Friday, December 16, 2022

Weekly Commentary: Credit Downturn Acceleration

Interesting week. The FOMC statement and “dot plot” were viewed as somewhat more hawkish than expected. In his press conference, it was a solid “Balanced Powell” performance.

Powell stuck with his now familiar hawkish points. “We have more work to do.” “Where we’re missing is on the inflation side. And we’re missing by a lot.” “We do see a very, very strong labor market, one where we haven’t seen much softening; where job growth is very high; where wages are very high.” “I would say it’s our judgment today that we’re not at a sufficiently restrictive level yet…

He has, however, definitely toned it down – now pulling some punches. Questioned about his previous warning of pain from the Fed’s inflation fight, Powell deflected: “So the largest amount of pain would come from a failure to raise rates high enough and from us allowing inflation becoming entrenched in the economy.

“Balanced Powell:” “We’re restrictive, and I think we’re getting close to the level we think sufficiently restrictive.” But one of the more interesting exchanges was Powell responding to whether the Fed might re-evaluate and adjust its 2% inflation target.

Powell: “Changing our inflation goal is not something we’re thinking about, and it’s something we’re not going to think about… I think this isn’t the time to be thinking about that. I mean, there may be a longer-term project at some point.”

“Longer-term project”? Commentators on Bloomberg were quick to question why the Chair would today even broach the subject of adjusting the target. “Balanced Powell.”

FT headline: “‘Emphasize the Pain’: Jay Powell Keeps Hawkish Tone Even as Inflation Eases.” Most pundits and analysts saw the FOMC and Fed as more hawkish. Curiously, however, two-year Treasury yields declined a couple basis points during Powell’s press conference to end the session slightly lower.

For the week, two-year Treasury yields dropped a notable 17 basis points to a more than two-month low 4.18% (down from Nov. 7 high of 4.72%). Bloomberg: “Bond Traders Dismiss Fed’s Hawkish Tone, Bet on 2023 Rate Cuts.”

Even more intriguing, Treasury yields declined this week in the face of a surge in European yields. German bund yields jumped 22 bps to 2.15%, with the spread to Treasuries narrowing a notable 31 to a two-year low 135 bps. French 10-year yields jumped 28 bps (2.68%), Spanish yields 29 bps (3.25%), and Portuguese yields 31 bps (3.17%). Italian yields surged 46 bps (up 69bps in six sessions) to a six-week high 4.30%. Reuters: “Debt-Laden Italy Lashes Out at 'Crazy' ECB After Rate Hike.” A harbinger of monetary union instability.

The Treasury market is behaving peculiarly. On the margin and versus market expectations, the ECB was somewhat more hawkish than the Fed. My sense is that Treasury market focus has subtly shifted more to fundamental developments and away from monetary policy. The entire yield curve is now inverted. The 2yr/10yr spread closed Friday’s session at negative 70 basis points, after trading at a multi-decade low negative 84 bps last week. And even the three-month/two-year spread traded this week to negative 16 bps (ended week at negative 13) – the low since crisis period March 2020. Something(s) has the markets anticipating a dovish pivot in the not too distant future. The expected Fed funds rate at the FOMC’s March 16th meeting dropped 10 bps this week to a seven-week low 4.78%. The expected rate for the June 15th meeting fell 15 bps to a nine-week low 4.76% (December down 18bps to 4.35%).

The “Bond Markets Call BS on Hawkish Fed Chair As Recession Risks Mount.” What might the bond market see that Fed officials are missing?

Stocks enjoyed a nice late-year rally. 2022 economic resilience has bolstered bullish sentiment in the face of stock market losses. The Fed should wrap up rate increases within the next few months. Meanwhile, global economic prospects have brightened with China jettisoning zero-Covid.

Yet there is a compelling bear case gathering momentum. Importantly, system Credit growth has slowed - and the risk of a precipitous lending slowdown is rising.

December 12 – Wall Street Journal (James Mackintosh): “Top executives at Blackstone Inc. declared themselves baffled that so many retail investors want their money back from its giant private property fund, given its strong performance. They shouldn’t be surprised. The very design of the fund encourages investors to withdraw when they see others doing so. My worry is, those same incentives could hit other parts of the financial system as central banks pull back from easy money… Most harmed will be those who piled into private assets without thinking about how much cash they might need. The basic principle of the Blackstone Real Estate Income Trust, or BREIT, is that it took $46 billion from ordinary investors, added debt and bought a bunch of property, mostly Sunbelt housing and warehouses. It was good at it, or perhaps lucky, and the value of the fund went up a lot, so it was very popular. But this year mortgage rates soared and recession fears rose, and house prices began to come down. They have dropped only a bit so far, and not everywhere, but enough to make it less obvious to investors that they ought to be piling cash into a leveraged bet on property prices.”

Bubble inflection points are typically marked by a reversal of speculative flows out of an asset class. After being inundated by flows during the pandemic (especially this year’s first nine months), the “private Credit” boom is suddenly jeopardized by (deferred) redemption requests. And with Blackstone and others limiting monthly/quarterly redemptions, remaining holders will fear being left holding the bag. Fund outflows require asset liquidations (i.e. commercial buildings and corporate loans), which is tantamount to tightening lending and financial conditions. Factor in tightening bank lending standards, and there’s reason to fear an accelerating downside to both the real estate Bubble and corporate lending boom.

December 11 – Wall Street Journal (Matt Wirz, Ben Eisen and Tom McGinty): “Consumer spending in the U.S. is going strong. Consumer lending, not so much. The financial squeeze that started about six months ago for companies that lend to ordinary Americans is getting worse, contrasting sharply with recent rallies in stocks and corporate bonds. The main reason: These finance companies have lost access to easy money. Widespread economic uncertainty has made debt investors less willing to buy the bonds these nontraditional lenders issue… Now, these finance companies are paying as much as four times what they paid in January to borrow in bond markets the cash they lend to customers… Once-highflying consumer-finance companies such as Pagaya Technologies have flipped from profit to loss. Some smaller outfits are shutting down altogether. Many of the nontraditional lenders launched within the past decade, which means they have never weathered a sustained period of high interest rates. ‘All of these fintech firms talk about their data science and machine learning capabilities, but the truth is, their models have not been battle tested through a recession yet,’ said Reggie Smith, JPMorgan… lead fintech stock analyst.”

The ongoing crypto Bubble collapse should have us all fearing the underbelly of “fintech,” “De-Fi” and BNPL (buy now, pay later). Carvana has imploded. NPR: “In a Year Marked by Inflation, 'Buy Now, Pay Later' is the Hottest Holiday Trend.” Hangover.

December 14 – Bloomberg (Paige Smith): “US credit-card and personal-loan delinquencies are likely to rise in 2023 to the highest in a dozen years, with lenders cutting back on originations as a potential recession looms. Serious card delinquencies are expected to climb to 2.6% at the end of next year from 2.1% at the close of 2022, according to a forecast… by credit-reporting firm TransUnion. Delinquency rates for unsecured personal loans are also expected to gain, to 4.3% from 4.1%. ‘The liquidity people had is going away,’ Michele Raneri, vice president of US research and consulting at the…company, said... ‘Inflation is a huge contributor.’”

December 16 – Bloomberg (Finbarr Flynn): “Moody’s… raised its forecast for speculative-grade corporate defaults in 2023, warning they could more than quadruple under its most pessimistic scenario. The agency predicts the default rate will climb to 4.9% by November of next year under its baseline scenario, from a forecast of 2.9% for the end of 2022. Last month’s year-ahead projection was 4.5%.”

It took some time. The Credit cycle downturn has accelerated. There is ample justification for joining Moody’s in contemplating the “most pessimistic scenario”. Credit conditions are tightening after historic Credit and speculative Bubbles. Losses – stocks, crypto, options and other speculative trading – continue to mount, as households and businesses burn through their pandemic stimulus cash hoards. Rising rates and market yields are pressuring asset prices. The cost and Availability of Credit are increasingly contractionary. In short, the backdrop is set for a powerful reversal of speculative flows coupled with lender angst to usher in a most painful and destabilizing Credit down-cycle.

Is another crypto shoe about to drop?

December 16 – Financial Times (Scott Chipolina, Michael O’Dwyer, Martha Muir, Joshua Oliver, and Stephen Foley i): “Outflows from Binance accelerated to $6bn in the first half of this week, while accounting firm Mazars has halted its work on crucial ‘proof of reserves’ reporting, as the crypto exchange battles to avert a crisis of confidence. Binance… is battling to reassure investors of its financial strength following the collapse of rival crypto exchange FTX. The exchange said on Friday that it had been hit by roughly $6bn in net withdrawls between Monday and Wednesday.”

December 16 – CNBC (Ari Levy): “Over a month after the collapse of FTX, investor concern over crypto exchange Binance isn’t fading. Binance’s native token, BNB, has fallen 15% in the past week, including a drop of over 6% in the past 24 hours. BNB, first minted in 2017, is the world’s fifth most valuable cryptocurrency, with a market cap of about $39 billion, according to CoinMarketCap. It’s behind only bitcoin, ethereum, tether and USD Coin.”

December 16 – CNBC (MacKenzie Sigalos and Kate Rooney): “Accounting firm Mazars Group has suspended all work with its crypto clients. The decision to cut ties with Binance, KuCoin and comes just after the global accounting firm released ‘proof of reserve’ reports for several digital asset exchanges. The move comes as major cryptocurrency exchanges look to prove their solvency, and show they have enough money to cover customer withdrawals.”

And the biggest shoe… Market and media focus have been on the loosening of zero-Covid, myriad Beijing stimulus measures, and rallying Chinese stocks and developer bonds. Meanwhile, new leaks are springing up in history’s greatest Bubble. Two key sources of acute vulnerability – “wealth management products” and local government financing vehicles (LGFV) – indicate heightened stress.

December 14 – Bloomberg (Wei Zhou): “Concerns are growing about the $1.6 trillion of debt from Chinese local government financing vehicles amid one of the fastest declines in the onshore credit market. Wealth-management products, investment pools that have been selling corporate bonds to meet investor redemptions, are one of the major buyers of LGFV yuan notes. Surging yields and widening credit spreads have prompted firms, including many LGFVs, to pull a cumulative 84 billion yuan ($12.1bn) of planned bond sales since the start of November… Yields on some notes from nonfinancial firms including LGFVs rose more than 10 bps Wednesday… Redemptions of WMPs had already resulted in yield premiums for three-year AAA-rated corporate bonds reaching the highest level since August 2020… The deepening selloff in corporate notes is poised to exacerbate refinancing pressure on LGFVs and lead to higher credit risk in the sector.”

December 14 – Financial Times (Sun Yu): “Beijing’s retreat from its zero-Covid policy is causing chaos in the country’s Rmb29tn ($4.1tn) market for wealth management products, with some fund managers having to freeze withdrawals or sell down their holdings as they struggle to cope with a rush of redemptions by investors. Half of the country’s 31,000 outstanding fixed-income WMPs have reported a decline in value since the government first signalled that it would relax its strict approach to Covid-19 on November 11… Wind, a financial data provider, reported that 1,837 fixed-income WMPs, a major source of funding for China’s bond market, were trading below par value as of December 12, compared with 256 at the beginning of November.”

China’s economy is in serious trouble – the most peril of the pandemic period. And I believe it was more fear of an unfolding downward economic spiral than public protests that was behind Beijing’s abrupt abandonment of zero-Covid. If, as I suspect, Beijing officials are panicked, we can expect a steady drumbeat of fiscal and monetary stimulus. Unlike in the past, markets can no longer take for granted that Beijing has things under control.

They certainly don’t have Covid under control, as a historic wave of infections gathers momentum. China faces a few extremely grim months. Unprecedented uncertainty. How does China’s inadequate healthcare system hold up? The frail economy? Housing pushed over the cliff? Can Chinese society hold together through additional challenging months, smothered by such extraordinary insecurity and deflated prospects? The Chinese will persevere, but can they regain the necessary confidence to thwart economic depression? How long will it take to restore trust in policymaking? And, finally, will confidence be sustained in China’s currency and bloated banking system in the face of massive Beijing stimulus measures?

December 14 – Bloomberg: “China asked some of the nation’s biggest banks to help stabilize the domestic bond market after a wave of fund redemptions by retail investors fueled the biggest credit selloff since 2015, according to people familiar... Regulators asked lenders to buy bonds via their proprietary trading desks… The goal is to absorb the selling pressure caused by retail withdrawals from some of those same banks’ wealth management products, the people said. The so-called window guidance on bond purchases includes notes issued by Chinese local government financing vehicles, one of the people said… The guidance underscores regulators’ concern that a downward spiral of fund redemptions and falling bond prices may stoke financial instability.”

Monstrous Chinese banks stuffed with dung. Little wonder Treasuries are rallying, with inklings of the first safe haven bid in a while. And I would tend to somewhat dismiss the view that Treasury yields are discounting typical recession risk. The inflation-fighting Fed is, after all, prepared to hold its ground in the event of some economic weakness. Market yields are instead pricing in rising probabilities of systemic instability forcing the Federal Reserve into emergency rate cuts and likely more QE. Fed officials are not prepared for such a scenario.

For the Week:

The S&P500 fell 2.1% (down 19.2% y-t-d), and the Dow lost 1.7% (down 9.4%). The Utilities slipped 0.5% (down 3.2%). The Banks dropped 2.8% (down 26.1%), and the Broker/Dealers sank 4.4% (down 8.5%). The Transports dipped 0.2% (down 16.6%). The S&P 400 Midcaps fell 2.1% (down 15.0%), and the small cap Russell 2000 slumped 1.9% (down 21.5%). The Nasdaq100 dropped 2.8% (down 31.1%). The Semiconductors fell 3.1% (down 33.2%). The Biotechs gained 2.1% (down 3.5%). With bullion slipping $4, the HUI gold equities index fell 2.5% (down 14.3%).

Three-month Treasury bill rates ended the week at 4.15%. Two-year government yields dropped 17 bps to 4.18% (up 345bps y-t-d). Five-year T-note yields fell 14 bps to 3.63% (up 245bps). Ten-year Treasury yields declined nine bps to 3.49% (up 198bps). Long bond yields slipped two bps to 3.55% (up 164bps). Benchmark Fannie Mae MBS yields sank 27 bps to 4.89% (up 282bps).

Greek 10-year yields jumped 31 bps to 4.29% (up 297bps y-t-d). Italian yields surged 46 bps to 4.30% (up 313bps). Spain's 10-year yields rose 29 bps to 3.25% (up 268bps). German bund yields gained 22 bps to 2.15% (up 233bps). French yields jumped 28 bps to 2.68% (up 248bps). The French to German 10-year bond spread widened six to 53 bps. U.K. 10-year gilt yields gained 15 bps to 3.33% (up 236bps). U.K.'s FTSE equities index fell 1.9% (down 0.7% y-t-d).

Japan's Nikkei Equities Index declined 1.3% (down 4.4% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.25% (up 18bps y-t-d). France's CAC40 dropped 3.4% (down 9.8%). The German DAX equities index fell 3.3% (down 12.5%). Spain's IBEX 35 equities index lost 2.1% (down 6.9%). Italy's FTSE MIB index slumped 2.4% (down 13.4%). EM equities were mostly lower. Brazil's Bovespa index sank 4.3% (down 1.9%), and Mexico's Bolsa index declined 1.7% (down 6.8%). South Korea's Kospi index lost 1.2% (down 20.7%). India's Sensex equities index declined 1.4% (up 5.3%). China's Shanghai Exchange Index fell 1.2% (down 13.0%). Turkey's Borsa Istanbul National 100 index jumped 4.2% (up 181%). Russia's MICEX equities index dropped 2.1% (down 43.7%).

Investment-grade bond funds posted inflows of $177 million, while junk bond funds reported outflows of $313 million (from Lipper).

Federal Reserve Credit was little changed last week at $8.547 TN. Fed Credit was down $354bn from the June 22nd peak. Over the past 170 weeks, Fed Credit expanded $4.820 TN, or 129%. Fed Credit inflated $5.736 Trillion, or 204%, over the past 527 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $1.8bn to $3.308 TN - off the low since June 2017. "Custody holdings" were down $129bn, or 3.8%, y-o-y.

Total money market fund assets jumped $22.6bn to $4.741 TN - the high since June 2020. Total money funds were up $105bn, or 2.3%, y-o-y.

Total Commercial Paper fell $15.9bn to $1.302 TN - declining from the high since November 2009. CP was up $216bn, or 20%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell 11 bps to a three-month low 6.17% (up 305bps y-o-y). Fifteen-year rates dropped 16 bps to 5.52% (up 318bps). Five-year hybrid ARM rates declined 11 bps to 5.36% (up 291bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down two bps to 6.61% (up 337bps).

Currency Watch:

For the week, the U.S. Dollar Index was little changed at 104.70 (up 9.4% y-t-d). For the week on the upside, the Norwegian krone increased 1.1%, the euro 0.4% and the Swiss franc 0.1% On the downside, the South African rand declined 1.9%, the Australian dollar 1.6%, the Brazilian real 1.1%, the British pound 0.9%, the Swedish krona 0.9%, the New Zealand dollar 0.6%, the South Korean won 0.4%, the Canadian dollar 0.4%, the Singapore dollar 0.4%, and the Mexican peso 0.1%. The Chinese (onshore) renminbi declined 0.22% versus the dollar (down 8.86% y-t-d).

Commodities Watch:

December 12 – Reuters (Deep Vakil): “Goldman Sachs expects gold, with its real demand drivers, to outperform the highly volatile bitcoin in the long term, the bank wrote… Gold is less likely to be influenced by tighter financial conditions, meaning it is ‘a useful portfolio diversifier,’ said Goldman, especially given that gold has developed non-speculative use cases while bitcoin is still looking for one. Goldman's analysis showed that while traders use gold to hedge against inflation and dollar debasement, bitcoin resembles a ‘risk-on high-growth tech company stock.’”

December 13 – Reuters (Naveen Thukral): “Drought or too much rain, the war in Ukraine and high energy costs look set to curb global farm production again next year, tightening supplies, even as high prices encourage farmers to boost planting. Production of staples such as rice and wheat is unlikely to replenish depleted inventories, at least in the first half of 2023, while crops producing edible oils are suffering from adverse weather in Latin America and Southeast Asia. ‘The world needs record crops to satisfy demand. In 2023, we absolutely need to do better than this year,’ said Ole Houe, director of advisory services at agriculture brokerage IKON Commodities…”

The Bloomberg Commodities Index increased 0.9% (up 13.7% y-t-d). Spot Gold slipped 0.2% to $1,793 (down 1.7%). Silver declined 1.1% to $23.22 (down 0.4%). WTI crude rallied $3.27 to $74.29 (down 1%). Gasoline recovered 3.7% (down 4%), and Natural Gas jumped 5.7% to $6.60 (up 77%). Copper dropped 3.0% (down 16%). Wheat rallied 2.6% (down 2%), and Corn gained 1.4% (up 10%). Bitcoin was down $550, or 3.2%, this week to $16,600 (down 64%).

Market Instability Watch:

December 9 – Wall Street Journal (Editorial Board): “Persistent inflation and a return to quasi-normal monetary policy have exposed a growing list of financial vulnerabilities, from bad hedging at British pension funds to reckless management in a major cryptocurrency exchange. Now comes word of another danger that could dwarf the others. The global financial system is bloated with some $65 trillion in hidden dollar debts, a recent report from the Bank for International Settlements warns. This takes the form of foreign-exchange swaps that entail a currency trade made today with a commitment to reverse it in the future… This level of off-balance-sheet forex-swap debt dwarfs the $28 trillion in on-balance-sheet swap liabilities that BIS tabulates. The BIS notes that this form of credit has exploded in recent years, rising from $37 trillion in off-balance-sheet obligations on the eve of the 2008 panic.”

December 16 – Bloomberg (Isabelle Lee): “Investors are spurning mutual funds at a record clip, driving a $1.5 trillion gap in the flow of money from the old-school investment vehicles and into ever-popular ETFs. The divide this year between the two investment types widened to an all-time high, up from $950 billion in 2021…”

December 9 – Financial Times (Brooke Masters): “When Citigroup chief executive Jane Fraser was asked earlier this week what risks she was most concerned about, market liquidity topped her list. The Bank for International Settlements is worried about ‘fragility’ in the market for mortgage-backed securities. And volatility has soared in US Treasury markets this autumn due to poor liquidity. With the world poised to plunge into recession, stresses are to be expected. But there is growing evidence that the post-crisis reforms, while aimed at shoring up financial stability may have, in important areas, simply traded counterparty risk for liquidity risk.”

Crypto Bubble Collapse Watch:

December 13 – CNBC (MacKenzie Sigalos): “A federal indictment was unsealed… alleging widespread fraud by FTX co-founder Sam Bankman-Fried… The indictment in U.S. District Court in Manhattan charges Bankman-Fried with eight criminal counts: conspiracy to commit wire fraud and securities fraud, individual charges of securities fraud and wire fraud, money laundering, and conspiracy to avoid campaign finance regulations. Prosecutors allege in the indictment that the former billionaire was engaging in criminal activity that began as far back as 2019 and continued through last month. Bankman-Fried deliberately and knowingly ‘agreed with others to defraud customers of by misappropriating those customers’ deposits and using those deposits to pay expenses and debts of Alameda Research,’ the indictment alleges.”

December 14 – Financial Times (Joshua Chaffin): “The wheels of American justice do not turn nearly so fast as the cryptocurrency markets. But in the last 48 hours they caught up to Sam Bankman-Fried, the boy king of the shattered FTX empire who now stands accused of perpetrating one of the largest financial frauds in US history. A series of overlapping events unfolding in the Bahamas, Washington and Manhattan left 30-year-old Bankman-Fried in police custody… For Bankman-Fried the reckoning began on Monday, when he was arrested by local police just after 6pm at his apartment in Nassau, the Bahamas, after the US Department of Justice sought his extradition. Coincidentally, it was in the same week 14 years earlier that Bernard Madoff, mastermind of Wall Street’s biggest Ponzi scheme, was arrested on a US securities fraud charge.”

December 12 – Reuters (Angus Berwick, Dan Levine and Tom Wilson): “Splits between U.S. Department of Justice prosecutors are delaying the conclusion of a long-running criminal investigation into the world's largest cryptocurrency exchange Binance, four people familiar with the matter have told Reuters. The investigation began in 2018 and is focused on Binance's compliance with U.S. anti-money laundering laws and sanctions… Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two of the sources. Others have argued taking time to review more evidence…”

December 14 – Financial Times (Joshua Oliver and Scott Chipolina): “Binance chief executive Changpeng Zhao has blamed the collapse of FTX and the fraud charges levelled against its founder Sam Bankman-Fried for a wave of withdrawals that struck the world’s largest cryptocurrency exchange this week. Zhao sought to reassure nervous customers on a Twitter ask-me-anything discussion that Binance is financially healthy after clients pulled more than $1bn from the trading venue, the highest daily withdrawal since June. ‘There is no amount of withdrawals that would put us under pressure,’ Zhao said.”

December 14 – Bloomberg (Olga Kharif): “One of the most closely watched indicators of trader sentiment on Binance’s market-leading derivatives exchange suggests that anxiety over additional fallout from this year’s crypto market meltdown has grown. The seven-day average of open interest for Bitcoin perpetual futures has dropped 40.3% from the start of November, according to… CryptoCompare… Bitcoin perpetual contracts… have long been a favorite of crypto speculators because they allow them to more easily maintain leveraged bets.”

Bursting Bubble and Mania Watch:

December 14 – Financial Times (Jennifer Hughes, Nicholas Megaw and Madison Darbyshire): “The main US markets watchdog has proposed the most sweeping overhaul of stock trading in almost two decades in an effort to improve prices and transparency for small investors. Gary Gensler, chair of the Securities and Exchange Commission, said the measures outlined in more than 1,500 pages of documents… would improve ‘competition and benefit both everyday investors and institutional investors’. But his plans led to resistance from market-making firms that dominate the system. Taken together, the proposals would produce the biggest changes to US equity trading rules since 2005, reshaping the business of executing deals for retail investors. The agency’s focus on the inner workings of the US stock market was revived after pandemic lockdowns prompted an explosion of activity from consumers.”

December 14 – Bloomberg (Jeran Wittenstein): “US companies are cutting share buybacks to conserve cash in the face of economic uncertainty, which threatens to add another weight to the equity market’s attempted rebound. S&P 500 Index firms bought back just over $200 billion of their own shares during the third quarter, marking the slowest quarter for repurchases since the middle of last year and coming in roughly 25% below the levels seen in late 2021 and early 2022…”

December 14 – Bloomberg (Silas Brown): “The biggest lenders are bagging bigger chunks of the $1.4 trillion market for private credit as investors get choosier about where they park their money. The 10 largest funds that have closed in the first nine months of the year, including ones run by Goldman Sachs… and Blackstone Inc., accounted for half of the $172 billion raised globally for direct lending in the period, according to… Preqin… While global fundraising is on track to match last year’s $215 billion record, a closer look at the data shows a ‘more fragile' picture emerging of a market buffeted by higher interest rates and weaker prospects for economic growth, according to Preqin.”

December 16 – Bloomberg (Dawn Lim and John Gittelsohn): “Steve Schwarzman’s Blackstone Inc. paved the way for private equity firms to pitch the everyday millionaire. Now, a flight of money from some of the industry’s retail funds is inviting scrutiny… That’s prompted the Securities and Exchange Commission to reach out to the firms, according to people familiar… The regulator is trying to understand the market impact and circumstances of the events, and asked how the firms met redemptions and if affiliates sold before clients, one of the people said.”

December 11 – Financial Times (Antoine Gara): “Blackstone has warned of the risk of delays to the launch of a new private equity fund designed for wealthy individuals, as it copes with heavy investor withdrawals at two other funds in real estate and credit aimed at a similar clientele. The… investment manager has been preparing to open a fund called the Blackstone Private Equity Strategies Fund, or BXPE, that would become its flagship strategy for rich individuals to participate in its private equity business… Blackstone has in recent days informed wealthy investors and their financial advisers that it may wait for fundraising conditions and financial markets to improve before launching BXPE, according to people familiar with the matter.”

December 12 – Financial Times (Sujeet Indap): “After Blackstone’s retail-focused credit and retail funds were hit by a wave of redemption requests, its rival Apollo is facing scrutiny over its own plans to target wealthy individuals. Apollo co-founder Marc Rowan last week defended his group’s drive to offer private capital products to rich clients as it rolls out a gated product that it says can match the returns of the S&P 500 but with less volatility. ‘I actually think it’s good for the industry right now,’ Rowan told a Goldman Sachs investor conference, as questions emerged about the suitability of so-called alternative investments for retail investors after Blackstone restricted withdrawals from a $69bn property fund. ‘We are going to train clients and advisers to think about how much liquidity they need and how much they’re prepared to stock away…’ ‘Private equity firms never wanted retail. Retail was not smart money. Now they are knocking on our door’ said one wealth management executive at a prominent Wall Street bank…”

December 14 – Bloomberg (Silas Brown): “The biggest lenders are bagging bigger chunks of the $1.4 trillion market for private credit as investors get choosier about where they park their money. The 10 largest funds that have closed in the first nine months of the year, including ones run by Goldman Sachs Group Inc.’s asset management unit and Blackstone Inc., accounted for half of the $172 billion raised globally for direct lending in the period, according to a report… by data provider Preqin.”

December 16 – Bloomberg (Sridhar Natarajan): “Goldman Sachs… may eliminate as many as 4,000 jobs, or roughly 8% of the workforce, as Chief Executive Officer David Solomon battles to contain a slump in profit and revenue. Top managers have been asked to identify potential cost-reduction targets, and no final job-cut number has been determined…”

December 12 – Bloomberg (Ben Scent, Dinesh Nair, and Aaron Kirchfeld): “Dealmakers racing to get transactions across the line before the holidays have finalized nearly $70 billion of mergers and acquisitions this week. Biotech giant Amgen Inc. is leading the flurry of transactions, saying… it will buy Horizon Therapeutics Plc for $28 billion in the year’s biggest health-care deal... Thoma Bravo announced a takeover of business-spend management platform Coupa Software Inc. for $8 billion including debt…”

December 15 – CNBC (Diana Olick): “As the housing market cools quickly, house flippers are finding it harder to make fast profits. In the third quarter, gross flipping profit, which is the difference between the median purchase price paid by investors and the median resale price, dropped to $62,000, according to ATTOM… That’s down 18.4% from the second quarter and down 11.4% year-over-year. It represents the smallest profit since the end of 2019 and the fastest quarterly drop since 2009… Roughly 7.5% were flips in the third quarter, still historically high, but down from 8.2% in the second quarter.”

December 14 – Bloomberg (Bailey Lipschultz and Lydia Beyoud): “The great SPAC crash is closing out the year in dramatic fashion as more shareholders prepare to cash out of the speculative-investing industry for good. At least 80 special-purpose acquisition companies, which have raised $24 billion in total, face a wall of investor meetings that will give clients the chance to exit ahead of a new US tax that could hurt their returns. At least 32 SPACs holding roughly $18 billion are looking to close up shop and return capital over the coming 2 1/2 weeks…”

December 16 – Bloomberg (Romy Varghese): “San Francisco is projecting a $728 million budget gap over the next two fiscal years as the technology hub reels from the economic hit of remote work and the depletion of one-time federal aid. Mayor London Breed asked municipal departments Thursday to find ways to reduce costs by 5% in the next fiscal year and by 8% in the year after that…”

December 14 – Reuters (Lananh Nguyen, Saeed Azhar and Shankar Ramakrishnan): “Some of the banks that lent Elon Musk $13 billion to buy Twitter are preparing to book losses on the loans this quarter, but they are likely to do so in a way that it does not become a major drag on their earnings… Banks typically sell such loans to investors at the time of the deal. But Twitter's lenders, led by Morgan Stanley, could face billions of dollars in losses if they tried to do so now…”

Ukraine War Watch:

December 16 – Reuters (Tom Balmforth and Olena Harmash): “Russia fired more than 70 missiles at Ukraine on Friday in one of its biggest attacks since the start of the war, knocking out power in the second biggest city and forcing Kyiv to bring in emergency blackouts nationwide…”

December 15 – Associated Press (Jamey Keaten): “Russia’s Foreign Ministry warned… that if the U.S. delivers sophisticated air defense systems to Ukraine, those systems and any crews that accompany them would be a ‘legitimate target’ for the Russian military, a blunt threat that was quickly rejected by Washington. The exchange of statements reflected soaring Russia-U.S. tensions amid the fighting in Ukraine… Russian Foreign Ministry spokeswoman Maria Zakharova said the U.S. had ‘effectively become a party’ to the war by providing Ukraine with weapons and training its troops. She added that if reports about U.S. intentions to provide Kyiv with Patriot surface-to-air missile system prove true, it would become ‘another provocative move by the U.S.’ and broaden its involvement in the hostilities, ‘entailing possible consequences.’”

U.S./Russia/China/Europe Watch:

December 14 – Wall Street Journal (Lingling Wei and Marcus Walker): “China’s leader Xi Jinping has in recent months tried to put public distance between Beijing and Moscow as Russia has suffered defeats in its war on Ukraine. Behind the diplomatic appearances, however, Mr. Xi is deepening his long-term bet on Russia. In recent weeks, he has instructed his government to forge stronger economic ties with Russia, according to policy advisers to Beijing, building on a trade relationship that has strengthened this year and become a lifeline to Moscow in the face of Western pressure. The plan includes increasing Chinese imports of Russian oil, gas and farm goods, more joint energy partnerships in the Arctic and increased Chinese investment in Russian infrastructure, such as railways and ports, the advisers say.”

December 12 – Wall Street Journal (Susan L. Shirk): “How bad is the relationship between China and the U.S.? There is no need to mince words: China and the U.S. are caught in a competitive downward spiral that if not reversed could drastically damage the two countries and the rest of the world. Even if Beijing and Washington can ‘put a floor’ under their competition (as the Biden administration likes to put it) so that it doesn’t go military, the hostile interactions between these two superpowers… will take a toll on innovation and growth… Fear and mutual suspicion are leading both countries to weaponize their interdependence—once considered a solid foundation for peace—and use it against each other. The risk that either country could suddenly block the other’s exports or imports of crucial technologies or materials—as both have already begun to do—is driving them to erect walls between them and pursue nationalist self-reliance after decades of fruitful collaboration.”

December 15 – Reuters (Patricia Zengerle): “The U.S. Senate passed legislation… authorizing a record $858 billion in annual defense spending, $45 billion more than proposed by President Joe Biden, and rescinding the military's COVID vaccine mandate. Senators supported the National Defense Authorization Act, or NDAA, an annual must-pass bill setting policy for the Pentagon… The fiscal 2023 NDAA authorizes $858 billion in military spending and includes a 4.6% pay increase for the troops, funding for purchases of weapons, ships and aircraft, and support for Taiwan as it faces aggression from China and for Ukraine as it fights an invasion by Russia.”

De-globalization and Iron Curtain Watch:

December 13 – Reuters (Emma Farge): “China accused Washington… of using subsidies to prop up national industries and refusing to abide by the rules of the World Trade Organization. China's ambassador to the WTO Li Chenggang said… he was disappointed in the U.S. trading record, saying it had not lived up to President Joe Biden's inaugural pledge to lead ‘by the power of our example’. ‘The United States puts 'America First' by prevailing its domestic laws over international rules and (the) laws of others, disregarding WTO rules and concerns of other members,’ he told a closed-door U.S. trade policy review at the… WTO.”

December 16 – Associated Press (Elaine Kurtenbach): “The U.S. Department of Commerce is adding 36 Chinese high-tech companies, including makers of aviation equipment, chemicals and computer chips, to an export controls blacklist, citing concerns over national security, U.S. interests and human rights. The inclusion of the companies in the trade ‘Entity List’ means that export licenses will likely be denied for any U.S. company trying to do business with them… The move signals a hardening of U.S. efforts to prevent China, especially its military, from acquiring advanced technologies such as leading edge computer chips and hypersonic weapons.”

December 10 – Reuters (Maha El Dahan and Aziz El Yaakoubi): “President Xi Jinping told Gulf Arab leaders… that China would work to buy oil and gas in yuan, a move that would support Beijing's goal to establish its currency internationally and weaken the U.S. dollar's grip on world trade. Xi was speaking in Saudi Arabia where Crown Prince Mohammed bin Salman hosted two ‘milestone’ Arab summits with the Chinese leader which showcased the powerful prince's regional heft as he courts partnerships beyond close historic ties with the West… Any move by Saudi Arabia to ditch the dollar in its oil trade would be a seismic political move, which Riyadh had previously threatened in the face of possible U.S. legislation exposing OPEC members to antitrust lawsuits.”

December 12 – Bloomberg (Julian Lee): “Russia has all but ceased to be a supplier of crude oil to Europe. A European Union ban on imports of Russian crude by sea came into force on Dec. 5, effectively closing off its closest oil market, which took roughly half the country’s supplies at the start of the year… The crude shunned by Europe has been diverted to Asia, with a flotilla of tankers steaming around the continent and through the Suez Canal to deliver cargoes to India and China. That flow swelled to more than 3 million barrels a day in the week to Dec. 9…”

Inflation Watch:

December 13 – CNBC (Jeff Cox): “Prices rose less than expected in November… The consumer price index... rose just 0.1% from the previous month, and increased 7.1% from a year ago… Economists surveyed by Dow Jones had been expecting a 0.3% monthly increase and a 7.3% 12-month rate… Excluding volatile food and energy prices, so-called core CPI rose 0.2% on the month and 6% on an annual basis, compared with respective estimates of 0.3% and 6.1%.”

December 13 – Bloomberg (Michael Hirtzer and Marvin G. Perez): “Dessert is likely to hurt the wallet. Ice cream, flour, cakes and cookies jumped the most ever, Labor Department data show, while eggs are up 49.1%, the biggest surge in almost four decades. The worst-ever outbreak of bird flu has shrunk egg supply, while refined-sugar costs have been driven higher by adverse weather for the US sugar beet crop and tighter global supplies that limited imports. Meat eaters can take heart as beef roast prices fell 8.1% in November from a year ago, the biggest slump in six years.”

December 12 – New York Times (Jeanna Smialek): “At this time last year, economists were predicting that inflation would swiftly fade in 2022 as supply chain issues cleared, consumers shifted from goods to services spending and pandemic relief waned. They are now forecasting the same thing for 2023, citing many of the same reasons. But as consumers know, predictions of a big inflation moderation this year were wrong… That raises the question: Should America believe this round of inflation optimism?”

December 9 – Bloomberg (Elizabeth Elkin): “Prices for vegetables have almost doubled since last year after the states that grow fresh produce for the US winter saw water cuts and storms that decimated supply. Vegetable prices saw a 38% jump in November from the prior month, according to… producer price index data. On a year-over-year basis, the surge was more than 80%... Farmers in Arizona, who provide more than 90% of the US’s leafy greens each November through March, have seen cuts to the amount of water they receive from the Colorado River.”

December 11 – Wall Street Journal (Jennifer Hiller): “After powerful storms wreaked havoc on America’s utility system in recent years, bills to cover recovery costs are coming due for customers. Electric and gas utilities are increasingly turning to lower-interest, ratepayer-backed bonds to finance mounting investments to fix and bolster their systems or cover extraordinary energy costs following hurricanes, wildfires and winter freezes. Customers are on the hook for repaying the loans… In the past year, around $12.4 billion of weather-related utilities debt that customers will have to pay has been issued…, up from around $7 billion in long-term recovery bonds that states and utilities issued from 2007 to 2021.”

Federal Reserve Watch:

December 14 – Associated Press (Christopher Rugaber): “The Federal Reserve reinforced its inflation fight… by raising its key interest rate for the seventh time this year and signaling more hikes to come. But it announced a smaller hike than it had in its past four meetings at a time when inflation is showing signs of easing. The Fed made clear, in a statement and a news conference by Chair Jerome Powell, that it thinks sharply higher rates are still needed to fully tame the worst inflation bout to strike the economy in four decades. The central bank boosted its benchmark rate a half-point to a range of 4.25% to 4.5%, its highest level in 15 years. Though lower than its previous three-quarter-point hikes, the latest move will further increase the costs of many consumer and business loans and the risk of a recession. More surprisingly, the policymakers forecast that their key short-term rate will reach a range of 5% to 5.25% by the end of 2023.”

December 16 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of New York President John Williams said that while inflation has showed some signs of slowing, a tight labor market and other factors are likely to keep price pressures elevated and warrant high interest rates for some time. ‘We have clear signs that demand exceeds supply in our labor market’ and broader economy, Williams said… He expects inflation to slow to the 3% to 3.5% range next year, but ‘the real issue is how do we get it all the way’ to 2%, Williams said. ‘We’re going to have to do what’s necessary,” Williams said. ‘It could be higher than what we’ve written down’ if that’s what it takes reduce inflation to the Fed’s 2% goal.”

December 16 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of San Francisco President Mary Daly said policymakers are committed to lowering inflation and are not close to accomplishing that task. ‘We still have a long way to go,’ Daly said… ‘We are far away from our price stability goal.’ ‘The labor market is out of balance,’ Daly said. ‘If you want a job it’s easy to find one. If you want a worker it’s hard to find one.’”

December 15 – Bloomberg (Liz Capo McCormick and Michael MacKenzie): “Bond investors just don’t seem to buy what the Federal Reserve is selling: that benchmark interest rates will keep moving higher and stay there for an extended period. The policy sensitive two-year Treasury yield initially surged after the Fed’s quarterly forecasts released Wednesday showed officials expect the central bank to raise its key rate to over 5% in 2023… That’s well above what futures traders are pricing in. But yields soon erased their increase, even as Powell signaled the central bank still has ‘some ways to go’ in its campaign to rein in the fastest bout of inflation since the early 1980s. Other bonds saw yields down on the day after the Fed Chair’s press conference.”

U.S. Bubble Watch:

December 15 – Reuters (Lucia Mutikani): “Retail sales fell 0.6% last month, the biggest drop since December 2021, after an unrevised 1.3% jump in October… Retail sales increased 6.5% year-on-year in November. Last month's decrease in sales also reflected the fading boost from one-time tax refunds in California… Sales at food services and drinking places… increased 0.9%. Electronics and appliance store sales fell 1.5%. There were also decreases in receipts at general merchandise stores as well as sporting goods, hobby, musical instrument and book stores. Clothing stores sales fell 0.2%. Nevertheless, the almost broad weakness in sales suggests higher borrowing costs and the threat of an imminent recession are hurting household spending. Savings, which have helped to cushion consumers against inflation, are dwindling.”

December 15 – CNBC (Jessica Dickler): “As of November, 63% of Americans were living paycheck to paycheck, according to a monthly LendingClub report — up from 60% the previous month and near the 64% historic high hit in March. Even high-income earners are under pressure, LendingClub found. Of those earning more than six figures, 47% reported living paycheck to paycheck, a jump from the previous month’s 43%. ‘Americans are cash-strapped and their everyday spending continues to outpace their income, which is impacting their ability to save and plan,’ said Anuj Nayar, LendingClub’s financial health officer.”

December 13 – Reuters (Lucia Mutikani): “U.S. small-business confidence rebounded in November, according to a survey…, which also showed that inflation and worker shortages remained major issues for owners. The National Federation of Independent Business (NFIB) said its Small Business Optimism Index rose 0.6 point to 91.9 last month amid an improvement in the share of owners who expected better business conditions over the next six months. Still, it was the 11th straight month that the index was below the 49-year average of 98. The share of owners expecting better business conditions over the next six months increased three points to -43%. It was -61% as recently as June. Thirty-two percent of owners reported that inflation was their single most important problem, down a point from October and 5 points lower than July's reading…”

December 12 – Associated Press (Christopher Rugaber): “Still eager to hire, America’s employers are posting more job openings than they did before the pandemic struck 2½ years ago. Problem is, there aren’t enough applicants. The nation’s labor force is smaller than when the pandemic struck. The reasons vary — an unexpected wave of retirements, a drop in legal immigration, the loss of workers to COVID-19 deaths and illnesses. The result, though, is that employers are having to compete for a smaller pool of workers and to offer steadily higher pay to attract them. It’s a trend that could fuel wage growth and high inflation well into 2023.”

December 14 – Reuters (Dan Burns): “Sales of previously owned U.S. homes will fall for a second year in 2023 to their lowest annual total since 2012…, but sales prices should hold up, the National Association of Realtors said… Existing-home sales… are projected to slide by another 6.8% to 4.78 million in 2023, Lawrence Yun, NAR chief economist and senior vice president of research, said. Sales through October of this year are just shy of 4.4 million, and Yun estimates the 2022 total will reach 5.13 million units when November and December data are reported, down by more than 16% from 2021's 6.12 million. That year was the highest sales total since 2006…”

December 15 – Bloomberg (Patrick Clark): “US mortgage rates dropped for a fifth straight week, bringing slight relief to a housing market that’s been slammed by the rise in borrowing costs this year. The average for a 30-year, fixed loan fell to 6.31%, the lowest since late September…”

December 14 – CNBC (Diana Olick): “After a month of declines, mortgage application volume is rising, as current homeowners and potential buyers move on lower mortgage rates… Mortgage applications to purchase a home rose 4% for the week and were 38% lower than the same week one year ago. That annual comparison is now shrinking slightly as rates drop.”

December 13 – Financial Times (Harriet Clarfelt): “The Federal Reserve’s most aggressive pace of interest rate increases in decades is set to trigger a surge of defaults over the next two years in the $1.4tn market for risky corporate loans, according to Wall Street banks and rating agencies. Analysts across the industry forecast that defaults will at least double from today’s relatively low 1.6%... Deutsche Bank expects the default rate on leveraged loans in the US to climb to 5.6% next year — up from 1.6% — before rising to 11.3% in 2024. That would leave defaults close to all-time highs set in 2009.”

December 13 – Wall Street Journal (Peter Grant): “The sharp decline in office building values is likely to become a growing problem for the budgets of cities, schools and other jurisdictions that depend heavily on property taxes from these building owners… Property tax is the largest single expense for most office landlords. Many hope to reduce it to help offset lost revenue from the sluggish return of employees to their desks and the cascading damage it is causing to local businesses catering to these workers. More recently, job cuts in the tech sector are reducing demand for workspace.”

Fixed-Income Watch:

December 16 – Bloomberg (Ronan Martin, Irene García Pérez and Priscila Azevedo Rocha): “Companies are set to raise the least new debt in more than a decade this year and there’s an unusual contributing factor: wild swings in markets mean borrowing windows often shut before firms can begin to sell their bonds. The trend is set to continue into 2023 because credit committees at some firms aren’t used to the levels of volatility, meaning demand can evaporate by the time they sign off on issuing securities, according to people with knowledge of the matter. It’s a major headache for companies that need to refinance…”

China Watch:

December 15 – Bloomberg: “Beijing’s rapidly spreading Covid outbreak has turned the Chinese capital of 22 million people into a virtual ghost town as stores close and restaurants empty, underscoring the cost of President Xi Jinping’s sudden pivot away from Covid Zero. Bucking expectations for a managed and gradual transition, Xi’s government is now allowing the virus to run rampant. While officials have abandoned efforts to track case numbers, anecdotal evidence suggests entire families and offices in Beijing have become infected in the span of just days — a potential harbinger of worse things to come in other parts of China with less-developed health care systems.”

December 16 – Bloomberg: “China pledged stronger monetary and fiscal stimulus for the economy and support for private businesses, as Beijing shifts toward boosting growth after dropping its Covid Zero policy. Top leaders including President Xi Jinping agreed to pursue ‘more forceful’ fiscal policy as well as a ‘forceful’ monetary policy stance to ensure ‘ample’ liquidity in the banking sector after concluding a meeting setting economic policy priorities for the coming year… They also pledged to aid private businesses. The meeting took a stronger pro-growth stance than in recent years, stating that the ‘amount’ of economic growth is important, and that boosting domestic consumption and investment is the top priority for 2023.”

December 14 – Bloomberg: “China’s central bank pumped more cash than forecast into the banking system in December, in a move that’s expected to bolster bonds roiled by the nation’s abrupt Covid policy shift. The People’s Bank of China injected 650 billion yuan ($94 billion) via its one-year medium-term lending facility on Thursday, more than the 500 billion yuan due this month.”

December 15 – Bloomberg: “China’s government hinted at further support for the real estate sector, with a top policy maker describing it as a ‘pillar’ of the world’s second-largest economy. Vice Premier Liu He said new measures are being considered to improve the financial condition of the industry and boost confidence… Liu also quashed concerns that weak housing demand may lead to a long-term slump, saying China is still on a course of ‘relatively quick urbanization.’”

December 13 – Reuters (Julie Zhu): “China is working on a more than 1 trillion yuan ($143bn) support package for its semiconductor industry, three sources said, in a major step towards self sufficiency in chips and to counter U.S. moves aimed at slowing its technological advances. Beijing plans to roll out what will be one of its biggest fiscal incentive packages, allocated over five years, mainly as subsidies and tax credits to bolster semiconductor production and research activities at home...”

December 12 – Bloomberg (Lorretta Chen): “Country Garden Holdings Co. Ltd. and Longfor Group Holdings Ltd. are among the first private Chinese developers being lined up to receive offshore loans that could help their debt repayment… Industrial & Commercial Bank of China Ltd. plans to provide $300 million in offshore loans to Country Garden backed by a domestic guarantee… The news followed a separate announcement by Bank of China… that its Hong Kong branch will offer an offshore loan of an unspecified amount to Longfor. The credit will be backed by a guarantee provided by Bank of China’s Chongqing branch.”

December 12 – Bloomberg: “China’s credit expanded at a slightly slower pace than expected in November after plunging in the previous month, despite efforts by the central bank to boost lending and ease restrictions on property loans. Aggregate financing, a broad measure of credit, was 2 trillion yuan ($287bn) last month…, marginally below the median estimate of 2.1 trillion yuan… New loans for all borrowers including non-bank financial institutions rose to 1.2 trillion yuan in the month from an almost five-year low of 615 billion in October. Growth in the broad M2 measure of money supply accelerated to 12.4% from 11.8%. The data shows a ‘rebound in the credit expansion under the policy guidance’ to boost liquidity to the real economy and property sector, but ‘the magnitude was softer than expected,’ said Ken Cheung, chief Asian FX strategist at Mizuho Bank Ltd.”

December 14 – Bloomberg (Ernest Tsang): “China’s reopening is starting to underscore challenges in the nation’s credit markets. Corporate bonds have seen the biggest selloff since 2015, prompting regulators to ask some of the country’s biggest banks to help stabilize the domestic debt market… China’s corporate bond yield is near the highest since April 2021 after a sixth consecutive gain earlier this week.”

December 11 – Reuters (Engen Tham, Clare Jim and Julie Zhu): “For more than a decade, Chinese developers' debt-fuelled construction boom enriched the country's shadow banks, who were eager to capitalise on the needs of an industry desperate for credit and too risky for traditional lenders. Now, in the wake of a government clampdown on real estate firms' debt binge, that credit demand has collapsed - and so too has the single biggest revenue stream for shadow banks, also known as trust firms. China's shadow banking industry - worth about $3 trillion, roughly the size of Britain's economy - is scrambling for new business, including direct investment in companies, family offices and asset management. It is also shrinking… The industry's plight is a sharp contrast to China's main street financial firms, which the crisis has not yet seriously affected.”

December 15 – Bloomberg: “Unemployment in China worsened last month, with vulnerable workers like migrants taking a bigger hit from the economy’s slump. The jobless rate for migrant workers jumped to 6% from 5.5% in October…, while it remained elevated at 17.1% for young people aged 16-24. For the country as a whole, the urban unemployment rate rose to 5.7% in November, the highest since May, when Shanghai was in lockdown… Labor market stress is likely to worsen in coming months after the government abandoned its Covid Zero strategy…”

December 14 – Reuters (Liangping Gao and Ryan Woo): “China's property sector shrank further in November, with falls in prices, sales and investment, partly as COVID-19 restrictions hit demand… New home prices fell 0.2% from October, the fourth straight decline, and by 1.6% from a year earlier, the seventh on-year drop… Property investment fell the fastest since the statistics bureau began compiling data in 2000, down 19.9% on year in November after a 16% slump in October…”

December 14 – Reuters (Ellen Zhang and Joe Cash): “China's economy lost more steam in November as factory output slowed and retail sales extended declines, both missing forecasts and clocking their worst readings in six months, hobbled by surging COVID-19 cases and widespread virus curbs. The data suggested a further deterioration in economic conditions as lockdowns in many cities, a property-sector crunch and weakening global demand pointed to a bumpy road ahead even as Beijing ditched some of the world's toughest anti-virus restrictions following widespread and rare public protests.”

December 12 – Bloomberg (Tom Hancock): “Chinese consumer sentiment fell in November back toward lows reached in early 2020, according to a survey that highlighted the economic pressure Beijing faces as it rolls back its most severe Covid Zero curbs. Consumers last month were almost as negative about their current and future financial conditions as they were in early 2020 as the pandemic was breaking out, according to… US firm Morning Consult.”

December 13 – Reuters (Farah Master and Julie Zhu): “A growing number of China's doctors and nurses are catching COVID-19 and some have been asked to keep working, as people showing mostly moderate symptoms throng hospitals and clinics… Health experts say China's sudden loosening of strict COVID rules is likely to trigger a surge in severe cases in coming months, and hospitals in big cities are already showing signs of strain… ‘Our hospital is overwhelmed with patients. There are 700, 800 people with fever coming every day,’ said a doctor surnamed Li at a tertiary hospital in Sichuan province.”

December 13 – Bloomberg: “China’s Covid wave is rippling through the nation’s financial industry, with currency volumes falling as traders call in sick and banks activating backup plans to keep operations running smoothly. A sudden uptick in the number of sick traders was one reason behind the drop in onshore yuan-dollar spot volumes to the lowest level since April on Monday… Half of the currency traders at one Chinese bank in Beijing were off sick as of yesterday, one of the people said.”

December 15 – Bloomberg: “With Covid-19 running rampant after President Xi Jinping’s government swiftly abandoned its zero-tolerance policy, the Communist Party is still insisting its strategy will ‘stand the test of history.’ In a front-page commentary on Thursday totaling over 11,000 Chinese characters, the People’s Daily newspaper — the party’s main mouthpiece — called on citizens to ‘unswervingly’ trust the nation’s leaders. It added that Xi’s Covid Zero policy ‘won precious time’ in controlling the outbreak, saying that China is now ‘not afraid of the continuous mutation of the virus.’ ‘After three years of efforts, we have the conditions, mechanisms, systems, teams and medicine to lay the foundation for an all-round victory in the fight against the epidemic,’ the commentary said.”

December 10 – New York Times (Daisuke Wakabayashi, Claire Fu, Isabelle Qian and Amy Chang Chien): “Mandy Liu, a 21-year-old university student in Beijing, believes that anyone who has lived in China during the pandemic can see that the country’s future is looking increasingly uncertain. Covid restrictions were stifling, and employment opportunities were grim. She is set to graduate next year with a degree in tourism management and has submitted more than 80 applications for jobs. She has not received a single offer. Many young people had followed what the Chinese Communist Party told them to do, only to be left disillusioned, Ms. Liu said. ‘What we are seeing is that people are struggling to survive.’”

December 11 – Reuters (Casey Hall): “China's weary public and businesses have welcomed the easing of stringent ‘zero-COVID’ measures, but Jorry Fan, who lives in the eastern city of Suzhou, said it prompted her to drop any plans to dine out for weeks. The 44-year-old mother of two aims to avoid indoor dining or crowded places, opting instead for food deliveries, as she fears she or her family could catch COVID-19… ‘I'm very happy because previously, I had to do a nucleic acid test nearly every day, so this is more convenient,’ she said. ‘On the other hand, we don't know who is safe, we don't know who has the coronavirus. So we will be more careful.’”

December 11 – Wall Street Journal (Jason Douglas): “Hungry for foreign currency to shore up their dwindling reserves, some troubled countries have in recent years turned to an unusual source of funds: The People’s Bank of China. China’s central bank has funneled billions over the past decade to around 20 countries, including Pakistan, Sri Lanka, Argentina and Laos, via swap lines that allow overseas central banks to exchange their domestic currencies for Chinese yuan. The transactions, researchers say, are part of a broad but opaque effort by Chinese authorities to prop up governments that borrowed heavily from Chinese banks as part of Beijing’s $1 trillion Belt and Road Initiative to finance infrastructure projects and win influence across the world.”

Central Banker Watch:

December 15 – Financial Times (Martin Arnold): “Christine Lagarde used to claim that the Federal Reserve had a bigger inflation problem than the European Central Bank. Now the ECB chief admits the eurozone may be in a bigger mess. The risk of inflation staying uncomfortably far above the 2% level targeted by both central banks was now greater here than on the other side of the Atlantic, Lagarde acknowledged after the ECB’s decision to raise interest rates by half a percentage point to 2%... US inflation is now falling following a series of aggressive rate rises by the Fed which have put borrowing costs within a range of 4.25% to 4.5%. However the ECB, which began raising rates later than its US counterpart, could be faced with a further bout of inflation. Lagarde said there were ‘reasons to believe’ price pressures in Europe would surge in early 2023.”

December 15 – Bloomberg (Alexander Weber and Jana Randow): “More than a third of the European Central Bank’s policymakers favored a 75 bps interest-rate hike… The Governing Council opted for the 50 bps move…, after a debate on the merits of a bigger increase that resulted in a compromise on the overall decision… Hawkish policymakers relented in their wish for a bigger increase because they prioritized the messaging on future moves and a firm agreement to promptly start reducing the ECB’s balance sheet, the people said.”

December 15 – Reuters (David Milliken): “The Bank of England raised its key interest rate to 3.5% from 3% on Thursday, its ninth rate rise in a row as it tries to speed inflation's return to target after price growth hit a 41-year high in October. The BoE's Monetary Policy Committee voted 6-3 in favour of the move, and said ‘further increases in Bank Rate’ may be required to tackle what it fears may be persistent domestic inflation pressures… ‘The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response,’ the BoE said.”

December 12 – Reuters (Steve Scherer): “The Bank of Canada's rapid-fire rate hikes are starting to slow the economy, the governor said…, but while the bank wants to avoid a recession, there is a risk sticky inflation will require ‘much higher’ rates… Governor Tiff Macklem said the tightening had ‘begun to work’ but would take time to feed through the economy. The bank lifted rates at a record pace of 400 bps in nine months to 4.25% - a level last seen in January 2008 - to tame inflation that was 6.9% in October.”

Global Bubble Watch:

December 13 – Reuters (Andrea Shalal): “Global public and private debt saw its biggest drop in 70 years in 2021 after reaching record highs because of the impacts of COVID-19, but overall remained well above pre-pandemic levels, the International Monetary Fund said… the IMF said total public and private debt decreased by 10 percentage points to 247% of global gross domestic product (GDP)in 2021 from its peak of 257% in 2020. That compares to around 195% of GDP in 2007… In dollar terms, global debt continued to rise, although at a much slower rate, reaching a record $235 trillion last year.”

Europe Watch:

December 16 – Bloomberg (Zoe Schneeweiss): “Euro-area inflation slowed less than initially reported in November… The 19-member currency zone saw consumer prices increase 10.1% from a year earlier… That’s down from 10.6% a month earlier, but 0.1 percentage point higher than a preliminary reading.”

December 16 – Reuters (Alvise Armellini, Dominique Vidalon, Sudip Kar-Gupta and Balazs Koranyi): “Italian ministers lashed out at the European Central Bank on Friday, labelling as ‘baffling’ and ‘crazy’ a decision to hike borrowing costs that raised the financial pressure on one of the euro zone's most indebted countries. Three senior ministers took aim after the ECB… raised its benchmark rate by 50 bps…, and signalled further increases ahead while laying out plans to reduce its bond purchases.”

December 14 – Reuters (David Milliken): “British inflation fell more than expected in November after it hit a 41-year high in October…The annual rate of consumer price inflation dropped to 10.7% in November from 11.1% in October, the Office for National Statistics (ONS) said, a bigger fall than the decline to 10.9% which economists had forecast…”

EM Crisis Watch:

December 10 – Bloomberg (Kyungji Cho): “Global central bankers are in a race against the clock to tame runaway inflation. But push too far, too fast, and markets key to the smooth functioning of the financial system are liable to buckle. That’s just what happened recently in South Korea, where the credit market experienced its worst run up in short-term yields since the global financial crisis. At the heart of the crisis was a type of short-term debt used to finance the nation’s construction boom. It’s called project finance asset-backed commercial paper, or PF-ABCP.”

December 13 – Bloomberg (Nguyen Dieu Tu Uyen): “Vietnam’s leaders are taking urgent steps to avert a potential financial crisis as companies struggle to tap funding sources and risk defaulting on bond payments in the next two years. Prime Minister Pham Minh Chinh ordered the finance ministry to submit measures to secure the financial market and investors’ rights before December 20…”

Japan Watch:

December 11 – Reuters (Leika Kihara): “Japan's November wholesale prices rose 9.3% from a year earlier… It was the 21st consecutive month to show an annual rise in wholesale prices. While food and energy costs continued to rise, the data may offer some relief for Japan's economy, which relies almost entirely on imports for fuel and raw material.”

December 16 – Reuters (Leika Kihara): “As Haruhiko Kuroda's decade helming Japan's central bank nears an end, more of his senior colleagues are seeing a case to remove the bank's cap on bond yields, a key but problematic piece of his radical monetary stimulus. The rare hawkish shift inside the Bank of Japan (BOJ) comes after years of heavy money printing failed to fire up anemic consumer demand and amid growing anger about the impact of ultra-low interest rates on bank lending margins and, more recently, the cost of living. A dozen people familiar with the BOJ's thinking say debate over how to remove a controversial cap on bond yields, introduced in 2016 as part of the bank's yield curve control (YCC) programme, could gather pace next year… While no detailed discussions of a policy change are under way yet, the preference of many within the BOJ is to completely remove the yield cap altogether, the sources said.”

December 11 – Bloomberg (Masaki Kondo and Masahiro Hidaka): “A dialing back of massive Bank of Japan bond purchases and even a tweak to yield-curve control would fail to solve the liquidity drought in the country’s debt market next year… Only an overhaul of the entire framework of policy easing would lead to a sustainable improvement in the liquidity strains, said Mitsubishi UFJ Kokusai Asset Management Co. A BOJ survey measure of investors’ perception of Japan’s bond market functioning has fallen to a record low. The BOJ ramped up bond purchases so far this year to the most since 2017… It bought ¥95 trillion ($693bn) of Japanese government bonds through November… But its outsized presence in the market — it owns about half of all government bonds — has dried up trading and distorted the yield curve…”

December 15 – Reuters (Kantaro Komiya): “Japan's manufacturing activity shrank at the fastest pace in more than two years in December on soft demand and persistent cost pressures, a corporate survey showed… While service-sector output rebounded on a tourism reopening, weak factory activity has blurred Japan's recovery prospects as companies enter labour talks, in which wage hikes are deemed essential for post-pandemic economic growth.”

December 12 – Bloomberg (Isabel Reynolds, Toru Fujioka and Stephanie Flanders): “One of Japanese Prime Minister Fumio Kishida’s closest aides said current and former deputy central bank governors Masayoshi Amamiya and Hiroshi Nakaso are among possible candidates for replacing Haruhiko Kuroda after he steps down in April. ‘They are both talented, they both have knowledge of the history of monetary policy, but I don’t think they are the only candidates,’ Deputy Chief Cabinet Secretary Seiji Kihara said…”

Social, Political, Environmental, Cybersecurity Instability Watch:

December 11 – NPR (Juliana Kim): “Public health officials are revisiting the topic of indoor masking, as three highly contagious respiratory viruses take hold during the holiday season. Over the past few weeks, a surge in cases of COVID, the flu and respiratory syncytial virus (RSV) has been sickening millions of Americans, overwhelming emergency rooms and even causing a cold medicine shortage.”

December 14 – CNBC (Spencer Kimball): “The omicron subvariants that have become dominant in recent months present a serious threat to the effectiveness of the new boosters, render antibody treatments ineffective and could cause a surge of breakthrough infections, according to a new study. The BQ.1, BQ.1.1, XBB and XBB.1 omicron subvariants are the most immune evasive variants of Covid-19 to date… These variants, taken together, are currently causing 72% of new infections in the U.S…. The scientists, in a study published… in the peer-reviewed journal Cell, found that these subvariants are ‘barely susceptible to neutralization’ by the vaccines…”

December 15 – CNBC (Greg Iacurci): “Long Covid results in $9,500 of total average medical costs for workers and their employers in the six months following a diagnosis, according to a study by Nomi Health. Long Covid is a chronic illness that can carry potentially debilitating symptoms, which may last for months or years… Up to 30% of Americans who get Covid have developed long-haul symptoms; that means as many as 23 million Americans have been affected…”

December 14 – Los Angeles Times (Hayley Smith and Ian James): “As California faces the prospect of a fourth consecutive dry year, officials with the Metropolitan Water District of Southern California have declared a regional drought emergency and called on water agencies to immediately reduce their use of all imported supplies. The decision from the MWD's board came about eight months after officials declared a similar emergency for 7 million people who are dependent on supplies from the State Water Project, a vast network of reservoirs, canals and dams that convey water from Northern California.”

Leveraged Speculation Watch:

December 14 – Wall Street Journal (Eric Wallerstein): “A cadre of quant investment strategies that benefit during times of tumult are on pace for their best year since at least 2000… The funds wager on various assets as they rise or fall, building their bets as a trend strengthens. When algorithmic warning signs flash, they pivot into fresh positions. Those strategies have been a rare haven for much of the year… The SG CTA Index, run by Société Générale and BarclayHedge to track the 20 largest such strategies, is up 18% in 2022, on pace for its best year since launching in 2000.”

Geopolitical Watch:

December 16 – Reuters (Tim Kelly and Sakura Murakami): “Japan on Friday unveiled its biggest military build-up since World War Two with a $320 billion plan that will buy missiles capable of striking China and ready it for sustained conflict, as regional tensions and Russia's Ukraine invasion stoke war fears. The sweeping, five-year plan, once unthinkable in pacifist Japan, will make the country the world's third-biggest military spender after the United States and China, based on current budgets.”

December 12 – Bloomberg (Takashi Mochizuki, Cagan Koc and Peter Elstrom): “Japan and the Netherlands have agreed in principle to join the US in tightening controls over the export of advanced chipmaking machinery to China…, a potentially debilitating blow to Beijing’s technology ambitions. The two countries are likely to announce in the coming weeks that they’ll adopt at least some of the sweeping measures the US rolled out in October to restrict the sale of advanced semiconductor manufacturing equipment… The Biden administration has said the measures are aimed at preventing Beijing’s military from obtaining advanced semiconductors. The three-country alliance would represent a near-total blockade of China’s ability to buy the equipment necessary to make leading-edge chips.”

Friday Evening Links

[Reuters] Wall Street ends lower for third straight day as recession worries rise 

[Yahoo/Bloomberg] Stocks End Jittery Week Lower as Fed Hawks Circle: Markets Wrap

[Yahoo/Bloomberg] Oil Falls as Recession Fears Outweigh Modest SPR Buyback Plan

[CNBC] Binance’s native BNB token plunges to lowest since July as concerns mount about withdrawals, FTX ties

[CNBC] Treasury’s financial stability watchdog says fraud is rampant in crypto markets

[Yahoo/Bloomberg] Fed Officials Reinforce Hawkish Message on Need for Higher Rates

[Reuters] Fed's Mester sees rates rising more than most policy makers have forecast

[Reuters] U.S. begins buying back oil for strategic petroleum reserve -official

[WSJ] Binance Says Accounting Firm Mazars Pauses Work for Crypto Clients

[WSJ] Beijing Crematorium’s Death Surge Points to Rising Covid Toll in China

[FT] Binance outflows hit $6bn as Mazars halts ‘proof of reserves’ work

[FT] The great crypto crisis is upon us

[FT] Top Fed officials steadfast on plans to squeeze economy with rate rises

[FT] Peak inflation? The new dilemma for central banks

[FT] Despite abandoning zero-Covid, China’s economic challenges are huge