Friday, February 11, 2022

Weekly Commentary: Lost Control

Consumer price inflation continued to run hot in January. CPI increased a stronger-than-expected 0.6% during the month, boosting y-o-y inflation to a 40-year high 7.5%. Hyperbole is unnecessary. Inflation is out of Control. The Fed would prefer us to believe otherwise, offering assurances that it is prepared to use “all its tools” to return inflation back to its comfortable 2% target level.

No one believes the FOMC has the stomach to pull a Volcker. Larry Summers today called for the Fed to immediately hold a special meeting and conclude QE a month early. Seems like the minimum they could do.  I’m not holding my breath. Others suggest a 50 bps hike in March. Reasonable enough, though our cautious central bank is pushing back.

Inflation is a global phenomenon outside the Fed’s Control. The Fed sits back and monitors supply chain issues like the rest of us. The Federal Reserve is certainly not today in Control of global energy and commodities prices. Here at home, the Fed doesn’t Control corporate pricing or wage decisions. While on the subject, geopolitical and climate change developments are way outside the Fed’s sphere of influence. After $5.1 TN (and counting) of new “money” in 126 weeks, it’s fair to conclude the Federal Reserve has Lost Control of Inflation.

At this point, the Fed would have to significantly tighten monetary policy – and inflict some real pain - if it were determined to wring inflationary pressures out of the system. This they clearly Control. Yet they don’t dare adopt this approach, as it comes with a high risk of losing something they desperately aim to maintain a semblance of Control over: the financial markets.

“It is nothing short of preposterous that in an economy with 7.5% inflation, that in an economy with the tightest labor market we’ve seen in two generations, that the central bank is still as we speak growing its balance sheet.” Larry Summers, February 11, 2022 (Wall Street Week with David Westin).

“Whatever it takes” central banking was preposterous from day one. Restarting QE in 2019 was preposterous. “Printing” Trillions of new (electronic) “money” has been preposterous. Ditto for buying corporate investment-grade and junk bonds through ETF shares. And as far as I’m concerned, punishing savers with zero rates is preposterous. But after purchasing over $5 TN during the past 28 months, it’s difficult to get all worked up over a few more weeks of buying.

What is a big deal, however, is that the Fed is losing Control of the markets. Rate markets are now pricing in 6.3 25 bps rate hikes by the FOMC’s December 14th meeting. This is not the normal exercise of the markets rather efficiently deciphering Fed intentions. I doubt there’s any FOMC consensus for such aggressive moves.

Rate markets are sending a powerful message that the Fed should commence aggressive tightening measures. Fed officials must look at the rate markets with nervous disbelief, and then glance over at faltering equities Bubbles with trepidation. For a long time now, stocks and bonds were all one big happy family, keen to enjoy quality time together compliments of their moneyed Uncle (central banks). Playing in the sandbox was such a delightful and harmonious experience.

The clan over the years “matured” and turned unruly. Myriad severe development issues are increasingly on full display. The halcyon sandbox days are over for good, replaced by a confluence of insecurity, greed, and now constant infighting. To be sure, rich Uncle’s years of lavish generosity fostered a bunch of spoiled malcontents. The lax benefactor has come to realize he can no longer finance all the dysfunction and is desperate to craft a plan for exiting the relationship without unleashing mayhem. Some have structured their lives to stand on their own, while others’ very survival is at stake. All have developed bad habits, with some succumbing to deadly addictions. One camp says, “It’s time to get on with our lives without being further warped by all this charity money.” Another is threatening to do harm to themselves. There’s no clean way out. Uncle fears calamity and harbors serious regret.

There were tantrums aplenty this week. Panic?

February 9 – Reuters (Francesco Canepa): “As guardians of stability in prices and financial markets, the last word central bankers want to be associated with is ‘panic’. Yet that is precisely the term used by two top European Central Bank watchers to describe the message communicated by ECB President Christine Lagarde since she opened the door to a rate hike in 2022 to curb record-high inflation. Investors took Lagarde's words last week - which were unexpected, as she had earlier all but ruled out a rate hike this year - as a signal the ECB would tighten policy soon, sending borrowing costs soaring across the 19-country euro zone.”

It's turning into a rout. Greek 10-year yields surged another 37 bps this week to 2.62%. Outside of the March 2020 spike, Greek yields ended the week at the highest level since June 2019. Greek yields are up 111 bps in only four weeks and 131 bps y-t-d. Italian yields jumped another 21 bps to a 21-month high 1.95% (up 67bps in two weeks). Portuguese yields rose 20 bps (2-wk gain 55bps) to 1.17% - the high since April 2020. And Spanish yields jumped 18 bps (2-wk gain 52bps) to 1.22% - the high back to February 2019.

European Credit continues to teeter. CDS prices rose further this week. European banks were again this week at the top of the global CDS leaderboard. Credit Suisse CDS jumped six to 81, trading this week to the highest level since May 2020. UniCredit CDS jumped six to a 15-month high 88 bps. An index of subordinated bank bond CDS rose another three to a 15-month high 143 bps. An index of European high-yield corporate bond CDS gained another 11 to a 15-month high 326 bps (after beginning 2022 at 242bps).

The ECB is still printing “money” and its initial rate increase is still months away. Yet, just the thought of pulling back stimulus has unleashed mayhem at Europe’s vulnerable “Periphery.” De-risking/deleveraging is gaining momentum. ECB policymakers this week unsuccessfully tried to push back against market rate expectations. Christine (German nickname: “Madam Inflation”) Lagarde has Lost Control.

Cracks have developed in Credit on both sides of the Atlantic. An index of U.S. investment-grade CDS jumped four to 68 bps, trading this week to the high since September 2020. High-yield CDS surged 14 to a 15-month high 369 bps. Following right behind Europe, U.S. bank CDS prices continue to march skyward. Bank of America CDS rose four this week to a 20-month high 68 bps. JPMorgan CDS rose four to a 20-month high 63 bps. Morgan Stanley CDS rose four to 72 bps, and Goldman Sachs added one to 81 bps.

The Nasdaq100 ended Wednesday’s session with a week-to-date gain of 2.5%. The Semiconductors closed Wednesday up 5.8% in three sessions. The small cap Russell 2000 was up 4.1% w-t-d, and the Midcaps were 3.8% higher. Bitcoin traded Thursday to a five-week high of $45,800. Buy the dip was working, and markets were ready to put recent weakness in the rear-view mirror.

And then came the Thursday/Friday bear market gut punch. The Nasdaq100 dropped 5.3% in two sessions, with the Semis sinking 7.9%. The small cap Russell 2000 and S&P400 Midcaps fell 2.5% and 2.7%. From Thursday’s trading high, Bitcoin dropped a quick $3,800 (8%) to trade down to $42,000.

I’ve been in awe of Chinese Credit for years now. I hold particular awe for the annual release of January data, a month where banks move aggressively to front-load lending for the new year. With records for both bank lending and growth in Aggregate Financing, January 2022 did not disappoint. At a staggering $972 billion (not annualized!), growth in Aggregate Financing was about 15% ahead of forecasts - while trouncing previous record growth of $817 billion in January 2021. At $1.754 TN, three-month growth was 24% ahead of last year – and only slightly below the pandemic period record (Feb. to April 2020).

So much for Beijing’s efforts to restrain runaway Credit expansion. Aggregate Financing expanded $5.092 TN, or 11.5%, over the past year to surpass $50 TN for the first time. Aggregate Financing surged 74% over five years.

Total Loans were also ahead of estimates and at a record level. At $624 billion, January Loan growth was 11% ahead of January 2021’s record. Loans expanded $3.204 TN, or 11.2%, over the past year.

Lending to corporations fueled the Credit spree. Corporate Bank Loans surged an unprecedented $529 billion during January, almost a third higher than January 2021. Corporate Loans were up 11.6% over the past year, 24.9% over two years, 38.5% over three and 68.7% over five years. How much new bank Credit is flowing to impaired developers who have Lost debt market access?

At $133 billion, Consumer (mostly mortgages) Loans were up from December’s $59 billion, but were still 34% below January 2021. Three-month Consumer Loan growth ($308bn) was down 24% y-o-y. Consumer Loans expanded 11.6% over the past year, the slowest pace since November 2008. Consumer Loans jumped 29% in two years, 47% in three and 111% in five years, in Bubble Excess, which has begun to haunt China’s system.

China’s M2 money supply surged (a crazy) $757 billion during January, the strongest expansion since March 2020’s $789 billion. M2 jumped $1.494 TN over the past three months, 50% higher than comparable growth from last year. M2 expanded 9.8% y-o-y, the strongest pace in almost a year.

February 11 – Bloomberg: “The People’s Bank of China reiterated it will encourage banks to expand lending to meet demand and bolster a slowing economy. The central bank will ‘keep liquidity reasonably ample, guide financial institutions to effectively expand loan extension, and make the overall credit growth more stable,’ it said in the quarterly monetary policy published Friday. The PBOC will avoid flooding the economy with stimulus while satisfying the real economy’s reasonable financing need, the report said. It will make monetary policy actions ‘ample, targeted and front-loaded,’ and enhance the structure of credit...”

From a macro perspective, it couldn’t be more ominous. Credit (Aggregate Financing) expanded a blistering $5.1 TN over the past year ($11.4 TN in 25 months!). Yet China’s real estate Bubble is faltering, while the general economy has stagnated.

Importantly, despite various policy easing measures, stress continues to overwhelm the highly-indebted developers. Real estate transactions have collapsed, and the longer the turmoil persists, the lower the odds of a near-term recovery in buyer sentiment.

February 10 – Caixin Global (Guo Yingzhe and Niu Mujiangqu): “China’s real estate market remained sluggish during the weeklong Lunar New Year holiday as developers and homebuyers responded without much enthusiasm to the recent easing of financing policies… By floor space, new home sales in 40 surveyed cities fell 40% during the seven days through Sunday, compared with the holiday period in 2021, according to… China Real Estate Information Corp. (CRIC). The market was weaker in smaller cities as migrants returning home didn’t buy as much property… The value of sales made by the top 100 developers in January fell 43% year-on-year, and the CRIC analysts projected another drop was on the way for February.”

“Debt Fears Swirl Around Logan as China Property Woes Deepen.” “Country Garden Yuan Bond Posts Record Drop at Close After Halt.” “China Developer Zhenro Plunges 66% on Bond Redemption Concern.” “Chinese Developer Fantasia January Property Sales Fall 78% Y/Y.” “Chinese Property Group Shimao Feels Chill of Sector’s Liquidity Crisis.”

Just a sampling of the week’s developer headlines. Evergrande yields jumped almost 700 bps this week to 88.79%. Logan yields (despite a late-week rally) ended the week up 180 bps to 32.32%. China’s developer crisis worsens by the week, despite myriad stimulus measures. While panic is perhaps too strong, indications this week pointed to heightened concerns in Beijing.

February 10 – Bloomberg: “China’s biggest bad-debt managers are moving to support cash-strapped real estate developers at the urging of policy makers in Beijing, according to people familiar…, adding to official efforts to contain the fallout from a string of defaults. Regulators have told state-owned firms including China Huarong Asset Management Co. and China Cinda Asset Management Co. to participate in the restructuring of weak developers, acquire stalled property projects and buy soured loans… Huarong is among financial institutions in talks with embattled developer Shimao Group Holdings Ltd., the people said.”

If Huarong and the “AMCs” (asset management companies) are viewed as part of the solution, expect mounting systemic concerns. Recall that heavily levered Huarong saw its CDS spike above 1,500 last April as debt fears swirled. Beijing directed Chinese banks to support troubled Haurong, and then in the summer oversaw a $7 billion recapitalization.

It’s worth noting that China Construction Bank CDS jumped four to close Wednesday trading at a two-month high 68 bps (began 2022 at 57). China Development Bank CDS jumped four to end Wednesday at a two-month high 65 bps (began year at 54). Industrial & Commercial Bank of China CDS jumped five in two sessions to end Tuesday trading at a nine-week high 69 bps (began 2022 at 57). Bank of China CDS jumped four bps to trade to a 10-week high 67 bps (began the year at 56). China sovereign CDS gained 2.5 this week to 53 bps, trading this week to the high since December 2nd.

Rampant Credit excess. The banks and AMCs supporting a collapsing developer industry. The “national team” aggressively buying stocks. I don’t expect these increasingly desperate measures to have much more impact than previous Beijing interventions. It’s early, but moving in one direction: Beijing Losing Control.

We’re now a week from February options expiration. Bearish hedges had been crushed, only to return from “put heaven” with Thursday's and Friday’s market drubbing. It’s difficult to see things calming down next week. The White House on Friday showed heightened concern for a Russian move on Ukraine even before the Beijing Olympics closing ceremonies. Putin, the online trader, could pocket handsome short-term trading profits. Conciliatory – and force the unwind of bearish hedges into expiration. Combative – and hit the adversary’s markets when they're down and vulnerable.

Friday trading was interesting. Gold pops $32, as financial assets and crypto fall under significant pressure. Silver surged 4.7% this week to go positive y-t-d. The 2022 storyline of Hard Assets over fragile financial assets seems more compelling by the week. The Bloomberg Commodity Index’s small advance pushed 2022 gains to 10.8%. Rising to $93, WTI crude’s y-t-d advance reached almost 24%. The VIX traded back above 30 in Friday trading, after ending Wednesday down at 20.

After trading to 2.06% in early Friday trading, the previously MIA safe haven bid for Treasuries flashed an appearance, with 10-year Treasury yields ending the week at 1.94%. Wild instability in securities and derivatives markets, with golden commodities. It’s about as one might expect when fear grows that central bankers have Lost Control.

For the Week:

The S&P500 dropped 1.8% (down 7.3% y-t-d), and the Dow declined 1.0% (down 4.4%). The Utilities sank 2.4% (down 7.3%). The Banks gained 1.0% (up 7.0%), and the Broker/Dealers added 0.5% (up 2.1%). The Transports fell 1.4% (down 9.0%). The S&P 400 Midcaps increased 0.9% (down 6.8%), and the small cap Russell 2000 gained 1.4% (down 9.6%). The Nasdaq100 sank 3.0% (down 12.7%). The Semiconductors lost 2.5% (down 14.7%). The Biotechs gained 0.6% (down 7.4%). With bullion jumping $50, the HUI gold index surged 7.8% (up 2.5%).

Three-month Treasury bill rates ended the week at 0.335%. Two-year government yields surged 19 bps to 1.51% (up 77bps y-t-d). Five-year T-note yields rose nine bps to 1.86% (up 59bps). Ten-year Treasury yields added three bps to 1.94% (up 43bps). Long bond yields increased three bps to 2.24% (up 34bps). Benchmark Fannie Mae MBS yields jumped 13 bps to a 31-month high 2.86% (up 80bps).

Greek 10-year yields surged 37 bps to 2.62% (up 131bps y-t-d). Ten-year Portuguese yields jumped 20 bps to 1.17% (up 70bps). Italian 10-year yields surged 21 bps higher to 1.95% (up 78bps). Spain's 10-year yields rose 18 bps to 1.22% (up 65bps). German bund yields gained nine bps to 0.30% (up 47bps). French yields jumped 12 bps to 0.77% (up 57bps). The French to German 10-year bond spread widened three to 47 bps. U.K. 10-year gilt yields jumped 13 bps to 1.55% (up 57bps). U.K.'s FTSE equities index rallied 1.9% (up 3.7% y-t-d).

Japan's Nikkei Equities Index increased 0.9% (down 3.8% y-t-d). Japanese 10-year "JGB" yields rose three bps to 0.23% (up 16bps y-t-d). France's CAC40 rallied 0.9% (down 2.0%). The German DAX equities index recovered 2.2% (down 2.9%). Spain's IBEX 35 equities index jumped 2.4% (up 1.0%). Italy's FTSE MIB index gained 1.4% (down 1.4%). EM equities were mostly higher. Brazil's Bovespa index added 1.2% (up 8.3%), and Mexico's Bolsa surged 3.9% (unchanged). South Korea's Kospi index was little changed (down 7.7%). India's Sensex equities index dipped 0.8% (down 0.2%). China's Shanghai Exchange rallied 3.0% (down 4.9%). Turkey's Borsa Istanbul National 100 index surged 5.5% (up 10.4%). Russia's MICEX equities index rose 2.2% (down 6.4%).

Investment-grade bond funds saw inflows of $1.083 billion, while junk bond funds posted outflows of $1.962 billion (from Lipper).

Federal Reserve Credit last week expanded $10.2bn to $8.838 TN. Over the past 126 weeks, Fed Credit expanded $5.111 TN, or 137%. Fed Credit inflated $6.027 Trillion, or 214%, over the past 483 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $7.9bn to $3.466 TN. "Custody holdings" were down $70bn, or 2.0%, y-o-y.

Total money market fund assets dropped $34.4bn to $4.593 TN. Total money funds increased $276bn y-o-y, or 6.4%.

Total Commercial Paper dipped $3.8bn to $1.019 TN. CP was down $58bn, or 5.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 14 bps to 3.69% (up 96bps y-o-y). Fifteen-year rates surged 16 bps to 2.93% (up 74bps). Five-year hybrid ARM rates rose nine bps to 2.80% (up 1bp). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates 24 bps to 3.99% (up 115bps).

Currency Watch:

For the week, the U.S. Dollar Index increased 0.6% to 96.08 (up 0.4% y-t-d). For the week on the upside, the South African rand increased 1.6%, the Brazilian real 1.5%, the Australian dollar 0.9%, the Mexican peso 0.7%, the New Zealand dollar 0.6%, the British pound 0.2% and the Canadian dollar 0.2%. On the downside, the Swedish krona declined 2.0%, the euro 0.9%, the Norwegian krone 0.8%, the Japanese yen 0.1%, the South Korean won 0.1%, and the Singapore dollar 0.1%. The Chinese renminbi increased 0.10% versus the dollar (up 0.02% y-t-d).

Commodities Watch:

February 7 – Bloomberg (Alex Longley and Francine Lacqua): “Jeff Currie, the closely-followed head of commodities research at Goldman Sachs..., says he’s never seen commodity markets pricing in the shortages they are right now. ‘I’ve been doing this 30 years and I’ve never seen markets like this,’ Currie said... ‘This is a molecule crisis. We’re out of everything, I don’t care if it’s oil, gas, coal, copper, aluminum, you name it we’re out of it.’ Futures curves in several markets are trading in super-backwardation -- a structure that indicates traders are paying bumper premiums for immediate supply. The downward sloping shape in prices is generally taken to mean commodities are severely undersupplied.”

The Bloomberg Commodities Index added 0.3% (up 10.8% y-t-d). Spot Gold jumped 2.8% to $1,859 (up 1.6%). Silver surged 4.7% to $23.59 (up 1.2%). WTI crude increased 79 cents to $93.10 (up 24%). Gasoline jumped 2.2% (up 23%), while Natural Gas sank 13.8% (up 6%). Copper added 0.4% (up 1%). Wheat jumped 5.3% (up 4%), and Corn rose 4.8% (up 10%). Bitcoin gained $1,620, or 4.0%, this week to $42,357 (down 8.7%).

Coronavirus Watch:

February 6 – Wall Street Journal (David Luhnow, Joanna Sugden and Rajesh Roy): “The world is living through a unique moment: In the past five or six weeks, the Omicron coronavirus variant has likely gotten more people sick than any similar period since the 1918-1919 flu pandemic… While Omicron infections have peaked in many places, February is likely to see similar case loads as the variant continues to spread before it flames out, causing worker shortages from hospitals to factories and spurring debate about Covid-19 restrictions, particularly since Omicron appears to be causing less serious illness. In England, more than one in six residents are estimated to have caught the coronavirus since Omicron emerged in late November…”

Covid Disruption Watch:

February 5 – Bloomberg (Vince Golle): “The helter-skelter playing out on U.S. factory floors from labor and supply shortages, transportation bottlenecks and the coronavirus looks likely to persist into the second half of the year. That’s the message from the heads of lumber producers and makers of air conditioners to homebuilders and apparel manufacturers. Recent corporate earnings calls have been replete with mentions of cascading and inflationary effects that are hampering companies’ ability to meet demand. Perhaps the best color was offered up by PPG Industries Inc.’s Michael McGarry. The paint maker’s chief executive officer described a day in the life of a plant manager… “They wake up in the morning, check their phone to see how many people call off sick... They go through the dock area to see how many trucks didn’t get picked up, and then they go to the receiving area and then find out what didn’t come in... And then they move it into the plant and the supply chain people are telling me that they’re going to have to make smaller batches because of lack of raw materials. And then the sales team is telling them, ‘oh, my God, if we don’t get paint out the door, here’s how many customers we’re going to impact.’”

February 9 – Reuters (Carlos Osorio, Blair Gable and Jarrett Renshaw): “Ford and Toyota… both said they were halting some production as anti-coronavirus mandate protesters blocked U.S-Canada border crossings that have prompted warnings from Washington and Ottawa of economic damage. Many pandemic-weary Western countries will soon mark two years of restrictions as copycat protests spread to Australia, New Zealand and France now the highly infectious Omicron variant begins to ease in some places.”

February 10 – Reuters (Jessie Pang and Farah Master): “Hong Kong reported 986 new coronavirus infections on Thursday as authorities scramble to contain an outbreak which medical experts warn could see 28,000 daily cases by the end of March, with the unvaccinated elderly a particular worry. The rise in cases, up 10-fold since Feb. 1, is proving to be the biggest test for the global financial hub's ‘dynamic zero’ policy of virus suppression, which has turned it into one of the world's most isolated cities.”

February 7 – Reuters (Sara Cheng): “Hong Kong residents crowded supermarkets and neighbourhood fresh food markets on Monday to stock up on vegetables, noodles and other necessities after a record number of COVID-19 infections in the city and transport disruptions at the border with mainland China.”

February 7 – Reuters (Roxanne Liu and Gabriel Crossley): “Authorities in China's southwestern city of Baise ordered residents to stay at home from Monday and avoid unnecessary travel as they enforced curbs that are among the toughest in the nation's tool-box to fight rising local infections of COVID-19. The outbreak in Baise, which has a population of about 3.6 million and borders Vietnam, is tiny by global standards, but the curbs, including a ban on non-essential trips in and out, follow a national guideline to quickly contain any flare-ups.

Market Mania Watch:

February 6 – Wall Street Journal (Gunjan Banerji): “The stock market’s popular FAANG trade is starting to show cracks. Investors say they are reconsidering their approach to trading big technology stocks after a week marked by giant swings in share prices… Gone, several investors said, are the days in which the stocks logged a simultaneous ascent and attracted crowds of fans. Some have become victims of rising interest rates, changing consumer tastes and stretched valuations. Those that have fallen short of high investor expectations have paid dearly in the market.”

February 5 – Financial Times (Joshua Oliver): “Cryptocurrency investment products suffered record outflows in January, as sliding token prices and a flight from risky assets reversed the fortunes of a sector that had frenzied interest last year. Vehicles such as the Grayscale Bitcoin Trust, which gives investors exposure to crypto assets without holding the tokens directly, attracted billions of dollars in 2021, as asset managers such as ProShares, VanEck and WisdomTree raced to launch products and capture a share of the market. But the tide of cash slipped into reverse in January for the first time since last summer…”

February 9 – Bloomberg (Joanna Ossinger): “The value of mergers and acquisitions in the cryptocurrency industry jumped 4,846% in 2021, PwC said in a report. The average deal size reached $179.7 million from $52.7 million, driven partly by special-purpose acquisition company -- or SPAC -- deals. Crypto fundraising deal value rose 645%. The top five investors by deal count were AU21, Genesis Block Ventures, Genblock Capital, Coinbase Ventures and Moonwhale. There’s no sign of crypto fundraising slowing anytime soon, Henri Arslanian, PwC crypto leader, said…, while adding some valuations have hit levels ‘that are often difficult to justify.’”

February 8 – Financial Times (Nicholas Megaw, James Fontanella-Khan and Miles Kruppa): “More US companies seeking fresh capital are turning to private investments or looking for potential buyers as volatile stock markets stand in the way of going public. Falling valuations and unpredictable market swings have led to a sharp drop in listings activity that experts think will take several months to bounce back, but private fundraisings are continuing at close to a record pace… Stocks from almost all the largest IPOs of 2021 have fallen dramatically from their early highs, with several including Rivian and Bumble tumbling more than 50%.”

Market Instability Watch:

February 10 – Bloomberg (Katie Greifeld): “Bearish bond investors are rushing for protection, fueling a surge in options activity in two of the biggest corporate-bond ETFs. Open interest for put contracts is close to all-time highs for both the $34 billion iShares iBoxx $ Investment Grade Corporate Bond exchange-traded fund (ticker LQD) and the $17 billion iShares iBoxx High Yield Corporate Bond ETF (HYG), according to data compiled by Bloomberg. Both funds have posted a barrage of outflows in recent days. Cracks are beginning to spread in the corporate-bond market as expectations build that the Federal Reserve will have to tighten policy aggressively to control inflation.”

February 5 – Financial Times (Joe Rennison): “Investors have rushed into the derivatives market to protect corporate bond portfolios from a possible sell-off, as they grapple with the growing risk that the recent slump in stock prices will spread to companies’ debt. Trades on a widely used index of low-rated credit default swaps, which allow investors to take out protection against companies defaulting on their debt, soared to $197bn in January, up from $123bn in December and the most since March 2020… ‘The market is a lot more nervous than it was at the start of the year,’ said Viktor Hjort, global head of credit strategy at BNP Paribas.”

February 9 – Bloomberg (Giulia Morpurgo): “Surging risk in the European credit market is signaling tough times ahead, clashing with a calmer scene in equities. Measures of risk have soared for both investment-grade and high-yield borrowers after the European Central Bank’s unexpectedly hawkish tilt last week, even as a gauge of euro-area stock volatility has stayed below earlier peaks. ‘It may be that the credit market is telling us there should be more concern in equity markets,’ Christian Mueller-Glissman, managing director for portfolio strategy at Goldman Sachs..., told Bloomberg…”

February 10 – Wall Street Journal (Anna Hirtenstein): “Corporate bonds in Europe have taken their biggest hit since 2020 over the past week after a sudden pivot from the European Central Bank toward tighter policy reanimated worries about the region’s economic health. ‘The ECB’s unexpectedly hawkish stance has been a detonator for a selloff,’ said Vincent Benguigui, a credit portfolio manager at Federated Hermes. Euro-denominated investment-grade bonds have fallen 1.9% over the past week on a total return basis, the most since June 2020, according to an ICE BofA index. High-yield bonds declined 2% in their weakest week since the pandemic began.”

February 8 – Financial Times (Tommy Stubbington): “Investors are growing worried that if the European Central Bank signals too aggressive a tightening in monetary policy, it could trigger the type of bond market tumult that worsened the eurozone debt crisis a decade ago. Government debt across the currency bloc has tumbled since last week’s ECB meeting, when President Christine Lagarde declined to rule out the possibility of a rise in interest rates this year as the central bank battles record high inflation. For bond investors, that prospect is particularly concerning because the ECB has repeatedly stressed that it will wind down its vast bond purchasing programmes before lifting rates. ‘The ECB is the only thing that’s been keeping the bond market at bay and it is being forced into retreat,’ said James Athey, a portfolio manager at Aberdeen Standard Investments.”

February 8 – Bloomberg (Thyagaraju Adinarayan): “More risks may be building for U.S. equities than meets the eye, Bank of America Corp. analysts said. This year’s extreme intraday market swings and fluctuations in single stocks’ value show there’s ‘turbulence’ under the surface, equity derivatives analysts led by Gonzalo Asis said… These gyrations have been exacerbated by the collapse in liquidity levels for S&P 500 e-mini futures to near all-time lows last seen during the 2020 Covid selloff.”

Inflation Watch:

February 10 – Associated Press (Christopher Rugaber): “Inflation soared over the past year at its highest rate in four decades, hammering American consumers, wiping out pay raises and reinforcing the Federal Reserve’s decision to begin raising borrowing rates across the economy. The… consumer prices jumped 7.5% last month compared with a year earlier, the steepest year-over-year increase since February 1982. The acceleration of prices ranged across the economy, from food and furniture to apartment rents, airline fares and electricity. When measured from December to January, inflation was 0.6%, the same as the previous month and more than economists had expected. Prices rose 0.7% from October to November and 0.9% from September to October.”

February 9 – Wall Street Journal (Orla McCaffrey): “Americans took on more new debt in 2021 than in any year since before the 2008-09 financial crisis. Total household debt rose by $1.02 trillion last year, boosted by higher balances on home and auto loans, the Federal Reserve Bank of New York said... It was the largest increase since a $1.06 trillion jump in 2007. Total consumer debt now sits at around $15.6 trillion, compared with $14.6 trillion a year earlier. The increase is largely a function of a sharp rise in prices for homes and cars. The price of the average U.S. home rose close to 20% in 2021, boosting mortgage balances and pricing out many middle-class buyers. Rising prices for new and used cars drove auto-loan originations to a record $734 billion.”

February 7 – Wall Street Journal (Lisa Bannon): “Alexis Abell recently walked out of a BJ’s Wholesale Club outside Buffalo, N.Y., with 24 boxes of Kraft Macaroni & Cheese, a box of 50 frozen mozzarella sticks, a 40-pound bag of basmati rice and a 12-can pack of garbanzo beans. ‘I don’t want to be in a position again where I can’t get something,’ says Ms. Abell… She estimates her family is now spending about 25% more a week on food and staples than before the pandemic, and she is buying more than twice as much of some staples and household supplies… Retailers and analysts predicted that the bulk buying in the early days of the pandemic, when supplies of many goods were constrained, would subside once people returned to work, stores were able to restock and vaccinations became widespread. Instead, Americans continue to stockpile food and household goods.”

February 10 – Bloomberg (Irina Anghel and Megan Durisin): “From morning coffee to dinnertime roasts, prices for major food staples are on the rise. The Bloomberg Agriculture Spot Subindex, which tracks nine agricultural commodities, is nearing an all-time high. Prices across grains, oilseed and softs markets have rallied as supply shortfalls abound, a signal that food inflation already hitting consumers worldwide is unlikely to let up soon. This year ‘will be a very odd year,’ Peder Tuborgh, chief executive of Denmark-based dairy Arla Foods, said… ‘Demand has to cool off. You cannot eat or drink something that is not available, and only the price can make it cool off.’ The company, the world’s fifth-largest dairy, said inputs from energy to packaging rose 10% in January versus last year.”

February 9 – Bloomberg (Michael Sasso and Raeedah Wahid): “As the cost of a used car has soared, mechanics are finding themselves inundated with ailing high-mileage vehicles, overhauling engines on autos once bound for the junkyard and having delicate conversations with desperate customers. The dramatic climb in new- and used-car prices has changed the calculus of when to repair and when to replace. It’s put mechanics in an uneasy position as financial advisers, often offering the final word on whether a clunker is worth fixing. Americans who before the pandemic would buy another car rather than pay a few thousand dollars for a repair are now having to shell out $5,000 or more.”

February 7 – Bloomberg (Joe Deaux and Yvonne Yue Li): “Surging prices of the raw materials needed for your refrigerators, automobiles, window frames and plumbing show no signs of abating as America’s supply-chain crisis spills into another year. John Gillespie is seeing the issues continue to mount across the country. The commodity manager for Superior Essex helps supply a large chunk of the metal wiring that electrifies U.S. homes and power grids and said the shipping and logistics charges for copper and aluminum are the most significant increase as part of the all-in cost… ‘Boats are stuck out at sea and rail doesn’t have enough staff, so rail yards are crowded and my material is stuck behind 1,500 cars so they have to dig that out and it takes days to do that,’ Gillespie… said. ‘The perfect storm is having a ripple effect and people are calling for metal, but the material is just not there.’”

February 10 – Wall Street Journal (David Harrison): “American consumers are kicking off 2022 with some big price increases in everyday purchases. The price of food and utilities surged in January from the previous month, according to the Labor Department. Prices for healthcare and housing have also started to creep up. Vehicle prices, which have been rising rapidly because of a shortage of computer chips, saw inflation moderate in January but remain well above where they were a year ago. Inflation is broadening out and affecting goods and services that had until now been relatively spared by rising prices, said Gus Faucher, chief economist at PNC Financial Services Group. ‘Businesses are dealing with higher labor costs, they’re dealing with higher input costs and they’re passing some of those along to their consumers,’ he said.”

February 10 – Bloomberg (Emma Kinery): “The typical U.S. household is spending an additional $276 a month on goods and services because of rising inflation, according to Moody’s Analytics Inc… ‘Having inflation at 7.5% on a year-ago basis, compared with the 2.1% average growth in 2018 and 2019, is costing the average household $276 per month,’ said Ryan Sweet, a senior economist at Moody’s. The cost of inflation differs across income and demographic cohorts, he said.”

February 9 – Wall Street Journal (Leslie Scism): “Car insurers are rapidly raising rates to try to get ahead of inflation, which has boosted the prices of car repairs, replacements and rentals. Many insurers are boosting premiums by 6% to 8% while some are asking for double-digit increases, according to industry executives and analysts. The rising rates are an example of inflation leading to more price increases as businesses try to compensate for higher costs.”

February 9 – Bloomberg (Jen Skerritt): “Lumber is on a tear again, bringing back the specter of increasing construction costs. Lumber futures have recouped recent losses and risen by the exchange maximum of $45 for six consecutive sessions, touching $1,204.90 per 1,000 board feet…”

February 8 – Bloomberg (Mark Burton and Yvonne Yue Li): “Aluminum surged to a 13-year high in London as booming demand and a swath of smelter closures from China to Europe bring the risk of shortages of the crucial industrial metal. Prices rose as much as 3.3% to $3,236 a ton on the London Metal Exchange, surpassing a peak in October to reach the highest since 2008.”

February 10 – Bloomberg (Michael Hirtzer and Brian K. Sullivan): “Widening drought in the U.S. High Plains is putting more pressure on cattle ranches already squeezed by soaring feed prices and a lack of hay. A week of dry weather worsened drought in top U.S. cattle states including Nebraska and Kansas, with recent precipitation totals in the region among the sparsest on record, according to Deborah Bathke, of the National Drought Mitigation Center…”

February 7 – Bloomberg (Tatiana Freitas): “The era of expensive coffee is not going to end any time soon, judging from dwindling amounts held in reserves. Stockpiles of high-end arabica beans, a favorite of artisan coffee shops and chains like Starbucks Corp., totaled 1.078 million bags or about 143 million pounds, according to… ICE Futures U.S. exchange. That’s the lowest level for inventories monitored by the New York exchange since February 2000.”

Biden Administration Watch:

February 7 – Reuters (Andrea Shalal, Jeff Mason and Andreas Rinke): “U.S. President Joe Biden said… the Nord Stream 2 gas pipeline would be halted if Russia invades Ukraine and stressed unity with German Chancellor Olaf Scholz as the West rallies to avert a war in Europe... ‘If Russia invades, that means tanks or troops crossing the ... border of Ukraine again, then there will be ... no longer a Nord Stream 2. We, we will bring an end to it,’ Biden said. Asked how, given the project is in German control, Biden said: ‘I promise you, we'll be able to do it.’”

February 6 – Wall Street Journal (Yuka Hayashi): “The Biden administration is preparing to unveil its first broad economic strategy for the Asia-Pacific region, a move awaited by U.S. allies and American business groups that are uneasy about China’s expanding influence in the region. With the new Indo-Pacific Economic Framework, the U.S. aims to work more closely with friendly nations on issues including digital trade, supply chains and green technology. The framework is aimed at filling the hole in U.S. Asia strategy left by its 2017 departure from the Trans-Pacific Partnership, a robust trade agreement the U.S. had helped to design as a counterweight to China.”

Federal Reserve Watch:

February 11 – Bloomberg (Craig Torres): “Federal Reserve officials are in no rush to raise interest rates prior to their scheduled policy meeting next month, nor is a half percentage-point move in March yet likely, despite a bigger-than-expected jump in consumer prices that stoked speculation about such options. An emergency increase risks signaling panic and cementing criticism that the central bank is too far behind in reining in inflation, while Chair Jerome Powell only last month predicted the pace of price increases would cool later this year. Powell also has shown a preference for building consensus within the policy-setting committee, and no Fed officials are now signaling a race to act before its March 15-16 gathering.”

February 10 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said he supports raising interest rates by a full percentage point by the start of July -- including the first half-point hike since 2000 -- in response to the hottest inflation in four decades. ‘I’d like to see 100 basis points in the bag by July 1,’ Bullard, a voter on monetary policy this year, said… ‘I was already more hawkish but I have pulled up dramatically what I think the committee should do.’”

February 9 – Bloomberg (Olivia Rockeman): “Federal Reserve Bank of Cleveland President Loretta Mester said she anticipates it will be appropriate for policy makers to raise U.S. interest rates at a faster pace because inflation is considerably higher and labor markets are much tighter than in 2015. ‘The risks to inflation are still tilted to the upside,’ but the ultimate path of the Fed funds rate in terms of the number and pace of increases will ‘depend on how the economy evolves,’ Mester said…”

February 9 – CNBC (Jeff Cox): “Atlanta Federal Reserve President Raphael Bostic said… he anticipates hiking interest rates three or four times this year, but he stressed that the central bank isn’t locked into a specific plan. Speaking on CNBC…, the policymaker signaled a view that is less aggressive than the market’s on rates. ‘In terms of hikes for the interest rates, right now I have three forecast for this year; he said. ‘I’m leaning a little towards four, but we’re going to have to see how the economy responds as we take our first steps through the first part of this year.’”

U.S. Bubble Watch:

February 8 – Associated Press (Paul Wiseman): “The U.S. trade deficit soared to a record $859.1 billion last year as Americans splurged on foreign-made electronics, toys and clothing during the economy’s unexpectedly robust recovery… The trade gap — the difference between what the United States sells and what it buys from foreign countries — surged 27% last year from $676.7 billion in 2020. U.S. exports rose 18% to more than $2.5 trillion. But imports rose more, climbing 21% to nearly $3.4 trillion.”

February 8 – MarketWatch (Jeffry Bartash): “The number of small businesses that raised prices on customers in January rose to a 48-year high, reflecting higher costs of labor and materials amid the biggest surge in U.S. inflation since the early 1980s. The National Federation of Independent Business said a net 61% of small businesses increased prices at the beginning of the new year. That’s the highest percentage since 1974. The NFIB’s small business optimism index, meanwhile, slipped 1.8 percentage points in January to 97.1 — an 11-month low. ‘More small business owners started the new year raising prices in an attempt to pass on higher inventory, supplies, and labor costs,’ said NFIB chief economist Bill Dunkelberg. ‘In addition to inflation issues, owners are also raising compensation at record high rates to attract qualified employees to their open positions.’”

February 7 – Wall Street Journal (Nicole Friedman): “The dream of homeownership has grown more out of reach for middle-class Americans during the pandemic. The surge in home prices and sharp decline in the number of homes for sale have made home buying more difficult for many Americans compared with two years ago, according to… the National Association of Realtors… At the end of last year, there were about 411,000 fewer homes on the market that were considered affordable for households earning between $75,000 and $100,000 than before the pandemic… At the end of 2019, there was one available listing that was affordable for every 24 households in this income bracket. By December 2021, the figure was one listing for every 65 households.”

February 7 – Bloomberg (Alexandre Tanzi): “The share of Americans who say it’s a good time to buy a house hit an all-time low of 25% in a monthly Fannie Mae survey. The pandemic-era surge in U.S. housing prices, combined with increased concerns about job stability and rising mortgage rates, are deterring potential buyers from trying to purchase a home. ‘Younger consumers -- more so than other groups -- expect home prices to rise even further,’ said Doug Duncan, Fannie Mae’s chief economist. ‘They also reported a greater sense of macroeconomic pessimism.’

February 7 – Wall Street Journal (Lauren Weber and Chip Cutter): “Employers from McDonald’s... to home builder PulteGroup Inc. said staffing pressures caused by hiring challenges and surging Covid-19 cases suppressed growth or cut into operations in the fourth quarter. While pressures may be easing in some aspects for large companies, indicating a diminishing effect from the Omicron variant going forward, labor challenges and other concerns remain. Staffing challenges were so acute at McDonald’s in mid-December that its restaurants cut back hours by about 10%...”

February 7 – Wall Street Journal (Angus Loten): “A shortage of information-technology workers is prompting some companies to buy firms for their employees, a strategy that is helping drive up the number of merger-and-acquisition deals across the IT and business-services sector, industry analysts say. Employers last month posted roughly 340,000 unfilled IT job openings, 11% higher than the 12-month average, spanning a range of positions, industries and locations, IT industry trade group CompTIA said… ‘With the persistently tight labor market for tech talent, an ever-greater number of companies are willing to put all options on the table, including M&A,’ said Tim Herbert, the group’s chief research officer.”

February 10 – Bloomberg (Jo Constantz): “Mortgage rates in the U.S. jumped to the highest level since January 2020, before the pandemic rocked financial markets. The average for a 30-year loan was 3.69%, up from 3.55% last week, Freddie Mac said in a statement Thursday. That was the highest since Jan. 2, 2020, when rates averaged 3.72%.”

February 10 – Bloomberg (Prashant Gopal): “It’s getting harder to afford a home in the U.S. For first-time buyers, mortgage payments jumped to 25.6% of household incomes in the fourth quarter, the worst affordability level in three years, according to the National Association of Realtors. The share was 22.4% a year earlier. The surge in purchase prices combined with rising mortgage rates added $201 a month to a typical home-loan payment…”

February 8 – Bloomberg (Olivia Rockeman and Alex Tanzi): “U.S. credit-card bills jumped sharply last quarter as Americans returned to pre-pandemic spending habits. Credit-card balances increased every quarter in 2021 to end the year at $856 billion, the Federal Reserve Bank of New York said... The fourth-quarter gain was the largest in figures dating back 22 years, and while the total amount is still below pre-Covid levels, the gap is closing rapidly.”

February 9 – Bloomberg (Claire Ballentine): “The rich, who got even richer in the pandemic era, are unceasingly deploying their wealth into luxury homes. More than $40 billion worth of residential real estate valued at $10 million or higher changed hands in 2021, according to… real estate brokerage Compass Inc. That’s more than double the amount in 2020. In New York’s Long Island alone, five properties — not in the Hamptons — sold for $10 million or more last year, totaling $101 million.”

February 8 – Bloomberg (Nick Turner): “Peloton… is slashing jobs and cutting production plans, but one part of the company is safe: its famous -- and famously well-compensated -- instructors. In announcing plans to cut about 2,800 jobs globally…, Peloton co-founder John Foley said the move won’t affect its roster of instructors… People familiar with the company said last year that senior instructors are paid upward of $500,000 annually.”

February 9 – Bloomberg (Alicia Diaz and Augusta Saraiva): “Tickets to Sunday’s Super Bowl between the Los Angeles Rams and the Cincinnati Bengals are the most expensive on record at $7,542 on average, according to ticket reseller TickPick.”

Fixed-Income Bubble Watch:

February 10 – Bloomberg (Lisa Lee and Lara Wieczezynski): “Investors piled into U.S. leveraged loan funds in a dash to seek protection from increasingly anticipated interest rate hikes to combat heated inflation. Loan funds attracted $2.29 billion of cash the week ended Feb. 9, according to data from Refinitiv’s Lipper, narrowly topping the previous record of $2.25 billion set a few weeks ago and marking the fifth-straight week of billion dollar-plus inflows. Buyers have been flocking to leveraged loans because their interest payments are tied to a floating-rate benchmark…”

China Watch:

February 8 – Reuters: “China's blue-chip index slumped to a 19-month low on Tuesday, with new-energy vehicle stocks leading the losses, as investors fretted over the prospect of the U.S. government adding more Chinese entities to the export control list.”

February 8 – Bloomberg: “Chinese state-backed funds intervened in the stock market on Tuesday, helping the benchmark index stage a strong recovery from its biggest intraday drop since August 2021. The CSI 300 Index ended down just 0.6% at the close, paring an earlier slump of 2.4%. State-related funds entered the market to buy local shares in the afternoon session, according to two people with direct knowledge…”

February 8 – Bloomberg: “China eased a year-long cap on loans for the real estate sector to fund public rental housing, the latest bid by authorities to tackle a slumping property market. Bank loans to fund low-cost rental projects will no longer be subject to regulatory curbs, the People’s Bank of China said… The move is one of the clearest signs yet that Chinese policy makers are easing up on a clampdown on leverage in the property sector that’s slowing growth in the world’s second-largest economy. Starting more public real estate projects may help counter the slowdown in development as debt-laden builders preserve cash.”

February 10 – Bloomberg (Alice Huang and Lorretta Chen): “Concerns over the financial health of Logan Group Co. have shaken investor confidence in what was seen as one of China’s stronger developers, deepening the turmoil faced by the crisis-hit industry. Fitch Ratings downgraded the firm this week, citing a ‘recent disclosure of a private debt arrangement that is off its balance sheet.’ Questions about the possible scale of Logan’s undisclosed debt had swirled in the weeks prior, pushing its dollar bonds to record declines and sending its shares to the lowest since 2017.”

February 11 – Bloomberg (Alice Huang): “Zhenro Properties Group Ltd.’s shares and dollar bonds plunged Friday, with traders citing concern that the Chinese builder won’t redeem a $200 million bond next month as planned. The 10.25% perpetual note in question slumped to 35 cents on the dollar from 93 cents Thursday… “

February 10 – Bloomberg (Dorothy Ma): “An onshore Country Garden bond fell a record 8.9% even while paring much of an afternoon plunge which triggered a 30-minute afternoon trading halt. The 4.8% note due 2026 closed at 86.99 yuan…, its lowest-ever finish. The bond had dropped as much as 21%, triggering the halt…”

February 11 – Ciaxin Global (Wang Jing and Denise Jia): “Zhang Jin, the billionaire founder and chairman of commodities giant Cedar Holdings, is under pressure to repay 20 billion yuan ($3.15bn) due investors in the company’s wealth management products (WMPs). WMP sales managers from across China gathered at the company’s Guangzhou headquarters Wednesday demanding that Zhang take personal responsibility for Cedar’s overdue WMP payments…”

Central Banker Watch:

February 9 – Bloomberg (Carolynn Look): “The European Central Bank may need to raise interest rates this year if the outlook for euro-zone inflation doesn’t improve ‘significantly,’ according to the new head of Germany’s Bundesbank… Joachim Nagel told the Zeit newspaper that the ECB has ‘reached a point that’s a textbook case for central-bank action’ -- signaling a significant policy shift could occur as soon as its next meeting in March. ‘The ECB now needs to step up. We’ll look at the data -- new growth and inflation forecasts are coming out in March. And that will be the basis for our decisions,” Nagel said... ‘If the inflation picture and above all the outlook hasn’t brightened significantly by then, we’ll have to recalibrate the monetary-policy stance.’”

February 7 – Bloomberg (Ven Ram): “Last week two-year German yields rose at a pace not seen in years, corporate spreads widened and rates volatility received a kickstart. Now peripheral yields are screaming higher. In effect financial conditions have tightened, contrary to the European Central Bank’s avowed intentions. While the ECB’s statement from its first policy review of the year largely reiterated the December guidance, President Christine Lagarde uncorked the genie by refusing to rule out a rate increase in her post-review remarks. It wasn’t as though she didn’t throw in sufficient disclaimers: ‘Don’t assume...immediacy, don’t assume too much.’ Or that the ECB “will be faithful to sequencing.” Or even ‘we are not seeing wage increases as the market sees, we don’t see inflation spiraling.’ And don’t forget, ‘we are not here to rock the boat.’”

February 7 – Financial Times (Martin Arnold): “Christine Lagarde, the European Central Bank president, has played down the chances of a ‘measurable tightening’ of monetary policy to tackle this year’s record eurozone inflation, saying any shift would be gradual. With financial markets pricing in an interest rate rise in June, Lagarde told the European Parliament on Monday that the ECB saw ‘no need to rush to any premature conclusion at this point in time — the outlook is way too uncertain’. Her comments were more cautious than last week when she sparked a sell-off in eurozone bond markets by refusing to rule out a potential rate rise this year and saying there was ‘unanimous concern’ about inflation on the ECB governing council.”

February 6 – Bloomberg (Cagan Koc and April Roach): “European Central Bank Governing Council Member Klaas Knot said he expects an interest-rate increase as early as in the fourth quarter. Borrowing costs are typically tightened in 25 bps steps and ‘I don’t have reason to think differently this time,’ he said… Knot said a second hike can then take place in the spring of 2023.”

EM Watch:

February 8 – Bloomberg (Matthew Malinowski and Valentina Fuentes): “Chile’s consumer prices rose at more than twice the pace analysts expected last month, suggesting the central bank will continue with its aggressive monetary tightening cycle after lifting its key rate by the most in over 20 years in January. Prices leaped 1.2% in January, above the 0.5% median estimate… The annual inflation rate unexpectedly climbed to 7.7%, rising for the 11th consecutive month…”

February 10 – Bloomberg (Adelaide Changole and Prinesha Naidoo): “Five key African economies will face debt risks over the next two years, according to the continent’s biggest bank, as an era of extraordinary pandemic-induced stimulus and relief for poor nations draws to an end. ‘Debt sustainability now requires sharper focus,’ Jibran Qureishi, head of African research at Standard Bank…, said… The Johannesburg-based lender named Ghana, Kenya, Angola, Ethiopia and Zambia as the ‘fragile five’ of 18 countries covered in a recent report…”

Europe Watch:

February 9 – Financial Times (Martin Arnold): “The new head of Germany’s central bank has said it is time for Europe to tighten its financial belt by ending the exceptional monetary and fiscal stimulus that helped the economy to rebound swiftly from the pandemic. Joachim Nagel, who took over as Bundesbank president last month, has called for a ‘normalisation’ of eurozone monetary policy in response to record inflation and said EU fiscal rules should be ‘stricter’ to prevent countries ignoring them. ‘Many countries are beginning to relax the pandemic restrictions,’ Nagel told Die Zeit… ‘The economy is recovering. The job markets are looking good. That’s an encouraging picture. That is why monetary policy can become less expansive.’”

February 10 – Financial Times (Martin Arnold and Owen Walker): “Europe’s top financial supervisor has warned banks it will raise capital requirements unless they reduce their exposure to risky loans to private equity acquisitions and other highly indebted borrowers. Andrea Enria, chair of supervision at the European Central Bank, said he planned to send a “Dear CEO” letter to the heads of the banks that provide most European leveraged loans to remind them of the regulator’s recommendation. ‘We notice some reluctance of banks to follow our guidelines,’ he said... ‘If eventually we are not satisfied with progress, it is the capital stick that will be used.’”

Japan Watch:

February 10 – Bloomberg (Masaki Kondo, Chikako Mogi and Toru Fujioka): “The Bank of Japan finally acted to keep a lid on bond yields and reaffirm its commitment to its stimulus framework after a tense week of upward market pressure. With most bond traders in Tokyo already well on their way home to start a long weekend, the central bank offered to buy an unlimited amount of bonds at a fixed rate, pushing back against weeks of trader speculation about policy normalization. The central bank will buy 10-year bonds at 0.25%... This is the first such operation since July 2018 as yields creep closer to the limit of tolerated levels under the BOJ’s yield curve control framework.”

Social, Political, Environmental, Cybersecurity Instability Watch:

February 9 – Bloomberg (Brian K Sullivan, Mark Chediak and Elizabeth Elkin): “As recently as Christmas, it looked like California’s devastating drought could—if not fully disappear—at least be on track for serious improvement by spring. That’s no longer the case. California’s snowpack was promisingly high at the start of the year after Pacific storms in October and December delivered a round of heavy rains and deep snows. But it has since dropped below where officials hoped it would be for this time of year after those early-season cloudbursts turned out to be isolated events. ‘If you think about drought as an overdrawn bank account, we have had a couple unexpected deposits in October and December,” said Daniel Swain, climate scientists at the University of California Los Angeles. ‘But right now we are right back to overdraft.’”

February 7 – Bloomberg: “China’s dependency on coal is likely to worsen this year as the authorities struggle to rein in prices after the Lunar New Year break. Chinese miners dug up more than 4 billion tons of the dirtiest fossil fuel for the first time in 2021. The effort to stave off power outages involved unleashing some 300 million tons of capacity that’s still producing, and which is likely to add another 1% or 2% to annual output this year, according to… the Shanghai Shipping Exchange.”

February 9 – CNBC (Michael Sheetz): “The sun has been hibernating – but it’s waking up, and the next few years may see more satellites damaged or destroyed by solar storms than ever before. Elon Musk’s SpaceX is feeling the pinch of that solar threat this week: The company expects to lose nearly a full launch’s worth of Starlink internet satellites after a geomagnetic storm disrupted the Earth’s atmosphere and sent about 40 of the spacecraft to an early, fiery demise. But these storms are not uncommon, space weather experts explained…, and are only expected to worsen over the next few years. The sun started a new 11-year solar cycle in December 2019 and is now ramping to a ‘solar maximum’ that is expected to hit in 2025.”

Leveraged Speculation Watch:

February 9 – Wall Street Journal (Rebecca Feng): “Some data-driven Chinese hedge funds have stumbled, after several years of eye-catching returns and surging inflows from investors. These quantitative fund managers use statistical models to select stocks and time trades, relying on machine-developed trading algorithms to filter out human weaknesses and find patterns in the market. The rise of Chinese quant investing mirrors earlier growth on Wall Street, with stock markets in both countries being large and liquid.”

Geopolitical Watch:

February 7 – Financial Times (Gideon Rachman): “Will there be a war in Ukraine? The one man who might know for sure is Vladimir Putin. The Russian president has ordered the build-up of troops on the borders of Ukraine. The ultimate decision about whether to invade will be his alone. But how will Putin decide? That depends on which version of the Russian leader you believe in: Putin the Rational or Vlad the Mad. Most western policymakers believe in Putin the Rational. They argue that, after more than 20 years in power, the Russian leader is a known quantity. He is ruthless and amoral. But he is also shrewd and calculating. He takes risks, but he is not crazy. But there are other analysts who fear the Russian leader is turning into Vlad the Mad. They think that Putin has been in power for too long and is growing increasingly out of touch and paranoid. His isolation during the pandemic has made matters worse. Vlad is listening to a dangerously small circle of nationalist advisers.”

February 10 – Reuters (Robin Emmott, Tom Balmforth and Vladimir Soldatkin): “Britain said… the West could face the ‘most dangerous moment’ in its standoff with Moscow in the next few days, as Russia held military exercises in Belarus and the Black Sea following its troop buildup near Ukraine. Tensions remained high, with Ukraine also staging war games, but leaders on all sides signalled they hoped diplomacy could still prevail in what British Prime Minister Boris Johnson called Europe's biggest security crisis for decades.”

February 9 – Reuters (Anton Kolodyazhnyy): “A senior Russian official accused the West... of ramping up political pressure on Moscow by supplying weapons and ammunition to support Ukraine during a standoff over a Russian military buildup. Moscow has massed troops near Ukraine, and is set to stage military drills in close ally Belarus to Ukraine's north, stirring fears that it could invade. Russia denies any plan to attack Ukraine. Countries such as the United States and Britain have supplied military aid to Ukraine that has included anti-tank missiles and launchers to help it defend itself. Others, such as Germany, have sent helmets, shunning lethal aid. Russian Deputy Foreign Minister Sergei Ryabkov said the military supplies to Ukraine amounted to Western ‘blackmail and pressure’. ‘Everything happening in terms of pumping Ukraine with equipment, ammunition, military hardware including lethal weapons is an attempt to put additional political pressure on us, as well as probably military technical pressure,’ Ryabkov was quoted…”

February 10 – Financial Times (John Paul Rathbone, Max Seddon and Roman Olearchyk): “Russia began massive military exercises in Belarus and naval drills in the Black Sea on Thursday as the UK warned that the stand-off with Moscow over Ukraine faced its “most dangerous moment” in the next few days. An estimated 30,000 Russian troops, supported by tanks, aircraft and the advanced S-400 air defence system are involved in the so-called Allied Resolve exercises in Belarus, near Ukraine’s border, which end on February 20. ‘This is probably the most dangerous moment, I would say, in the course of the next few days, in what is the biggest security crisis that Europe has faced in decades,’ UK prime minister Boris Johnson told a news conference with Nato’s secretary-general Jens Stoltenberg…”

February 5 – Reuters (Ben Blanchard): “Taiwan… condemned as ‘contemptible’ the timing of China and Russia’s ‘no limits’ partnership at the start of the Winter Olympics, saying the Chinese government was bringing shame to the spirit of the Games. China and Russia, at a meeting of their leaders hours before the Winter Olympics officially opened, backed each other over standoffs on Ukraine and Taiwan with a promise to collaborate more against the West.”

February 6 – Bloomberg (Ben Westcott): “The U.S. and its allies need to push back harder against China after they ‘acquiesced and allowed’ Beijing to expand its footprint in the South China Sea over the past decade, Australia’s Defense Minister Peter Dutton said. ‘If we continue on that trajectory, then I think we’ll lose the next decade,’ Dutton said… ‘And my sense is that we’re better off being honest about that.’”