Friday, December 3, 2021

Weekly Commentary: Walk the Walk

Senator Pat Toomey: “Mr. Powell, under the Fed’s new flexible average inflation targeting the inflation target remains at 2%... Core PCE, the Feds preferred inflation metric, is running above 2% over the past five years, nearly 3% over the past two years, and 4.1% over the past year. So, it’s above target; it has been above target and it’s accelerating. Yet, the Fed has maintained an extraordinary emergency monetary policy stance. It looks to me like this framework appears to be a weakening of the Fed’s commitment to stable prices. Now I know you believe this is transitory. But everything is transitory. Life is transitory. How long does inflation have to run above your target before the Fed decides maybe it’s not so transitory?”

Jerome Powell: “Well, first of all, the test that we’ve articulated I think clearly has been met now. You’re absolutely right: Inflation has run well above 2% for long enough that, if you look back a few years, inflation averages 2%. So, I think we can say that it was not the case going into this episode. It had been many years since we had inflation at 2%. I think the word transitory has different meanings to different people. To many, it carries a sense of short lived. We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation. I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”

Powell: “Remember that every dollar of asset purchases actually adds accommodation to the economy. But at this point, the economy is very strong and inflationary pressures are high and it is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases - which we actually announced at the November meeting - perhaps a few months sooner. And I expect that we will discuss that at our upcoming meeting in a couple of weeks. Of course, between now and then, we will see another labor market report, another inflation report, and we’ll also get a better sense of the new Covid variant, as well, before we make that decision.”

Chair Powell (and the Fed) stepped away from the ledge. Their dismissive approach to inflation risk was both untenable and an increasing embarrassment. Institutional credibility has taken a major hit, while attempts to repair the damage will have the Fed “talking the talk” of a traditional central bank focus on stable prices and financial stability.

It’s been a while (1994), since inflation concerns spurred the Fed to tighten financial conditions. Will the Fed actually prioritize its stable prices mandate above other considerations, most prominently the level of securities prices? Will the Fed – or even can they – “Walk the Walk” in reining in consumer inflation at the expense of bursting securities and asset Bubbles?

There’s no doubt that neglect has left the Fed hopelessly “behind the curve”. Conventional thinking today has it that the Federal Reserve will be forced into more aggressive tightening measures, to the detriment of booming markets and the economic expansion.

Mohamed El-Erian: “The problem now is that such a late wake-up to the reality of inflation increases the risks of mismanaging its policy catch-up process, exposing the economy to a higher risk of an unnecessary, Fed-induced slowdown.”

December 3 – Bloomberg (Christopher Anstey): “Former Treasury Secretary Lawrence Summers said that Federal Reserve Chair Jerome Powell ought to signal the possibility of raising interest rates four times next year, in order to restore what he argues is the central bank’s lost credibility on fighting inflation. ‘I’d be signaling four rate increases next year – with two-sided uncertainty, depending on how the inflation figures of work out,’ Summer said… ‘That will be a jolt. But a jolt is what is required to restore credibility.’”

“Slamming on the brakes” is undoubtedly out of the question. Moreover, there is now significant risk associated with the Fed's attempt to revive its inflation fighting credentials. And count me skeptical a “jolt” will help with the Fed’s credibility problem. Mainly, I see a greater unappreciated risk: Faltering U.S. and global markets will be putting intense pressure on the Federal Reserve (and central bank community) to again stabilize markets with large liquidity injections. Will the Fed “Walk the Walk” on reining in inflation when bursting speculative Bubbles beckon for another bout of aggressive monetary support? Ten-year Treasury yields, this week dropping 13 bps to 1.35%, are not signaling a hawkish rate tightening cycle.

We’re now only 11 days from the start of the Fed’s final (two-day) meeting of 2021. Chair Powell and other Fed officials have suggested an openness to accelerating the taper – perhaps doubling the QE reduction to $30 billion monthly. This would end taper by March, presumably creating the possibility for an initial rate increase at the FOMC’s March 16th meeting.

Right now, 11 days seems an eternity. It’s been awhile since the FOMC faced a difficult decision. Their only bold moves have been pain-free openings of the monetary floodgates. It’s going to be a close call, but I doubt the Fed will double the pace of its taper. And I don’t see them signaling earlier rate increases. They’ll surely talk inflation. But I suspect their worries will be centered on Global Crisis Dynamics by December 15th. It would not surprise me to see the next move on QE to put taper on hold. And it may be weeks away, but I expect the next major move on the Fed’s balance sheet to be to the upside. I would bet on the Fed’s balance sheet surpassing $10 TN in 2022. I’ll place 50/50 odds on $12 TN.

Global crisis dynamics now accelerate weekly. What started in China and soon infected the “Periphery” has reached the “Core.” Chinese developers suffered a miserable week, as evidence mounts that China’s collapsing apartment Bubble is impacting confidence and the general economy. Meanwhile, the Turkish lira lost another 10% this week, with y-t-d losses up to 46%. Turkey faces brutal financial and economic crises. Who’s next? Global de-risking/deleveraging is gaining momentum, as contagion feasts on heightened risk aversion and waning liquidity.

If the backdrop wasn’t sufficiently perilous, there’s Delta and Omicron. Things are unfolding quickly, but the initial narrative associated with Omicron has been that “mild symptoms” leave little to be concerned with. My concerns became more elevated as the week progressed.

December 3 – Bloomberg (Amogelang Mbatha): “South Africa’s daily number of confirmed Covid-19 cases almost quadrupled from Tuesday as the omicron variant spreads across the country. The country recorded 16,055 infections in the last 24 hours and the positivity rate accelerated to 24.3% of tests from 16.5% on Tuesday… Hospitals reported an increase of 279 admissions in the past 24 hours, bringing the total to 3,202.”

December 3 – Washington Post (Amy Cheng): “Scientists in South Africa say omicron is at least three times more likely to cause reinfection than previous variants such as beta and delta, according to a preliminary study published Thursday. Statistical analysis of some 2.8 million positive coronavirus samples in South Africa, 35,670 of which were suspected to be reinfections, led researchers to conclude that the omicron mutation has a ‘substantial ability to evade immunity from prior infection.’ Scientists say reinfection provides a partial explanation for how the new variant has been spreading. The elevated risk of being reinfected is ‘temporally consistent’ with the emergence of the omicron variant in South Africa, the researchers found.”

The article quoted Juliet Pulliam, the director of an epidemiological modeling center at the University of Stellenbosch and one of the study’s authors: “Contrary to our expectations and experience with the previous variants, we are now experiencing an increase in the risk of reinfection that exceeds our prior experience.” And from Stellenbosch University professor Tulio de Oliveira: “Omicron is probably the fastest-spreading variant that South Africa has ever seen.”

December 3 – New York Times (Apoorva Mandavilli and Lynsey Chutel): “If the finding holds up elsewhere, Omicron may be more difficult to contain than previous iterations of the coronavirus, lengthening the pandemic… ‘It is actually really striking how quickly it seems to have taken over,’ said Juliet Pulliam, the director of an epidemiological modeling center at the University of Stellenbosch in South Africa… Omicron cases in particular are doubling roughly every three days in Gauteng province, home to South Africa’s densely populated economic hub and now the epicenter of the country’s fourth wave of infections… In a mathematical analysis, they estimated the variant’s Rt — a measure of how quickly a virus spreads — and compared it to the metric for Delta. They found that Omicron’s Rt is nearly 2.5 times higher than that of Delta… The rise in cases in South Africa has been accompanied by a week-over-week increase in hospital admissions, already higher than seen in previous waves…”

December 3 – Bloomberg: “The omicron variant is now in at least 10 U.S. states, and White House chief medical adviser Anthony Fauci said there is ‘absolutely’ community spread… The states of New Jersey, Pennsylvania, Missouri, Maryland and Nebraska reported omicron infections on Friday, and cases are guaranteed to keep on rising in the coming days... Covid-19 infections in the U.S. have reached the highest level in two months.”

December 3 – Washington Post (Lenny Bernstein, Frances Stead Sellers and Fenit Nirappil): “The Minnesota man who contracted the omicron variant of the coronavirus met up with about 35 friends at a New York City anime convention and about half have tested positive for the coronavirus… Members of the group traveled to New York from a variety of states for the weekend convention that began Nov. 19 and tested positive after their return, said Kris Ehresmann, director of the Infectious Disease Epidemiology, Prevention, and Control Division at the Minnesota Department of Health… ‘We don't know if we'll see a lot of omicron, or we’ll see a lot of delta,’ Ehresmann said... ‘But we're likely to see a lot of covid’ out of the convention, which drew 53,000 people and tightly packed crowds from Nov. 19 to 21.”

What the world has learned in a week: Omicron is highly contagious. It also appears antibodies from previous Covid infections have reduced effect on the Omicron variant. Over 10% of those hospitalized with Omicron in South Africa are children. There were earlier in the week encouraging comments from Israel regarding the efficacy of vaccines against Omicron, although some Israeli scientists are not yet convinced.

As of yet, there are limited infections in individuals either unvaccinated or without previous infections (estimates of up to 70% of the South African population likely to have suffered a previous Covid infection). It will take weeks before a clear picture of symptom severity, hospitalizations and deaths from Omicron develops.

Fragile global markets will struggle with weeks of Delta and Omicron uncertainties. Having missed its timing, the Fed must decide how comfortable it is to adopt a “hawkish pivot” into an unfolding Global Financial Crisis. They’ve dug themselves such a deep hole. If they uncharacteristically turn their backs on panicked markets, the great unravel could begin in earnest.

The VIX (equities volatility) Index traded Friday to the highest level (35) since January. High-yield and Investment-grade Credit default swap (CDS) prices rose to one-year highs. The spread between 10-year and two-year Treasury yields sank 22 bps to a one-year low. The five-year Treasury “breakeven” inflation rate dropped 20 bps to a six-week low 2.75%. The Bloomberg Commodities Index sank 4.4 points, or 4.3%, the largest weekly drop since March 2020. Natural Gas collapsed 24%. “Oil Posts Longest Run of Weekly Losses since 2018…”

The week was noteworthy for de-risking/deleveraging seemingly attaining important momentum. The global leveraged speculating community is increasingly frazzled and stunned by the prospect of a market rout into year-end. And there has surely been significant hedging over the past two weeks. Meanwhile, Omicron may be enough to subdue the over-confident buy the dippers.

The important December expiration of options and other derivatives comes two days following the Fed meeting. Markets have grown comfortable watching bouts of derivative hedging guarantee a rally and unwind of hedges into expiration. But things can always go the other way. Masses of outstanding puts and bearish derivatives create the potential for a self-reinforcing market breakdown. The Fed has painted itself into a corner. If they want to “Walk the Walk,” they’ll have to disregard market risk and unveil its newfound tough stance on inflation. I’ll believe that when I see it.

For the Week:

The S&P500 fell 1.2% (up 20.8% y-t-d), and the Dow declined 0.9% (up 13.0%). The Utilities gained 1.0% (up 7.6%). The Banks dropped 3.2% (up 33.2%), and the Broker/Dealers slumped 2.2% (up 24.3%). The Transports declined 1.5% (up 27.7%). The S&P 400 Midcaps dropped 2.8% (up 17.1%), and the small cap Russell 2000 sank 3.9% (up 9.3%). The Nasdaq100 dropped 2.0% (up 21.9%). The Semiconductors rose 1.3% (up 36.1%). The Biotechs fell 3.2% (down 9.0%). With bullion down $19, the HUI gold index slumped 4.0% (down 17.9%).

Three-month Treasury bill rates ended the week at 0.0425%. Two-year government yields jumped nine bps to 0.59% (up 47bps y-t-d). Five-year T-note yields declined three bps to 1.13% (up 77bps). Ten-year Treasury yields dropped 13 bps to 1.35% (up 43bps). Long bond yields sank 15 bps to 1.68% (up 3bps). Benchmark Fannie Mae MBS yields declined one basis point to 1.99% (up 65bps).

Greek 10-year yields dropped nine bps to 1.19% (up 57bps y-t-d). Ten-year Portuguese yields fell eight bps to 0.28% (up 25bps). Italian 10-year yields declined six bps to 0.92% (up 37bps). Spain's 10-year yields fell eight bps to 0.35% (up 30bps). German bund yields declined five bps to negative 0.39% (up 18bps). French yields dropped seven bps to negative 0.03% (up 31bps). The French to German 10-year bond spread narrowed two to 36 bps. U.K. 10-year gilt yields fell eight bps to 0.75% (up 55bps). U.K.'s FTSE equities index rallied 1.1% (up 10.2% y-t-d).

Japan's Nikkei Equities Index dropped 2.5% (up 2.1% y-t-d). Japanese 10-year "JGB" yields slipped two bps to 0.05% (up 3bps y-t-d). France's CAC40 increased 0.4% (up 21.9%). The German DAX equities index declined 0.6% (up 10.6%). Spain's IBEX 35 equities index fell 1.9% (up 2.1%). Italy's FTSE MIB index added 0.3% (up 16.7%). EM equities rallied. Brazil's Bovespa index jumped 2.8% (down 11.7%), and Mexico's Bolsa recovered 2.2% (up 14.8%). South Korea's Kospi index gained 1.1% (up 3.3%). India's Sensex equities index rallied 1.0% (up 20.8%). China's Shanghai Exchange rose 1.2% (up 3.9%). Turkey's Borsa Istanbul National 100 index surged 7.5% (up 29.4%). Russia's MICEX equities index recovered 2.7% (up 19.0%).

Investment-grade bond funds saw outflows of $3.860 billion, and junk bond funds had negative flows of $2.623 billion (from Lipper).

Federal Reserve Credit last week dropped $41.0bn to $8.610 TN. Over the past 116 weeks, Fed Credit expanded $4.884 TN, or 131%. Fed Credit inflated $5.800 Trillion, or 206%, over the past 473 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week sank $16.5bn to a one-year low $3.459 TN. "Custody holdings" were down $9.0bn, or 0.3%, y-o-y.

Total money market fund assets jumped $23.7bn to $4.621 TN. Total money funds increased $301bn y-o-y, or 7.0%.

Total Commercial Paper declined $8.3bn to $1.094 TN. CP was up $126bn, or 13.0%, year-over-year.

Freddie Mac 30-year fixed mortgage rates added one basis point to 3.11% (up 40bps y-o-y). Fifteen-year rates declined three bps to 2.39% (up 13bps). Five-year hybrid ARM rates increased two bps to 2.49% (down 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up five bps to 3.22% (up 28bps).

Currency Watch:

For the week, the U.S. Dollar Index was little changed at 96.12 (up 6.9% y-t-d). For the week on the upside, the Mexican peso increased 3.1%, the South African rand 1.3%, the South Korean won 1.1%, the Swiss franc 0.6%, the Japanese yen 0.5%, and the Swedish krona 0.2%. For the week on the downside, the Australian dollar declined 1.7%, Norwegian krone 1.1%, the Brazilian real 0.9%, the British pound 0.8%, the New Zealand dollar 0.7%, and the Canadian dollar 0.4%. The Chinese renminbi increased 0.26% versus the dollar (up 2.36% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index sank 4.3% (up 22.7% y-t-d). Spot Gold fell $19 to $1,783 (down 6.1%). Silver dropped 2.7% to $22.52 (down 14.7%). WTI crude dropped $1.89 to $66.26 (up 37%). Gasoline dropped 3.8% (up 39%), and Natural Gas sank 24.1% (up 63%). Copper dipped 0.6% (up 21%). Wheat dropped 4.3% (up 36%), and Corn declined 1.3% (up 21%). Bitcoin lost $1,313 or 2.4%, this week to $52,405 (up 80%).

Coronavirus Watch:

December 3 – Bloomberg (Loni Prinsloo and Antony Sguazzin): “South Africa’s National Institute for Communicable Diseases said that 68% of Covid-19 hospital admissions in the Tshwane municipal area during the early part of the fourth wave were under 40 years old. That compares with 66.1% of admissions being over 50 in the early part of the third wave, it said… In the early part of the fourth wave 32.9% of admissions were severe, compared with 66.1% in the same period of the third wave. The NICD said 11% of hospital admissions were under 2 years old.”

November 29 – Associated Press (Jamey Keaten, Raf Casert and Mari Yamaguchi): “The World Health Organization warned Monday that the global risk from the omicron variant is ‘very high’ based on the early evidence, saying the mutated coronavirus could lead to surges with ‘severe consequences.’ The assessment from the U.N. health agency, contained in a technical paper issued to member states, amounted to WHO’s strongest, most explicit warning yet about the new version that was first identified days ago by researchers in South Africa.”

November 30 – Financial Times (Jamie Smyth): “The chief executive of Moderna has predicted that existing vaccines will be much less effective at tackling Omicron than earlier strains of coronavirus and warned it would take months before pharmaceutical companies could manufacture new variant-specific jabs at scale. Stéphane Bancel said the high number of Omicron mutations on the spike protein… and the rapid spread of the variant in South Africa suggested that the current crop of vaccines may need to be modified next year. ‘There is no world, I think, where [the effectiveness] is the same level . . . we had with [the] Delta [variant],’ Bancel told the Financial Times…”

December 1 – Financial Times (Chris Giles): “The Omicron coronavirus variant threatens to intensify imbalances that are slowing growth and raising costs, the OECD said… as it significantly increased its inflation forecasts from three months ago. The new variant… could delay the world economy’s return to normality, the… international organisation of largely rich country members warned. Monetary policymakers should be ‘cautious’, the OECD added, saying that the most urgent policy requirement was to accelerate deployment of Covid vaccines globally.”

December 2 – Bloomberg (Antony Sguazzin and Janice Kew): “The omicron coronavirus variant is spreading faster in Gauteng, the epicenter of the latest outbreak in South Africa, than the delta strain or any of the earlier mutations, an adviser to the provincial government said. There is the ‘strongest acceleration in community transmission ever seen in South Africa,’ Bruce Mellado, the adviser, said... This is ‘consistent with dominance of a variant that is more transmissible,’ he said.”

December 2 – Wall Street Journal (Joanna Sugden, Gabriele Steinhauser and Drew Hinshaw): “Scientists in South Africa tracking the spread of Omicron said… they are seeing a rise in coronavirus reinfections in people who had recovered from Covid-19 as the country reported another sharp daily rise in new cases. The scientists’ conclusions suggest previous infection provides less protection against the new variant than against earlier versions. ‘Previous infection used to protect against Delta, and now with Omicron it doesn’t seem to be the case,’ Professor Anne Von Gottberg from the National Institute for Communicable Diseases… said…”

December 2 – Reuters (Francesco Guarascio and Josephine Mason): “The European Union's public health agency said… that the Omicron variant could be responsible for more than half of all COVID-19 infections in Europe within a few months… ‘Based on mathematical modelling conducted by ECDC, there are indications that Omicron could cause over half of all SARS-CoV-2 infections in the EU/EEA within the next few months,’ the European Centre for Disease Prevention and Control (ECDC) said…”

Global Crisis Watch:

December 1 – Reuters (Dasha Afanasieva): “Minutes before President Tayyip Erdogan delivered a speech renouncing high interest rates once again, the Turkish central bank said it was selling dollars to support the lira. The bank has $25 billion of net reserves as of November, down from $28 billion the month before. But that includes another $48 billion of swaps from local banks, without which reserves are firmly in negative territory. It’s a flawed bid to support Erdogan’s ultra-loose monetary policy, which has caused the lira to fall more than 40% versus the dollar this year. Propping up the currency might slow Turkey’s descent into hyperinflation, but the country’s pot of dollars risks running out. The bank sold some $128 billion to steady the lira in 2019-2020 and still had to hike rates… The lower reserves fall, the more likely another depreciation becomes. Erdonomics is a pricey endeavour.”

December 1 – Reuters (Ezgi Erkoyun): “Turkish President Tayyip Erdogan appointed a strong supporter of his low interest rate drive as minister of treasury and finance…, replacing the last top official seen to favour orthodox policy in a government gripped by a currency meltdown. Nureddin Nebati was appointed after his predecessor Lutfi Elvan asked to be ‘released from his duties’…, as the lira hit a series of record lows - hammered by market concerns at the direction of economic policy… Erdogan has fired three central bank governors since mid-2019, and dismissed three of the bank's senior policymakers in October.”

December 1 – Bloomberg (Onur Ant): “With political discontent growing in Turkey and scattered protests breaking out, President Recep Tayyip Erdogan’s disregard for the value of the lira may have reached a breaking point. The central bank’s move to spend about $1 billion to halt a precipitous decline in the currency shows that policymakers are increasingly worried about Erdogan’s plan for economic transformation… Now investors are openly wondering how much monetary authorities can do to ward off a deeper crisis. Judging by the lira’s muted response to… intervention, investor confidence remains bleak. It looks like a ‘sign of desperation,’ said Mike Harris, the founder of… Cribstone Strategic Macro.”

December 2 – Bloomberg (Maria Elena Vizcaino): “Fitch Ratings cut the outlook on Turkey’s sovereign credit rating to negative, citing a deterioration in domestic confidence as a result of monetary easing the credit assessor described as ‘premature.’”

December 1 – Bloomberg (Olivia Raimonde, Bruce Douglas and Clara Hernanz Lizarraga): “Global junk bonds suffered their worst November in 10 years after the omicron variant supercharged concerns over economic growth, inflation and tightening monetary policy. The yield on non-investment grade bonds worldwide, excluding emerging markets, climbed 50 bps in November to 4.89%... It’s the biggest monthly jump in yields since the pandemic first roiled markets in March 2020. The Bloomberg U.S. Corporate High Yield Bond Index suffered its biggest monthly loss since September 2020.”

Market Mania Watch:

November 27 – Bloomberg (Lu Wang and Nikos Chrysoloras): “One reason the first Covid crash was so brutal back in March 2020 was all the froth that built up in markets before the virus landed. While there are differences for traders navigating the latest scare, a lot is the same, too. Chief among the similarities is a prevailing sense of comfort that investors found in solid economic data, robust earnings and an accommodative Federal Reserve. From retail amateurs to professional money managers, equity positioning sits at levels of bullishness that could exacerbate a reversal. Viewed from the perspective of valuations, the stock market is notably more stretched than it was at the 2020 turning point.”

December 3 – Reuters (Rodrigo Campos): “Portfolio flows to emerging markets slowed by $100 billion last month from a year earlier and decelerated from October, hit by increased bets on tighter U.S. monetary policy and by weaker EM currencies, the Institute of International Finance (IIF) said. Non-resident flows to emerging markets landed at $15.6 billion last month, compared with $18.6 billion in October and $115.5 billion in November 2020, IIF data showed…”

Market Instability Watch:

November 28 – Bloomberg (Joanna Ossinger and Lu Wang): “The fate of global markets now depends at least in part on laboratories around the world probing the omicron Covid-19 strain, potentially leaving investors with weeks of uncertainty in the wait for answers.”

December 1 – Bloomberg (Michael MacKenzie, Liz Capo McCormick and Garfield Reynolds): “Bond volatility is accelerating as Covid-19 and inflation fears play havoc with the policy outlook… The whipsaw trading in bonds is threatening to compound the nervousness that has spread across financial markets as the recovery from the pandemic threatens to go off the rails. The higher the debt-market volatility gets, the greater the prospect it will filter through to spook stocks, which are still not far from record highs despite this week’s declines.”

November 27 – Bloomberg (Devika Krishna Kumar): “Black Friday turned red very quickly for global oil markets. The day after Thanksgiving has been choppy before -- fewer traders can mean more volatility -- but nothing like this year. The prospect of the freshly named Omicron variant of Covid derailing the world’s fight against the pandemic saw an early morning sell-off become a full-blown crash. At the end, investors were rushing to cover short positions, analysts were ripping up forecasts and next week’s OPEC+ meeting was up in the air. West Texas Intermediate oil, the U.S. benchmark, closed 13% lower, the biggest decline since April 2020.”

November 28 – Financial Times (Robin Wigglesworth): “Investors have been blithely skating into the Christmas period, basking in another remarkable rally across financial markets. But the ice underneath may be thinner and brittler than many realise, as Friday’s violent sell-off showed. The past decade has been characterised by unusually calm, strong and long stock market bounces that have occasionally been punctuated by brief but exceptionally ferocious nosedives. This is not a new observation. But there is rising acknowledgment of the phenomenon… The latest exploration of this market regime came from US investment group Wellington this summer when it published a report titled ‘Why fragility is the new reality for the stock market’.”

November 29 – Bloomberg (Edward Bolingbroke): “A mass exodus from bets on higher rates appears to have accelerated Friday’s explosive Treasury-market rally during a holiday-shortened session. In eurodollar futures -- an analog of the Treasury yield curve -- early positioning data show there was wholesale dumping as initial reports about the omicron coronavirus variant threatened to knock down expectations for multiple Federal Reserve rate hikes next year. Staggering declines in open interest across a range of contracts in CME Group’s preliminary data suggest that exits from hawkish Fed bets helped fuel the extreme gains. Open interest in the 12 quarterly eurodollar contracts expiring from December 2021 to September 2024 declined by a combined 103,400, equivalent to just over $100 billion in notional, or face, value.”

November 29 – Bloomberg (Cristin Flanagan): “A lopsided bearish stance on vaccine and testing stocks may have caught hedge funds out of position for the surge triggered on Friday by reports about the new Covid-19 omicron variant, says Goldman Sachs strategist Asad Haider. The rally for those stocks stretched into Monday’s trading, with Moderna and Pfizer adding to their gains. The advance, sparked by a macro shock from omicron, ‘was textbook ‘covid-on,’’ Haider writes... ‘Many hedge funds were caught off-guard’ because they had bought reopening stocks and sold stay-at-home names in the past week…”

Inflation Watch:

December 1 – Wall Street Journal (Paul Hannon): “The pickup in inflation rates around the world will be longer-lasting and sharper than previously anticipated, with a growing risk that households and businesses grow accustomed to faster price rises, the Organization for Economic Cooperation and Development said… But the… research body’s chief economist also warned that should the new Omicron variant of the coronavirus sidestep existing vaccines, the world economy could face a sharper slowdown than previously expected and a round of price declines similar to those seen in the early months of the pandemic… The OECD said it now expects consumer-price inflation in the U.S. to average 4.4% in 2022, up from 3.1% when it last released forecasts in September.”

November 29 – Bloomberg (Michael Sasso and Steve Matthews): “Becky Gunn is the Federal Reserve’s eyes and ears on the ground in Atlanta. She’s constantly chatting up business leaders and consumers, prying intelligence out of them that is sent on to… Washington. This puts Gunn in a unique position to witness first-hand the greatest inflation surge the U.S. has experienced in decades. Atlanta, it turns out, is posting faster price increases than any other major metropolitan area in the country… The city’s annual rate soared to 7.9% in October, well above the 6.2% nationwide average. Gunn says that her business contacts, big and small, in industries from retail to manufacturing and construction, are all seeing price gains across the board. ‘Most are just saying ‘Everything is increasing,’’ said Gunn, a vice president at the Federal Reserve Bank of Atlanta. ‘Things are increasing multiple times.’”

November 28 – New York Times (Jeanna Smialek, Sara Chodosh and Ben Casselman): “Millennials have spent much of their lives enduring economic calamity. Many were children when the dot-com bubble burst; graduated from high school in the late 2000s, when the real estate market crumbled; and had to compete with a huge generation of baby boomers in an anemic postcrisis job market before Covid-19 brought the global economy to its knees last year. But there was one powerful phenomenon that millennials, the largest generation in the United States, had never felt, at least as adults: rapid inflation.”

Biden Administration Watch:

December 3 – The Hill (Alexander Bolton): “The Senate averted a government shutdown that would have thrown President Biden’s agenda into limbo when Senate Majority Leader Charles Schumer (D-N.Y.) struck a deal late Thursday with conservative Senate Republicans to fund the government until February. The last-minute deal gives senators some hope that Congress isn’t completely dysfunctional and that another imminent standoff over raising the nation’s debt limit can be resolved in the same way without much carnage. In the end, senators on both sides of the aisle realized that a government shutdown — even a temporary one — would anger the public and both parties would wind up taking the blame.”

December 2 – CNBC (Annika Kim Constantino): “The Biden administration is tightening travel rules to and within the U.S., requiring all in-bound international passengers to test for Covid within 24 hours of departure starting on Monday and extending its mask requirement on planes and public transportation through March 18. The changes were announced Thursday as part of a broader plan to bolster the nation’s arsenal of tools in its fight against the virus as the world enters its third year of the pandemic.”

Federal Reserve Watch:

November 30 – Bloomberg (Lu Wang and Vildana Hajric): “Jerome Powell’s appetite for a faster tapering of Federal Reserve stimulus is casting him in a role financial markets haven’t seen since 2018: hawk… For investors, an urgent question becomes whether Tuesday’s congressional testimony was a watershed moment for the monetary policies that have helped the S&P 500 effectively to double since Christmas 2018. That’s when Powell’s last big pivot occurred -- the dismantling of interest-rate hikes that made the fourth quarter of that year one of the worst for equities ever. ‘Not only is he speaking in a more hawkish tone, but he’s dropping major policy implications almost without regard to how the markets may take them,’ said Max Gokhman, chief investment officer at AlphaTrAI. ‘All of the predictability he’s previously tried to cultivate in terms of taper and liftoff scheduling is in question.’”

November 30 – Bloomberg (Rich Miller): “Team Transitory is throwing in the towel. In a clear sign that the Federal Reserve is shifting to tighter monetary policy, Jerome Powell -- who’s spent months arguing that the pandemic surge in inflation was largely due to transitory forces -- told Congress… it’s ‘probably a good time to retire that word.’ The Fed chair… still thinks inflation will ebb next year. But in testimony before the Senate Banking Committee, he acknowledged that it’s proving more powerful and persistent than expected, and said the Fed will consider ending its asset purchases earlier than planned.”

December 1 – Associated Press (Christopher Rugaber): “In a fresh sign of his growing concerns about inflation, Chair Jerome Powell said… the Federal Reserve can’t be sure that price increases will slow in the second half of next year as many economists expect… In the past, Powell, who was nominated last week to a second four-year term by President Joe Biden, has frequently expressed his belief that these supply-and-demand imbalances should fade as the pandemic eases, which would reduce inflation. But on Wednesday, he said that while such an outcome is ‘likely,’ it is only a forecast. ‘The point is, we can’t act as if we’re sure of that,’ he said. ‘We’re not at all sure of that. Inflation has been more persistent and higher than we’ve expected.’”

November 30 – Bloomberg (Craig Torres, Matthew Boesler and Christopher Condon): “Federal Reserve Chair Jerome Powell said officials should weigh removing pandemic support at a faster pace and he retired the word ‘transitory’ to describe stubbornly high inflation, though a new Covid-19 strain remains a risk… ‘It is appropriate, I think, for us to discuss at our next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier,’ said Powell… ‘In those two weeks we are going to get more data and learn more about the new variant.’”

December 1 – Bloomberg (Bill Dudley): “When the U.S. Federal Reserve holds its next policy-making meeting in mid-December, officials will face a tough decision: Whether to remove stimulus by cutting back more sharply on asset purchases, as Chair Jerome Powell suggested they might in his testimony to Congress this week. I think they should and probably will double the pace of tapering, setting a trajectory to end the asset-purchase program by mid-March.”

December 1 – New York Times (Ben Casselman and Jeanna Smialek): “John C. Williams, president of the Federal Reserve Bank of New York, said the latest variant of the coronavirus could prolong the bottlenecks and shortages that have caused inflation to run hotter than expected, and is a risk Fed officials will assess as they ‘grapple’ with how quickly to remove economic support. It is still too soon to know how the Omicron variant… will affect the economy, Mr. Williams said... But if the new version of the virus leads to another wave of infections, it could exacerbate the disruptions that have caused prices to rise at their fastest pace in three decades. ‘Clearly, it adds a lot of uncertainty to the outlook,’ Mr. Williams said of the new variant.”

December 1 – Bloomberg (Olivia Rockeman): “Federal Reserve Bank of Cleveland President Loretta Mester said she is ‘very open’ to scaling back the Fed’s asset purchases at a faster pace so it can raise interest rates a couple of times next year if needed. ‘Making the taper faster is definitely buying insurance and optionality so that if inflation doesn’t move back down significantly next year we’re in a position to be able hike if we have to,’ Mester said… She said that recent data ‘have come in supportive of that case, so I’m very open to considering a faster pace of tapering.’”

November 30 – Reuters (Jonnelle Marte): “Federal Reserve officials are not happy with elevated inflation running above the central bank's 2% target and it would not be a success for those inflation levels to be repeated next year, Fed Vice Chair Richard Clarida said… ‘No one is happy when inflation is running at 4% or 5% when our goal is 2%,’ Clarida said during a conversation with Cleveland Fed President Loretta Mester. ‘This is not a success, this year, and I wouldn't consider a repeat next year of inflation at this level a success.’”

U.S. Bubble Watch:

December 3 – CNBC (Jeff Cox): “The U.S. economy created far fewer jobs than expected in November, in a sign that hiring started to slow even ahead of the new Covid threat… Nonfarm payrolls increased by just 210,000 for the month, though the unemployment rate fell sharply to 4.2% from 4.6%, even though the labor force participation rate increased for the month to 61.8%, its highest level since March 2020… A more encompassing measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons dropped even more, tumbling to 7.8% from 8.3%. The household survey painted a brighter picture, with an addition of 1.1 million jobs as the labor force increased by 594,000.”

December 1 – Bloomberg (Olivia Rockeman): “The U.S. economy grew at a modest to moderate pace through mid-November while price hikes were widespread amid supply-chain disruptions and labor shortages, the Federal Reserve said. ‘There were wide-ranging input cost increases stemming from strong demand for raw materials, logistical challenges, and labor-market tightness,’ the U.S. central bank said in its Beige Book survey... ‘Prices rose at a moderate to robust pace, with price hikes widespread across sectors of the economy.’ The report was based on anecdotal information collected by the Fed’s 12 regional banks through Nov. 19…”

December 1 – CNBC (Jeff Cox): “Companies added jobs at a robust pace in November despite worries about rising inflation and the threat that the pandemic could slow growth into the winter months, according to… ADP. Private hiring increased by 534,000 for the month, better than the Dow Jones estimate of 506,000 in a labor market that appears to be getting tighter. The total was a decline from the October growth of 570,000…”

December 2 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits increased less than expected last week, pointing to tightening labor market conditions, while layoffs tumbled to the lowest level in 28-1/2 years in November. The weekly unemployment claims report… also showed jobless benefits rolls falling below 2 million for the first time since the COVID-19 pandemic started in the United States nearly two years ago.”

November 30 – Yahoo Finance (Amanda Fung): “Home price growth in the U.S. is starting to decelerate. Standard & Poor’s said… its S&P CoreLogic Case-Shiller national home price index posted a 19.5% annual gain in September, down from 19.8% from August. The 20-City Composite posted a 19.1% annual gain, down from 19.6% a month earlier. The 20-City results came in lower than analysts’ expectations of a 19.3% annual gain… Phoenix continued to lead the 20-City Composite, posting a 33.1% annual gain followed by two cities in Florida — Tampa and Miami. Tampa posted a 27.7% year-over-year gain and Miami a 25.2% gain.”

November 30 – Bloomberg (Reade Pickert): “U.S. consumer confidence decreased to a nine-month low in November as accelerating inflation and a pickup in Covid-19 cases weighed on Americans’ views on the economy. The Conference Board’s index declined to 109.5 from a downwardly revised 111.6 reading in October…”

November 29 – Dow Jones (Josh Mitchell and Kathryn Dill): “The pandemic has unleashed a historic burst in entrepreneurship and self-employment. Hundreds of thousands of Americans are striking out on their own as consultants, retailers and small-business owners. The move helps explain the ongoing shake-up in the world of work, with more people looking for flexibility, anxious about covid exposure, upset about vaccine mandates or simply disenchanted with pre-pandemic office life. It is also aggravating labor shortages in some industries and adding pressure on companies to revamp their employment policies. The number of unincorporated self-employed workers has risen by 500,000 since the start of the pandemic…, to 9.44 million. That is the highest total since the financial-crisis year 2008, except for this summer.”

November 28 – Wall Street Journal (Miriam Gottfried): “Big leveraged buyouts are back, and this year’s crop might just be a taste of things to come. Private-equity firms have announced a record $944.4 billion worth of deals in the U.S. so far this year…, according to Dealogic. That is 2.5 times the volume in the same period last year and more than double that of the previous peak in 2007. So far this year, there have been five $10 billion-plus buyouts in the U.S., equaling the total in all of 2007… Driving the urge to go big are the billions of dollars flowing into private-equity coffers as institutions such as pension funds seek higher returns in an era of low interest rates. Buyout firms have raised $314.8 billion in capital to invest in North America so far in 2021, pushing available cash earmarked for the region to a record $755.6 billion, according to… Preqin.”

December 1 – CNBC (Robert Frank): “CEOs and corporate insiders have sold a record $69 billion in stock in 2021, as looming tax hikes and lofty share prices encourage many to take profits. From Satya Nadella at Microsoft to Jeff Bezos and Elon Musk, CEOs, founders and insiders have been cashing in their stock at the highest pace on record. As of Monday, sales by insiders are up 30% from 2020 to $69 billion, and up 79% versus a 10-year average, according to InsiderScore/Verity…”

November 30 – Bloomberg (Jesse Westbrook): “Fannie Mae and Freddie Mac climbed after their regulator announced that the mortgage giants will be able to back loans worth nearly $1 million in some of the most expensive U.S. housing markets. Reflecting the surge in home prices during the Covid-19 pandemic, Fannie and Freddie will be able to buy loans of $970,800 in areas including San Francisco, Los Angeles and New York, the Federal Housing Finance Agency announced... Shares of Fannie and Freddie both rose about 14% to 99 cents and $1, respectively…”

November 30 – Bloomberg (Allison McNeely): “A growing cohort of smaller companies that survived the cold depths of the pandemic say now they’re in danger because the economy is too hot. Mattress sellers, flooring manufacturers and makers of clean energy equipment are warning that stretched supply chains and runaway freight bills have pushed them to the brink of ruin. Unlike global giants, they don’t have the cash and scale to hire their own cargo ships or pass on the soaring expenses, forcing them to seek private bailouts.”

Fixed-Income Bubble Watch:

November 30 – Financial Times (Joe Rennison): “US junk bonds fell in November by the most in more than a year on fears the spread of the Omicron coronavirus variant will hinder the ability of low-rated companies to repay their debts. A high-yield bond index compiled by Ice Data Services dropped just over 1% in November, marking only the second month this year in which the gauge has posted a negative total return and its worst showing since September last year… The selling last month was even more severe for the lowest-rated corner of the market. The bonds of triple C and lower-rated companies returned minus 1.4%...”

China Watch:

November 30 – Reuters (Stella Qiu and Gabriel Crossley): “China's factory activity fell back into contraction in November as subdued demand, shrinking employment and elevated prices weighed on manufacturers, a business survey showed… The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) fell to 49.9 in November from 50.6 the month before, versus analyst expectations of 50.5 in a Reuters poll. The 50-mark separates growth from contraction on a monthly basis.”

December 2 – Reuters (Gabriel Crossley): “Activity in China's services sector expanded at a slower pace in November amid rising inflationary pressures and continuing small-scale COVID-19 outbreaks… The Caixin/Markit services Purchasing Managers' Index (PMI) fell to 52.1 in November from 53.8 in October…”

November 30 – Bloomberg (Jeanny Yu): “China’s property market woes are causing pains in broader parts of the economy, as disappointing earnings drove a major gas distributor’s stock to sink by the most since 2000, wiping out $2.5 billion in market value in one day… China Gas’s results were a ‘big miss’…, Citigroup Inc. analysts including Pierre Lau wrote… The company ‘has more city gas projects in relatively small cities (in terms of population and project) hence is more vulnerable to property market downside risk than those focusing more on big cities,’ they added.”

November 28 – Reuters (David Kirton): “Life used to be good for Jerry Tang, who left his rural hometown in 2014 to become a real estate agent in Shenzhen - China's tech megacity and one of the world's hottest property markets. Just a few years ago Tang could make up to 50,000 yuan ($7,800) in a good month selling apartments. Last year, he was making around 15,000 yuan a month, but this year that's fallen to about 5,000 yuan and mostly comes from commission on rentals. ‘It's definitely much harder to sell this year,’ he said. ‘Buyers are waiting to see what happens with the market, while developers are cash-strapped, they are taking time to pay commission to agents.’”

November 30 – Bloomberg: “Chinese developers are facing $12 billion in trust payments coming due in December, posing a major challenge for the sector whose liquidity squeeze has spooked global markets. The firms have already this year defaulted on more than $10 billion of these high-yielding, short-term products, which had been deemed to be a legitimate, safe and predictable place to park money for mainly wealthy Chinese and institutions. That comes on top of at least $10.9 billion of potential losses in other wealth products at developers, including China Evergrande Group, which has angered employees and tens of thousand people across China.”

November 28 – Bloomberg: “China’s stressed developers face nearly $1.3 billion of bond payments in December, after a month in which investor sentiment toward the property sector showed signs of stabilizing despite fresh signs of liquidity pressure.”

December 3 – Bloomberg: “China Evergrande Group Chairman Hui Ka Yan was summoned by the Guangdong government after the troubled property developer said it plans to work with creditors on a restructuring plan for its offshore debt. Provincial authorities will send a working group to urge the company to manage risks, as well as strengthen internal controls and management and ensure normal operations, according to a statement on the government’s website.”

December 3 – Bloomberg (Alice Huang): “Some Evergrande dollar notes are on pace for their biggest drops in months, ahead of the grace period on a unit’s bond interest payments ending on Monday. The declines also occurred as China’s high-yield dollar bond market weakened Friday, as two other builders warned of possible inability to meet upcoming debt payments…”

December 3 – Bloomberg (David Watkins): “Kaisa Group Holdings Ltd. failed to win bondholder approval for a $400 million debt swap designed to avert default, in a development that could spur contagion risk just as global investors return to offshore property bonds. Grace periods end in just over a week on two bond interest payments by Kaisa. A China Evergrande Group unit has until Monday to make two such payments before a possible event of default.”

December 1 – Bloomberg (Shawna Kwan and Venus Feng): “In less than two years, Chinese property developer Kaisa Group Holdings Ltd. has gone from being an up-and-coming player in Hong Kong’s property market to a desperate seller. As it strives to raise money to alleviate a liquidity crunch during China’s property deleveraging campaign, Kaisa has been reversing its expansion in the city with a series of asset sales in the past month.”

December 3 – Bloomberg (David Watkins): “China Aoyuan Group Ltd.’s shares plunged after it warned it may be unable to make certain debt payments demanded by creditors following a series of rating downgrades. The developer closed 12% lower…, taking its fall this year to nearly 80%. Its 7.95% 2023 note was indicated down 1.5 cents on the dollar, poised for a fresh low of 20.5 cents and on track for a seventh straight day of declines.”

November 30 – Reuters (Liangping Gao and Gabriel Crossley): “China's property market woes worsened in November, with prices for both new and resale homes falling amid weaker demand in bigger cities, a private-sector survey showed… The property sector, accounting for a quarter of the country's gross domestic product, has slowed sharply in recent months, with sentiment shaken by tight regulations and a growing liquidity crisis that has engulfed some of the country's most indebted developers. New home prices in 100 cities dipped 0.04% in November from a month earlier, compared with 0.09% growth in October, according to… [the] China Index Academy…”

November 29 – Bloomberg: “Signs of increasing stress in China credit has led to a drop in the bond pledge ratios for Chinese local government financing vehicles, exchange-traded repo data show. In the five trading days through Nov. 26, some of the biggest declines in the pledge ratio was seen in LGFV debt… China’s exchange-traded repo market offers a way to monitor changes in onshore credit risk. The so-called pledge ratio determines the value a note has when pledged for cash, and declines in the metric may be a signal of weakening investor confidence.”

December 3 – Reuters (Julie Zhu and Kane Wu): “Just five months after its debut, ride-hailing giant Didi Global said it plans to withdraw from the New York Stock Exchange and pursue a Hong Kong listing, a stunning reversal as it bends to Chinese regulators angered by its U.S. IPO.”

November 28 – Financial Times (Eleanor Olcott and Erin Hale): “China has targeted a large corporate donor to Taiwanese political election campaigns with extensive business in the mainland as it broadens efforts to undermine support for the country’s governing pro-democracy party. ‘We will not allow any company to make money in the Chinese mainland and then donate money to diehard Taiwanese independence groups,’ Zhu Fenglian, a spokesperson for China’s Taiwan Affairs Office, told reporters. Beijing’s warning to Taiwanese companies came after Chinese authorities fined the island’s Far Eastern Group, the largest corporate funder of election campaigns in Taiwan, Rmb88.62m ($13.9m) for environmental, labour and tax violations.”

Central Banker Watch:

December 3 – Financial Times (Martin Arnold): “The president of the European Central Bank said it was unlikely eurozone interest rates would increase next year, calling the current rise in inflation a passing ‘hump’, but added that the ECB would act swiftly if needed to staunch the increase in prices. Despite eurozone inflation hitting a record high of 4.9 per cent in November, well above the ECB’s target of 2%, Christine Lagarde said it was likely to have peaked and would decline next year. ‘I see an inflation profile that looks like a hump . . . and a hump eventually declines,’ she said… Lagarde also repeated her assertion that the ECB was ‘very unlikely’ to raise interest rates next year.”

December 2 – Bloomberg (David Goodman and Philip Aldrick): “The emergence of the omicron variant of the coronavirus may add enough uncertainty to the U.K. economic outlook to delay a widely-anticipated interest rate rise this month. The Bank of England’s decision on Dec. 16 was always set to be a close call, and the new strain of Covid-19 has surpassed the labor market as the key variable likely to guide the speed of the recovery.”

December 2 – Financial Times (Martin Arnold and Guy Chazan): “Joachim Nagel, a top executive at the Bank for International Settlements, has moved into pole position to head Germany’s central bank in one of the first major appointments by the country’s incoming coalition government… Nagel, 55, who spent most of his career at the Bundesbank before joining the BIS as deputy head of the banking unit last year, has emerged as the preferred candidate to succeed Jens Weidmann, who announced last month that he would step down as president at the end of the year.”

Global Bubble Watch:

November 30 – Bloomberg (Tatiana Darie): “It’s only Tuesday, and it’s already the worst week for European junk bond sales since at least February. Reno De Medici, an Italian producer of recycled cardboard, has had to sweeten a 445-million euro ($506 million) floating-rate note offering since its last price update last week. And on Monday Phoenix Pharma postponed its euro-dominated transaction, citing market conditions.”

November 28 – Financial Times (Hudson Lockett, Tabby Kinder and Stephen Morris): “Half of the companies that raised more than $1bn at initial public offerings this year are trading below their listing price, despite robust stock markets around the world. The busted IPOs include some of the best-known names to list, such as UK food delivery app Deliveroo, alternative food manufacturer Oatly and Indian payments giant Paytm. Their weak performance has raised questions about the valuations pinned to companies by large investors such as SoftBank* and leading underwriters including Goldman Sachs and Morgan Stanley.”

November 30 – Bloomberg (Shelly Hagan): “Canadians are flush with cash and ready to spend. Quarterly economic activity numbers released Tuesday showed consumers powering the nation’s economy back to growth over the summer as most Covid restrictions were lifted. A surge in household spending fueled a faster-than-expected 5.4% annualized expansion in the third quarter -- a sharp comeback from a disappointing first half of the year…”

December 3 – Bloomberg (Shelly Hagan): “Canada’s labor market blew past expectations in November as the end of income support programs helped fuel new hiring. Employment rose 153,700 last month… That’s more than quadruple the 37,500 gain economists were predicting…”

EM Watch:

December 2 – Reuters (Ebru Tuncay and Jonathan Spicer): “Turkey's central bank chief signalled on Thursday that aggressive policy easing would likely pause in January after one more rate cut this month… Turkish President Tayyip Erdogan separately chose Nureddin Nebati, a strong supporter of his low rate policy, as treasury and finance minister overnight after Lutfi Elvan, who was seen as having more orthodox views, resigned the post. The lira fell a further 3.5% to reach 13.9 versus the dollar at 1559 GMT, near Tuesday's record low of 14.0…”

December 3 – Reuters (Ece Toksabay and Ezgi Erkoyun): “Turkey's annual inflation jumped more than expected to a three-year high of 21.31% in November…, further exposing the risks of recent aggressive rate cuts that prompted a historic slide in the lira… Month-on-month, the consumer price index (CPI) rose 3.51%...”

December 1 – Bloomberg (Firat Kozok): “Turkey’s interest rates will continue to fall, President Recep Tayyip Erdogan said, making a case for an economy freed from dependence on short-term foreign cash and transformed into one that thrives on local production and exports. Cheaper money will boost manufacturing, create jobs and slow consumer inflation currently running at four times the official target of 5%, and the currency will eventually strengthen, Erdogan said in an interview with state broadcaster TRT…”

December 2 – Bloomberg (Andrew Rosati): “Brazil’s economy fell into recession as extreme weather conditions, high interest rates and inflation cut short its recovery from the pandemic, dealing a blow to President Jair Bolsonaro just as he prepares for his re-election campaign. Gross domestic product fell 0.1% in the July-September period after posting a revised decline of 0.4% in the second quarter. From a year ago, the economy expanded 4%...”

November 29 – Financial Times (Michael Stott): “Political risk is nothing new in Latin America. But three big shocks in the space of a few days in previously business-friendly nations have reminded companies that even by the region’s elevated standards, risk is rising fast. Voters in traditionally moderate Chile handed a first round election victory to José Antonio Kast of the far right, the most extreme presidential candidate in three decades to secure such a strong result… Peru’s hard-left government announced without prior warning that it would close two copper mines owned by London-listed Hochschild Mining on environmental grounds… Mexico’s populist president alarmed markets by abandoning his nomination of a respected former finance minister, Arturo Herrera, as the next central bank head in favour of a little-known public sector economist who is loyal to him.”

Europe Watch:

November 29 – Financial Times (Martin Arnold): “Inflation in Germany has surged to its highest level since 1992, increasing the pressure on the European Central Bank to explain why it thinks it would be premature to tighten its ultra-loose monetary policy. German inflation rose 6% in November from a year earlier… Inflation in the country was last this high shortly after its reunification three decades ago. Spiralling prices are a sensitive subject in a country where people’s approach to money is still haunted by the hyperinflation of the 1920s and 1940s that wiped out most people’s savings.”

November 30 – Bloomberg (Michael Nienaber): “Germany's incoming Finance Minister Christian Lindner… vowed to champion solid public finances and a reduction of debt levels across the euro zone so that the European Central Bank (ECB) could fight inflation without hesitation if needed. Lindner's comments… came after data showed on Monday that German consumer price inflation accelerated further in November to reach its highest level in nearly three decades. ‘The inflation gives rise to legitimate concerns. In the case of currency devaluation, we'll observe how it develops after the pandemic,’ Lindner wrote…”

November 30 – Financial Times (Martin Arnold): “Inflation in the eurozone rose to 4.9% in November, a record high since the single currency was created more than two decades ago, prompting policymakers and economists to warn that price pressures are likely to persist for longer than expected. Driven by soaring energy prices, the increase in eurozone inflation… outstripped the 4.5% expected on average by economists... The rise is likely to put more pressure on the European Central Bank to reduce its monetary stimulus. Some investors said the ECB seemed too relaxed about rising prices. ‘It may be wishful thinking on the part of ECB president [Christine] Lagarde when she declares that price pressures won’t run out of control — they already are and it’s difficult to follow the argument that it will abate soon,’ said Charles Hepworth, investment director at GAM Investments.”

December 2 – Reuters (Jan Strupczewski): “Euro zone producer prices jumped more than expected in October…, driven mainly by a surge in energy prices, while unemployment eased... The European Union's statistics office Eurostat said prices at factory gates in the 19 countries sharing the euro rose 5.4% month-on-month for a 21.9% year-on-year surge.”

Japan Watch:

November 30 – Bloomberg (Isabel Reynolds and Cindy Wang): “Former Japanese Prime Minister Shinzo Abe said China should be aware that any crisis with Taiwan would pull in Japan and its ally the U.S., warning of the disastrous effect on the economy of any military action. The comments drew a protest from Beijing and were some of the most pointed by a prominent Tokyo politician on tensions in the Taiwan Strait. Delivering a speech by video to an audience in Taiwan…, Abe said actions of an increasingly powerful China toward Japan and Taiwan were likely to become more complex, blurring the line between war and peace.”

Social, Political, Environmental, Cybersecurity Instability Watch:

December 2 – Bloomberg (Brian K Sullivan): “Drought has gripped every inch of California for 30 straight weeks, or more than half a year, according to the U.S. Drought Monitor. Abnormally dry conditions began to afflict parts of the Golden State as far back as February 2020 and by May of this year had enveloped every corner of California. That’s strained water resources and added to ongoing wildfire risks. So far this year, more than 8,000 fires have charred almost 3.1 million acres across California… Across 11 western states, nearly 94% of the land is in drought conditions…”

December 3 – Yahoo Finance (Dani Romero): “Retail theft is soaring across the U.S., with large chains like Best Buy (BBY) and Walgreens (WBA) beset by increasingly brazen and widespread instances of shoplifting… In recent weeks, reports of ‘smash and grab’ robberies in major cities — featuring crowds of thieves making it off with electronics, clothing and footwear, have flooded social media. Security experts cite a litany of reasons including fallout from the COVID-19 pandemic, overwhelmed law enforcement, and deteriorating public safety. In San Francisco in particular, certain types of theft have been all but decriminalized, with officials facing accusations of being too lax on crime.”

Leveraged Speculation Watch:

December 1 – Bloomberg (Lu Wang and Melissa Karsh): “Add professional traders to the ranks of investors bailing from stocks as anxiety over the omicron variant and monetary policy roil markets. Hedge funds, which use borrowed money to amplify returns, have gone risk-off in a major way just as the S&P 500 endured its biggest two-day rout since October 2020. Net leverage, a measure of industry risk appetite that takes into account long versus short positions, fell to a one-year low this week, according to… Goldman Sachs…”

December 2 – Bloomberg: “The era of breakneck growth for China’s quantitative hedge funds may be ending as regulatory scrutiny intensifies and some of the $219 billion industry’s most popular trades become increasingly crowded. After a boom that saw assets under management at algorithm-driven funds in the country jump by fivefold over the past two years, a growing number of firms are now restricting inflows or dialing back expansion plans. The number of products launched by top Chinese private funds -- the local equivalent of hedge funds -- plunged by more than half in October from a month earlier to 246 and was poised to fall even further in November…”

Geopolitical Watch:

December 3 – Reuters (Natalia Zinets): “Russia has massed more than 94,000 troops near Ukraine's borders and may be gearing up for a large-scale military offensive at the end of January, Ukraine's defence minister told parliament…, citing intelligence reports. Oleksii Reznikov said Ukraine would not do anything to provoke the situation but was ready to fight back if Russia launched an attack.”

November 30 – Associated Press (Vladimir Isachenkov): “Russian President Vladimir Putin… sternly warned NATO against deploying its troops and weapons to Ukraine, saying it represents a red line for Russia and would trigger a strong response. Commenting on Western concerns about Russia’s alleged intention to invade Ukraine, he said that Moscow is equally worried about NATO drills near its borders… Putin said that NATO’s eastward expansion has threatened Russia’s core security interests. He expressed concern that NATO could eventually use the Ukrainian territory to deploy missiles capable of reaching Moscow in just five minutes. ‘The emergence of such threats represents a ‘red line’ for us,’ Putin said. ‘I hope that it will not get to that and common sense and responsibility for their own countries and the global community will eventually prevail.’”

December 1 – Reuters (Humeyra Pamuk and Sabine Siebold): “The United States urged Russia… to pull back its troops from the Ukrainian border, warning that a Russian invasion would provoke sanctions that would hit Moscow harder than any imposed until now. ‘We don't know whether President (Vladimir) Putin has made the decision to invade. We do know that he is putting in place the capacity to do so on short order should he so decide,’ U.S. Secretary of State Antony Blinken said. ‘Should Russia follow the path of confrontation, when it comes to Ukraine, we’ve made clear that we will respond resolutely, including with a range of high impact economic measures that we have refrained from pursuing in the past.’”

November 30 – Reuters (Robin Emmott): “Ukraine Prime Minister Denys Shmygal accused Russia… of being ‘absolutely’ behind what he called an attempt to organise a coup to overthrow the pro-Western government in Kyiv, citing intelligence. Last Friday, President Volodymyr Zelenskiy said Ukraine had uncovered a plot to topple his government this week, involving individuals from Russia, but he stopped short of saying whether he believed the Kremlin was behind the plot.”

December 2 – Reuters (Humeyra Pamuk and Johan Ahlander): “NATO allies share an ‘unwavering commitment’ to Ukraine's sovereignty, U.S. Secretary of State Antony Blinken said…, hours before he meets Russia's Foreign Minister Sergei Lavrov amid escalating East-West tensions over Ukraine. Blinken, speaking at the start of talks with Ukrainian Foreign Minister Dmytro Kuleba, reiterated Washington's concerns over a build-up of Russian troops on the border that has triggered threats of fresh Western sanctions against Moscow… ‘The unwavering commitment of the United States to Ukraine's territorial integrity, sovereignty, its independence... that is a view that not only the United States holds but all of our NATO allies hold as well,’ Blinken told Kuleba…”

November 28 – Reuters (Ben Blanchard): “Taiwan's air force scrambled again on Sunday to warn away 27 Chinese aircraft that entered its air defence zone, Taiwan's defence ministry said, the latest increase in tensions across the Taiwan Strait as China's president met his top generals. Chinese-claimed Taiwan has complained for a year or more of repeated missions by China's air force near the democratically governed island…”

November 30 – Reuters (Ben Blanchard): “Japan and the United States could not stand by if China attacked Taiwan, and Beijing needs to understand this, former Japanese Prime Minister Shinzo Abe said… Tensions over Chinese-claimed Taiwan have risen as President Xi Jinping seeks to assert his country's sovereignty claims against the democratically ruled island. Taiwan's government says it wants peace, but will defend itself if needed.”

December 1 – Reuters (Joe Brock): “Threats and coercion by China towards Taiwan increase the need for the United States to help Taiwan maintain a credible self-defense, the top U.S. diplomat for Asia said… Assistant Secretary of state for East Asian and Pacific Affairs Daniel Kritenbrink… said the U.S. has a rock solid commitment to assist Taiwan. ‘As the threat and coercion from the People's Republic of China increases, I think we need to respond as well in an appropriate way,’ Kritenbrink told reporters…”

December 1 – Financial Times (Kathrin Hille, Robin Harding, Eri Sugiura and Demetri Sevastopulo): “A Chinese attack on Taiwan would be an emergency for Japan and for its alliance with the US, former Japanese prime minister Shinzo Abe has warned, hinting that an invasion could meet the conditions for Tokyo to use military force. Abe said a Chinese invasion would amount to ‘economic suicide’, in a speech delivered via video to a conference in Taiwan... The remarks highlight the growing tensions across the Taiwan Strait and Japan’s shift towards more forthright support for Taipei.”

December 1 – Reuters (Josh Horwitz and Sakura Murakami): “China's foreign ministry summoned Japan's ambassador in Beijing for an ‘emergency meeting’ on Wednesday, after former Japanese Prime Minister Shinzo Abe said neither his country nor the United States could stand by if China attacked Taiwan. Chinese Assistant Foreign Minister Hua Chunying called Abe's remarks ‘erroneous’ and a violation of basic norms of relations between China and Japan in the meeting with ambassador Hideo Tarumi…”

November 30 – Reuters (Mike Stone): “The United States and China are engaged in an arms race to develop the most lethal hypersonic weapons, the U.S. Air Force secretary said…, as Beijing and Washington build and test more and more of the high-speed next-generation arms. ‘There is an arms race, not necessarily for increased numbers, but for increased quality,’ Air Force Secretary Frank Kendall told Reuters… ‘It’s an arms race that has been going on for quite some time. The Chinese have been at it very aggressively.’”

Friday Evening Links

[Yahoo/Bloomberg] Megacap Tech Knocked Down Amid Wild Stock Swings: Markets Wrap

[Yahoo/Bloomberg] Oil Posts Longest Run of Weekly Losses Since 2018 Amid Omicron

[Yahoo/Bloomberg] Bitcoin’s Correlation With Stocks Grows as Risk Appetite Drops

[AP] Explainer: 5 key takeaways from the November jobs report

[AP] Omicron-stricken South Africa may be glimpse into the future

[AP] Study suggests past COVID infection may not fend off omicron

[Yahoo] Omicron Triggers ‘Unprecedented’ COVID Surge Hitting Children Under Age 5 in South Africa

[Reuters] Omicron-fuelled volatility deals hedge funds worst monthly return since March 2020

[AP] Struggling Chinese developer warns it could run out of money

[Reuters] Blinken says Biden to tell Putin U.S. will stand up against aggressive actions

[WSJ] Omicron Variant Detected in at Least Nine U.S. States

[WSJ] Turkey’s Economic Turmoil Sends Desperation and Inflation Soaring

[FT] The race to decipher Omicron: will it take days, weeks or months?

[FT] La Niña expected to intensify global rain and drought after second consecutive year