Friday, October 21, 2022

Weekly Commentary: Dissecting Chairman Xi

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It has always sounded archaic, at best. Most think “lunatic fringe.” Yet, there is nothing as fundamental, vital, as urgent as Sound Money. Stable money and Credit that we can trust; that doesn’t inherently cause trouble; that doesn’t unleash the Scourge of Inflation.

How many crises - how much mayhem, monetary disorder and human hardship - until we finally learn? Serial economic booms and busts; market Bubbles, manias and collapses; inequality and inflation; insecurity, fragmentation and conflict – both domestically and internationally. And the process is so incredibly insidious, as unsound money and attendant monetary disorder surreptitiously operate as a wrecking ball - methodically chipping away, bit by bit by bit, over decades. Chipping away at financial, economic, social, political and geopolitical stability. Chipping away at our faith in the markets, policymaking, our institutions, the future. And the costs are unfathomable. Even war.

The S&P500’s 4.6% rally notwithstanding, it was another in a series of distressing weeks. The world is changing, and sometimes there’s an almost slow-motion element that offers a particularly coherent view of what the future holds. The UK, one of our closest allies, has succumbed to financial, economic and political crisis – with strong, effective leadership seemingly a pipedream. Chairman Mao – I mean Xi – spewing ideology from an era the world thought had been relegated to a less enlightened period of history. The war in Ukraine, which becomes more reminiscent of World War II savagery by the week.

And it’s one of the great ironies: After inundating the world with Trillions of surplus dollar balances, “king dollar” nonetheless reigns supreme. But that doesn’t alter the fact that the U.S. has arguably been the world’s most consequential perpetrator of unsound money. Where might energy prices trade today if not for multi-Trillions of global QE? The size of Russia’s international reserve position and Putin’s ambitions? And then there’s China’s $4.0 TN (now closer to $3TN) of international reserves, having inflated perilous delusions of grandeur (among other things).

October 16 – Bloomberg (Rebecca Choong Wilkins and Kari Soo Lindberg): “President Xi Jinping had a clear message to those who want to thwart China’s rise: You will fail… Xi let the world know that China wouldn’t change course even as it faces ‘dangerous storms’ in a more hostile world. Instead, he declared the ‘rejuvenation of the Chinese nation is now on an irreversible historical course’ and more forcefully offered China up as an alternative to the US and its allies. ‘China’s international influence, appeal and power to shape the world has significantly increased,’ Xi said… ‘Chinese modernization offers humanity a new choice for achieving modernization,’ he added. Xi’s remarks indicate that China is ready to stare down a growing challenge from the US under President Joe Biden, who has moved to hinder Beijing’s ability to access advanced technology and sought to deter any military action against Taiwan -- the biggest flash point between the world’s biggest economies. The Chinese leader hailed the nation’s ‘fighting spirit’ and said the country was ‘well-positioned for pursuing development and ensuring security.’”

I remember back in the eighties, when Japanese manufacturing and finance appeared poised to take over the world. It was all a fantastic Bubble illusion. And when their Bubble burst, Japanese policymakers were completely absorbed by domestic issues. There was recognition that serious mismanagement was responsible for the nation’s predicament. I was always intrigued that more blame wasn’t directed at U.S. pressure on Japan to further stimulate throughout the Bubble period. The Japanese weren’t out to settle scores, forge enemies or remake the world order. And perhaps the ballot box provides (provided) democracies more of a release valve and levelheaded political disposition than is generally appreciated.

I worry about China. I have deep sympathy for the Chinese people. They’ve worked incredibly hard – endured so much. They had dreams and expectations inflated by historic Bubble excess. Of course, they were willing to tolerate Beijing’s heavy hand – that didn’t seem such a hefty price to pay when wages were surging and apartment prices skyrocketing. It was nothing short of truly unimaginable (perceived) wealth-creation. Confidence grew that the Chinese growth model was both clearly superior and sustainable. It was easy to ignore a lot, while hailing the great Beijing meritocracy. Bubbles create genius.

October 18 – New York Times (Keith Bradsher): “For the past quarter-century, China was run by a well-oiled government bureaucracy that predictably focused on the economy as its top priority. That may no longer be the case. Xi Jinping, China’s top leader, made clear… that politics and national security were paramount. That point was reinforced the next day when Beijing made the unusual move of delaying what should have been a routine, closely stage-managed release of data on how the economy fared in the past three months. ‘It does show the primacy of politics in influencing the very competent, institutional technocracy that China has,’ said Victor Shih, a specialist in Chinese elite politics and finance at the University of California, San Diego.”

Make no mistake, China’s historic Bubble is deflating. And nary a ballot box to be found anywhere. Expect no humility out of Beijing – no self-reflection or adjustment. Who’s willing to take responsibility for mistakes? The communist party totally bought into the Bubble Illusion: China finally overcoming centuries of foreign deprivation to assume its destiny as a (the) world superpower. How things play out over the coming decades is unknown. For now and the foreseeable future, China faces arduous post-Bubble financial and economic adjustment.

October 16 – Bloomberg: “Chinese President Xi Jinping reiterated that economic development is the Communist Party’s ‘top priority,’ a signal that Beijing will continue to emphasize growth despite some analysts expecting a shift toward greater focus on national security. At the opening of the 20th party congress… he echoed development-first phrasing used in congress addresses by every party leader since Jiang Zemin in 2002. ‘Development is the party’s top priority in governance,’ he said. Xi has increasingly been highlighting the need to balance security concerns with economic growth since 2020, prompting some analysts to suggest Xi would drop the development-first slogan… At the same time, the president warned of the security risks China faces when pursing its ambitions, and twice mentioned in his speech the need to ‘balance development with security.’”

Some analysts took comfort from Xi signaling no change in priority for maintaining China’s economic growth model. Yet Beijing should today be keenly focused on post-Bubble structural adjustment, willing to tolerate a period of economic contraction necessary to purge uneconomic enterprises while reallocating resources. Fundamental to this readjustment is a focus on stabilizing a perilously dysfunctional Credit system. Finance should be redirected to sound enterprises, while significantly reducing system Credit growth. In short, Beijing must radically change the trajectory of monetary inflation to avert financial collapse.

Xi’s and the communist party’s priorities are elsewhere – so-called “security.” Beijing will use company/industry collapses as proof of Capitalism’s lawlessness and fragility, while absorbing more and more of the economy into the state apparatus. They remain determined to push hard for GDP growth, downplaying the risk of acute financial crisis, with the overarching objective of bolstering global standing, influence and raw power. Geopolitics – their dangerous obsession - is now driving Beijing policymaking. Serious policy mistakes will continue to pile up. There will be accidents, and the miscreants responsible are all preplanned: the U.S., Japan and the West.

October 16 – Bloomberg: “President Xi Jinping declared China’s global power had increased while warning of ‘dangerous storms’ ahead, striking a defiant tone to kick off a twice-a-decade Communist Party meeting… ‘China’s international influence, appeal and power to shape the world has significantly increased,’ Xi said… Still, he warned of a more unstable international environment, saying China must be prepared for ‘strong winds and high waves and even dangerous storms.’ ‘Confronted with drastic changes in the international landscape, we have maintained a firm strategic resolve and shown a fighting spirit,’ Xi, 69, said... ‘Throughout these endeavors, we have safeguarded China’s dignity and core interests and kept ourselves well-positioned for pursuing development and ensuring security.’”

I was holding out for a little positive surprise. I hoped Xi might inject a sliver of caution regarding his “partner without limits” - Putin’s Russia. None. If there were any lingering doubts, it’s now obvious that the objective of the China/Russia axis is to forge a new world order to counter U.S. power and influence. The quagmire Russia is creating does not alter China’s overarching goal. Xi is clearly more determined than ever, and his speech likely marks a critical historical juncture.

October 16 – Financial Times (Edward White): “China’s president Xi Jinping has signalled his intention to steer the foreign policy of the world’s most populous country and rising military superpower away from reconciliation with the west as he warned of ‘grave international developments’ not seen in the past 100 years… Xi touted his administration’s success in countering foreign interference and safeguarding China’s ‘dignity’ and ‘core interests’. Xi also issued thinly veiled criticism of the US and its allies, boasting that China under his leadership had taken a ‘clear-cut stance’ against hegemonism and stood unwavering in the face of ‘bullying’. China’s most powerful leader since Mao Zedong reiterated his commitment to taking control of Taiwan, potentially by military force.”

October 17 – Politico (Phelim Kine): “Chinese President Xi Jinping’s speech… charts a course for ongoing tense relations with the U.S. hinged to a dark vision of a China beset by ‘external attempts to suppress and contain’ it. Xi outlined an aggressive foreign policy on Sunday as he detailed his ‘work report,’ a document that sets out domestic and foreign policy priorities for the Chinese Communist Party for the next five years. ‘We will resolutely safeguard the security of China’s state power, systems and ideology — and build up security capacity in key areas,’ Xi said. ‘We will crack down hard on infiltration, sabotage, subversion, and separatist activities by hostile forces.’”

Xi’s speech widens the global chasm – hardens the new “iron curtain.” “China’s international influence, appeal and power to shape the world has significantly increased.” “Chinese modernization offers humanity a new choice for achieving modernization.” “China stands firmly against all forms of hegemonism and power politics, the Cold War mentality, interference in other countries' internal affairs, and double standards.”

At a minimum, China will move aggressively toward self-sufficiency, certainly in the areas of semiconductors and high-technology generally. I would also now expect a more hostile approach with retaliatory trade measures. Restricting U.S. high-tech exports to China surely hit a nerve in Beijing. Retaliating with a ban on areas of importance to the U.S. economy would elevate this unfolding economic war to a more threatening level. I’ll also assume more overt support for Russia over the coming months, with the U.S. and Europe potentially adopting tougher attitudes toward sanctioning China.

The nurturing of a cult of personality is another ominous facet of Xi and the communist party. There’s too much narrative that would appear to be preparing the Chinese people for military confrontation.

October 19 – Bloomberg: “President Xi Jinping has accumulated so many titles he’s been called the Chairman of Everything. But one gaining traction among Communist Party elites is raising concerns of a Mao Zedong-style personality cult. Lingxiu, or ‘leader,’ is a revered title of praise previously reserved for Mao, the founder of the People’s Republic, who was referred to as ‘the great leader’ when the Cultural Revolution started in 1966. While party officials and state media have occasionally bestowed the title on Xi in the past few years -- in the form of renmin lingxiu, or ‘people’s leader’ -- this week has seen more cadres using the term, including at least two Politburo members.”

October 15 – Financial Times (Tom Mitchell and Primrose Riordan): “President Xi Jinping has called on the Chinese Communist party’s 97mn members to steel themselves for a ‘critical time’ in the country’s history, as he opened a congress that will solidify his status as its most powerful ruler since revolutionary hero Mao Zedong. In an almost two-hour speech…, Xi said the party’s ‘mission is glorious beyond compare’ as he outlined goals ranging from an ‘all-out people’s war’ against the Covid-19 pandemic to realising the unification of China and Taiwan. In one of the speech’s biggest applause lines, Xi pledged that the party, which celebrated its centennial last year and has been in power since 1949, would ‘never renounce the use of force [to achieve unification] and will take all necessary measures to stop all separatist movements’.”

October 16 – Financial Times (Kathrin Hille): “China’s leader Xi Jinping has used his biggest agenda-setting speech in half a decade to warn the US against further support for Taiwan, chiding ‘external forces’ for soaring tensions in the Taiwan Strait and suggesting they would be to blame if Beijing felt compelled to attack the country. ‘Facing severe provocations from the Taiwan independence forces and from interference by external forces, we resolutely carried out a major struggle against separatism and interference,’ Xi said…”

It was an important speech, though it’s left to future historians to judge how important. For years now, I’ve fretted the U.S. and China at loggerheads. I’ve worried that a bursting Bubble would provoke a Beijing move on Taiwan – as a distraction, as much as a mechanism to stoke nationalist fervour against the American and Japanese antagonists. It all seems even more palpable after Xi’s speech.

Yet another wild market week. Options expiration surely helped fuel the equities rally. Bond market vigilantes celebrated their newfound power, first with the abandonment of Truss’s “mini budget” and, soon afterwards, with the abandonment of Liz Truss. A Reuters headline: “Australia Aims for ‘Responsible’ Budget After UK Mayhem.”

The British pound rallied 1.2%, as 10-year gilt yields sank 28 bps (to 4.05%). But except for the week’s final few hours of trading, the global bond market sure looked broken. Treasury long-bond yields spiked 34 bps this week to 4.34%.

Japanese 10-year JGB yields traded above the BOJ’s 25 bps ceiling. Meanwhile, the yen breached 150 to the U.S. dollar for the first time since the dark bursting Bubble days of August 1990. The Bank of Japan was said to have aggressively intervened to support the yen, with the curious timing of intervention at the Friday London close on U.S. expiration day. With a shaky BOJ juggling a collapsing currency and faltering bond market peg, there’s every reason to expect markets to launch an aggressive and sustained assault.

In a sign of the times – of the new cycle – Chinese stocks and bonds couldn’t muster even a modicum of a rally for the big Communist Party Congress. The Shanghai Composite declined 1.1%. More alarming, it was another atrocious week for China’s developer bonds. Country Garden (#1 developer) yields surged another 10 percentage points to almost 77%. Evergrande yields spiked 23 percentage points (250%), Sunak 30 percentage points (164%), Lonfor 17 percentage points (165%) and Kaisa 33 percentage points (220%). An index of Chinese high yield dollar bonds was up over 100 bps to yield a record 28.2%. The renminbi declined another 0.5% versus the dollar (down 12% y-t-d) to the low since January 2008.

With systemic fears mounting, China’s “big four” bank CDS rose moderately to new multi-year highs. China sovereign CDS jumped a notable nine to 122 bps, the high since 2016.

It took longer than I expected. But it appears Federal Reserve officials are becoming increasingly concerned. Bullard, Evans, Daly and Kashkari all suggested a more cautious approach to Fed tightening measures may soon be appropriate.

While the economy has for the most part remained resilient, housing markets are at the cusp of a serious downturn. At 6.94%, benchmark 30-year mortgage rates have spiked to a 20-year high. This will be a different bust than the post-2008 housing crisis. I don’t expect Phoenix and California’s “inland empire” to be at the epicenter. Instead, inflated high-end markets across the country are unusually vulnerable to the spike in mortgage borrowing costs. In particular, we’ll see how much leverage and nonsense infected the California housing Bubble over this most protracted period of loose Credit.


For the Week:

The S&P500 rallied 4.7% (down 21.3% y-t-d), and the Dow recovered 4.9% (down 14.5%). The Utilities gained 1.9% (down 12.8%). The Banks increased 0.7% (down 25.2%), and the Broker/Dealers jumped 4.0% (down 11.0%). The Transports advanced 1.5% (down 23.0%). The S&P 400 Midcaps rose 3.0% (down 18.6%), and the small cap Russell 2000 rallied 3.6% (down 22.4%). The Nasdaq100 jumped 5.8% (down 30.7%). The Semiconductors surged 8.1% (down 40.8%). The Biotechs gained 1.5% (down 15.2%). With bullion gaining $13, the HUI gold equities index recovered 6.8% (down 24.2%).

Three-month Treasury bill rates ended the week at 3.8375%. Two-year government yields declined two bps to 4.48% (up 374bps y-t-d). Five-year T-note yields rose seven bps to 4.34% (up 308bps). Ten-year Treasury yields jumped 20 bps to 4.22% (up 271bps). Long bond yields surged 34 bps to 4.34% (up 244bps). Benchmark Fannie Mae MBS yields gained 10 bps to 6.01% (up 395bps).

Greek 10-year yields jumped 11 bps to 5.04% (up 372bps y-t-d). Italian yields declined four bps to 4.75% (up 358bps). Spain's 10-year yields added two bps to 3.53% (up 297bps). German bund yields rose seven bps to 2.42% (up 259bps). French yields gained three bps to 2.97% (up 277bps). The French to German 10-year bond spread narrowed four to 55 bps. U.K. 10-year gilt yields sank 28 bps to 4.05% (up 308bps). U.K.'s FTSE equities index rallied 1.6% (down 5.6% y-t-d).

Japan's Nikkei Equities Index slipped 0.7% (down 6.6% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.26% (up 19bps y-t-d). France's CAC40 rallied 1.7% (down 15.6%). The German DAX equities index recovered 2.4% (down 19.9%). Spain's IBEX 35 equities index rose 2.2% (down 13.4%). Italy's FTSE MIB index rallied 3.0% (down 21.1%). EM equities were mostly higher. Brazil's Bovespa index surged 7.0% (up 14.4%), and Mexico's Bolsa index rose 3.7% (down 11.6%). South Korea's Kospi index was unchanged (down 25.7%). India's Sensex equities index gained 2.4% (up 1.8%). China's Shanghai Exchange Index fell 1.1% (down 16.5%). Turkey's Borsa Istanbul National 100 index surged 8.5% (up 111.8%). Russia's MICEX equities index jumped 4.8% (down 46.0%).

Investment-grade bond funds posted outflows of $3.623 billion, and junk bond funds reported negative flows of $144 million (from Lipper).

Federal Reserve Credit declined $4.2bn last week to $8.721 TN. Fed Credit was down $180bn from the June 22nd peak. Over the past 162 weeks, Fed Credit expanded $4.994 TN, or 134%. Fed Credit inflated $5.910 Trillion, or 210%, over the past 519 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $10.0bn to $3.335 TN. "Custody holdings" were down $146bn, or 4.2%, y-o-y.

Total money market fund assets slipped $3.7bn to $4.585 TN. Total money funds were up $67bn, or 1.5%, y-o-y.

Total Commercial Paper jumped $31.4bn to $1.287 TN. CP was up $97bn, or 8.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates added two bps to 6.94% (up 385bps y-o-y) - the high since April 2002. Fifteen-year rates jumped 14 bps to 6.23% (up 390bps) - the high since August 2007. Five-year hybrid ARM rates declined 10 bps to 5.71% (up 317bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 7.18% (up 400bps) - the high since December 2008.

Currency Watch:

October 17 – Reuters (Leika Kihara): “Japan and other countries facing the fallout from a soaring U.S. dollar found little comfort from last week's meetings of global finance officials, with no sign that joint intervention along the lines of the 1985 ‘Plaza Accord’ was on the horizon. With a strong push from Japan, finance leaders of the Group of Seven advanced economies included a phrase in a statement… saying they will closely monitor ‘recent volatility’ in markets. But the warning, as well as Japanese Finance Minister Shunichi Suzuki's threat of another yen-buying intervention, failed to prevent the currency from sliding to fresh 32-year lows against the dollar as the week came to a close.”

October 16 – Reuters: “China's state banks stepped up their intervention to defend a weakening yuan on Monday, with banking sources telling Reuters these banks sold a high volume of U.S. dollars and used a combination of swaps and spot trades. Six banking sources told Reuters the country's major state-owned banks were spotted swapping yuan for U.S. dollars in the forwards market and selling those dollars in the spot market, a playbook move used by China in 2018 and 2019 as well.”

For the week, the U.S. Dollar Index declined 1.1% to 112.01 (up 17.1% y-t-d). For the week on the upside, the New Zealand dollar increased 3.4%, the Brazilian real 3.2%, the Australian dollar 2.9%, the Canadian dollar 1.8%, the South African rand 1.5%, the euro 1.4%, the Norwegian krone 1.4%, the Swedish krona 1.2%, the British pound 1.2%, the Singapore dollar 0.8%, the Swiss franc 0.8%, the Mexican peso 0.8% and the Japanese yen 0.7%. On the downside, the South Korean won declined 0.8%. The Chinese (onshore) renminbi declined 0.53% versus the dollar (down 12.09% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index fell 2.1% (up 12.2% y-t-d). Spot Gold rallied 0.8% to $1,658 (down 9.4%). Silver surged 6.3% to $19.42 (down 16.7%). WTI crude slipped 56 cents to $88.05 (up 13%). Gasoline added 1.2% (up 20%), while Natural Gas sank 23.2% to $4.96 (up 33%). Copper gained 1.5% (down 22%). Wheat declined 1.0% (up 10%), and Corn slipped 0.8% (up 15%). Bitcoin was little changed this week at $19,200 (down 59%).

Market Instability Watch:

October 19 – Reuters (Junko Fujita and David Dolan): “The Bank of Japan on Thursday conducted emergency bond-buying operations, extending efforts to put a floor under bond prices, as the yen nears a 32-year-low against the dollar. The BOJ offered to buy some 250 billion yen ($1.67bn)of government bonds with maturities from 5- to longer than 25 years. But its effect was limited as yields only kept rising, sending the 5- and 20-year bond yields to their highest levels since 2015.”

October 20 – Reuters (Leika Kihara, Daniel Leussink, Kevin Buckland, Sakura Murakami, Kantaro Komiya and Tetsushi Kajimoto): “Japanese policymakers made fresh threats of intervention on Thursday after the yen tumbled past the key psychological level of 150 to the dollar, keeping investors on high alert in case Tokyo steps into markets again to support the fragile currency. After the yen's first break beyond the symbolic mark since 1990, top currency diplomat Masato Kanda told reporters that authorities were ‘always ready to take necessary action as excessive volatility has become increasingly unacceptable.’”

October 19 – Bloomberg (Ayai Tomisawa and Masaki Kondo): “Governor Haruhiko Kuroda has taken pains to explain why the Bank of Japan is nowhere close to even a modest adjustment to its ultra-easy policy, but traders are yet to be convinced. Yen swaps are climbing, average coupons on 10-year corporate bonds are pushing higher and overnight-indexed swaps are pricing in an end to negative-rate policy around the time Kuroda steps down in April. His yield curve control is also getting tested with the benchmark yield rising above the BOJ’s target range on Wednesday.”

October 20 – Bloomberg (Toru Fujioka and Ruth Carson): “Even a modest tweak to the Bank of Japan’s entrenched monetary policy could set a wrecking ball in motion through worldwide markets, if traders project the last heavyweight anchor stopping global yields from rocketing further is finally shifting. Most economists expect Governor Haruhiko Kuroda to stick with yield-curve control, until he steps down in April, even as the yen slides. But there’s no denying his policy framework has been under more pressure this year than it ever has since its formation in 2016. If the Bank of Japan decides to shock investors and finally tighten policy, they face the turmoil inflicted on global markets by the UK’s recently-abandoned economic plan -- just on a larger scale.”

October 16 – Bloomberg (Ben Holland and Liz McCormick): “In the all-hands-on-deck economics of the pandemic, governments and their central banks shared the same goals. Now they’re starting to pull in different directions. The tug-of war has already claimed one victim. The UK’s attempt to boost its economy with fiscal stimulus backfired, triggering a bond rout. In the short-term, the Bank of England was forced to step in and support markets, while Liz Truss’s government partially reversed course. In the medium-term, investors are betting it’ll mean higher interest rates for Britons.”

October 17 – Reuters (John Revill and Oliver Hirt): “Credit Suisse Group AG has approached at least one Middle Eastern sovereign wealth fund for a capital injection, a source said, while some funds are looking at the scandal-hit Swiss bank's businesses as potential investment opportunities. Abu Dhabi and Saudi Arabia were weighing up, through their sovereign wealth funds, whether to put money into Credit Suisse's investment bank and other businesses, Bloomberg reported.”

October 17 – Financial Times (Martin Arnold): “France’s central bank head has warned that the recent turmoil in the UK’s bond markets illustrates the ‘vicious loop’ governments face if they undermine efforts by rate-setters to curb soaring inflation. Fran├žois Villeroy de Galhau, who sits on the European Central Bank’s rate-setting governing council, said in an interview that the sharp rise in the British government’s cost of borrowing after it unveiled £45bn worth of unfunded tax cuts last month highlighted the importance of ‘a consistent policy mix’ between central banks and lawmakers. Underlining the risks of fiscal expansion at a time of rapidly rising interest rates, the Banque de France governor said: ‘If you have a monetary policy with an anti-inflationary stance and there are doubts about whether your fiscal policy will fuel inflation, then you really risk nurturing a vicious loop.’”

October 16 – Bloomberg (Lisa Lee and Taiga Uranaka): “Financial chaos in the UK is hitting the shores of Japan and roiling the $1 trillion global market for collateralized loan obligations. Norinchukin Bank, once known as the CLO whale, has stopped buying new deals in the US and Europe for the foreseeable future because of volatility sparked by UK pension funds, according to people… The move by an important buyer to stay on the sidelines will make new issuance even more challenging, they said. Nochu historically acted as an anchor investor, buying all of the safest AAA bonds in a particular deal.”

UK Crisis Watch:

October 17 – Bloomberg (Philip Aldrick): “Chancellor of the Exchequer Jeremy Hunt ripped up most of what was left of Prime Minister Liz Truss’s controversial economic program, scrapping tax cuts and cutting back support for household energy bills in an effort to restore order to the UK public finances. Hunt set out £32 billion ($36bn) of savings in response to a backlash against Truss’s plan, which spooked investors and pushed up borrowing costs. The measures were less than half of what economists say he may eventually need to put the deficit on a stable trajectory after soaring inflation and sputtering growth gutted tax revenue.”

October 17 – Reuters (Paul Sandle): “Britain's Prime Minister Liz Truss apologised for ‘mistakes’ in her programme that caused investor confidence to evaporate and her poll ratings to plunge before nearly all of it was finally shredded on Monday, but said she would not step down. ‘I do want to accept responsibility and say sorry for the mistakes that have been made,’ Truss told the BBC. ‘I wanted to act but to help people with their energy bills to deal with the issue of high taxes, but we went too far and too fast.’”

October 19 – Reuters (Andy Bruce and Ana Nicolaci Da Costa): “The biggest jump in food prices since 1980 pushed British inflation back into double digits last month, matching a 40-year high hit in July... The… consumer price index (CPI) increased by 10.1% in annual terms in September.”

October 19 – Bloomberg (David Goodman, Greg Ritchie and Libby Cherry): “The Bank of England will start its delayed bond sales early next month, refocusing on the fight against record inflation after averting the threat of a market meltdown. The announcement of so-called quantitative tightening is a statement of intent from the central bank, which had been on the defensive for weeks after fallout from a government plan for massive unfunded tax cuts forced it to start buying gilts again in order to avoid a fire sale by pension funds. The sales will initially exclude the long-dated debt at the heart of recent market turmoil triggered by the government’s ill-fated fiscal plans.”

October 18 – Financial Times (George Parker, Jim Pickard, Emma Dunkley, Siddharth Venkataramakrishnan and Daniel Thomas): “Chancellor Jeremy Hunt is preparing to raid the profits of banks and energy companies in an attempt to fill a £40bn fiscal hole through a mix of tax rises and public spending cuts. Hunt’s Budget on October 31 is due to include big tax rises, with allies of the chancellor saying they expect him to target the earnings of lenders and oil and gas companies. He has spoken of ‘eye-wateringly difficult’ decisions. The chancellor told a sombre cabinet meeting on Tuesday that ministers would have to exert tight spending control, as he tries to prove to financial markets that he can bring Britain’s deficit under control.”

October 18 – Wall Street Journal (Chelsey Dulaney): “It has been a bad year for global bonds. But U.K. corporate bonds are being hit particularly hard by a toxic mix of political turmoil, high inflation and soaring interest rates. Highly rated corporate bonds issued in the British pound have posted a negative total return of around 25% this year as measured by the ICE BofA Sterling Corporate Index, by far the largest loss in the index’s almost 26-year history. In comparison, a similar index tracking U.S. dollar bonds is down 19% while one for euro-denominated bonds has lost 16% on a total-return basis…”

Bursting Bubble and Mania Watch:

October 17 – Reuters (Davide Barbuscia): “Government bonds may not offer much protection in a recession if surging inflation pressures central banks to continue tightening monetary policy, the BlackRock Investment Institute said. Risks of a global recession have increased as central banks around the world tighten monetary policy to bring down consumer prices… ‘Investors traditionally take cover in sovereign bonds, but we see this recession playbook as obsolete ... Result: We stay underweight Treasuries,’ they said, adding they expect government bond yields - which move inversely to prices - will keep rising.”

October 20 – Bloomberg (Jill R. Shah and Claire Ruckin): “The world’s biggest banks have already had to use about $30 billion of their own cash this year to fund loans for acquisitions and buyouts that they weren’t able to offload to investors. The lenders have been forced to fund at least 15 deals in the US and Europe as inflation and fears of a recession sap investor appetite for risky corporate debt. The total tally… could nearly double over the coming months as more deals are scheduled to close. While it’s not uncommon for banks to self-fund deals when market sentiment sours, the sheer amount of hung debt -- including $3.9 billion for Apollo Global Management Inc.’s purchase of Brightspeed and more than $8 billion for a buyout of Nielsen Holdings Plc -- is deterring banks from making new financing commitments.”

October 19 – Bloomberg (Davide Scigliuzzo and Michelle F. Davis): “Long maligned as the debt-addicted corporate raiders of Wall Street, private equity firms are resorting to an unusual maneuver to get deals done as borrowing costs spiral. They’re taking the leverage out of leveraged buyouts. Francisco Partners, Thoma Bravo and Stonepeak Partners are among those that announced new acquisitions in recent weeks without debt financing in place, effectively backstopping the entire purchase price… with cash from their own funds. Though likely temporary, the all-equity move is a dramatic departure for an industry famously hooked on leverage and constantly on the hunt for ever-more creative ways to boost returns.”

October 17 – Bloomberg (Nick Turner): “Chip delivery times shrank by four days in September, the biggest drop in years, in a sign that the industry’s supply crunch is easing. Lead times -- the gap between when a chip is ordered and when it is delivered -- averaged 26.3 weeks in the period, according to research by Susquehanna Financial Group. That compares with nearly 27 weeks the prior month.”

October 18 – Bloomberg (William Shaw, Ronan Martin and Jack Pitcher): “The world’s biggest banks are heading for their worst year of credit trading in a decade as soaring interest rates and global economic uncertainty bite into their profits. The 200 biggest investment banks are set to collectively make $8.3 billion in flow credit this financial year, a 36% yearly drop and the lowest since at least 2012, according to forecasts from Coalition Greenwich. Company bond yields are at the highest levels since the financial crisis in 2009.”

October 19 – Wall Street Journal (Peter Rudegeair): “The pandemic day-trading boom has gone bust. A swooning stock market and high inflation have sapped individual investors’ enthusiasm for buying and selling stocks. That was on display in earnings reports and financial disclosures from some of the biggest retail brokerages in recent weeks. The average daily number of retail trades handled by Charles Schwab Corp. fell to 5.52 million in the third quarter, the lowest level since it acquired TD Ameritrade… in late 2020. At Morgan Stanley, retail traders placed an average of 805,000 trades a day in the third quarter. That was down 16% from a year earlier and the lowest level since the investment bank bought E*Trade Financial Corp. in late 2020.”

October 17 – Bloomberg (Jan-Patrick Barnert): “History shows that the bear market in US stocks may be far from over. The S&P 500 Index has fallen 25% in a little more than nine months since its January peak, a shallower and shorter drop than is typical of similar instances over the last century. On average in that time, the benchmark has slid about 38% over a period of 15 to 16 months before reaching a bottom…”

October 16 – Financial Times (Emma Boyde): “Policymakers should re-examine risks posed by exchange traded funds during periods of stress, the IMF says… The authors of the IMF’s recently published global financial stability report expressed their deepest concerns about mutual funds with exposure to illiquid bonds, calling on policymakers to ensure that the funds used adequate liquidity management tools. However, it also said that policymakers ‘should further analyse exchange traded funds’. ‘The provision of intraday liquidity by ETFs makes them attractive for liquidity traders with short-term horizons. Together with the arbitrage activities of authorised participants who create and redeem ETF shares, this facilitates the transmission of non-fundamental shocks from short-term liquidity traders to securities markets,’ the IMF report said…”

Ukraine War Watch:

October 20 – Bloomberg (Jill R. Shah and Claire Ruckin): “Russian missile and drone attacks toppled more Ukraine power supplies on Thursday, forcing electricity grid operator Ukrenergo to prepare for rolling blackouts. Power demand exceeded supply for the first time since Russian salvos began targeting electricity infrastructure last week… ‘The enemy’s constant missile attacks are destroying our energy infrastructure,’ Ukrenergo said…”

October 18 – Bloomberg: “Ukrainian President Volodymyr Zelenskiy said nearly a third of the country’s power stations have been destroyed in Russian strikes since Oct. 10, triggering blackouts, while a report showed the nation’s power grid held steady. Kyiv’s mayor, Vitali Klitschko, said power and water supplies were partially restored. Earlier, he urged residents in the capital to conserve use as more critical infrastructure was damaged in further strikes. Zelenskiy expressed gratitude to troops who have intercepted attacking drones, saying ‘every destroyed drone is a life saved.’”

October 19 – Reuters (Mark Trevelyan): “Russian President Vladimir Putin said… he was introducing martial law in four Russian-occupied regions of Ukraine that Moscow claimed last month as its own territory but is struggling to defend from Ukrainian advances. In televised remarks to members of his Security Council, Putin boosted the powers of Russia's regional governors and ordered the creation of a special coordinating council under Prime Minister Mikhail Mishustin to step up the faltering war effort. He said the ‘entire system of state administration’, not only the specialised security agencies, must be geared to supporting what Russia calls its ‘special military operation’.”

October 18 – Reuters (Michael Georgy): “Iran has promised to provide Russia with surface to surface missiles, in addition to more drones, two senior Iranian officials and two Iranian diplomats told Reuters, a move that is likely to infuriate the United States and other Western powers. A deal was agreed on Oct. 6 when Iran's First Vice President Mohammad Mokhber, two senior officials from Iran's powerful Revolutionary Guards and an official from the Supreme National Security Council visited Moscow for talks with Russia about the delivery of the weapons.”

U.S./Russia/China Watch:

October 16 – CNBC (Evelyn Cheng): “Chinese President Xi Jinping said China reserves the option of ‘taking all measures necessary’ against ‘interference by outside forces’ on the issue of Taiwan. In a wide-ranging speech…, Xi spoke firmly about China’s resolve for reunification with the self-governed island... He was speaking at the opening ceremony of the ruling Communist Party of China’s 20th National Congress… ‘We will continue to strive for peaceful reunification with the greatest sincerity and the utmost effort,’ Xi said... ‘But, we will never promise to renounce the use of force. And we reserve the option of taking all measures necessary.’ ‘This is directed solely at interference by outside forces and a few separatists seeking Taiwan independence,’ he said, emphasizing that resolving the Taiwan question is a matter for the Chinese to resolve.”

October 20 – Financial Times (Demetri Sevastopulo): “The head of the US Navy has warned that the American military must be prepared for the possibility of a Chinese invasion of Taiwan before 2024, as Washington grows increasingly alarmed about the threat to the island. Admiral Mike Gilday, chief of naval operations, said the US had to consider that China could take action against Taiwan much sooner than even the more pessimistic warnings. The debate in the US about when China might invade Taiwan has intensified since Admiral Philip Davidson, then-head of Indo-Pacific Command, told Congress last year that the Chinese military could take action against Taiwan before 2027… ‘When we talk about the 2027 window, in my mind that has to be a 2022 window or potentially a 2023 window,’ Gilday told the Atlantic Council… ‘I don’t mean at all to be alarmist… it’s just that we can’t wish that away.’”

October 20 – Reuters (Michael Martina, David Brunnstrom, Elaine Lies and Daniel Leussink): “The U.S. government is considering a plan to jointly produce weapons with Taiwan, a business lobby said…, an initiative intended to speed up arms transfers to bolster Taipei's deterrence against China. U.S. presidents have approved more than $20 billion in weapons sales to Taiwan since 2017 as China has ramped up military pressure… But Taiwan and the U.S. Congress have warned of delivery delays because of supply chain difficulties and backlogs caused by increased demand for some systems due to the war in Ukraine.”

October 17 – Financial Times (Henry Foy): “The EU must toughen up its attitude towards China and see the country as an all-out competitor with limited areas of potential engagement, the bloc’s ministers have been advised ahead of talks on recalibrating Brussels’ strategy towards Beijing. The EU should work more closely with the US, strengthen its cyber and hybrid threat defences, diversify its supply chains away from China and deepen ties with other Indo-Pacific powers, according to a paper prepared for member states by the bloc’s foreign service. ‘China has become an even stronger global competitor for the EU, the US and other like-minded partners,’ says the paper… ‘It is therefore essential to assess how best to respond to current and foreseeable challenges.’ These, the paper says, are likely to ‘widen the divergence between China’s and our own political choices and positions’.”

Economic War/Iron Curtain Watch:

October 17 – Bloomberg (George Lei): “A global, integrated supply chain is on its death bed, with Washington working hard to prevent China from accessing US high-tech and kicking some Made-in-China items out of American supply chains. In response, Beijing is doubling down on import substitution in a bid to avoid being choked off from key technology by Washington or its allies. President Xi Jinping made a perfectly clear case for greater controls on supply chains when he delivered a keynote report on Sunday to the 20th Congress of the Chinese Communist Party. The report has been tweaked for the first time since Xi came to power in 2012, with two new chapters added -- one on security and the other on science/education, noted Julian Evans-Pritchard, senior China economist at Capital Economics. Both are connected to the push for ‘self-sufficiency,’ a phrase that was mentioned six times this year but absent five years ago.”

October 16 – Reuters (Evelyn Cheng): “Gazprom CEO Alexei Miller… said plans to cap the price of Russian gas exports would cause supplies to be halted, echoing a similar threat from President Vladimir Putin. The conflict in Ukraine has prompted European Union customers to reduce their purchases of Russian energy while the G7 and the EU are trying to impose a price cap on Russian oil and gas. ‘Such a one-sided decision is of course a violation of existing contracts, which would lead to a termination of supplies,’ Miller said…”

October 19 – Reuters (Sarah Wu): “Rising Taiwan-China and U.S.-China tensions have brought ‘more serious’ challenges for the semiconductor industry, the chairman of Taiwanese chipmaker TSMC said... Taiwan is a major producer of chips used in everything from cars and smartphones to data centres and fighter jets, and Taiwan Semiconductor Manufacturing Co Ltd (TSMC) is the world's largest contract chipmaker and Asia's most valuable listed firm… TSMC Chairman Mark Liu said: ‘The U.S.-China trade conflict and the escalation of cross-Strait tensions have brought more serious challenges to all industries, including the semiconductor industry.’”

Inflation Watch:

October 19 – Bloomberg (Jo Constantz): “Over half of working Americans have considered holding multiple jobs to pay their living expenses as inflation remained stubbornly high in September and real wages fell. About 38% of workers have looked for a second job, while an additional 14% have plans to do so, according to a survey of more than 1,000 full-time US employees by Qualtrics International… At the same time, 18% of working adults said they had moved to an area with a lower cost of living to cut expenses, and another 13% plan to do so. Working parents, in particular, are in the hot seat. About 70% say their pay isn’t keeping up with rising expenses.”

Biden Administration Watch:

October 18 – Washington Post (Ellen Francis): “Secretary of State Antony Blinken accused China of speeding up plans to seize Taiwan… ‘There has been a change in the approach from Beijing toward Taiwan in recent years’ Blinken told an event… This includes ‘a fundamental decision that the status quo was no longer acceptable and that Beijing was determined to pursue reunification on a much faster timeline,’ he said. Blinken did not provide details… and said China may be willing to use coercive means, a prospect that is ‘creating tremendous tensions.’ Responding Tuesday, the Chinese Foreign Ministry described Blinken’s comments as an example of the United States reneging on its commitment to the one-China policy…”

October 18 – Reuters (Pavel Polityuk and Jeff Mason): “The United States will hold Russia accountable for ‘war crimes’, the White House said…, hours after Russia attacked Ukrainian cities with drones during morning rush hour, killing at least four people in an apartment building in Kyiv. Ukrainian President Volodymyr Zelenskiy, in his Monday evening video address, said there had been more attacks. ‘Right now, there is a new Russian drone attack. There are (drones) that have been shot down.’”

October 16 – Reuters (David Lawder): “U.S. President Joe Biden will act ‘methodically’ in deciding how to respond to Saudi Arabia over oil output cuts, but options include changes to U.S. security assistance, White House national security adviser Jake Sullivan said… Sullivan… said no changes to the U.S.-Saudi relationship were imminent as Biden re-evaluates it. ‘And so the president isn't going act precipitously. He is going to act methodically, strategically and he's going to take his time to consult with members of both parties, and also to have an opportunity for Congress to return so that he can sit with them in person and work through the options,’ Sullivan said.”

October 19 – Financial Times (Edward Luce): “Imagine that a superpower declared war on a great power and nobody noticed. Joe Biden this month launched a full-blown economic war on China — all but committing the US to stopping its rise — and for the most part, Americans did not react. To be sure, there is Russia’s war on Ukraine and inflation at home to preoccupy attention. But history is likely to record Biden’s move as the moment when US-China rivalry came out of the closet. America is now pledged to do everything short of fighting an actual war to stop China’s rise. It is not clear that corporate America, or its foreign counterparts, have fully digested what is about to hit them.”

Federal Reserve Watch:

October 19 – Bloomberg (Dan Burns): “Federal Reserve Bank of St. Louis President James Bullard said he expects the central bank to end its ‘front-loading’ of aggressive interest-rate hikes by early next year and shift to keeping policy sufficiently restrictive with small adjustments as inflation cools. ‘You do have to think about what the reasonable level is,’ Bullard said…, suggesting that he doesn’t currently see the need to push rates higher than officials have already projected. The goal is to move to ‘some meaningfully restrictive level’ that will push inflation down. ‘But it doesn’t mean that you go up forever,’ he said.”

October 19 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of Minneapolis President Neel Kashkari said that the US central bank could potentially pause its interest-rate increases at some point next year if policymakers see clear evidence that core inflation is slowing. ‘My best guess right now is yes, do I think inflation is going to level out over the next few months, the services, the core inflation, and then that would position us some time next year to potentially pause,’ Kashkari said…”

October 19 – Reuters (Howard Schneider): “Interest rates that move too high could have a ‘nonlinear’ impact on the economy as businesses become more pessimistic, Chicago Fed President Charles Evans said…, mapping out a case for caution in the central bank's battle against high inflation. The Fed currently projects its target federal funds rate will rise to 4.6% next year, and Evans said that ‘if we have to increase the path of the funds rate much more ... it really does begin to weigh on the economy.’”

U.S. Bubble Watch:

October 18 – Wall Street Journal (Heather Gillers): “The U.K. pension blowup has left many U.S. companies pushing to assess whether the sharp 2022 rise in global interest rates could expose losses tied to the use of derivatives—contracts whose value is derived from the price of some other financial asset or indicator—in defined-benefit pension plans. The question hangs over private pension plans that together control $3.7 trillion in retirement savings in the U.S… General Motors Co., Eli Lilly & Co. and General Electric Co. are among the companies using a version of liability-driven investing, a strategy that triggered sizable cash calls for U.K. pensions and fueled market upheaval and central-bank intervention. So far, people who work in the U.S. corporate pension industry say there appears to be little cause for alarm.”

October 19 – Reuters (Dan Burns): “U.S. economic activity expanded modestly in recent weeks, although it was flat in some regions and declined in a couple of others, the Federal Reserve said… in a report that showed firms growing more pessimistic about the outlook. Moreover, the U.S. central bank's latest collection of anecdotes from contacts across its 12 districts, known as the ‘Beige Book,’ noted inflation pressures had eased somewhat and were expected to continue doing so, a key ‘soft data’ indication that the Fed's aggressive interest rate hikes may have started to turn the tide against the highest inflation in 40 years. ‘Some contacts noted solid pricing power over the past six weeks, while others said cost pass-through was becoming more difficult as customers push back… Looking ahead, expectations were for price increases to generally moderate.’”

October 19 – Bloomberg (Molly Smith): “US mortgage rates continued to climb last week, advancing to a two-decade high and escalating the downturn in the housing market. The contract rate on a 30-year fixed mortgage jumped another 13 bps to 6.94% in the week ended Oct. 14, marking the ninth-straight increase… That pushed down the group’s gauge of applications to purchase or refinance a home by 4.5%, the ninth drop in 10 weeks, to remain at the lowest level since 1997. Mortgage News Daily… put the 30-year rate at 7.15% on Tuesday.”

October 19 – CNBC (Diana Olick): “Mortgage demand… fell last week to the lowest level since 1997, as interest rates continued to rise. Homebuyers’ demand for mortgages dropped 4% for the week and was 38% lower than the same week one year ago… Applications to refinance a home loan fell 7% compared with the previous week… Demand was 86% lower than the same week one year ago. The number of borrowers who can benefit from refinancing is at a record low. Interest rates were so low during the first two years of the Covid pandemic that the vast majority of borrowers with higher rates already refinanced.”

October 20 – CNBC (Diana Olick): “Existing homes are selling at the slowest pace since September 2012, with the exception of a brief drop at the start of the Covid 19 pandemic. Sales of previously owned homes fell 1.5% in September from August to a seasonally adjusted annual rate of 4.71 million units… That marked the eighth straight month of sales declines. Sales were lower by 23.8% year over year… Despite the slowdown in sales, inventory continues to drop. There were 1.25 million homes for sales at the end of September, down 0.8% compared with September 2021… The median price of an existing home sold in September was $384,800, an increase of 8.4% from September 2021. Prices climbed at all price points. This makes 127 consecutive months of annual increases.”

October 18 – CNBC (Diana Olick): “Homebuilder sentiment in the single-family home market has fallen to half what it was just six months ago as mortgage rates climb… The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), which is designed to gauge market conditions, fell 8 points to 38 in October from the previous month. That’s the lowest level since 2012, with the exception of a brief drop at the start of the coronavirus pandemic… ‘High mortgage rates ... have significantly weakened demand, particularly for first-time and first-generation prospective home buyers,’ said NAHB Chairman Jerry Konter… ‘This situation is unhealthy and unsustainable.’… Of the index’s three components, current sales conditions slid 9 points to 45, and sales expectations in the next six months dropped 11 points to 35. Buyer traffic fell 6 points to 25.”

October 18 – Bloomberg (John Gittelsohn): “California home sales plunged 30% in September from a year earlier as soaring interest rates held back buyers in the costly state. Prices appeared to plateau, rising just 1.6% from last September to a median of $821,680, the California Association of Realtors reported... The majority of homes sold below the asking price as properties stayed on the market for a median of 22 days — more than double last year’s selling time. ‘High inflationary pressures will keep mortgage rates elevated, which will reduce homebuyers’ purchasing power and depress housing affordability in the upcoming year,’ Jordan Levine, chief economist for the real estate group, said... ‘A pullback in sales and a downward adjustment in home prices are expected in 2023.’ Last week, the group projected the statewide median home price would decline 8.8% next year, following a 5.7% gain for 2022.”

October 19 – Bloomberg (Esha Dey): “The clouds over the US car industry darkened further on Wednesday after auto-lending giant Ally Financial Inc.’s disappointing third-quarter results showed fewer people than expected took out new loans to buy vehicles. Ally’s shares nosedived on the results, falling as much as 11%... before trimming part of those losses. General Motors Co. and dealers Carvana Co. and CarMax Inc. also fell. ‘Ally is among the largest auto lenders in the country -- if credit is cracking, this is just the latest giant red flag for the whole auto complex,’ the Vital Knowledge newsletter wrote.”

October 18 – Reuters (Danilo Masoni): “Investors raised cash levels further in October to their highest in 21 years, as sentiment towards the economic outlook remained close to max bearishness, the latest global fund manager survey (FMS) by BofA showed… BofA said however growing investor expectations of a change in central bank monetary policy indicate a 'big rally' is likely in 2023. ‘FMS screams macro capitulation, investor capitulation, start of policy capitulation,’ BofA said, adding it expected the rally in the first half of next year, when interest rate cuts by the U.S. Federal Reserve become the consensus position.”

Fixed Income Watch:

October 19 – Wall Street Journal (Matt Grossman): “Investors are unloading securities sold by Fannie Mae and Freddie Mac FMCC that shift the risk of mortgage defaults away from taxpayers, a sign of growing concern about defaults if rising interest rates cause a severe recession. The securities, called credit-risk transfers, could incur losses if rising defaults creep into the massive swaths of mortgage debt backed by the housing-finance giants. The Federal Reserve’s interest-rate increases have shown signs of cooling the pandemic’s roaring real-estate market, and many worry that the central bank’s inflation-fighting may cause a recession that hurts homeowners’ ability to repay their loans.”

China Watch:

October 16 – Bloomberg: “Chinese President Xi Jinping signaled no change in direction for two main risk factors dragging down China’s economy -- strict Covid rules and housing market policies -- providing little lift to a worsening growth outlook. Xi praised Covid Zero, his no-tolerance approach to containing infections…, although he didn’t reference the virus again in sections laying out plans for the future. His slogans on China’s property market, meanwhile, repeated prior language even as the sector experiences its longest-ever slump due to policies aimed at curbing debt and financial risks.”

October 17 – Reuters (Yawen Chen): “President Xi Jinping has just made clear that he has bigger worries than the flagging economy. He opened the twice-a-decade Communist Party Congress… with a speech more focused on national security and stability than in the past. That means state-led, inward-looking policies like self-sufficiency and zero-Covid will trump economic growth. Xi’s… speech summarising the Party’s achievements and priorities will be painstakingly studied by 96 million Party cadres across the country and become the basis for all other policy documents over the next five years. Investors would do well to follow their lead. Compared to 2017, it is far more political: Xi took direct aim at power factions, urging more ‘self-struggle’. A new plan to regulate wealth accumulation will also keep up the pressure from his sweeping anti-corruption drive.”

October 19 – Financial Times (Sun Yu): “Private sector attendance at China’s Communist party congress has fallen almost 50% since Xi Jinping assumed power, reflecting what analysts say is the waning status of tycoons. The party has pledged to crack down on the ‘disorderly expansion of capital’ in an effort to reduce wealth inequality and ensure ‘common prosperity’. ‘It is clear that Xi saw the political access that entrepreneurs had in previous years as a potential threat to the Communist party,’ said Neil Thomas at Eurasia Group, a consultancy.”

October 15 – Financial Times (Thomas Hale and Edward White): “China has insisted it will stick with its strict zero-Covid policies, saying its extensive testing and quarantine apparatus is sufficient… Government measures, which also include lockdowns, are ‘the most cost effective and have worked the best for our country’, a spokesperson for China’s Communist party said. He pointed to the country’s large elderly population, its uneven regional development and its insufficient medical resources, adding that the policies would continue to improve.”

October 18 – Bloomberg: “China’s economy is improving, Premier Li Keqiang said Monday, as he called on officials to better implement policies intended to keep the recovery going. Li echoed pledges from President Xi Jinping’s two-hour speech Sunday…”

October 18 – Bloomberg: “A worsening crisis in China’s property market is dragging junk dollar bonds from the nation’s borrowers deeper into distress, as the implosion of what was once one of the world’s most-profitable bond trades sends ripples across trading floors. Anyone who had been expecting a market turnaround from the 20th Communist Party congress which started Sunday has been left grappling with a further grind lower… Average prices of the securities, dominated by real estate firms, dropped 1-2 cents Tuesday to a record low below 56 cents. Chinese high-yield notes have now suffered a record drawdown of more than 55% from a peak in 2021.”

October 16 – Reuters (Ellen Zhang and Ryan Woo): “By any account, $1 trillion seems huge. That's the scale of budget shortfalls facing Chinese provinces, reducing their fiscal firepower to fund infrastructure spending and tax cuts, and raising risks for the world's second-biggest economy in 2023. The timing couldn't be worse for policymakers in Beijing, as the economy wobbles… Local governments have long been a pump-primer of China's growth, but declining state land sales revenue in the wake of an ongoing crackdown on debt in the sector has severely eroded their financial power… In the first eight months, China's 31 provincial-level regions reported a gap between general public revenue and expenditure totalling 6.74 trillion yuan ($948bn). That’s the widest for the period since at least 2012…”

October 18 – Bloomberg (Kyoungwha Kim): “The outlook for distressed Chinese developers will likely turn even more bearish. Slumping home prices and transaction volumes have left developers with less cash to buy land from local governments, leading to a reduced pipeline of future projects. With a confidence crisis among buyers causing demand to shrink along with supply, the worst may be yet to come. Fitch Ratings has announced more than 120 downgrades in the sector since 2021.”

Central Banker Watch:

October 17 – Bloomberg (Jana Randow and William Horobin): “The European Central Bank’s unity over the size of monetary-policy moves risks unraveling in coming months as officials diverge on the pain they reckon the economy can handle in the depths of the energy crisis. With a window for public comments before the Oct. 27 decision about to close…, the sum of multiple remarks in Washington in recent days by a spectrum of Governing-Council members point to underlying discord that is likely to become more pronounced as the year draws to a close.”

October 16 – Financial Times (Balazs Koranyi): “Two key European Central Bank policymakers made the case… for a cut in the bank's oversized balance sheet, indicating that the next key policy debate will be on how to run down the ECB's more than 5 trillion euros worth of bonds. Bundesbank President Joachim Nagel and Dutch central bank chief Klaas Knot both said that the time for this so-called quantitative tightening is approaching, joining a still small but growing group advocating a run-off in assets. ‘Once we will have reached neutral territory with our policy rate, it makes sense to consider the roll-off of asset purchases by limiting reinvestments,’ Knot said… ‘As monetary policy continues to normalise, we will also need to look into scaling back Eurosystem asset holdings, which amount to almost 5 trillion euros,’ Nagel told a separate event.”

October 18 – Bloomberg (Carolynn Look): “The European Central Bank must continue to rapidly roll back monetary support and not halt interest-rate increases too early, according to Governing Council member Joachim Nagel. With inflation ‘alarmingly high’ and policy still accommodative, officials ‘have to withdraw that stimulus quickly,’ the Bundesbank president told an audience… If necessary, borrowing costs will have to move ‘into restrictive territory.’ The ECB is expected to repeat September’s historic 75 bps hike when it meets next week.”

Global Bubble Watch:

October 19 – Reuters (Toby Sterling): “The Dutch central bank (DNB) said… it had called on pension funds in the Netherlands to review their readiness to weather a sudden spike in interest rates, following turmoil among British funds. A spokesperson for the bank confirmed a Financial Times report that said the funds had been asked to review their holdings of liquid assets.”

October 17 – Reuters (Julie Gordon): “Business sentiment has softened in Canada, with many firms expecting slower sales growth amid rising interest rates and cooling demand, and a majority now think a recession is likely in the next 12 months, a Bank of Canada survey showed… While there are early signs that pressures on prices and wages are easing, business inflation expectations remain high, the third quarter Business Outlook Survey showed…”

Europe Watch:

October 16 – Wall Street Journal (Joe Wallace and Margherita Stancati): “Europe is as ready as it can be for a winter without Russian natural gas, but there is no margin for error. Storage facilities of gas for heating and power generation are almost full, consumption is down and liquefied natural gas tankers are steaming in. Europe is in a stronger position than feared in recent months, after Moscow slashed gas deliveries… However, much could go wrong. One long cold spell or a busted pipeline could upset the region’s preparations, threatening emergency rationing, blackouts and a deeper economic recession. Officials and analysts say the willingness of consumers to cut back on gas use will be key for getting through the winter. A mild winter would help, too.”

October 18 – Financial Times (Amy Kazmin): “Until midsummer, Italian ceramics company Saxa Gres was on a high. It had record first-half sales of €50mn — up from €43mn for all of 2021 — as demand for its cobblestones and faux stone paving slabs surged in the wake of the post-coronavirus construction recovery. But in July, Francesco Borgomeo, the company’s president, shut down its three kilns and furloughed 500 employees as soaring gas prices made production economically unviable. ‘I had no other option,’ he said. ‘I had to protect the company. It is impossible to produce like this. I am waiting for the storm to pass and then we will reopen.’ Saxa Gres’s woes are symptomatic of the deepening distress among Italian manufacturers in energy-intensive industries such as ceramics, paper, glass and metal… Their woes highlight the daunting task confronting Italy’s prime minister in waiting Giorgia Meloni…”

October 16 – Associated Press (Boubkar Benzabat and Patrick Hermansen): “Thousands of protesters, including France’s newly crowned Nobel literature laureate, piled into the streets of Paris…, in a show of anger against the bite of rising prices and cranking up pressure on the government of President Emmanuel Macron. The march for wage increases and other demands was organized by left-wing opponents of Macron and lit the fuse on what promises to be an uncomfortable week for his centrist government. Transport strikes called for Tuesday threaten to dovetail with wage strikes that have already hobbled fuel refineries and depots, sparking chronic gasoline shortages that are fraying nerves among millions of workers and other motorists dependent on their vehicles, with giant lines forming at gas stations.”

EM Crisis Watch:

October 19 – Reuters (Peter Frontini): “Brazilian presidential candidate Luiz Inacio Lula da Silva's lead over President Jair Bolsonaro has shrunk to 5 percentage points ahead of a runoff vote set for Oct. 30, a poll by Genial/Quaest showed… Former President Lula has 47% voter support, down from the last week's 49%, while Bolsonaro gained 1 point to 42%.”

October 20 – Bloomberg (Beril Akman): “Turkey’s central bank lowered its benchmark interest rate for the third time in a row and by a bigger magnitude than forecast, signaling it’s close to ending a series of cuts that have pushed an ultra-loose monetary policy to new extremes… The Monetary Policy Committee reduced its one-week repo rate to 10.5% from 12%..., despite annual inflation rocketing past 83%.”

October 17 – Reuters (Rae Wee and Summer Zhen): “Indonesia's currency is tumbling and foreign money in its bond markets is heading for the exits, stoking fears that Southeast Asia's largest economy is finally starting to crack after months of remarkable resilience against global headwinds. Despite its history of merciless market drubbings during times of global economic stress, Indonesia was a surprising outperformer until August, buoyed in large part by its exports of gas, palm oil, and other prized commodities… The rupiah's historic vulnerability owed to its status as a risky but high-yielding ‘carry’ trade, attracting high foreign ownership of Indonesian bonds when yields in more developed markets offered relatively paltry returns.”

October 17 – Bloomberg (John Boudreau): “It was a jarring image for one of the world’s fastest growing economies: Scores of Vietnamese flooded branches of the nation’s fifth-largest bank to pull out their savings amid rumors the lender was tied to a real estate conglomerate under investigation for fraud. Vietnam’s central bank spent the last week calming markets and depositors while Saigon Commercial Bank raised interest rates and lured back customers. On Saturday, the regulator said it would place the privately-held lender under ‘special scrutiny’ and directed four banks to help manage it.”

Japan Watch:

October 17 – Reuters (Mariko Katsumura and Daniel Leussin): “The Bank of Japan (BOJ) will raise its inflation forecast for this fiscal year to above 2.5% at its next policy meeting as a weakening yen and higher raw material costs drive up prices, the Kyodo news agency cited sources as saying… While the upgrade will bring inflation more firmly above the central bank's 2% target, the policy board of the BOJ was likely to keep ultra-loose monetary policy in place to support Japan's economy, Kyodo said.”

October 19 – Bloomberg (Garfield Reynolds and Michael McKenzie): “The value of US Treasuries owned by Japanese investors slid by almost 3% in August to the lowest level in three years as a slump in global debt markets hammered down prices. The dollar value of US sovereign securities held by official and private investors from the Asian nation fell by $34.5 billion to $1.2 trillion…”

Social, Political, Environmental, Cybersecurity Instability Watch:

October 20 – NBCNY: “COVID-19 positivity rates are back above 20% in parts of Manhattan, as the latest city data indicate the virus is digging in ahead of winter… At the same time, the transmission rate in Manhattan, at 172.7 new cases per every 100,000 people over the last seven days, is up 7% in the last two weeks.”

October 16 – Bloomberg (Sybilla Gross and Ben Westcott): “Australian firms and the government are sounding the alarm over relentless flooding that’s threatening economic damage and even higher cost-of-living pressures for consumers. Communities in parts of Victoria and New South Wales states have been urged to evacuate, as emergency services issue alerts about worsening floods. Treasurer Jim Chalmers warned… the damage to some of the nation’s top food-producing regions would likely lift prices at a time when inflation is already high.”

Leveraged Speculation Watch:

October 18 – Bloomberg (Nur Dayana Mustak): “Goldman Sachs... said its wealthy clients are turning to the bank for more than investment advice and portfolio management. ‘Increasingly, they're looking for us also to provide financing,’ Chief Financial OfficerDenis Coleman said… during the company’s earnings call, adding, ‘we continue to see good opportunities particularly across the wealth-management segment.’ Banking executives are catering to high-net-worth clients whose paper wealth has fallen — and in some cases, evaporated — as rising interest rates have pushed the S&P 500 down more than 20% this year.”

October 17 – Bloomberg (Nishant Kumar): “For one of the world’s largest hedge funds, the UK pension fund crisis is just start as central banks around the world raise interest rates and turn off quantitative easing. Paul Marshall, co-founder of $62 billion investment firm Marshall Wace, said central banks had created the perfect environment for ‘mal-investment’ by artificially holding interest rates low for years. ‘The UK LDI industry is the first casualty of the end of the ‘money for nothing’ era - the first dead fish to float to the surface as rising central bank interest rates act like dynamite fishing in global asset markets,’ Marshall said in a letter sent to clients this month.”

Geopolitical Watch:

October 17 – Financial Times (James Politi): “The US and UK have agreed to bolster their co-operation in implementing and enforcing financial sanctions as they try to make it harder for Russia and other countries to elude economic punishment imposed by the west. In a joint announcement…, top officials at the US and UK Treasury said they had decided to take their collaboration to a ‘new level’. ‘We will identify opportunities to pool expertise, to think creatively about the challenges we face, to explore opportunities to align the way we implement sanctions, and to assist our stakeholders either through joint products or by providing guidance resulting from collaboration behind the scenes,’ wrote Andrea Gacki, director of the US Treasury’s Office of Foreign Assets Control, and Giles Thomson, director of the Office of Financial Sanctions Implementation at the UK Treasury.”

October 19 – Reuters (Tim Kelly, Nobuhiro Kubo and Yukiko Toyoda): “Between China's 20th Communist Party Congress… and the next one in 2027, Japan will undertake its biggest arms buildup since World War Two in a race to deter Beijing from war in East Asia, according to Japanese government officials and security analysts. Japan identified China as its chief adversary in its 2019 defence white paper, worried that Beijing's flouting of international norms, pressure on Taiwan and rapid military modernisation posed a serious security threat. That anxiety has intensified since Russia invaded Ukraine, weakening Japanese public opposition to rearming…”

October 16 – Bloomberg (Eric Martin): “Finance ministers and central bankers from the world’s biggest economies were divided on a variety of issues, including Russia’s war in Ukraine and ways to deal with climate change, according to a Group of 20 statement released three days later than usual due to those tensions. ‘Many members strongly condemned Russia’s war against Ukraine and expressed the view that Russia’s illegal, unjustified and unprovoked war of aggression against Ukraine is impairing the global economic recovery,’ according to the G-20 ‘Chair’s Summary’ issued on Sunday by Indonesia, which leads the body this year.”

Friday Evening Links

[Reuters] Wall Street ends higher as hopes for less aggressive Fed grow

[Yahoo/Bloomberg] Gold Jumps as Japan Moves to Prop Up Yen Drive Down Greenback

[Yahoo/Bloomberg] Treasury Yields Jolted From Highs on Prospect of Fed Letup

[Yahoo/Bloomberg] Yen Intervention Sparks Speculation Over Japan’s Funding Moves

[Yahoo/Bloomberg] Fed Officials Expect Debate on Rate Peak and When to Slow Hikes

[Reuters] Fed's Daly says it's time to start talking about slowing rate hikes

[CNBC] U.S. consumer is soldiering on despite soaring inflation and recession risk, credit card giants say

[Yahoo/Bloomberg] Summers Warns on Deficit ‘Doom Loop’ Risk, Oil Price Spike

[Yahoo Finance] The real trade war with China has begun

[Yahoo/Bloomberg] BMO’s Davis Warns of Japan as Next Potential Bond ‘Hurricane’

[Reuters] Cases of BQ.1, BQ.1.1 COVID variants double in U.S. as Europe warns of rise

[Reuters] Protests rage in Iran's southeast, amid crackdown call

[FT] Investors should brace: shocks are on the way

[FT] Could the Tory turmoil get even worse?

Friday Afternoon Links

[Yahoo/Bloomberg] Stocks Jump With Treasury Reversal in Wild Session: Markets Wrap

[Yahoo/Bloomberg] Yen Surges as Japan Intervenes in Market Again to Prop It Up

[Reuters] Wall Street rallies on hopes of smaller Fed rate hikes

[Reuters] Race to be next UK PM begins as momentum grows behind Boris Johnson

[Reuters] U.S. 2022 budget deficit halves to $1.375 trillion despite student loan costs