Friday, November 4, 2022

Weekly Commentary: Powell Building Credibility

The guy sounds like a discerning traditional central banker. Powell is an admirer of Paul Volcker’s fortitude, and he’s clearly drawing inspiration from the legendary Fed Chairman. Markets are growing impatient.

It was a misstep for the FOMC to have inserted new language into its post-meeting statement: “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Stocks rallied a quick 1% on the statement, assuming a newfound focus on “cumulative tightening” and “lags” signaled a shift in the committee’s thinking. Inklings of such a turn had already been offered by Fed officials, including Bullard, Daly, Evans and Kashkari. Markets could take comfort that the Fed was in sync with other central banks, with recent market instability forcing a reassessment of aggressive tightening. Importantly, relieved markets were seeing confirmation that the beloved - but estranged - “Fed put” was back in play. Now they just needed to hear it delivered from the lips of Jay Powell.

Powell’s head was elsewhere, perhaps drawing inspiration from the resolve Paul Volcker had demonstrated some 40 years earlier. I respect and admire Powell. His Fed has made historic mistakes, but he’s determined to try to make amends. The Chair is doing what he knows is in our nation’s best interest. He’s willing to take the heat.

Distinguishing himself from his predecessors (back to Greenspan), the Fed Chair is not kowtowing to the financial markets. A further departure from the past: Powell’s a straight-shooter. He probably planned on a balanced approach, though the more Powell earnestly answered questions, the more his inner Volcker came through.

“There’s no sense that inflation is coming down…”

“Rates have to go higher and stay higher for longer.”

“Here in the United States, we have a strong economy…”

“Our message should be, what I’m trying to do is make sure that our message is clear, which is that we think we have a ways to go; we have some ground to cover with interest rates before we get to that level of interest rates that we think is sufficiently restrictive.”

“We’re exactly where we were a year ago. So, I would also say it’s premature to discuss pausing. And it’s not something that we’re thinking about – that’s really not a conversation to be had now. We have a ways to go. And the last thing I’ll say is that I would want people to understand our commitment to getting this done. And to not making the mistake of not doing enough - or the mistake of withdrawing our strong policy and doing that too soon. So those, I control those messages and that’s my job.”

“Now you see services inflation, core services inflation moving up, and I just think that the inflation picture has become more and more challenging over the course of this year, without question. That means that we have to have policy be more restrictive, and that narrows the path to a soft landing, I would say.”

“I don’t have any sense that we’ve over-tightened or moved too fast. I think it’s been good and a successful program that we’ve gotten this far this fast. Remember though that we still think there’s a need for ongoing rate increases, and we have some ground left to cover here and cover it we will.”

“In the United States, we also have a demand issue. We’ve got an imbalance between demand and supply, which you see in many parts of the economy. So, our tools are well-suited to work on that problem, and that’s what we’re doing.”.

“We’ll want to get the policy rate to a level where it is, where the real interest rate is positive.”

Powell repeatedly emphasized the strong labor market.

“Overall though, the broader picture is of an overheated labor market where demand substantially exceeds supply. Job creation still exceeds, sort of the level that would hold the market where it is. So that’s the picture. Do we see, we keep looking for signs that sort of the beginning of a gradual softening is happening, and maybe that’s there. But it’s not obvious to me because wages aren’t coming down. They’re just moving sideways at an elevated level, both ECI and average hourly earnings.”

“I don’t know that the channels through which policy works have changed that much. I would say a big channel is the labor market, and the labor market is very, very strong. Very strong. And households, of course, have strong balance sheets.”

“I think no one knows whether there’s going to be a recession or not, and if so, how bad that recession would be. And our job is to restore price stability so that we can have a strong labor market that benefits all over time. And that’s what we’re going to do.”

Powell pushed back strongly against the criticism that the Fed had already driven the economy into recession. Interestingly, Powell also downplayed housing risk, a risk I believe is significantly greater than the Fed appreciates.

“I would say the housing market was very overheated for the couple of years after the pandemic, as demand increased and rates were low. We all know the stories of how overheated the housing market was, prices going up, many, many bidders and no conditions, that kind of thing. So, the housing market needs to get back into a balance between supply and demand… From a financial stability standpoint, we didn’t see in this cycle the kinds of poor credit underwriting that we saw before the global financial courses. Housing credit was very carefully, much more carefully managed by the lenders. So, it’s a very different situation and doesn’t appear to present financial stability issues.”

How the Fed’s risk management focus has evolved is also noteworthy. Powell repeatedly stated that the risk of not tightening enough greatly outweighs doing too much.

“And trying to make good decisions from a risk management standpoint, remembering of course that if we were to over-tighten, we could then use our tools strongly to support the economy; whereas if we don’t get inflation under control because we don’t tighten enough, now we’re in a situation where inflation will become entrenched and the costs, the employment costs in particular, will be much higher potentially. So, from a risk management standpoint, we want to be sure that we don’t make the mistake of either failing to tighten enough, or loosening policy too soon.”

“Again, if we over tighten, and we don’t want to, we want to get this exactly right, but if we over tighten, then we have the ability with our tools, which are powerful, to, as we showed at the beginning of the pandemic episode, we can support economic activity strongly if that happens, if that’s necessary. On the other hand, if you make the mistake in the other direction, and you let this drag on, then it’s a year or two down the road and you’re realizing inflation behaving the way it can, you’re realizing you didn’t actually get it. You have to go back in. By then, the risk really is that it has become entrenched in people’s thinking and the record is that employment costs, the cost to the people that we don't want to hurt, they go up with the passage of time.”

The S&P500 reversed 3.5% lower on Powell’s comments and was down another 1.5% at Thursday’s opening. After declining eight bps on the Fed statement to 3.97%, 10-year Treasury yields jumped to 4.11% on Powell. Yields then traded as high as 4.22% on Thursday (closed the week at 4.16%). Yield curve gyrations were noteworthy. After beginning the week with an inversion of 41 bps, the 2/10 Treasury yield spread was as much as 62 bps inverted in early-Friday trading – the biggest inversion since Volcker was in charge in 1981.

Global markets remain extraordinarily unstable.

After collapsing 57 bps the previous week, Italian yields jumped 29 bps this week. Italian stocks (MIB) gained 3.3%, with Italian banks surging 6.2%. European bank stocks rallied 4.1%. Major equities index gained 5.8% in Poland, 5.2% in Hungary, and 3.4% in the Czech Republic. Stocks were up 4.3% in Mexico, 3.2% in Brazil, and 2.0% in Columbia. South Korea’s KOSPI Index recovered 3.5%. In the currencies, the Brazilian real gained 4.7%, the Chilean peso 1.7% and the Mexican peso 1.4%.

November 2 – Bloomberg: “Nobody is quite sure who wrote it, when it was written or if it’s even true. But a screenshot of four paragraphs detailing a China reopening plan was enough for traders to scoop up stocks for two days running. The unverified post, which contained black characters on a white background with no identifying marks, first began circulating on Monday night in WeChat… By the next morning, it was spreading like wildfire. The screenshot claimed that China’s No. 4 official Wang Huning -- one of seven men on the powerful Politburo Standing Committee -- held a meeting on Sunday of Covid-19 experts at the request of President Xi Jinping. It called Xi ‘big boss’ and used ‘WHN to refer to Wang in a bid to sidestep censors, who strictly manage messages and social media posts on China’s political elite. Representatives at the meeting, which included members of the economic and propaganda departments, discussed ‘speeding up a conditional opening plan, with the goal of substantially opening by March next year,’ it said.”

Hong Kong’s Hang Seng Index jumped 5.4% in Friday trading and 8.7% for the week – the biggest weekly gain since 2015 (from Bloomberg). The Shanghai Composite rose 2.4% Friday and 5.3% for the week. The growth-oriented ChiNext Index surged 3.2% and 8.9%.

Friday was an extraordinary day in the currencies. The dollar index dropped 1.6%, the biggest one-day decline since March 2020. The Chinese Renminbi jumped 1.62%, and the Offshore Renminbi surged 2.02% versus the dollar. Bloomberg: “Chinese Yuan Has Its Best Day in Decades as Good News Piles Up.”

Let’s not get carried away. It’s a Chinese mole hill of good versus a mountain of bad news. Another Bloomberg headline: “China Stock Frenzy Enters Overdrive on Hopes That Worst Is Over.” There are lots of rumors and some substance that China is moving toward relaxing “zero-Covid.”

November 4 – Reuters: “China will make substantial changes to its ‘dynamic-zero’ COVID-19 policy in coming months, a former Chinese disease control official told a conference hosted by Citi on Friday... Separately, three sources familiar with the matter said China may soon further shorten quarantine requirements for inbound travellers. Zeng Guang, former chief epidemiologist at the Chinese Centre for Disease Control and Prevention who has remained outspoken on China's COVID fight, said the conditions for China opening up were ‘accumulating’, citing new vaccines and progress the country had made in antiviral drug research.”

China is moving to loosen travel and quarantine restrictions. Also encouraging, Beijing has agreed to allow foreigners to be vaccinated with BioNtech’s mRNA vaccine. China’s inferior vaccines and the prohibition of foreign mRNA vaccinations left the Chinese, especially its large elderly population and inadequate healthcare system, vulnerable. The thought is that this could be a first step toward more effective vaccinations.

Clearly, Beijing has to relax “zero-Covid.” And it makes sense that, planning ahead, they might target March for a potential loosening. The developer collapse and housing downturn have attained powerful momentum. Sirens must be blaring in Beijing. Between now and March, China faces a perilous winter.

China reported 3,871 new cases Friday, the most since early in the Shanghai wave (May). Moreover, infections are increasing in two-thirds of China’s 31 provinces. There are also huge unknowns associated with the slew of new, highly transmissible variants.

I certainly understand the clamoring for positive news out of China. Sentiment coming out of the national congress seemingly couldn’t have been more negative. Markets were ripe for a short squeeze and bout of panic buying. Beijing is now in crisis management mode, which is always a salve for the markets.

There is, however, clear potential for Covid to get a whole lot worse over the coming weeks and months – and Xi’s Beijing has way too much invested in “zero-Covid” to relax measures at this juncture. And prospects for apartment markets and the Chinese economy over the winter are bleak at best. As such, prospects for massive Beijing-directed infrastructure spending are looking good.

Relaxation of “zero-Covid” was credited for this week’s commodities price surge. The Bloomberg Commodities Index rallied 5.1%, increasing y-t-d gains to 18.5%. “Prices Up on China Optimism”; “Copper has Best Day Since 2009 as Metals Rocket on Dollar Drop.” Copper surged 7.5%, Nickel 7.6%, Aluminum 6.5%, and Tin 4.3%. Silver jumped 8.3%, Gold 2.3% and Platinum 1.7%.

Despite festering crisis dynamics, there remain strong inflationary impulses globally. For the most part, commodities markets continue to be underpinned by strong demand and supply constraints. Investment and speculative demand, however, have recently been restrained by the spiking dollar and downward spiraling Chinese fundamentals. This week’s Chinese market squeeze, especially in the renminbi versus the dollar, provided a catalyst for a bit of a commodities buyer's stampede. There will no doubt be ongoing volatility. I wouldn’t be surprised to see a resumption of the commodities secular bull market.

Despite pockets of weakness (i.e. housing), the overall U.S. economy continues to demonstrate strong inflationary biases. There’s a lot of focus on the size of the December rate hike, along with the so-called “terminal rate.” The market is now forecasting a peak Fed funds rate of 5.09% for the May 3rd 2023 meeting. I’m skeptical that 5% short-term rates will suffice in returning inflation to the Fed’s 2% target. I see it more as the market’s estimate of how far rates can rise before things start to break.

While layoff announcements (especially associated with the bursting tech Bubble) are adding up, the greater U.S. economy is demonstrating resilience. But I tend to view today’s resilience as a negative consequence of previous boom-time excesses. Most corporations and the household sector are still living off QE cash and wealth effects. Moreover, energized banking and “private Credit” sectors are lending at a record pace. Never had it so good. And while reduced from crazy Covid levels, federal deficit spending remains formidable.

The bottom line is that system Credit continues to expand at a rate sufficient to underpin excess demand while fueling inflation. It’s also becoming increasingly clear that secular supply dynamics (i.e. “de-globalization”, China frictions and the new “Iron Curtain,” climate change…) point to sticky inflation even in the face of some waning demand. New Cycle Dynamics. And the Fed’s job is all the more challenging. It’s increasing the likelihood of something breaking.

Securities markets have had a dismal year. Yet, a Credit slowdown will actually mark the down-cycle’s onset. And that’s when the economic downturn gathers pace, exposing weak bank and “private Credit” underwriting and other excesses. It’s still early in the process.

For the Week:

The S&P500 dropped 3.3% (down 20.9% y-t-d), and the Dow declined 1.4% (down 10.8%). The Utilities dipped 0.8% (down 7.8%). The Banks slipped 0.7% (down 21.4%), while the Broker/Dealers gained 1.4% (down 3.3%). The Transports declined 0.7% (down 18.2%). The S&P 400 Midcaps lost 1.2% (down 15.4%), and the small cap Russell 2000 fell 2.5% (down 19.8%). The Nasdaq100 sank 6.0% (down 33.5%). The Semiconductors declined 1.5% (down 39.2%). The Biotechs slipped 0.2% (down 10.7%). While bullion rallied $37, the wildly volatile HUI gold equities index was unchanged (down 23.1%).

Three-month Treasury bill rates ended the week at 4.005%. Two-year government yields surged 24 bps to 4.66% (up 393bps y-t-d). Five-year T-note yields rose 15 bps to 4.33% (up 307bps). Ten-year Treasury yields gained 14 bps to 4.16% (up 265bps). Long bond yields rose 11 bps to 4.25% (up 235bps). Benchmark Fannie Mae MBS yields jumped 19 bps to 5.93% (up 387bps).

Greek 10-year yields jumped 23 bps to 4.71% (up 339bps y-t-d). Italian yields surged 29 bps to 4.46% (up 329bps). Spain's 10-year yields rose 20 bps to 3.35% (up 279bps). German bund yields jumped 19 bps to 2.30% (up 247bps). French yields rose 22 bps to 2.83% (up 263bps). The French to German 10-year bond spread widened about three to 53 bps. U.K. 10-year gilt yields increased six bps to 3.54% (up 257bps). U.K.'s FTSE equities index rallied 4.1% (down 0.7% y-t-d).

Japan's Nikkei Equities Index increased 0.3% (down 5.5% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.26% (up 19bps y-t-d). France's CAC40 gained 2.3% (down 10.3%). The German DAX equities index rose 1.6% (down 15.3%). Spain's IBEX 35 equities index increased 0.3% (down 8.8%). Italy's FTSE MIB index rallied 3.3% (down 14.9%). EM equities were mostly higher. Brazil's Bovespa index jumped 3.2% (up 12.7%), and Mexico's Bolsa index surged 4.3% (down 4.0%). South Korea's Kospi index recovered 3.5% (down 21.1%). India's Sensex equities index gained 1.7% (up 4.6%). China's Shanghai Exchange Index rallied 5.3% (down 15.6%). Turkey's Borsa Istanbul National 100 index surged 8.7% (up 127%). Russia's MICEX equities index declined 0.5% (down 43.1%).

Investment-grade bond funds posted outflows of $2.096 billion, while junk bond funds reported inflows of $4.278 billion (from Lipper).

Federal Reserve Credit fell $39.4bn last week to $8.662 TN. Fed Credit was down $239bn from the June 22nd peak. Over the past 164 weeks, Fed Credit expanded $4.935 TN, or 132%. Fed Credit inflated $5.851 Trillion, or 208%, over the past 521 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $27.1bn to $3.310 TN - the low since July 2017. "Custody holdings" were down $171bn, or 4.9%, y-o-y.

Total money market fund assets jumped $47.5bn to $4.632 TN. Total money funds were up $77bn, or 1.7%, y-o-y.

Total Commercial Paper was little changed at $1.301 TN. CP was up $147bn, or 12.8%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell 13 bps to 6.95% (up 386bps y-o-y). Fifteen-year rates declined seven bps to 6.29% (up 394bps). Five-year hybrid ARM rates slipped a basis point to 5.95% (up 341bps) - near the high since November 2008. Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 16 bps to 7.23% (up 406bps) - the high since December 2008.

Currency Watch:

For the week, the U.S. Dollar Index was little changed at 110.88 (up 15.9% y-t-d). For the week on the upside, the Brazilian real increased 4.7%, the New Zealand dollar 2.1%, the Mexican peso 1.4%, the South African rand 1.3%, the Australian dollar 0.9%, the Canadian dollar 0.9%, the Norwegian krone 0.8%, the Japanese yen 0.7%, the Swedish krona 0.4%, the Singapore dollar 0.3%, the South Korean won 0.2% and the Swiss franc 0.1%. On the downside, the British pound declined 2.0%, and the euro slipped 0.1%. The Chinese (onshore) renminbi increased 0.94% versus the dollar (down 11.54% y-t-d).

Commodities Watch:

November 1 – Reuters (Peter Hobson): “Central banks bought a record 399 tonnes of gold worth around $20 billion in the third quarter of 2022, helping to lift global demand for the metal, the World Gold Council (WGC) said… Demand for gold was also strong from jewellers and buyers of gold bars and coins, the WGC said in its latest quarterly report, but exchange traded funds (ETFs) storing bullion for investors shrank… Buying by central banks in the third quarter far exceeded the previous quarterly record in data stretching back to 2000 and took their purchases for the year to September to 673 tonnes, more than the total purchases in any full year since 1967…”

November 3 – Bloomberg (Eddie Spence): “A normally dry research report jolted the gold market this week, when it pointed to massive but so far unidentified sovereign buyers. Central banks bought 399 tons of bullion in the third quarter, almost double the previous record, according to the World Gold Council. Just under a quarter went to publicly identified institutions, stoking speculation about mystery buyers. While most central banks inform the International Monetary Fund when they buy gold to supplement their foreign exchange coffers, others are more secretive. Few have the capacity to undertake the third-quarter buying spree…”

The Bloomberg Commodities Index surged 5.1% (up 18.5% y-t-d). Spot Gold gained 2.3% to $1,682 (down 8.1%). Silver surged 8.3% to $20.86 (down 10.5%). WTI crude jumped $4.71 to $92.61 (up 23%). Gasoline dropped 5.9% (up 23%), while Natural Gas rallied 12.6% to $6.40 (up 72%). Copper jumped 7.5% (down 17%). Wheat rose 2.2% (up 10%), while Corn was little changed (up 15%). Bitcoin gained 2.7% this week, or $560, to $21,184 (down 54%).

Market Instability Watch:

November 1 – Bloomberg (Lu Wang): “It happens in a flash: The S&P 500 turns on a dime, and piranha-like options traders pile into short-dated contracts in a dash to harvest a quick advantage… Once a popular playbook for day traders seeking quick profits on meme stocks, the risky strategy appears to have grown more popular among retail and institutional investors alike. During the third quarter, S&P 500 options expiring within one day accounted for more than 40% of total volume, almost doubling from six months ago, according to… Goldman Sachs... The rush reinforces concern that derivatives can amplify moves in underlying assets, potentially creating market dislocations.”

November 4 – Reuters (Amanda Cooper): “Investors put money into cash at the fastest pace at the start of a quarter since the 2020 COVID crisis in the week to Wednesday…, BofA Global Research said… Cash funds saw inflows of $62.1 billion in the latest week, reflecting investor demand for dollars, which in turn saw the 19th straight week of outflows from gold funds - the longest string of outflows since 2014, BofA said…”

November 3 – Financial Times (Leo Lewis, Kana Inagaki and Tommy Stubbington): “There’s a Chinese proverb that holds it is better to plan one’s means of retreat than 36 different ways to win the battle. The axiom has cropped up on Tokyo trading floors this autumn, after Japan lavished a record $62bn to fight the yen’s collapse below a three-decade low, in as many as four separate interventions since September. That is only one front in its war against global market forces. By the end of June, after months fighting to control the yield curve, the Bank of Japan had raised its holdings of Japanese government bonds (JGBs) to over half a quadrillion yen ($3.6tn). Last week, to fight the negative impact of inflation, the government unveiled a $200bn stimulus package. There is mounting fear, however, that an orderly retreat may be impossible. Instead the BoJ is betting everything on yet another strategy aimed at winning the battle. It is making a giant gamble…”

November 3 – Bloomberg (Kyungji Cho and Shinhye Kang): “South Korea will temporarily relax liquidity rules for insurance companies and is asking them to refrain from bond sales, the latest in a series of measures by officials in recent days to ease credit market stress. Officials will ease the liquidity risk evaluation standard, the financial regulator said... That will give them a one-notch lift in the regulator’s system, a step designed to help insurers contribute to stabilizing the market, including by paying into an already-unveiled fund for bond purchases.”

November 3 – Bloomberg (Lorretta Chen and Ameya Karve): “An obscure South Korean insurer’s decision to buck market convention by skipping a call option sparked a region-wide selloff in so-called perpetual bonds. That’s now providing a wakeup call to investors that a wave of financial companies could follow suit. A perpetual note from AIA Group Ltd., one of Asia’s largest insurers, fell by a record 6.7 cents to 70 cents on the dollar Thursday. Similar securities from Kyobo Life Insurance Co. and Bank of East Asia Ltd. tumbled more than 13 cents. A perpetual bond of Woori Bank dropped, while notes from Shinhan Financial Group Co. and Kookmin Bank headed for their worst weekly retreats.”

November 2 – Bloomberg (Kyungji Cho): “A South Korean insurer took the unusual step of delaying buying back perpetual bonds, in the first such case for the nation’s issuers since 2009 that adds to signs of a crisis in the local credit market. Heungkuk Life Insurance Co. will postpone exercising a Nov. 9 call option for its dollar perpetual note, citing market conditions that prompted it to delay a planned security issuance that would have repaid the bonds... Korea has been scrambling to prevent a credit market meltdown from sparking broader contagion…”

October 31 – Bloomberg (Harry Suhartono): “High-yield corporate bonds in Southeast Asia suffered their biggest monthly blow in more than two years in October, as recession risks and higher rates put pressure on their finances. The Bloomberg index for the region’s junk corporate dollar debt are set to have lost 6% in October… That’s the biggest monthly drop in returns since March 2020, if the losses through Oct. 28 hold.”

October 30 – Wall Street Journal (Matt Grossman and Sam Goldfarb): “Rising friction in the trading of U.S. government debt has investors worried about the health of a $24 trillion market that is critical to the functioning of the broader financial system. The ranks of traders ready to buy and sell Treasurys are shrinking. Individual trades are moving prices more. Treasury securities with similar characteristics are trading at larger-than-normal price differences. Major players, including the big banks and asset managers that have long been significant buyers, are in retreat.”

November 2 – Reuters (Alden Bentley and Davide Barbuscia): “The U.S. Treasury said… it will continue to assess whether or how to implement a program to buy back some of its existing bonds, a move partly aimed at improving liquidity in the Treasuries market. Last month, as part of its regular survey of dealers before each of its quarterly refunding announcements, the Treasury asked dealers about the specifics of how buybacks could work. These included questions on how much it would need to buy so-called off-the-run Treasuries, which are older and less liquid issues, to improve liquidity in those securities.”

November 3 – Reuters (Noele Illien): “Credit Suisse profitability could be hit by a drop in asset management fees in the fourth quarter, the Swiss bank said… Lower asset values because of adverse market movements in client portfolios in the third quarter could lead to decreased fee revenues for the group…, the bank said. Along with its restructuring plan, Credit Suisse last month revealed that social media rumours had led to client asset outflows in the first two weeks of October that substantially exceeded third-quarter rates.”

UK Crisis Watch:

November 2 – Bloomberg (Greg Ritchie): “The cost of borrowing sterling against high quality collateral is sliding away from the Bank of England’s key rate, a distortion that risks impeding the central bank’s ability to tighten policy effectively. The price investors pay to borrow cash overnight by pledging gilts to counterparties, the so-called Repurchase Overnight Index Average or RONIA, is trading 43 bps below the BOE’s rate. That’s a record discount… Normally, the two rates should move broadly in tandem… But investors including pension funds are hoarding cash after the bond market turmoil last month, and the flood of liquidity is exacerbating the impact of an existing collateral shortage keeping repo rates depressed.”

November 4 – Reuters (David Milliken): “The Bank of England must sell in ‘a timely and orderly’ way the 19.3 billion pounds ($21.7bn) of government bonds which it bought in its recent emergency operation to support the market, a senior BoE official said… The BoE was forced to step in to buy long-dated and index-linked gilts to halt a fire sale of assets by British pension funds following former prime minister Liz Truss's Sept. 23 'mini-budget'.”

Bursting Bubble and Mania Watch:

October 28 – Bloomberg (Sam Kim and Whanwoong Choi): “Past financial crises are haunting South Korean policy makers as they rush to support a local credit market that’s quickly gone from one of the world’s safest to teetering on the brink. As Korea gets swept into a global debt market rout, corporate treasurers and market regulators in Seoul are staring down one of the most rapid deteriorations in the nation’s credit market ever… Yields on top-rated five-year Korean corporate debt have spiked 157 bps in the three months through October, the worst such blowout on record. One particularly alarming development has been yields surging to a 13-year high on local commercial paper…”

November 2 – Bloomberg (Lydia Beyoud): “The head of Wall Street’s main regulator has a stern warning for market players: the US Securities and Exchange Commission’s crackdown is just getting started. SEC Chair Gary Gensler told securities lawyers… that his agency would continue to pursue violations wherever and however they occur. In remarks for the Practising Law Institute’s 54th Annual Institute on Securities Regulation, Gensler ticked through enforcement actions the agency had brought during his tenure. ‘Make no mistake: If a company or executive misstates or omits information material to securities investors, whether in an earnings call, on social media, or in a press release, we will pursue them for violating the securities laws,’ he said.”

October 29 – Associated Press (Adam Beam): “The good times might soon be over for California’s government. The nation’s most populous state has had so much cash lately that lawmakers have spent freely — handing out free health care to low-income immigrants, paying for every 4-year-old to attend kindergarten and sending more than $21 billion in stimulus checks to taxpayers over the past two years. That seemingly endless flow of money has started to dry up as state tax collections have fallen below expectations for four months in a row. There’s now an 80% chance California will be about $8 billion short when its fiscal year ends next summer, according to the latest estimate from the nonpartisan Legislative Analyst’s Office.”

November 3 – Bloomberg (Patrick Clark): “Opendoor Technologies Inc. reported third-quarter losses that were steeper than expected, after the US housing slump led the company to sell homes for less than anticipated and pushed it to write down the value of its inventory… Opendoor pioneered a data-driven spin on home-flipping known as iBuying, in which the company purchases homes, makes light repairs and resells the properties.”

Ukraine War Watch:

November 2 – Bloomberg (Marc Champion): “President Vladimir Putin’s swift and severe response to an attack on his Black Sea fleet reflects a war that is increasingly marked by a duel between long range Russian missiles and Ukraine’s innovative array of drones and truck bombs… The long-range war that the Black Sea Fleet forms part of is only likely to become more important in the coming months, as fighting on the ground is slowed by autumn rain and falling winter temperatures, adding to exhaustion on both armies… It is a ‘war of drones,’ Ukraine’s Deputy Prime Minister for Digital Transformation Mykhailo Fedorov told Forbes Ukraine…, adding his country was on the cusp of a boom in their manufacture, including a model specifically designed to shoot down the Shahed-136 loitering drones the US says Russia bought from Iran.”

November 2 – Reuters (Polina Devitt): “President Vladimir Putin on Wednesday reserved Russia's right to withdraw again from an international agreement allowing Ukraine to export grain via the Black Sea, after ending four days of non-cooperation with the deal. If Russia did so, however, Putin said it would not impede shipments of grain from Ukraine to Turkey. Moscow had on Saturday pulled out of the arrangement, brokered by Turkey and the United Nations, saying it could not guarantee the safety of civilian ships crossing the Black Sea because of a drone attack on its fleet there.”

October 31 – Bloomberg (Daryna Krasnolutska and Kateryna Choursina): “Ukraine warned of widespread blackouts after a massive wave of Russian missile attacks on Monday damaged power and water supplies across the country including in the capital Kyiv. The Kremlin meanwhile warned that grain shipments would be ‘much riskier and more dangerous’ after it pulled out of a deal allowing Ukrainian exports from Black Sea ports following an attack on Russian navy vessels in Crimea that Moscow blamed on the government in Kyiv.”

November 2 – New York Times (Marc Santora): “As night falls and darkness descends on Kyiv, the flashlights on smartphones begin to flicker on like fairy lights, leading the way home. Dogs wear glow sticks around their necks; flower merchants switch on headlamps to show off the vibrant colors of their lilacs and peonies; and children are outfitted in reflective clothing for safety. The streets of this capital city, illuminated with nightlife only weeks ago, are now shrouded in darkness and shadows after sunset. That’s the result of the rolling power outages Ukraine has put in place to prevent a complete collapse of the national energy grid, after repeated Russian bombardments. Failing on the battlefield, President Vladimir V. Putin of Russia has stepped up his campaign to break the nation’s resolve by degrading daily life…”

U.S./Russia/China Watch:

November 1 – Reuters: “Russia said… it was considering what ‘further steps’ to take in connection with its allegation that Britain was responsible for an attack on the Nord Stream undersea gas pipelines. Russia's defence ministry said… British navy personnel had blown up the Nord Stream pipelines in September, an assertion that London said was false and designed to distract from Russian military failures in Ukraine. ‘There is evidence that Britain is involved in sabotage ... a terrorist act against vital energy infrastructure,’ Kremlin spokesman Dmitry Peskov told reporters. ‘Such actions cannot be put aside. Of course, we will think about further steps. It definitely cannot be left like this,’ Peskov said.”

Economic War/Iron Curtain Watch:

October 31 – Bloomberg: “Chinese Foreign Minister Wang Yi criticized US export curbs in a call with US Secretary of State Antony Blinken, underscoring the tensions between the nations before a possible face-to-face meeting of their leaders. ‘The US side should stop its containment and suppression of China and not create new obstacles to bilateral relations,’ said Wang… ‘The US side introduced new export controls against China, restricting investments in China, seriously violating free-trade principles and seriously harming China’s legitimate rights and interests, which must be corrected.’”

November 3 – Reuters (Eduardo Baptista): “The U.S has ‘no right’ to interfere in Chinese cooperation with Germany, China's foreign ministry said…, after Washington cautioned against Beijing getting a controlling stake in Hamburg's port terminal. U.S. interference is symptomatic of its practice of coercive diplomacy, foreign ministry spokesman Zhao Lijian told reporters… ‘Pragmatic cooperation between China and Germany is a matter for the two sovereign countries, the United States should not attack it without reason and has no right to meddle and interfere,’ Zhao said…”

October 31 – Financial Times (Patti Waldmeir): “Sino-US relations are at their worst since I began my love affair with China with the adoption of two Chinese infants 22 years ago, followed by eight years as the FT’s Shanghai bureau chief. The news that only around half as many mainlanders are coming to the US to study now as before the pandemic seems a harbinger of worse to come. International students are like unofficial ambassadors between their cultures — halving that group will do nothing to heal the rift between the superpowers… Years of explosive growth in the number of Chinese students in America had begun to plateau even before the pandemic, but numbers have plummeted since then. F1 student visas issued to Chinese mainlanders fell 45% in the six months to the end of September from the comparable period in 2019…”

October 31 – Bloomberg: “The China-Russia Comprehensive Strategic Partnership of Coordination in the New Era has maintained a momentum of high-level development, Chinese President Xi Jinping said in a congratulatory message to the 65th anniversary of founding of China-Russia Friendship Association on Saturday... Exchanges and cooperation in various fields have been deepened: Xi.”

November 3 – Reuters (Ismail Shakil, Siyi Liu and Eduardo Baptista): “Canada ordered three Chinese companies… to divest their investments in Canadian critical minerals, citing national security. China in response accused Ottawa of using national security as a pretext and said the divestment order broke international commerce and market rules… The Canadian government ordered the divestiture after ‘rigorous scrutiny’ of foreign firms by Canada's national security and intelligence community, Industry Minister Francois-Philippe Champagne said…”

November 2 – Reuters (Ella Cao and Ryan Woo): “China will continue to support Pakistan as it tries to stabilise its financial situation, state media quoted President Xi Jinping as saying…, during a visit by Pakistan's prime minister to Beijing. Pakistan had been struggling with a balance of payments crisis even before devastating floods hit the country this summer, causing it an estimated $30 billion or more in losses. Pakistan was expected to seek debt relief from China, particularly the rolling over of bilateral debt of around $23 billion.”

October 30 – Financial Times (Harry Dempsey and Mercedes Ruehl): “Indonesia is studying the establishment of an Opec-like cartel for nickel and other key battery metals, highlighting the geopolitical confidence of nations that are rich in resources needed to make electric cars. Bahlil Lahadalia, the country’s investment minister, said Jakarta was looking at mechanisms similar to those used by Opec… ‘I do see the merit of creating Opec to manage the governance of oil trade to ensure predictability for potential investors and consumers,’ he said…”

Inflation Watch:

November 3 – Reuters (Scott Disavino and Laura Sanicola): “This winter the U.S. Northeast faces its highest energy costs in more than 25 years due to tight heating oil supplies and fierce global competition for liquefied natural gas (LNG) cargoes. Throughout 2022, consumers have been socked with higher costs for everyday items, including groceries and gasoline. The winter could bring more pain, with heating costs nationwide set to soar as much as 28% from last year, according to the U.S. Energy Information Administration's (EIA).”

October 31 – Bloomberg (Alexandre Tanzi): “Rent delinquency rates among US small businesses increased significantly this month, a new report shows. About 37% of small businesses… were unable to pay their rent in full in October. That’s according to a survey from… Alignable, a network of 7 million small business members. It’s up seven percentage points from last month and is now at the highest pace this year… The survey of 4,789 small business owners was conducted between Oct. 15 and Oct. 27… More than half say their rent is at least 10% higher than it was six months ago, and in seven say rents have increased at least 20%.”

Biden Administration Watch:

November 3 – CNBC (Chelsey Cox): “U.S. Commerce Secretary Gina Raimondo doubled down on the Biden administration’s controversial plan to ban U.S. companies, and citizens, from helping China manufacture advanced semiconductor chips, saying: ‘We have to protect the American people against China. Period. Full stop.’ ‘China has become more aggressive in what they call their military-civil fusion strategy, which is essentially fancy talk for buying our sophisticated chips, which are supposedly for commercial purposes,’ Raimondo said… China, however, is using those chips in military equipment that U.S. officials worry could be used against America, she said. ‘This is the most strategic, most bold move we’ve ever made to say no, we’re not going to stand for that.’”

October 30 – Financial Times (Kate Duguid and Colby Smith): “US government bond investors are urging the Treasury department to intervene in the market, hoping for signals this week of possible buybacks after months of wild prices swings and poor liquidity. The Federal Reserve’s aggressive increases in interest rates and quantitative tightening programme this year have amplified the drama in the normally staid $24tn Treasury market. Investors want the Treasury to provide clues of its plans when it makes its fourth-quarter funding announcement in the coming days.”

October 31 – CNBC (Emma Kinery): “President Joe Biden threatened… to pursue higher taxes on oil company profits if industry giants do not work to cut gas prices. Biden has criticized oil companies that have made record-high profits as consumers struggle to keep up with high gas prices… ‘Their profits are a windfall of war,’ Biden said, referring to Russia’s war in Ukraine… ‘It’s time for these companies to stop their war profiteering.’ ‘If they don’t they’re going to pay a higher tax on their excess profits,’ he said.”

October 31 – Reuters (Josh Smith): “The United States and South Korea began one of their largest combined military air drills on Monday, with hundreds of warplanes from both sides staging mock attacks 24 hours a day for the better part of a week. The operation, called Vigilant Storm, will run until Friday, and will feature about 240 warplanes conducting about 1,600 sorties…”

October 31 – Reuters (Renju Jose and Lewis Jackson): “The United States is planning to deploy up to six nuclear-capable B-52 bombers to an air base in northern Australia, a source familiar with the matter said…, amid heightened tensions with China. Dedicated facilities for the bombers will be set up at the Royal Australian Air Force's remote Tindal base, about 190 miles south of Darwin…”

Federal Reserve Watch:

November 2 – Bloomberg (Katie Greifeld and Vildana Hajric): “Jerome Powell’s Federal Reserve did something Wednesday it hadn’t done for months: say something dovish. Investors had all of 30 minutes to celebrate. Like a reproving parent, the Federal Reserve chairman quickly put the kibosh on any budding euphoria his comments about monitoring the lagged effect of interest rate policy might have provoked. Rates are still going up, he reiterated, probably more than people thought. The result was a painful bait-and-switch for stock and bond bulls. After surging 1% in the half-hour after the Fed decision was released, the S&P 500 Index sank when Powell said it was ‘very premature’ to think about the central bank’s historically aggressive tightening cycle taking a pause. The benchmark finished down 2.5% for its worst Fed day performance since January 2021.”

November 2 – Yahoo Finance (Jennifer Schonberger): “The U.S. Federal Reserve raised interest rates Wednesday by 75 bps for the fourth straight meeting while hinting at a potential slower pace in the future — and then Fed Chair Jerome Powell reiterated the central bank's commitment to raise rates further in an attempt to tame multi-decade highs in inflation. ‘In determining the pace of future increases in the target range the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments,’ the policy statement said.”

November 2 – Reuters (Dan Burns): “The ‘ultimate level’ of the Federal Reserve's benchmark policy rate is likely higher than previously estimated, Fed Chair Jerome Powell said… In remarks at a press conference after the Fed raised rates by 75 bps for a fourth consecutive meeting, Powell said there is ‘significant uncertainty’ around the level of rates needed to bring down inflation, but ‘we still have some ways to go.’”

November 2 – Reuters (Dan Burns): “There remains a chance that the U.S. economy can escape a recession as the Federal Reserve raises interest rates to lower inflation, but that window of opportunity for a ‘soft landing’ has narrowed this year as price pressures have been slow to ease, Fed Chair Jerome Powell said… ‘Has it narrowed? Yes,’ Powell said at a press conference... ‘Is it still possible? Yes.’”

October 31 – Bloomberg (Catarina Saraiva): “The Federal Reserve is getting an early taste of the next two years as Democratic lawmakers warn it against pushing the US economy into recession via its massive interest-rate hikes. With the central bank preparing to boost rates again Wednesday and Americans voting in midterm congressional elections Nov. 8, Senate Banking Committee chief Sherrod Brown of Ohio and Colorado Senator John Hickenlooper last week publicly lobbied Chair Jerome Powell to exercise restraint.”

U.S. Bubble Watch:

November 4 – Associated Press (Christopher Rugaber): “America’s employers kept hiring vigorously in October, adding 261,000 positions, a sign that as Election Day nears, the economy remains a picture of solid job growth and painful inflation. Friday’s report… showed that hiring was brisk across industries last month, though the overall gain declined from 315,000 in September. The unemployment rate rose from a five-decade low of 3.5% to a still-healthy 3.7%. The government also said that average hourly pay, on average, rose 4.7% from a year ago, a smaller year-over-year gain than in September. Still, last month’s wage increase remained high enough to fuel inflation.”

November 1 – Reuters (Lindsay Dunsmuir): “U.S. manufacturing activity grew at its slowest pace in nearly 2-1/2 years in October while a measure of prices paid by businesses for inputs slid for a seventh straight month… The Institute for Supply Management (ISM) said… its manufacturing PMI fell to 50.2 last month from 50.9 in September, both the lowest readings since May 2020. But while overall manufacturing activity fell, the ISM survey's forward-looking new orders sub-index rose to 49.2 last month from 47.1 in September… A measure of prices paid by manufacturers dropped to 46.6, the lowest reading since May 2020, from 51.7 in September.”

November 3 – Bloomberg (Augusta Saraiva): “US service providers expanded in October at the slowest pace since May 2020 as orders growth and business activity moderated, suggesting the broader economy continues to cool. The Institute for Supply Management’s gauge of services retreated to 54.4 last month from 56.7 in September… The group’s measure of business activity… declined to a five-month low, and the new orders index fell to the lowest level since June.”

November 2 – CNBC (Jeff Cox): “Private payroll growth held strong in October while worker pay rose as well, particularly in the leisure and hospitality industry, according… ADP. Companies added 239,000 positions for the month, ahead of the… estimate of 195,000 and better than the downwardly revised 192,000 in September. Wages increased 7.7% on an annual basis… Job gains were especially strong in the pivotal leisure and hospitality sector, which added 210,000 positions while wage growth accelerated 11.2%. The industry, which includes hotels, restaurants, bars and related businesses, is seen as a bellwether as it took the hardest Covid hit and is still below pre-pandemic levels.”

November 1 – CNBC (Jeff Cox): “Job openings surged in September… Employment openings for the month totaled 10.72 million, well above the FactSet estimate for 9.85 million, according to… the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey. The total eclipsed August’s upwardly revised level by nearly half a million.”

November 3 – Wall Street Journal (James Freeman): “Demand for labor remains intense at U.S. small firms as owners continue to struggle to find willing and qualified applicants for their numerous open positions. That’s according to the latest National Federation of Independent Business monthly employment survey... NFIB Chief Economist William Dunkelberg reports: Forty-six percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, unchanged from September. The share of owners with unfilled job openings far exceeds the 48-year historical average of 23%. Forty percent have openings for skilled workers (down 2 points) and 22% have openings for unskilled labor (unchanged).”

November 3 – CNBC (Jeff Cox): “The cost of labor rose less than expected, but low productivity helped keep the pressure on inflation in the third quarter… Unit labor costs… increased 3.5% for the July-to-September period, below the 4% Dow Jones estimate and down from 8.9% in the second quarter. However, productivity rose at just a 0.3% annualized rate, below the 0.4% estimate…”

November 2 – CNBC (Diana Olick): “Mortgage application volume barely moved last week, falling 0.5% compared with the previous week… Mortgage applications to buy a home fell 1% for the week and were 41% lower year over year. Real estate agents and homebuilders alike say buyer traffic has slowed to a crawl.”

November 2 – Bloomberg (Craig Trudell): “Just as automakers start making headway sorting out the parts shortages that have constrained production and left dealers with a scarce supply of vehicles to sell, the Federal Reserve is putting up a new obstacle: much costlier car loans. The average annual percentage rate on new-car loans was 6.3% last month, the highest since April 2019, according to Edmunds.”

October 31 – Wall Street Journal (Ben Eisen): “The mortgage industry turned from feast to famine faster than America’s largest home lender anticipated. Rocket Mortgage harnessed a generation of low rates to refinance millions of homeowners. Last year, it racked up more than double the refi volume of any other lender, accounting for more than $1 of every $10… Now the Federal Reserve’s efforts to fight inflation have sent mortgage rates soaring. And refinancing, the driver of Rocket’s business, no longer makes sense for many homeowners. With mortgage rates now above 7%, just 133,000 U.S. homeowners can save money by refinancing at today’s rates, down from a peak of over 19 million in late 2020…”

October 31 – Bloomberg (Mary Schlangenstein): “The US airline industry is more vulnerable than it might appear to a potential recession, said William Franke, chairman of discount carrier Frontier Group… Airlines that have racked up a lot of debt during the pandemic will be in trouble if interest rates continue to rise and demand for travel softens with the onset of a recession, Franke said… ‘It’s going to be an interesting issue to see what happens to airlines if there’s a reduction in demand, if there’s a recession and people decide that paying for the car is more, important than flying to see their grandparents,’ he said. ‘You’re going to have an issue.’”

China Watch:

October 30 – Bloomberg: “China’s factory and services activity contracted in October, with signs that things could worsen in the coming months as the government sticks to Covid controls that have disrupted activity across the world’s second-largest economy. Both the official manufacturing purchasing managers index and the non-manufacturing gauge, which measures construction and services activity, fell in the month to 49.2 and 48.7, respectively, missing economists’ expectations.”

November 3 – Reuters (Ellen Zhang and Ryan Woo): “China's services activity contracted again in October as COVID-19 containment measures hit businesses and consumption, overshadowing the economic rebound in the last quarter, a private-sector business survey showed… The Caixin services purchasing managers' index (PMI) fell to 48.4 last month, the lowest since May, from 49.3 in September as rising COVID caseloads led to worsened disruptions and weighed on consumer confidence.”

November 2 – Financial Times (Edward White and Qianer Liu): “China’s ‘closed-loop’ system was designed to keep the world’s factory running during coronavirus outbreaks. But the system, used at factories making Apple devices and Tesla cars, is fast becoming unsustainable as supply chains are choked and foreign companies risk reputational damage from human rights violations against marginalised workers. Over the past month, Covid-19 cases have flared up again in China, returning the focus on Xi Jinping’s contentious zero-Covid policy that entails snap lockdowns, quarantines, mass testing and fastidious contact tracing… ‘I don’t know how much longer I can hang on [in the closed loop]. The accommodation and food in the factory are terrible,’ said a worker surnamed Xiao in Jiangsu, a province north of Shanghai. ‘I am a human being, not a machine.’”

October 30 – Financial Times (Ryan McMorrow and Gloria Li): “Workers have been staging an exodus this weekend from the world’s largest iPhone factory, amid a coronavirus outbreak at the Foxconn plant in central China. The huge complex in the city of Zhengzhou, which workers say produces Apple’s iPhone 14, is the latest manufacturing centre to be hobbled by President Xi Jinping’s tough zero-Covid policies. Five workers who spoke to the Financial Times said that the situation at the plant had gradually deteriorated as Covid continued to spread, with food and medical supplies running low and workers being locked in dormitory rooms for quarantine — causing hundreds of employees to flee on foot over the weekend. ‘It was total chaos in the dormitories,’ said a 22-year-old worker surnamed Xia. ‘We jumped a plastic fence and a metal fence to get out of the campus.’”

November 1 – Bloomberg: “China’s property debt crisis is entering a new phase as even developers that had long been considered safer rapidly tumble into distress. The past 24 hours have brought things to a head for several builders in that group… Greenland Holding Group Co., partially owned by local government entities and long seen as among the nation’s most resilient property firms, slid to record lows after saying Monday it would likely default on a dollar note due Nov. 13… The contagion is even reaching property giants that still have investment-grade ratings including China Vanke Co., the nation’s second biggest developer by sales. Its note due 2027, which was trading above 80 cents just a month ago, fell 4 cents Tuesday in the worst two-day drop ever to an all time-low of 40.3 cents.”

November 2 – Bloomberg (Alice Huang): “The crisis in Chinese property dollar bonds has become so extreme that an analyst who’s been covering the market since its inception in 2005 says meaningful analysis is no longer possible. ‘The proven investment approach is that it won’t go wrong being negative or more negative ahead of the market,’ said Zhi Wei Feng, a senior analyst at Loomis Sayles Investments…, who was working on credit research at Barclays Capital in 2005, when the first-ever Chinese real estate firm dollar bond was issued. ‘It is very frustrating when the market is no longer analyzable,’ she said. China’s offshore property notes have plummeted to record lows that reflect deep distress, as defaults mount to unprecedented levels.”

October 31 – Bloomberg: “China’s home sales slump intensified in October, the latest sign that a recovery in the nation’s property market remains distant. The 100 biggest real estate developers saw new-home sales drop 28.4% from a year earlier to 556.1 billion yuan ($76.2bn) in October, according to preliminary data from China Real Estate Information Corp. That plunge widened from a 25.4% slump in September.”

November 1 – Reuters (Liangping Gao and Ryan Woo): “China's property market continued its slump in October, with private data showing home prices and sales falling, suggesting lacklustre sentiment and a bleak outlook amid strict COVID curbs that have rattled consumer confidence. China's property sector, once a pillar of growth, has slowed sharply in the past year as a result of a government clampdown on excessive borrowing by developers, and a COVID-19-induced economic slump. Prices in 100 cities dropped for a fourth month in October, falling 0.01% month-on-month after a decline of 0.02% in September… Property sales by floor area in 100 cities fell about 20% year-on-year in October, according to a separate statement by the academy.”

October 31 – Reuters (Clare Jim): “Shanghai-based property developer CIFI Holdings said… it has suspended payments on all of its offshore debt after it failed to reach an agreement with creditors to which it owes $414 million in total… CIFI's default is another blow to a deepening debt crisis in the sector, following the resignation of Longfor Group's chairwoman and state-backed Greenland Holdings' request to extend some offshore bond repayments on Monday.”

October 30 – Bloomberg: “Chinese developer Longfor Group Holdings Ltd. plummeted the most on record after billionaire Chairperson Wu Yajun stepped down, leaving the company without its longtime leader during a deepening nationwide property crisis… Wu, 58, is stepping down due to health and age reasons, the company said… She follows in the footsteps of other billionaires…”

November 1 – Reuters (Roushni Nair): “Debt-laden property developer China Evergrande Group said… its unit received a notice of enforcement for unrecoverable funds from Shengjing Bank Co Ltd. The bank said it failed to recover funds totalling 32.595 billion yuan ($4.48bn), which was provided to the unit from 2020 to 2021…”

November 3 – Bloomberg: “A midsized developer became China’s first maiden domestic bond defaulter in four months, as more cracks appear in a local market that has so far avoided massive delinquencies caused by a deepening property crisis. Jinke Properties Group Co., based in the southwestern metropolis of Chongqing, failed to deliver payment due Oct. 30 on a note maturing in 2023 and with 850 million yuan ($116 million) in principal outstanding…”

November 2 – Reuters (Clare Jim): “Auditors of at least 14 Hong Kong-listed Chinese property firms have exited this year, securities filings showed, raising governance concerns about the debt-ridden developers several of whom are yet to publish long-pending financial results. Embattled developers including Sunac China, Shimao Group and Kaisa Group are among those whose auditors have parted ways in recent months. In many cases, firms outside the Big-Four accounting firms have been roped in as replacements.”

November 1 – Bloomberg (Krystal Chia): “China’s Banking and Insurance Regulatory Commission said that the country’s property sector is an area of concern, although risks are manageable. ‘That’s what we are concerned about,’ Vice Chairman Xiao Yuanqi said in response to Hong Kong Monetary Authority Chief Executive Eddie Yue’s question about real estate’s impact on banks… Xiao added that the property sector is ‘stable,’ and that Chinese banks’ exposure to real estate is at a ‘reasonable’ 26% of total loans. The default ratio of mortgage loans is lower than 0.1%, he said.”

October 28 – Financial Times (Chen Leng): “When Zhongwang Holdings made the prestigious acquisition of an Australian superyacht builder in 2017, it represented the high-water mark of the Chinese aluminium processor’s ambitions. Five years on, the tide has turned dramatically in its fortunes, with Zhongwang declared bankrupt last month and leaving more than $60bn in debt. Its founder and former chair, Liu Zhongtian, said at the time that the deal to buy SilverYachts would help the company take on the marine sector ‘at full speed’, introducing its extruded aluminium to high-end boat building. Instead, it has become part of the company’s cautionary tale of debt-fuelled binge buying that contributed to its downfall.”

November 3 – Bloomberg (Lisa Du and Jane Zhang): “Venture capital investments in China are falling sharply this year, making it one of the worst-performing countries globally after the Communist Party’s crackdown and an overall decline in tech valuations. The value of venture capital deals in the country tumbled 44% to $62.1 billion through October, compared with the same period in 2021, according to… Preqin. China once rivaled the US for capital invested in startups, before Xi Jinping’s administration embarked on sweeping efforts to reform the practices of giants like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. In addition, venture firms have pulled back globally as investors sour on money-losing technology companies and publicly traded stocks tumble.”

October 31 – Bloomberg (Sarah Zheng): “Hong Kong’s economy recorded its worst quarter in more than two years as weak demand and pandemic isolation battered the financial hub… Gross domestic product plunged 4.5% in the July-to-September period from a year earlier… That was far weaker than economists’ forecasts for a 0.8% decline, and worse than the second quarter’s 1.3% fall.”

November 1 – Reuters (William Langley and Edward White): “Chinese celebrities have been banned from endorsing a clutch of health and education services, signalling a new phase in President Xi Jinping’s campaign to overhaul the country’s corporate and social landscape. The rules, which ban entertainers and influencers from backing the products via social media, television commercials, live-streams and interviews, will constrict the lucrative world of star endorsements… ‘Celebrities should consciously practise socialist core values in their advertising endorsement activities,’ the rules stated. ‘Activities should conform to social morals and traditional virtues.’”

Central Banker Watch:

November 3 – Reuters (David Milliken and Andy Bruce): “The Bank of England raised interest rates to 3% on Thursday from 2.25%, its biggest rate rise since 1989 as it warned of a ‘very challenging’ outlook for the economy. The central bank forecasts inflation will hit a 40-year high of around 11% during the current quarter, but that Britain has already entered a recession that could potentially last two years - longer than during the 2008-09 financial crisis. Thursday's decision - the biggest in 33 years apart from a failed attempt to support the pound on Black Wednesday in 1992 - was in line with economists' expectations… Two policymakers, Silvana Tenreyro and Swati Dhingra, voted for smaller increases…”

November 3 – Bloomberg (Alexander Weber and Aaron Eglitis): “European Central Bank President Christine Lagarde warned that a ‘mild recession’ is possible but that it wouldn’t be sufficient in itself to stem soaring prices. Speaking a week after the ECB’s second straight 75 bps hike in borrowing costs, and as fears mount that the energy crisis will drag down output in the 19-nation euro zone, Lagarde said ‘we don’t believe that that recession will be able to tame inflation.’”

October 30 – Reuters (Bart Meijer): “The European Central Bank (ECB) could hike its interest rates by 75 bps again at its next policy meeting in December, ECB governing council member Klaas Knot said… The central bank for the 19 countries that share the euro raised the interest rate it pays on bank deposits by 75 bps last week, taking it 1.5%, its highest level since 2009. ‘We will take a significant interest step again in December,’ Knot said…”

November 1 – Reuters (Balazs Koranyi): “The European Central Bank must keep raising interest rates to fight off inflation, even if the probability of a euro zone recession has increased, ECB President Christine Lagarde said… ‘Our mandate is price stability and we have to deliver on that using all the tools we have available,’ Lagarde told Latvian news outlet Delfi… ‘We are determined to do what is necessary to bring inflation back to our 2% target.’”

November 1 – Reuters (David Ljunggren and Julie Gordon): “The Bank of Canada has not ruled out another oversized interest rate hike to fight sky-high inflation, governor Tiff Macklem said…, acknowledging Canadians feel ‘ripped off’ by fast rising prices. Macklem… said that while the central bank is starting to see signs rate increases are slowing the economy, it is still in excess demand. ‘Looking forward, we have indicated that we think interest rates need to go up and maybe that's another bigger-than-normal step, or maybe we can go down to more normal steps,’ Macklem said. ‘But we still think we have more to go.’”

Global Bubble Watch:

October 31 – Reuters (Choonsik Yoo and Jihoon Lee): “South Korea's exports in October fell the most in 26 months while a trade deficit persisted for a seventh month, underscoring that Asia's fourth-largest economy is slowing and its currency is hovering near 13-year lows. The government held a meeting of senior officials from more than 10 ministries and agencies hours after the data… and pledged to ‘make every effort’ to boost exports, while saying any near-term turnaround would be difficult.”

October 30 – Reuters (Sam Kim): “Global chip sales contracted for the first time since early 2020, in a blow to South Korea’s economy which is highly geared to the industry and struggling to adjust to weaker demand. Worldwide sales of semiconductors declined 3% in September from a year earlier, according to… the… Semiconductor Industry Association.”

Europe Watch:

October 31 – Reuters (Balazs Koranyi): “Euro zone inflation surged past expectations yet again this month to hit a record high, pointing to further interest rate hikes from the European Central Bank as price pressures appear to be broadening. Consumer price growth in the 19 countries sharing the euro accelerated to 10.7% in October from 9.9% a month earlier, beating expectations… for 10.2% as inflation in Germany, Italy and France all rose more than forecast…”

November 2 – Reuters (Jonathan Cable): “The decline in euro zone manufacturing activity was sharper than initially estimated last month, indicating that the sector is in recession, as the cost of living crisis put a big dent in demand... S&P Global's final manufacturing Purchasing Managers' Index (PMI) fell to a 29-month low of 46.4 in October from September's 48.4, below a preliminary reading of 46… The new orders index slumped to 37.9 last month from 41.3 in September, despite a slight easing in still elevated inflationary pressures.”

November 3 – Financial Times (Patricia Nilsson and Mark Wembridge): “Uniper has reported a €40bn loss, one of the biggest in corporate history, after Russia’s decision to limit European gas supplies pushed the soon-to-be-nationalised German energy group to the brink of collapse. Uniper, once Europe’s largest importer of Russian gas, is among the hardest hit companies by the war in Ukraine, with its shares having plunged nearly 93% this year. The company said… net losses in the first nine months of the year had reached €40.4bn, against a €4.7bn loss recorded in the same period last year.”

November 2 – Reuters (Tom Sims): “Global credit ratings agency Moody's downgraded its outlook for banks in Germany, Italy and four other countries to ‘negative’ from ‘stable’… as Europe's energy crisis and high inflation weaken its economies. The downgrade also affects banking sectors in the Czech Republic, Hungary, Poland and Slovakia, and Moody's said the grouping includes those most at risk of energy price inflation and possible energy rationing. ‘We expect operating conditions to deteriorate further,’ Louise Welin of Moody's said.”

October 30 – Financial Times (Olaf Storbeck and Martin Arnold): “Thousands of German industrial workers walked out for several hours over the weekend in an escalating pay dispute as leaders of Germany’s powerful IG Metall union warned of more strikes to come… Europe’s largest industrial union is demanding an 8% wage increase for 3.9mn employees in Germany’s automotive, metal and electrical industries to compensate for surging inflation. The pay demand is the highest since 2008. The sector is the backbone of Germany’s wider economy and a bellwether for wage agreements in other sectors.”

EM Crisis Watch:

November 1 – Reuters (Ricardo Brito, Brian Ellsworth and Rodrigo Viga Gaier): “Brazilian President Jair Bolsonaro on Tuesday did not concede defeat in his first public remarks since losing Sunday's election, saying protests by his supporters were the fruit of ‘indignation and a sense of injustice’ over the vote. However, he stopped short of contesting the election result and authorized his chief of staff, Ciro Nogueira, to begin the transition process… It took Bolsonaro, a right-wing nationalist, more than 44 hours to comment after the election was decided by electoral authorities… Amid his silence, supporters blocked highways to protest his defeat, with some calling for a military coup to stop former president Lula from returning to power. The highway blockades have disrupted fuel distribution, supermarket supplies, and the flow of grains exports to major ports, according to industry groups.”

November 2 – Reuters (Brian Ellsworth and Rodrigo Viga Gaier): “Supporters of Brazilian President Jair Bolsonaro on Wednesday held rallies to call for an armed forces intervention following the election of Luiz Inacio Lula da Silva, a move that military experts say is out of the question. The country's electoral authority on Sunday said Lula won almost 51% of the vote. Bolsonaro has not officially acknowledged the result, though his cabinet has initiated a transition, with Lula set to take over the presidency on Jan. 1.”

November 3 – Reuters (Nevzat Devranoglu): “Turkish annual inflation climbed to a new 24-year high of 85.51% in October… Inflation has surged since last year, when the lira slumped after the central bank began cutting its policy rate in an easing cycle long sought by President Tayyip Erdogan. In the last three months, the central bank slashed its policy rate by a total of 350 bps to 10.5%. It promised another cut this month…”

October 30 – Reuters (Yasmin Hussein, Aidan Lewis in Cairo, Rodrigo Campos and Jorgelina do Rosario): “Egypt's pound fell about 3% to 23.8 against the dollar as trading resumed on Sunday…, after authorities committed to a flexible exchange rate under an International Monetary Fund support deal. The pound slid about 14.5% to 23.1 against the dollar on Thursday… It has weakened about 34% against the dollar so far this year.”

Japan Watch:

October 31 – Reuters (Tetsushi Kajimoto): “Japan spent a record $42.8 billion on currency intervention in October to prop up the yen, the finance ministry said, with investors keen for clues about how much more the authorities might step in to soften the yen's sharp fall.”

November 1 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japan’s currency interventions have been stealth operations in order to maximise the effects of its forays into the market, Finance Minister Shunichi Suzuki said…, after the government spent a record $43 billion supporting the yen last month. Bank of Japan Governor Haruhiko Kuroda, however, reiterated the central bank's resolve to keep interest rates ultra-low, indicating that the yen's broad downtrend could continue… ‘There are times when we announce intervention right after we do it and there are times when we don't,’ Suzuki told a news conference... ‘We are doing this to maximise effects to smoothe sharp currency fluctuations.’ The finance minister repeated his warning that authorities are closely watching market moves and will not tolerate ‘excessive currency moves driven by speculative trading’.”

November 2 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda… hinted at the chance of tweaking the bank's yield curve control (YCC) policy down the road, saying it could become a future option if inflation continues to pick up. ‘For now, I don't see the need to raise interest rates or make any modification to YCC,’ Kuroda told parliament, stressing the importance of supporting the fragile economy with ultra-loose policy. ‘But if Japan sees prospects that inflation will head for 2% accompanied by wage hikes, a tweak to monetary policy will of course become necessary,’ he said.”

Social, Political, Environmental, Cybersecurity Instability Watch:

November 3 – New York Times (Keith Bradsher and Clifford Krauss): “China is poised to take advantage of the global urgency to tackle climate change. It is the world’s dominant manufacturer and user of solar panels and wind turbines. It leads the world in producing energy from hydroelectric dams and is building more nuclear power plants than any other country. But China also burns more coal than the rest of the world combined and has accelerated mining and the construction of coal-fired power plants, driving up the country’s emissions of energy-related greenhouse gases nearly 6% last year, the fastest pace in a decade. And China’s addiction to coal is likely to endure for years, even decades.”

Leveraged Speculation Watch:

November 2 – Financial Times (Laurence Fletcher): “The world is on the road to ‘hyperinflation’ and could be heading towards its worst financial crisis since the second world war, according to Elliott Management, one of the world’s biggest and most influential hedge funds. The… firm, which was founded by billionaire Paul Singer and manages about $56bn in assets, has warned its clients of an ‘extremely challenging’ situation for the global economy and for financial markets where investors will find it difficult to make money. An ‘extraordinary’ set of financial extremes that come as the era of cheap money draws to a close ‘[has] made possible a set of outcomes that would be at or beyond the boundaries of the entire post-WWII period’, it wrote…”

Geopolitical Watch:

November 2 – Reuters (Josh Smith and Soo-Hyang Choi): “North Korea fired at least 23 missiles into the sea on Wednesday, including one that landed less than 40 miles’ off South Korea's coast, which South Korean President Yoon Suk-yeol described as ‘territorial encroachment’ and Washington denounced as ‘reckless’. It was the first time a ballistic missile had landed near the South's waters since the peninsula was divided in 1945, and the most missiles fired by the North in a single day. South Korea issued rare air raid warnings and launched its own missiles in response. The launches came just hours after Pyongyang demanded that the United States and South Korea stop large-scale military exercises, saying such ‘military rashness and provocation can be no longer tolerated’. In Washington, White House national security spokesperson John Kirby called the North Korean launches ‘reckless’ and said the United States would make sure it had the military capabilities in place to defend its treaty allies South Korea and Japan.”

November 3 – Reuters (Kantaro Komiya, Hyonhee Shin and Josh Smith): “North Korea fired multiple missiles into the sea on Thursday, including a possible failed intercontinental ballistic missile (ICBM), prompting the United States and South Korea to extend air drills that have angered Pyongyang. Despite an initial government warning that the apparent ICBM had flown over Japan, triggering warning alarms for some residents, Tokyo later said this was incorrect. The launches came a day after the North fired a daily record 23 missiles, including one that landed off the coast of South Korea for the first time, and drew swift condemnation from Washington, Seoul and Tokyo.”

November 3 – Financial Times (Demetri Sevastopulo and Christian Davies): “The US plans to deploy more nuclear-capable warplanes around the Korean peninsula, in an effort to boost deterrence as North Korea steps up missile launches and prepares for a possible nuclear test… South Korean defence minister Lee Jong-sup said the US would increase the frequency of deployments of nuclear-capable assets to the Korean peninsula.”

November 2 – Reuters: “Videos on social media showing Iranian security forces severely beating protesters have gone viral as anger grows at a widening crackdown with arrests of prominent figures from rappers to economists and lawyers aimed at ending seven weeks of unrest. Protests ignited by the death in morality police custody of Mahsa Amini on Sept. 16 after her arrest for inappropriate attire have shaken Iran's clerical establishment with people from all layers of society demanding wholesale political change. The nationwide demonstrations which have called for the death of Supreme Leader Ayatollah Ali Khamenei are posing one of the boldest challenges to Iran's rulers since the 1979 Islamic Revolution.”