Friday, April 22, 2022

Weekly Commentary: Losing Capacity to Stabilize

It was an important week – perhaps critical. There was additional support for my macro thesis. The bottom line: increasingly unstable global markets today face extreme uncertainty, arguably the greatest array of uncertainties in decades. By Friday, developments left me with an uneasy, foreboding feeling.

We’re all aware of the serious global inflation problem. A few recognize the perilous global Bubble quandary, with China’s deflating Bubble becoming difficult to dismiss. The interaction of these powerful – and potentially countervailing - forces has become a source of acute market uncertainty and instability. There’s also the war in Ukraine, along with the developing global economic war. There is an FOMC compelled to clamorous hawkishness.

But before we turn to the Fed, let’s discuss the fraught global backdrop. It appears the war in Ukraine may take a further turn for the worse. There has been discussion of Russia regrouping for a blitzkrieg in the eastern Donbas region, providing for a swift land grab and claims of triumph in time for Russia’s May 9th “Victory Day” celebration. It appears, however, that Putin has not given up on his designs for a major chunk of Ukrainian territory.

April 22 – Bloomberg: “A Russian general said the Kremlin’s war in Ukraine aims to secure control of the entire south of the country as well as the eastern Donbas region, according to state news services, as he also suggested the campaign could extend into neighboring Moldova. The push in southeastern Ukraine aims ‘to establish full control over Donbas and southern Ukraine,’ Major General Rustam Minnekayev, acting commander of Russia’s Central Military District, said Friday at a defense industry meeting in Ekaterinburg… ‘This will allow us to ensure a land bridge to Crimea as well as influence key aspects of the Ukrainian economy, Black Sea ports through which agricultural and metallurgical exports go to other countries,’ he said.”

If Putin indeed has his sights on Ukraine’s entire southern territory along the Black Sea, ramifications are huge and potentially momentous. Losing its key ports (becoming landlocked) is viewed as an existential threat to the Ukrainian nation. The prospect of months of horrendous fighting – and limited scope for constructive negotiations – increases greatly in that scenario. Moreover, the U.S. and NATO would only harden their resolve to see a defeated Russia.

Despite the Kremlin’s warnings, the West will continue to dramatically expand the scope of military support for Kyiv. It appears tanks, artillery, sophisticated drones and advanced weaponry, air defense systems, helicopters, and even fighter aircraft are now flooding into Ukraine. And the longer the conflict rages, the further it will materialize into a proxy war between bitter adversaries the U.S. and Russia. The world fundamentally changed on February 24th - and there’s no turning back.

April 20 – Bloomberg: “Russia’s Defense Ministry released video of a Sarmat intercontinental ballistic missile being test-fired from the Plesetsk cosmodrome in the northern Arkhangelsk region, Tass said. The ministry previously showed videos of the missile in 2018. ‘This unique weapon will strengthen the military potential of our armed forces, will reliably guarantee Russia’s security against outside threats and force those who in the heat of frenzied aggressive rhetoric try to menace our country to think again,’ Putin said on state TV.”

I’ll assume that a protracted war scenario boosts prospects for overt economic and financial support from Russia’s partner China.

April 20 – Bloomberg (Daniel Ten Kate): “China will continue strengthening strategic ties with Russia, a senior diplomat said, showing the relationship remains solid despite growing concerns over war crimes in Vladimir Putin’s war in Ukraine. Vice Foreign Minister Le Yucheng called for deepening ties in a range of fields during a meeting on Monday in Beijing with Russian envoy Andrey Ivanovich Denisov… He said that a nearly 30% jump in trade between the nations during the first three months of 2022 demonstrate ‘the great resilience and internal dynamism of bilateral cooperation.’ While bilateral trade did grow… ‘No matter how the international landscape may change, China will continue to strengthen strategic coordination with Russia for win-win cooperation, jointly safeguard the common interests of the two countries and promote the building of a new type of international relations and a community with a shared future for mankind,’ Le said… Denisov said Russia regards relations with China as a ‘diplomatic priority,’ the statement said.”

The administration is actively preparing for China’s circumvention of Russia sanctions.

April 22 – Bloomberg (Iain Marlow): “A senior U.S. diplomat again warned China of sanctions if it offers ‘material support’ for Vladimir Putin’s war in Ukraine, while also pledging to help India end its dependence on Russian weapons. China wasn’t helping the situation in Ukraine by doing things like amplifying Russian disinformation campaigns, U.S. Deputy Secretary of State Wendy Sherman said… She said she hoped Beijing will learn the ‘right lessons’ from Russia’s war, including that it can’t separate the U.S. from its allies. ‘They have seen what we have done in terms of sanctions, export controls, designations, vis-a-vis Russia, so it should give them some idea of the menu from which we could choose if indeed China were to provide material support,’ Sherman told a crowd at an event hosted by the group Friends of Europe…”

The specter of the U.S. and its allies imposing sanctions couldn’t come at a worse juncture for the faltering Chinese Bubble. But, then again, such a scenario would play into the groundswell of anti-U.S. propaganda. Beijing would be given the opportunity to blame the United States, while deflecting responsibility for gross mismanagement of its housing market, credit system and economy. Moreover, Beijing could divert attention away from its “Covid zero” fiasco.

April 22 – Bloomberg (David Qu): “Lockdowns in Shanghai and other cities are taking a heavy toll on activity, high-frequency indicators show. Restrictions are helping contain the virus, but at a steep cost. Mobility and consumption continue to drop, and job worry remains elevated. Subway travel was 43% below the pre-pandemic level in 11 large cities, worsening by 6.5 percentage points from a week earlier. Home sales in major cities were less than half year-earlier levels for a third straight week. Car sales dropped for a second consecutive week by more than 50% versus pre-pandemic numbers… The number of provinces with at-risk areas fell to 14 from 17. Affected provinces now account for about 59% of GDP, down from 73%.”

It was an especially ominous week for China. The Shanghai Composite dropped 3.9% (near lows since July 2020), boosting y-t-d losses to 15.2%. The growth-oriented ChiNext Index sank 6.7% (down 30.9% y-t-d), trading to lows since June 2020. Chinese developer bonds were under pressure. Evergrande yields surged 183 bps (to 109.62%), Sunac 319 bps (76.75%), Lonfor 844 bps (71.88%) and Kaisa 230 bps (76.17%). Country Garden, China’s largest developer, saw yields jump 266 bps this week to an almost one-month high 15.51% (began 2022 at 6.6%). An index of Chinese high-yield dollar bonds jumped over 100 bps to an April high 21.43%.

April 17 – Bloomberg: “The Chinese Communist Party’s flagship newspaper called on the nation to support President Xi Jinping’s Covid Zero strategy, showing any shift in policy is unlikely even as lockdowns in Shanghai and elsewhere threaten to hurt the economy. In a front-page commentary Monday, the People’s Daily said Xi’s strategy to snuff out the virus has proven ‘correct and effective’ and China should be ‘uniting more closely around the party’s leadership with Xi Jinping as the core.’ Citizens should follow the strategy ‘unswervingly and unrelentingly’ with ‘earlier, faster, stricter and more practical’ measures, it said. ‘At present, it is the most difficult critical period for epidemic prevention and control,’ the People’s Daily commentary said. China can ‘never let the hard-earned achievements of epidemic prevention and control be wasted,’ it added.”

A Thursday Bloomberg headline: “China Stocks Plunge as Xi Offers No Respite From Covid Lockdowns.” It increasingly appears that “Covid zero” has pushed China’s Bubble deflation past the point of no return. And as irrational as it may appear to stick with such draconian measures even as economic activity collapses, Beijing is so deep into this policy stance that it is loath to backtrack and risk losing face. The Omicron wave will pass, though confidence has been badly shaken – confidence in government policy, the apartment and securities markets, the jobs market and the economy more generally.

April 21 – Bloomberg: “China’s central bank governor stressed the importance of keeping inflation under control in two separate speeches released Friday and pledged more targeted support for small businesses, reinforcing policy makers’ cautious approach to monetary stimulus. The People’s Bank of China’s ‘policy is to maintain price stability,’ Governor Yi Gang said on a panel at the Boao Forum for Asia. In separate comments delivered at a meeting of the International Monetary and Financial Committee, he emphasized that ‘China’s monetary policy’s primary objectives are stable prices and stable employment.’”

China’s markets had been unimpressed by all Beijing’s talk of stimulus measures. Dismay then set in this week after the People’s Bank of China refrained from lowering rates and commencing meaningful stimulus. Officials do have every reason to worry about inflation taking hold. Beijing now also has reason to fear for the stability of its currency, despite Friday's Bloomberg headline: “China Downplays Currency Concerns Amid Record Outflows.” International investors have been dumping Chinese stocks and bonds. And seeing trouble ahead, throngs of wealthy Chinese will be exploring their options.

China’s renminbi dropped a notable 2.00% against the dollar this week to an eight-month low, while the offshore renminbi lost 2.22% - the “biggest weekly depreciation since August 2015.” Meanwhile, Chinese major bank CDS rose to - either at or near - multi-year highs. Ominously, China’s sovereign CDS jumped five to 75 bps – the high since the March 2020 pandemic spike.

The renminbi is not alone in this week’s breaking of the currency volatility dam. The South African rand sank 6.3%, with the Colombian peso down 3.5%, the Chilean peso 2.4%, the Malaysia ringgit 2.1%, the Brazilian real 2.0%, and the Mexican peso 1.3%.

In general, the commodity currencies were under pressure. The Australian dollar dropped 2.0%, the New Zealand dollar 1.9%, the Norwegian krone 1.6%, and the Canadian dollar 0.8%. While we don’t want to make too much of one week’s action, the Bloomberg Commodities Index reversed 2.6% lower this week, with notable weakness in some of the more industrial-based commodities (focus shifting to China and vulnerable global Bubbles?).

Meanwhile, the global bond rout ran unabated. EM bonds joined weak currencies, equities and CDS for what appeared a portentous week for developing markets. Yields were up 36 bps in Poland, 35 bps in Peru, 29 bps in the Czech Republic, 26 bps in Colombia, 24 bps in Hungary, 21 bps in Thailand and 17 bps in Brazil. Dollar-denominated EM bonds were also under pressure. Mexican dollar bond yields surged 33 bps (3-wk gain of 87bps) to 4.90%, the high since the March 2020 pandemic spike.

Italian 10-year yields spiked 19 bps higher to a three-year high 2.67% (up 56bps in 3wks). Portugal yields rose 15 bps (1.99%), Spain 16 bps (1.94%), and Greece seven bps (2.98%) – all to multi-year highs. German bund yields surged another 13 bps this week to 0.97%, the high back to September 2014. Yields were up 16 bps (to 2.97%) in Australia, 17 bps (3.56%) in New Zealand and eight bps in Canada (2.88%).

China has its “Covid zero” fiasco. For Japan, it’s BOJ Governor Haruhiko Kuroda’s “JGB zero.” He’s apparently determined to just print as much “money” as necessary to keep Japanese government bond yields near (25bps) zero – while global inflation and bond yields spike ever higher.

April 22 – Bloomberg (Toru Fujioka and Matthew Boesler): “Governor Haruhiko Kuroda said the Bank of Japan must keep applying monetary stimulus given the more subdued inflation dynamics in the country compared with the U.S., in remarks Friday that omitted any reference to the yen’s depreciation. ‘The Bank of Japan should persistently continue with the current aggressive money easing toward achieving the price-stability target of 2% in a stable manner,” Kuroda said… ‘There is still a long way to go to achieve the 2% target in a stable manner.’”

BOJ policymaking is not confidence inspiring. And in another facet of global market instability, the yen declined another 1.6% this week. The Japanese currency is now down 6% over the past month and 10.4% year-to-date – to a 20-year low.

Here in the U.S., benchmark MBS yields jumped another 18 bps this week to 4.16%, the high since April 2011. MBS yields are now up a stunning 209 bps in less than four months. And the more hawkish the Fed’s rhetoric, the more intense the spike in market yields. Meanwhile, conventional 30-year mortgage rates are already 214 bps higher in 2022 to the high (5.11%) since December 2009. Each week, Credit markets are more reminiscent of 1994.

April 22 – Financial Times (Tommy Stubbington): “Investors’ expectations for US inflation have shot to their highest level in decades even as the Federal Reserve signals an aggressive tightening of monetary policy is imminent… A historic bond rout has intensified this week as officials from both the Fed and the European Central Bank stepped up their inflation-fighting rhetoric. But the hawkish message has done little to arrest a rise in long-term inflation expectations, which are watched closely by central bankers concerned that they can become self-fulfilling. The US 10-year break-even — a closely watched gauge of market inflation expectations over the next decade — climbed to 3.08% on Friday, the highest level in at least two decades.”

Are bonds more worried by inflation or the Federal Reserve’s policy shift? The Fed is being forced to at least talk of “slamming on the brakes.” This is anathema to highly levered speculative Bubbles and Bubble financial and economic structures. There is growing recognition of what a mess the Fed has made of things. The cover of the new Economist magazine: “Why the Federal Reserve Has Made a Historic Mistake on Inflation.”

How big of a mistake are we talking about? The Fed being slow to react to inflation over the past year? The historic pandemic monetary response? Or might the blunder go back further – perhaps much further?

Again, my thoughts return to pivotal year 1994 – the last real tightening cycle. That was the year Fed rate increases unleashed powerful de-risking/deleveraging dynamics. If not for the GSE’s $150 billion quasi-central bank “buyers of last resort” liquidity operations, there would have been major systemic issues in fledgling markets for securitizations, derivatives and “Wall Street finance,” more generally. Instead, the GSE liquidity backstop, along with an implicit Fed promise to avoid destabilizing rate increases going forward, validated the financial system’s move to market-based finance (and away from a traditional bank-dominated Credit system).

Credit is inherently unstable. History is unequivocal on this. The nineties commenced a historic experiment in financial and monetary management. A couple decades ago, I first posited that global finance never before had operated without restraints on the quantity and quality of new Credit instruments. There had been gold standard periods, the Bretton Woods monetary regime, and the more ad hoc dollar reserve system. And, importantly, a history of runs and calamitous collapses ensured banks adhered to reserve and capital requirements. This at least placed some restraint on system Credit growth.

All of this began to change during the nineties, as the Greenspan Fed accommodated a transition to Wall Street-based Credit. Mortgage-backed securities, asset-backed securities, money market funds, and repurchase agreements all expanded rapidly outside the confines of the banking system. Powerful non-bank Credit operators emerged – the GSEs, the Wall Street firms, and the leveraged speculating community. These credit instruments, along with the non-bank players, created a New Financial Infrastructure that aggressively expanded Credit unrestrained by traditional reserve and capital requirements.

Historical literature examining Credit debacles often highlights the risks of “fractional reserve banking” and the bank deposit/money multiplier. In the nineties, I began referring to the “infinite multiplier effect.” There was effectively a new financial structure taking root – one I was convinced was highly unstable and a disaster in the making.

Several major boom and bust cycles later, there is no doubt in my mind of the magnitude of the disaster created. From my analytical perspective, it has been the worst-case scenario to this day. Others, living through the same booms and busts, became more confident than ever that central bankers would always do whatever it takes to ensure the cycle continued indefinitely.

At its core, a belief galvanized that the Fed was willing and able to do whatever was necessary to ensure Credit system stability – regardless of the quantity or quality of Credit creation. It has been my view – especially after the reckless $5 TN pandemic response – that desperate policymakers were precariously exacerbating unwieldy Bubbles. They were losing control.

And “losing control” is a proper framework for analyzing today’s extraordinary backdrop. The Fed clearly doesn’t have control over inflation dynamics. And being forced to shift to surging consumer and producer inflation fundamentally changes the focus of monetary management. This effectively concludes a cycle of prioritizing loose financial conditions and a liquidity backstop that has underpinned booming markets back to the 1994 tightening experience.

The big debate today is whether the surge in yields has created buying opportunities throughout fixed-income markets. In particular, have risk premiums widened sufficiently in MBS, ABS, and corporate debt markets? Not with the Fed’s newfound preoccupation with inflation and the attendant fundamental shift in the risk profile of Credit. With the Fed about to commence “QT” - and the future of QE in question - no longer can markets take liquidity for granted. Indeed, the timing and scope of the beloved “Fed put” liquidity backstop is now uncertain. This implies significantly higher Credit, market and economic risks.

New realities will require a major risk premium/valuation adjustment for a broad swath of Credit instruments – from MBS and consumer securitizations to corporate Credit and structured finance to municipal securities. This adjustment has commenced, though it’s still early in the process. That Trillions of vulnerable instruments are held in ETF and mutual fund structures adds another dimension to latent fragilities.

I can’t see how this adjustment proceeds smoothly. A panicked run – similar to what was materializing in March 2020 – is a distinct possibility. Credit is inherently unstable. This has been a deeply-flawed multi-decade experiment. For years, markets have taken stability and the Fed’s liquidity backstop for granted. Now the Federal Reserve - and central banks around the globe - are Losing the Capacity to Stabilize securities and derivatives markets.

For the Week:

The S&P500 dropped 2.8% (down 10.4% y-t-d), and the Dow fell 1.9% (down 7.0%). The Utilities slumped 2.7% (up 2.5%). The Banks dipped 0.6% (down 12.2%), and the Broker/Dealers sank 4.1% (down 12.4%). The Transports rallied 1.5% (down 8.6%). The S&P 400 Midcaps fell 1.7% (down 9.1%), and the small cap Russell 2000 dropped 3.2% (down 13.6%). The Nasdaq100 sank 3.9% (down 18.2%). The Semiconductors declined 1.3% (down 24.2%). The Biotechs were hammered 6.4% (down 11.4%). With bullion dropping $47, the HUI gold index sank 9.3% (up 15.9%).

Three-month Treasury bill rates ended the week at 0.755%. Two-year government yields surged 21 bps to 2.67% (up 194bps y-t-d). Five-year T-note yields rose 15 bps to 2.93% (up 167bps). Ten-year Treasury yields gained seven bps to 2.90% (up 139bps). Long bond yields increased three bps to 2.95% (up 104bps). Benchmark Fannie Mae MBS yields surged 18 bps to 4.16% (up 209bps).

Greek 10-year yields gained seven bps to 2.98% (up 166bps y-t-d). Ten-year Portuguese yields jumped 15 bps to 1.99% (up 152bps). Italian 10-year yields surged 19 bps to 2.67% (up 150bps). Spain's 10-year yields jumped 16 bps to 1.94% (up 137bps). German bund yields gained 13 bps to 0.97% (up 115bps). French yields rose nine bps to 1.42% (up 123bps). The French to German 10-year bond spread narrowed four to 45 bps. U.K. 10-year gilt yields increased seven bps to 1.96% (up 99bps). U.K.'s FTSE equities index declined 1.2% (up 1.9% y-t-d).

Japan's Nikkei Equities Index was little changed (down 5.9% y-t-d). Japanese 10-year "JGB" yields rose four bps to 0.25% (up 18bps y-t-d). France's CAC40 was about unchanged (down 8.0%). The German DAX equities index slipped 0.2% (down 11.0%). Spain's IBEX 35 equities index declined 0.5% (down 0.7%). Italy's FTSE MIB index dropped 2.3% (down 11.2%). EM equities were mostly lower. Brazil's Bovespa index sank 4.4% (up 6.0%), and the Mexico's Bolsa index fell 1.8% (down 0.2%). South Korea's Kospi index increased 0.3% (down 9.2%). India's Sensex equities index dropped 2.0% (down 1.8%). China's Shanghai Exchange Index sank 3.9% (down 15.2%). Turkey's Borsa Istanbul National 100 index declined 0.9% (up 33.1%). Russia's MICEX equities index sank 7.9% (down 41.1%).

Investment-grade bond funds saw outflows of $3.585 billion, and junk bond funds posted negative flows of $886 million (from Lipper).

Federal Reserve Credit last week expanded $10.1bn to a record $8.916 TN. Over the past 136 weeks, Fed Credit expanded $5.190 TN, or 139%. Fed Credit inflated $6.105 Trillion, or 217%, over the past 493 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $15.4bn to $3.446 TN. "Custody holdings" were down $114bn, or 3.2%, y-o-y.

Total money market fund assets sank $61.3bn to a seven-month low $4.468 TN. Total money funds increased $2bn y-o-y.

Total Commercial Paper jumped $16.4bn to $1.087 TN. CP was down $132bn, or 10.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose another 11 bps to 5.11%, the high back to December 2009 (up 214bps y-o-y). Fifteen-year rates surged 21 bps to 4.38% - the high since April 2010 (up 209bps). Five-year hybrid ARM rates gained six bps to 3.75% (up 92bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 22 bps to a more than decade-high 5.23% (up 216bps).

Currency Watch:

April 19 – Bloomberg (Chikako Mogi and Yuko Takeo): “The yen extended its longest losing streak in at least half a century as traders ignored government warnings about the speed of the currency’s decline, focusing instead on the widening gap between Japanese and U.S. interest rates. Japan’s currency slid for a 13th day against the dollar, the longest run of losses in Bloomberg data starting in 1971…”

For the week, the U.S. Dollar Index increased 0.7% to 101.22 (up 5.8% y-t-d). For the week on the upside, the Swedish krona increased 0.2%. On the downside, the South African rand declined 6.3%, the Australian dollar 2.0%, the Brazilian real 2.0%, the New Zealand dollar 1.9%, the British pound 1.7%, the Norwegian krone 1.6%, the Japanese yen 1.6%, the Swiss franc 1.5%, the Mexican peso 1.3%, the Singapore dollar 1.0%, the Canadian dollar 0.8%, the South Korean won 0.7%, and the euro 0.2%. The Chinese renminbi dropped 2.00% versus the dollar (down 2.23% y-t-d).

Commodities Watch:

April 20 – Bloomberg (Archie Hunter): “The International Monetary Fund said the London Metal Exchange’s governance systems need to be strengthened after a massive short squeeze that left the world’s main nickel market suspended for six days last month and billions of dollars of trades canceled. The LME has been criticized by investors for its handling of the crisis, when prices surged by 250% in less than two days in a squeeze centered around Chinese nickel and stainless steel producer Tsingshan Holding Group Co.”

April 18 – Bloomberg (Sergio Chapa and Gerson Freitas Jr.): “U.S. natural gas surged to a 13-year high, briefly breaking above $8 for the first time since 2008, as robust demand tests drillers’ ability to expand supplies. Front-month futures closed 7% higher… Monday. The last time prices were this high was August 2008, when hurricanes menaced offshore gas platforms in the Gulf of Mexico and searing summer weather stoked demand for power to run air conditioners.”

April 19 – Bloomberg (Tarso Veloso): “Corn futures in Chicago exceeded $8 a bushel for the first time in almost a decade, approaching a record high as war threatens global supplies, boosting demand for U.S. grain… Futures are nearing an all-time high of $8.49 a bushel reached in 2012 after devastating drought and heat damaged crops in the U.S. Midwest. Wheat contracts surged as cold and snow slowed planting.”

The Bloomberg Commodities Index dropped 2.6% (up 30.1% y-t-d). Spot Gold fell 2.4% to $1,932 (up 5.6%). Silver sank 5.5% to $24.14 (up 3.6%). WTI crude dropped $4.88 to $102.07 (up 36%). Gasoline declined 2.3% (up 48%), and Natural Gas sank 10.5% (up 75%). Copper fell 2.9% (up 3%). Wheat declined 2.6% (up 40%), while Corn added 0.7% (up 33%). Bitcoin lost $878, or 2.1%, this week to $39,658 (down 14.5%).

Russia/Ukraine Watch:

April 19 – Financial Times (Colby Smith and Eric Platt): “Russia said it had begun a new phase of its invasion of Ukraine… as officials in the eastern border region of Donbas urged civilians to flee a renewed offensive. ‘Another stage of this operation is beginning and I am sure this will be a very important moment of this entire special operation,’ Sergei Lavrov, Russia’s foreign minister, told the India Today TV… Lavrov’s comments were the first Russian confirmation that it had begun a new offensive to capture the Donbas after partially regrouping its forces and appointing a new field commander for the invasion.”

April 19 – Associated Press (Adam Schreck): “Russia assaulted cities and towns along a boomerang-shaped front hundreds of miles long and poured more troops into Ukraine on Tuesday in a potentially pivotal battle for control of the country’s eastern industrial heartland of coal mines and factories. If successful, the Russian offensive in what is known as the Donbas would essentially slice Ukraine in two and give President Vladimir Putin a badly needed victory following the failed attempt by Moscow’s forces to storm the capital, Kyiv, and heavier-than-expected casualties nearly two months into the war.”

April 18 – Reuters (Pavel Polityuk): “Russia's invasion has damaged or destroyed up to 30% of Ukraine's infrastructure at a cost of $100 billion, a Ukrainian minister said…, adding reconstruction could be achieved in two years using frozen Russian assets to help finance it. Ukraine has not previously outlined the specific impact on infrastructure, such as roads and bridges, although officials say the total bill for damage to everything from transport to homes and other buildings runs to about $500 billion so far. ‘Practically all components of our transport infrastructure have suffered in one form or another,’ Infrastructure Minister Oleksander Kubrakov told Reuters.”

April 20 – Reuters (Andrew Macaskill): “British Prime Minister Boris Johnson said any peace talks over Ukraine are likely to fail, as he compared holding talks with Russian President Vladimir Putin to negotiating with a crocodile. Johnson said dealing with Putin was like ‘a crocodile when it's got your leg in its jaws’ and said it was vital that the West continues arming Ukraine… ‘It is very hard to see how the Ukrainians can negotiate with Putin now given his manifest lack of good faith… His strategy, which is evident, is to try engulf and capture as much of Ukraine as he can and perhaps to have some sort of negotiation from a position of strength.’”

April 18 – Bloomberg: “President Vladimir Putin gave a special elite designation to an army unit that Ukraine has accused of committing war crimes in the town of Bucha. Citing ‘mass heroism and valor’ but making no mention of Russia’s war in Ukraine, the decree Putin signed Monday awarded the 64th Motorized Infantry Brigade the honorary title of Guards. Ukraine’s Defense Ministry earlier this month identified the unit as one involved in war crimes during the occupation of Bucha, a town that has drawn international attention for reports of Russian atrocities committed during the war.”

April 17 – Reuters: “Russia is worried about increased activity of NATO forces in the Arctic and sees risks of ‘unintended incidents’ occurring in the region, TASS news agency cited Russian ambassador-at-large Nikolai Korchunov as saying... In March, Finland and Sweden, which are both considering joining the U.S.-led military NATO alliance, conducted combined NATO military drills. The exercise was long planned, but Russia's invasion of Ukraine on Feb. 24 added intensity to the war game.”

April 20 – Associated Press (Cara Anna and Inna Varenytsia): “Here in the dirt of one of the world’s most radioactive places, Russian soldiers dug trenches. Ukrainian officials worry they were, in effect, digging their own graves. Thousands of tanks and troops rumbled into the forested Chernobyl exclusion zone in the earliest hours of Russia’s invasion of Ukraine in February, churning up highly contaminated soil from the site of the 1986 accident that was the world’s worst nuclear disaster. For more than a month, some Russian soldiers bunked in the earth within sight of the massive structure built to contain radiation from the damaged Chernobyl nuclear reactor. A close inspection of their trenches was impossible because even walking on the dirt is discouraged.”

Economic War/ Iron Curtain Watch:

April 20 – Reuters (Andrea Shalal, David Lawder and David Milliken): “Top officials from Britain, the United States and Canada walked out on Russia's representatives at a Group of 20 meeting on Wednesday and many members spoke to condemn Moscow's war in Ukraine, exposing deep divisions in the bloc of major economies. Indonesian Finance Minister Sri Mulyani Indrawati, who chaired the meeting of G20 finance officials…, acknowledged the body faced unprecedented challenges but called for cooperation to overcome headwinds slowing global growth. ‘This is an extraordinary situation,’ Indrawati told reporters… ‘It's not business as usual, a very dynamic and challenging one.’”

April 21 – Bloomberg (Jenny Surane, Irene García Pérez and Hannah Levitt): “Russia’s race to avoid default just escalated. The country has been inching closer after JPMorgan.., under orders from the… Treasury, halted interest payments the country owed on two dollar-denominated bonds in recent weeks. The move forced the Russian central bank to make the payments in rubles instead and left it scrambling for ways to sidestep JPMorgan and rival Citigroup Inc. to make good on its debt. The situation got more serious on Wednesday: The Credit Derivatives Determinations Committee said the ruble payment was a potential default, fueling growing consensus that Russia may have reneged on its debt obligations. The CDDC’s ruling, which doesn’t directly impact the debt, could trigger payment of credit-default swaps if Russia doesn’t pay bondholders in dollars before the debt’s grace period ends on May 4.”

April 17 – Washington Post (Karen DeYoung and Michael Birnbaum): “Nearly two months into Vladimir Putin’s brutal assault on Ukraine, the Biden administration and its European allies have begun planning for a far different world, in which they no longer try to coexist and cooperate with Russia, but actively seek to isolate and weaken it as a matter of long-term strategy. At NATO and the European Union, and at the State Department, the Pentagon and allied ministries, blueprints are being drawn up to enshrine new policies across virtually every aspect of the West’s posture toward Moscow, from defense and finance to trade and international diplomacy. Outrage is most immediately directed at Putin himself… While ‘we don’t say regime change,’ said a senior E.U. diplomat, ‘it is difficult to imagine a stable scenario with Putin acting the way he is.’”

April 19 – Financial Times (Chris Giles and Colby Smith): “The global economy will suffer a hit to growth and higher inflation this year as a result of Russia’s invasion of Ukraine, the IMF said… In its World Economic Outlook, the fund said prospects had ‘worsened significantly’ with countries closest to the war likely to be hardest hit. But it warned that risks had intensified everywhere, raising the chances of even lower growth and more rapid price rises, and upending the fund’s view that there would be a stronger recovery from the pandemic this year. The IMF’s forecasts showed global growth of gross domestic product this year of 3.6%, down 0.8 percentage points since the fund’s January projections and 1.3 percentage points lower compared with six months ago. In 2021, global growth was estimated at 6.1%, the fund said.”

April 20 – Bloomberg (Birgit Jennen and Annmarie Hordern): “Companies buying Russian natural gas should not have to set up ruble accounts to pay for it, German Finance Minister Christian Lindner said, pushing back against a demand made last month by Russian President Vladimir Putin. ‘Contracts are contracts,’ Lindner said… ‘Contracts are based on dollars and euros and so private-sector companies should pay in dollars or euros.’”

April 19 – Bloomberg (Ann Koh): “The war in Ukraine will put further pressure on grain-importing countries in Africa and Asia as a reduced number of vessels for delivering cargoes drives up shipping rates, according to the head of the International Chamber of Shipping. About 80 to 100 ships, mostly bulk carriers, have been unable to leave Ukrainian waters for almost two months due to underwater mines and military blockades, ICS Chairman Esben Poulsson said... Bulk freight rates are rising as owners and charterers price in the fact that ships will be tied up for longer periods.”

April 19 – Bloomberg: “A day after Bank of Russia Governor Elvira Nabiullina touted the country’s alternative to the SWIFT financial-messaging service, the regulator said it will no longer publicly disclose who participates. U.S. and European sanctions over Russia’s invasion of Ukraine have cut several major banks off from SWIFT. But Nabiullina told parliament Monday that 52 institutions from 12 countries are participating. Until recently, the list was posted on the central bank’s website.”

April 20 – Reuters: “Russian households withdrew foreign currency worth $9.8 billion from their accounts in March and banks cut new corporate lending by around one third, the central bank said…, as western sanctions over events in Ukraine spooked consumers. ‘The quarter was difficult, to put it bluntly. It was very worrying at certain moments, but most importantly, the situation managed to stabilise,’ said Alexander Danilov, director of the central bank's banking regulation and analytics department.”

U.S./Russia Watch:

April 20 – AFP: “Russian President Vladimir Putin said… that Russia has successfully tested the Sarmat intercontinental ballistic missile, saying the weapon capable of carrying nuclear charges will make Kremlin's enemies ‘think twice.’ The Sarmat — dubbed Satan 2 by Western analysts — is among Russia's next-generation missiles that Putin has called ‘invincible,’ and which also include the Kinzhal and Avangard hypersonic missiles. Last month, Russia said it used Kinzhal for the first time in warfare to strike a target in Ukraine, where Russian troops have been engaged in a special military operation since Feb. 24. ‘I congratulate you on the successful launch of the Sarmat intercontinental ballistic missile,’ Putin told the army in televised remarks…”

China/Russia/U.S. Watch:

April 16 – Financial Times (James Fernyhough): “China will welcome a prolonged war in Ukraine as a ‘rolling strategic diversion’ from its own assertiveness, according to former Australian prime minister Kevin Rudd, and exploit a distracted west to focus on its competition with the US… China has refused to condemn Russia’s belligerence, drawing accusations that Beijing supported Moscow’s invasion. Rudd, a Mandarin speaker who cultivated Australia’s relationship with China during his tenure as prime minister between 2007 and 2010, said the importance of its ties to Moscow meant that Beijing would ‘not distance itself from Russia’ under President Xi Jinping.”

April 21 – Reuters (Kevin Yao and Yew Lun Tian): “Chinese President Xi Jinping… proposed a ‘global security initiative’ that upholds the principle of ‘indivisible security’, a concept also endorsed by Russia, although he gave no details of how it would be implemented. During a video speech to the annual Boao Asia Forum, Xi said that the world should respect the sovereignty and territorial integrity of all countries, while paying attention to the ‘legitimate’ security concerns of all. ‘We should uphold the principle of indivisibility of security, build a balanced, effective and sustainable security architecture, and oppose the building of national security on the basis of insecurity in other countries,’ Xi told the gathering…”

Europe/Russia/China Watch:

April 20 – Reuters (Riham Alkousaa and Miranda Murray): “Germany will stop importing oil from Russia by the end of the year, said German Foreign Minister Annalena Baerbock after a meeting with her Baltic counterparts… ‘I therefore say here clearly and unequivocally yes, Germany is also completely phasing out Russian energy imports,’ said Baerbock. ‘We will halve oil by the summer and will be at 0 by the end of the year, and then gas will follow, in a joint European roadmap, because our joint exit, the complete exit of the European Union, is our common strength.’”

April 21 – Bloomberg (Lenka Ponikelska): “The Czech Republic warned China that its closer cooperation with Russia risks undercut ties with the European Union because of Vladimir Putin’s war against Ukraine. Czech Deputy Foreign Minister Martin Tlapa met with a delegation led by China’s special representative to central and Eastern Europe, Huo Yuzhen, this week… Following a pledge this week by Chinese Vice Foreign Minister Le Yucheng to intensify ties with Putin’s government, the Czechs, who will assume the EU’s rotating presidency in the second half of this year, warned doing so would hurt relations with the bloc.”

April 19 – Reuters (Thomas Escritt, Sarah Marsh and Andreas Rinke): “Germany will continue to support Ukraine militarily although it has practically maxed-out the weapons it can deliver from its own stocks and is instead working with its armaments industry and other nations to send more, Chancellor Olaf Scholz said… Scholz is facing growing frustration at home as well as abroad with what critics say is his lack of leadership on Ukraine. Even members of the junior partners in his three-way coalition are now openly accusing him of dithering on Ukrainian pleas to send it more heavy weapons.”

Market Instability Watch:

April 18 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “Global bond funds witnessed massive money outflows in the week to April 13, as investors were worried that the Federal Reserve would start tightening its policy more aggressively… According to Refinitiv Lipper, global investors shed bond funds worth $14.5 billion in the reported week, compared with $1.15 billion worth of net disposals in the previous week.”

April 18 – Reuters (Gaurav Dogra and Patturaja Murugaboopathy): “U.S. equity funds faced heavy outflows in the week to April 13, as investors were spooked by rising yields and fears that the impending monetary tightening from the Federal Reserve would slow growth. According to Refinitiv Lipper data, U.S. equity funds suffered outflows of $12.57 billion, marking the biggest weekly net selling since Dec. 15… Meanwhile, U.S. money market funds faced net selling of $26.4 billion, compared with outflows of $29.56 billion in the previous week.”

April 18 – Bloomberg (Greg Ritchie): “Long-maturity Treasuries are contending with their biggest drawdown on record, at least according to their most popular exchange-traded fund. BlackRock’s $19 billion iShares 20+ Year Treasury Bond ETF (ticker TLT) has fallen almost a third from an all-time high in August 2020. That’s more than the previous record drawdown seen between 2008 and 2010, based on closing prices.”

April 19 – Bloomberg (Nikos Chrysoloras): “Investors are rapidly exiting stocks, with U.S. equities seeing their biggest weekly outflows of the year as recession fears take hold. U.S. equity funds had outflows of $15.5 billion in the week through April 13, while European funds experienced a ninth straight week of outflows, Bank of America Corp. strategists wrote, citing EPFR Global data. The bank’s private clients -- with $3.2 trillion of assets under management -- also exited stocks in the largest amount since November.”

Bubble/Mania Watch:

April 19 – Bloomberg (Peyton Forte): “Viral success stories of people who used the post-pandemic stock market to trade their way out of mountains of student loan debt keep inspiring do-it-yourself investors. But while equities have provided a time-honored route to wealth creation for generations of Americans, aspects of these latest get-out-of-debt-quick efforts sit uneasily with Wall Street’s conservative-investing old guard. With the fight against inflation whipping up volatility across asset classes, and exotica like cryptocurrency still finding its way into retail portfolios, they warn that the risk of bad outcomes is as high as it’s ever been.”

April 22 – Bloomberg (Bailey Lipschultz): “Plans for four new blank-check firms have been pulled in less than 24 hours by the serial dealmakers at Navigation Capital Partners as the once frenetic industry goes cold.”

April 21 – Bloomberg (Kevin Crowley): “If stock sales are anything to go by, the heads of some of the largest U.S. oil and gas companies may be signaling that this year’s boom in energy shares is limited. Hess Corp.’s Chief Executive Officer John Hess offloaded $85 million worth of stock in the first quarter… Meanwhile, Marathon Oil Corp. CEO Lee Tillman sold $34.3 million. All told for the period, more U.S. energy executives sold rather than bought stock in their companies than at any time since 2012…”

Inflation Watch:

April 19 – Bloomberg (Thomas Hum): “The 2021-22 school year is quickly coming to an end, prompting parents to begin looking for summer day camps and other similar programs to keep their children occupied... According to American Camp Association (ACA) President and CEO Tom Rosenberg, in light of soaring demand by parents to send their children to summer camp, inflation is taking its toll on camp programs. ‘Well, the costs of providing camp, just like everything else right now, is really going up,’ Rosenberg told Yahoo... ‘We've had increases in labor costs, food costs, program supply costs, COVID-related costs. Everything has gone up. So camps are trying to operate at scale this summer, which is different from the past two summers.’”

April 21 – Wall Street Journal (Suman Bhattacharyya): “Wage inflation in the technology sector is accelerating, pressuring companies to boost compensation for key roles by 20% or more as they compete for a limited pool of workers skilled in areas such as cloud computing and data science. There is no single source of data on all tech jobs, but it is clear from a range of market analysts and executives that demand for labor in the tech sector is on the rise. During the first quarter, U.S. employers posted 1.1 million tech jobs, an increase of 43% from a year earlier, according to… CompTIA.”

April 18 – Bloomberg (Scott Moritz): “Verizon Communications Inc. is the latest wireless carrier to raise its minimum wage to $20 an hour, reflecting the tighter job market and a push by labor organizers to unionize retail and customer service employees.”

Biden Administration Watch:

April 21 – Reuters (Phil Stewart and Idrees Ali): “Newly disclosed ‘Ghost’ drones that are part of America's latest arms package for Ukraine were developed by the U.S. Air Force for attacking targets and are destroyed after a single use, the Pentagon said… The United States and its allies have ramped up arms shipments to Kyiv ahead of Russia's announced offensive in eastern Ukraine, as Moscow tries to salvage its nearly two-month old campaign.”

Federal Reserve Watch:

April 21 – Financial Times (Colby Smith): “Jay Powell sent his strongest signal so far that the Federal Reserve is prepared to raise interest rates by half a percentage point at its meeting next month as it steps up efforts to fight soaring inflation. ‘It is appropriate in my view to be moving a little more quickly,’ the chair of the US central bank said at a panel hosted by the IMF. ‘We make these decisions at the meeting and we’ll make them meeting by meeting, but I would say that 50 bps will be on the table for… May.’ Powell’s comments underscore a shift in tone from several Fed officials, who have recently embraced the need for the central bank to take more forceful action to tame the highest inflation in 40 years.”

April 18 – Bloomberg (Pavel Polityuk): “Federal Reserve Bank of St. Louis President James Bullard said the central bank needs to move quickly to raise interest rates to around 3.5% this year with multiple half-point hikes and that it shouldn’t rule out rate increases of 75 bps. ‘More than 50 bps is not my base case at this point,’ Bullard said…, adding the Fed under Alan Greenspan did such a hike in 1994 leading to a decade-long expansion. ‘I wouldn’t rule it out, but it is not my base case here.’”

April 19 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic said it was important to get inflation under control but policy makers should not act with such vigor that they harm the economy, especially with a weaker global outlook. ‘This is one reason why I am reluctant to really declare that I want to go a long way beyond our neutral place because that may be more hikes than are warranted given the economic environment,’ he said... ‘That’s just a sign that we definitely need to be cautious as we move forward.’”

April 20 – Bloomberg (Catarina Saraiva): “U.S. central bankers should move ‘purposefully’ and raise interest rates to neutral -- the level which neither speeds up nor slows down the economy -- by the end of the year, Federal Reserve Bank of San Francisco President Mary Daly said. ‘I see an expeditious march to neutral by the end of the year as a prudent path,’ Daly said…, noting that most forecasters see that level lying around 2.5%. ‘Moving purposefully to a more neutral stance that does not stimulate the economy is the top priority.’”

April 19 – Bloomberg (Matthew Boesler): “The U.S. central bank will probably raise interest rates above levels it considers neutral for the economy next year given the outlook for inflation, Federal Reserve Bank of Chicago President Charles Evans said. ‘Probably we are going beyond neutral,’ Evans said… ‘That’s my expectation, when I see that, taking out special factors, I’m still left with 3 to 3.5% inflation’ by the end of 2022, he said. ‘That’s not what we want. If we’re at a 2.5% inflation rate, I think we have more things to ponder there.’”

U.S. Bubble Watch:

April 21 – CNBC (Jeff Cox): “Initial jobless claims last week were a bit higher than expected but still reflective of a labor market where employers are loathe to fire workers. First-time claims for benefits in the week ended April 16 totaled 184,000, a decline of 2,000 from the previous week… The numbers indicate the U.S. employment picture remains historically tight as job openings outnumber the available labor pool by about 5 million. Continuing claims, which run a week behind the headline number, fell by 58,000 to 1.417 million, the lowest level since Feb. 21, 1970.”

April 16 – Wall Street Journal (Charley Grant and David Benoit): “U.S. consumers say they aren’t feeling great about the economy. But they have a curious way of showing it. Pessimism about the economy has been on the rise due to surging inflation and falling household income since pandemic-related stimulus programs expired. But the latest round of bank earnings shows that apprehension hasn’t kept Americans from reaching for their credit cards. First-quarter spending was up 23% on Citigroup Inc. credit cards, compared with a year ago. Spending rose 29% on JPMorgan… cards and 33% on Wells Fargo & Co. cards.”

April 19 – Bloomberg (Olivia Rockeman): “New U.S. home construction rose unexpectedly in March to the highest level since 2006, boosted by multifamily projects as builders seek to replenish housing inventory. Residential starts climbed 0.3% last month to a 1.79 million annualized rate from an upwardly revised February figure… Applications to build, a proxy for future construction, climbed to an annualized 1.87 million units. The increase in starts reflected the strongest pace of multifamily home construction since January 2020.”

April 20 – Wall Street Journal (Telis Demos): “Banks are going to need solid loan growth to outrun some of their recent challenges. Auto lending might provide a lift, so long as banks don’t violate any speed limits. Across several large banks with auto-lending units—a group including Ally Financial, JPMorgan Chase and Wells Fargo —the average growth year over year in auto loans was just over 13% in the first quarter, only a bit slower than in the fourth quarter… That is more than twice the pace of overall loan growth across U.S. banks in the quarter, according to Federal Reserve data.

April 18 – Bloomberg (Ross Kerber): “Median pay for top U.S. CEOs rose 31% last year to a record $20 million, a new study found, surging after a slight decline during the COVID-19 pandemic, as companies showered leaders with stock awards and cash bonuses… Equilar director of content Amit Batish said companies looked to reward leaders who steered them through challenges like supply shortages… ‘A lot of these companies did well during the pandemic, that was definitely driving the increases in pay,’ he said.”

April 20 – Reuters (Lindsay Dunsmuir): “The average interest rate on the most popular U.S. home loan climbed to a 12 year high last week and fewer homebuyers sought properties in a sign that the Federal Reserve's aim of cooling the housing market may be beginning to have an impact, data from the Mortgage Bankers Association (MBA) showed… The average contract rate on a 30-year fixed-rate mortgage increased to 5.20% in the week ended April 15 from 5.13% a week earlier... It has risen 2 percentage points from one year ago.”

April 20 – CNBC (Diana Olick): “Sales of existing homes dropped 2.7% in March to a seasonally adjusted, annualized rate of 5.77 million units… March sales were 4.5% lower than the same period in 2021… The median price of an existing home sold in March was $375,300, an increase of 15% from March 2021. That’s the highest median price ever recorded by the Realtors. With rates rising, and prices significantly higher, the average borrower is paying about 38% more on the monthly payment now than they would have for the same home one year ago, according to Prices continue to rise because the supply of homes for sale is still incredibly low... At the end of March there were 950,000 homes for sale, a decrease of 9.5% year over year. At the current sales pace that represents a two-month supply… Homes that are for sale are moving quickly with average days on the market just 17 days, down from 18 days a year ago. And cash is king. It made up 28% of all sales in March, the highest since July 2014.”

April 18 – CNBC (Diana Olick): “Sharply rising mortgage rates are taking their toll on the nation’s homebuilders, as already pricey new construction becomes even less affordable. Builder confidence in the market for new single-family homes fell 2 points to 77 in April, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Any reading above 50 is considered positive sentiment, but the reading marks the fourth straight month of declines for the index… Of the index’s three components, current sales conditions fell 2 points to 85. Buyer traffic dropped 6 points to 60, and sales expectations in the next six months increased 3 points to 73 following a 10-point drop in March.”

April 17 – Bloomberg (Eric Martin): “History suggests that the Federal Reserve will face a difficult task in tightening monetary policy enough to cool inflation without causing a U.S. recession, with the odds of a contraction at about 35% over the next two years, according to Goldman Sachs… The Fed’s main challenge is to reduce the gap between jobs and workers, and to slow wage growth to a pace consistent with its 2% inflation goal by tightening financial conditions enough to reduce job openings without sharply raising unemployment, Chief Economist Jan Hatzius wrote…”

April 18 – Bloomberg (Farah Elbahrawy): “The positive effects from inflation on earnings growth for U.S. firms have peaked as rising costs trim their margins and price pressures caused by the Ukraine war hit consumers, according to Morgan Stanley strategists. ‘Margin expectations look overly optimistic for the balance of ‘22 given the myriad of cost pressures companies face,’ the strategists led by Michael Wilson wrote... Meanwhile, the Ukraine conflict ‘has led to a spike in energy and food costs which serve as nothing more than a tax on a consumer that is already struggling with high inflation.’”

Fixed-Income Bubble Watch:

April 19 – Bloomberg (Olivia Raimonde): “The extra compensation investors are demanding to hold America’s most-speculative debt has risen around 50 bps this month on concern economic growth is slowing and the chance of a recession is increasing. Spreads on CCC-rated debt -- bonds most at risk for a default should the economy falter -- have widened 125 bps this year, compared to 57 bps for BB rated debt and 69 basis points on average for all junk bonds, according to… Bloomberg.”

April 20 – Wall Street Journal (Matt Wirz): “Low-rated U.S. companies borrowed record amounts in the loan market last year, taking advantage of low interest rates and generous credit. Now all that debt is starting to get more expensive. So-called leveraged loans typically have borrowing costs that float, and the Federal Reserve’s suddenly faster pace of interest-rate hikes is set to drive them up. Investors are paid more as rates rise, which made the loans attractive. Borrowers were also keen, because rates were low and the Fed had set out a gradual path to raise them. But inflation knocked that off course. Just last year, many on Wall Street expected a gradual increase in interest rates, but those expectations were upended by persistent inflation.”

Economic Dislocation Watch:

April 21 – Wall Street Journal (Liza Lin and Yang Jie): “Zhu Zhongtao, a Shanghai-based truck driver, was hauling a load of supplies urgently needed by a local manufacturer in a nearby city when he was unexpectedly sent to quarantine. Driving from Shanghai… Mr. Zhu was stopped at a toll gate when trying to enter a county in nearby Wenzhou, said Zhou Chenguang, Mr. Zhu’s employer. There, he was asked to show three different health declarations to prove he was Covid-free and hadn’t passed virus hot spots in the past two weeks. He also underwent an on-site Covid test and his result was negative. The driver had met all the requirements to enter the county... Yet, authorities this week ordered Mr. Zhu to isolate at a quarantine center for at least two weeks, leaving his truck and its contents parked outside the facility. Some local officials told Mr. Zhu that he lacked the right permissions, while others said the extended isolation was the norm for trucks from Shanghai…”

China Watch:

April 21 – Bloomberg (Jill Disis): “China’s economic activity took a dramatic hit in April, according to a survey of sales managers that offered an early indication of how badly expansive Covid lockdowns weighed on industry... The Sales Managers Index fell to 49.2, a 22-month low, from 51.8 in March, World Economics Ltd. Said... The SMI surveys sales managers across both manufacturing and services sectors… ‘All areas of economic activity appear to have been impacted,’ the… data provider said…, adding that some 49% of survey companies claimed to have been affected by the lockdowns. Business confidence in April ‘all but evaporated,’ with an index measuring all sectors plunging to 50.6 from March’s 53.5, the lowest since February 2020…”

April 18 – Bloomberg: “China reported its biggest decline in consumer spending and worst unemployment rate since the early months of the pandemic as Covid lockdowns put a strain on the world’s second-largest economy, adding another threat to global growth. The figures for March came alongside a stronger-than-expected acceleration in gross domestic product growth in the first quarter to 4.8%, an outcome that doesn’t capture the full extent of the economic damage from Covid lockdowns… Some economists also questioned the strength of the data… Retail sales contracted in March for the first time since 2020, falling 3.5% from a year ago. The surveyed jobless rate climbed to 5.8%, the highest since May 2020.”

April 20 – Reuters (Liangping Gao and Ryan Woo): “The growth of China's government fiscal revenue slowed in March compared with the first two months of the year…, further weighing on a flagging recovery… Last month's government fiscal revenue rose 3.42% year-on-year to 1.5834 trillion yuan ($91.03bn), slowing from a 10.5% growth in January-February… The country's fiscal spending growth accelerated to 10.4% year-on-year to 2.536 trillion yuan in March, after a 7.0% growth in January-February… For March, land sales revenues fell 22.84% from a year earlier to 403.6 billion yuan, after a 29.5% plunge in the first two months, as cash-strapped developers grew cautious about land purchases.”

April 19 – Bloomberg: “Investors aren’t buying the Chinese government’s bullish rhetoric and promises of support for an economy paying the price for its stringent Covid Zero strategy. China reported the biggest contraction in retail sales and the highest unemployment since the early months of the pandemic on Monday. Hours later, the central bank announced 23 measures to cushion the economy, including more loan support to help businesses struggling to cope with damaging lockdowns. State media followed with a detailed statement on growth, saying annual targets could still be met. Government departments on Tuesday pledged more steps to help companies resume production in key sectors. The response from local markets was indifference…”

April 21 – Bloomberg: “Nomura Holdings Inc. cut its forecast for China’s economic growth rate to 3.9% as the country’s insistence on sticking with Covid Zero disrupts the economy more severely than monetary policy can provide support. The estimate was lowered from 4.3% due to ‘rapidly’ worsening high-frequency data for April and logistics problems as a growing number of cities fully or partially lock down to contain the virus. Meanwhile, Beijing has shown no sign of a move away from its Covid Zero strategy soon, Nomura’s economists including Lu Ting wrote… If realized, the 3.9% expansion rate for 2022 would mark China’s worst annual performance since 1990, excluding 2020 when the pandemic battered the economy and pushed the growth rate to 2.2%.”

April 19 – Bloomberg: “China’s property sector contracted for a third straight quarter, a sign that real estate was still dragging on the economy, even before the recent Covid outbreaks and lockdowns began to escalate. Output in the real-estate industry, a key economic contributor, contracted 2% in the first quarter from a year ago, China’s National Bureau of Statistics said... It was the steepest drop among all sectors…”

April 18 – Bloomberg: “China’s worst Covid-19 outbreak in two years is prolonging the country’s property slump, starving stressed developers of cash and weighing on the economy. Only weeks ago, things were looking up for the battered real estate sector after the government pledged to prevent a disorderly collapse. Now the industry is contending with lockdowns in key cities including Shanghai that are keeping prospective homebuyers away. China’s property sector contracted for a third straight quarter… A 29% drop in new home sales in March was the biggest since they began falling last July. Seven months of falling home prices are adding to the pain.”

April 21 – Bloomberg: “The income that local authorities in China get from land sales slid in the first quarter, a sign that a housing slump is crimping government finances. Revenue in the first three months of 2022 from selling rights to use state-owned land fell 27.4% from the same period a year ago to 1.2 trillion yuan ($187bn), according to Ministry of Finance data... That drop follows the biggest sales slump on record for the first two months of 2022. The slide poses a test for cash-strapped local authorities, who rely on land sales as a source of income yet already face pressure to bolster economic growth by cutting taxes and spending more on infrastructure.”

April 21 – Reuters (Brenda Goh and Ella Cao): “Shanghai authorities said on Thursday tough restrictions would remain in place for now even in districts which managed to cut COVID-19 transmission to zero, as the number of cases outside quarantined areas across the city rose again. That sober assessment came after health officials earlier in the week had fuelled hopes of some return to normal by saying that trends in recent days showed Shanghai had ‘effectively curbed transmissions’.”

April 20 – Financial Times (Hudson Lockett and Thomas Hale): “Foreign investors ditched a record $18bn worth of renminbi-denominated debt last month, with selling accelerating as soaring US bond yields dulled the allure of holding Chinese debt. Offshore investors sold a net Rmb113bn ($17.6bn) worth of Chinese onshore bonds in March… That took outflows over the past two months to Rmb193bn as concerns mounted over China’s economic growth outlook and the debt’s diminishing yield advantage over bonds denominated in US dollars. ‘These are by far the greatest outflows since China began opening up its domestic bond market,’ said Becky Liu, head of China macro strategy at Standard Chartered, adding that when combined with net selling of stocks, foreign investors had dumped a total of about Rmb234bn in Chinese securities over the past two months.”

April 22 – Reuters (Brenda Goh and Martin Quin Pollard): “Stiffening resolve after three weeks of strict lockdown, authorities warned Shanghai's 25 million frazzled residents on Friday that their purgatory would go on until the COVID-19 virus was eradicated neighbourhood by neighbourhood. ‘I have no idea whether I will ever be allowed to go out again in my lifetime, I'm falling into depression,’ one user commented on China's Twitter-like Weibo beneath a report by state news agency Xinhua on the latest measures announced in Shanghai…”

April 18 – Reuters (David Stanway, Josh Horwitz, Andrew Galbraith and Engen Tham): “The tensions of lockdown have exposed divisions among Shanghai residents, pitting young against old, locals against outsiders, and above all, COVID-negative against COVID-positive people. Shanghai's 25 million people, most of whom live in apartment blocks, have forged new communal bonds during the city's coronavirus outbreak, through barter and group buying and setting up food-sharing stations. But with no end in sight to a lockdown that for some has lasted four weeks, frustrations are also mounting… In one, conflict erupted when a woman who had been taken to centralised quarantine - where she tested negative - accused her neighbour of reporting her to authorities.”

April 21 – Bloomberg: “Officials ordered some Shanghai neighborhoods to throw away food they received from the government after complaints about quality issues, adding to frustration among residents locked in their homes for weeks as the city struggles to tame the country’s worst virus outbreak. At least two districts in Shanghai’s east warned residents about problems with moldy braised duck and meatballs or issues with the packaging of food that had been distributed by the government to compounds still in lockdown…”

April 18 – Financial Times (Sun Yu): “Chinese immigration consultants say inquiries from wealthy individuals trying to leave the country have surged following the lockdown of Shanghai, underscoring the mounting frustration with Beijing’s zero-Covid strategy. Requests for help have risen sharply this month, according to more than a dozen consultancies… Related keyword searches have also soared, with WeChat recording an almost seven-fold jump for ‘immigration’ since the beginning of April, according to the WeChat Index… ‘The authorities are making people sacrifice their basic needs to fight a disease that’s a bit more severe than seasonal flu,’ said James Chen, a Shanghai-based consultant. ‘Our clients chose to vote with their feet.’ ‘I have had so many inquiries over the past few weeks that I couldn’t reply to them in a timely manner,’ said an agent at QWOS, a Shanghai-based immigration services company…”

Central Banker Watch:

April 21 – Bloomberg (Jana Randow and Greg Ritchie): “The European Central Bank’s first interest-rate increase in more than a decade is potentially just three months away and policy makers may move faster than anticipated after that -- a prospect that’s jolting markets. Four officials, including Vice President Luis de Guindos, said in recent days that the ECB may raise its deposit rate from minus 0.5% early in the third quarter after ending asset purchases. The comments reflect growing concerns that inflation -- already nearly four times the 2% goal and rising -- risks getting out of control despite a deteriorating growth outlook.”

April 20 – Bloomberg: “Asia’s two biggest central banks are having to grapple with the fallout from the Federal Reserve’s hawkish pivot. The interest rates China’s biggest banks charge their best customers were held steady on Wednesday, even as the economy slows under the weight of rolling lockdowns to curb Covid-19. That may slow the pace of capital outflows after investors sold government bonds at a record pace over February and March as the People’s Bank of China eased monetary policy, while the Fed tightened. In Japan, the central bank was forced to ramp up its bond purchases again on Wednesday as investors continue to test its ability to keep yields low as their American equivalents climb. The yen has suffered a historic run of losses as a result…”

April 20 – Financial Times (Tony Barber): “War, political tensions and a deteriorating macroeconomic outlook are testing the skills of central banks in Hungary, Poland and Romania. They add up to the region’s third great challenge after the 2008 financial crisis and the transition from communism to a market economy in the 1990s. Month by month, the central banks are raising interest rates to curb inflation pressures that were already rising before Russia’s invasion of Ukraine in February drove up the prices of oil, gas, metals, food and fertilisers. Yet real interest rates remain deep in negative territory, a sign that more hikes will be needed to reduce or anchor inflation expectations.”

April 22 – Bloomberg (Erik Hertzberg): “Traders placed bets on a 75-bps rate hike from the Bank of Canada after Governor Tiff Macklem acknowledged the potential for rapid increases to borrowing costs to curb inflation that’s at a three-decade high. Macklem and his officials delivered the first 50-bps increase in interest rates among Group of Seven nations last week. Asked… about the possibility of moving by more than that amount at a future decision, Macklem said he was ‘not going to rule anything out.’”

Global Bubble and Instability Watch:

April 16 – Financial Times (Tommy Stubbington): “This year’s hawkish change in tack from central banks is close to ending the era of negative-yielding debt, shrinking the global tally of bonds with sub-zero yields by $11tn. Bond prices have tumbled this year as central banks move to end large-scale asset purchases and raise interest rates in their battle with soaring inflation… As a result, bonds worth $2.7tn currently trade at a yield of less than zero, the lowest figure since 2015, and a sharp plunge from more than $14tn in mid-December…”

April 17 – Financial Times (John Plender): “Economists’ definitions of so-called safe assets — those that serve as a bolt hole for nervous money in crises — are often devoid of political content. This omission is historically under-informed. Safe assets, like reserve currencies and financial centres, have largely lost their pre-eminent status thanks to war. Russia’s invasion of Ukraine serves as a reminder that the definition of a safe asset will differ according to which geopolitical camp you side with in the strategic competition between the US and China… To qualify as safe, an asset has to be highly liquid, backed by a solvent sovereign borrower — or incapable of default like gold — and reliably able to hold its value during a disaster. Yet geopolitics matters, which is why Japan, dependent on the US security guarantee, holds a higher percentage of reserves in US Treasuries than Russia does.”

April 19 – Bloomberg (Theophilos Argitis and Erik Hertzberg): “Canadian home sales posted their biggest decline since June as rising interest rates begin to cool the country’s red-hot real estate market. National home sales fell 5.4% in March from the previous month, with new listings also declining by about the same amount, according to… the Canadian Real Estate Association. Despite the decline in activity, benchmark prices still rose 1% on the month and are up 27% from a year ago.”

April 18 – Wall Street Journal (Sean McLain and Scott Patterson): “Rivian Automotive Inc. Chief Executive RJ Scaringe is warning that the auto industry could soon face a shortage of battery supplies for electric vehicles—a challenge that he says could surpass the current computer-chip shortage. Car companies are trying to lock up limited supplies of raw materials such as cobalt, lithium and nickel that are key to battery making, and many are constructing their own battery plants to put more battery-powered models in showrooms. ‘Put very simply, all the world’s cell production combined represents well under 10% of what we will need in 10 years,’ Mr. Scaringe said… ‘Meaning, 90% to 95% of the supply chain does not exist,’ he added.”

Europe Watch:

April 21 – Reuters (Ingrid Melander, Elizabeth Pineau and Tassilo Hummel): “French President Emmanuel Macron… accused his far-right rival Marine Le Pen of being in thrall to Russian President Vladimir Putin over a years-old Russian bank loan to her party during a fiery TV debate ahead of Sunday's election. While he also charged Le Pen with harbouring an undiminished desire to pull France out of the European Union (EU), she struck back with a pledge to put money back in the pockets of millions of French made poorer during his five-year presidency. The debate… was peppered with appeals of ‘don't interrupt me’ and accusations the other was not up to the job of leading France, a veto-wielding U.N. Security Council member and Europe's second-largest economy.”

April 20 – Bloomberg (Albertina Torsoli, Libby Cherry and Michael Msika): “All the polls show French President Emmanuel Macron is likely to win a second term Sunday. But from Citigroup Inc. to asset manager Amundi SA, the warnings are piling up that markets are underestimating the risk of a surprise. If nationalist Marine Le Pen upsets the incumbent, European stocks are likely to slump Monday, while French bonds would underperform German securities and the euro could even trade at parity with the dollar in coming months, according to investors and strategists.”

April 20 – Financial Times (Valentina Romei): “German producer prices surged at their fastest pace in at least 73 years, raising concerns that the eurozone’s largest economy is at risk of a serious bout of stagflation. Producer prices for industrial products were 30.9% higher in March than they were the same month last year, the sharpest increase since the data series began in 1949. The figures follow downgrades by economists of forecasts for German growth.”

April 20 – Financial Times (Guy Chazan, Joe Miller and Martin Arnold): “Rosenthal, one of Germany’s oldest porcelain manufacturers, has seen plenty of disruption in its 140-year history. But nothing has prepared it for this: the threat of a cut-off of natural gas that would bring production of its bone china plates, bowls and vases to an abrupt halt. ‘We can’t live without gas,’ says Mads Ryder, Rosenthal’s chief executive. ‘We don’t have an alternative energy source.’ The war in Ukraine is reordering the global energy landscape. Shocked by the devastation visited on Ukrainian cities by Russian bombs, the EU has imposed swingeing sanctions on Russian hydrocarbons. Coal is banned; oil could be next. Gas may also be on the agenda. But talk of a full-scale embargo on Russian energy is spreading panic in Germany, which until the war received 55% of its imported gas from Russia. The fear is that any sudden gas shut-off could paralyse large parts of the country’s industry. Martin Brudermüller, chief executive of the chemicals group BASF, says it would plunge German business into its ‘worst crisis since the second world war’.”

April 19 – Bloomberg (Philip Aldrick): “Britain faces the worst inflation shock of all major advanced economies over the next two years, the International Monetary Fund warned as it slashed its growth forecast. The global watchdog said the U.K. economy will be around 1% smaller in both 2022 and 2023 than it forecast in January. It blamed the downgrade on the cost of living crisis and slowing investment as interest rates rise to tackle rocketing consumer prices.”

April 21 – Bloomberg (Lizzy Burden): “U.K. consumer confidence plunged to the lowest since the 2008 recession, with the outlook for their personal finances and the general economy worse than during the depths of the financial crisis.”

EM Bubble Watch:

April 21 – Bloomberg (Kevin Crowley): “A barrage of shocks is building that’s unlike anything emerging markets have had to confront since the 1990s, when a series of rolling crises sank economies and toppled governments. Turmoil triggered by rising food and energy prices is already gripping countries like Sri Lanka, Egypt, Tunisia and Peru. It risks turning into a broader debt debacle and yet another threat to the world economy’s fragile recovery from the pandemic. Compounding the danger is the most aggressive monetary tightening campaign the Federal Reserve has embarked on in two decades. Rising U.S. interest rates mean a jump in debt-servicing costs for developing nations — right after they borrowed billions to fight Covid-19 — and tend to spur capital outflows. And on top of it all: the stark reality that war in Europe, which is driving the latest food and energy shock, shows few signs of ending.”

April 17 – Wall Street Journal (Yuka Hayashi, Jason Douglas and Chao Deng): “The war in Ukraine is making it tougher for many emerging-market governments to make debt payments to foreign creditors, fueling concerns of potential crises that could shake markets and weaken the global economic recovery. Many of these countries accumulated mountains of debt during the past decade while inflation and interest rates were low and in the past two years when Covid-19-related costs were climbing. Then Russia’s invasion of its neighbor and the West’s sanctions sent food, energy and other prices soaring at a time when many major central banks are raising interest rates to tame inflation. Now, from Islamabad to Cairo to Buenos Aires, government officials are struggling with rising import prices and debt bills on top of the continuing pandemic.”

April 21 – Bloomberg (Rajesh Kumar Singh): “An already sweltering summer and acute coal shortages are triggering blackouts across parts of India, raising fears of a new power crisis that could roil Asia’s third-biggest economy. A surge in demand for electricity has prompted states including Punjab and Uttar Pradesh in the north and Andhra Pradesh in the south to cut off supply. The disruption, as long as eight hours in some places, is forcing customers to either endure the heat or look for costlier back-up options.”

Japan Watch:

April 17 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Haruhiko Kuroda said recent rapid yen moves were fueling negative effects on the economy in remarks that sparked a strengthening of the yen. ‘Recent yen moves have been very rapid,’ Kuroda said… ‘A significantly weak yen or very rapid moves fuel the negative effects.’ Kuroda is escalating his rhetoric after describing the Japanese currency as ‘somewhat weak’ earlier this month. Still, Kuroda maintained his view that a weak yen is positive for the economy overall.”

April 20 – Bloomberg (Chikako Mogi and Toru Fujioka): “The Bank of Japan reiterated its ultra loose monetary policy with four days of unscheduled bond buying as the widening interest rate gap with the U.S. puts upward pressure on bond yields and weakens the yen. The move comes as Japan’s benchmark 10-year yield stayed elevated at the 0.25% upper limit of the BOJ’s tolerated trading band despite announcing unlimited bond purchases for the first time since late March.”

April 21 – Bloomberg (Ken McCallum and Ayai Tomisawa): “Risk aversion, the likes of which hasn’t been seen in recent decades, is slamming Japan’s usually staid corporate bond market as climbing yields and the yen’s plunge to a 20-year low limit debt sales to some of the safest, most conservative issuers. An astonishing fact emerges when debt sales data for Japan’s fiscal year started this month are examined: issuance by power utilities made up fully 65% of all deals, the highest proportion for any April or year… back to 1999. By comparison, those firms, all with investment-grade scores from local rating firms, comprised 16% of all offerings last fiscal year.”

Covid Watch:

April 18 – Wall Street Journal (Alex Janin): “BA.2 is spreading in the U.S., although few want to talk about it. The Omicron subvariant is contributing to school and work absences, yet two years of dealing with Covid-19 have made people tired of taking precautions, getting tested and asking about other people’s status, say physicians, psychologists and behavioral scientists. If this is a pandemic wave, then many have decided the best response is a weary shrug.”

April 16 – Wall Street Journal (Josh Mitchell): “Several million workers who dropped out of the U.S. workforce during the Covid-19 pandemic plan to stay out indefinitely because of persistent illness fears or physical impairments… About three million workforce dropouts say they don’t plan to return to pre-Covid activities—whether that includes going to work, shopping in person or dining out—even after the pandemic ends, according to a monthly survey conducted over the past year… The workforce dropouts tend to be women, lack a college degree and have worked in low-paying fields. The research team has named this phenomenon ‘long social distancing’ and believes it will be one of the lasting scars of the Covid-19 pandemic.”

April 19 – Reuters (Bhanvi Satija): “The BA.2 sub-variant of Omicron and its sublineage BA.2.12.1 is estimated to make up more than 90% of the coronavirus variants in the United States as of April 16, the U.S. Centers for Disease Control and Prevention (CDC) said… Overall cases have dropped sharply nationally since hitting record levels in January, but COVID-19 infections have been on the rise during the last few weeks, particularly in Northeast states like New York, and Connecticut.”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 18 – Bloomberg (Pratik Parija, Mai Ngoc Chau and Ditas Lopez): “Soaring fertilizer costs have rice farmers across Asia scaling back their use, a move that threatens harvests of a staple that feeds half of humanity and could lead to a full-blown food crisis if prices aren’t curbed. From India to Vietnam and the Philippines, prices of crop nutrients crucial to boosting food production have doubled or tripled in the past year alone. Lower fertilizer use may mean a smaller crop. The International Rice Research Institute predicts that yields could drop 10% in the next season, translating to a loss of 36 million tons of rice, or the equivalent of feeding 500 million people.”

Geopolitical Watch:

April 17 – Associated Press (Hyung-Jin Kim): “North Korea has test-fired a new type of tactical guided weapon designed to boost its nuclear fighting capability…, a day before its chief rivals the United States and South Korea begin annual drills that the North views as an invasion rehearsal. The 13th weapons test this year came amid concerns that North Korea may soon conduct an even larger provocation. That may include a nuclear test in an effort to expand the country’s arsenal and increase pressure on Washington and Seoul while denuclearization talks remain stalled.”

April 20 – Reuters (Meg Shen and Twinnie Siu): “Taiwan is a part of China and no one can change that, Chinese Defense Minister Wei Fenghe said… during a rare phone call with U.S. Defense Secretary Lloyd Austin, according to a statement from Beijing. ‘If the Taiwan issue were not handled properly, it would have a damaging impact on Sino-U.S. relations,’ Wei added…”

Friday Evening Links

[AP] Ukraine: Russians shift elite units to the new battleground

[Reuters] Ukraine's Zelenskiy: allies finally delivering weapons Kyiv asked for

[Reuters] Kyiv accuses Moscow of 'imperialism' after general's southern Ukraine comment

[Yahoo/Bloomberg] Stocks Fall for Third Week on Earnings, Rate Risks: Markets Wrap

[Yahoo/Bloomberg] Oil Posts Weekly Loss as China Lockdowns Amplify Demand Fears

[Yahoo/Bloomberg] Fed’s Mester Backs ‘Methodical’ Rate Hikes, Not a 75 Basis-Point Move

[Yahoo/Bloomberg] Four SPAC Offerings Aborted as Investors Flee Blank Checks

[WSJ] New Details of Shanghai Nursing Home Covid Deaths Suggest City Is Overwhelmed

[FT] Russia seeks control of southern Ukraine, says top Russian commander

Friday Afternoon Links

[Yahoo/Bloomberg] Stocks Fall on Earnings, Rate Risks; S&P Down 2%: Markets Wrap

[Reuters] Oil Set for Weekly Loss as China Lockdowns Amplify Demand Fears

[Yahoo/Bloomberg] Lagarde Says ECB Bond Buys Will Likely End Early in Third Quarter

[Yahoo/Bloomberg] BOJ Must Keep ‘Aggressive’ Easing Even as Yen Drops, Kuroda Says

[Reuters] Canada March producer prices up 4.0%, biggest monthly gain in 66 years

[Reuters] Hedge funds lure biggest inflow in seven years in first quarter, data provider says