Friday, October 14, 2022

Weekly Commentary: New Cycle Realities

It would have been a nonevent; inconsequential. Confirming New Cycle Dynamics, the Truss government’s “mini budget” has unleashed absolute mayhem. Pension funds blowing up. Emergency central bank rescue operations. Global market instability. UK’s Treasury Secretary sacrificed after a mere 38 days, while an entire government hangs in the balance.

Friday evening Financial Times headlines: “Gilts in Fresh Slide as Investors Say Truss U-turn Did Not Go Far Enough.” “Can Liz Truss Survive as UK Prime Minister?”; “Austerity Beckons as Truss Seeks to Restore Britain’s Reputation with Investors.” And “UK Debacle Shows Central Bank ‘Tough Love’ is Here to Stay.”

The world has changed right before our eyes. It has been one of my favored rhetorical questions for the past couple decades: Is “money” (monetary inflation) the solution or the problem? The answer is obvious – has been for some time, and I’ll assume central bankers have accepted the harsh reality.

Years of unprecedented monetary inflation created false realities. The perception of endless cheap (free) “money” distorted how our market, economic, financial, political and social systems function. The long-overdue adjustment period has commenced, and there’s every reason to expect it to be especially brutal. So quickly, so many things are different. There were this week more tremors and that nagging feeling the ground was about to give way.

I feel for Liz Truss. She could very well be the shortest-serving Prime Minister in UK history. Central bankers and bond markets have merrily accommodated many a crazy budget. Now they’re running scared, leaving stunned politicians to try to figure out what can work in today’s new reality.

In a microcosm of unfolding global phenomena, the UK faces dual fiscal and monetary policy crises of confidence. And to this point in the UK, uncompromising markets want nothing to do with additional fiscal spending and monetary stimulus.

October 12 – Reuters (Dhara Ranasinghe, Harry Robertson, Tommy Wilkes): “Bank of England Governor Andrew Bailey has been unequivocal: the central bank will end emergency support for bonds on Friday. Yet with markets showing few signs of stabilising, the BoE may have little choice but to come back with more. Britain's government borrowing costs jumped again on Wednesday with 20- and 30-year bond yields hitting 20-year highs after Bailey told pension funds on Tuesday they had three days to fix liquidity problems before emergency BoE bond-buying ends. The central bank is caught between a rock and a hard place. On the one hand it is navigating what it has called a ‘material risk to financial stability’ with the gilt market rout exposing vulnerabilities in the pensions sector. But buying bonds doesn’t sit well with the BoE's mandate to control surging inflation and BoE officials are anxious to avoid giving the impression that they are buying bonds to support the fiscal plans of the government.”

After a decade of becoming fully embedded in market perceptions, prices and structures, as well as within governmental planning and budgets, business strategies, economic structure and the like – how do central bankers these days signal that “whatever it takes” has run its course? Can it be done without unleashing instability virtually everywhere?

Prime Minister Truss and BOE Governor Bailey could commiserate over a cup of English breakfast tea. Truss is forced to placate the bond market, while trying to avoid the appearance of a wimpy pushover quickly caving on her government’s entire fiscal agenda. It’s messy U-turns and the short-timer look of indecision.

Bailey must prevent bond market and pension system breakdowns, while not completely opening the monetary floodgates with inflation raging and the pound fragile. The BOE’s emergency bond support was to expire Friday, though few believe that’s doable. Most remain convinced that central banks are forever subjugated to “whatever it takes” market crash protection. For the BOE, it’s messy U-turns and the unsettling look of indecision. Credibility hanging in the – it’s dangling.

UK gilt yields traded as high as 4.63% in Wednesday trading, dropping to a low of 3.89% early Friday, before ending the week up 10 bps to 4.34%. Two-year UK yields traded at a 4.40% high intraday Monday, with a Friday low of 3.46% (closed the week down 25bps to 3.87%). The pound traded at a low of 1.092 Wednesday and a high of 1.138 on Thursday, before ending the week up 0.8% to 1.118.

It was an ominous week for global bank CDS. UK’s Barclays Bank CDS jumped 11 to 147 bps, the high back to July 2013 (“taper tantrum”). Barclays CDS traded at 105 bps on September 15th. NatWest CDS increased four to 131 bps, and Lloyds rose seven to 97 bps (trading this week to the high since 2016).

Curiously, US banks were again up near the top of this week’s CDS leaderboard, with the majors all seeing CDS Friday closes at highs since March 2020. JPMorgan CDS rose eight to 112 bps, with Bank of America up nine to 121 bps. Citigroup CDS rose seven to 139 bps, Goldman 11 to 142 bps, and Morgan Stanley nine to 140 bps. Elsewhere, Deutsche Bank CDS increased four to 173 bps (trading intraday Wednesday to 189 bps); Societe Generale 13 to 110 bps (intraday Thursday to 120 bps); and troubled Credit Suisse 12 to 318 bps (intraday Thursday to 341 bps).

Thursday’s stock market volatility was noteworthy. The S&P500 traded down to 3,492 following worse-than-expected CPI data, only to post a stunning 5.5% intraday rally (closing the session up 2.6%). The S&P500 then traded up to 3,712 in early-Friday trading, before reversing 3.5% lower to end the week at 3,583 (down 1.6%).

U.S. investment-grade corporate spreads-to-Treasuries widened 11 bps this week to 1.63 percentage points, the widest level since May 2020. More support this week for the singular global Bubble thesis.

October 10 – Reuters (Davide Barbuscia): “Government bond prices around the world are moving in tandem, reducing investors’ ability to diversify their portfolios and raising concerns of being blindsided by market gyrations. Correlations between currency-adjusted returns on the government debt of countries such as the U.S., Japan, the U.K. and Germany are at their highest level in at least seven years, data from MSCI showed, as central banks around the world ramp up their fight against inflation.”

October 11 – Wall Street Journal (Matt Wirz and Caitlin Ostroff): “Fallout from the crisis in U.K. financial markets has hit a faraway corner of Wall Street: the trillion-dollar market for collateralized loan obligations. Once a niche product, CLOs are now widely held by investors around the world, including the British pensions, insurers and funds that got caught by the recent crash in U.K. currency and government-bond markets. Many of them sold CLO bonds to meet margin calls, sending prices of the securities tumbling well below their intrinsic value, analysts and fund managers said.”

Sometimes you just scratch your head…

October 10 – Bloomberg (Ott Ummelas and Niclas Rolander): “Former Federal Reserve Chair Ben S. Bernanke and two US-based colleagues won the 2022 Nobel Prize in Economics for their research into banking and financial crises. Douglas Diamond, Philip Dybvig and the one-time central banker will share the 10-million-kronor ($885,000) award, the Royal Swedish Academy of Sciences announced… ‘The laureates have provided a foundation for our modern understanding of why banks are needed, why they are vulnerable and what to do about it,’ John Hassler, professor of Economics and member of the prize committee, told reporters... ‘In the laureates’ work, it is shown that deposit insurance is a way of short-circuiting the dynamics behind bank runs. With deposit insurance, there is no need to run to the bank.’”

No comment.

On second thought… Few seem to appreciate the irony of Bernanke receiving the Nobel Prize in Economics just as central bank inflationist doctrine faces a monumental crisis of confidence. He won his Nobel Prize for his research on bank runs. No one has done more to ensure a run on global market instruments.

The correct interpretation of the 1920s, then, is not the popular one - that the stock market got overvalued, crashed, and caused a Great Depression. The true story is that monetary policy tried overzealously to stop the rise in stock prices. But the main effect of the tight monetary policy, as Benjamin Strong had predicted, was to slow the economy - both domestically and, through the workings of the gold standard, abroad… This interpretation of the events of the late 1920s is shared by the most knowledgeable students of the period, including Keynes, Friedman and Schwartz, and other leading scholars of both the Depression era and today… monetary policy had already turned exceptionally tight by late 1927… A small compensation for the enormous tragedy of the Great Depression is that we learned some valuable lessons about central banking. It would be a shame if those lessons were to be forgotten.” Ben Bernanke, “On Milton Friedman’s Ninetieth Birthday,” November 8, 2002

Bernanke concluded his 2002 speech: “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

He went and did it, with Dr. Bernanke the (now wealthier) standard-bearer of history’s most disastrously flawed economic ideology. Bernanke: “[NY Fed president Benjamin] Strong died from tuberculosis early in 1928, and the Fed passed into the control of a coterie of aggressive bubble-poppers…” Worse yet, the former Fed chair believes the tragedy of the Great Depression would have been avoided had the Fed printed money to recapitalize the U.S. banking system.

“Roaring Twenties” excesses were not the problem. Credit and speculative Bubbles that emerged from the First World War (and nurtured by the fledging Federal Reserve) do not factor into his analysis. And market and economic structures that evolved over years of loose financial conditions are irrelevant. Simply point blame to Fed incompetence (for not inflating), along with the gold standard.

We’re already seeing evidence of the failure of Bernanke-style central bank inflationism. The Bank of England’s printing press has to somehow perform as buyer of last resort for a collapsing bond market Bubble, while also reining in inflation. Bernanke ridiculed the Bank of Japan until they finally succumbed to egregious money printing. The resulting debacle is at the cusp of being exposed.

Yet there’s an even more historic experiment in Bernanke inflationism that continues to unfold in China. The money and Credit floodgate is propped wide open. And Beijing will surely recapitalize its massively bloated banking system as they see fit. But will ongoing monetary inflation forestall Bubble collapses? Of course not. Will avoiding bank runs prove decisive in sustaining China’s boom cycle? Bank runs or not, China’s Credit system is on an unsustainable course. It’s nothing short of epic “Terminal Phase Excess” – with massive Credit growth of rapidly deteriorating quality feeding exponential growth in systemic risk.

China’s September growth in Aggregate Financing jumped to a much stronger-than-expected $490 billion, up from August’s $340 billion and 22% ahead of September 2021 ($404bn) – to a record $46.9 TN. Year-to-date growth of $3.85 TN is about 12% above comparable 2021 – and only 6.5% below 2020’s historic Credit onslaught. Aggregate Financing posted 10.5% one-year growth, perilously racing ahead as the deeply maladjusted Chinese economy stagnates. Recipe for currency crisis.

Bank Loans expanded $344 billion, rising from August’s $174 billion and almost 50% ahead of September 2021 ($230bn). Year-to-date Loan growth of $2.51 TN is 8% ahead of comparable 2021 and 11% above 2020.

Corporate Loans surged $267 billion, double both August and September 2021. At $2.01 TN, y-t-d growth is running 39% ahead of comparable 2021. Year-over-year growth rose to 13.4%, the strongest pace since February 2016. Corporate Loans expanded 26.3% over two years, 41.9% over three, and 73.9% over five years.

Consumer Loans expanded $90 billion, up from August’s $64 billion, while still 18% below September 2021. Year-to-date growth of $474 billion is 46% below comparable 2021 and 44% below 2020. One-year growth of 7.2% is the weakest in data back to 2007. A historic consumer (chiefly mortgage) lending boom has faltered, with two-year growth slowing to 21%, three-year to 39%, five-year to 91%, and 10-year growth to 380%.

Government Bonds increased $78 billion during September, up from August’s $42 billion, but down from the year ago $111 billion. Y-t-d growth of $823 billion was 35% ahead of comparable 2021, and only 12% below 2020’s record issuance. Government bonds expanded 16.9% over one year, 32.7% over two, and 59% over three years.

China’s stocks rallied, yet it was an ominous week for Chinese finance. An index of Chinese dollar developer bonds dropped to a record low (yield up to 26.8%). Evergrande yields surged 40 percentage points to 227%. Country Garden yields jumped 13 percentage points to a record 66.5%. Sunac yields rose 26 percentage points (135%), Lonfor 28 percentage points (148%), and Kaisa 38 percentage points (187%).

Indicative of escalating systemic risk, Chinese bank CDS jumped to multi-year highs. China Construction Bank rose 13 to 143 bps; Industrial and Commercial Bank 12 to 137 bps; Bank of China 10 to 136 bps; and China Development Bank 12 to 126 bps. “AMC” China Huarong CDS jumped 41 to 635 bps (began the year at 261bps). China sovereign CDS traded up to 115 bps Thursday, the high since early-2017. The renminbi lost 1.1% versus the dollar, trading near the low back to 2008.

Meanwhile, Italian 10-year yields rose nine to 4.79%, closing the week at the highest yield since 2012. Japanese 10-year JGB yields are at the BOJ’s 25 bps ceiling, while the yen sank another 2.3% (down 22.6% y-t-d) to 30-year lows. Vulnerable EM bonds were under intense pressure. Yields surged 128 bps in Colombia (14.36%), 74 bps in Hungary (10.66%), 54 bps in Romania (9.05%), 38 bps in Czech Republic (5.48%), and 37 bps in Poland (7.69%). Yields were up 19 bps in both Mexico (9.83%) and South Africa (11.27%).

The dominoes are aligning for a major synchronized global market crisis.

October 12 – Financial Times (Laura Noonan): “The Bank of England has said ‘lessons must be learned’ from the pensions crisis that triggered an unprecedented intervention in the UK gilt markets, and stressed the need for action to mitigate similar risks in other parts of the financial sector. ‘While it might not be reasonable to expect market participants to insure against all extreme market outcomes, it is important that lessons are learned from this episode and appropriate levels of resilience ensured,’ the BoE’s financial policy committee said… The BoE also warned that UK households and companies were under strain as high interest rates, high energy costs and the cost of living crisis combined to make it harder for them to pay bills and loans. Mortgages were a particular concern, with the bank warning that household debt levels could hit historic highs.”

The UK is a microcosm. Lessons will finally be learned – but it will be the hard way.

For the Week:

The S&P500 dropped 1.6% (down 24.8% y-t-d), while the Dow recovered 1.2% (down 18.4%). The Utilities fell 2.5% (down 14.4%). The Banks increased 0.6% (down 25.7%), and the Broker/Dealers sank 4.3% (down 14.5%). The Transports increased 0.2% (down 24.1%). The S&P 400 Midcaps declined 1.0% (down 21.0%), and the small cap Russell 2000 lost 1.2% (down 25.1%). The Nasdaq100 dropped 3.1% (down 34.5%). The Semiconductors sank 8.2% (down 45.2%). The Biotechs gained 0.5% (down 16.4%). With bullion dropping $50, the HUI gold equities index fell 7.2% (down 29.1%).

Three-month Treasury bill rates ended the week at 3.615%. Two-year government yields surged 19 bps to 4.50% (up 376bps y-t-d). Five-year T-note yields rose 13 bps to 4.27% (up 301bps). Ten-year Treasury yields gained 14 bps to 4.02% (up 251bps). Long bond yields jumped 15 bps to 4.00% (up 209bps). Benchmark Fannie Mae MBS yields surged 19 bps to 5.92% (up 385bps).

Greek 10-year yields rose 11 bps to 4.92% (up 361bps y-t-d). Italian yields gained nine bps to 4.79% (up 362bps). Spain's 10-year yields jumped 10 bps to 3.52% (up 295bps). German bund yields surged 15 bps to 2.35% (up 252bps). French yields jumped 14 bps to 2.94% (up 274bps). The French to German 10-year bond spread narrowed about one to 59 bps. U.K. 10-year gilt yields rose 10 bps to 4.34% (up 336bps). U.K.'s FTSE equities index fell 1.9% (down 7.1% y-t-d).

Japan's Nikkei Equities Index was little changed (down 5.9% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.25% (up 18bps y-t-d). France's CAC40 rallied 1.1% (down 17.1%). The German DAX equities index gained 1.3% (down 21.7%). Spain's IBEX 35 equities index increased 0.7% (down 15.3%). Italy's FTSE MIB index was little changed (down 23.5%). EM equities were mixed. Brazil's Bovespa index sank 3.7% (up 6.9%), and Mexico's Bolsa index slipped 0.6% (down 14.7%). South Korea's Kospi index declined 0.9% (down 25.7%). India's Sensex equities index dipped 0.5% (down 0.6%). China's Shanghai Exchange Index rallied 1.6% (down 15.6%). Turkey's Borsa Istanbul National 100 index rose 1.7% (up 95.2%). Russia's MICEX equities index increased 0.3% (down 48.5%).

Investment-grade bond funds posted outflows of $4.359 billion, and junk bond funds reported negative flows of $713 million (from Lipper).

Federal Reserve Credit slipped $3.4bn last week to $8.725 TN. Fed Credit was down $176bn from the June 22nd peak. Over the past 161 weeks, Fed Credit expanded $4.998 TN, or 134%. Fed Credit inflated $5.914 Trillion, or 210%, over the past 518 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week were little changed at $3.325 TN - near the low since April 2020. "Custody holdings" were down $158bn, or 4.5%, y-o-y.

Total money market fund assets gained $10.3bn to $4.588 TN. Total money funds were up $64bn, or 1.4%, y-o-y.

Total Commercial Paper expanded $12.1bn to $1.256 TN. CP was up $83bn, or 7.1%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 26 bps to 6.92% (up 387bps y-o-y) - the high since April 2002. Fifteen-year rates jumped 19 bps to 6.09% (up 379bps) - the high since July 2008. Five-year hybrid ARM rates spiked 45 bps to 5.81% (up 326bps) - the high since December 2008. Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 12 bps to 7.17% (up 396bps) - the high since December 2008.

Currency Watch:

October 11 – Financial Times (Edward Luce): “A French leader once called the dollar America’s ‘exorbitant privilege’. Today’s world might go for blunter language. Vector of pain, anyone? Green monster? Whatever we call it, the strong dollar’s victims have one culprit in mind — the Federal Reserve. Even Josep Borrell, the EU’s foreign policy chief, is joining in. This week he warned that the Fed was exporting recession in the same way the euro crisis was imposed by Germany’s post-2008 dictates. Much of the world is now in danger of becoming Greece. Such finger-pointing is mostly unfair to the Fed. The US central bank clung for too long to its ‘team transitory’ dismissal of inflation and is thus tightening at speed to restore its credibility.”

October 11 – Bloomberg: “Bearish bets on the yuan are gaining momentum after the Biden administration curbed China’s access to US semiconductor technology and reports endorsing Beijing’s Covid Zero policy dashed hopes the curbs would be lifted soon. Option traders are boosting bearish wagers on the offshore yuan as indicated by the one-month risk reversal, which hit the highest level since May 10. Onshore yuan implied volatility for the same period rose to the highest on record as demand for protection against yuan weakness grew.”

For the week, the U.S. Dollar Index added 0.5% to 113.31 (up 18.4% y-t-d). For the week on the upside, the British pound increased 0.8%, the Singapore dollar 0.4% and the Norwegian krone 0.3%. On the downside, the Australian dollar declined 2.8%, the Japanese yen 2.3%, the Brazilian real 2.3%, the South African rand 1.4%, the South Korean won 1.1%, the Swiss franc 1.1%, the Canadian dollar 1.1%, the New Zealand dollar 0.9%, the Swedish krona 0.9%, the euro 0.2% and the Mexican peso 0.2%. The Chinese (onshore) renminbi declined 1.06% versus the dollar (down 11.63% y-t-d).

Commodities Watch:

October 9 – Bloomberg (Eddie Spence and Sing Yee Ong): “There’s a global migration underway in the gold market, as western investors dump bullion while Asian buyers take advantage of a tumbling price to snap up cheap jewelry and bars. Rising rates that make gold less attractive as an investment mean that large volumes of metal are being drawn out of vaults in financial centers like New York and heading east to meet demand in Shanghai’s gold market or Istanbul’s Grand Bazaar. In fact, it can’t move fast enough. Logistical issues combined with quirks of the market are making it difficult for traders to get enough bullion where it’s wanted. As a result, gold and silver are selling at unusually large premiums over the global benchmark price in some Asian markets.”

The Bloomberg Commodities Index fell 3.0% (up 14.6% y-t-d). Spot Gold dropped 3.0% to $1,644 (down 10.1%). Silver sank 9.2% to $18.28 (down 21.6%). WTI crude retreated $7.03 to $85.61 (up 14%). Gasoline fell 3.8% (up 18%), and Natural Gas dropped 4.4% to $6.45 (up 73%). Copper recovered 1.1% (down 23%). Wheat declined 2.3% (up 12%), while Corn added 1.0% (up 16%). Bitcoin lost $360, or 1.9%, this week to $19,200 (down 58.6%).

Market Instability Watch:

October 10 – Bloomberg (Liz Capo McCormick, Garfield Reynolds and Michael MacKenzie): “Everywhere you turn, the biggest players in the $23.7 trillion US Treasuries market are in retreat. From Japanese pensions and life insurers to foreign governments and US commercial banks, where once they were lining up to get their hands on US government debt, most have now stepped away. And then there’s the Federal Reserve, which a few weeks ago upped the pace that it plans to offload Treasuries from its balance sheet to $60 billion a month.”

October 8 – Bloomberg (Alice Gledhill and Libby Cherry): “Still rattled by the meltdown in the UK bond market, traders are now turning their sights to Italy, where the risk of fiscal profligacy by another newly elected government in Europe looms large. Giorgia Meloni’s incoming right-wing coalition is due to send its draft budget to the European Commission by Oct. 15. Any sign that leaders of one of the region’s most indebted countries are looking to ramp up borrowing could trouble investors, prompting a selloff in the nation’s debt.”

October 11 – Bloomberg (Jan-Patrick Barnert and Myriam Balezou): “Credit Suisse Group AG faces a capital shortfall of as much as 8 billion Swiss francs ($8bn) in 2024, analysts at Goldman… estimate, underscoring the challenges for the troubled lender as it nears what’s likely to be a deep restructuring. At the very least, the… firm is facing a hole of 4 billion francs, given the need to restructure the investment banking operations at a time of ‘minimal’ capital generation, analysts led by Chris Hallam wrote. That means it would be ‘prudent’ for the lender to raise capital.”

October 10 – Bloomberg (Chikako Mogi and Masaki Kondo): “Foreign investors dumped a record amount of Japanese bonds last month amid a global debt rout as major central banks rushed to raise rates to fight inflation. Overseas funds offloaded 6.39 trillion yen ($43.9bn) of Japanese bonds in September… As a global bond selloff drove up yields sharply at the time, 10-year JGB yields climbed to the upper limit of the Bank of Japan’s curve control range, spurring additional purchases from the central bank.”

October 14 – Bloomberg (Selcuk Gokoluk): “Emerging market governments that borrowed heavily in dollars when interest rates were low are now facing a surge in refinancing costs, evoking flashbacks to Asia’s 1990s debt crisis and stoking fears of a default wave. Sovereign dollar bonds from a third of the countries in Bloomberg’s EM Sovereign Dollar Debt Index are trading with a spread of 1000 bps or more over US Treasuries, a generally accepted metric of distress. Nigeria’s finance minister said this week that Africa’s biggest economy is seeking to extend the tenors of some of its debt, but added that eurobonds won’t be included in the plan. The surge in yields is reminding investors of previous emerging debt crises, notably the one that swept Asia in 1997 when collapsing domestic currencies propelled country after country into default.”

October 13 – Financial Times (Michael Stott): “Emerging markets that have coped well with the surge in global borrowing costs so far could find themselves in trouble if episodes such as the turbulence in the UK government bond market spread, a top IMF official has warned. Ilan Goldfajn, head of the IMF’s western hemisphere division, told the Financial Times that, while emerging markets had so far been spared a rush into dollar-based assets, investors may flee into markets such as US Treasuries if turbulence intensifies. ‘It could be the case that what we saw in the UK . . . could become a more generalised vulnerability so that markets become more disorderly,’ Goldfajn said… ‘In this world something very important will happen for emerging markets . . . the flight to safety.’”

UK Crisis Watch:

October 14 – Financial Times (Jasmine Cameron-Chileshe, George Parker and Sebastian Payne): “Liz Truss, UK prime minister, has appointed Jeremy Hunt to replace Kwasi Kwarteng as chancellor and scrapped corporation tax cuts set out in the government’s ‘mini’ Budget less than a month ago. The government announced the appointment of Hunt, the former health and foreign secretary, who is from the left of the Conservative party, ahead of a press conference at which Truss abandoned Kwarteng’s plan to cut corporation tax. ‘We need to act now to reassure the markets of our fiscal discipline,’ Truss said. ‘It is clear that parts of our ‘mini’ Budget went further and faster than the markets were expecting. So the way we are delivering our mission right now has to change.’”

October 11 – Reuters (Pete Schroeder and David Milliken): “Bank of England Governor Andrew Bailey said on Tuesday that British pension funds and other investors hit hard by a slump in bond prices had just three days left to fix their problems before the central bank would withdraw support. Only hours earlier, the BoE expanded its programme of daily bond purchases to include inflation-linked debt, citing a ‘material risk’ to British financial stability and ‘the prospect of self-reinforcing 'fire sale' dynamics’. But speaking in Washington late in the day, Bailey was clear that he had no intention of extending purchases of bonds beyond Friday when they are due to stop. ‘We have announced that we will be out by the end of this week. We think the rebalancing must be done,’ Bailey said at an event organised by the Institute of International Finance. ‘My message to the funds involved and all the firms involved managing those funds: You've got three days left now. You've got to get this done.’”

October 12 – Bloomberg (Philip Aldrick): “Governor Andrew Bailey put the Bank of England’s credibility on the line with a pledge to end emergency gilt purchases as scheduled on Friday, in the face of mounting market pressure to extend the program. The central bank has already seen its credibility called into question after a lackluster initial response to rocketing inflation and now Bailey finds himself boxed in: If he holds the line the UK could see another punishing surge in bond yields that would cause more economic damage; if he backs down, his reputation will be in tatters. ‘Bailey will have to walk these comments back,’ said Erik Nelson, a currency strategist at Wells Fargo. ‘This is looking like an increasingly untenable situation.’”

October 11 – Bloomberg (Libby Cherry and James Hirai): “The Bank of England is expanding the scope of its bond purchases to include inflation-linked debt in an effort to avert what it called a ‘fire sale’ that threatens financial stability. It’s the second time this week the central bank has added to its arsenal of tools aimed at curbing market turbulence. The move, coming on the heels of Monday’s record selloff in inflation-linked debt, had the immediate effect of bringing some calm to the market… ‘The BOE is clearly playing gilt selloff whack-a-mole,’ said Antoine Bouvet, senior rates strategist at ING Groep NV. ‘The policy of consistently acting at the last minute without putting a more credible long-term plan in place is unnerving for markets.’”

October 11 – Bloomberg (Libby Cherry, Mumbi Gitau and Alice Gledhill): “The Bank of England may be forced to push back a long-awaited plan to start selling bonds this month after a fresh bout of market panic. The central bank has already postponed a so-called active quantitative tightening program to the end of the month and has had to start buying debt to prop up the market. Many investors and analysts are now betting bond sales will be delayed even longer. ‘I would imagine they will keep kicking the can down the road until the market finds more stable footing,’ said James Lindley, a portfolio manager at Columbia Threadneedle. ‘The bank is going to be far, far more nervous about potentially adding to the dysfunction of the gilt market.’”

October 10 – Bloomberg (David Goodman and Joe Mayes): “British authorities’ efforts to reassure investors fell largely flat after a series of announcements on Monday failed to arrest a rout in UK assets, threatening to tip a $1 trillion part of the pensions industry into chaos. Prime Minister Liz Truss’s government signaled U-turns on issues that unsettled investors. The Bank of England extended its intervention in bond markets, and Chancellor of the Exchequer Kwasi Kwarteng brought forward a major fiscal statement by almost a month.”

October 12 – Bloomberg (Kitty Donaldson and Joe Mayes): “Prime Minister Liz Truss reiterated a pledge not to cut public spending, as pressure mounted on her government to explain how it will pay for its massive package of tax cuts. ‘Absolutely,’ Truss replied when asked in the House of Commons if she would stick to her promise on spending made repeatedly during the Conservative Party leadership campaign. ‘What we will make sure is that over the medium-term the debt is falling, but we will do that not by cutting public spending, but by making sure we spend public money well,’ Truss said…”

October 12 – Bloomberg (Katherine Griffiths and William Shaw): “The Bank of England has warned that some UK households may face a strain over debt repayments that is as great as before the 2008 financial crisis, if economic conditions continue to be difficult. ‘It will be challenging for some households to manage the projected rises in the cost of essentials alongside higher interest rates,’ the central bank’s Financial Policy Committee said in its quarterly Financial Policy Summary report…”

Bursting Bubble and Mania Watch:

October 14 – Reuters (Lucy Raitano): “Investors with classic "60/40" portfolios are facing the worst returns this year for a century, BofA Global Research said in a note on Friday, noting that bond markets continue to see huge outflows. ‘2022 (is) a simple tale of ‘inflation shock’ causing ‘rates shock’ which in turn threatening ‘recession shock’ & ‘credit event’; inflation shock ain't over,’ BofA said… BofA said annualised returns so far in 2022 on portfolios like these are the worst in the past 100 years, while those on ‘25/25/25/25’ portfolios that hold equal portions of cash, commodities, stocks and bonds have dropped 11.9%, the worst since 2008.”

October 11 – Yahoo Finance (Alexandra Semenova): “Inflows to stocks neared a record last week as bets on a bottom forming spurred major dip-buying across U.S. equities. The optimism, however, is likely premature, according to Bank of America. Analysts at the bank said… allocations to equities reached the third-highest sum since 2008 during the five-day period, according to client data — a sign investors believe indicates that the market sell-off is nearing an end. But BofA contested the notion that the worst is behind for the stock market… noting that the $6.1 billion total of inflows was the third largest inflow in the banks data history since '08 and the fifth consecutive week of inflows… Bank of America noted that the broad-based shopping spree across U.S. equities ranged from single stocks to exchange-traded funds while the purchases spanned hedge funds, institutions, and individual investors. Institutional investors were the biggest buyers, recording their first inflow in a month and largest inflow since December 2020.”

October 13 – Financial Times (Antoine Gara): “The managers of Harvard University’s $51bn endowment have warned of substantial markdowns to come in its private equity and venture capital portfolio, predicting heavy losses for institutional investors. The largest US university investment fund expects ‘meaningful adjustments’ to its private fund holdings at the end of the year, it said…, as annual audits force private equity and venture capital funds to cut the valuations of unlisted assets. Harvard’s endowment lost 1.8% for the year ended June 30 2022…, as its portfolio of private assets mitigated a sharp drop in public stock markets.”

October 13 – Bloomberg (Richard Henderson and Amy Bainbridge): “A shift toward private markets is cushioning many of the world’s largest investors from the wreckage wrought by runaway inflation and spiraling interest rates. The big question now looming over giants from China’s $1.2 trillion sovereign wealth fund to California’s public pension, the largest in the US, is how long those private bets will remain insulated as the economic outlook darkens. The ten biggest global funds that disclose holdings in non-public markets doubled their combined weightings to assets such as private equity and credit, real estate, infrastructure and hedge funds to about a quarter of their portfolios since the global financial crisis…”

Ukraine War Watch:

October 11 – Reuters (Aleksandar Vasovic and Max Hunder): “Russia rained cruise missiles on busy Ukrainian cities on Monday in what the United States called ‘horrific strikes’, killing civilians and knocking out power and heat with its most widespread air attacks since the start of the war. Missiles tore into intersections, parks and tourist sites in the capital Kyiv and explosions were reported in Lviv, Ternopil and Zhytomyr in western Ukraine, Dnipro and Kremenchuk in the centre, Zaporizhzhia in the south and Kharkiv in the east… President Vladimir Putin said he had ordered ‘massive’ long range strikes after an attack on the bridge linking Russia to the annexed Crimean peninsula over the weekend…”

October 10 – Financial Times (Alexander Gabuev): “Russia’s latest attacks on Ukrainian cities are a sad reminder that the most horrific pages of this ugly war are still ahead of us. But they also point to something more profound: Vladimir Putin’s appetite for escalation, and the emotional nature of his decision-making. With Ukraine increasingly victorious on the conventional battlefield, the Kremlin’s response is becoming ever more erratic, disproportionate and destructive. The indiscriminate air strikes came in retaliation for blowing up the Kerch bridge to Crimea. For the Kremlin, the bridge is not only a lifeline connecting mainland Russia with the annexed peninsula (enabling military supplies, among other things), but also a symbol of Putin’s legacy… The Kremlin’s response contains two significant lessons. First, Russia still has a vast toolkit for escalation… The second lesson is Putin’s reaction to humiliating setbacks. Far from backing down, he will double down with little regard for the strategic consequences of his actions.”

October 12 – Reuters (Mark Trevelyan): “A flurry of military activity in Belarus this week has caught the attention of Ukraine and the West as a potential sign that President Alexander Lukashenko may commit his army in support of Russia's flailing war effort in Ukraine. Lukashenko has ordered troops to deploy with Russian forces near the Ukraine border, and his defence ministry says ‘combat readiness’ drills are under way. On Tuesday, the interior ministry held exercises to eliminate ‘sabotage groups’ near Yelsk, only 20 km (12 miles) from the border with Ukraine.”

October 11 – Reuters (Sabine Siebold and Philip Blenkinsop): “NATO told Moscow… it would meet attacks on allies' critical infrastructure with a ‘united and determined response’ and was monitoring Russia's nuclear forces closely as the country was ‘losing on the battlefield’ in Ukraine. NATO Secretary-General Jens Stoltenberg said ahead of a two-day meeting of the Western alliance's defence ministers in Brussels that it had not seen any changes in Russia's nuclear posture, but was ‘vigilant’.”

October 10 – Reuters (Aleksandar Vasovic and Max Hunder): “The Ukrainian energy ministry said it will halt exports of electricity to the European Union following Russian missile strikes on energy infrastructure... ‘Today's missile strikes, which hit the thermal generation and electrical substations, forced Ukraine to suspend electricity exports from Oct. 11, 2022 to stabilize its own energy system,’ the ministry said… Russia earlier on Monday launched its most widespread missile strikes on Ukraine since the start of the conflict, raining cruise missiles on cities and knocking out power supplies…”

U.S./Russia/China Watch:

October 8 – Associated Press: “China… criticized the latest U.S. decision to tighten export controls that would make it harder for China to obtain and manufacture advanced computing chips, calling it a violation of international economic and trade rules that will ‘isolate and backfire’ on the U.S. ‘Out of the need to maintain its sci-tech hegemony, the U.S. abuses export control measures to maliciously block and suppress Chinese companies,’ said Foreign Ministry spokeswoman Mao Ning. ‘It will not only damage the legitimate rights and interests of Chinese companies, but also affect American companies’ interests,’ she said. Mao also said that the U.S. ‘weaponization and politicization’ of science and technology as well as economic and trade issues will not stop China’s progress.”

October 8 – Reuters (Andrius Sytas): “NATO must do more to protect itself against Russia and President Vladimir Putin, German Defence Minister Christine Lambrecht said…, because we ‘cannot know how far Putin's delusions of grandeur can go’. ‘One thing is certain: the current situation means we need to do more together,’ Lambrecht said… ‘The brutal Russian war of aggression in Ukraine is getting more and more brutal and unscrupulous... Russia's threat of nuclear weapons shows that Russian authorities have no scruples.’”

October 14 – Reuters (Sabine Siebold): “NATO said… it would launch its annual nuclear exercise ‘Steadfast Noon’ on Monday, with up to 60 aircraft taking part in training flights over Belgium, the North Sea and Britain to practise the use of U.S. nuclear bombs based in Europe. The nuclear drills… are taking place amid heightened tensions after Russia repeatedly threatened nuclear strikes in Ukraine following major military setbacks on the battlefield there. ‘Steadfast Noon’ is likely to coincide with Moscow's own annual nuclear drills, dubbed ‘Grom’, which are normally conducted in late October and in which Russia tests its nuclear-capable bombers, submarines and missiles.”

Economic War/Iron Curtain Watch:

October 8 – Financial Times: “Two years after the US hit Huawei with harsh sanctions, the Chinese technology group’s revenue has dropped, it has lost its leadership position in network equipment and smartphones and its founder has told staff that the company’s survival is at stake. Now, China’s entire chip industry is bracing for similar pain as Washington applies the tools tested on Huawei much more broadly. Under new export controls announced on Friday, semiconductors made with US technology for use in artificial intelligence, high-performance computing and supercomputers can only be sold to China with an export licence — which will be very difficult to obtain.”

October 11 – Wall Street Journal (Yoko Kubota, Raffaele Huang and Asa Fitch): “U.S. chip-equipment suppliers are pulling out staff based at China’s leading memory-chip maker and pausing business activities there…, as they grapple with the impact of Commerce Department semiconductor export restrictions. State-owned Yangtze Memory Technologies Co. is facing a freeze in support from key suppliers including KLA Corp. and Lam Research… The suspensions follow last week’s sweeping curbs imposed by the U.S. on China’s chip sector, ostensibly to prevent American technology from advancing China’s military power, though the impact might reach further into the industry. The U.S. suppliers have paused support of already installed equipment at YMTC in recent days and temporarily halted installation of new tools... The suppliers are also temporarily pulling out their staff based at YMTC…”

October 7 – Financial Times (Derek Brower, David Sheppard, Andrew England and Felicia Schwartz): “Half a century ago, the Yom Kippur war between Israel and Arab states put a new cartel of oil producers at the centre of global politics. The Organization of Arab Petroleum Exporting Countries, including Saudi Arabia and the United Arab Emirates, halted oil supplies to the western countries that had supported Israel. It was the first global oil shock. On Wednesday, the Jewish holy day of Yom Kippur, Saudi Arabia and its oil allies — which now include Russia in the Opec+ group — moved to upend the world’s energy order again. Their decision to slash 2mn barrels a day from production targets, or 2% of global supply, might sound modest. But doing so while Brent crude was trading at a lofty $90 a barrel — almost twice its long-term historical price — is a threat to a global economy stalked by inflation and mounting consumer anxiety... And it marks a new and perhaps dangerous breach between producer and consumer countries, especially between the US and Saudi Arabia.”

October 9 – Reuters: “The Kremlin… praised OPEC+ for agreeing production cuts that had successfully countered the "mayhem" sown by the United States in global energy markets. The OPEC+ decision to cut oil production despite stiff U.S. opposition has further strained already tense relations between President Joe Biden's White House and Saudi Arabia's royal family…”

October 13 – Reuters (Emma Farge): “Moscow has submitted concerns to the United Nations about an agreement on Black Sea grain exports, and is prepared to reject renewing the deal next month unless its demands are addressed, Russia's Geneva U.N. ambassador told Reuters… The agreement, brokered by the United Nations and Turkey in July, paved the way for Ukraine to resume grain exports from Black Sea ports that had been shut since Russia invaded. Moscow won guarantees for its own grain and fertiliser exports.”

October 12 – Bloomberg: “Russia’s President Vladimir Putin said any energy infrastructure in the world is at risk after the explosions on the Nord Stream gas pipelines. The attacks were an act of terror that set ‘the most dangerous precedent,’ the Russian president told a Moscow energy forum... ‘It shows that any critically important object of transport, energy or utilities infrastructure is under threat’ irrespective of where it is located or by whom it is managed, he said.”

Inflation Watch:

October 13 – Wall Street Journal (Austen Hufford): “Inflation started in goods affected by supply-chain issues. It isn’t ending that way. While costs to transport goods have declined and supply-chain snarls are easing, prices are now rising briskly in services. Core service prices… jumped 0.8% in September from August…, driven by shelter, medical care and car insurance. Core goods prices, which exclude food and energy, were flat. For the 12 months ended September, core service prices were up 6.7%, the fastest since 1982. They are now rising faster than core goods prices, which rose 6.6% the same month, down from a peak of 12.3% in February.”

October 12 – CNBC (Jeff Cox): “Wholesale prices rose more than expected in September despite Federal Reserve efforts to control inflation… The producer price index, a measure of prices that U.S. businesses get for the goods and services they produce, increased 0.4% for the month, compared with the… estimate for a 0.2% gain. On a 12-month basis, PPI rose 8.5%, which was a slight deceleration from the 8.7% in August. Excluding food, energy and trade services, the index increased 0.4% for the month and 5.6% from a year ago, the latter matching the August increase. Food prices helped boost the increase in goods inflation, with a 1.2% monthly increase. Energy rose 0.7% after posting massive gains the previous two months.”

October 12 – Bloomberg (Julia Fanzeres): “Americans trying to keep warm this winter are poised to spend the most on heating in at least 25 years. US households face an average power bill of $1,359 this winter, the highest since at least 1997, according to the Energy Information Administration. While much of that spike is driven by higher natural gas costs, homes that rely on oil for heat -- such as in the Northeast -- will be hit even harder, with an average bill of $2,354. The outlook comes as a global shortage of diesel and natural gas set up a tough winter for households across the globe.”

Biden Administration Watch:

October 12 – Financial Times (Laura Noonan): “Joe Biden has warned that the US faces a ‘decisive decade’ in its rivalry with China, as he unveiled a national security strategy that singled out Beijing as having the intent and capability to reshape the world order. In the first such document of his presidency, Biden… wrote that his administration was ‘clear-eyed about the scope and seriousness’ of the challenge that China and Russia posed to the international order. ‘China harbors the intention and, increasingly, the capacity to reshape the international order in favor of one that tilts the global playing field to its benefit,’ Biden wrote… The national security strategy said the US faced two strategic challenges: a post-cold war competition between superpowers and transnational challenges that range from climate change to global health issues.”

October 12 – Reuters (Jarrett Renshaw, Trevor Hunnicutt, Michael Martina and David Brunnstrom): “The White House rolled out a long-delayed national security strategy on Wednesday that seeks to contain China's rise while reemphasizing the importance of working with allies to tackle challenges confronting democratic nations. The 48-page document, which was delayed by Russia's invasion of Ukraine, includes no major shifts in thinking and introduces no major new foreign policy doctrines. Instead, it highlights the view that U.S. leadership is the key to overcoming global threats like climate change and the rise of authoritarianism.”

October 10 – Bloomberg: “The Biden administration’s new restrictions on technology exports to China could undercut the country’s ability to develop wide swaths of its economy, from semiconductors and supercomputers to surveillance systems and advanced weapons. The US Commerce Department on Friday unveiled sweeping regulations that limit the sale of semiconductors and chip-making equipment to Chinese customers, striking at the foundation of the country’s efforts to build its own chip industry. The agency also added 31 organizations to its unverified list, including Yangtze Memory Technologies Co. and a subsidiary of leading chip equipment maker Naura Technology Group Co., severely limiting their ability to buy technology from abroad.”

October 11 – Bloomberg (Justin Sink and Steven T. Dennis): “President Joe Biden voiced his fury with Saudi Arabia over OPEC+ oil production cuts Tuesday, accusing the kingdom of allying itself with Russia and vowing to engage with US lawmakers clamoring to punish Riyadh. ‘There’s going to be some consequences for what they’ve done, with Russia,’ Biden said… The president added that he believes it’s time for the US to rethink its relationship with Saudi Arabia. But he and senior administration officials also conceded that a legislative plan to retaliate was unlikely to materialize until after November’s midterm elections, underscoring the complex calculations the US faces as it weighs a longtime partnership that has quickly soured.”

October 12 – Reuters (Jane Lanhee Lee, Karen Freifeld and Akriti Sharma): “The U.S. is scrambling to tackle unintended consequences of its new export curbs on China's chip industry that could inadvertently harm the semiconductor supply chain, people familiar with the matter said. Hours before a new restriction took effect, South Korean memory chipmaker SK Hynix Inc said it got authorization from the United States to receive goods for its chip production facilities in China without additional licensing imposed by the new rules.”

Federal Reserve Watch:

October 10 – Bloomberg (Alexandra Harris): “The unwind of the Federal Reserve’s balance sheet is running at its maximum capacity, though just how long it could go depends on whether global bond markets can continue to function without incident. Goldman Sachs strategists say any volatility shock will lead to further deterioration in market liquidity, something that global central banks are unlikely to tolerate. Supply of liquidity has been poor, they note, with top-of-book market depth in several places close to its worst levels in five years. Bond markets are already starting to show lines of massive dislocation as trading in US Treasuries has experienced some of the largest swings since the early days of the pandemic, while the gilts market has seen the wildest moves on record.”

October 10 – Bloomberg (Craig Torres and Matthew Boesler): “Federal Reserve Vice Chair Lael Brainard laid out a case for exercising caution as the central bank raises interest rates to curb high inflation, noting that previous increases are still working through the economy in a time of high global and financial uncertainty… Brainard noted that central banks around the world are tightening concurrently, and weaker demand abroad could spill back into the US. She also warned that lags in policy could impact the economy in the months ahead. ‘We are starting to see the effects in some areas, but it will take some time for the cumulative tightening to transmit throughout the economy and to bring inflation down,’ she said. ‘Uncertainty remains high, and I am paying close attention to the evolution of the outlook as well as global risks.’”

October 12 – Reuters (Dan Burns, Lindsay Dunsmuir, Ann Saphir and Sinead Carew): “Federal Reserve officials agreed they needed to raise interest rates to a more restrictive level - and then maintain them there for some time - to meet their goal of lowering ‘broad-based and unacceptably high’ inflation, a readout of last month's policy meeting showed... Many U.S. central bank officials ‘emphasized the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action,’ the minutes of the Sept. 20-21 meeting said, with many of them also stressing the importance of staying the course on the inflation fight ‘even as the labor market slowed.’”

October 11 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of Cleveland President Loretta Mester said officials need to keep raising interest rates and cannot get complacent as they work to battle the strongest inflation in a generation. ‘Given the current level of inflation, its broad-based nature, and its persistence, I believe monetary policy will need to become more restrictive in order to put inflation on a sustainable downward path to 2%,’ Mester said… She said that US central bankers must weigh the risk of tightening too much against not doing enough, but ‘at this point the larger risks come from tightening too little and allowing very high inflation to persist and become embedded in the economy.’”

October 12 – Bloomberg (Matthew Boesler): “The bar for a Federal Reserve pivot away from monetary policy tightening is ‘very high’ amid ongoing strength in underlying inflation, Minneapolis Fed President Neel Kashkari said. ‘If the economy entered a steep downturn, we could always stop what we’re doing. We could always — if we needed to — reverse what we’re doing, if we thought that inflation was headed back down very, very quickly… For me, the bar for such a change is very high because we have not yet seen much evidence that the underlying inflation — the services inflation, the wage inflation, the labor market — that that is yet softening,’ he said.”

October 7 – Bloomberg (Christopher Anstey): “Former Treasury Secretary Lawrence Summers said it’s important for the Federal Reserve to deliver on the further monetary tightening it has signaled, even in the face of financial risks stemming from its actions. ‘It’s a real mistake to suggest that somehow we shouldn’t do the monetary policies that are necessary to avoid inflation becoming entrenched because of concerns about financial stability,’ Summers told Bloomberg… ‘There’s risk of some kind of financially traumatic event. But I think the chances of something that is large enough to divert the Fed are really quite low.’”

U.S. Bubble Watch:

October 14 – Associated Press (Anne D’Innocenzio): “The pace of sales at U.S. retailers was unchanged in September from August as rising prices for rent and food chipped away at money available for other things. Retail sales were flat last month, down from a revised. 0.4% growth in August… Retail sales fell 0.4% in July. Excluding sales of automobiles and at gas stations, retail sales rose 0.3%. Excluding gas sales, spending was up 0.1% While the report showed the resilience of the American consumer, the figures are not adjusted for inflation… In fact, sales at grocery stores rose 0.4%, helped by rising prices in food.”

October 11 – Bloomberg (Augusta Saraiva): “Optimism among US small businesses edged up in September as firms grew less downbeat about the outlook for sales, while a smaller share said they raised prices. The National Federation of Independent Business overall optimism index rose 0.3 point to 92.1 last month… Five of the gauge’s 10 components increased. Despite rising for a third-straight month, the measure is historically low.”

October 12 – Reuters (Lindsay Dunsmuir): “The average interest rate on the most popular U.S. home loan rose to its highest level since 2006 as the housing sector continued to bear the brunt of tightening financial conditions… Mortgage rates have more than doubled since the beginning of the year… The average contract rate on a 30-year fixed-rate mortgage rose by 6 basis points to 6.81% for the week ended Oct. 7…”

October 10 – Financial Times (Taylor Nicole Rogers): “Realtors, mortgage brokers and appraisers across the US are bracing for widespread job cuts as home sales plummet amid rising interest rates. For those who work in and around the housing market, the effect of aggressive moves by the Federal Reserve to reduce inflation has been swift and severe. ‘It went from feast to famine, from everybody buying to turtle slow,’ said Linda McCoy, board president of the National Association of Mortgage Brokers. Realtors, mortgage brokers, appraisers and construction groups say they have lost as much as 80% of their revenue since the Fed started raising rates in March.”

October 12 – CNBC (Diana Olick): “Mortgage demand dropped again last week as rates climbed higher, but one type of loan is attracting borrowers. Adjustable-rate mortgages, or ARMs, which offer lower rates, are seeing renewed demand after getting very little interest over the last decade… Mortgage applications to purchase a home, which fell 2% for the week, were 39% lower than a year ago. Buyers have stepped way back this fall, as higher rates have made affordability even worse.”

October 11 – Bloomberg (Prashant Gopal): “After an abrupt end to the US housing boom, home flippers who were winning big just months ago are now racing to stem losses. The doubling of mortgage rates since January has crushed buyer demand and depressed values in investors’ most favored locations, from Phoenix and Las Vegas to Jacksonville, Florida. It’s a swift turnabout for flippers such as Tammi Merrell, who’s stuck with homes to sell and loans to pay. ‘It’s a high-risk, high-reward business — and now we’re facing the high risk,’ said Merrell, a full-time flipper in the Denver area. ‘I’m just praying for break even.’”

October 10 – Wall Street Journal (Theo Francis): “Many big U.S. businesses say they have been able to increase prices this year with limited pushback from customers. Not all the changes are leading to higher corporate profits. Cintas… and Vulcan Materials… have reported widening profit margins as they raised prices. Others, including furniture maker MillerKnoll Inc. and Olive Garden operator Darden Restaurants Inc., say inflation continues to eat into their profits, as their costs are rising faster than their price increases… ‘There’s never been a better time to have a conversation with a customer about price increase because they all understand it, because inflation is pretty much across the board,’ John Michael, an executive at MillerKnoll, told investors…”

October 10 – CNBC (Sam Meredith): “JPMorgan Chase CEO Jamie Dimon… warned that a ‘very, very serious’ mix of headwinds was likely to tip both the U.S. and global economy into recession by the middle of next year. Dimon, chief executive of the largest bank in the U.S., said the U.S. economy was ‘actually still doing well’ at present and consumers were likely to be in better shape compared with the 2008 global financial crisis. ‘But you can’t talk about the economy without talking about stuff in the future — and this is serious stuff,’ Dimon told CNBC’s Julianna Tatelbaum…”

October 12 – Reuters (Lindsay Dunsmuir): “The United States faces increased uncertainty due to rapid rises in interest rates, and the Federal Reserve should adjust policy as needed as it monitors global events and the impact of its actions on the domestic economy, the OECD said… ‘Risks and uncertainties are larger than usual and tilted to the downside,’ the Organisation for Economic Cooperation and Development said… It forecast the U.S. economy would grow 1.5% this year and 0.5% in 2023.”

Fixed Income Watch:

October 8 – Bloomberg (Olivia Raimonde and Kevin Simauchi): “It’s already bleak for Wall Street banks that struggled to sell risky debt to fund leveraged buyouts. Elon Musk’s revived deal for Twitter Inc. is only adding to the strain. Banks have already been saddled with losses of about $600 million for the buyout of Citrix Systems Inc. and are still stuck with $6.5 billion of debt they couldn’t sell. They also had to shelve a $3.9 billion deal for Brightspeed after investors balked at the offer -- and are expected to soon fund the buyout of Nielsen Holdings, and possibly even Tenneco Inc. With that in mind, and with little else in the way of imminent deals, Twitter is likely to remain center stage for credit markets in the coming week.”

China Watch:

October 14 – Bloomberg (Tom Hancock): “On the eve of a landmark Communist Party congress that’s set to confirm Xi Jinping’s third term in power, China’s economy is confronted with one of its most challenging periods in decades... Latest data paint a picture of a weak economy, largely a consequence of Xi’s zero-tolerance approach to combating Covid infections and a crackdown on property sector debt. Consumer-price figures for September raised the possibility of deflation in the economy as demand slumps. High-frequency indicators and a spike in Covid cases suggest economic weakness continued into October. Trade data… will likely show exports, which have supported the economy through the pandemic, are slowing as European economies and the US stand on the brink of recession.”

October 12 – Reuters (Yew Lun Tian): “China's Communist Party has ‘prioritised national interests’ and displayed a ‘fighting spirit’ in the past five years, it said on Wednesday, in the most explicit acknowledgement yet that it has put domestic factors first in dealings with other countries. Observers say this affirmation of foreign policy during a key meeting, in a review of diplomacy under the leadership of President Xi Jinping, is a clear signal that China will continue to be assertive, with Xi expected to renew his rule this month… The party has ‘prioritised national interests and put internal politics first, maintained strategic patience, displayed fighting spirit, fought to safeguard national dignity and core interests,’ Xinhua reported.”

October 9 – Reuters (Liangping Gao and Ryan Woo): “China's services activity in September contracted for the first time in four months, as COVID-19 restrictions dented already fragile demand and dimmed business confidence, a private-sector business survey showed… The Caixin services purchasing managers' index (PMI) fell to 49.3 from 55.0 in August as COVID containment measures disrupted supply and demand and restricted national travel.”

October 13 – Bloomberg: “China will push banks to lend more to some sectors and also speed up the rollout of existing economic support policies, the country’s central bank governor and finance minister said. People’s Bank of China Governor Yi Gang… reaffirmed a pledge to ‘step up the implementation of a prudent monetary policy and provide stronger help to the economy,’ in a video speech at a meeting of the central bank governors of the Group of 20 countries. Yi also said the PBOC will press banks to increase loans related to infrastructure, manufacturing and property.”

October 9 – Bloomberg: “China used a controversial tool to inject funds into policy banks for the first time in more than two years, as Beijing increasingly relies on the semi-official lenders to support the economy while monetary easing is constrained by rising global interest rates. The People’s Bank of China added a net 108.2 billion yuan ($15.2bn) in Pledged Supplemental Lending last month for China Development Bank, Agricultural Development Bank of China, and Export-Import Bank of China…”

October 11 – Reuters (Karin Strohecker): “The cost of insuring exposure to China's sovereign debt rose to the highest level since January 2017 on Tuesday, data from S&P Global Market Intelligence showed. China's five-year credit defaults swaps added 5 bps from Monday's close to hit 112 bps, the data showed. China CDS started the year at 40 bps.”

October 14 – Reuters (Kevin Yao, Liangping Gao and Ryan Woo): “China's consumer inflation rose to a 29-month high in September, driven mainly by pork prices, but price pressures remain largely benign… China's central bank has been trying to bolster growth while avoiding aggressive loosening that could fan price pressures and risk outflows, as the Federal Reserve and other central banks raise interest rates to fight soaring inflation. Consumer prices rose an expected 2.8% from a year earlier, accelerating from 2.5% in August and climbing at the fastest pace since April 2020…”

October 11 – Reuters (Ryan Woo and Casey Hall): “Shanghai and other big Chinese cities, including Shenzhen, have ramped up testing for COVID-19 as infections rise, with some local authorities hastily closing schools, entertainment venues and tourist spots. Infections have risen to the highest since August, with the uptick coming after increased domestic travel during the National Day ‘Golden Week’ earlier this month. Authorities reported 2,089 new local infections for Oct. 10, the most since Aug. 20.”

October 11 – Bloomberg (Phila Siu): “Shanghai has ordered all districts to organize at least 2 PCR Covid testings per week for residents until early November to speed up the process of identifying Covid patients…”

October 11 – Bloomberg: “The Chinese Communist Party’s flagship newspaper endorsed the country’s Covid Zero policy for the second day in a row, dousing hopes that President Xi Jinping will relax controls soon after a key political meeting starting later this week.”

October 9 – Reuters (Liangping Gao and Ryan Woo): “Chinese new home sales by floor area fell 37.7% year-on-year over the week-long National Day holiday starting from Oct. 1, a private survey showed… The property market has lurched from crisis to crisis, with slumping sales and developers defaulting on debts, while consumer confidence has been soured by repeated COVID-19 lockdowns and a mortgage boycott. Among 20 cities monitored by the China Index Academy, the average daily floor area of homes sold in four tier-one cities all fell sharply from last year's holiday season, with declines of 64% in Beijing, 49% in Shenzhen and 47% in Shanghai. The sharpest fall, of 80% on the year, was in the eastern city of Hangzhou…”

October 14 – Bloomberg (Dorothy Ma): “Two of the world’s top credit rating firms are fast exiting the business of assessing Chinese developers, citing inadequate information from the companies as the sector’s debt crisis intensifies. Fitch Ratings and Moody’s… have withdrawn ratings on at least seven builders this week.”

October 11 – Bloomberg (Ailing Tan): “The amount of dollar bonds from Chinese issuers yielding more than 15% has totaled $65.4 billion… Nearly 83% amount from 168 bonds with such yield were issued by real estate firms. Country Garden Holdings Co Ltd topped all issuers with 16 bonds on the list.”

October 10 – Bloomberg: “The main units of China SCE Group Holdings Ltd. and Shimao Group Holdings Ltd. missed payments on 1.6 billion yuan ($225 million) of trust borrowings, adding to a string of defaults by Chinese developers as the industry’s liquidity crunch spreads.”

Central Banker Watch:

October 10 – Financial Times (Robin Wigglesworth): “The bond market has had a lousy year. And no one holds more bonds than central banks, which have amassed a fixed income portfolio worth well north of $30tn over the past decade. But do their mounting losses actually matter? Yes and no. Central banks are obviously pretty unique institutions. On one hand they have a balance sheet and a P&L like anyone else, and right now they’re not looking great. Toby Nangle estimates the Bank of England’s losses alone are currently around £200bn, and the Federal Reserve says it had notched up almost $720bn of unrealised losses by the end of the second quarter.”

October 11 – Reuters (Choonsik Yoo and Jihoon Lee): “South Korea's central bank raised interest rates by a half percentage point… and flagged more to come as a surging dollar pushed up import costs but there were signs policymakers may be considering slowing the pace of tightening. The Bank of Korea (BOK) raised its benchmark policy rate by 50 bps to 3.00%, as expected, bringing total rates hike since August last year to 250 bps.”

Global Bubble Watch:

October 11 – Reuters (David Lawder): “The International Monetary Fund warned… that colliding pressures from inflation, war-driven energy and food crises and sharply higher interest rates were pushing the world to the brink of recession and threatening financial market stability… The IMF said Global GDP growth next year will slow to 2.7%, compared, down from its July forecast of 2.9%, as higher interest rates slow the U.S. economy, Europe struggles with spiking gas prices and China contends with continued COVID-19 lockdowns and a weakening property sector.”

October 11 – Financial Times (Chris Giles and Colby Smith): “Governments must place greater weight on keeping their finances in shape, or risk undermining the confidence of the bond market investors that buy their debt, the IMF has cautioned. Rising interest rates and high inflation have increased the importance of countries building resilience into their public finances so they can deal with a more ‘shock-prone’ world, the IMF said… in its annual Fiscal Monitor... In a reversal of the message of previous years, the IMF ditched its calls for governments to borrow more, saying greater debt levels were no longer appropriate now that interest rates needed to rise to defeat the widespread inflation threat.”

October 10 – Wall Street Journal (Yuka Hayashi): “Rapidly rising interest rates are squeezing the flow of private capital to the world’s poorest countries. The problem is that the preferred alternatives—the International Monetary Fund and World Bank—are getting quickly committed. Lending by the pair has reached a record as they help poor and emerging countries cope with the pandemic, soaring energy and food costs and the fallout from Russia’s invasion of Ukraine… The IMF has committed $258 billion to 93 countries since the onset of the pandemic, and an additional $90 billion to 16 countries since Russia’s invasion of Ukraine… At the end of September, the IMF had a record $135 billion of loans outstanding, up 45% from 2019, and more than double the amount in 2017.”

October 10 – Wall Street Journal (Kathryn Hardison): “Demand for personal computers is sliding at the fastest pace in decades after elevated pandemic-related sales were followed by a slowdown in consumer spending on electronics. Worldwide shipments in the third quarter dropped 19.5% from a year ago, marking the steepest decline in more than two decades, according to… Gartner Inc. Computer makers shipped 68 million PCs in the recent quarter, down from 84.5 million units the year prior.”

Europe Watch:

October 11 – Reuters (Andreas Rinke): “Germany does not see the need for further European Union debt to tackle the bloc's energy crisis, a government spokesperson said, after a media report said Berlin would change its position and support a joint issuance of EU debt through loans.”

October 12 – Reuters (Manas Mishra and Raghav Mahobe): “Another wave of COVID-19 infections may have begun in Europe as cases begin to tick up across the region, the World Health Organization and European Centre for Disease Prevention and Control (ECDC) said… ‘Although we are not where we were one year ago, it is clear that the COVID-19 pandemic is still not over,’ WHO's Europe director, Hans Kluge, and ECDC's director, Andrea Ammon, said… ‘We are unfortunately seeing indicators rising again in Europe, suggesting that another wave of infections has begun.’”

October 9 – Bloomberg (Josefine Fokuhl): “The severing of cables that disrupted train travel in Germany… was highly ‘professional,’ and illustrates how vulnerable the country’s infrastructure is to sabotage, the head of the country’s police union said… ‘This was a targeted and professional attack on the railroads,’ Andreas Rosskopf, the chairman of the main police union, told RedaktionsNetzwerk Deutschland.”

EM Crisis Watch:

October 11 – Bloomberg (Eric Martin): “Emerging and developing nations face a ‘hurricane’ of risks from rising energy costs and food insecurity, and any resilience some countries may have won’t last long, the chair of the Group of 20 finance ministers forum said. ‘The hurricane is definitely very strong,’ Indonesian Finance Minister Sri Mulyani Indrawati said… These difficulties -- coupled with inflation, dollar strength and interest-rate increases – ‘will put many emerging and developing countries in a very serious, difficult situation.’”

October 8 – Reuters (Ece Toksabay): “Turkish President Tayyip Erdogan vowed… the central bank would continue to cut its policy interest rates every month for as long as he stayed in power, after it surprised markets by cutting rates twice in the last two months. ‘As long as this brother of yours is in this position, the interest will continue to fall with each passing day, each passing week, each month,’ he told a rally…”

October 13 – Bloomberg (Karl Lester M Yap): “Vietnam’s sovereign credit rating faces limited risks after customers of Saigon Commercial Bank, the nation’s fifth-largest commercial bank also known as SCB, pulled out their savings for several days, according S&P Global Ratings. ‘To the extent that these are isolated events and have limited financial stability impact, we do not expect a material impact on our sovereign credit ratings on Vietnam,’ Rain Yin, a sovereign analyst at S&P in Singapore, said…”

October 12 – Bloomberg (Matthew Malinowski): “Chile’s central bank raised its interest rate by 50 bps, saying borrowing costs have reached the highest level of its tightening cycle and that they will remain steady to ensure inflation eases to target. Policymakers voted unanimously to lift borrowing costs to 11.25% on late Wednesday, as expected…”

Japan Watch:

October 12 – Wall Street Journal (Megumi Fujikawa): “Bond traders to the Bank of Japan: Thanks for nothing. For the fourth straight session, none of the latest issue of 10-year Japanese government bonds traded on Wednesday. According to Japan Bond Trading Co., it was the longest streak since March 1999, when comparable data became available. The responsibility for making a normally large market wither away into nothing belongs to the Bank of Japan, which on days such as these is offering a higher price for the 10-year bond than any private firm is willing to pay. That means trading between financial institutions, the kind tracked by market-data firms, dries up.”

October 11 – Bloomberg (Chikako Mogi): “In a fresh sign of Japan’s dysfunctional bond market, the 10-year benchmark failed to trade for a third consecutive session Tuesday, the longest such streak since 1999. The Bank of Japan’s overwhelming presence in the JGB market where it’s the biggest buyer under its curve control policy has exacerbated liquidity issues and led to a deterioration in market functioning. A gauge of liquidity stress in the Japanese bond market has hit levels last seen over a decade ago.”

October 10 – Reuters (Akriti Sharma and Kantaro Komiya): “Japanese Prime Minister Fumio Kishida is not considering shortening the term of Bank of Japan (BOJ) Governor Haruhiko Kuroda, he told the Financial Times…, adding he would continue to ‘work closely’ with the central bank chief. Kishida also said the BOJ needed to maintain its current policy until wages rise and that companies need to increase pay…”

October 10 – Reuters (Tetsushi Kajimoto): “Japan's current account surplus shrank to its smallest amount on record for the month of August…, with surging prices of energy imports outstripping price rises in exports and draining national wealth. The surplus stood at 58.9 billion yen ($404.45 million)… On a seasonally adjusted basis, the account was in a deficit for a second month, at 530.5 billion yen.”

Social, Political, Environmental, Cybersecurity Instability Watch:

October 14 – Wall Street Journal (Cameron McWhirter): “Sections of the Mississippi River are approaching low water levels not seen in more than three decades, disrupting a vital supply lane for agriculture, oil and building materials and threatening businesses including barge and towboat operators, farmers and factories. The low water… has halted commercial traffic and river boat cruises at numerous spots below Illinois. Prices to ship goods have more than doubled in a matter of weeks. Barges are grounding on sandbars in unprecedented numbers and many ports and docks no longer have water deep enough for commercial boats to safely reach them. ‘America is going to shut down if we shut down,’ said Mike Ellis, chief executive of Indiana-based American Commercial Barge Line LLC.”

October 14 – Reuters (Renju Jose and Lewis Jackson): “Thousands of people across Australia's southeast were asked to evacuate their homes on Friday, including some in a western suburb of Melbourne, after two days of incessant rains triggered flash flooding… Large parts of Victoria state, southern New South Wales and the northern regions of the island state of Tasmania were pounded by an intense weather system with some taking more than a month's worth of rain since late Wednesday…”

Leveraged Speculation Watch:

October 11 – Bloomberg (Nishant Kumar): “Even in the high-pressure, high-pay world of hedge funds, the ‘long-short’ stockpicker is supposed to be somebody special… In addition to betting on their favorite stocks going up (or being long, in Wall Street’s argot), they wager on other stocks falling (selling short) and use leverage to juice their gains. The idea is that an investor with true skill at spotting both good and bad companies will be hedged against broader market declines… And that clients would be willing to pay enormous fees—traditionally 2% of assets per year, plus 20% of profits—for that kind of magic touch. But the performance of these would-be wizards has slipped, just when their clients need them to soften the blows from the most ferocious market selloff in more than a decade. Equity hedge funds are down 15% this year… Chase Coleman’s Tiger Global is in the worst shape among large players, losing almost 52%. Dan Sundheim’s D1 Capital Partners has slumped 28%, and Ross Turner’s Pelham Capital is down 32.5%. Lone Pine Capital… has seen firmwide assets slump 42%, to $16.7 billion. Discouraged investors are pulling billions of dollars from long-short equity funds.”

October 10 – Bloomberg (Hema Parmar): “Tiger Global Management and Whale Rock Capital Management were among stock-picking hedge funds to report September losses as equity markets tumbled. Chase Coleman’s Tiger Global fell 4.4% for the month, extending its decline for the year to 52%... The… firm’s long-only fund tumbled 9.6% in September to bring its year-to-date slide to 66.5%. The flagship fund at Alex Sacerdote’s Whale Rock dropped 6% in September, widening its loss for 2022 to 41%.”

Geopolitical Watch:

October 14 – Wall Street Journal (Dasl Yoon and Timothy W. Martin): “Tensions on the Korean Peninsula have escalated to their highest level in years, with the two countries engaging in tit-for-tat military exercises, trading barbs and hardening a diplomatic stalemate. Since conservative South Korean President Yoon Suk-yeol took office in May, North Korea’s weapons launches have been met with an equal show of force, including missile drills and jet fighters. The two Koreas have blamed each other for worsening ties. Both sides are threatening to beef up their military powers.”

October 13 – Reuters (Josh Smith and David Brunnstrom): “South Korea scrambled fighter jets after a group of about 10 North Korean military aircraft flew close to the border dividing the two countries, South Korea's Joint Chiefs of Staff said, amid heightened tensions over repeated North Korean missiles tests.”

October 10 – Reuters (Yimou Lee and Ben Blanchard): “War between Taiwan and China is ‘absolutely not an option’, Taiwan President Tsai Ing-wen said on Monday, as she reiterated her willingness to talk to Beijing and also pledged to boost the island's defences including with precision missiles. China again rejected her latest overture, saying the island was an inseparable part of its territory.”

Friday Evening Links

[Reuters] Wall St drops as consumer data stokes inflation worry

[Yahoo/Bloomberg] Stocks Upended by Inflation Survey’s Sobering View: Markets Wrap

[Yahoo/Bloomberg] Oil Posts Weekly Loss as Slowdown Fears Dim Demand Outlook

[Reuters] UK's Truss sacrifices finance minister, scraps tax plan in fight to survive

[Yahoo/Bloomberg] IMF Latest: Gopinath Sees Rocky Ride on Dollar, No Plaza 2.0

[Yahoo/Bloomberg] Bonds Tied to Consumer Debt Are About the Only Market Open Now

[Reuters] Exclusive: Bullard: September inflation warrants "frontloading," but may not need higher overall rates

[Yahoo/Bloomberg] Summers Sees More Land Mines After UK, Warns on Bond Shut-Out

[Reuters] US Treasury asks major banks if it should buy back U.S. government bonds

[Reuters] Bostic acknowledges accidental trades that violated Fed ethics code

[FT] Gilts in fresh slide as investors say Truss U-turn did not go far enough

[FT] UK debacle shows central bank ‘tough love’ is here to stay

[FT] Can Liz Truss survive as UK prime minister?