Friday, November 12, 2021

Weekly Commentary: Accident-Prone Endgame Dynamic

Bloomberg Television’s Jonathan Ferro (November 12, 2021): “You wrote a scathing piece in the Financial Times this week. I want to start with a quote from it: ‘Failure to act promptly would turn the Fed’s increasingly discredited ‘transitory’ characterization from one of the worst inflation calls in decades to also a big policy mistake with widespread and unnecessary damage.’ Mohamed, I want to start with that single piece there: ‘One of the worst inflation calls in decades.’ Why do you think it’s this bad?”

Mohamed El-Erian: “Because they didn’t show humility at the beginning of the process… There are lots of structural changes going on in the post-pandemic economy… post immediate shock. You can’t simply dismiss them as transitory. You’ve got to respect the fact that behaviors change. And they just didn’t have the open mindset enough to see that. So, they got stuck in this narrative and they held on to it for too long, and the result of which is they’re looking at inflation that is much higher than they ever expected; they’re looking at inflation that is much broader than they expected; and they’re looking at inflation that is going to last even longer than they expect even now. So, it’s going to go down in history as one of the worst inflation calls by the Federal Reserve.

The Consumer Price Index (CPI) was reported up a stronger-than-expected 0.9% for the month of October, pushing the year-over-year increase to a distressing 6.2% - the strongest gain since November 1990. Up 0.4% for the month, Core CPI rose 4.6% y-o-y (high since July 1991). It’s worth noting that heightened inflationary pressures in 1990 were fueled by a fleeting spike in crude prices ahead of the first Persian Gulf War. Crude prices spiked from $16.50 in early-July to above $40 by November, only to trade back below $20 by February 1991. CPI jumped from July’s 4.8% y-o-y to 6.3% in November. Saddam’s military promptly crumbled, with the crude oil and inflationary spikes proving transitory. CPI was below 3.0% y-o-y within a year.

The New York Fed’s November survey of one-year Household Inflation Expectations jumped 0.4% for the month to 5.7%. Ignoring the summer of 2008’s ($140 crude-induced) spike to 5.1%, this month’s 4.9% reading of University of Michigan Consumer One-Year Inflation Expectations was the highest since 1981. Weighed down by inflation concerns, Consumer Expectations sank five points (21 points in 5 months!) to 62.8, the low since 2011. Producer Prices (PPI) gained 0.6% during October, with PPI up 8.6% y-o-y.

November 12 – Associated Press (Christopher Rugaber): “Americans quit their jobs at a record pace for the second straight month in September, while businesses and other employers posted a near-record number of available jobs. The Labor Department said… 4.4 million people quit their jobs that month, or about 3% of the nation’s workforce. That’s up from 4.3 million in August. There were 10.4 million job openings, down from 10.6 million in August… The figures point to a historic level of turmoil in the job market as newly-empowered workers quit jobs to take higher pay that is being dangled by increasingly-desperate employers in need of help. Incomes are rising, Americans are spending more and the economy is growing, and employers have ramped up hiring to keep the pace. Rising inflation, however, is offsetting much of the pay gains for workers.”

Chinese Producer Prices were reported up a stronger-than-expected 13.5% y-o-y, their hottest inflation in 26 years. Germany posted y-o-y consumer inflation of 4.6%, the highest in decades, with aggregate euro zone inflation at 4.1%. Brazil’s inflation rose stronger than expected, while Mexico reported a 6.24% y-o-y CPI increase. Surging inflation is a global phenomenon.

The week had the feel of an inflection point in terms of market perceptions of both inflation risk and central bank inflation neglect. Global bond markets had rallied last week on concerted central bank dovishness. There was heightened concern this week that inflationary pressures will run unchecked. The Treasury five-year “breakeven rate” of market inflation expectations spiked 29 bps to a Friday intraday high 3.18% (before ending the week at 3.12%). Friday’s rate was the highest in data from 2001. The Treasury 10-year “breakeven rate” jumped 17 bps to 2.72% (Friday’s 2.76% intraday high was a record in data back to 1997).

November 11 – Bloomberg (Alexandra Harris): “The U.S. Treasury market has become a minefield over the past month. As bond traders around the world try to force central banks to respond to elevated inflation rates, unusually large price swings have taken their toll. Signs have emerged of a vicious cycle in which reluctance to participate in the market impairs liquidity, making large price swings even more likely. As measured by Bloomberg’s U.S. Government Securities Liquidity Index, trading conditions in Treasuries are the worst since March 2020, when the pandemic spurred massive central-bank intervention around the world. The index measures deviations in yields from a fair-value model. As for expected volatility, the ICE BofA MOVE Index for U.S. bonds is near the highest since April 2020.”

Two-year Treasury yields began October at 0.27% and ended the month at 0.50%. Dovish central banks sparked a short squeeze, with two-year yields closing last Friday at 0.40%. Inflation angst had yields back to 0.51% to close this week, as wild volatility engulfs short-term rate markets. Five-year Treasury yields jumped 17 bps this week – after sinking 13 bps last week. In what must be quite a hedging challenge, benchmark MBS yields surged 16 bps this week, following the previous week’s 11 bps drop.

The rates market ended the week pricing in 2.5 Fed hikes by the end of 2022, up from last Friday’s 1.79. Importantly, markets have begun to deemphasize the dovish policy stance, focusing instead on deteriorating inflation dynamics. This problematic loss of central bank control bodes poorly for market stability, with elevated risk of a disorderly market adjustment.

And speaking of disorderly market adjustments… The Shanghai Composite rallied 1.4%, with the growth-oriented ChiNext Index up 2.3% this week. Chinese developer bonds recovered, as “Chinese Property Stocks Soar Most in Six Years…”

November 11 – Bloomberg: “China’s efforts to limit fallout from China Evergrande Group’s crisis are gathering steam. A series of articles published in state media in the past few days signal support measures are on the way to help developers tap debt markets, potentially easing a liquidity crunch that began with Evergrande’s meltdown five months ago. Stocks and bonds of property firms jumped for a second day on reports that regulators may adjust rules so that real estate firms can sell debt in the domestic interbank market. Another report showed state-owned enterprises are pushing for the right to increase borrowing for mergers, which could make it easier for them to scoop up struggling developers. State-run banks meanwhile boosted lending to the sector last month, state media reported.”

There’s no conundrum surrounding the market’s disregard for the ongoing historic Chinese developer bond collapse. Beijing has been expected to intervene when the situation gets bad enough. They certainly wouldn’t tolerate things spiraling out of control. Well, things were looking really bad earlier in the week.

In a major ratcheting up of crisis dynamics, instability jumped from the developer “Periphery” to the “Core,” engulfing what had been perceived as the most financially sound and stable developers. Friday’s closing prices (and yields) are not indicative of the week’s chaotic trading.

Country Garden, China’s largest developer, saw its bond (2025) yield close Friday at 5.43%, down from the previous week’s 7.80% close. This yield began September at 3.25%, largely ignoring the Evergrande implosion. In a spectacular market dislocation, Country Garden yields spiked to 9.5% in Monday trading and to as high as 10.74% in Tuesday mayhem.

Vanke (#4 developer) bonds (2029) traded Wednesday to 4.56%, up over 100 bps in four sessions. This yield was just above 3% in mid-September. Vanke CDS, having traded below 100 bps in September, surged 152 bps this week to a record 252 bps. Longfor (#6) yields surged almost 100 bps to 4.70%, with its CDS this week spiking 188 to a record 285 bps. Interestingly, the marketplace even turned on government-backed Poly Real Estate (#2). After trading below 2% in mid-September, (2024) yields surged 60 bps this week to 2.94%. Perhaps the wildest move of the week was achieved by government-backed Sino Ocean, whose yields, after closing the previous week at 7.79%, traded as high as 32% on Tuesday before ending the week at 9.62%.

Fears again this week pointed to mounting systemic risks, manifesting in higher CDS prices for China’s major banks. Bank of China CDS jumped as much as seven to 70 bps, matching highs from the mid-October systemic scare. Trading at four-week highs, Construction Bank of China CDS rose as much as seven to 71.5 bps. Industrial and Commercial Bank of China CDS was up eight mid-week to 72 bps, and China Development Bank CDS rose four to 66.5 bps.

There was also this week a noteworthy jump in China's sovereign CDS prices. After closing last Friday at 49 bps, China CDS jumped to almost 57 bps during Wednesday trading. This was the high since the mid-October spike, when China CDS traded as high as 60 bps – and up from about 32 bps on September 16th.

November 8 – Bloomberg (Richard Frost): “Kaisa is showing that Evergrande was just the tip of the iceberg when it comes to the challenges facing China’s real estate industry. Kaisa is putting up 18 projects in Shenzhen for sale, with a total value estimated at about 82 billion yuan ($13bn), according to reports… That’s after the company said it was facing ‘unprecedented pressure on its liquidity’ and missed payments on high-yield consumer products it had guaranteed. With more than $11 billion of dollar bonds outstanding, Kaisa is the nation’s third-largest dollar debt borrower among developers.”

November 11 – Financial Times (Thomas Hale and Hudson Lockett): “A bout of selling this week in junk bonds issued by riskier Chinese property developers has sent their borrowing costs soaring to the highest level in a decade and imperilled companies’ ability to access an important funding source… ‘The downward spiral for Chinese developers is the result of a massive liquidity squeeze,’ said Paul Lukaszewski, head of corporate debt for Asia-Pacific at Abrdn. ‘Few companies can survive for long in environments where they cannot access their internal cash or external financing.’”

Beijing is no doubt becoming increasingly nervous. The developer bond collapse turned disorderly, eliciting supportive comments from China’s state media and PBOC officials. There was a spectacular short squeeze in developer shares and bonds, but it’s difficult to believe the situation won't continue to deteriorate. China is very early in its real estate bust. I doubt Chinese citizens understand the seriousness of the situation. Published apartment prices have remained stable, despite the acute liquidity squeeze, which will force heavy discounting of unsold units.

China’s October Credit data were out this week. At $250 billion, the growth in Aggregate Financing was about 7% below estimates and down sharply from September’s $455 billion. October (1st month of the quarter) is typically a seasonally weak period for lending, with the month’s growth up 14% from October 2020. Aggregate Finance expanded $4.72 TN over the past year, or 10.0%.

At $129 billion, New Loans were less than half September’s $260 billon, but were above estimates. Over the past three months, New Loans were 4% below comparable 2020. Corporate Bank Loans dropped to $49 billion (from Sept’s $154bn), yet were ahead of the year ago $37 billion. Corporate lending over the past three months was 13% ahead of 2020, with six-month growth 23% above comparable 2020. Corporate Bank Loans were up 11.4% y-o-y, 25.3% over two years, 39% over three and 68% over five years.

Consumer Loans dropped to $73 billion, down from September’s $123 billion - but ahead of the year ago $68 billion. Over the past three months, Consumer Loan growth was 19% below comparable 2020. Six-month growth was down 21% from comparable 2020. Even with the slowdown, Consumer Loans were up 13.1% y-o-y, 30% over two years, 50% over three years and 117% over five years – in mortgage lending excess that will come back to bite.

Beijing faces a precarious balancing act. A historic Bubble collapse has commenced, with producer price inflation running at a 26-year high. It’s unclear that cutting rates and bank reserve requirement, while showering the system with liquidity, would significantly alter the trajectory of China’s bursting apartment Bubble. Excess liquidity, however, will surely find its way into inflating producer and consumer prices.

It’s been my view that the prospect of a faltering Chinese Bubble has provided crucial underpinning to global bond markets confronting accelerating inflation. It’s always the case that liquidity will seek out inflation. Inject enormous liquidity when securities prices have attained a strong inflationary bias, and you’ll fuel a mania. Adding liquidity when price levels throughout the economy have gained strong momentum will propel an inflationary cycle.

I believe it matters that China’s Bubble is faltering in a backdrop of powerful global inflationary dynamics. At least in the near-term, the likelihood of the bond-pleasing deflationary scenario appears much reduced compared to a year or even six months ago. Perhaps that’s part of what has lately lit a fire under the “breakeven rates.” Up another $46 dollars this week, gold prices have also heated up. It appears global central bankers have begun to lose control of bond yields. And if yields begin reflecting inflation realities, bond markets have an arduous adjustment period ahead.

Returning to the Fed’s worst inflation call in decades. The developing global financial crisis has been decades in the making. Contemporary central bank doctrine is fundamentally flawed. Using the securities markets as the primary mechanism for system stimulus – for Credit growth and financial conditions more generally – ensures speculative excess, over-leveraging and Bubbles. Coddle speculative markets at the system’s peril.

The Fed is trapped. They’ve been trapped for a while, but it essentially didn’t matter (in the age of open-ended QE) so long as consumer price inflation remained well-contained. That era has run its course. Speculative market Bubbles are these days dependent on persistently low rates, liquidity abundance and extremely loose financial conditions – a backdrop that is now quite problematic in terms of stoking the perilous confluence of manic blow-off Bubble excess and surging inflation. It was always going to end badly. Markets are exhibiting an erratic, Accident-Prone Endgame Dynamic.


For the Week:

The S&P500 slipped 0.3% (up 24.7% y-t-d), and the Dow declined 0.6% (up 17.9%). The Utilities fell 1.0% (up 6.6%). The Banks added 0.6% (up 43.0%), while the Broker/Dealers declined 0.3% (up 32.4%). The Transports slipped 0.5% (up 34.0%). The S&P 400 Midcaps were little changed (up 25.8%), while the small cap Russell 2000 retreated 1.0% (up 22.1%). The Nasdaq100 fell 1.0% (up 25.7%). The Semiconductors rose 1.0% (up 35.7%). The Biotechs sank 3.2% (down 5.3%). With bullion jumping $47, the HUI gold index surged 7.4% (down 7.2%).

Three-month Treasury bill rates ended the week at 0.04%. Two-year government yields jumped 11 bps to 0.51% (up 39bps y-t-d). Five-year T-note yields surged 17 bps to 1.22% (up 86bps). Ten-year Treasury yields rose 11 bps to 1.56% (up 65bps). Long bond yields gained five bps to 1.93% (up 29bps). Benchmark Fannie Mae MBS yields jumped 16 bps to 2.05% (up 71bps).

Greek 10-year yields jumped 14 bps to 1.21% (up 59bps y-t-d). Ten-year Portuguese yields gained seven bps to 0.37% (up 34bps). Italian 10-year yields rose eight bps to 0.95% (up 41bps). Spain's 10-year yields gained six bps to 0.46% (up 41bps). German bund yields increased two bps to negative 0.26% (up 31bps). French yields gained four bps to 0.10% (up 44bps). The French to German 10-year bond spread widened two to 36 bps. U.K. 10-year gilt yields jumped seven bps to 0.91% (up 72bps). U.K.'s FTSE equities index added 0.6% (up 13.7% y-t-d).

Japan's Nikkei Equities Index was unchanged (up 7.9% y-t-d). Japanese 10-year "JGB" yields increased two bps to 0.08% (up 6bps y-t-d). France's CAC40 increased 0.7% (up 27.7%). The German DAX equities index added 0.2% (up 17.3%). Spain's IBEX 35 equities index declined 0.5% (up 12.5%). Italy's FTSE MIB index slipped 0.2% (up 24.7%). EM equities were mixed. Brazil's Bovespa index rallied 1.4% (down 10.7%), while Mexico's Bolsa fell 1.0% (up 16.7%). South Korea's Kospi index was unchanged (up 3.3%). India's Sensex equities index advanced 1.0% (up 27.1%). China's Shanghai Exchange rallied 1.4% (up 1.9%). Turkey's Borsa Istanbul National 100 index jumped 3.5% (up 11.0%). Russia's MICEX equities index fell 1.3% (up 25.3%).

Investment-grade bond funds saw inflows of $2.536 billion, and junk bond funds posted positive flows of $2.577 billion (from Lipper).

Federal Reserve Credit last week jumped $27.8bn to a record $8.558 TN. Over the past 113 weeks, Fed Credit expanded $4.832 TN, or 130%. Fed Credit inflated $5.748 Trillion, or 204%, over the past 470 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $1.2bn to $3.480 TN. "Custody holdings" were up $53bn, or 1.6%, y-o-y.

Total money market fund assets rose $12.2bn to $4.567 TN. Total money funds increased $240bn y-o-y, or 5.5%.

Total Commercial Paper dropped $22.0bn to $1.131 TN. CP was up $170bn, or 17.7%, year-over-year.

Freddie Mac 30-year fixed mortgage rates sank 11 bps to 2.98% (up 14bps y-o-y). Fifteen-year rates fell eight bps to 2.27% (down 7bps). Five-year hybrid ARM rates slipped a basis point to 2.53% (down 28bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 12 bps to 3.05% (down 2bps).

Currency Watch:

For the week, the U.S. Dollar Index gained 0.9% to 95.13 (up 5.8% y-t-d). For the week on the upside, the Brazilian real rallied 1.6%, and the South Korean won increased 0.5%. For the week on the downside, the Swedish krona declined 2.2%, the South Korean won 1.8%, the Norwegian krone 1.5%, the euro 1.1%, the New Zealand dollar 1.0%, the Swiss franc 1.0%, the Australian dollar 0.9%, the Mexican peso 0.9%, the Canadian dollar 0.7%, the British pound 0.6%, the Japanese yen 0.4% and the Singapore dollar 0.2%. The Chinese renminbi increased 0.30% versus the dollar (up 2.31% y-t-d).

Commodities Watch:

November 12 – Bloomberg (Marvin G. Perez): “Global supply woes from Brazil to Vietnam sent coffee prices to a seven-year high… with poor weather, freight snarls and higher fertilizer costs threatening to curb supply. Arabica futures for March delivery rose as much as 2.6% to $2.189 a pound…, the highest since Oct. 16, 2014. Prices have soared more than 90% in the past year.”

The Bloomberg Commodities Index was little changed (up 31.7% y-t-d). Spot Gold jumped $47 to $1,865 (down 1.8%). Silver surged 4.8% to $25.32 (down 4.1%). WTI crude slipped 48 cents to $80.79 (up 67%). Gasoline declined 0.4% (up 64%), while Natural Gas sank 13.1% (up 89%). Copper rallied 2.3% (up 26%). Wheat surged 6.3% (up 29%), and Corn jumped 4.0% (up 21%). Bitcoin rose $2,879, or 4.7%, this week to $64,071 (up 120%).

Coronavirus Watch:

November 11 – Associated Press (Carla K. Johnson): “The contagious delta variant is driving up COVID-19 hospitalizations in the Mountain West and fueling disruptive outbreaks in the North, a worrisome sign of what could be ahead this winter in the U.S. While trends are improving in Florida, Texas and other Southern states that bore the worst of the summer surge, it’s clear that delta isn’t done with the United States. COVID-19 is moving north and west for the winter as people head indoors, close their windows and breathe stagnant air.”

November 8 – Reuters (Vera Eckert, Paul Carrel and Sarah Marsh): “Germany's coronavirus infection rate has risen to its highest level since the start of the pandemic…, and doctors warned they will need to postpone scheduled operations in coming weeks to cope. The seven-day incidence rate - the number of people per 100,000 to be infected over the last week - rose to 201.1, higher than a previous record of 197.6 in December last year…”

November 6 – Financial Times (Thomas Hale): “China’s efforts to eliminate Covid-19 are coming under increasing pressure, with officials warning of a ‘grave challenge’ in the months ahead and dozens of new cases reported over the weekend… The current wave of cases has reached the majority of the country’s 31 provinces, in the broadest outbreak since the early days of the Covid-19 pandemic last year. The figures were released a day after officials… in Beijing said China would continue to adhere to its strict prevention measures even as other countries in the region abandoned their zero-Covid policies.”

Market Mania Watch:

November 10 – Reuters (Noor Zainab Hussain and Ben Klayman): “Shares of Rivian Automotive Inc surged as much as 53% in its Nasdaq debut on Wednesday, giving the Amazon-backed electric vehicle maker a market valuation of more than $100 billion after the world’s biggest initial public offering this year. Rivian shares closed at $100.73, marking a nearly 30% jump from its offering price. That made Rivian the second most valuable U.S. automaker after Tesla Inc, which is worth $1.06 trillion.”

November 11 – Wall Street Journal (Patricia Kowsmann and Caitlin Ostroff): “The world’s fastest-growing major financial exchange has no head office or formal address, lacks licenses in countries where it operates and has a chief executive who until recently wouldn’t answer questions about his location. Started just four years ago, Binance is the exchange giant that towers over the digital currency world, a crypto equivalent of the London, New York and Hong Kong stock exchanges combined. After a burst of growth, Binance processes more trades for cryptocurrencies such as bitcoin and ether each day, $76 billion worth, than its four largest competitors put together, according to… CryptoCompare.”

November 8 – Wall Street Journal (Paul Kiernan): “Wall Street is fighting back as Securities and Exchange Commission Chairman Gary Gensler considers policy changes that threaten to upend a lucrative business model. Trading firms and brokers have ramped up their lobbying efforts and campaign donations to Republicans seeking to win control of Congress in next year’s midterm elections. They have become especially vocal about Mr. Gensler’s scrutiny of payment for order flow, whereby some brokerages sell their clients’ stock and option orders to high-speed trading firms that execute the trades. At stake, the industry says, is a yearslong trend toward commission-free trading that has encouraged millions of Americans to invest in the stock market.”

November 11 – Bloomberg (Nishant Kumar): “The longest running bull market in history has claimed one of its most high-profile victims. Russell Clark, who has wagered against stocks for much of the last decade, told clients that he is shutting down his eponymous hedge fund after a run of losses. The RC Global Fund he has managed since 2010 lost 2.6% through October this year and was down to about $200 million in assets from about $1.7 billion in 2015… The closure marks an end to yet another bearish hedge fund manager’s fund as stocks continue to march ahead. Clark, who uses macro economic analysis to bet on stocks, is among a series of long-short equity hedge fund managers who have fallen way behind surging markets and have suffered investors exodus.”

November 11 – Bloomberg (Hannah Levitt): “The trading desk was just embarking on a second banner year when senior executives started defecting to the likes of Bank of America Corp., Citigroup Inc. and Millennium Management. By this fall, many of the team’s heaviest hitters had gone. The setting wasn’t some struggling investment bank. It was the equity derivatives desk inside the mighty JPMorgan… -- one of many pockets of employee turnover that have erupted there in recent months… Pan out, and it’s part of a trend sweeping across Manhattan’s financial industry. Signs of a surge in Wall Street job-hopping are emerging everywhere: An independent recruiter said he’s never seen so many eight-figure hiring packages.”

November 8 – Wall Street Journal (Kelly Crow): “Collectors know exactly what they want from art: more. A lot more. Starting Tuesday, the world’s chief auction houses—Sotheby’s, Christie’s and boutique house Phillips—will seek to sell at least $1.6 billion worth of art during a two-week series of sales… The houses estimate at least 15 pieces will sell for over $20 million, including examples by Alberto Giacometti, Mark Rothko and Vincent van Gogh. Recent discoveries such as Reggie Burrows Hodges are also poised to fly to records. How to tell? Last month in London, Mr. Hodges’s auction debut, ‘For the Greater Good,’ sold for $606,685—nearly 15 times its estimate. ‘People don’t care if they have to pay $1 million for a piece that’s priced to sell for $60,000,’ said Alex Rotter, chairman of Christie’s 20/21 art departments. ‘They’re making up their own rules.’”

Market Instability Watch:

November 10 – Financial Times (Kate Duguid and Naomi Rovnick): “US government bonds sold off sharply on Wednesday after the labour department reported consumer prices soared last month, intensifying concerns the Federal Reserve will need to act more decisively to slow inflation. Yields on two-year Treasury notes, which are highly sensitive to interest rate expectations, rose by the most since the market turbulence triggered by the coronavirus outbreak in March 2020. The yield increased 0.09 percentage points to 0.52%, signalling a significant fall in price. The biggest move was in the five-year note, which rose 0.14 percentage points to 1.22%.”

November 10 – Bloomberg (Liz Capo McCormick and Elizabeth Stanton): “U.S. bond market expectations for inflation surged after consumer prices in October rose at the fastest pace since 1990, sparking traders to accelerate estimates for when the Federal Reserve will hike its benchmark interest rate…. The so-called five-year breakeven rate on Treasury inflation protected securities -- or the difference between those yields and the ones on typical Treasuries -- jumped as much as about 14 bps to around 3.13%, a record high. Traders increasingly see risk that the out-sized pace of consumer-price increases will prove more sticky than the Fed now expects.”

November 8 – Bloomberg (Lu Wang): “The day-trader obsession with using bullish options to speculate on stocks is doing strange things to the age-old relationship between the U.S. equity market and its benchmark volatility index. Rather than move in the opposite direction, as the S&P 500 and Cboe Volatility Index have almost always done for three decades, they went up in unison for two weeks -- a stretch of synchronized increases not seen in 14 months. One common interpretation might be that there is a growing sense of uneasiness as traders bid up the prices of bearish options that in turn lifted the VIX. But an analysis from Susquehanna International Group showed the opposite is true. And that is, investors are flocking to call options to chase gains in stocks like Tesla Inc. and Nvidia Corp., resulting in a spike in upward volatility.”

November 7 – Wall Street Journal (Gregory Zuckerman and Julia-Ambra Verlaine): “A rapid U-turn in government-bond markets has sparked deep losses for some of Wall Street’s biggest investors, a stark demonstration of how even small shifts in expectations for economic growth and central-bank policy can upend the most carefully laid bets. Behind the losses are recent abrupt moves in government-bond prices. With central banks signaling plans to end their extraordinary stimulus measures, short-term bonds have tumbled in price, sending yields—which rise when prices fall—to touch their highest levels since March 2020.”

November 5 – Financial Times (John Dizard): “The $22tn US Treasury market is ill-equipped to finance whatever US spending packages are finally delivered by Congress. The administration and market regulators know that, and are preparing to formally develop a new market structure. Work has started even before the Federal Reserve board has confirmed (or reconfirmed) the next chair and vice chair. Officials including Nellie Liang, the under secretary of the Treasury for domestic finance, and Gary Gensler, chair of the Securities and Exchange Commission, have already been laying out preliminary sketches. Their shared concept is to shift to a market where the liquidity is provided by a diversity of large and small participants, rather than a couple of dozen ‘primary dealers’ and 50 big hedge funds.”

November 7 – Bloomberg (Rebecca Choong Wilkins): “Investor concerns are shifting to China’s stronger property firms as a selloff across the industry’s dollar bonds turns to higher-quality borrowers. A dollar bond from China’s largest property firm by sales, Country Garden Holdings Co., fell 2 cents to 77.4 cents Monday morning after tumbling a record 10.3 last week. China Vanke Co., the nation’s second largest, also slid. A dollar note sold by one of its units was indicated down at 96.2 cents after falling 3.2 cents last week, the steepest drop since March 2020.”

November 8 – Wall Street Journal (Quentin Webb and Frances Yoon): “The biggest selloff that China’s international junk-bond market has ever seen has wiped out around a third of bondholders’ wealth in just six months. The steep and rapid decline shows how regulatory curbs on borrowing, extremely dislocated credit markets, and slowing home sales have combined to pressure more Chinese property developers… The market endured another wave of selling late last week and on Monday, as investors even dumped bonds issued by financially stronger developers. On Friday, the yield on an ICE BofA index of Chinese junk bonds topped 25% for the first time since March 2009, near the height of the global financial crisis, and on Monday it rose further, to 26.6%.”

November 9 – Bloomberg (Ailing Tan): “The amount of dollar bonds from Chinese issuers yielding more than 15% has totaled $114.9 billion… Nearly 96% amount from 279 bonds with such yield were issued by real estate firms. Majority of issuers on the list are Guangdong-based and represent $55b of bonds.”

November 8 – Financial Times (Tommy Stubbington and Kate Duguid): “When the Bank of England sprang a surprise last week by keeping interest rates on hold, the impact quickly spread beyond UK government bonds. The ensuing rally in the gilt market, as traders unwound their bets on UK rate rises, also jammed yields sharply lower on eurozone bonds and US Treasuries. The episode highlights how a clutch of smaller central banks — most notably the BoE, but also the Bank of Canada and Reserve Bank of Australia — have recently found themselves in the unusual position of dictating moves across the world’s biggest bond markets.”

Inflation Watch:

November 10 – Wall Street Journal (Gwynn Guilford): “U.S. inflation hit a three-decade high in October, delivering widespread and sizable price increases to households for everything from groceries to cars due to persistent supply shortages and strong consumer demand. The Labor Department said the consumer-price index—which measures what consumers pay for goods and services—increased in October by 6.2% from a year ago. That was the fastest 12-month pace since 1990… The core price index, which excludes the often-volatile categories of food and energy, climbed 4.6% in October from a year earlier, higher than September’s 4% rise and the largest increase since 1991. On a monthly basis, the CPI increased a seasonally adjusted 0.9% in October from the prior month, a sharp acceleration from September’s 0.4% rise and the same as June’s 0.9% pace.”

November 10 – Financial Times (Darren Dodd): “Today’s news that US consumer prices rose in October at the fastest rate since 1990 is the latest sign of the inflationary pressures facing the world’s major economies as they attempt to bounce back from the pandemic… Inflation is also a serious problem for global business. New data published today showed Chinese factory gate prices… rose at their fastest pace in 26 years… The potential of rising inflation — which hit a 28-year high of 4.6% in October — to dent economic recovery in Germany was highlighted by the country’s Council of Economic Experts today, which raised its inflation forecasts for this year and next.”

November 10 – Bloomberg (Michael Sasso and Alexandre Tanzi): “Residents of the Atlanta area are experiencing the worst inflation among major U.S. cities, with October prices up 7.9% from a year ago... The St. Louis and Phoenix metro areas also saw inflation above 7% last month, data from the Bureau of Labor Statistics show. The cities are above the national average of 6.2%, which itself was the fastest annual pace since 1990 in the county. By contrast, prices in San Francisco and New York rose 3.8% of 4.3%, respectively.”

November 9 – Bloomberg (Reade Pickert): “Prices paid to U.S. producers accelerated in October, largely due to higher goods costs, fueling concerns about the persistence of inflationary pressures in the economy. The producer price index for final demand increased 0.6% from the prior month and 8.6% from a year earlier… The annual advance was the largest in figures back to 2010. Excluding the volatile food and energy components, the so-called core PPI rose 0.4% and was up 6.8% from a year ago. More than 60% of the headline increase was due to goods, which jumped 1.2%.”

November 8 – Bloomberg (Alex Tanzi): “Inflation expectations among U.S. consumers rose to a new high for the coming year after months of soaring prices, according to the latest Federal Reserve Bank of New York survey. Household expectations for inflation in the next 12 months climbed to 5.7% in October from 5.3% the previous month, according to the monthly Survey of Consumer Expectations... Median expected inflation over the next three years held steady at 4.2%. Both figures are the highest since the survey began in 2013.”

November 10 – Associated Press (Christopher Rugaber): “A worsening surge of inflation for such bedrock necessities as food, rent, autos and heating oil is setting Americans up for a financially difficult Thanksgiving and holiday shopping season… Inflation is eroding the strong gains in wages and salaries that have flowed to America’s workers in recent months, creating a political threat to the Biden administration and congressional Democrats and intensifying pressure on the Federal Reserve as it considers how fast to withdraw its efforts to boost the economy.”

November 8 – New York Times (Talmon Joseph Smith): “With consumers already dealing with the fastest price increases in decades, another unwelcome uptick is on the horizon: a widely expected increase in winter heating bills… Natural gas, used to heat almost half of U.S. households, has almost doubled in price since this time last year. The price of crude oil — which deeply affects the 10% of households that rely on heating oil and propane during the winter — has soared by similarly eye-popping levels. And those costs are being quickly passed through to consumers…”

November 8 – Wall Street Journal (Stephanie Stamm): “The supply-chain crunch is about to hit another part of American life: Thanksgiving dinner. Supplies of food and household items are 4% to 11% lower than normal as of Oct. 31, according to… market-research firm IRI. That figure isn’t far from the bare shelves of March 2020, when supplies were down 13%. For grocery shoppers this holiday season, it means that someone with 20 items on their list would be out of luck on two of them. Although U.S. supermarket operators started purchasing holiday items early, aiming to avoid shortages, many holiday essentials are already in short supply.”

November 8 – Bloomberg (Jen Skerritt and Michael Hirtzer): “Inflation’s next victim might be your Sunday dinner. North American beef prices are soaring as a labor crunch squeezes meatpackers and supply-chain snarls add to freight costs. In Canada, prices for a prime rib roast have risen 20% in the past year and are the highest since at least 1995, Statistics Canada data show. Sirloin and round steaks have surged as much as 10% in the last year and in the U.S. beef steaks are fetching record prices.”

November 10 – Bloomberg (Marcy Nicholson and Jen Skerritt): “Beef prices in North America are soaring amid global supply chain snarls, and now a labor dispute could inject even more uncertainty into the market. A union representing thousands of workers at a Cargill Inc. beef plant in Alberta gave official notice… of a strike starting Dec. 6 following two days of negotiations.”

November 9 – Associated Press (Janie Har): “U.S. food banks already dealing with increased demand from families sidelined by the pandemic now face a new challenge — surging food prices and supply chain issues walloping the nation… As holidays approach, some food banks worry they won’t have enough stuffing and cranberry sauce for Thanksgiving and Christmas. ‘What happens when food prices go up is food insecurity for those who are experiencing it just gets worse,’ said Katie Fitzgerald, chief operating officer of Feeding America…”

November 11 – Financial Times (Mohamed El-Erian): “Once again, a widely watched inflation data release surprises on the upside. Once again, the underlying drivers of inflation continue to broaden. Once again, it is the most vulnerable segments of the population that are hit hardest. And once again, those who all year long have been characterising this inflation episode as ‘transitory’ appear hesitant to revisit their convictions despite consistently contradictory data. At one level, this hesitancy should not come as a huge surprise given the usual behavioural traps: in this case, they include inappropriate framing, confirmation biases, narrative inertia, and resistance to a loss of face. Yet, its persistence in the face of repeatedly contradictory data seriously increases the risk of otherwise-avoidable economic, financial, institutional and social damage.”

Biden Administration Watch:

November 6 – Reuters (Susan Cornwell and Makini Brice): “After a daylong standoff, Democrats set aside divisions between progressives and centrists to pass a $1 trillion package of highway, broadband and other infrastructure improvement, sending it on to President Joe Biden to sign into law. The 228-to-206 vote late on Friday is a substantial triumph for Biden's Democrats, who have bickered for months over the ambitious spending bills that make up the bulk of his domestic agenda. Biden's administration will now oversee the biggest upgrade of America's roads, railways and other transportation infrastructure in a generation, which he has promised will create jobs and boost U.S. competitiveness.”

November 10 – Reuters (Andrea Shalal): “President Joe Biden’s first trip to celebrate a long-sought congressional victory on infrastructure was clouded by new data showing inflation rose to a level not seen for more than 30 years. Biden, who ran on his ability to whip COVID-19 and revive the economy that the pandemic left in tatters, now faces rising political pressure over shortages of goods and rising prices as society comes back to life. ‘Consumer prices remain too high,’ Biden said at the Port of Baltimore. ‘We still face challenges we have to tackle head on.’”

November 10 – Financial Times (James Politi and Colby Smith): “Joe Biden’s White House is scrambling to tame soaring inflation as rising prices threaten to undercut the US economic recovery, jeopardise his spending plans and doom the Democratic party’s chances in next year’s midterm elections. The fight against inflation marks a big shift in economic strategy for Biden compared with his early months in office, when the administration’s main goal was to revive the pandemic-hit US economy with a jolt in demand through fiscal stimulus. But battling high prices has now become a large focus for Biden’s economic team after incoming data have confounded its expectations that inflationary pressures would be shortlived.”

November 10 – Reuters (Kanishka Singh): “U.S. Senator Joe Manchin may delay President Joe Biden's ‘Build Back Better’ legislation until next year over inflation worries, Axios reported…, citing people familiar with the matter. The $1.75 trillion proposal aims to expand the social safety net in the United States and boost climate change policy.”

November 9 – Financial Times (Kate Duguid): “The trading climate in the $22tn US government bond market has become less hospitable, adding to choppy moves in securities that act as a foundation of the global financial system. Liquidity — the ease with which an investor can buy or sell an asset — has deteriorated in recent weeks, data show. That has added to the pressure on regulators to improve a market long viewed as a haven during times of trouble. But regulators are far from any solution, according to a progress report released this week by a federal working group charged with assessing the structure of the US Treasury bond market.”

Federal Reserve Watch:

November 8 – Bloomberg (Jesse Hamilton): “The Federal Reserve is warning that prices of risky assets keep rising, making them more susceptible to perilous plunges if the economy takes a turn for the worse, and cited stablecoins as an emerging threat. ‘Asset prices remain vulnerable to significant declines should investor risk sentiment deteriorate, progress on containing the virus disappoint, or the economic recovery stall,’ the Fed said in its twice-yearly Financial Stability Report… The central bank also said stablecoin threats are growing, that fragility in China’s commercial real-estate sector could spread to the U.S. if it deteriorated dramatically, and that ‘difficult-to-predict’ volatility similar to this year’s meme-stock frenzy could become more frequent as social media increasingly influence trading.”

November 9 – Reuters (Lindsay Dunsmuir): “The U.S. Federal Reserve looks at a wide range of indicators in gauging how close the economy is to reaching full employment, Fed Chair Jerome Powell said…, as he reiterated the benefits of targeting workers who often remain on the sidelines. ‘When we assess whether we are at maximum employment, we purposely look at a wide range of indicators,’ Powell told a virtual conference on diversity and inclusion in economics, finance, and central banking, co-hosted by the Fed alongside other major central banks. In doing so the Fed is attentive to labor market disparities, ‘rather than just the headline numbers,’ Powell said…”

November 8 – Bloomberg (Craig Torres, Steve Matthews and Matthew Boesler): “Federal Reserve Vice Chair Richard Clarida said the ‘necessary conditions’ to raise the U.S. central bank’s benchmark lending rate from near zero will probably be in place at the end of next year. ‘We are clearly a ways away from considering raising interest rates,’ Clarida told a virtual event… ‘I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022,’ he said, referring to the labor market and inflation tests laid out by the Fed for liftoff.”

November 8 – Associated Press (Christopher Rugaber): “Randal Quarles announced… he will resign from the Federal Reserve’s Board of Governors at the end of the year after completing a four-year term as its top bank regulator, opening up another vacancy on the Fed’s influential board for President Joe Biden to fill. Quarles has served as the Fed’s first vice chair of supervision, which gave him wide-ranging authority over the banking system. In that role, he oversaw a broad loosening of some of the financial regulations that were put in place after the 2008-2009 global financial crisis and recession.”

November 9 – Reuters (Ann Saphir): “Two of the U.S. central bank's most dovish policymakers said… they expect to get more clarity on the post-pandemic economic outlook by next summer, when the Federal Reserve is expected to finish winding down its asset purchases. Whether that clarity leaves them convinced interest rates should stay at their current near-zero level for another year or more, or moves them to join the half of their fellow Fed policymakers who support more immediate rate hikes, will depend on two main factors…: if inflation has begun to abate as they expect, and if workers are flooding back into the labor force as they have long hoped.”

November 9 – Reuters (Matt Clinch): “St. Louis Federal Reserve President James Bullard told CNBC that he’s currently expecting the U.S. central bank to hike its benchmark rate twice in 2022, after it’s finished with winding down its bond-buying program. Bullard added the caveat that his viewpoint was based on current economic data… ‘What we can do is assess the situation next spring and see where we’re at, and at that point we can make a decision about raising the policy rate,’ Bullard told CNBC’s Julianna Tatelbaum… ‘Based on where I think we are today I actually have two rate increases penciled in for 2022 ... that could change by the time we get into the first half of next year in either direction really.’”

November 10 – Bloomberg (Olivia Rockeman): “Federal Reserve Bank of San Francisco President Mary Daly said she is monitoring ‘eye-popping’ inflation but it is too soon to judge if the central bank should accelerate its pace of policy tightening. ‘Right now it would be premature to start changing our calculations about raising rates,’ Daly, one of the central bank’s most dovish officials, said… ‘Right now, uncertainty requires us to wait and watch with vigilance.’”

November 9 – Bloomberg (Sofia Horta e Costa): “Just weeks ago, Wall Street analysts and central bankers were quick to assure investors that a collapse by China Evergrande Group wouldn’t be a Lehman moment. Regulators in Beijing said that the crisis would be ‘contained.’ Now that a bond selloff has spread to China’s entire real estate sector and beyond, concern is growing about the potential risk to the global financial system. The U.S. Federal Reserve made that link explicit in a report…, warning that what happens in China’s property industry could impact financial markets and threaten world economic growth. Underscoring the risks of a potential spillover, the Hong Kong Monetary Authority asked banks to disclose their exposure to Chinese real estate…”

U.S. Bubble Watch:

November 10 – Bloomberg (Reade Pickert, Steve Matthews and Katia Dmitrieva): “After U.S. prices climbed by the most in three decades, there’s even worse news ahead for households and policy makers: Inflation likely has further to rise before it peaks. October’s annual rate was 6.2%, the highest since 1990, as price increases spread well beyond the parts of the economy most disrupted by pandemic closures. Key drivers, like hot housing markets and a global energy crunch, show few signs of fading away soon -- leading economists to predict even bigger jumps in the coming months. ‘We’re going to see the inflation picture get worse before it gets better,’ said Sarah House, senior economist at Wells Fargo… Surging prices are eating into family budgets, wiping out the wage increases that U.S. workers have battled for after last year’s jobs wipeout, and squeezing profit margins for small businesses.”

November 10 – Reuters (Dan Burns): “The U.S. government… posted a $165 billion budget deficit for October, 42% lower than the $284 billion shortfall a year earlier as personal and corporate income tax receipts surged… The October deficit was $14 billion below the median estimate… Receipts for the first month of the federal government's fiscal year totaled $284 billion, up 19% and a record for the month of October. Individual tax receipts rose 18% to $214 billion, and corporate taxes rose 39% to $21 billion.”

November 12 – Wall Street Journal (Gabriel T. Rubin): “The U.S. economy has had more than 10 million open jobs since June, an extraordinary stretch of imbalance in the labor market that also includes record numbers of workers quitting their jobs. As of Nov. 5, there were a projected 11.2 million U.S. job openings, according to estimates from the jobs site Indeed, exceeding 7.4 million unemployed workers in the U.S. labor force last month. The so-called quits rate—a measurement of workers leaving jobs as a share of overall employment—was 3% in September, a record high…”

November 10 – Yahoo Finance (Emily McCormick): “New weekly jobless claims touched a fresh pandemic-era low yet again this week, as labor shortages and companies' efforts to bring on and retain workers, helping to put a cap on the pace of firings and other separations… Initial unemployment claims, week ended November 5: 267,000 vs. 260,000 expected and a revised 271,000 during prior week…”

November 10 – Reuters (Jeff Cox): “What looked like a big jump in workers’ wages during October turned into just another gut punch after accounting for inflation. The Labor Department reported… average hourly earnings increased 0.4% in October… That was the good news. However, the department reported… that top-line inflation for the month increased 0.9%, far more than what had been expected. That was the bad news – very bad news, in fact. That’s because it meant that all told, real average hourly earnings when accounting for inflation, actually decreased 0.5% for the month. ‘For now, inflation is going to continue to run above very solid wage growth,’ said Joseph LaVorgna, chief economist… at Natixis… ‘This is why when you look at consumer confidence, it’s really taking a beating. Households do not like the inflation story, and rightly so.’”

November 12 – Bloomberg (Jordan Yadoo): “U.S. consumer sentiment unexpectedly collapsed in early November as Americans grew increasingly concerned about rising prices and the inflationary impact on their finances. The University of Michigan’s preliminary sentiment index decreased to 66.8 from 71.7 in October… Waning confidence reflects ‘an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation,’ Richard Curtin, director of the survey… Consumers expect inflation to rise 4.9% over the next year, the highest since 2008…”

November 9 – CNN (Anneken Tappe): “American households are carrying record amounts of debt as home and auto prices surge… Between July and September, US household debt climbed to a new record of $15.24 trillion, the Federal Reserve Bank of New York said… It was an increase of 1.9%, or $286 billion, from the second quarter of the year.”

November 11 – Wall Street Journal (Nicole Friedman): “American home buyers are having to pounce faster than ever to clinch a deal, forcing many of them to make snap decisions about what house to purchase and where to live. Home sales between July 2020 and June 2021 sat on the market for a median period of only one week before going under contract, according to a survey… by the National Association of Realtors. That’s down from three weeks a year earlier and marks a record low in data going back to 1989.”

November 8 – Bloomberg (Emily Cadman and Alice Kantor): “Homeowners are taking advantage of a global housing boom by pulling equity out of their homes at the highest volume since the financial crisis. In the U.S., homeowners withdrew $63 billion in equity from their properties through more than 1.1 million cash-out refinances in the second quarter of the year — the largest quarterly volume since mid-2007, according to… Black Knight. Just under one in five American homeowners say they have pulled money out of their properties in the last year, according to a survey in late October by… Harris Poll, with another 18% saying they are considering it.”

November 10 – Bloomberg (Christine Maurus): “The punishing price gains of the pandemic-era housing market are showing signs of easing. In the third quarter, the median price of an existing single-family home in the U.S. rose 16% from a year earlier to $363,700, the National Association of Realtors said… The rate was 23% in the second quarter. About 78% of 183 metropolitan areas measured had double-digit increases, down from 94% in the previous three-month period. The brutal bidding wars brought on by the pandemic housing frenzy are easing up in some areas as more owners list their homes for sale.”

November 9 – Bloomberg (Felice Maranz): “U.S. homebuilders are intentionally limiting sales due to widespread labor shortages and supply-chain issues. That’s concerning for the construction industry, particularly as the government prepares for a wave of infrastructure spending. D.R. Horton… earlier reported weaker-than-expected orders as materials and labor scarcity interfered with new home production. The company and fellow builder PulteGroup Inc., which has also been grappling with supply-chain problems, are both restricting sales.”

November 9 – Bloomberg (Alex Tanzi): “Americans are racking up bills on credit cards, returning to pre-pandemic habits after emergency relief programs ended and the economy reopened. Credit card balances increased by $17 billion to $800 billion in the third quarter, the second gain in a row after a year of declines, the Federal Reserve Bank of New York said... While the total number is $123 billion lower than at the end of 2019, the past two quarters mark a return to relative normalcy.”

November 9 – Bloomberg (John Gittelsohn): “Record numbers of cargo ships bob in the waters off Southern California, unable to unload. A late shipment of patio furniture gets moved -- three times -- before finding a home for the winter. With no warehouse space, a crew assembles holiday displays in a parking lot in an effort to get them to clients on time. It’s all fallout from the global supply-chain crisis that’s clogging U.S. ports, pushing warehouses to capacity and forcing logistics managers to scramble for space. And it’s making already scarce warehouse space even more valuable.”

November 8 – Bloomberg (Catherine Bosley): “The era of rock-bottom interest rates may be drawing to a close, courtesy of a stronger-than-expected surge in inflation and massive government spending, according to… Goldman Sachs… Although the aftermath of the 2008 collapse of Lehman Brothers was characterized by persistently weak price pressures and negative monetary policy, Jan Hatzius and colleagues reckon decisions by the Federal Reserve and European Central Bank to adopt new frameworks, investments to combat climate change and higher household savings will likely change that. ‘Stronger demand, especially for investment, along with the uptick in inflation expectations due to the pandemic inflation shock, suggest that we are on a long road to higher nominal interest rates relative to the post-global financial crisis world,’ the economists wrote…”

Fixed-Income Bubble Watch:

November 9 – Bloomberg (Paula Seligson): “U.S. high-yield bond sales reached an annual record of $432.4 billion... Cheap funding costs have unleashed a prolonged pile-on of debt issuance, and borrowers have been hurrying to take advantage of the opportunity before the Federal Reserve eventually raises interest rates. That could come sooner than expected amid inflation pressures…”

November 10 – Bloomberg (Lara Wieczezynski): “Year-to-date U.S. high-yield bond default volume stands at just $5.6 billion, the lowest tally since 2007, according to… Fitch… Corresponding YTD default rate is 0.4%, slightly below 2007 due to the significant market growth that has occurred since then.”

China Watch:

November 10 – Bloomberg: “China’s inflation risks are building as producers pass on higher costs to consumers, reigniting a debate over whether the central bank has scope to ease monetary policy to support a weakening economy and potentially adding to the pressure on global consumer prices. The producer price index climbed 13.5% from a year earlier, the fastest pace in 26 years and above economists’ median forecast for a 12.3% gain… The consumer price index rose 1.5%, the highest since September 2020 and exceeding the projected 1.4% gain… Vegetable prices have jumped since mid-October following supply disruptions… Their price rose 15.9% from a year ago… Prices of freshwater fish, eggs and edible vegetable oil also rose sharply in October from a year ago.”

November 7 – Reuters (Albee Zhang, Stella Qiu and Ryan Woo): “China's export growth slowed in October but beat forecasts… However, imports missed analysts' expectations, likely pointing to the overall weakness in domestic demand. Outbound shipments jumped 27.1% in October from a year earlier, slower than September's 28.1% gain. Analysts polled by Reuters had forecast growth would ease to 24.5%.”

November 7 – Financial Times (Tom Mitchell): “Xi Jinping has summoned hundreds of senior Chinese Communist party officials to Beijing for a meeting that is expected to pave the way for his unprecedented bid for a third term in power next year. The annual autumn meeting, or plenum, of the party’s Central Committee will review and approve a rare ‘resolution’ on Chinese history, and comes just four months after Xi presided over an elaborate celebration of the 100th anniversary of the party’s founding. Both Mao Zedong and Deng Xiaoping, the party’s two other transformational leaders to whom Xi compares himself, secured such resolutions at the beginning of their long tenures in power.”

November 11 – Financial Times: “The Chinese Communist party has passed its first ‘historical resolution’ in 40 years, in a development likely to pave the way for President Xi Jinping to stay in office until at least 2028. The resolution, formally adopted by the party’s central committee at the end of its annual meeting, or plenum…, declared that Xi’s leadership was ‘the key to the great rejuvenation of the Chinese nation’… The central committee typically holds one plenum a year, attended by its 370 full and alternate members at a military hotel on the western outskirts of Beijing. This week’s plenum opened on Monday and is particularly significant because it comes just a year before a party congress will appoint a new leadership team to serve until 2027.”

November 11 – Associated Press (Joe McDonald): “Leaders of China’s ruling Communist Party… set the stage for President Xi Jinping to extend his rule next year, praising his role in the country’s rise as an economic and strategic power and approving a political history that gives him status alongside the most important party figures. Central Committee members declared Xi’s ideology the ‘essence of Chinese culture’ as they wrapped up a leadership meeting. In unusually effusive language even for a Chinese leader, a party statement said it was ‘of decisive significance’ for ‘the great rejuvenation of the Chinese nation.’”

November 11 – Reuters (Kevin Yao, Cheng Leng, Zhang Yan and Samuel Shen): “China will stand firm on policies to curb excess borrowing by property developers even as it makes financing tweaks to help home buyers and meet ‘reasonable’ demand amid an industry liquidity crunch, say bankers and analysts… ‘There are absolutely no fundamental changes or relaxations on the property lending caps,’ said a banker at a state lender in Beijing… ‘But there's always leeway for lenders to adjust for themselves to reflect the latest guidance of 'meeting the normal financing needs' of both home buyers and developers.’”

November 11 – Financial Times: “China’s top banking regulator is set to complete an investigation into the relationship between Evergrande and a little-known Chinese regional bank, which could pose a new threat to the world’s most indebted property group and its billionaire founder Hui Ka Yan. Chinese media reported in May that the China Banking and Insurance Regulatory Commission (CBIRC)… was examining more than Rmb100bn ($15.6bn) of transactions involving the… developer and Shengjing Bank, a Hong Kong-listed lender it part-owned. The probe is nearing its final stages…”

November 10 – Reuters (Samuel Shen and Engen Tham): “Some real estate companies disclosed plans to issue debt in the inter-bank market at a meeting with China's inter-bank bond market regulator, the Securities Times reported… The meeting on Tuesday heralded the loosening of domestic bond policies, the Securities Times said... In the near future, real estate companies will issue bonds in the open market for financing, while banks and other institutional investors will assist via bond investment, said the paper.”

November 10 – Bloomberg: “Chinese developers’ bonds and stocks rallied on a report that authorities are likely to loosen controls for the nation’s real estate companies to issue local-currency notes, part of efforts to prevent a further deterioration in their financing. The Securities Times said the easing will center on the interbank bond market… While the report didn’t specify which rules would be loosened, Chinese junk-rated dollar bonds surged the most in three weeks, and an index of developer shares saw the biggest jump since February. Gains extended following speculation that officials may allow companies to acquire debt-laden property firms without breaching metrics known as the three red lines.”

November 11 – Reuters (Anshuman Daga, Clare Jim and Andrew Galbraith): “Cash-strapped developer China Evergrande Group once again averted a destabilising default with a last minute bond payment but the reprieve did little to alleviate strains in the country's wider property sector… Although the developer managed to sidestep imminent disaster, woes in the country's $5 trillion property sector showed no signs of abating with a wall of debt coming due.”

November 8 – Bloomberg (Sofia Horta e Costa): “Not even state-owned firms are safe from the deepening rout in Chinese developer bonds. Sino Ocean Group…, part-owned by the finance ministry, has become the latest property company to see its bonds slump. Its 4.75% note due 2030 fell Monday to as low as 73.48 cents on the dollar, with spreads over comparable Treasuries widening to a record 800 bps…”

November 10 – Wall Street Journal (Keith Zhai, Elaine Yu and Anniek Bao): “Some investors feared that China Evergrande Group, the world’s most indebted real-estate firm, would collapse spectacularly, triggering losses far and wide. Instead, the Chinese state is dismantling the giant developer slowly and behind the scenes, in what amounts to one of the biggest financial challenges Beijing has faced in years. The plan, according to people familiar… and official government statements, is to manage a controlled implosion by selling off some Evergrande assets to Chinese companies while limiting damage to home buyers and businesses involved in its projects. Chinese authorities must do this without bringing down the country’s epic property boom.”

November 8 – Financial Times: “Prices of newly constructed residential buildings in Wuhan have risen 6% in the past year. But in October, there were signs of a more concerning trajectory taking hold in the central Chinese city. A group of homebuyers protested last month after a developer cut prices by up to 30% at a project where they had already made purchases. Several demonstrators were detained… The issues in Wuhan are the latest sign that a crisis across the country’s real estate developers is putting pressure on house prices, heightening sensitivities around a property slowdown that already poses a threat to the wider Chinese economy. Over recent years, authorities have introduced measures to control carefully price increases… But at a time when the overall real estate industry is contracting and a host of developers have already defaulted, officials in some regions are also acting to stop price moves in the other direction. ‘Price controls are not just about price caps — local governments are also afraid of a sharp decline in price,’ said Ting Lu, chief China economist at Nomura. ‘They want to prevent developers from cutting prices [and] competing against each other too aggressively.’”

November 11 – Bloomberg: “Local governments in China will probably see a contraction in income from land sales next year, putting their finances under more pressure and prompting a renewed shift toward debt-financed growth, according to Moody’s… A drop in land sales revenue, which accounts for about one-third of regional governments’ income, will likely constrain fiscal funding for infrastructure, Moody’s analysts including Jack Yuan said… That will curb the economy’s expansion and intensify the policy dilemma between supporting growth and deleveraging, according to the report. ‘Highly indebted provinces with higher land-sales reliance, such as Guizhou, will face fiscal pressure in a property market slowdown,’ they said.”

November 8 – Reuters (Dominique Patton): “Older residents in Beijing recently stocked up on cabbage, giving a tradition a new lease of life after the government advised people to keep enough basic goods at home in case of emergencies. People have for years bought up dozens of large cabbages, which can be kept fresh for months and are widely used in local cuisine, in early November to see them through freezing winters. A government notice issued last Monday advising households to stock up on daily necessities and a snow forecast reinforced the rush this year… ‘Every year at this time the (cabbage) sales volume is high. But after the report came out, everyone rushed to buy even more,’ said Jia Jinzhi, a grower who sells cabbage…”

Central Banker Watch:

November 10 – Reuters (Dhara Ranasinghe and Sujata Rao): “For markets trying to navigate the pathway for stickier-than-expected inflation, a move to asymmetric price targets at the world's two biggest central banks may be a recipe for wild and increasingly frequent bond price swings. The U.S. Federal Reserve adopted in 2020 a flexible average inflation target (FAIT) designed to be more forgiving of price pressures than before, a major shift in the Fed's dual approach towards achieving maximum employment and stable prices. The European Central Bank followed this year, setting a 2% medium-term inflation target and ditching its long-established ‘below but close to 2%’ goal. Although both dismiss current price pressures as ‘transitory’, they are facing the first real test of these new frameworks. ‘Hindsight is a beautiful thing, but it is unfortunate timing that we had those reviews,’ said Rabobank… strategist Lyn Graham-Taylor. ‘Under the old mandates, we knew the reaction function of central banks. Now there's more uncertainty around that.’”

November 10 – Bloomberg (Jana Randow and Leonard Kehnscherper): “The European Central Bank could stop buying bonds as early as next September if inflation looks to have sustainably returned to the official target, Governing Council member Robert Holzmann said. Introduced in 2015, the bank’s asset purchase program, or APP, was designed to get consumer-price growth back to 2%... ‘So the elimination of the condition and therefore the end of the program could -- depending on the inflation development -- happen in September or at the end of the year,’ he told an event… ECB officials are five weeks away from a meeting to lay out their post-pandemic policy path.”

November 11 – Bloomberg (Maya Averbuch): “Mexico’s central bank raised interest rates by a quarter point for its fourth consecutive meeting, sticking to a steady adjustment pace even as inflation accelerated faster than expected. Policy makers… cast a split 4-1 vote to raise the key rate to 5%...”

November 11 – Bloomberg (MarĂ­a Cervantes): “Peru’s central bank tightened monetary policy for a fourth straight month after inflation accelerated to its fastest pace in more than 12 years. Policy makers, led by bank President Julio Velarde, raised their key interest rate by a half-point to 2%...”

November 11 – Bloomberg (Ken Parks): “Uruguay’s central bank accelerated the withdrawal of monetary stimulus with a 50 bps increase to its key interest rate amid a surge in consumer prices. The bank lifted the benchmark rate to 5.75% from 5.25%... to help lower inflation expectations that remain above its 3%-6% target. Its decision… follows a 25 bps increase in October and a 50 bps hike in August…”

November 10 – Bloomberg (Robert Brand): “Even as a number of central and east Europe’s monetary authorities have embarked on tightening cycles, they’re falling behind the curve, at least if real interest rates are anything to go by. That could weigh on the region’s currencies as developed nations start normalizing policy. Price increases in the Czech Republic and Romania accelerated more than economists’ expectations in October…, plunging their real rates deeper into negative territory. And they’re not the only ones in the region with below-zero real rates.”

Global Bubble Watch:

November 8 – Financial Times (John Paul Rathbone and Valentina Romei): “The surge in inflation is leaving the world’s leading economies with their lowest real interest rates in decades, as central banks delay any abrupt tightening of the extra-loose monetary policy… Real interest rates, which subtract inflation from central bank policy rates, reflect the real cost of borrowing and real return on savings. The combination of accelerating inflation in the US, eurozone and UK, and their central banks’ decision to remain patient when it comes to rate increases, effectively raises monetary stimulus despite these countries being close to recovering lost output from the crisis.”

November 8 – Financial Times (Hudson Lockett and Tabby Kinder): “Global holdings of Chinese stocks and bonds have jumped by about $120bn in 2021 as foreign investors chase returns in the country’s markets… International investors held Rmb7.5tn ($1.1tn) of equity and fixed income securities priced in renminbi as of the end of September, up about Rmb760bn from the end of 2020, according to Financial Times calculations.”

November 9 – Bloomberg (Ann Koh): “Truckers are striking against surging diesel prices across Asia’s emerging economies, threatening to add pressure to snarled global supply chains. The latest protest is taking place in Bangladesh, where truck owners and staff have stopped work since Friday, vowing to continue until the government reverses its decision to raise diesel prices by 23%... Port operations have been affected and cargo movement between districts is restricted, shipping line Hapag-Lloyd AG said in a customer advisory.”

EM Watch:

November 10 – Bloomberg (Andrew Rosati): “Brazil’s inflation sped up more than expected in October, spurring bets that the central bank will hike interest rates by as much as 2 percentage points in response to government plans for greater spending. Annual inflation accelerated to 10.67%, above all estimates… Consumer prices rose 1.25% from the month prior… It was the biggest rise for the month of October in nearly two decades. Policy makers have raised the interest rate by 575 bps since March amid surging cost of living increases.”

November 9 – Reuters (Noe Torres): “From the auto industry to producers of toilet paper and cement, Mexican companies have been hit hard by bottlenecks in international supply chains, depressing growth prospects for Latin America's second-largest economy. Thousands of vehicles have sat on Mexican assembly lines awaiting missing semiconductors, but the impact of raw material shortages has been felt right across the corporate landscape. Time and again in third quarter reports, companies flagged concerns over the disruptions that are increasingly bleeding into their bottom line in Mexico, an economy built around free trade that depends heavily on international supply chains.”

Europe Watch:

November 10 – Bloomberg (Catherine Bosley): “Germany’s council of economic advisers urged the European Central Bank to publish a strategy for normalizing its ultra-expansive monetary policy in light of building inflation risks. The four-member group sees inflation in the euro-area’s largest economy averaging 3.1% in 2021 and 2.6% in 2022, and warned that persistent supply-chain logjams and rising fuel prices could turn temporary factors into lasting higher rates of inflation. ‘There are risks to the upside for the inflation outlook for the coming years,’ the advisers said… The ECB ‘should communicate a normalization strategy soon,’ with quantitative metrics for the unwinding of its ultra-loose policy… Popular tabloid Bild has published several articles criticizing the ECB’s ultra-loose monetary policy…”

November 10 – Financial Times (Martin Arnold in Frankfurt and Guy Chazan): “Germany risks becoming the eurozone’s economic laggard, as economists worry that restrictions to contain a fresh surge in Covid-19 infections will hit consumer activity and compound the supply chain problems already throttling industrial output. The German Council of Economic Experts, which advises the government, became the latest group to cut its forecasts for growth…, warning that supply problems are taking a greater toll than expected on manufacturers. ‘These supply-side bottlenecks are slowing down industrial production above all, and Germany is affected particularly badly by this, more than countries in which industry makes up a smaller share of GDP,’ said Volker Wieland, professor of monetary economy at… Goethe university.”

November 10 – Reuters (Christian Kraemer): “Germany's federal government finances are in a critical state and the next government must consolidate them, the federal audit office said… in a warning shot to parties working to form a ruling coalition who are considering taking on more debt. The centre-left Social Democrats (SPD), the ecologist Greens and the pro-business Free Democrats (FDP) face a massive spending problem as they agreed in exploratory talks to return to strict debt limits from 2023 and avoid tax increases.”

Japan Watch:

November 10 – Reuters (Leika Kihara): “Japan’s wholesale inflation hit a four-decade high in October, following a similar spike in China’s factory gate prices as supply bottlenecks and rising commodity costs threatened Asian corporate profits. The rising cost pressures, coupled with a weak yen that inflates the price of imported goods, adds to pain for the world’s third-largest economy as it emerges from the consumer slump caused by the pandemic… The corporate goods price index (CGPI), which measures the prices companies charge each other for their goods and services, surged 8.0% in October from a year earlier, exceeding market expectations for a 7.0% gain…”

November 8 – Reuters (Yoshifumi Takemoto and Daniel Leussink): “Japan is considering an economic stimulus package worth more than 30 trillion yen ($265bn) aimed at easing the pain from the COVID-19 pandemic, a plan that would require issuing new debt, Kyodo news reported.”

November 8 – Bloomberg (Leika Kihara): “Bank of Japan (BOJ) policymakers see the need to maintain ultra-easy policy as inflation is rising only modestly and wage growth remains feeble, a summary of opinions from their October meeting showed… The nine-member board also sounded sanguine about recent yen declines, with one member saying it reflected the differentials in the inflation and monetary policy stances between Japan and other countries.”

November 9 – Reuters (Kantaro Komiya): “Japanese manufacturers' business confidence fell to a seven-month low in November due to ongoing supply shortages, while sentiment in the services sector hit a three-month high on easing coronavirus curbs, the Reuters Tankan poll showed. The mood among manufacturers deteriorated for the third month…”

Social, Political, Environmental, Cybersecurity Instability Watch:

November 6 – Associated Press (Seth Borenstein): “While conducting research in Greenland, ice scientist Twila Moon was struck this summer by what climate change has doomed Earth to lose and what could still be saved. The Arctic is warming three times faster than the rest of the planet and is on such a knife’s edge of survival that the U.N. climate negotiations underway in Scotland this week could make the difference between ice and water at the top of the world in the same way that a couple of tenths of a degree matter around the freezing mark, scientists say. Arctic ice sheets and glaciers are shrinking, with some glaciers already gone. Permafrost, the icy soil that traps the potent greenhouse gas methane, is thawing. Wildfires have broken out in the Arctic. Siberia even hit 100 degrees…”

Leveraged Speculation Watch:

November 8 – Bloomberg (Garfield Reynolds): “Hedge funds look to have gotten their timing very wrong, piling into bullish short-term Treasury bets ahead of some of the steepest yield spikes in years. Leveraged funds built up bullish bets on two-year Treasury futures and Eurodollar contracts at the fastest pace on record over the last four weeks… The seemingly mistimed bets came amid convulsions in the bond market as investors brought forward wagers on global rate hikes, only to have central bankers seek to push them back.”

November 9 – Financial Times (Kate Duguid): “Element Capital sustained a roughly $1bn loss last month, making the New York hedge fund run by Jeffrey Talpins one of the highest-profile victims of the October tumult across bond markets. Element, which with $15bn in assets is one of the world’s biggest macro hedge funds, lost 6.7% in October, according to people familiar with the fund’s performance. That takes the firm’s loss this year to 9.9%.”

November 11 – Financial Times (Robin Wigglesworth): “Computer-powered hedge fund group AQR Capital Management is to remove five partners from its ranks and trim its bond arm, continuing to retrench operations after several lean years for many systematic trading strategies. The $137bn investment group led by Clifford Asness has been a pioneer of ‘quantitative’ investment strategies that attempt to profit from long-term market signals, rather than traditional human traders and fund managers. AQR’s assets under management peaked at $226bn in mid-2018, but since then many of the main strategies it uses have fizzled, deflating its size and leading to several rounds of job cuts…”

Geopolitical Watch:

November 7 – The Hill (Ellen Mitchell and Jordan Williams): “China’s military buildup and its push to develop nuclear-capable missiles is unnerving Congress and U.S. defense officials alike. America’s defense establishment has watched threats from Beijing rapidly grow in multiple areas, including recent hypersonic missile tests, an expanding nuclear arsenal, strides in space and cyber and seemingly daily threats to Taiwan. ‘We’re witnessing one of the largest shifts in global geo-strategic power the world has witnessed,’ Joint Chiefs of Staff Chairman Gen. Mark Milley said… ‘They are clearly challenging us regionally and their aspiration is to challenge the United States globally.’ A potential shift in the global balance of power is worrisome to U.S. officials and lawmakers.”

November 7 – Bloomberg (Iain Marlow): “The Chinese military is using mock-ups of a U.S. aircraft carrier at a weapons-testing range in a remote western desert, new satellite imagery shows, indicating the People’s Liberation Army is focused on neutralizing a key tool of U.S. power. Satellite images depict targets in the shape of a carrier and two Arleigh Burke-class guided missile destroyers at a testing facility in the Ruoqiang area of Xinjiang’s Taklamakan desert… Both types of vessels are deployed by the U.S. Seventh Fleet, which patrols the Western Pacific including the waters around Taiwan.”

November 9 – Reuters (Meg Shen, Ryan Woo, Yew Lun Tian and Yimou Lee): “China's military said… it had conducted a combat readiness patrol in the direction of the Taiwan Strait, after its defence ministry condemned a visit to Taiwan by a U.S. congressional delegation it said had arrived on a military aircraft. The patrol was aimed at the ‘seriously wrong’ words and actions of ‘relevant countries’ on the Taiwan issue and the activities of pro-independence forces in Taiwan, a Chinese military spokesperson said…”

November 11 – Bloomberg (Nick Wadhams): “Secretary of State Antony Blinken said allied nations would be prepared to ‘take action’ if China uses force against Taiwan, though he again refused to say whether the Biden administration would be prepared to use the U.S. military in such a conflict. ‘There are many countries both in the region and beyond that would see any unilateral action to use force to disrupt the status quo as a significant threat to peace and security,’ Blinken said… ‘And they too, would take action in the event that happened.’ Blinken was responding to a question about the extent of the U.S. commitment to Taiwan…”

November 8 – Bloomberg (Yimou Lee): “China's armed forces are capable of blockading Taiwan's key harbours and airports, the island's defence ministry said…, offering its latest assessment of what it describes as a ‘grave’ military threat posed by its giant neighbour… Taiwan's defence ministry, in a report it issues every two years, said China had launched what it called ‘gray zone’ warfare, citing 554 ‘intrusions’ by Chinese war planes into its southwestern theatre of air defence identification zone between September last year and the end of August.”

November 10 – Reuters (Josh Horwitz): “China's foreign ministry said… that a visit to Taiwan by a U.S. congressional delegation violates the One China policy, and that the United States must immediately stop all forms of official interaction with Taiwan. It is a dangerous game to collude with pro-independence forces in Taiwan, Wang Wenbin, a spokesman at the Chinese foreign ministry, said…”

November 11 – Reuters (Maxim Rodionov): “Belarusian leader Alexander Lukashenko said… he needed Russian nuclear-capable bombers to help him navigate a migrant crisis at the Poland-Belarus border after two Russian Tu-160 planes rehearsed bombing runs in a training exercise. It was the second day running that Russia had sent strategic bomber planes to overfly Belarus in a show of support for its close ally Minsk, which the European Union has accused of mounting a ‘hybrid attack’ by pushing migrants from the Middle East, Afghanistan and Africa across the border into Poland.”

November 11 – Bloomberg (Aliaksandr Kudrytski): “Belarusian President Alexander Lukashenko threatened to shut down a key pipeline carrying Russia gas to the European Union, escalating a dispute flaring over migrants seeking to cross from his country into the EU. Together with the U.K. and U.S., the bloc is planning more sanctions on the isolated authoritarian leader, who has turned to Moscow for economic and political support.”

November 10 – Reuters (Dmitry Antonov and Robin Emmott): “The European Union accused Belarus… of mounting a ‘hybrid attack’ by pushing migrants across the border into Poland, paving the way for widened sanctions against Minsk in a crisis that threatens to draw in Russia and NATO. Russia took the rare step of dispatching two nuclear-capable strategic bombers to patrol Belarusian airspace in a show of support for its close ally. Poland briefed fellow NATO allies at a closed-door meeting and they pledged their support, an alliance official said. Migrants from the Middle East, Afghanistan and Africa trapped in Belarus made multiple attempts to force their way into Poland overnight, Warsaw said, announcing that it had reinforced the border with extra guards.”

November 10 – Reuters (Dmitry Antonov, Maria Kiselyova, Andrew Osborn and Tom Balmforth): “Russia blamed the European Union… for the migrant crisis on the border between Belarus and Poland, accusing it of trying to ‘strangle’ Belarus with plans to close part of the frontier and urging it to talk directly with Minsk. As migrants from the Middle East, Afghanistan and Africa made new attempts to break into Poland overnight, Moscow sent a further signal of support for its ally Belarus by dispatching two strategic bomber planes to patrol Belarusian airspace.”

November 7 – Associated Press (Qassim Abdul-Zahra): “The failed assassination attempt against Iraq’s prime minister at his residence on Sunday has ratcheted up tensions following last month’s parliamentary elections, in which the Iran-backed militias were the biggest losers. Helicopters circled in the Baghdad skies throughout the day, while troops and patrols deployed around Baghdad and near the capital’s fortified Green Zone, where the overnight attack occurred. Supporters of the Iran-backed militias held their ground in a protest camp outside the Green Zone to demand a vote recount.”

Friday Afternoon Links

[Yahoo/Bloomberg] U.S. Stocks Rise in Shadow of Inflation Pressure: Markets Wrap 

[Yahoo/Bloomberg] Coffee Prices Hit Highest in Seven Years on Global Supply Threats

[AP] Americans quit their jobs at record pace for 2nd month

[Reuters] Column: Wall Street dancing to real yield tune amid inflation mood music

[CNBC] Manhattan’s luxury real estate market is setting records. Here’s what $50 million can buy