japan and the UK, conducted one of the biggest naval exercises in the western Pacific in decades. This flexing of military muscle was accompanied by confrontational rhetoric on both sides. Over the weekend, President Xi Jinping pledged in a speech that the ‘historical task of the complete reunification of the motherland . . . will definitely be fulfilled’. The Chinese leader stressed that his preference is to take over Taiwan by peaceful means. But, since voluntary surrender by Taiwan is close to inconceivable, that leaves military force.”

October 11 – Reuters (Ben Blanchard): “China's military said… it had carried out beach landing and assault drills in the province directly across the sea from Taiwan… The official People's Liberation Army Daily newspaper, in a brief report on its Weibo microblogging account, said the drills had been carried out ‘in recent days’ in the southern part of Fujian province. The action had involved ‘shock’ troops, sappers and boat specialists…”

October 15 – Reuters (Andrew Osborn): “Russia and China held joint naval drills in the Sea of Japan on Friday and practised how to operate together and destroy floating enemy mines with artillery fire, the Russian defence ministry said… The war games are part of naval cooperation drills between the two countries which run from Oct. 14-17 and involve warships and support vessels from Russia's Pacific Fleet, including mine-sweepers and a submarine. Moscow and Beijing have cultivated closer military and diplomatic ties in recent years at a time when their relations with the West have soured.”

October 13 – Wall Street Journal (Georgi Kantchev and Benoit Faucon): “The natural gas shortage that drove prices to records in Europe has exposed Russia’s rising leverage over global energy markets, with Moscow now playing a key role in everything from OPEC negotiations to coal exports to China. Russia, the world’s largest exporter of gas and the source of more than a third of Europe’s gas, has emerged as a critical supplier with the power to quickly alleviate the continent’s gas deficit. Western officials accuse the Kremlin of trying to score geopolitical points by withholding extra supplies, a charge Moscow denies. Moscow instead says it is the troubleshooter in volatile global energy markets. It denies it is exploiting its huge energy reserves for political gain.”

October 13 – Bloomberg (Irina Reznik and Henry Meyer): “Fresh from crowing over Europe’s gas crisis, Russian President Vladimir Putin now sees a chance to capitalize on it. Putin wants to press the European Union to rewrite some of the rules of its gas market after years of ignoring Moscow’s concerns, to tilt them away from spot-pricing toward long-term contracts favored by Russia’s state run Gazprom… Russia’s also seeking rapid certification of the controversial Nord Stream 2 pipeline to Germany to boost gas deliveries, they said. Russia is prepared to supply as much gas as Europe needs and is ready for dialog with the EU on stabilizing the market, Putin said…”

Friday Afternoon Links

[Reuters] Wall St tracks weekly gains on strong banks earnings, retail sales data

[Reuters] Treasuries - U.S. yields rise on bearish rates outlook

[Reuters] Oil prices rise to three-year high on back of supply deficit forecasts

[Reuters] Bitcoin tops $60,000, a six-month high, on U.S. ETF expectations

[Yahoo/Bloomberg] Fed Rate Hike in June Has Become a Coin Flip as Yields Climb

[Yahoo Finance] The Great Resignation is ripping through the restaurant industry

[Reuters] Exclusive: Evergrande CEO in Hong Kong for restructuring, asset sale talks, sources say