Friday, January 14, 2022

Weekly Commentary: Kaufman Knows Inflation

“U.S. Inflation Hits 39-Year High of 7%, Sets Stage for Fed Hike.” “Powell Makes Case for Fed Curbing Inflation While Doing No Harm.” “Federal Reserve Is on Top of Inflation, Powell Tells Congress.” “Powell Assures Americans That Fed Will Tackle High Inflation.” “China Home Market Slump Deepens as Prices Fall for Fourth Month.” “The ‘Mother of All’ Supply Shocks Lurks in China’s Covid Crackdowns.” “Cyberattack Hits Ukraine as U.S. Warns Russia Could be Prepping for War.”

In a week of notable headlines, I’ll start with the Bloomberg headline, “Mester Says Shrink Fed Balance Sheet Fast But Don’t Roil Markets.” Notions of “Doing No Harm” and “Don’t Roil Markets” are wishful thinking. There’s the long-established principle that central banks must move early to quash inflationary impulses - to ensure that a central bank doesn’t fall “behind the curve.” History teaches that to allow inflation to gain a foothold ensures the containment challenge rises exponentially over time. Unleash inflation dynamics - in the markets and/or the real economy – and getting it back under control will invariably inflict magnitudes of harm, pain and market “roil” necessary to alter behavior and quell inflation psychology.

But don’t take my word for it. We have the good fortune of having one of the great Credit and macro thinkers of our age still with us – and providing astute analysis - at the age of 94. For those unfamiliar with the esteemed Henry Kaufman, he was a Fed economist before becoming a Wall Street legend in the seventies as chief economist and head of bond market research at Salomon Brothers (my analytical framework owes a great debt to Dr. Kaufman). Kaufman Knows Inflation.  

Henry Kaufman was interviewed this week for an article by Bloomberg’s Erik Schatzker: “I don’t think this Federal Reserve and this leadership has the stamina to act decisively. They’ll act incrementally. In order to turn the market around to a more non-inflationary attitude, you have to shock the market. You can’t raise interest rates bit-by-bit.”

“The longer the Fed takes to tackle a high rate of inflation, the more inflationary psychology is embedded in the private sector -- and the more it will have to shock the system.”

“‘It’s dangerous to use the word transitory,’ Kaufman said. ‘The minute you say transitory, it means you’re willing to tolerate some inflation.’ That, he said, undermines the Fed’s role of maintaining economic and financial stability to achieve ‘reasonable non-inflationary growth.’”

“If he were advising Powell, Kaufman said he’d urge the Fed chair to be ‘draconian,’ starting with an immediate 50-bps increase in short-term rates and explicitly signaling more to come. Plus, the central bank would have to commit in writing to doing whatever is necessary to stop prices from spiraling higher.”

There’s no “draconian” in our central bank’s playbook. Markets were heartened by Powell’s suggestion that inflation will likely be coming down on its own by mid-year, as well as by the general reassuring tone (echoed by Brainard) that the Fed is focused on doing no harm. To the ears of acutely vulnerable Bubble markets, “no harm” implies no Fed appetite for risks associated with a meaningful tightening of financial conditions.

In last week’s “Issues 2022” piece, I attempted to put the new year into some historical context. Inflation is running the hottest in four decades. Commenting on Volcker’s decisive move to crush inflation, Kaufman stated: “It required a lot of fortitude in 1979 to do what the Fed did.” In Volcker’s day, the Fed would impact financial conditions through the banking system, for the most part with subtle adjustments to bank reserves (that would impact bank short-term funding costs - and lending and financial conditions generally).

Under Alan Greenspan, the Fed transitioned to the securities markets as the primary mechanism for system stimulation. It was both seductive and powerful. Greenspan realized he could stoke speculation, leverage, higher market prices and overall looser financial conditions, uttering not many syllables. But this approach was ominously “asymmetrical” – maximum stimulus to sustain booms, but minimal effort to rein in excess. And the larger Bubbles inflated, the more aggressive the requisite rate cuts to hold Bubble deflation at bay. Out of rate cuts, Bernanke resorted to massive “money” creation. Massive degenerated into monumental. The Fed’s balance sheet has inflated $5.0 TN in 121 weeks, now having inflated 10-fold since 2007.

Decades of mismanagement are coming home to roost in 2022. The risk of collapsing “Everything Bubbles” precludes aggressive tightening measures. The Fed surely grasps that it will not be forcefully hiking rates, though officials hope that through a concerted effort to talk tough, the markets will get the message and moderately tighten for them.

The Bloomberg Commodities Index rose 2.2% this week, increasing early-2022 gains to 4.4%. WTI crude surged $4.92 for the week to $83.82, quickly back within striking distance of October’s $85.40 high. Gasoline jumped 5.2% this week, with Natural Gas surging 8.8%. There are powerful inflationary biases percolating throughout energy and commodities markets.

Faltering speculative Bubbles (i.e. equities, crypto, corporate Credit, etc.) and associated de-risking/deleveraging would spark a problematic tightening of financial conditions. My sense, however, is that today’s environment has important differences to previous backdrops, where market “risk off” was immediately perceived as bearish for energy and commodities prices (and inflation generally). Inflationary forces have made decisive headway throughout the global economy (including energy and commodities).

There is more than ample monetary tinder available, and investment interest in the commodities markets could actually grow as the appeal of financial assets wanes. Besides, 2022 appears poised for another year of enormous growth in government indebtedness globally. While all bets are off in a crash environment, I would expect inflationary pressures to prove resilient even in the face of weak securities markets. Indeed, a crisis of confidence in financial assets could exacerbate the unfolding shift to commodities and real things as more secure stores of wealth/value.

As for the stock market, there was a dynamic this week that was reminiscent of the bursting “tech” Bubble back in 2000. In trading Monday (and again on Thursday), there were notable correlations between sinking technology stocks and the cryptocurrencies - and some key financial conditions indicators (including various CDS prices). It was as if fear was starting to take hold - the market was beginning to connect the dots between a collapsing crypto Bubble, the desperately overheated technology industry, and latent systemic risk. In short, we started to see some of the correlations I would expect at the incipient stage of market panic.

At the late stage of the nineties’ tech Bubble, there was recognition that the big technology companies were extraordinarily overvalued. Yet the bulls were undeterred. After all, revenues and profits were growing so rapidly that overvaluation was viewed as short-lived. Not appreciated was that inflated stock prices were but one facet of industry Bubble Excess. Speculation, speculative leverage, and the attendant loosest financial conditions (at the time) imaginable were spurring massive spending (over- and malinvestment) by fledging Internet, technology and media companies.

When the speculative market Bubble burst and financial conditions tightened suddenly and dramatically, scores of companies were left without access to new finance. Investment in technology and communications equipment and services collapsed. Even for many established companies and industry bellwethers, revenues and earnings dropped significantly. It is this dynamic that helps explain how stock prices tend to collapse up to 80 or 90% in major bear markets. Price-to-earnings ratios sink, while earnings collapse.

And speaking of Bubbles and bear markets, Chinese stocks were again under pressure this week. In particular, many developer stocks and bonds are well on their way to losses unimaginable just a few short months ago.

China Crisis Dynamics gained important momentum this week. While this is a significant global development, market focus is elsewhere. And that’s how things tend to play out. The initial phase of instability garners much attention. But then policy responses and a semblance of stability nurture the perception that the situation has been largely resolved. Meanwhile, Credit stress builds and broadens, methodically gravitating from the “Periphery” toward the systemic “Core.”

January 14 – Bloomberg (Alice Huang and Rebecca Choong Wilkins): “Concerns about China’s largest builder by contracted sales are weighing on the nation’s other higher-rated developers, triggering worries that contagion risks may be rising. Country Garden Holdings Co. saw its shares and dollar bonds plunge Thursday following a report that it was unable to generate sufficient interest in a potential convertible bond deal. China’s stronger builders have so far been relatively immune to a credit crisis sweeping the sector. If those firms’ capacity to raise debt offshore is seen to be under threat, the industry may see further defaults -- increasing the stress on China’s struggling housing market.”

Country Garden, China’s largest developer by sales, saw its share price sink almost 10% this week, while yields surged 460 bps to a record 12.77%. Yields began the year at 6.43% and traded at only 3.30% in September. Developer Crisis Dynamics have accelerated, making their way to what was recently considered the bluest of blue chips.

Other top-ten developer bonds were slaughtered this week. Sunac’s bond yields surged 1,310 bps to a record 38.44% (traded at 7.6% in September). Longfor yields jumped 850 bps to a record 18.19% (4.75% in September). Seazen Group bond yields spiked 2,000 bps (20 percentage points) to 60.00%. Seazen yields began the year at 20.8%, after trading at 3.85% in September.

Somewhat smaller, Shimao yields ended the week above 100%. Kaisa Group yields surpassed 72%, China Aoyuan Group 65%, Yuzhou Group 66%, and Agile Group 48% - to name but a few.

January 14 – Bloomberg (Jan Dahinten): “Chinese property developer Guangzhou R&F Properties Co. was downgraded to restricted default by Fitch Ratings following its successful delay in repaying most of a $725 million dollar bond due Thursday. The debt move, completed Thursday, was necessary for the builder to avoid default given its limited liquidity…”

R&F Group yields were up another 800 bps this week to 135%, boosting the two-week yield spike to almost 45 percentage points. An index of Chinese dollar high-yield bonds sank to a record low, with yields surging 230 bps to 20.60% (largest weekly increase since November). The Shanghai Stock Exchange Property Index was down 4.3% this week

Suggestive of the developer crisis turning more systemic, Friday saw a notable rise in Chinese bank CDS prices. For the week, China Development Bank CDS increased four to a one-month high 62 bps. Bank of China rose four to a one-month high 63 bps. Industrial & Commercial Bank gained three to a one-month high 64 bps, and China Construction Bank rose two to a one-month high 62 bps. Furthermore, China sovereign CDS rose four to a five-week high 47 bps (began 2020 at 30 bps).

And let’s not forget Huarong and the highly levered “asset management companies,” or AMCs. They are in Crisis Dynamics Crosshairs.

January 14 – Bloomberg (Crystal Chui and Zheng Li): “China Cinda Asset Management Co. tumbled in Hong Kong trading after the state-owned firm unexpectedly backed out of a plan to take a major stake in Ant Group Co.’s consumer finance unit which aims to boost its registered capital as part of a regulatory-driven overhaul. Cinda is withdrawing from a share subscription agreement that the company announced Dec. 24, the Beijing-based bad-loan manager said… Shares of Cinda fell as much as 13%, the biggest decline since its debut in 2013.”

January 14 – Bloomberg (Alice Huang): “Dollar bonds issued by China’s major state-controlled distressed debt managers continued to decline Friday, with some on pace for their biggest-ever drops. Spread on China Cinda’s 4.4% perpetual note has widened 39bps this week to 332bps, including 28bps on Friday… It’s poised for its biggest-ever daily and weekly widenings since November’s issuance. Huarong’s 3.75% 2024 note widened 47bps to 349bps, on track for the biggest daily increase since November. Spread has widened 106bps this week, set for the most since July.”

January 13 – Bloomberg: “Several of China’s largest banks have become more selective about funding real estate projects by local government financing vehicles, concerned that some are taking on too much risk after they replaced private developers as key buyers of land, people familiar with the matter said. At least five state-run banks have imposed new restrictions this year on loans to weaker LGFVs seeking to buy land and develop new real estate projects, said the people… Banks are being more stringent in assessing the financial strength of the local economy and the sales prospects of the projects, the people said. China’s biggest lenders are walking a fine line over the property sector…”

China developers, the “AMCs,” and LGFVs – we’re literally talking about Trillions of suspect liabilities.

China’s December Credit data was reported this week. Aggregate Financing, China’s metric of system Credit, expanded a near-forecast $373 billion during December to a record $49.47 TN. This was down from November, but up significantly (44%) from December 2020. For the year, Aggregate Financing surged $4.938 TN, or 10.3%. While down 23% from 2020’s off-the-charts Credit splurge, 2021 growth was up 23% from 2019 and 39% from 2018.

Notably, Total Bank Loans were about 10% below forecast at $178 billion - to a record $30.345 TN. This was down from November’s $201 billion and 10% below December 2020. Q4 Bank Loan growth was 4.4% below Q4 2020. Bank Loans were up 11.5% y-o-y, 25.8% over two years and 80.8% over five years.

Most noteworthy, Consumer Loans dropped by almost half from November’s $116 billion to only $59 billion, and were down a third from December 2020. Indicating a rapid slowdown in mortgage lending, it was the weakest Consumer loan growth since February 2021. It’s worth noting that Q4 consumer loan growth was about 10% below Q4 2020.

At $104 billion, Corporate Loan growth was up from November and 13% above December 2020. Corporate loans expanded 11.1% over the past year, 25.1% over two years and 67.6% over the past five years. And while down slightly from 2020, total 2021 loan growth was up 27.3% from 2019 and 45.2% above 2018.

Explaining how Aggregate Financing held up so well in the face of such weak consumer lending, Government Bonds surged $183 billion in December, up from November’s $129 billion and December 2020’s $112 billion – growth second only to August 2020’s $217 billion. Government bonds expanded $1.050 TN during 2021, or 15.2%, with two-year growth of 40.6% and three-year growth of 60.8%. While down slightly from 2020’s record $1.164 TN, last year’s annual expansion of Government bonds was 62% higher than 2019. It is ominous, to say the least, that such severe Credit issues have erupted in the face of ongoing enormous system Credit expansion.

January 14 – Reuters (Aamer Madhani, Nomaan Merchant and Vladimir Isachenkov): “U.S. intelligence officials have determined a Russian effort is underway to create a pretext for its troops to further invade Ukraine, and Moscow has already prepositioned operatives to conduct ‘a false-flag operation’ in eastern Ukraine, according to the White House. White House press secretary Jen Psaki said on Friday the intelligence findings show Russia is also laying the groundwork through a social media disinformation campaign that frames Ukraine as an aggressor that has been preparing an imminent attack against Russian-backed forces in eastern Ukraine.”

War Drums. Russian stocks sank 4.6% this week. Russia’s 10-year ruble yields surged 100 bps to an almost six-year high 9.46%. Russia’s sovereign CDS jumped 53 to 178 bps, the high since the March 2020 crisis spike. Ukraine dollar yields jumped 126 bps to 10.44% (high since April 2020). Ukraine sovereign CDS surged 227 to 858 bps, the high since the 2014 Russian invasion period.

We’re only two weeks into 2022, yet there are already threatening convulsions at key fault lines: the mighty U.S. tech and crypto Bubbles; China’s collapsing apartment Bubble turning more systemic; and a geopolitical backdrop fraught with risk. If things start to unravel, how reliable is the Fed (and global central bank) liquidity backstop? For years now, dependable and predictable Fed responses to market instability have been fundamental to (cheap) pricing for risk protection derivatives.

There’s still a solid argument for the dependability of the Fed’s liquidity backstop. But surging inflation has significantly clouded the predictability of both the timing and scope of Fed QE responses to market instability. I expect this to increasingly be a key factor in higher pricing and waning liquidity throughout the derivatives universe. This will become a pressing issue as market Bubbles falter.

For the Week:

The S&P500 slipped 0.3% (down 2.2% y-t-d), and the Dow declined 0.9% (down 1.2%). The Utilities fell 1.5% (down 3.5%). The Banks gained 1.1% (up 11.3%), while the Broker/Dealers fell 1.3% (up 1.3%). The Transports dropped 2.2% (down 3.5%). The S&P 400 Midcaps slipped 0.4% (down 2.1%), and the small cap Russell 2000 declined 0.8% (down 3.7%). The Nasdaq100 was little changed (down 4.3%). The Semiconductors rallied 2.7% (down 1.2%). The Biotechs recovered 1.0% (down 4.8%). With bullion rallying $21, the HUI gold index jumped 3.4% (down 2.8%).

Three-month Treasury bill rates ended the week at 0.11%. Two-year government yields jumped 11 bps to 0.97% (up 24bps y-t-d). Five-year T-note yields rose six bps to 1.56% (up 30bps). Ten-year Treasury yields added two bps to 1.79% (up 28bps). Long bond yields increased a basis point to 2.12% (up 22bps). Benchmark Fannie Mae MBS yields jumped 10 bps to a two-year high 2.51% (up 44bps).

Greek 10-year yields were little changed at 1.51% (up 9bps y-t-d). Ten-year Portuguese yields declined three bps to 0.55% (up 9bps). Italian 10-year yields fell four bps to 1.27% (up 10bps). Spain's 10-year yields slipped a basis point to 0.64% (up 7bps). German bund yields were unchanged at negative 0.05% (up 13bps). French yields rose five bps to 0.33% (up 14bps). The French to German 10-year bond spread widened five to 38 bps. U.K. 10-year gilt yields declined three bps to 1.15% (up 18bps). U.K.'s FTSE equities index gained 0.8% (up 2.1% y-o-y).

Japan's Nikkei Equities Index declined 1.2% (down 2.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.14% (up 7bps y-t-d). France's CAC40 fell 1.1% (down 0.1%). The German DAX equities index dipped 0.4% (unchanged). Spain's IBEX 35 equities index increased 0.6% (up 1.1%). Italy's FTSE MIB index slipped 0.3% (up 0.7%). EM equities were mixed. Brazil's Bovespa index surged 4.1% (up 2.0%), and Mexico's Bolsa gained 1.0% (up 0.9%). South Korea's Kospi index fell 1.1% (down 1.9%). India's Sensex equities index jumped 2.5% (up 5.1%). China's Shanghai Exchange slumped 1.6% (down 3.3%). Turkey's Borsa Istanbul National 100 index gained 1.9% (up 11.6%). Russia's MICEX equities index sank 4.6% (down 5.0%).

Investment-grade bond funds saw inflows of $1.023 billion, while junk bond funds posted outflows of $2.236 billion (from Lipper).

Federal Reserve Credit last week increased $16.9bn to $8.737 TN. Over the past 122 weeks, Fed Credit expanded $5.010 TN, or 134%. Fed Credit inflated $5.926 Trillion, or 211%, over the past 479 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week jumped $18.5bn to $3.434 TN. "Custody holdings" were down $83.3bn, or 2.4%, y-o-y.

Total money market fund assets fell $28.1bn to $4.675 TN. Total money funds increased $359bn y-o-y, or 8.3%.

Total Commercial Paper dropped $26.4bn to $1.048 TN. CP was down $13bn, or 1.3%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 23 bps to a 22-month high 3.45% (up 66bps y-o-y). Fifteen-year rates jumped 19 bps to 2.62% (up 39bps). Five-year hybrid ARM rates rose 16 bps to 2.57% (down 58bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 15 bps to an 18-month high 3.51% (up 56bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 0.6% to 95.17 (down 0.5% y-t-d). For the week on the upside, the Brazilian real increased 1.9%, the South African rand 1.2%, the South Korean won 1.2%, the Japanese yen 1.2%, the Norwegian krone 0.8%, the British pound 0.6%, the Singapore dollar 0.6%, the Swiss franc 0.5%, the Mexican peso 0.5%, the euro 0.5%, the Australian dollar 0.4%, the New Zealand dollar 0.4%, and the Swedish krona 0.3%. The Chinese renminbi increased 0.40% versus the dollar (up 0.05% y-t-d).

Commodities Watch:

January 12 – CNBC (Pippa Stevens): “U.S. natural gas futures surged more than 14% on Wednesday as temperatures drop and forecasts call for more winter weather ahead… ‘The heating demand outlook for [the] eastern-third of the U.S. has strengthened materially for this weekend and for the last week of January,’ said Again Capital’s John Kilduff…”

The Bloomberg Commodities Index gained 2.2% (up 4.4% y-t-d). Spot Gold rallied 1.2% to $1,818 (down 0.6%). Silver recovered 2.7% to $22.96 (down 1.5%). WTI crude surged $4.92 to $83.83 (up 11.4%). Gasoline jumped 5.2% (up 9%), and Natural Gas surged 8.8% (up 14%). Copper increased 0.2% (down 1%). Wheat dropped 2.2% (down 4%), and Corn fell 1.7% (up 1%). Bitcoin recovered $1,535, or 3.7%, this week to $43,097 (down 7.1%).

Coronavirus Watch:

January 12 – CNBC (Lauren Feiner): “A record 15 million new Covid-19 infections were reported across the globe in a single week as omicron rapidly replaces delta as the dominant variant across the globe, and ‘we know this is an underestimate,’ World Health Organization Director-General Dr. Tedros Adhanom Ghebreyesus told reporters… ‘The sheer volume of cases is putting a burden on health-care systems,’ said Maria Van Kerkhove, WHO’s technical lead on Covid-19. ‘Even though omicron is less severe than delta, it is still putting people in the hospital. It is still putting people into ICU and needing advanced clinical care. It is still killing people.’”

January 11 – Bloomberg (Corinne Gretler): “More than half of Europe’s population may be infected with omicron within weeks at current transmission rates, a World Health Organization official said. The fast-spreading variant represents a ‘west-to-east tidal wave sweeping across the region,’ said Hans Kluge, the regional director of the WHO for Europe…”

January 11 – Bloomberg (Irina Anghel): “European Union regulators warned that frequent Covid-19 booster shots could adversely affect the immune system and may not be feasible. Repeat booster doses every four months could eventually weaken the immune system and tire out people, according to the European Medicines Agency. Instead, countries should leave more time between booster programs and tie them to the onset of the cold season in each hemisphere, following the blueprint set out by influenza vaccination strategies…”

Covid Disruption Watch:

January 13 – CNN (Parija Kavilanz): “Grocery store shelves across America are wiped clean, and they're staying empty as stores struggle to quickly restock everyday necessities such as milk, bread, meat, canned soups and cleaning products. Disgruntled shoppers have unleashed their frustration on social media over the last several days, posting photos on Twitter of bare shelves at Trader Joe's locations, Giant Foods and Publix stores, among many others. After contending with two years of a pandemic and supply chain-related problems, grocery stores still aren't getting the break they had hoped for. Rather, they are now confronting a host of other setbacks.”'

January 11 – Fox News (Jon Michael Raasch): “Empty shelves and thinning groceries and drug supplies are reminiscent of March 2020, Washington, D.C., shoppers told Fox News... ‘It's like a Soviet store during 1981. It's horrible,’ one man said. ‘Honestly, it looks like March of 2020, when everybody was stockpiling and the shelves were bare,’ another man, Dominic, told Fox News Digital. Grocery shoppers across the country have encountered barren shelves when looking for their typical supplies due to supply chain snags, increasing COVID-19 infections and related hurdles as well as severe winter weather.”

January 10 – Wall Street Journal (Amanda Albright): “The Covid-19 Omicron variant’s spread among U.S. factory workers is slowing operations and stretching staff for manufacturers, leading some to consider unconventional, and sometimes expensive, solutions to keep operating. Mounting absences among Covid-infected workers are bringing masks back to some factory floors, executives said, while manufacturers shuttle available workers to jobs and plants where they are most needed. Companies are also redoubling recruiting efforts to fortify workforces already worn thin by high turnover in a tight job market. The speed at which the highly contagious variant is spreading has stunned some executives…”

January 8 – Associated Press (Jennifer Sinco Kelleher and Terry Tang): “Ambulances in Kansas speed toward hospitals then suddenly change direction because hospitals are full. Employee shortages in New York City cause delays in trash and subway services and diminish the ranks of firefighters and emergency workers. Airport officials shut down security checkpoints at the biggest terminal in Phoenix and schools across the nation struggle to find teachers for their classrooms. The current explosion of omicron-fueled coronavirus infections in the U.S. is causing a breakdown in basic functions and services — the latest illustration of how COVID-19 keeps upending life more than two years into the pandemic.”

January 12 – Bloomberg (Enda Curran): “The world economy could be headed for the ‘mother of all’ supply chain stumbles. That’s the warning from HSBC economists who caution that if the highly infectious omicron variant which is already swamping much of the global economy spreads across Asia, especially China, then disruption to manufacturing will be inevitable. ‘Temporary, one would hope, but hugely disruptive all the same’ in the next few months, they wrote in a research note this week.”

January 12 – Bloomberg (Enda Curran): “An omicron outbreak in China is sending jitters through supply chains as manufacturers and shippers brace for disruption inside the world’s-biggest trading nation if it can’t contain the fast-spreading variant. In 2020 and 2021, China’s ‘covid-zero’ strategy meant factories could stay open throughout the pandemic to produce everything from health equipment to laptops that global consumers hoovered up at a record pace. But there’s been confirmed cases of local infection everyday since mid-October and it’s likely even tougher restrictions will be needed to curb omicron’s spread, with knock-on consequences for ports and factories as more cities lock down… ‘The reality is that China remains the center of global manufacturing,’said Thomas O’Connor, a supply chain expert at Gartner Inc…. ‘If there was significant manufacturing or logistic shutdowns in China associated with covid-related challenges, that would have a massive impact on the global economic environment.’”

January 11 – Wall Street Journal (Stella Yifan Xie, Yang Jie and Dan Strumpf): “With Covid-19 flaring up across China, major manufacturers are shutting factories, ports are clogging up and workers are in short supply as officials impose city lockdowns and mass testing on a scale unseen in nearly two years. The prospect of continued disruptions in the world’s second-largest economy… is heightening fears that the disruptions will ripple through the global economy. Already, companies including memory-chip maker Samsung Electronics Co., German auto maker Volkswagen AG and a textiles company that supplies Nike Inc. and Adidas AG are suffering production hitches. Since late December, officials have taken measures to counter Covid-19 outbreaks in several Chinese cities, including the eastern port of Tianjin, Xi’an in central China, and the southern technology hub of Shenzhen. The world’s third-busiest container port of Ningbo-Zhoushan, near Shanghai, risks worsening backlogs from restrictions on trucks and warehouse operations after more than two dozen Covid-19 cases were confirmed in the surrounding area.”

January 13 – Bloomberg (Ann Koh): “Ships looking to avoid Covid-induced delays in China are making a beeline for Shanghai, causing growing congestion at the world’s biggest container port. Shipping firms are making the switch to avoid delays at nearby Ningbo, which suspended some trucking services near that port after an outbreak of Covid-19… Ships are also re-routing to Xiamen in the south… Those diversions are adding to the new wave of congestion facing China’s ports as an increasing number of cities deal with virus outbreaks. The strict testing of workers and truckers ahead of the Lunar New Year holiday at the end of this month is further stressing already strained supply chains as the pandemic heads into its third year.”

January 12 – Bloomberg (Cristina Lindblad, James Mayger, and Dorothy Gambrell): “In 2021, China managed to stamp out scattered Covid outbreaks while still delivering annual economic growth in the neighborhood of 8%. It helped that, even as the country kept its borders more or less sealed, foreign direct investment and portfolio capital kept rushing in, while exports continued to flow out. Yet as Goldman Sachs noted in a Jan. 5 report, the economic costs of Beijing’s Covid-zero stance ‘appear to be increasing over time as each new variant is more transmissible than the previous ones.’ Omicron is a threat of a different magnitude, even for a population that’s 87% vaccinated, because the China-made shots appear to provide inadequate protection against it. Expect more citywide lockdowns like the one instituted in Xi’an, a metropolis of 13 million residents. These wreak havoc on local businesses and can snarl up supply chains. They also spook consumers.”

January 11 – Bloomberg (Will Davies): “Global air-cargo growth slowed sharply in November as demand was hit by supply-chain disruptions, partly because Covid-19 restrictions left workers stuck in quarantine, causing labor shortages. Demand for air freight, measured in cargo ton kilometers, rose 3.7% from the same month in 2019, prior to the pandemic, according to the International Air Transport Association. That’s less than half the 8.2% increase seen in October and also significantly lower than in previous months, IATA said.”

January 12 – CNBC (Spencer Kimball): “Acting Food and Drug Administration Commissioner Dr. Janet Woodcock gave U.S. lawmakers an ominous warning this week: The nation needs to ensure police, hospital and transportation services don’t break down as the unprecedented wave of omicron infections across the country forces people to call out sick. ‘It’s hard to process what’s actually happening right now, which is most people are going to get Covid,’ Woodcock testified before the Senate health committee... ‘What we need to do is make sure the hospitals can still function, transportation, other essential services are not disrupted while this happens.’”

January 11 – Bloomberg (Swati Pandey): “Australia was already facing a record shortfall of workers before spiraling omicron infections triggered the widespread absenteeism that is causing the country more acute pain from the variant than its global peers. Official data… showed job vacancies climbed to a record, up 18.5% to almost 400,000 in the three months through November. With the virus now raging, a key industry body is warning that firms in food and logistics are reporting 10%-50% of their workers are sick or in isolation, leaving supermarket shelves empty.”

January 10 – Bloomberg (Shirley Zhao): “Hong Kong’s omicron outbreak is dealing a double whammy to businesses. Not only will new social distancing curbs crimp revenue for retailers and restaurants, a slashing of flights they rely on to bring everything from Australian cherries to Wagyu beef into the financial hub is set to raise costs and boost inflation. Cathay Pacific Airways Ltd., the city’s most connected airline, has canceled hundreds of flights. Cargo capacity could drop below one-fifth of pre-pandemic levels. Logistics costs may surge by 40% within three weeks. Importers expect the price of fruit to rise by 10%.”

Market Mania Watch:

January 10 – CNBC (Tanaya Macheel): “The price of bitcoin fell at one point Monday to its lowest level since September, as rising rates continued leading investors to shed positions in risky, growth-oriented assets. Bitcoin fell as much as 6% to touch a low of $39,771.91, according to Coin Metrics, reclaiming most of its losses… Ether, the second-largest cryptocurrency by market cap, also took back losses. It tumbled as low as $2,940 in the morning and last traded 3.4% lower at $3,090.67.”

January 10 – Yahoo Finance (Alexandra Semenova): “Venture capitalists bet big on crypto in 2021, plowing more cash than ever into emerging companies in the sector. Startups in the cryptocurrency and blockchain space were powered by a record $33 billion in VC funding last year — exceeding flows from all prior years combined and forging at least 43 companies worth more than $1 billion, according to a report from… Galaxy Digital.”

January 13 – Bloomberg (Davide Scigliuzzo): “Private equity firms have loaded more debt onto their acquisition targets than ever before, surpassing their pre-pandemic record -- and even the glory days of 2007 -- thanks to the availability of cheap credit and the billions of dollars they have amassed to pursue new deals. Last year, companies backed by private equity firms took on debt equal to an average of six times earnings, more than the record set in 2019 or in any of the past 20 years, according to… S&P Global Market Intelligence’s LCD. The wave of deals helped propel issuance of junk-rated loans for M&A to a record $331 billion last year, LCD data show, with $147 billion of that coming from companies rated six levels below investment grade by at least one of the three main credit-grading firms -- the most ever.”'

January 12 – Bloomberg (Thomas Hum): “Non-fungible token (NFT) sales volume surged past the $4 billion mark in the last month, according to… The top marketplaces for NFTs included OpenSea, Magic Eden, Axie Infinity, and CryptoPunks, with transactions on OpenSea accounting for over $3 billion of the sales alone.”

Market Instability Watch:

January 11 – Bloomberg (Katie Greifeld): “Investors are offloading exchange-traded funds across the fixed-income spectrum amid a wide-ranging debt selloff. The two largest high-yield ETFs posted a combined $733 million outflow yesterday, fresh off their biggest weekly withdrawals since February… Outflows from fixed-income funds are accelerating as traders price in a more aggressive path of monetary policy tightening from the Federal Reserve…”

January 11 – Bloomberg (Garfield Reynolds, Liz Capo McCormick, James Hirai and Masaki Kondo): “The amount of government bonds hitting the private sector is set to swell in 2022, adding pressure on yields to rise further as investors across most major markets absorb much larger helpings of debt. While governments are set to pare borrowings as fiscal outlays ease, the $2 trillion drop in central banks’ net demand will provide a risky real-world test of how much private demand exists. With inflation driving most policy makers to err on the side of tighter settings -- some central banks already plan to start trimming their balance sheets -- investors will need to absorb an increase in effective supply of about $230 billion.”

Inflation Watch:

January 12 – CNBC (Jeff Cox): “Inflation plowed ahead at its fastest 12-month pace in nearly 40 years during December… The consumer price index… increased 7%... On a monthly basis, CPI rose 0.5%... Excluding food and energy prices, so-called core CPI increased 5.5% year over year and 0.6% from the previous month. That compared with estimates of 5.4% and 0.5%. For core inflation, it was the largest annual growth since February 1991. Shelter costs, which make up nearly one-third of the total rose 0.4% for the month and 4.1% for the year. That was the fastest pace since February 2007. Used vehicle prices… rose another 3.5% in December, bringing the increase from a year ago to 37.3%.”

January 12 – Bloomberg (Alex Tanzi): “U.S. inflation ended 2021 at red-hot levels, and its main drivers reflect the woes of the economic recovery as the country got hit by several waves of Covid-19. Food costs, which account for about 14% of the consumer price index, jumped 6% in December from a year earlier, led by meats such as bacon -- up almost 19%. Last year’s surge in car prices was a byproduct of component shortages that hit automakers globally. New and old motor vehicles, with a weight of more than 8% in the CPI index, jumped a record 20.9% last month.”

January 12 – Bloomberg (Michael Sasso): “Areas of the U.S. Sun Belt are approaching double-digit inflation rates, as transportation and other costs combine to pinch Southern consumers. Prices in the Atlanta area rose 9.8% in December compared with a year ago, while Phoenix climbed 9.7% -- the two highest inflation rates in a survey of 14 metropolitan areas… In Atlanta, which has been at or near the top of the monthly Consumer Price Index in recent months, transportation costs rose 29.3% and apparel costs climbed 14.2%, both significantly higher than the average for U.S. cities, up 21.1% and 5.8% respectively.”

January 10 – Bloomberg (Michael Hirtzer): “U.S. beef prices jumped to the highest levels since November, threatening to worsen already raging food inflation. Production has slowed as the omicron virus variant sickens workers. Beef output last week fell 5.3% from a year ago, and wholesale prices on Monday climbed by 1.3%, the most since August…”

January 14 – Bloomberg (Michael Hirtzer): “Want to buy a ham? You better bring home the bacon. Prices for pork hams spiked 54% on Thursday, the biggest one-day rise since October 2012… The sharp one-day rise in ham prices comes as the omicron variant keeps workers out of U.S. slaughterhouses, hitting meat production.”

January 14 – Bloomberg (Marvin G. Perez): “Cotton prices soared to a fresh multiyear high in New York fueled by sizzling global demand at time of shrinking crops, including in the U.S., the world’s top exporter. That’s driving costs higher for apparel such as jeans and t-shirts, as well as diapers.”

January 11 – Financial Times (Valentina Romei and Martin Arnold): “Inflation in the world’s rich economies has hit a 25-year high, fuelling concerns about the rising cost of living for households and increasing pressure on central banks to raise interest rates. The annual pace of consumer price growth in the OECD group of developed nations hit 5.8% in November…, up from just 1.2% in the same month the previous year and the highest rate since May 1996.”

January 13 – Wall Street Journal (Lingling Wei): “Beijing is trying to fortify the Chinese economy against a prolonged period of tension with the U.S. and other countries, stockpiling some essentials and planning on more domestic production as it accelerates efforts to make China less dependent on the world. China’s economic agencies, including the top planning authority, the National Development and Reform Commission, and the ministry overseeing agriculture, recently have singled out ‘security’ as a priority for 2022... In particular, authorities are pledging to secure the supplies of everything from grains to energy and raw materials, as well as the processes involved in production and distribution of industrial parts and commodities.”

January 11 – Financial Times (Rurika Imahashi): “The price of batteries for electric vehicles looks set to rise in 2022 following a decade of sharp decline as supplies of lithium and other raw materials fail to keep up with ballooning demand. While mining companies scramble to increase production from existing facilities and develop new sources of supply, benchmark prices of lithium carbonate ended 2021 at record levels. In China, the biggest battery-producing country, the price was Rmb261,500 ($41,027) a tonne, more than five times higher than last January. Other commodities used in cathodes, the most expensive part of a battery, have also been rising. The price of cobalt has doubled since last January to $70,208 a tonne, while nickel jumped 15% to $20,045.”

January 13 – Bloomberg (Elizabeth Elkin and Leslie Patton): “There isn’t enough romaine lettuce for salads in the U.S. and it’s all due to the chaos created by the pandemic. Demand has been unpredictable with the Covid-19 virus changing consumer behavior and eating patterns, and produce farmers have sustained heavy financial losses since the pandemic started given the volatility. As a result, growers are purposely planting less so they’re not stuck with excess lettuce that’s getting more and more expensive to grow and ship… Romaine lettuce is up 61% from last year to $3.27 a pound, the highest… going back to 2006, while ground beef is up 17%.”

Biden Administration Watch:

January 12 – Financial Times (Max Seddon and Henry Foy): “Russia has said talks with the US and Nato in Geneva and Brussels have failed to address its security grievances, casting doubt over the prospect of a western diplomatic push to defuse Moscow’s threat of military action against Ukraine. Dmitry Peskov, spokesperson of… Vladimir Putin, told reporters the talks had been ‘unsuccessful’ despite ‘positive elements’ on issues Moscow did not consider central to its demands. ‘That’s bad,’ he said.”

Federal Reserve Watch:

January 12 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chairman Jerome Powell called high inflation a ‘severe threat’ to a full economic recovery and said… the central bank was preparing to raise interest rates because the economy no longer needed emergency support. Mr. Powell said he was optimistic that supply-chain bottlenecks would ease this year to help bring down inflation as the Fed takes its foot off the gas pedal. But he told lawmakers at his Senate confirmation hearing that if inflation stayed elevated, the Fed was ready to step on the brakes. ‘If we have to raise interest rates more over time, we will,’ he said. He said nothing to push back against expectations that have firmed in interest-rate futures markets over the past week that the central bank would begin a cycle of rate increases in March.”

January 11 – Associated Press (Christopher Rugaber): “Warning that high inflation could make it harder to restore the job market to full health, Federal Reserve Chair Jerome Powell said… the Fed will raise interest rates faster than it now plans if needed to stem surging prices. With America’s households squeezed by higher costs for food, gas, rent, autos and many other items, the Fed is under pressure to rein in inflation by raising rates to slow borrowing and spending. At the same time, the economy has recovered enough that the Fed’s ultra-low-interest rate policies are no longer needed. ‘If we have to raise interest rates more over time, we will,’ Powell said…”

January 13 – Associated PRess (Christopher Rugaber): “Lael Brainard, President Joe Biden’s nominee for the Federal Reserve’s No. 2 spot, said… combating high inflation is the central bank’s top priority and said she believed the Fed could reduce it without sacrificing economic growth. Testifying at her confirmation hearing…, Brainard noted that inflation is ‘too high, and working people around the country are concerned about how far their paychecks will go.’ ‘We are taking actions ... that I have confidence will be bringing inflation down, while continuing to allow the labor market to return to full strength over time,’ she said. Fighting inflation is ‘our most important task.’ Brainard’s elevation of inflation-fighting as the Fed’s top goal is notable given that she is, for now, the lone Democrat on the Fed’s board and has long been seen as inclined to keep interest rates low to boost employment…”

January 11 – Bloomberg (Craig Torres): “Federal Reserve Chair Jerome Powell pledged to do what’s necessary to contain an inflation surge and prolong the expansion, while steering clear of fresh details on the path of U.S. monetary policy. ‘If we have to raise interest rates more over time, we will,’ Powell told the Senate Banking Committee… ‘We will use our tools to get inflation back.’ Both Republicans and Democrats have expressed concern that the Fed is over-stimulating the economy with low rates and bond purchases as inflation runs far above officials’ 2% target.”

January 12 – Wall Street Journal (Michael S. Derby): “Federal Reserve Bank of St. Louis President James Bullard said the U.S. central bank will need to move more aggressively on rate rises this year as it seeks to stem an inflation surge, amid a job market that could see the unemployment rate fall below 3% by the end of the year. ‘We want to bring inflation under control in a way that does not disrupt the real economy, but we are also firm in our desire to get inflation to return to 2% over the medium term,’ Mr. Bullard said…”

January 12 – Bloomberg (Olivia Rockeman): “Federal Reserve Bank of Cleveland President Loretta Mester said the central bank should shrink its balance sheet as fast as it can without disrupting financial markets and repeated her backing to a March interest-rate increase. ‘The case is very compelling that we remove accommodation,’ Mester, who votes on the rate-setting Federal Open Market Committee this year, said… ‘We’ll also be considering what we can do with our balance sheet, to bring the level of assets on our balance sheet down.’”

January 12 – Financial Times (Colby Smith): “Patrick Harker, president of the Philadelphia branch of the Federal Reserve, said he would support more than three interest rate rises this year if inflation surges higher, becoming the latest US central bank official to throw his weight behind an increase in March. ‘I currently have three increases in for this year, and I’d be very open to starting in March,’ Harker said… ‘I’d be open to more if that’s required.’”

January 13 – Bloomberg (Laura Curtis and Olivia Rockeman): “Federal Reserve Bank of San Francisco President Mary Daly and her Philadelphia Fed peer Patrick Harker joined the ranks of officials publicly discussing an interest-rate increase as early as March as the central bank seeks to combat the hottest inflation in a generation. ‘I definitely see rate increases coming, as early as March even, because it really is clear that prices have been uncomfortably high,’ Daly told PBS… ‘American consumers are feeling the pain.’”

January 10 – Wall Street Journal (Nick Timiraos): “Federal Reserve Vice Chairman Richard Clarida said he would resign from the central bank on Friday, two weeks before his term on the central bank’s board is set to end. His resignation follows questions raised over financial transactions he conducted at the onset of the coronavirus pandemic.”

January 9 – Bloomberg (Enda Curran): “The Federal Reserve will likely raise interest rates four times this year and will start its balance sheet runoff process in July, if not earlier, according to Goldman Sachs… Rapid progress in the U.S. labor market and hawkish signals in minutes from the Dec. 14-15 Federal Open Market Committee suggest faster normalization, Goldman’s Jan Hatzius said... ‘We are therefore pulling forward our runoff forecast from December to July, with risks tilted to the even earlier side,’ Hatzius said. ‘With inflation probably still far above target at that point, we no longer think that the start to runoff will substitute for a quarterly rate hike. We continue to see hikes in March, June, and September, and have now added a hike in December.’”

January 11 – Bloomberg (Patrick McHale and Alex Wittenberg): “Federal Reserve Chair Jerome Powell will struggle to contain rising inflation, and a variety of assets will face challenges as a result, Paul Tudor Jones said. ‘He’s got a lot of catching up to do,’ the hedge fund manager said… ‘We’re getting ready to see a major shift, and it’s going to have a lot of consequences for a variety of asset prices.’”

U.S. Bubble Watch:

January 11 – CNBC (Jessica Dickler): “Higher prices are already taking a toll. As consumers pay more for everything from groceries to gasoline, household income is failing to keep pace with a higher overall cost of living, according to recent reports. Over the past two years, median income fell 3% while the cost of living rose nearly 7%, due, in part, to rising housing and medical costs… The average U.S. household with debt now owes $155,622, or more than $15 trillion altogether, including debt from credit cards, mortgages, home equity lines of credit, auto loans, student loans and other household obligations — up 6.2% from a year ago.”

January 13 – Associated Press (Martin Crutsinger): “Prices at the wholesale level surged by a record 9.7% for all of 2021, setting an annual record and providing further evidence that inflation is still present at all levels of the U.S. economy. The… producer price index, which measures inflation before it reaches consumers, did slow on a monthly basis, rising just 0.2% in December compared with November, when prices had shot up 1%.”

January 14 – Bloomberg (Molly Smith): “U.S. retail sales slumped in December by the most in 10 months, suggesting the fastest inflation in decades is taking a greater toll on consumers just as the nation confronts more coronavirus infections. The value of overall purchases decreased 1.9%, after a revised 0.2% gain a month earlier… The figures aren’t adjusted for inflation, suggesting price-adjusted receipts were even weaker than the headline number.”

January 13 – Yahoo Finance (Emily McCormick): “Initial unemployment claims unexpectedly jumped to total 230,000 last week, but still remained low compared to their pandemic-era averages… And meanwhile, continuing claims tracking the total number of Americans claiming benefits on regular state programs fell to a multi-decade low in the latest weekly data. At 1.559 million, the number of continuing claims was at its lowest since 1973.”

January 12 – Bloomberg (Olivia Rockeman): “The U.S. economy grew at a modest pace in the final weeks of last year, the Federal Reserve said, but business expectations cooled in some places as the omicron variant of the coronavirus spread. ‘Optimism remained high but waned somewhat, as the share of firms expressing positive expectations for continued economic growth over the next six months narrowed,’ the U.S. central bank said in its Beige Book survey… Ten of the Fed’s 12 regional banks said that the omicron variant was affecting activity and adding to labor-market challenges.”

January 13 – Bloomberg (Jo Constantz): “Mortgage rates in the U.S. rose for a third straight week, reaching the highest point in almost two years. The average for a 30-year loan was 3.45%, up from 3.22% last week and the highest since March 2020, Freddie Mac said…”

January 9 – Wall Street Journal (Nicole Friedman): “Supply-chain backlogs are roiling the new home market, upending efforts to accelerate construction, limiting home-buyer choices, and causing some new owners to move into unfinished homes. Home builders have increased activity in the past year in response to robust… demand and a shortage of homes in the existing-home market. In many cases, the surge in demand in late 2020 and early 2021 overwhelmed builders, forcing many to halt sales in some markets while they caught up. Now the industry is struggling with global supply-chain woes. Pandemic-related factory closures, transportation delays and port-capacity limits have stymied the flow of many goods and materials critical for home building, including windows, garage doors, appliances and paint.”

January 11 – Bloomberg (Laura Davison): “A senior House Democrat is expanding his inquiry into whether the compensation packages for college football coaches run afoul of laws for tax-exempt organizations, seeking details about contracts from the University of Miami and Michigan State University. Representative Bill Pascrell, a New Jersey Democrat who chairs a Ways and Means Committee oversight panel, sent letters to the presidents of the two schools seeking information about the $89 million contract for Miami’s Mario Cristobal and the $95 million package for Michigan State’s Mel Tucker. ‘Americans are rightly astonished by the litany of mammoth contracts awarded to college sports coaches by taxpayer-supported schools,’ Pascrell said…”

January 14 – Bloomberg (Sridhar Natarajan): “The top 1% at Goldman Sachs Group Inc. is set to receive a special one-time reward in addition to annual bonuses, recognizing the Wall Street titan’s roaring success through the pandemic. The unusual payments to partners -- the roughly 400 executives who fill out the investment bank’s highest rung -- will add millions of dollars to many compensation packages…”

January 13 – Dow Jones (Joseph Pisani and Theo Francis): “TikTok stars are dancing their way to the bank. Some are making more than America's top chief executives. Charli D'Amelio, who started posting videos of herself dancing on TikTok in 2019, brought in $17.5 million last year, according to Forbes, which recently ranked the highest-earning TikTok stars of 2021. With 133 million followers on TikTok, she makes her money from a clothing line and promoting products in TikTok videos and other ads. By comparison, median pay for chief executives of S&P 500 companies was $13.4 million in 2020…”

Fixed-Income Bubble Watch:

January 10 – Bloomberg (Amanda Albright): “The municipal-bond market’s worst start to a year since at least 2001 is marking a major departure from what has historically been a period of strength for the securities. State and local debt has sold off along with the rest of the bond market in the early days of 2022, losing 0.7% last week… That comes as traders are absorbing the possibility that the Federal Reserve will start hiking interest rates as soon as March amid elevated inflation.”

January 10 – Financial Times (Joe Rennison): “Companies raised more than $100bn on the bond market in the first week of this year as finance chiefs kicked off an effort to lock in low borrowing costs before benchmark interest rates start to climb. Global corporate bond issuance reached $101bn in the year to January 7, with US deals reaching a record pace. The global haul trailed only a blockbuster $118bn start to 2021, which was the highest on Refinitiv records going back 19 years.”

January 13 – Wall Street Journal (Matt Wirz): “One of Brigade Capital Management’s best trades of 2021 was making about one million loans to U.S. shoppers. The investment firm made double-digit returns funding more than $500 million of ‘buy now, pay later’ and other consumer loans used for purchases on digital marketplaces like Inc., people familiar with the trade said. Brigade’s foray into consumer finance is part of a boom in private credit—lending by money managers rather than banks—spreading across the globe. Funds that make such loans now control about $1.2 trillion, nearly twice the capital they had five years ago, according to… Preqin… Private lending is opaque, lightly regulated, susceptible to conflicts of interest and concentrated among a small number of large fund managers, according to Moody’s... That poses risks to the financial system. ‘The economy is increasingly exposed to the governance and risk management of these asset managers,’ the ratings firm said…”

January 8 – Wall Street Journal (Orla McCaffrey): “Rocket Cos. struck it big selling the American Dream. Now it has to convince investors it can keep growing even in a sleepy mortgage market. The… lender has barreled through the pandemic. It doubled its mortgage originations in 2020 and grew them by another third through last fall. It is now the biggest mortgage lender in the country, making nearly as many home loans as Wells Fargo... and JPMorgan... combined. Through much of 2021, roughly one out of every 14 mortgages in the U.S. went through Rocket. But if Rocket is the king of mortgages, it rules a feast-or-famine kingdom.”

China Watch:

January 11 – Bloomberg: “China’s inflation pressures moderated in December, giving the central bank scope to cut interest rates to cushion the economy’s downturn just as most major nations look to tighten policy. The producer price index rose 10.3% from a year earlier, down from November’s 12.9%, while the consumer price index increased 1.5%, compared with 2.3% in November. Both came in lower than economists expected.”

January 12 – New York Times (Li Yuan): “China’s ‘zero Covid’ policy has a dedicated following: the millions of people who work diligently toward that goal, no matter the human costs. In the northwestern city of Xi’an, hospital employees refused to admit a man suffering from chest pains because he lived in a medium-risk district. He died of a heart attack. They informed a woman who was eight months pregnant and bleeding that her Covid test wasn’t valid. She lost her baby. Two community security guards told a young man they didn’t care that he had nothing to eat after catching him out during the lockdown. They beat him up. The Xi’an government was quick and resolute in imposing a strict lockdown in late December when cases were on the rise. But it was not prepared to provide food, medical care and other necessities to the city’s 13 million residents, creating chaos and crises not seen since the country first locked down Wuhan in January 2020.”

January 13 – Associated Press (Huizhong Wu): “Most access to a major city adjacent to Beijing was suspended Thursday as China tried to contain an outbreak of the highly contagious omicron variant, which poses a test to its ‘zero-tolerance’ COVID-19 policy and its ability to successfully host the Winter Olympics. Tianjin, a port and manufacturing center with 14 million people, is one of a half-dozen cities where the government is imposing lockdowns and other restrictions as part of a policy that aims to track down every virus case. But the outbreak in a city so close to the Olympic host is particularly worrying. Throughout the pandemic, authorities have been especially protective of Beijing since it is the seat of government and home to senior politicians. With the Games opening there in just over three weeks and China’s national pride on the line, the stakes are even higher now.”

January 12 – Bloomberg: “China detected omicron in a second major port city, deepening concern that the vastly more infectious variant could spread quickly across the world’s largest trading nation, upending global supply chains. Chinese officials said Thursday that at least one person has omicron in Dalian, a city of seven million.”

January 10 – Bloomberg (David Scanlan): “Distress is mounting in China’s $870 billion offshore debt markets as more property firms miss debt payments and record refinancing costs effectively block them from rolling over borrowings, according to Bloomberg’s credit tracker.”

January 10 – Reuters (Clare Jim): “Debt-laden property developer Guangzhou R&F Properties said it would use $104 million to pay for a tender offer and fees to offshore bondholders deemed to have consented to an extension in maturity of a $725-million bond due… The amount, while far less than the $300 million the firm had expected, will still help it avert default, as Chinese developers battle an unprecedented liquidity squeeze…”

January 13 – Bloomberg (Alice Huang and Rebecca Choong Wilkins): “China’s largest developer is feeling the pain of dwindling investor confidence as a debt crisis sweeps across the country’s real estate sector. Country Garden Holdings Co. securities tumbled after it emerged the real estate firm on Wednesday failed to generate sufficient investor demand for a potential $300 million convertible bond. Shares fell 7.8% Thursday, the most in nearly four months, while its dollar bond due 2031 dropped 2.7 cents on the dollar to 72, on pace for a record low…”

January 12 – Bloomberg: “Most Chinese local governments saw revenue from land sales fall in 2021, damaging their budgets just as Beijing calls for faster spending to counteract a housing-market slowdown and pull the economy out of a downturn. Thirteen of China’s 31 provinces saw income from selling land-use rights drop more than 20% in 2021 from a year earlier, Tianfeng Securities Co. analysts including Sun Binbin wrote… That includes Xinjiang, Helongjiang and the other two provinces in the northeast, and Shanxi in the north. Another 10 had falls of 20% or less and only six provinces, including Beijing, Shanghai, and Zhejiang, saw revenue from land sales grow.”

January 11 – Bloomberg (Alice Huang): “Three Chinese property firms received multiple-step ratings cuts Monday by major international ratings firms as concerns persist about debt-repayment abilities. Both Shimao Group Holdings Ltd. and Yuzhou Group Holdings Co. received a pair of downgrades, while smaller peer DaFa Properties Group Ltd. received one.”

January 11 – Bloomberg: “It was once hailed as the future of Chinese banking, a privately run lender that would mint money by outmaneuvering its state-owned rivals. An ill-fated push into property lending has instead turned China Minsheng Banking Corp. into one of the biggest casualties of the real estate debt crisis that’s roiling Asia’s largest economy. Battered by mounting losses on loans to developers including China Evergrande Group, Minsheng’s stock tumbled 31% in the 12 months through last weee… People familiar with Minsheng’s operations say the bank, founded in 1996 as China’s first non-state controlled lender, is now in damage control mode.”'

January 9 – Bloomberg (Coco Liu): “When China’s government launched a sweeping crackdown on the technology industry over the summer, panicky venture capital investors stopped writing checks and startup valuations began to plummet. It looked like the country’s historic innovation boom was over. Then a strange thing happened: In just a matter of weeks, the startup machine kicked back into gear. In fact, venture capital investments in China reached $130.6 billion for 2021, according to the research firm Preqin. That set a new record for the country -- about 50% higher than the $86.7 billion total the year before.”

January 10 – Bloomberg: “A choppy start to the new year for Chinese stocks is driving investors further away from equity mutual funds. New equity-focused funds raised 9.6 billion yuan ($1.5bn) in the first nine days of 2022, just a 10th of what was seen in the year-earlier period. Retail sentiment toward stock funds has soured since demand peaked in early 2021…”

January 11 – Reuters (Jessie Pang and Marius Zaharia): “Hong Kong will soon feel the negative effects of tougher COVID-19 quarantine curbs on air crew, with cargo traffic and the supply of goods into the city set to drop, Chief Executive Carrie Lam said… The tighter rules prompted Cathay to cancel most of its planned passenger and cargo flights in January. Cathay will operate about 20% of its pre-pandemic cargo capacity and around 2% of its pre-pandemic passenger flight capacity this month.”

Central Banker Watch:

January 8 – Reuters (Balazs Koranyi): “Rising energy prices may force the European Central Bank to stop ‘looking through’ high inflation and act to temper price growth, particularly if the green transition proves inflationary, ECB board member Isabel Schnabel said... Inflation hit a record high 5% last months, more than twice the ECB's 2% target but the bank has not tightened policy so far, arguing that price growth will abate on its own as transitory one-off factors are the main reasons for high inflation. ‘The green transition poses upside risks to medium-term inflation,’ Schnabel said… ‘Rising energy prices may require a departure from a 'looking through' policy.’”

Global Bubble Watch:

January 11 – Associated Press (Paul Wiseman): “The World Bank is downgrading its outlook for the global economy, blaming continuing outbreaks of COVID-19, a reduction in government economic support and ongoing bottlenecks in global supply chains. The 189-country, anti-poverty agency forecasts worldwide economic growth of 4.1% this year, down from the 4.3% growth it was forecasting last June. It’s also down from the 5.5% expansion it estimates the global economy tallied in 2021. In its Global Economic Prospects report…, the World Bank projects that the U.S. economy will grow 3.7% this year, down from 5.6% in 2021. It expects China, the world’s second-biggest economy, to see growth decelerate to 5.1% in 2022 from 8% last year.”

January 10 – Bloomberg (Ziad Daoud and Felipe Hernandez): “Since the end of 2019, the United Nations’ gauge of food prices has risen by about a third, with the causes of the surge -- bad weather, higher shipping costs, worker shortages, an energy crunch and rising fertilizer costs -- meaning high prices could persist this year. Countries in the Middle East and North Africa such as Sudan, Yemen, Lebanon, Tunisia and Egypt are the most exposed given their imports of wheat and sugar, according to Bloomberg Economics. Some of these are experiencing coups, regime changes, civil war and economic collapse. Higher food prices could compound unrest.”

EM Watch:

January 12 – Reuters (Anthony Boadle): “Former leftist President Luiz Inacio Lula da Silva retains a clear lead for this year's presidential election in Brazil, where inflation and the resurgence of the COVID-19 pandemic most worry voters, a poll… showed. Lula would get 45% of the votes against 23% for the country's far-right President Jair Bolsonaro if the election were held today, according to the Banco Genial/Quaest Pesquisas survey.”

Europe Watch:

January 13 – Associated Press (David McHugh): “Europe’s natural gas crisis isn’t letting up. Reserves are low. Prices are high. Utility customers are facing expensive bills. Major Russian supplier Gazprom isn’t selling gas like it used to. It all raises the question: How exactly is Europe, which imports most of its energy, going to make it through the winter without a gas disaster, especially if the season turns out to be colder or longer than usual?”

January 11 – Reuters (Riham Alkousaa): “Germany's BGA trade association warned on Wednesday of massive supply chain disruptions due to the rapid spread of the highly infectious Omicron variant of the coronarvirus, but said a long-term collapse of the supply chains was unlikely. German industry has been hit by supply shortages of microchips and other components, while rising coronavirus cases are clouding the outlook for retailers at the start of 2022.”

Japan Watch:

January 11 – Bloomberg (Toru Fujioka): “Inflation expectations for Japanese households jumped to the highest in 13 years, showing how costlier energy is influencing sentiment even as overall price gains remain far below the Bank of Japan’s target. Households see inflation of 5% by next year, the most expected since December 2008…”

January 11 – Reuters (Kantaro Komiya and Kentaro Sugiyama): “Premium telescopes, violin bows and speciality paper are bucking a deflationary trend that has defined Japan for decades - all have had their prices hiked by companies confident they can charge more without losing business. Years of stagnant prices and wages have made Japan Inc nervous about charging more for fear of alienating shoppers and losing market share… While the overall rise in prices is still modest, more firms are opting for increases, led by market leaders often with speciality products, as commodities and transport costs soar due to the COVID-19 pandemic and a weakening yen makes fuel and imports costly.”

Social, Political, Environmental, Cybersecurity Instability Watch:

January 13 – Bloomberg (Eric Roston): “The last eight years were the hottest in global records that date to 1880, with 2021 ranking as the sixth-hottest year, according to analyses of global weather station and ocean measurements released… by NASA’s Goddard Institute for Space Studies and the U.S. National Oceanic and Atmospheric Administration. Last year’s global average temperature was a bit more than 1° Celsius higher than the 1880-1900 average.”

January 8 – Financial Times (Camilla Hodgson and Steven Bernard): “Extreme weather events in 2021 triggered spikes in the prices of agricultural commodities, which remained elevated into 2022, as the unusual conditions that damaged crops resulted in ongoing shortages. The price of goods including Brazilian coffee, Belgian potatoes and Canadian yellow peas — in demand as a protein substitute in plant-based foods — rose sharply last year in response to extreme temperatures and flooding. Scientists have warned that these conditions will become more frequent and intense as climate change accelerates.”

January 10 – Bloomberg (Brian K. Sullivan): “Storms, floods and fires killed 688 people across the U.S last year and caused more than $145 billion of losses, the third-highest tally in records going back to 1980… There were twenty disasters that exceeded $1 billion of losses each, according to the National Centers for Environmental Information.”

Leveraged Speculation Watch:

January 14 – Bloomberg (Sonali Basak): “AQR Capital Management is taking the ax to return projections for markets around the globe -- yet again -- while touting fresh strategies from commodities to leverage to salvage investment performance. The quantitative manager co-founded by Cliff Asness is back with its annual capital-markets outlook, cutting expectations for asset gains in everything from U.S. equities, Treasuries and credit to developed-market stocks and global 60/40 portfolios.”

January 11 – Bloomberg (Tom Maloney): “Ken Griffin has for years been one of the wealthiest people on the planet thanks to his hedge fund’s success. Now it’s his powerhouse market maker that’s driving the bulk of his fortune to new heights. The billionaire sold a $1.15 billion stake in… Citadel Securities to Sequoia Capital and Paradigm, valuing the firm at approximately $22 billion. After the outside investment, Griffin, 53, will own roughly 80% of the trading business, worth about $17.5 billion. Citadel Securities’s new valuation raises Griffin’s wealth by $6.5 billion to $27.6 billion and vaults him past Jim Simons, founder of famed quantitative hedge fund Renaissance Capital, and Carl Icahn…”

January 10 – Bloomberg (Hema Parmar): “Tiger Global Management’s hedge fund tumbled 7% last year, its first annual loss since 2016… The fund struggled in the final two months, dropping 8% and 10.7% in November and December... That erased a 13% gain that it had built through the first 10 months of the year.”

Geopolitical Watch:

January 12 – Reuters (Robin Emmott and Sabine Siebold, Gabriela Baczynska): “NATO said on Wednesday it was willing to talk to Russia about arms control and missile deployments to avert the risk of war in Europe, but Moscow said the situation was ‘very dangerous’ and the way forward was unclear. The gulf between Russia's position and that of the United States and its allies appeared as stark as ever after four hours of talks in Brussels, the second attempt this week to defuse a crisis provoked by the massing of Russian troops near Ukraine.”

January 13 – Reuters (Thomas Escritt): “Europe is nearer war than it has been in 30 years, Poland's foreign minister warned during the third round of diplomacy this week aimed at defusing tensions over Russia's demand that Ukraine never be allowed to join NATO. Addressing envoys from the 57 members of the Organization for Security and Cooperation in Europe (OSCE), Zbigniew Rau did not name Russia, but listed a string of conflicts in which Moscow's involvement has been alleged. ‘It seems that the risk of war in the OSCE area is now greater than ever before in the last 30 years,’ Rau said… ‘For several weeks we have been faced with the prospect of a major military escalation in Eastern Europe.’”

January 13 – Reuters (Thomas Escritt and Tom Balmforth): “Poland's foreign minister said on Thursday that Europe was at risk of plunging into war as Russia said it was not yet calling time on diplomacy but that military experts were preparing options in case tensions over Ukraine could not be defused. U.S. Ambassador Michael Carpenter said after talks with Russia in Vienna that the West should prepare for a possible escalation in tensions with Moscow. ‘The drumbeat of war is sounding loud, and the rhetoric has gotten rather shrill,’ he told reporters. Russia said dialogue was continuing but was hitting a dead end as it tried to persuade the West to bar Ukraine from joining NATO and roll back decades of alliance expansion in Europe - demands that the United States has called ‘non-starters’.”

January 9 – Wall Street Journal (Ann M. Simmons): “The flood of Russian troops into Kazakhstan to help shore up the embattled government sends a clear signal to both the West and other former Soviet republics: Russian President Vladimir Putin will brook no threat to what he views as Russia’s inviolable sphere of influence. The venture into Kazakhstan, at the request of the country’s leader, follows nearly 15 years of Russian interventionism in Georgia, Belarus, Ukraine and elsewhere aimed at pulling these countries even closer to Russia, by propping up leaders aligned with the Kremlin, playing regional power-broker, or trying to weaken those who have shown deference to the West. Mr. Putin’s determination to reassert Russian hegemony in the former Soviet sphere is largely based on his view that the demise of the U.S.S.R. was ‘a major geopolitical disaster.’”

January 10 – Bloomberg: “China doubled down on imports of Iranian and Venezuelan crude in 2021, taking the most from the U.S.-sanctioned regimes in three years, as refiners brushed off the risk of penalties to scoop up cheap oil.”

Friday Afternoon Links

[Yahoo/Bloomberg] Stocks Trade Near Day’s Lows as Bond Yields Spike: Markets Wrap

[Yahoo/Bloomberg] Oil Powers Into the New Year as Traders Shrug Off Omicron Impact

[Yahoo/Bloomberg] U.S. Home Sales Tumble Most in 18 Months With Listings Scarce

[Reuters] Early holiday shopping hammers U.S. retail sales; Omicron drag anticipated in January

[Guardian] Hospitals in half of US states close to capacity as Omicron continues surge

[Yahoo Finance] JPMorgan CEO Jamie Dimon says 'there could be 6 or 7' interest rate hikes

[Reuters] Cyberattack hits Ukraine as U.S. warns Russia could be prepping for war

[Politico] U.S. intel suggests Russia is planning a false-flag operation

[CNN] First on CNN: US intelligence indicates Russia preparing operation to justify invasion of Ukraine