Saturday, January 8, 2022

Saturday's News Links

[AP] Omicron explosion spurs nationwide breakdown of services

[Yahoo/Bloomberg] N.Y. Hits Record Cases; U.S. Infections Double: Virus Update

[NBC] Florida Adds 69,914 New COVID-19 Cases, as 7-Day Average Continues to Set Records

[Yahoo/Bloomberg] U.S. Inflation Rate Is Probably Going to Spike Again: Eco Wee

[Yahoo/Bloomberg] Risk Bubbles Are Deflating Everywhere, Some Market Watchers Say

[CNBC] Inflation, rising rates and the Federal Reserve could whip stocks around in the week ahead 

[Yahoo/Bloomberg] Surging Bond Rates Threaten to Muzzle Dip-Buying Stock Bulls

[The Hill] Omicron fuels unprecedented spike in COVID-19 cases

[Reuters] ECB may need to act if energy price rises more persistent: Schnabel

[Yahoo/Bloomberg] Europe Targets Anti-Vaxxers; Djokovic Fights Back: Virus Update

[Reuters] Ex-security chief arrested as Kazakhstan presses crackdown on unrest

[CBS] Battle lines appear to tighten over Russia's potential invasion into Ukraine

[Bloomberg] China Vows to Ensure Daily Food Supply in Covid-Hit Xi’An City

[Bloomberg] Hong Kong Faces Worst of Both Worlds as Omicron Ruins Covid Zero

[Bloomberg] China Makes a Risky Bet on Olympic Victory Over Covid

[WSJ] Restaurants Seek Federal Aid as Omicron Surge Threatens Another Hard Winter

[WSJ] Rocket Grew Into America’s Biggest Mortgage Lender, but Now Comes the Hard Part

[FT] Food prices remain high into 2022 on shortages due to extreme weather

[FT] America’s Covid testing system buckles under weight of Omicron surge

[FT] ‘People are scared’: Xi’an residents struggle to find food and medical help

Weekly Commentary: Issues 2022

Issue (singular) 2022. Is “money” (monetary inflation) more the solution or the problem? For a number of years now, I’ve highlighted in my January “Issues” pieces the Credit Bubble Maxim: “The Bubble Either Further Inflates or Bursts.” As I detailed in “2021 Year in Review,” last year’s Bubble inflation went to perilous extremes. This significantly raised the odds for a destabilizing 2022 bursting episode.

November 29 – Financial Times (Mary O’Sullivan): “In a celebrated book published in 1963, Milton Friedman and Anna Schwartz constructed a counterfactual history in which the Great Depression did not have to take place in the United States in the 1930s. They imagined an alternative world in which there was no collapse in production, no spiralling deflation, no mass unemployment and no poverty. It was a world, they claimed, in which an ordinary recession might have occurred but not a depression. And one that could have been part of our history if only America’s central bankers had flooded liquidity into the financial system to avert its collapse… Friedman’s work with Schwartz proved decisive in sustaining the claim that in the 1930s the US Federal Reserve had exercised its monetary responsibility ‘so ineptly as to convert what otherwise would have been a moderate contraction into a major catastrophe’. The alternative world that Friedman and Schwartz imagined proved so alluring that their interpretation had become the orthodoxy of the Great Depression in the US by the end of the 20th century.”

Our nation (and the world) was profoundly scarred by the Great Depression experience. At the time, it was recognized that years of Bubble excess had fostered deep economic structural maladjustment. The Credit system had degenerated into a mechanism promoting epic asset inflation, mal-investment and chicanery. The securities markets devolved into a bastion of speculation, with destructive end-of-cycle excesses (1927-1929) placing the system in great peril. Boomtime Federal Reserve monetary management was an abject failure. And, especially late in the cycle, resources – real and financial – could not have been more poorly (or inequitably) allocated. Years of accelerating Credit and speculative excess – and attendant Monetary Disorder - had forged hopelessly over-levered and dysfunctional Bubble markets.

Milton Friedman and Anna Schwartz couldn’t accept that free market Capitalism had gone completely off the rails; that markets were not rationally self-regulating. Throughout their almost 900-page tome, discussion of the key topics Credit and Credit excess were curiously omitted. In portentous historical revisionism, they fashioned analysis that the Great Depression was not the upshot of boom-time excess, but rather the result of Federal Reserve negligence for not flooding the system with money after the 1929 crash and subsequent banking crisis. The “Roaring Twenties” were designated “the golden age of Capitalism.” Their fallacious thesis was eagerly accepted by an intelligentsia happy to button up the depression experience and move on.

More from the FT (Mary O’Sullivan): “In 2002, Ben Bernanke offered a tribute to Friedman and Schwartz: ‘I would like to say to Milton and Anna: regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.’ The rest is history. The flood of liquidity that followed the financial crisis was remarkable when considered in historical perspective. And that was before central banks responded to the coronavirus crisis with even more spectacular injections of liquidity.”

The trio Friedman, Schwartz and Bernanke converge for the greatest misadventure in central bank monetary doctrine the world has ever experienced. I’ve argued for years now that history’s greatest Bubble would end in catastrophe. In the meantime, however, it has appeared nothing short of the “Golden Age of Capitalism.” Last year’s monetary madness fueled “Roaring Twenties” redux.

I was worried in January 2008. Yet those disturbing mortgage finance Bubble excesses are today dwarfed by unparalleled levels of debt, speculative excess and economic maladjustment – at home and abroad. My 2008 concerns were mainly domestic – financial, economic and social. All three are today more deeply concerning. Moreover, with Bubbles having engulfed the world, wealth redistribution and inequities greatly heighten geopolitical risks.

History teaches that Credit is inherently unstable. It’s self-reinforcing, where excess begets only greater excess. It is morally and ethically fundamental that money and Credit remain well-anchored. The risk of losing control is potentially catastrophic.

The U.S. nineties’ adoption of “Wall Street” market-based finance (i.e. the GSEs, MBS, ABS, “repos”, derivatives, etc.) created highly unstable securities markets, along with unsound Credit more generally. Instability was conspicuous in 1994, 1998 and 2000-2002. Instead of tightening monetary policy and developing the regulatory framework to contain this unfettered Credit, monetary policy changed specifically to accommodate the new financial structure. Rather than the 2008 debacle provoking a necessary major remake of financial structure and monetary management, it was far simpler to unleash overpowering monetary inflation.

I fear decades of mismanagement come home to roost in 2022. Friedman and Schwartz revisionism. Greenspan’s inflationism, manipulation and promotion of unchecked market-based finance. Bernanke’s deeply flawed inflationist doctrine – readily embraced by global policymakers. Yellen and Powell’s affirmation of monetary insanity.

The Fed’s balance sheet has inflated more than 10-fold since 2007. Repeatedly, monetary inflation was called upon to bolster increasingly unstable markets – to resuscitate Credit and speculative Bubbles. QE and “whatever it takes” central banking combined for the most powerful inflation of market wealth ever. And the bigger the Bubbles - and resulting fragility - the more intense the addiction to monetary excess. The pandemic created the necessary backdrop for the mobilization of $5.0 TN of additional Fed liquidity ($6.4TN, or 40%, M2 growth) in 120 weeks.

December CPI is forecast to exceed 7% for the first time in 40 years. The Powell Fed took a huge gamble on “transitory,” and its institutional credibility was the big loser. Suddenly, the Federal Reserve has lost the aura of competence and infallibility. Having escaped the confines of the asset markets, inflation is there for everyone to see and feel. The Fed’s whitewashing was an embarrassment. Now, the FOMC’s “manhood” is questioned. Time to stand tall and roll out some brawn.

QE is the nuclear option to be used only when necessary to thwart market collapse. If adopted, it should be methodically reversed soon after system stabilization. It should never be part of the policy tool kit to goose the markets, confidence and economic activity.

Last year’s Trillion plus liquidity injections in the face of manic markets was a dire policy blunder I’ll assume not today lost on members of the FOMC. Markets this week were shaken by the Fed meeting minutes and talk of QT – “quantitative tightening” – or balance sheet reduction.

It’s wishful thinking on the part of the Fed, Wall Street or anyone to think that historic monetary inflation and associated market speculation can simply be tamed by a nudge higher in short-term rates and some liquidations of Fed Treasury/MBS holdings. Major Bubbles inflate or burst. Runaway Bubbles self-destruct – first to the upside and, then, implosion. Today’s mania faces the uncomfortable prospect of a Federal Reserve that’s actually ready to meaningfully tighten policy, so long as markets hold Bubble collapse at bay.

A few years back, I posited that the Fed’s balance sheet could reach $10 TN during the next crisis. That number needs to be ratcheted up to $15 TN. I had expected major Fed balance sheet expansion would be necessary to accommodate a bursting Bubble and historic speculative de-leveraging. Instead, the Fed in March 2020 reversed de-risking/deleveraging, with colossal QE instead spurring only more egregious speculative leverage (derivatives, Treasuries, fixed-income, equities, crypto, NFT, housing, etc.).

I doubt QT ever gets off the ground. If it does, expect grounding in short order. The odds favor a larger Fed balance sheet by year-end – perhaps much bigger. But today’s backdrop is unique in the “whatever it takes” open-ended QE era: inflation presents a clear and present danger. In a major problem for such highly inflated manic markets, the Fed will have to think twice before restarting the electronic printing press. Markets will have to be in some serious trouble before securing the tranquilizing effects of QE announcements. Expect liquidity injections to come, though perhaps too late for the equities Bubble.

In March 2020, rapidly deleveraging market Bubbles had the Fed hastily boosting QE commitments in increments of $500 billion until deleveraging subsided. For the next “risk off” episode, even $500 billion QE increments may prove insufficient, as an indecisive Fed keeps one eye on the markets and the other focused on troubling inflation data.

January 2 – Financial Times (Robin Wigglesworth): “In Steven Spielberg’s original Jurassic Park, the chaos theorist played by Jeff Goldblum chastises the theme park father’s folly in resurrecting dinosaurs by noting: ‘Your scientists were so preoccupied with whether or not they could, they didn’t stop to think if they should.’ The exchange traded fund industry should take note. This is a heady time for the ETF world. Overall inflows last year topped $1tn for the first time. Coupled with the buoyancy of financial markets, this means that the ETF industry is on the cusp of crossing the $10tn of assets under management mark… Bond ETFs took in about $244bn in 2021 — a new record and the third $200bn-plus year in a row.”

Ten-year Treasury yields jumped 25 bps in the first week of the year, to an almost two-year high 1.76%. Five-year Treasury yields jumped 24 bps to a 23-month high 1.50%.

Amazingly, bond funds posted strong inflows this past week, adding to last year’s windfall. The FT's Jurassic Park analogy is a good one. ETF assets reaching almost $10 TN, having grown tremendously since the Fed’s March 2020 bailout. The “Moneyness of Credit” concept was key to my mortgage finance Bubble analytical framework. I shifted to the “Moneyness of Risk Assets” when Bernanke employed $1.0 TN of QE, collapsed rates, and coerced savers into the risk markets. The mushrooming ETF marketplace best exemplifies today’s distorted perception of safety and liquidity (“moneyness”), which has been fundamental to this cycle’s speculative blow-off – culminating with 2021’s spectacular mania.

Do rising market yields and mounting losses panic bond ETF holders, spurring market dislocation and a destabilizing yield spike? How much leverage has accumulated in the ETF universe and fixed-income markets more generally? Globally, in particular EM and China? Reflecting the challenging rate hedging backdrop, benchmark MBS yields surged 34 bps this week to 2.41%, the highest level since the chaotic March 2020 yield spike.

All hell broke loose back in February 1994, when the Fed belatedly commenced a tightening cycle after an extended period of market excess. “IOs,” “POs,” and myriad mortgage derivative products/strategies imploded, with de-leveraging stoking illiquidity and a self-reinforcing yield spike. The amount of debt, speculative leverage and derivatives these days makes 1994 excess appear trivial.

Never have the American people had such exposure to U.S. securities markets. The U.S. household sector (from the Z.1) ended Q3 with Total Equities exposure at 184% of GDP, dwarfing previous cycle peaks 104% from Q2 2007 and 115% back in Q1 2000. Who buys when the crowd moves to sell? Clearly, the leverage speculating community will seek to beat “retail” to the exits. Disorderly selling of ETF equities shares is a major risk, compounded by the extraordinary growth in options trading and derivatives hedging strategies. Who is on the other side (buying) of derivatives-related selling when sinking markets see the cascade of sell orders required to hedge market protection previously written/sold.

The KBW Bank index surged 10.1% this week, boosting one-year gains to almost 37%. The bullish narrative holds that rising rates will benefit banking system profitability. Japanese banks jumped 6.9%, with European banks this week rising 6.7%. No one is prepared for a global crisis.

China faces an extraordinarily challenging 2022. Developments point to a deepening developer crisis expanding further into a collapsing apartment Bubble and a broadening systemic crisis.

January 3 – Bloomberg: “A wall of maturing debt and a surge in seasonal demand for cash will test China’s financial markets this month, putting pressure on the central bank to ensure sufficient liquidity. Demand for liquidity may total about 4.5 trillion yuan ($708bn) in January, 18% more than the amount seen last year, according to calculations by Bloomberg based on official data and analysts’ estimates. An increase in the amount of policy loans coming due and demand for cash to be spent during the Lunar New Year… are drivers… ‘There are a number of factors that may pose threats in January to the stable liquidity conditions the central bank has vowed to maintain,’ said Yishuang Li, an analyst at Cinda Securities Ltd., citing tax payments and maturity of policy loans. ‘The bond market is currently vulnerable after an increase of leverage in December, which means financial institutions will be more reliant on PBOC’s liquidity support.’”

January 1 – Bloomberg (Olivia Tam and Sofia Horta e Costa): “China’s property developers have mounting bills to pay in January and shrinking options to raise necessary funds. The industry will need to find at least $197 billion to cover maturing bonds, coupons, trust products and deferred wages to millions of migrant workers, according to Bloomberg calculations and analyst estimates. Beijing has urged builders like China Evergrande Group to meet payrolls by month-end in order to avoid the risk of social unrest.”

A crisis of confidence in China is a key Issue 2022. The perception that Beijing has the developer crisis under control is fading. Faith in the mighty Beijing “meritocracy” is in jeopardy. The Chinese people have persevered through a couple tough years. Beijing’s Covid “zero tolerance” has demanded personal sacrifice. Now Omicron risks exposing a highly vulnerable population (less effective vaccines and limited natural immunity). Omicron outbreaks, widespread lockdowns, mass infections and economic crisis is not a low probability scenario. Beijing risks the appearance of a misguided Covid policy failure.

January 7 – Bloomberg (Jinshan Hong): “Hong Kong is at a Covid-19 tipping point. The once-vibrant gateway to China sacrificed its status as an international hub to ‘Covid Zero,’ its strategy for eliminating the virus by isolating itself from a world awash in the pathogen. It worked for nearly a year, keeping residents safe and largely unfettered while raising the tantalizing possibility of reopening the border with China, the city’s economic lifeblood. Now it’s living with the worst of both worlds, after a couple of imported infections caused by the highly transmissible omicron variant started spreading in the under-vaccinated city, triggering renewed curbs. Residents can no longer go to the gym or the cinema, and the once-ubiquitous banquets where people gathered to celebrate the Chinese New Year were cancelled for another year. Also gone is the sense of security that stemmed from the city being virus-free…”

China’s communist party has guided an unprecedented period of national growth and prosperity. They are credited with a historic boost to Chinese wealth, living standards and global standing. Leadership has been revered domestically for adept economic management. As such, there is today a vast chasm between the perception of unassailable competency and the reality of a catastrophic failure to rein in Credit and speculative excess. I expect 2022 to see this gap narrow, with the realization that China’s unsound Bubble economy is both fragile and faltering. If this realization comes concurrent with a destabilizing Omicron outbreak, the risk of a crisis of confidence (in policymaking, apartment markets, the economy and prospects) will rise exponentially.

January 4 – Financial Times (Sun Yu): “Chinese banks rushed to meet their annual state-imposed lending quotas last month by buying up low-risk financial instruments rather than issuing loans, a surge that bankers and analysts said reflected financial institutions’ wariness about the country’s slowing economy. The rise in demand for banker’s acceptance bills, which are guaranteed by their issuers and technically classified as loans, reduced the yield on the instruments to close to 0% in the second half of December, hitting a record low of 0.007% on December 23. That was far lower than Chinese banks’ average 2.5% cost of capital over the same period, implying that they preferred to lose money on low-yielding banker’s acceptance bills rather than risking greater losses by issuing their own loans… Loan officers said buying up banker’s acceptances to meet their year-end lending quotas was the safest way to back the government’s policy objectives. ‘Supporting the broader economy is a political task we can’t say ‘no’ to,’ said an executive at Zhongyuan Bank in…’Our losses from buying banker’s assurances are smaller than lending to unqualified businesses’… ‘The authorities want us to support the real economy while keeping bad debts under control,’ said a loan officer at Zheshang Bank... ‘That is difficult to achieve in the current business environment.’”

“The authorities want us to support the real economy while keeping bad debts under control.” I pity the Chinese banker. Especially in the event of widespread lockdowns, Beijing will have little alternative than to inject large amounts of liquidity into the system. Not long ago they stated that policy would not go in this direction. Similar to other central banks, the People’s Bank of China risks stoking inflation. A confluence of sinking asset prices (apartments and securities) and rising consumer prices would pose quite a challenge to policymakers and the banking system. A surge in yields and currency instability would further cloud the soundness of China’s banking system. I don’t expect the ring-fence protecting the banking system from developer instability to hold through 2022.

I worry about China’s faltering Bubble and the ramifications for geopolitical risk. Fear that a domestic crisis could be a factor in a more belligerent approach with Taiwan doesn’t today sound so farfetched. That Putin placed 100,000 Russian troops at the Ukraine border concurrent with escalating China and Taiwan tensions leaves me apprehensive. With my view that 2022 will be a pivotal year for the historic global Bubble, I’m on high alert for geopolitical developments.

I take no comfort in sounding like an extremist. When I began posting the CBB back in 1999, I promised readers to “call them as I see them and let the chips fall where they will.” This Bubble has inflated far longer and to much greater excess than I ever imagined possible. But it is undoubtedly a historic Bubble – and Bubbles know no cure. No amount of “money” will inflate out of this predicament. And pain on the downside will be proportional to the excess and duration of the preceding boom.

Late-cycle manic markets become increasingly dysfunctional. Fundamental factors are disregarded in favor of short-term speculative dynamics. Markets turn incapable of self-adjustment. If the first week of the year is any indication, it’s destined to be a wildly unsettled year for financial markets. The Nasdaq100 sank 4.5%, and the Biotechs (BTK) dropped 5.7%. The NYSE Financial Index jumped 3.3% (Nasdaq Bank Index up 7.9%), and the Philadelphia Oil Service Sector Index surged 14.4%. Globally, the Shanghai Composite dropped 1.7% (ChiNext down 6.8%), while India’s Sensex jumped 2.6%. Stocks finished the week higher throughout Europe.

Here at home, the social mood continues to darken. The country seemingly couldn’t be more deeply divided. Trust in our government, our institutions, in each other – has withered. There is underlying angst and frustration. It’s as if the securities markets are an oasis of faith and confidence.

There’s never been so much riding on acutely unstable financial markets. It will be a pivotal year. At the minimum, there will be extraordinary wealth redistribution. Tens of millions of unsuspecting online “investors” will be educated about risk the hard way. Odds are high of a series of bursting Bubbles – bonds, stocks, crypto, NFT, options trading, etc.

At some point this year, I expect a serious bout of de-risking/deleveraging. And I suspect Wall Street assumes that a market-based tightening of financial conditions would curtail inflation risk and open the Fed to dispensing another shot of liquid courage. I’m just not sure if market trouble initially translates into disinflationary forces, as it has in the past. November Consumer Credit surged a record $40 billion, double the median estimate. As sure as the morning sunrise, our federal government will borrow and spend with reckless abandon. At least for now, I expect strong growth in mortgage and business Credit. In short, the economy has attained such strong inflationary biases that even with some market deleveraging, there could still be ample system Credit growth to fuel rising consumer prices.

There’s a potential Issue 2022 worthy of a mention. It would be a very problematic development if the Fed responds to collapsing stock prices with large liquidity injections - and the Treasury market protests with a spike in bond yields. With inflation increasingly ingrained, a move by the bond market to discipline the Fed is not a totally wacky notion. At the minimum, I expect extreme policy, market and economic uncertainties to unleash wildly unstable currency markets. Currency values are relative – and the world is replete with fundamentally sick currencies. Destabilizing dollar and renminbi volatility is a distinct possibility.

There were 850,000 new Covid cases reported today. Over 130,000 Covid sufferers are currently hospitalized, rising with a trajectory to soon surpass the previous pandemic peak. Deaths are approaching 2,000 a day – with the one millionth U.S. Covid fatality likely in 2022. While Omicron symptoms are generally less severe, Covid has never enjoyed such transmissibility and freedom to infect in staggering numbers. While it should be a short-term phenomenon, there are troubling indications of worker shortages, expanding disruptions, and supply chain issues on multiple fronts. Already stretched global supply chains will face greater challenges as Omicron spreads through Asia and, at some point, China.

We’re living history. The backdrop could not simultaneously be more fascinating, intriguing and deeply troubling. I could be back this time next year again chanting, “Bubbles inflate or burst.” But I have high conviction it’s time to be prepared. “We are never prepared for what we expect” (James A. Michener). And as we begin 2022, never has a phrase seemed more germane: Let’s hope for the best, but prepare for the worst.

For the Week:

The S&P500 dropped 1.9% (up 22.3% y-o-y), and the Dow slipped 0.3% (up 16.5%). The Utilities fell 2.0% (up 12.3%). The Banks surged 10.1% (up 36.9%), and the Broker/Dealers gained 2.6% (up 25.5%). The Transports declined 1.3% (up 26.4%). The S&P 400 Midcaps lost 1.7% (up 15.6%), and the small cap Russell 2000 slumped 2.9% (up 4.2%). The Nasdaq100 sank 4.5% (up 19.0%). The Semiconductors dropped 3.8% (up 29.3%). The Biotechs fell 5.7% (down 12.7%). With bullion dropping $33, the HUI gold index sank 6.0% (down 19.5%).

Three-month Treasury bill rates ended the week at 0.09%. Two-year government yields rose 13 bps to 0.86% (up 73bps y-o-y). Five-year T-note yields jumped 24 bps to 1.50% (up 102bps). Ten-year Treasury yields surged 25 bps to 1.76% (up 65bps). Long bond yields rose 21 bps to 2.12% (up 24bps). Benchmark Fannie Mae MBS yields spiked 34 bps higher to 2.41% (up 94bps).

Greek 10-year yields jumped 20 bps to 1.52% (up 93bps y-o-y). Ten-year Portuguese yields rose 11 bps to 0.58% (up 60bps). Italian 10-year yields gained 14 bps to 1.31% (up 78bps). Spain's 10-year yields increased eight bps to 0.65% (up 61bps). German bund yields jumped 13 bps to negative 0.04% (up 48bps). French yields rose nine bps to 0.29% (up 60bps). The French to German 10-year bond spread narrowed about four to 33 bps. U.K. 10-year gilt yields surged 21 bps to 1.18% (up 89bps). U.K.'s FTSE equities index gained 1.4% (up 8.9% y-o-y).

Japan's Nikkei Equities Index declined 1.1% (up 1.2% y-o-y). Japanese 10-year "JGB" yields rose seven bps to 0.14% (up 11bps in y-o-y). France's CAC40 increased 0.9% (up 26.5%). The German DAX equities index added 0.4% (up 13.5%). Spain's IBEX 35 equities index increased 0.4% (up 4.1%). Italy's FTSE MIB index rose 1.0% (up 21.2%). EM equities were mixed. Brazil's Bovespa index dropped 2.0% (down 17.9%), while Mexico's Bolsa was little changed (up 13.9%). South Korea's Kospi index declined 0.8% (down 6.3%). India's Sensex equities index jumped 2.6% (up 22.5%). China's Shanghai Exchange fell 1.7% (up 0.3%). Turkey's Borsa Istanbul National 100 index surged 9.5% (up 32.0%). Russia's MICEX equities index dipped 0.4% (up 9.2%).

Investment-grade bond funds saw inflows of $3.831 billion, and junk bond funds posted positive flows of $584 million (from Lipper).

Federal Reserve Credit last week declined $21.5bn to $8.720 TN. Over the past 121 weeks, Fed Credit expanded $4.994 TN, or 134%. Fed Credit inflated $5.909 Trillion, or 210%, over the past 478 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $2.4bn to $3.415 TN. "Custody holdings" were down $74bn, or 2.1%, y-o-y.

Total money market fund assets slipped $2.6bn to $4.703 TN. Total money funds increased $393bn y-o-y, or 9.1%.

Total Commercial Paper fell $13.4bn to $1.074 TN. CP was down $31bn, or 2.8%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 11 bps to a 19-month high 3.22% (up 57bps y-o-y). Fifteen-year rates rose 10 bps to 2.43% (up 27bps). Five-year hybrid ARM rates were unchanged at 2.41% (down 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates jumping 13 bps to a nine-month high 3.36% (up 42bps).

Currency Watch:

For the week, the U.S. Dollar Index was little changed at 95.72 (up 6.3% y-o-y). For the week on the upside, the South African rand increased 2.3%, the Mexican peso 0.6%, and the British pound 0.4%. For the week on the downside, the Australian dollar declined 1.1%, the South Korean won 1.1%, the Brazilian real 1.0%, the New Zealand dollar 0.7%, the Swiss franc 0.6%, the Singapore dollar 0.5%, the Japanese yen 0.4%, the Norwegian krone 0.2%, the Euro 0.1%, and the Canadian dollar 0.1%. The Chinese renminbi declined 0.34% versus the dollar (up 1.84% y-o-y).

Commodities Watch:

The Bloomberg Commodities Index advanced 2.1% (up 27.2% y-o-y). Spot Gold fell 1.8% to $1,797 (down 2.8%). Silver dropped 4.0% to $23.37 (down 9.2%). WTI crude jumped $3.69 to $78.90 (up 51%). Gasoline gained 3.2% (up 49%), and Natural Gas surged 5.0% (up 45%). Copper declined 1.2% (up 20%). Wheat fell 1.6% (up 19%), while Corn jumped 2.3% (up 22%). Bitcoin sank $4,800, or 10.4%, this week to $41,560 (up 3.8%).

Coronavirus Watch:

January 6 – Reuters (Mrinalika Roy): “The more infectious Omicron variant of COVID-19 appears to produce less severe disease than the globally dominant Delta strain, but should not be categorised as ‘mild’, World Health Organization (WHO) officials said… Janet Diaz, WHO lead on clinical management, said early studies showed there was a reduced risk of hospitalisation from the variant… compared with Delta… ‘Just like previous variants, Omicron is hospitalising people and it is killing people.’ [Director general Tedros Adhanom Ghebreyesus] warned of a ‘tsunami’ of cases as global infections soar to records fuelled by both Omicron and Delta, healthcare systems are overwhelmed, and governments struggle to tame the virus…”

January 4 – NBCNY: “As COVID-19 infections with the omicron variant of the virus surge out of control nationwide, emergency rooms are filling up again -- and one well-known New York City doctor says what they’re seeing now is much different than the last two years of the pandemic. Manhattan emergency room physician Dr. Craig Spencer took to Twitter… to explain how the current surge is different -- both in who's coming to the ER and how they're being affected by the highly contagious virus. ‘Today it seemed like everyone had COVID. Like, so many. And yes, like before, there were some really short of breath and needing oxygen. But for most, COVID seemed to topple a delicate balance of an underlying illness. It’s making people really sick in a different way,’ Spencer wrote. Spencer cited a few examples - diabetic being tipped into ketoacidosis, the elderly who were so weak from being ill that they couldn't get out of bed, and etc. ‘What’s also different now is those COVID cases are often in beds next to patients who’ve done everything to avoid the virus, and for whom an infection might have a dramatic toll. The cancer patient on chemotherapy. Those immunocompromised or severely sick with something else,’ Spencer said.”

January 7 – Bloomberg (John Tozzi): “U.S. hospitals are struggling to get the workers they need to treat patients through the winter’s Covid-19 surge as the virus collides with a historically tight labor market. High demand for labor throughout the economy is making it harder to find replacements for doctors, nurses and support staff who have been sidelined by the omicron variant. It’s especially tough in small towns and rural areas with aging populations and fewer people entering the workforce. Finding sufficient staff is a daily challenge that industry veterans say is harder than any time they can remember.”

January 5 – Reuters (Renju Jose and Sonali Paul): “Fuelled by the highly transmissible Omicron variant, Australia's daily coronavirus infections soared to a fresh peak on Thursday, overwhelming hospitals, while isolation rules caused labour shortages, putting a strain on businesses and supply chains.”

January 7 – AFP: “Haunted by the spectre of last year's crisis, India is bracing for a deluge of Covid-19 cases, with authorities of various megacities bringing in restrictions in a bid to keep infections in check… But daily infections nearly tripled over two days this week to more than 90,000, a surge driven by the highly contagious Omicron variant that some experts worry could again see the country's hospitals overwhelmed.”

Covid Disruption Watch:

January 6 – Bloomberg (Leslie Patton, Elizabeth Elkin and Deena Shanker): “The highly contagious omicron virus variant is disrupting already stressed food supply chains, sickening so many workers that more shortages at grocery stores are all but certain. Supermarkets have been struggling to keep food fully stocked throughout the pandemic as a result of labor shortfalls in every part of the food system, from farms to manufacturers to distributors. Now omicron is bringing the problem to a new level. The variant is raging across the U.S. and raising health concerns… Schools and daycares are seeing closures again, keeping more Americans from work. All of that will help fuel wage increases and price surges for consumers, as well as 2020-style food outages. ‘We’re already seeing bare shelves,’ said Bindiya Vakil, chief executive officer of supply-chain consultant Resilinc Corp. ‘Labor shortages due to omicron are going to exacerbate the issue.’”

January 6 – Washington Post (David J. Lynch): “The omicron coronavirus variant is slowing the economic recovery, making worker shortages for already-shorthanded employers more severe and leading consumers to pull back from spending on restaurants, hotels and airlines that have been battered by two years of pandemic upheaval… Omicron’s fallout, which is likely to worsen before it eases, shows that the recovery remains vulnerable to the coronavirus’s unpredictable trajectory. The growing toll of sick workers — Capital Economics says more than 5 million Americans are in quarantine — is hammering employers that already were struggling to secure enough labor.”

January 2 – Wall Street Journal (Andrew Tangel, Jaewon Kang and Heather Haddon): “The rapid spread of Covid-19’s Omicron variant is weighing on U.S. businesses, keeping more workers home sick or quarantined and leading some companies to cut services and reduce hours. The rise of U.S. Covid-19 infections to record levels in recent days has driven thousands of canceled flights, prompted retailers to train available employees on new jobs, and closed some stores altogether, companies said. The rapidly spreading Omicron variant is hitting businesses at a time when consumers’ demand for products and services has surged, and many companies already are struggling with staffing and supply-chain challenges.”

January 3 – Bloomberg (Laura Nahmias, Amanda Gordon and Fola Akinnibi): “New York City Mayor Eric Adams tried to reassure parents of 1 million public school students that it was safe to return to classes on Monday after the winter break despite a surge in Covid cases, staffing shortages and no testing requirement to come back… One in three Covid tests came back positive over the last seven days, according to city data as of Dec. 31. The seven-day Covid positivity rate surpassed 45% in some areas of the Bronx, while hospitalizations have more than tripled since mid-December to 492.”

January 6 – Bloomberg (Skylar Woodhouse and Michelle Kaske): “New York City Mayor Eric Adams wants workers back in offices to boost the city’s economy and lower an unemployment rate that’s twice the national average. But first, employees need reliable transportation to get there… One big reason is staff shortages: About 1,300 subway operators and conductors have been out daily this week, or roughly 21%...”

January 2 – Reuters (Kanishka Singh): “Over 4,000 flights were cancelled around the world on Sunday, more than half of them U.S. flights, adding to the toll of holiday week travel disruptions due to adverse weather and the surge in coronavirus cases caused by the Omicron variant.”

January 5 – The Canadian Press: “An intensifying labour shortage is rippling through the economy, forcing businesses to curtail operations, reduce hours and in some cases, euthanize livestock. The situation is a result of a chronic worker shortage worsened by the crush of new COVID-19 cases forcing many into isolation. School closures have also left some workers scrambling for child care and unable to go into work. The result is rising employee shortages, prompting airlines to cancel flights, drugstores to close early, restaurants to shutter or move to takeout only and municipalities to warn of delayed waste collection.”

January 3 – Bloomberg (Swati Pandey): “Sydneysiders are facing empty shelves at some supermarkets as exploding coronavirus cases force a range of staff from truck drivers to warehouse workers into isolation. Woolworths Group Ltd., Australia’s biggest supermarket operator, said some store deliveries are being delayed, while rival Coles Group Ltd. said growing numbers of staff are isolating because of household exposure to the virus. A wave of coronavirus infections in New South Wales, Australia’s most populous state, is hampering deliveries from major distribution centers to suburban supermarkets. The state -- which includes Sydney -- has recorded more than 100,000 cases in the past five days. While the omicron variant appears less severe than previous strains, the sheer volume of infections is disrupting supply chains by grounding essential workers."

Market Mania Watch:

January 6 – Financial Times (Joe Rennison, Naomi Rovnick and William Langley): “Bitcoin traders suffered their worst day in a month after turbulence in traditional markets spilled into digital asset trading and caused almost $900m worth of bets to turn sour. The liquidations that hit leveraged traders come after the US Federal Reserve signalled that it could tighten monetary sooner than many investors had expected... The prospect of rising interest rates has caused prices to tumble in equity markets and pushed yields higher on government bonds. The shift in stance also unleashed a sell-off in bitcoin, which shed 10% of its value in the last 24 hours…”

January 5 – Financial Times (Miles Kruppa): “Investors poured a record $330bn into private start-ups in the US last year, nearly doubling the total from 2020 in a flurry of dealmaking that rapidly inflated company valuations. Venture capitalists vied with other deep-pocketed investors to win deals, giving leverage to the founders of attractive start-ups. Investors gained confidence from a wave of public listings that have delivered large returns to their backers… Private venture-backed companies in the US raised a total of $329.8bn last year compared with $166.6bn in 2020, the previous record, according to PitchBook... Investors put about four times as much money into start-ups than they did five years ago.”

January 2 – Wall Street Journal (Eliot Brown): “Blank Street has a simple business: It sells coffee—sometimes in carts, usually in small stores. It launched its first location 17 months ago, before it began dotting Manhattan and Brooklyn with baristas. Even a couple of years ago, a rapidly growing chain of no-frills, low-cost coffee shops might have had trouble finding interest from tech investors. But in today’s booming market for early-stage startups, the… company has received commitments for its third funding round in a year. The $35 million investment comes just three months after the still-fledgling company received $25 million… Investors in 2021 pumped $93 billion into so-called seed-stage and early-stage startups in the U.S. through Dec. 15, a record. That amount compares with $52 billion for all of 2020 and $30 billion in 2016, according to PitchBook… With more money coming in… valuations have surged. The median valuation for the seed- and early-stage companies funded in 2021 was $26 million, up from $16 million in 2020 and $13 million in 2016…”

Market Instability Watch:

January 4 – Bloomberg (Katie Greifeld): “Investors are ditching one of the biggest Treasury-tracking ETFs in a hurry as U.S. yields rocket higher. Nearly $1.2 billion was pulled from the $18 billion iShares 20+ Year Treasury Bond exchange-traded fund (ticker TLT) Monday -- the third-biggest outflow since its 2002 launch…”

January 5 – Yahoo Finance (Brian Sozzi): “Investors may want to think twice about putting their money to work in China, contends DoubleLine founder Jeffrey Gundlach. ‘China is uninvestible, in my opinion, at this point,’ the bond king told Yahoo Finance... ‘I've never invested in China long or short. Why is that? I don't trust the data. I don't trust the relationship between the United States and China anymore. I think that investments in China could be confiscated. I think there's a risk of that.’”

Inflation Watch:

January 4 – Bloomberg (Adam Minter): “In recent months, food prices have hit 10-year highs, causing concern worldwide. Supply-chain bottlenecks, labor shortages, bad weather and a surge in consumer demand are among the factors responsible for the spike. So, too, is a lesser-known phenomenon: China is hoarding key commodities. By mid-2022, according to the U.S. Department of Agriculture, China will hold 69% of the world’s corn reserves, 60% of its rice and 51% of its wheat. By China’s own estimation, these reserves are at a ‘historically high level’ and are contributing to higher global food prices. For China, such stockpiles are necessary to ensure it won’t be at the mercy of major food exporters such as the U.S. But other countries, especially in the developing world, might ask why less than 20% of the world’s population is hoarding so much of its food.”

January 6 – Bloomberg (Reade Pickert): “A record 48% of U.S. small-business owners said they raised compensation in December and nearly a third said they plan to do so in the coming months, the National Federation of Independent Business said… With almost half of small businesses reporting job openings they could not fill last month, employers are boosting pay to attract and retain workers. The share of firms that raised compensation last month was the largest in monthly data back to 1986 and up four points from November. ‘The labor shortage is holding back the small business economy as owners work to retain their current employees and attract employees for their open positions,’ Bill Dunkelberg, NFIB’s chief economist, said… ‘A record-high number of small business owners are raising compensation to help retain and attract new employees.’”

January 1 – Bloomberg (Gerson Freitas Jr, Sergio Chapa and Natalia Kniazhevich): “U.S. natural gas is in for another wild year as the insularity that once shielded North American energy consumers from overseas turmoil disintegrates. Benchmark American gas futures climbed almost 45% in 2021 for the strongest annual performance in half a decade… As 2022 dawns, traders, explorers and utility operators are facing the prospect of continued volatility amid rising competition from buyers as far away as Poland and the Netherlands who are dealing with a crisis so acute that factories have shut down and Goldman Sachs Group Inc. is warning there’s a ‘clear risk of running out of gas.’”

January 5 – Bloomberg (Stephen Stapczynski): “The hunt for natural gas is spreading to Asia’s developing economies, with India and Indonesia adding to the global demand pressure… The rising interest from South and Southeast Asia adds to elevated demand from Europe, which pushed prices to record highs last month.”

January 3 – Associated Press (Tom Krisher): “A couple of months ago, a woman paid a visit to Jeff Schrier’s used car lot in Omaha, Nebraska. She was on a tight budget, she said, and was desperate for a vehicle to commute to work. She was shown three cars priced at her limit, roughly $7,500. Schrier said the woman was stunned. ‘That’s what I get for $7,500?’ he recalled her saying. The vehicles had far more age or mileage on them than she had expected… Consider that the average price of a used vehicle in the United States in November, according to, was $29,011 — a dizzying 39% more than just 12 months earlier. And for the first time that anyone can recall, more than half of America’s households have less income than is considered necessary to buy the average-priced used vehicle.”

January 4 – Bloomberg (Marvin G. Perez): “Cotton prices climbed back near 10-year highs in New York on bets that strong demand will keep supplies constrained. Arabica coffee surged on sinking Brazilian exports. Hedge funds are actively buying cotton, which means this year’s commodity index rebalancing may be positive for the market…”

Biden Administration Watch:

January 2 – Reuters (Jarrett Renshaw): “U.S. President Joe Biden… told Ukraine's President Volodymyr Zelenskiy the United States and its allies will ‘respond decisively’ if Russia further invades Ukraine, the White House said… The call came days after Biden held a second conversation in a month with Russian President Vladimir Putin amid tensions on Russia's border with Ukraine, where Russia has massed some 100,000 troops. ‘President Biden made clear that the United States and its allies and partners will respond decisively if Russia further invades Ukraine,’ White House spokesperson Jen Psaki said…”

Federal Reserve Watch:

January 5 – Bloomberg (Matthew Boesler): “Federal Reserve officials said a strengthening economy and higher inflation could lead to earlier and faster interest-rate increases than previously expected, with some policy makers also favoring starting to shrink the balance sheet soon after. ‘Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,’ according to minutes… of the Dec. 14-15 meeting of the… Federal Open Market Committee, when it pivoted to a more aggressive inflation-fighting stance. ‘Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,’ the minutes said.”

January 5 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials at their meeting last month eyed a faster timetable for raising interest rates this year, potentially as soon as in March, amid greater discomfort with high inflation. Minutes of their Dec. 14-15 meeting, released Wednesday, showed officials believed that rising inflation and a very tight labor market could call for lifting short-term rates ‘sooner or at a faster pace than participants had earlier anticipated.’ Some officials also thought the Fed should start shrinking its $8.76 trillion portfolio of bonds and other assets relatively soon after beginning to raise rates, the minutes said.”

January 4 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are beginning to map out how and when they could shrink their $8.76 trillion portfolio of Treasury and mortgage securities, which more than doubled amid efforts to stabilize the economy over the past two years. At their policy meeting last month, officials agreed to wind down their bond-purchase stimulus program more quickly amid growing concerns about high inflation, setting it on track to end in March. Officials began discussing at that meeting what should happen to the bondholdings after that point, and some are pushing to start shrinking them sooner and faster than they did after an earlier asset-purchase program.”

January 6 – Bloomberg (Steve Matthews): “Federal Reserve policy makers could start to raise their target interest rate as soon as March and shrink the central bank’s balance sheet as a next step in response to surging inflation, Federal Reserve Bank of St. Louis President James Bullard said. ‘The FOMC could begin increasing the policy rate as early as the March meeting in order to be in a better position to control inflation,’ Bullard… said… ‘Subsequent rate increases during 2022 could be pulled forward or pushed back depending on inflation developments.’”

January 6 – Bloomberg (Craig Torres and Matthew Boesler): “Federal Reserve officials are preparing to move quicker than the last time they tightened monetary policy in a bid to keep the U.S. economy from overheating amid high inflation and near-full employment… Traders raised bets on an interest-rate hike as soon as March to around an 80% probability…”

January 4 – Bloomberg (Matthew Boesler): “Federal Reserve Bank of Minneapolis President Neel Kashkari said he supports two interest-rate increases this year to counter risks posed by inflation. ‘I brought forward two rate increases into 2022 because inflation has been higher and more persistent than I had expected,’ Kashkari said… in an essay posted on the Minneapolis Fed’s website. Kashkari has been the Fed’s most dovish policy maker since taking the top job in Minneapolis in 2016.”

U.S. Bubble Watch:

January 7 – CNBC (Jeff Cox): “The U.S. economy added far fewer jobs than expected in December just as the nation was grappling with a massive surge in Covid cases… Nonfarm payrolls grew by 199,000, while the unemployment rate fell to 3.9%... That compared with the Dow Jones estimate of 422,000 for the payrolls number and 4.1% for the unemployment rate… The unemployment rate was a fresh pandemic-era low and near the 50-year low of 3.5% in February 2020. That decline came even though the labor force participation rate was unchanged at 61.9% amid an ongoing labor shortage in the U.S.”

January 4 – New York Times (Ben Casselman): “The number of Americans quitting their jobs is the highest on record, as workers take advantage of strong employer demand to pursue better opportunities. More than 4.5 million people voluntarily left their jobs in November, the Labor Department said... That was up from 4.2 million in October and was the most in the two decades that the government has been keeping track. The surge in quitting in recent months — along with the continuing difficulty reported by employers in filling openings — underscores the strange, contradictory moment facing the U.S. economy after two years of pandemic-induced disruptions.”

January 5 – CNBC (Jeff Cox): “Companies hired at the fastest pace in seven months in December ahead of escalating concerns over surging Covid cases, according to a report… from… ADP. Private job growth totaled 807,000 for the month, well ahead of the Dow Jones estimate for 375,000 and the November gain of 505,000… The total was the best for the job market since May 2021′s 882,000 figure… Hiring was broad-based, though leisure and hospitality led with 246,000 new positions.”

January 6 – Reuters (Lucia Mutikani): “The U.S. trade deficit widened sharply in November as goods imports surged to a record high, suggesting that trade likely remained a drag on economic growth in the fourth quarter. The… trade gap jumped 19.4% to $80.2 billion in November. Economists polled by Reuters had forecast a $77.1 billion deficit. Goods imports soared 5.1% to an all-time high $254.9 billion, likely as congestion at ports eased. Overall imports increased 4.6% to $304.4 billion.”

January 6 – Bloomberg (Molly Smith): “A gauge of U.S. firms extending credit climbed in December to the highest level in almost 18 years, signaling a strong bet on the economy’s prospects and heavy investment in automation. A National Association of Credit Management index, which tracks credit extended to both the manufacturing and services sectors, increased to 72.3 in December, the highest reading since 2004. The gauge has been mostly rising since hitting an all-time low of 41.6 in April 2020. Activity has especially ramped up since July as manufacturers play catch-up after forgoing big purchases of new machinery earlier in the pandemic, said Chris Kuehl, an economic analyst for the NACM… “They went ballistic in the last two to three months,” said Kuehl…”

January 1 – Wall Street Journal (Orla McCaffrey): “Americans borrowed more than ever to buy homes in 2021. Mortgage lenders issued $1.61 trillion in purchase loans in 2021, according to estimates by the Mortgage Bankers Association. That is up slightly from $1.48 trillion in 2020 and above the previous record of $1.51 trillion in 2005. The mortgage boom reflects a thriving housing market and the corresponding run-up in prices over the past year.”

January 6 – Bloomberg (Olivia Rockeman): “A measure of U.S. service providers pulled back abruptly in December after soaring to a record a month earlier, reflecting more moderate growth in business activity and orders. The Institute for Supply Management’s gauge of services activity dropped to 62 from 69.1 a month earlier… The December figure trailed all economists’ projections…, which had a median estimate of 67… The 7.1-point decline was the sharpest since April 2020 and may suggest that the omicron variant of the coronavirus is beginning to take a toll on providers of in-person services... Even so, the services gauge remains well above pre-pandemic levels… The ISM index of prices paid for materials edged up to 82.5, from 82.3 in November.”

January 3 – Bloomberg (Natalie Wong): “Manhattan home sales reached a fourth-quarter record, capping a comeback year for a market that took a major hit earlier in the pandemic. Closed purchases of co-ops and condos totaled 3,559 in the three months that ended in December, the most for the period in more than 30 years of data-keeping by… Miller Samuel Inc. and… Douglas Elliman Real Estate. The median price of all apartments that sold rose 11% from a year earlier to $1.17 million.”

Fixed-Income Bubble Watch:

January 5 – Wall Street Journal (Nina Trentmann): “Many U.S. finance chiefs secured cheap funding for their businesses in 2021 and anticipate similar conditions in 2022… Monetary stimulus from the Fed coupled with strong investor demand for bonds, equity issuances and other financing instruments provided corporate finance executives across industries with good access to the capital markets in 2021… In 2021, the volume of bond issuances by investment-grade-rated U.S. companies reached $1.079 trillion, down 28% from the record $1.491 trillion raised in 2020, though still higher than the $965.04 billion raised in 2019, according to Refinitiv... U.S. companies sold $402.55 billion in junk bonds in 2021, up 11% from 2020 and almost double the amount they raised in 2019. Equity issues, at $377.38 billion, were up 4.2% in 2021 from 2020…”

January 3 – Bloomberg (Lara Wieczezynski): “Companies looking to the U.S. leveraged loan market for fresh funds capitalized on low interest rates in 2021 to raise over $862 billion, the highest tally since 2017, according… Bloomberg. Mergers and acquisitions in need of financing drove sales while the prospect of rising rates powered demand for much of the year, clearing a path for borrowers to continuously tap the market for just about every need.”

China Watch:

January 3 – Bloomberg: “Almost two weeks of lockdown is wearing on the residents of Xi’an, the western Chinese city that’s the nexus of the longest outbreak of Covid-19 in the country since the virus was first detected there. Shortages of food and medical care have worsened over the past 12 days since officials sealed off the city of 13 million people in an effort to stymie a flareup that has already led to more than 1,600 infections. More posts are starting to emerge on Chinese social media criticizing the government’s poor management of the lockdown and complaining that access to food is extremely limited. Scenes like this haven’t been seen in China since the first days of the pandemic, when officials shut down Wuhan and introduced the Covid Zero policy it’s maintained ever since.”

January 4 – Associated Press (Ken Moritsugu): “Residents of the Chinese city of Xi’an are enduring a strict coronavirus lockdown, with business owners suffering yet more closures and some people complaining of difficulties finding food, despite assurances from authorities that they are able to provide necessities for the 13 million people largely confined to their homes. Stringent measures to stem outbreaks are common in China, which still maintains a policy of stamping out every COVID-19 case long after many other countries have opted to try to live with the virus. But the lockdown imposed Dec. 23 in Xi’an is one of the harshest in the country since a shutdown in 2020 in and around Wuhan…”

January 6 – Financial Times (Thomas Hale, William Langley and Andy Lin): “The Shanghai Stock Exchange suspended trading in several bonds of Chinese property developer Shimao, a day after the company’s failure to make a loan payment increased fears that a cash crunch will spread more widely across the country’s embattled real estate industry… The problems at Shimao suggested that China’s real estate sector woes, which have mainly affected companies with riskier credit ratings such as Evergrande and Kaisa Group, could spread to more highly rated developers as they grapple with a slump in housing sales and a loss of investor confidence.”

January 6 – Bloomberg: “Shimao Group Holdings Ltd., a bellwether for financial contagion in China’s embattled property industry, suffered its biggest-ever bond rout on Thursday after a creditor said one of the developer’s units defaulted on a local loan… Shimao is China’s 14th biggest developer by contracted sales and has about $10 billion in outstanding local and offshore bonds.”

January 5 – Bloomberg: “The wrecking ball headed for 39 apartment blocks on a tropical island at the southern tip of China poses the latest threat for China Evergrande Group as local governments race to reclaim land ahead of a looming restructuring of the embattled developer. The government of Danzhou, a city in the province of Hainan, has asked Evergrande to tear down what it says are illegal buildings within 10 days. The order was signed Dec. 30, meaning the company could start demolition work on the near-complete condos by Jan. 9. Evergrande has appealed the order… The Hainan edict is among the most extreme in a spate of government actions to seize Evergande’s property and land holdings, underscoring risks to its most-prized assets as the firm prepares for what could be the largest restructuring ever in China.”

January 4 – Bloomberg: “China Evergrande Group is seeking to delay an option for investors to demand early repayment on one of its yuan-denominated bonds, in the latest sign of distress amid a broader real estate debt crisis.”

January 7 – Reuters (Julie Zhu and Clare Jim): “Under pressure from authorities, Chinese property firm Kaisa Group Holdings Ltd is working furiously to come up with a feasible plan to repay wealth product investors, two sources… said. Kwok Ying Shing, chairman of the cash-strapped developer, has agreed to a request from the government of Shenzhen where the company is based, to provide by the end of January a proposal to repay investors in its wealth management products (WMPs)…The sources added that if the company fails to do so, they believe possible consequences include the Shenzhen government seizing some of Kaisa's assets and gradually taking over the company. Kaisa's dilemma underscores how authorities are pushing property developers to prioritise meeting onshore debt obligations.”

January 7 – Bloomberg: “China called on banks to boost real estate lending in the first quarter and eased a key debt restriction for developers, a sign that authorities are becoming increasingly concerned about the industry’s liquidity crisis. In previously unreported window guidance issued last month, regulators told banks to step up lending to developers after at least two quarters of consecutive declines, people familiar… said… At the same time, borrowing by major property firms used to fund mergers and acquisitions will no longer be counted toward the ‘three red lines’ metrics that limit debt…”

January 6 – Bloomberg: “The property industry association in China’s Taizhou city urged real estate developers to set property prices at reasonable levels, and avoid cutting prices maliciously or engaging in ‘vicious competition’…”

January 1 – Bloomberg: “China added $16.7 billion in foreign debt in the third quarter of 2021 due in part to increased purchases of onshore yuan-denominated bonds by foreign investors. About 47% of China’s outstanding debt of $2.7 trillion at the end of September are medium to long-term obligations…, Wang Chunying, deputy director and spokesman of the State Administration of Foreign Exchange, said… Offshore investors’ increased holdings of onshore bonds reflect China’s achievement in opening up its financial markets and their confidence in the country’s economic outlook, Wang was quoted as saying.”

January 3 – Bloomberg: “China’s anti-graft crackdown has so far brought down more than 20 financial officials as authorities step up scrutiny over the nation’s $54 trillion financial system at a time of growing turmoil in the property market. At least 24 officials had been probed or penalized since Oct. 12 when China launched a national anti-corruption inspection focused on financial institutions and regulators…”

January 5 – Financial Times (Primrose Riordan and Chan Ho-him): “Hong Kong shoppers are bracing for a sharp rise in food prices, including for dairy products, fruit and meat, after authorities cancelled flights to protect the international financial hub from the Omicron coronavirus variant. Cathay Pacific, the territory’s de facto flag carrier, has suspended long-haul cargo flights, while the government has banned services from eight countries including the US, the UK, Canada and Australia for two weeks. Some airlines have also halted flights because of the city’s strict pandemic policies.”

January 3 – Financial Times (Chan Ho-him and Primrose Riordan): “Hong Kong’s free press is on the brink of extinction after the two largest remaining independent news websites in the Chinese territory announced they were shutting down in the space of a week. Citizen News… said it would cease operations…, citing safety concerns for its reporters. The decision… was announced after pro-democracy publication Stand News closed last Wednesday. Stand News was raided by police and a number of journalists and former directors were arrested for allegedly publishing ‘seditious’ materials.”

Central Banker Watch:

January 6 – Bloomberg (Patrick Gillespie): “Argentina raised its benchmark interest rate for the first time in over a year as it faces calls from the International Monetary Fund to tighten its monetary policy. The central bank lifted the key Leliq rate to 40% from 38%, the level it had stood for over a year even with annual inflation running at around 50%.”

Global Bubble Watch:

January 6 – Bloomberg (Reed Landberg and Philip Aldrick): “British companies are planning to boost prices by 5% in the next year, a Bank of England survey showed, indicating increasing inflationary pressures across the economy. The reading… was up sharply from 4.2% in November.”

January 5 – Bloomberg (River Davis and Craig Trudell): “The epic fight over who controls the future of the car industry is about to get a whole lot more interesting. Tesla Inc., the pioneer and pacesetter, has dominated the early rounds of the new-energy age, capturing investors’ imaginations with a vision for what the next generation of vehicles looks like and seizing the nascent market for fully electric cars. In the other corner are giants of scale: Volkswagen AG and Toyota Motor Corp. The world’s two biggest automakers — each sold roughly 10 or 11 cars for every one Elon Musk did last year — realize the age of the battery-powered vehicle is here and are gaming out how to stay on top. Within five days of one another last month, these masters of mass production laid out plans to splurge $170 billion over the coming years to preserve their claim on an industry they’ve dominated for decades.”

January 3 – Bloomberg (Nabila Ahmed and Swati Pandey): “Australia’s housing boom appears to be over, with growth is poised to fall as low as 5% this year after a 22.1% rise in 2021 -- the strongest since 1988. A softening housing market cooled further in December, rising 1% nationally as the boom in high-end properties that has underpinned the record run tapered significantly, according to CoreLogic…”

EM Watch:

January 3 – Reuters (Daren Butler and Jonathan Spicer): “Turkey's annual inflation rate surged to 36.1% last month, its highest in the 19 years that Tayyip Erdogan has ruled, laying bare the depths of a currency crisis engineered by the president's unorthodox interest rate-cutting policies. In December alone, consumer prices took a rare step into double-digits, rising 13.58%..., eating deeper into the earnings and savings of Turks rattled by the economic turmoil.”

January 7 – Financial Times (Laura Pitel): “Turkey spent more than $7bn on propping up the lira in December, official data showed, as analysts warned that backdoor interventions meant that the true toll of the currency defence was even higher.”

January 4 – Bloomberg (Ugur Yilmaz): “Turkish investors are still clinging to foreign currencies, undermining President Recep Tayyip Erdogan’s plan to support the lira without raising interest rates. Companies boosted their foreign-currency holdings by around $1.6 billion in the seven days through Dec. 24, taking advantage of a rally that saw the lira almost double in value that week. While households trimmed their positions by just over $100 million, it hardly put a dent in total foreign-currency deposits, which rose to a record $239 billion…”

January 3 – Bloomberg (Asli Kandemir): “Turkey will require exporters to convert a quarter of their revenues to liras, the latest step in the government’s efforts to boost its reserves and support the local currency. The central bank will buy 25% of all income from exports of goods so long as the exporters receive payments in U.S. dollars, euros or pounds, the monetary authority said in a decree…”

January 3 – Bloomberg (Sydney Maki and Vinícius Andrade): “A record-breaking number of emerging-market companies made their public debuts in 2021, just ahead of what should be a tough year for equity investors… Those headwinds were far from investors’ minds as higher capital needs and hope for a global economic recovery led 1,162 companies from emerging markets to make initial public offerings last year on local or foreign exchanges. All together, they raised $228 billion via listings, about a 31% increase from 2020…”

Europe Watch:

January 7 – Reuters (Alexander Weber): “Inflation in the euro region accelerated beyond already record levels, defying expectations for a slowdown and complicating the task for European Central Bank officials who insist the current spike is temporary. The euro strengthened. Consumer prices jumped 5% from a year earlier in December -- faster than the previous month’s 4.9% gain and more than the 4.8% median estimate…”

January 5 – Bloomberg (Alexander Weber and Aaron Eglitis): “No one should be in any doubt that the European Central Bank stands ready to act if the inflation outlook strengthens, according to Governing Council member Martins Kazaks. While the ECB sees consumer-price growth slipping below its 2% goal as supply-chain snarls are resolved and soaring energy costs ease, it must stay vigilant amid the persistent threat from Covid-19 and the elevated economic uncertainty, the Latvian central bank chief said. ‘Don’t be misguided that we won’t raise rates, or that we won’t cut the support if necessary,’ Kazaks said… ‘Of course we’ll do our job.’ Speaking about the need to be able to adapt, he said ‘flexibility is the name of the game.’”

Japan Watch:

January 6 – Bloomberg (Yoshiaki Nohara and Yuko Takeo): “Japanese household spending fell in November for the first time in three months, a sign of unexpected fragility in consumption even before the omicron variant of the virus started to spread. Spending declined 1.2% from the prior month, led by drops in outlays on housing, education and transportation… Overall expenditures were 1.3% below 2020’s level, compared with economists’ expectations for a 1.2% increase.”

Leveraged Speculation Watch:

January 3 – Financial Times (Laurence Fletcher): “Big rallies in US tech behemoths and a series of painful market jolts have disrupted many hedge funds’ attempts to lure back investors who have deserted the sector in recent years. Hedge funds gained 8.7% on average from January to November 2021, according to… HFR. That marks their third consecutive year of gains, but trails by some distance the US S&P 500 index’s 24% total return over that period. Managers have lagged behind the benchmark US equities index because they tend to hold relatively small positions in tech giants… Hedge funds have also found it difficult to make money as some bets have been disrupted by often-hostile retail investors.”

January 4 – Bloomberg (Samuel Shen and Selena Li): “China’s algorithm-driven quant funds boomed in 2021 as investors sought alternatives to a languid stock market, but the final months of the year saw some ‘flash boys’ bogged down by heavy volatility and their sheer size. High-flyer Quant, a top hedge fund house in China that uses powerful computers and artificial intelligence (AI) to exploit market opportunities, last week apologised to investors for a record slump in performance. The fund house, which manages roughly 100 billion yuan ($15.69bn), blamed the crash on wild shifts in investor sentiment and crowded trades in a sector that is ‘growing too fast in size.’”

Geopolitical Watch:

January 7 – Reuters (Ju-min Park and David Brunnstrom): “The United States and Japan… voiced strong concern about China's growing might in unambiguous terms and pledged to work together against attempts to destabilise the region. The comments from the two allies, in a joint statement that followed a virtual meeting of their foreign and defence ministers, highlight how deepening alarm about China - and growing tension over Taiwan - have put Japan's security role in focus. The ministers expressed concerns that China's efforts ‘to undermine the rules-based order’ presented ‘political, economic, military and technological challenges to the region and the world’, according to their statement.”

January 2 – Wall Street Journal (Brett Forrest, Ann M. Simmons and Chao Deng): “Russian President Vladimir Putin and Chinese leader Xi Jinping oversaw an ambitious joint military exercise in China this summer, which along with reported collaborations in aviation, undersea and hypersonic-weapons technology point to a solidifying defense alignment, according to military analysts. U.S. officials and military specialists say it is difficult to pin down the level of collaboration between two nations that tightly control information, and whose actions are increasingly opaque to outsiders. But Western officials and defense experts are growing more convinced of the closer relationship based on recent economic alliances, military exercises and joint defense development, as well as the few public statements from government leaders. While U.S. officials have long been skeptical of a unified threat from the two countries, some are now changing their tune.”

January 3 – Financial Times (Gideon Rachman): “‘Who controls the past controls the future: who controls the present controls the past.’ George Orwell was writing in the late 1940s — but that extract from 1984 is a perfect guide to how Vladimir Putin and Xi Jinping… treat history. In the dying days of 2021, the Russian and Chinese governments both took dramatic action to censor discussion of their countries’ history. In both cases, the decision to ‘control the past’ sends a bleak signal about the future. Russia’s Supreme Court closed Memorial, an organisation founded in the last years of the Soviet Union to record and preserve the memory of the victims of Stalinism. In Hong Kong, local universities bowed to China’s central government — removing from campuses statues commemorating the Tiananmen Square massacre of 1989. In the decades after decolonisation in 1997, Hong Kong was a bastion of free speech within the People’s Republic of China. But that era has now definitively come to a close.”

January 1 – Reuters (Sarah Wu): “Taiwan President Tsai Ing-wen had a New Year message for China on Saturday: military conflict is not the answer, but Beijing responded with a stern warning that if Taiwan crossed any red line it would lead to ‘profound catastrophe’… We must remind the Beijing authorities to not misjudge the situation and to prevent the internal expansion of ‘military adventurism’,’ Tsai said…”

January 5 – Reuters (Fabian Hamacher and Ann Wang): “Taiwan air force jets screamed into the sky… in a drill simulating a war scenario, showing its combat readiness amid heightened military tensions with China, which claims the island as its own. Before takeoff, flight crews at a base in the southern city of Chiayi - home to U.S.-made F-16 fighter jets that are frequently scrambled to intercept Chinese warplanes - rushed to ready aircraft as an alarm sounded. The exercises were part of a three-day drill to show Taiwan's battle readiness ahead of the Lunar New Year holiday at the end of this month.”

January 4 – CNBC (Sumathi Bala): “The tense relationship between the U.S. and China over Taiwan will be the main risk for Asia in the year ahead, according to one political risk analyst. Beijing sees any move by Washington on Taiwan as negative or infringing on its interests, said D.J. Peterson, president of Longview Global Advisors... ‘That is very much the top risk, I think in Asia in 2022. If you look at the relationship between the United States and China right now, it really is a ‘Cold War 2’ type relationship,’ he told CNBC…”

January 5 – Bloomberg (Nariman Gizitdinov): “Russia and its allies dispatched troops to help quell protests in Kazakhstan after fuel-price increases unleashed a wave of popular anger that poses the biggest threat to the central Asian country’s leadership since its independence in 1991. Troops cleared a main square in Almaty, the nation’s largest city... Dozens of anti-government protesters were killed by security forces, police said Thursday, after President Kassym-Jomart Tokayev ordered them to put down the demonstrations, which have drawn thousands.”