Friday, December 23, 2022

Weekly Commentary: Just the Facts: December 23, 2022

For the Week:

The S&P500 slipped 0.2% (down 19.3% y-t-d), while the Dow increased 0.9% (down 8.6%). The Utilities rallied 1.5% (down 1.8%). The Banks recovered 1.7% (down 24.9%), and the Broker/Dealers gained 1.1% (down 7.5%). The Transports fell 1.3% (down 17.7%). The S&P 400 Midcaps increased 0.8% (down 14.3%), while the small cap Russell 2000 was little changed (down 21.6%). The Nasdaq100 lost 2.3% (down 32.7%). The Semiconductors dropped 3.8% (down 35.7%). The Biotechs dipped 0.6% (down 4.0%). With bullion gaining $5, the HUI gold equities index rallied 4.4% (down 10.5%).

Three-month Treasury bill rates ended the week at 4.1825%. Two-year government yields jumped 14 bps to 4.32% (up 359bps y-t-d). Five-year T-note yields rose 23 bps to 3.86% (up 259bps). Ten-year Treasury yields surged 26 bps to 3.75% (up 224bps). Long bond yields jumped 28 bps to 3.83% (up 192bps). Benchmark Fannie Mae MBS yields surged 30 bps to 5.20% (up 313bps).

Greek 10-year yields jumped 22 bps to 4.51% (up 333bps y-t-d). Italian yields rose 21 bps to 4.50% (up 333bps). Spain's 10-year yields gained 22 bps to 3.47% (up 291bps). German bund yields surged 25 bps to 2.40% (up 258bps). French yields rose 26 bps to 2.93% (up 273bps). The French to German 10-year bond spread widened about one to 53 bps. U.K. 10-year gilt yields surged 31 bps to 3.64% (up 267bps). U.K.'s FTSE equities index rallied 1.9% (up 1.2% y-t-d).

Japan's Nikkei Equities Index sank 4.7% (down 8.9% y-t-d). Japanese 10-year "JGB" yields jumped 13 bps to 0.385% (up 31bps y-t-d). France's CAC40 increased 0.8% (down 9.1%). The German DAX equities index gained 0.3% (down 12.2%). Spain's IBEX 35 equities index recovered 1.9% (down 5.1%). Italy's FTSE MIB index increased 0.8% (down 12.7%). EM equities were mixed. Brazil's Bovespa index rallied 6.7% (up 4.7%), and Mexico's Bolsa index recovered 1.9% (down 5.1%). South Korea's Kospi index fell 2.0% (down 22.3%). India's Sensex equities index dropped 2.4% (up 2.7%). China's Shanghai Exchange Index sank 3.9% (down 16.3%). Turkey's Borsa Istanbul National 100 index jumped 4.6% (up 194%). Russia's MICEX equities index slipped 0.4% (down 43.9%).

Investment-grade bond funds posted outflows of $6.089 billion, and junk bond funds reported negative flows of $3.500 billion (from Lipper).

Federal Reserve Credit declined $16.4bn last week at $8.531 TN. Fed Credit was down $370bn from the June 22nd peak. Over the past 171 weeks, Fed Credit expanded $4.804 TN, or 128%. Fed Credit inflated $5.720 Trillion, or 203%, over the past 528 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt were little changed last week at $3.309 TN. "Custody holdings" were down $116bn, or 3.4%, y-o-y.

Total money market fund assets fell $28.2bn to $4.713 TN. Total money funds were up $47bn, or 1.0%, y-o-y.

Total Commercial Paper dropped $24bn to $1.278 TN. CP was up $195bn, or 18%, over the past year.

Freddie Mac 30-year fixed mortgage rates increased three bps to 6.20% (up 315bps y-o-y). Fifteen-year rates slipped two bps to 5.50% (up 320bps). Five-year hybrid ARM rates gained three bps to 5.39% (up 302bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 6.57% (up 334bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 0.4% to 104.31 (up 9.0% y-t-d). For the week on the upside, the South African rand increased 3.9%, the Brazilian real 2.8%, the Japanese yen 2.8%, the Mexican peso 2.1%, the South Korean won 2.1%, the Canadian dollar 0.7%, the Singapore dollar 0.6%, the Australian dollar 0.5%, the euro 0.3%, and the Swiss franc 0.1%. On the downside, the New Zealand dollar declined 1.5%, the Swedish krona 1.1%, and the British pound 0.8%. The Chinese (onshore) renminbi declined 0.23% versus the dollar (down 9.07% y-t-d).

Commodities Watch:

December 22 – Bloomberg (Marvin G. Perez): “Cotton futures plunged after data showed Chinese buyers of US cotton made the largest purchase cancellation in a decade in fresh signs of demand headwinds for the world’s biggest exporter. China nixed 144,400 bales of purchases for the week ended Dec. 15…, the biggest weekly cancellation since June 2012… China’s demand has slowed due to Covid-19 lockdowns and a contraction in manufacturing. The Asian nation is the world’s biggest importer of the fiber and the biggest US customer.”

The Bloomberg Commodities Index was little changed (up 13.5% y-t-d). Spot Gold increased 0.3% to $1,798 (down 1.7%). Silver gained 2.2% to $23.73 (up 1.8%). WTI crude surged $5.27 to $79.56 (up 6%). Gasoline rallied 11.8% (up 7%), while Natural Gas sank 23.0% to $5.08 (up 36%). Copper rallied 1.3% (down 15%). Wheat jumped 3.0% (up 1%), and Corn rose 2.0% (up 12%). Bitcoin was up $200, or 1.2%, this week to $16,800 (down 64%).

Market Instability Watch:

December 20 – Bloomberg (Masaki Kondo and Ruth Carson): “The Bank of Japan’s unexpected hawkish shift sent shock waves through global markets as the developed world’s last holdout for rock-bottom interest rates inches toward policy normalization. Japanese government bonds and Treasuries both slumped, while the yen surged after the BOJ raised its cap on benchmark 10-year yields to around 0.5% from 0.25%, surprising every economist surveyed by Bloomberg… Japan is the world’s largest creditor, and tightening domestic financial conditions may result in a wave of capital returning home. That threatens to push down asset prices and boost global borrowing costs at a time the economic outlook is deteriorating. ‘It’s important not to underestimate the impact this could have, because tighter BoJ policy would remove one of the last global anchors that’s helped to keep borrowing costs at low levels more broadly,’ Deutsche Bank AG’s global head of macro research Jim Reid wrote…”

December 20 – Bloomberg (Toru Fujioka, Ruth Carson and Sumio Ito): “Bank of Japan Governor Haruhiko Kuroda just gave investors a glimpse of what to expect when the world’s boldest experiment with ultra-loose monetary policy comes to an end. In the face of sustained market pressure, Kuroda shocked markets Tuesday by saying he’ll now allow Japan’s 10-year bond yields to rise to around 0.5%, double the previous upper limit of 0.25%. Whether this is a strategic tweak to buy time for his yield-curve control settings until his decade-long term ends in April or the start of the end for his unprecedented monetary easing remains to be seen. But one thing is clear: a crack has opened that markets around the world will keep pricing in the weeks and months ahead.”

December 20 – Financial Times (Nikou Asgari): “Global government debt markets dropped on Tuesday after the Bank of Japan surprised markets by unexpectedly adjusting its policy of pinning long-term bond yields at ultra low levels. The move sparked a sell-off in government debt, with the yield on Japan’s 10-year bonds surging by as much as 0.2 percentage points to 0.47%, its highest level since 2015, before easing to 0.41%. Other sovereign debt yields climbed higher… The yield on 10-year US Treasuries climbed to a three-week high of 3.7%, while UK 10-year gilt yields rose by 0.1 percentage point to 3.6% and Germany’s 10-year Bund yield rose by a similar level to 2.27%.”

December 22 – Financial Times (John Plender): “The retreat by the developed world’s big central banks from ultra-loose monetary policy is imposing a severe stress test on the global financial system. That much is clear from the lack of liquidity in markets… Signs of financial instability have recurred since the seizure in the British gilt-edged market in late September which stemmed from pension funds’ so-called liability-driven investment strategies. The Bank of England’s decisive move to act as a buyer of last resort succeeded in restoring order to the gilt market after the Truss government’s disastrous ‘mini’ Budget on September 23. But the episode provided early warning of what the future might hold as a result of radical changes in the structure of the financial system since the crisis of 2007-09.”

December 23 – Bloomberg (Sagarika Jaisinghani): “Investors have dumped equities at a record pace in the days since major central banks signaled they won’t be deterred in their fight against inflation… Equity funds were hit by outflows of almost $42 billion — the highest ever — in a week when the Federal Reserve, the European Central Bank and the Bank of Japan all sounded staunchly hawkish in their policy outlook for next year… Typical year-end trends contributed to the selling, strategists said.”

Crypto Bubble Collapse Watch:

December 22 – Bloomberg (Ava Benny-Morrison, Allyson Versprille and David Voreacos): “FTX co-founder Sam Bankman-Fried landed in the US… to face a range of criminal charges just as two of his long-time associates said they were cooperating with prosecutors. The revelation that Caroline Ellison and Gary Wang had pleaded guilty to fraud and were working with federal officials probing the collapse of the crypto exchange is an ominous sign for Bankman-Fried. The 30-year-old is facing an eight-count indictment in New York.”

December 19 – Reuters (Tom Wilson, Angus Berwick and Elizabeth Howcroft): “The world's biggest crypto exchange, Binance, is battling to shore up confidence after a surge in customer withdrawals and a steep drop in the value of its digital token. The exchange said it dealt with net outflows of around $6 billion over 72 hours last week ‘without breaking stride’ because its finances are solid and ‘we take our responsibility as a custodian seriously.’ After the collapse of rival exchange FTX last month, Binance's founder Changpeng Zhao promised his company would ‘lead by example’ in embracing transparency… Yet a Reuters analysis of Binance's corporate filings shows that the core of the business – the giant Binance.com exchange that has processed trades worth over $22 trillion this year – remains mostly hidden from public view. Binance declines to say where Binance.com is based. It doesn't disclose basic financial information such as revenue, profit and cash reserves. The company has its own crypto coin, but doesn't reveal what role it plays on its balance sheet. It lends customers money against their crypto assets and lets them trade on margin, with borrowed funds. But it doesn't detail how big those bets are, how exposed Binance is to that risk, or the full extent of its reserves to finance withdrawals.”

December 22 – Wall Street Journal (Jean Eaglesham): “The Securities and Exchange Commission is stepping up scrutiny of the work that audit firms are doing for cryptocurrency companies, concerned that investors may be getting a false sense of reassurance from the firms’ reports… ‘We’re warning investors to be very wary of some of the claims that are being made by crypto companies,’ Paul Munter, the SEC’s acting chief accountant, said…”

December 19 – Reuters (Noor Zainab Hussain and Carolyn Cohn): “Insurers are denying or limiting coverage to clients with exposure to bankrupt crypto exchange FTX, leaving digital currency traders and exchanges uninsured for any losses from hacks, theft or lawsuits, several market participants said. Insurers were already reluctant to underwrite asset and directors and officers (D&O) protection policies for crypto companies because of scant market regulation and the volatile prices of Bitcoin and other cryptocurrencies. Now, the collapse of FTX last month has amplified concerns.”

December 20 – Bloomberg (Steven Church and Emily Nicolle): “A unit of digital asset firm Genesis won a spot on an official creditors committee in the FTX bankruptcy, a panel that may have a leading role in the biggest crypto insolvency case filed so far. Genesis previously said it had $175 million in exposure to FTX, which forced its parent Digital Currency Group to provide the firm with a $140 million capital infusion in November. Genesis is currently attempting to raise at least $1 billion in fresh funds to avoid filing for bankruptcy.”

December 21 – Reuters (Dietrich Knauth and Hannah Lang): “Core Scientific Inc, one of the biggest publicly traded cryptocurrency mining companies in the United States, said… it filed for Chapter 11 bankruptcy protection, the latest in a string of failures to hit the sector… Core Scientific attributed its bankruptcy to slumping bitcoin prices, rising energy costs for bitcoin mining and a $7 million unpaid debt from U.S. crypto lender Celsius Network, one of its biggest customers.”

Bursting Bubble and Mania Watch:

December 21 – Bloomberg (Masaki Kondo and Garfield Reynolds): “Negative yields R.I.P. The global pile of bonds with sub-zero yields shrank on Wednesday as Japan’s two-year sovereign yield briefly climbed into positive territory for the first time since 2015. The worldwide stock of negative-yielding debt stood at about $686 billion on Tuesday, down from a peak of $18.4 trillion reached two years ago. The jump in Japan’s yields was triggered by the central bank’s policy adjustment, a move which may signal that the world’s last uber-dovish monetary authority is inching toward normalization. The European Central Bank exited its negative-rate policy in July, followed by its counterparts in Switzerland and Denmark in September.”

December 20 – Reuters (Chiara Elisei): “Stellar growth in private debt markets over the past decade looks set to face a reality check as a looming recession and higher interest rates squeeze companies' earnings and their ability to service borrowing costs. An era of ultra-easy cash from central banks lured investors into private credit, attracted by juicy returns in the high-single to low-double-digits. Regulation in the wake of the global financial crisis forced banks to dial back on lending to corporates -- particularly riskier ones. This opened the way for investment funds, such as Blackstone, to fill the gap and lend money to companies, which are often owned by private equity firms. But the private debt market -- the fastest-growing in the credit sector since the financial crisis -- is about to hit a speed bump as investor appetite for risky assets is tested by aggressive monetary tightening and recession. The private debt market has expanded to $1.4 trillion, up from $250 billion in 2010, according to… Preqin…”

December 21 – Bloomberg (Michelle F. Davis, Crystal Tse and Jan-Henrik Förster): “Stubbornly high inflation, soaring borrowing costs and geopolitical uncertainty hindered dealmaking in 2022, sending global mergers and acquisitions activity down by almost a third compared with last year’s record haul. Companies announced $3.5 trillion of deals in 2022… Megadeals announced early in the year were soon replaced by jitters about getting M&A over the finish line, with monthly deal activity plummeting by almost half from May to June. The volumes have yet to recover. ‘It’s really the tale of two years’ said Melissa Sawyer, global head of Sullivan & Cromwell’s M&A group. ‘When we started 2022, people were churning out deals left and right and SPACs were still a thing. Then the landscape for M&A changed dramatically.’”

December 19 – Financial Times (Tabby Kinder): “Tech start-ups that have traditionally relied on deep-pocketed Silicon Valley investors to fund ambitious growth plans are being forced into alternative financing deals to sustain their businesses and avoid drastic cuts in valuation. A sharp decline in venture capital dealmaking, alongside a closed market for initial public offerings, has resulted in a funding crunch for many private technology companies over the past year. Leading start-ups have been aggressively cutting costs, creating a wave of lay-offs across the tech sector. Still, a growing number of companies are running out of cash… New VC deals fell 42% in the first 11 months of this year to $286bn…, according to… Preqin. Silicon Valley law firm Cooley said the total value of late-stage VC deals it advised on had slumped almost 80% this year… Meanwhile, initial public offerings have dropped to their lowest level since 2009, cutting off a key source of fundraising for mature private companies and their backers. ‘Next year is when it all comes home to roost,’ said Ravi Viswanathan, founder of… New View Capital. ‘There will come a point where even companies with 18 to 24 months’ capital have to raise. There is going to be a lot of pain.’”

December 22 – MarketWatch (Joy Wiltermuth): “The $21 trillion commercial real-estate market faces a deluge of debt coming due, at much higher rates. An era of cheap debt that helped lift prices on hotels, office buildings and other U.S. commercial properties to dizzying new heights has ended. Borrowers thirsty for financing have watched mortgage rates roughly double in 2022 from the 3% lows… Higher financing costs already were a concern for 2023, with billions of dollars worth of older commercial mortgages coming due. Adding to the woes, top tech titans, including Meta Platforms (META), in recent weeks have retreated from splashy office leases.”

December 21 – Reuters (Akash Sriram and Jane Lanhee Lee): “Chipmaker Micron Technology Inc… forecast a much steeper-than-expected second-quarter loss and said it will lay off 10% of its workforce next year, citing a nagging glut in the semiconductor market. ‘Due to the significant supply demand mismatch entering calendar 2023, we expect that profitability will remain challenged throughout 2023,’ Micron chief executive Sanjay Mehrotra said. Micron had about 48,000 employees worldwide as of September 1.”

December 19 – Bloomberg (Jan-Henrik Förster, Priscila Azevedo Rocha and Abhinav Ramnarayan): “Private equity will have to get the check book out in the coming months if the industry wants to return to its record pace of deal making. That’s because banks stuck with billions of dollars of risky corporate loans, a hangover from deals underwritten in a lower-rate environment, are unlikely to back sizable new transactions until well into 2023… ‘It may be the second half of the year before banks return in force to leveraged buyouts,’ EQT AB Chief Executive Officer Christian Sinding said… Those lenders ‘haven’t been there to underwrite, not in any meaningful size, and still aren’t,’ he added later. That leaves buyout giants such as EQT, CVC Capital Partners and KKR & Co. with fewer funding options for acquisitions, a far cry from previous years… The easy money era had been a boon for the industry, helping increase assets under management by more than 250% in just over a decade.”

December 18 – Reuters (Rae Wee): “Private equity holdings are being sold at a record clip in an opaque secondary market, investors say, as asset managers cash out to cover losses elsewhere and rebalance portfolios. The wave of selling is the latest of several signs of stress in private markets and is another signal of investors starting to fall out of love with ‘alternative assets’ that only recently were drawing in cash… As they have become popular, they have expanded to encompass property and infrastructure projects. Yet since such funds are difficult to exit before maturity - usually at least three years - money managers needing to cash out use a secondary market that has lit up in the last few months. The discounts on offer suggest there is a hurry to get out… Investment firm Hamilton Lane says an unprecedented $224 billion in private equity stakes have been offered in the secondary market this year to mid-November. Not all have been sold, but analysis firm Preqin estimates the value of secondary transactions up until the third quarter was about $65 billion. This is not far off 2021's total of just over $70 billion and is far higher than previous years.”

December 22 – Reuters (Lananh Nguyen, Saeed Azhar and Lawrence White): “Bankers in New York and London are bracing for year-end bonuses that recruiters estimate are 30% to 50% lower, while some may receive none at all as dealmaking sputters and economic gloom sets takes hold. Financiers face disappointment when their compensation awards land in the first quarter, and thousands more of their colleagues could be laid off after hundreds were let go this year… Last year, the industry handed out the biggest awards since 2006 as the economy roared back from the pandemic. But this year, the pace of mergers and acquisitions and stock offerings dramatically slowed as debt financing markets collapsed and stock market volatility hurt valuations.”

December 21 – Financial Times (Harriet Agnew): “Cathie Wood’s Ark Investment Management has lost almost $50bn in assets from its stable of exchange traded funds since its 2021 peak, highlighting the scale of this year’s losses in speculative tech stocks. Total assets across Ark’s nine ETFs have slumped to $11.4bn from a peak of $60.3bn in February last year… ‘Ark Innovation’s results have been horrendous this year and very disappointing for investors,’ says Robby Greengold, a strategist at Morningstar, which in April downgraded the ETF from ‘neutral’ to ‘negative’.”

December 19 – Wall Street Journal (Veronica Dagher): “Many Americans dream the path to building wealth is like a trip around the Monopoly board, buying up properties that generate rental income. That can be true, but financial advisers warn the costs and aggravations of playing the landlord game are increasing. People thinking about becoming landlords might have a tougher time turning a profit after a year marked by higher home prices and mortgage rates. Rents are up too, but because of inflation so are the costs of repairs and routine home maintenance. The benefits to owning a rental property—passive income and tax breaks—have been touted frequently on YouTube and TikTok in recent years. However, anyone planning to buy a rental property right now should factor in the likelihood of higher costs and unexpected expenses.”

December 19 – Bloomberg (Sagarika Jaisinghani): “US equities are set for their worst year since the global financial crisis, and, according to Morgan Stanley strategist Michael Wilson, corporate profits are about to meet the same fate. A looming earnings recession ‘by itself could be similar to what transpired in 2008/2009,’ said Wilson. That could spark a new stock-market low that’s ‘much worse than what most investors are expecting,’ he wrote... ‘Our advice — don’t assume the market is pricing this kind of outcome until it actually happens,’ Wilson said.”

Ukraine War Watch:

December 22 – Wall Street Journal (Ken Thomas and Andrew Restuccia): “Ukrainian President Volodymyr Zelensky said his country would never surrender in its fight against Russia and urged Washington to ramp up military aid in an impassioned speech before Congress that unfolded as the war enters its 11th month. Speaking in a packed House chamber…, a defiant Mr. Zelensky touted Ukraine’s successes on the battlefield and said the West was united in its opposition to Russia’s invasion. It capped a whirlwind, roughly eight-hour visit to Washington that included an Oval Office meeting with President Biden and a joint news conference at the White House. ‘Against all the gloom-and-doom scenarios, Ukraine didn’t fall. Ukraine is alive and kicking,’ he said.”

December 19 – Reuters (Tom Balmforth and Valentyn Ogirenko): “Russian ‘kamikaze’ drones hit key energy infrastructure in and around Kyiv on Monday and President Vladimir Putin visited Belarus for the first time since 2019, fuelling Ukrainian fears he will pressure his ally to open a new invasion front. But Ukraine was hardly mentioned by Putin and his Belarusian counterpart Alexander Lukashenko after their talks, with remarks to reporters dwelling instead on bilateral and economic cooperation.”

December 19 – Reuters (John O'Donnell): “European Union unity over sanctions on Russia has started to falter as jitters about the impact on Europe's own stumbling economy weakens resolve to punish Moscow for war in Ukraine. EU leaders agreed on Thursday to a ninth package of sanctions but talks were acrimonious, with Poland and the Baltic states that neighbour Russia campaigning for tougher measures, while states further west, such as Germany, were more hesitant.”

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

December 19 – Wall Street Journal (Ann M. Simmons): “Russia said it would hold joint naval drills with China, highlighting the close partnership between the two nations as the Kremlin seeks to bolster support among partners to offset Western isolation for its war in Ukraine. The Russian Defense Ministry said… a detachment of warships of the Pacific Fleet from Vladivostok has been put to sea to participate in naval exercises with their Chinese counterparts, starting Wednesday... The active part of the exercises would include ‘joint rocket and artillery firing at air targets, artillery firing at sea targets, as well as practicing joint anti-submarine actions with the practical use of weapons,’ the Defense Ministry said.”

December 21 – Reuters: “Former Russian president Dmitry Medvedev has undertaken a surprise trip to Beijing and held talks with Chinese President Xi Jinping during which he said they discussed the Ukraine conflict. Medvedev, now deputy chairman of Russia's Security Council, posted a video… showing him meeting Xi, smiling for photos and a meeting between Chinese and Russian officials. Medvedev said he and Xi had discussed the two countries' ‘no limits’ strategic partnership, as well as Ukraine.”

December 22 – Reuters (Mark Trevelyan): “Russia accused Japan… of abandoning decades of pacifist policy and embracing ‘unbridled militarization’, responding to a $320-billion defence plan announced by Prime Minister Fumio Kishida last week. ‘It can be clearly seen that Tokyo has embarked on the path of an unprecedented build-up of its own military power, including the acquisition of strike potential,’ the Russian Foreign Ministry said…”

De-globalization and Iron Curtain Watch:

December 22 – Bloomberg (Michelle Jamrisko and Ruth Carson): “King Dollar is facing a revolt. Tired of a too-strong and newly weaponized greenback, some of the world’s biggest economies are exploring ways to circumvent the US currency. Smaller nations, including at least a dozen in Asia, are also experimenting with de-dollarization. And corporates around the world are selling an unprecedented portion of their debt in local currencies, wary of further dollar strength. No one is saying the greenback will be dethroned anytime soon… Calls for ‘peak dollar’ have many times proven premature. But not too long ago it was almost unthinkable for countries to explore payment mechanisms that bypassed the US currency or the SWIFT network that underpins the global financial system.”

Inflation Watch:

December 18 – Financial Times (Valentina Romei): “Underlying price pressures are still mounting in most major developed economies despite the recent falls in headline inflation, indicating that central banks will have to keep tightening policy in the coming months. Core inflation — which excludes changes in food and energy prices, and is viewed by rate setters as a better measure of the persistence of price pressures — is accelerating in many parts of the world… Core rates were still rising in November in the majority of the 33 countries tracked by the FT and remain well above the 2% level of inflation that most central bankers target.”

December 23 – Associated Press (Paul Wiseman): “A measure of inflation closely watched by the Federal Reserve slowed last month… Friday’s… showed that prices rose 5.5% in November from a year earlier, down from a revised 6.1% increase in October and the smallest gain since October 2021. Excluding volatile food and energy prices, so-called core inflation was up 4.7% over the previous year. That was also the smallest increase since October 2021. On a month-to-month basis, prices rose 0.1% from October to November after rising 0.4% the previous month. Core prices rose 0.2%.”

Biden Administration Watch:

December 21 – Reuters (Steve Holland and Pavel Polityuk): “Presidents Volodymyr Zelenskiy and Joe Biden showed solidarity at the White House… in the first foreign trip of the war for the Ukrainian leader, as the United States announced new military aid including Patriot missiles. Zelenskiy plans to seek more support during the trip. The Ukrainian president, wearing his trademark olive green pants and sweater, Biden and first lady Jill posed on the White House lawn before the two leaders spoke at the Oval Office in front of reporters.”

December 22 – Associated Press (Zeke Miller, Lisa Mascaro and E. Eduardo Castillo): “Ukraine’s Volodymyr Zelenskyy told cheering U.S. legislators during a defiant wartime visit to the nation’s capital… that against all odds his country still stands, thanking Americans for helping to fund the war effort with money that is ‘not charity,’ but an ‘investment’ in global security and democracy. The whirlwind stop in Washington — his first known trip outside his country since Russia invaded in February — was aimed at reinvigorating support for his country in the U.S. and around the world… Zelenskyy called the tens of billions of dollars in U.S. military and economic assistance provided over the past year vital to Ukraine’s efforts to beat back Russia and appealed for even more in the future. ‘Your money is not charity,’ he sought to reassure both those in the room and those watching at home. ‘It’s an investment in the global security and democracy that we handle in the most responsible way.’”

Federal Reserve Watch:

December 21 – Reuters (Michael S. Derby): “Seven Republican U.S. senators… announced a new bill aimed at reshaping the Federal Reserve's 12 regional banks, amid concerns that those institutions have become too political. In a news release from outgoing Senator Pat Toomey, the legislators said they are calling for regional Fed bank presidents to be presidentially nominated and confirmed by the Senate, matching the requirements to become a member of the central bank's Board of Governors. Among its provisions, the bill would also shrink the 12 regional Fed banks to five. ‘This will enable more effective congressional oversight and ensure that all presidents of Fed regional banks have permanent seats on the Federal Open Market Committee,’ the news release said.”

December 21 – Reuters (Michael S. Derby): “The Federal Reserve's ongoing efforts to shrink its balance sheet may end earlier than once thought… Fed watchers reckon it will most likely have to stop in some form its current shedding of Treasury bonds and mortgage-backed securities (MBS) next year due to rising shortfalls of financial sector liquidity that may already be happening. Such shortfalls could threaten the central bank's control over its overnight interest rate target… When it comes to officials' comments on the balance sheet outlook, ‘it seems like they're oddly silent about this whole thing at the moment,’ said Derek Tang, economist with forecasting firm LH Meyer.”

U.S. Bubble Watch:

December 21 – CNBC (Diana Olick): “Sales of existing homes fell 7.7% in November compared with October, according to the National Association of Realtors. The seasonally adjusted annualized pace was 4.09 million units… Sales were down 35.4% year over year, marking the tenth straight month of declines. That was the weakest pace since November 2010, with the exception of May 2020… At the end of November there were 1.14 million homes for sale, which is an increase of 2.7% from November of last year, but at the current sales pace it represents a still-low 3.3 month supply… Sales decreased in all regions but fell hardest in the West, where prices are the highest, down nearly 46% from a year ago. Homes sat on the market longer in November, an average 24 days, up from 21 days in October and 18 days in November 2021. Despite the slower market, 61% of homes went under contract in less than a month.”

December 23 – Bloomberg (Reade Pickert): “Sales of new US homes unexpectedly rose in November, suggesting some stabilization in demand as mortgage rates eased late in the month... Purchases of new single-family homes increased 5.8% to an annualized 640,000 pace last month after rising in October… The increase in sales last month was concentrated in the West and Midwest. The report… showed the median sales price of a new home was up 9.5% from a year earlier to $471,200. There were 461,000 new homes for sale as of the end of last month, though the grand majority remain under construction or not yet started.”

December 19 – CNBC (Diana Olick): “Homebuilders were less confident about their business in December, but they are starting to see potential green shoots. Builder sentiment in the single-family housing market dropped 2 points to 31 in December on the National Association of Home Builders/Wells Fargo Housing Market Index. Anything below 50 is considered negative. This is the 12th straight month of declines and the lowest reading since mid-2012, with the exception of a very brief drop at the start of the Covid pandemic.”

December 20 – Bloomberg (Reade Pickert): “New US home construction continued to decline in November and permits plunged as high borrowing costs paired with widespread inflation eroded housing affordability and demand. Residential starts decreased 0.5% last month to a 1.43 million annualized rate… Single-family homebuilding dropped to an annualized 828,000 rate, the lowest since May 2020. Applications to build… decreased 11.2% to an annualized 1.34 million units. Permits for construction of one-family homes fell 7.1% to the weakest pace since 2020… Meanwhile, the number of homes completed jumped nearly 11% to an annualized 1.49 million, the highest since August 2007 and a sign builders are making greater progress on backlogs amid a demand pullback.”

December 21 – Reuters (Lucia Mutikani): “The U.S. current account deficit narrowed sharply in the third quarter as exports jumped to a record high… The… current account deficit, which measures the flow of goods, services and investments into and out of the country, contracted 9.1% to $217.1 billion last quarter. That was the smallest gap since the second quarter of 2021. The current account gap represented 3.4% of gross domestic product, down from 3.8% in the second quarter. That was the smallest share in two years.”

December 19 – Axios (Emily Peck): “There were 374 worker strikes started in 2022 — a 39% increase over 2021, according to a database run by Cornell. Why it matters: Fueled partly by anger over working conditions in the pandemic and spurred on by other labor wins, all sorts of workers — warehouse employees, teachers, nurses, graduate students, journalists — walked off the job. Many others voted to unionize — including at more than 260 Starbucks stores in the past year — demanding better pay and working conditions. Over the weekend, the University of California reached a tentative agreement with around 36,000 employees that would end the year's biggest strike, and provide some workers with wage increases of as much as 55%.”

December 21 – CNBC (Diana Olick): “Mortgage interest rates dropped again last week, and while that did little to bolster demand from homebuyers, it did send homeowners looking for savings on their monthly payments… Mortgage applications to purchase a home decreased 0.1% for the week and were 36% lower than the same week one year ago.”

December 21 – Wall Street Journal (Jesse Newman and Jacob Bunge): “High prices for crops and livestock are fueling a boom in the U.S. Farm Belt, making farmers, ranchers and agricultural companies rare winners as the broader American economy softens. U.S. net farm income is expected to surge to $160.5 billion this year, boosted by increased prices for farm goods… If realized, farm income would reach the highest level since 1973 in inflation-adjusted dollars, marking a sharp recovery from an agricultural recession that battered farmers and their suppliers during the past decade.”

December 20 – Reuters (December 22 – Financial Times (John Plender): “U.S. companies borrowed 9% more to finance their equipment investments in November from a year earlier, industry body Equipment Leasing and Finance Association (ELFA) said… The companies signed up for $8.6 billion in new loans, leases and lines of credit last month… Borrowings were up nearly 6% from January. ‘Rising interest rates seem to have little or no effect on origination volume in November,’ ELFA CEO Ralph Petta said…”

Fixed-Income Watch:

December 22 – Bloomberg (Carmen Arroyo): “Debt markets are increasingly sorting US leveraged loans into two categories: money good, and distressed. A growing proportion of prices in the market are either very high, or very low. About 5% of the market is trading under 80 cents on the dollar, a share that has more than doubled since June, according to a JPMorgan... With more loan prices reaching extremes, companies that run into any sort of difficulty can see their loans plunge quickly. That can translate to surging borrowing costs, boosting the chance of corporations defaulting. ‘This puts the worst companies at risk, as they’ll have a harder time refinancing,’ said Roberta Goss, senior managing director and head of the bank loan and collateralized loan obligations platform at Pretium Partners LLC…”

December 20 – Reuters (Shankar Ramakrishnan and David French): “Private U.S. oil and gas companies are increasingly turning to a niche financing structure that securitizes their production, providing a funding avenue for producers and owners as traditional sources become more expensive or simply dry up. Known as PDP asset-backed securitizations (ABS), this product takes revenue generated by companies' proved, developing and producing (PDP) oil and gas operations and uses that cash flow as collateral for a bond that is sold to investors. With banks pressured by stakeholders to restrict loans to the oil and gas sector over its environmental impact, private energy producers - more reliant on bank lines than listed peers - are able to maintain access to outside finance through this niche product.”

China Watch:

December 18 – Bloomberg: “Heavy redemptions by China’s retail investors are prompting the nation’s financial product managers to slash their bond holdings like never before. Some analysts say that the debt selloff is far from over. Managers of domestic mutual funds and wealth management products offloaded 1.3 trillion yuan ($186bn) of bonds from the interbank market last month, the most on record, according to… data going back to 2017. The outflow is nearly twice the size of global funds’ sales of China’s bonds so far this year and shows the rising influence of individual investors in the nation’s debt market… To moderate the redemption shock, regulators were said to have asked some banks’ proprietary trading desks and insurers to buy bonds.”

December 18 – Reuters (Liangping Gao, Ryan Woo and Joe Cash): “China's business confidence fell to its lowest since January 2013, a survey by World Economics showed…, reflecting the impact of surging COVID-19 cases on economic activity with the abrupt lifting of many pandemic control measures. The index fell to 48.1 in December from 51.8 in November, showed the World Economics' survey of sales managers at over 2,300 companies conducted Dec. 1-16. The index was the lowest since the survey began in 2013.”

December 21 – Bloomberg: “Chinese authorities ramped up their calls to prioritize growth next year and help the property sector recover from its worst slump on record, in further signs the economy will be top of mind in 2023. The State Council, central bank and top securities watchdog each met in recent days to study last week’s agenda-setting economic policy meeting… Readouts of those meetings detailed a commitment to policies intended to rescue the economy and set it on a track to stability. The government urged for the implementation of previously announced stimulus measures, saying existing policies can be more effective…”

December 16 – Bloomberg: “China pledged to revive consumption and support private businesses, as Beijing shifts toward boosting growth after dropping its Covid Zero policy. Top leaders including President Xi Jinping said restoring and expanding consumption should ‘take the precedence’ as they concluded a meeting setting economic policy priorities for 2023… They also vowed to encourage private sector growth and support platform firms in playing a leading role in development. ‘Numerous economic work is to be done next year,’ according to the readout of the meeting. ‘We should start with improving social expectations and boosting the confidence in development.’”

December 20 – Reuters (Kevin Yao): “The World Bank has cut its China growth outlook for this year and next, citing the impact of the abrupt loosening of strict COVID-19 containment measures and persistent property sector weakness. The… lender… said it expected China's economy to grow 2.7% in 2022, before recovering to 4.3% in 2023 as it reopens following the worst of the pandemic. The bank's expected expansion for 2022 would be well below the official target of around 5.5%.”

December 23 – Financial Times (Qianer Liu, Cheng Leng, Sun Yu and Ryan McMorrow): “Chinese officials estimate about 250mn people or 18% of the population were infected with Covid-19 in the first 20 days of December… The estimates — which include 37mn people who were infected on Tuesday alone, or 2.6% of the population — were revealed by Sun Yang, a deputy director of the Chinese Center for Disease Control and Prevention… Sun said the rate of Covid’s spread in the country was still rising and estimated that more than half of the population in Beijing and Sichuan were already infected, the people briefed on the meeting said.”

December 19 – New York Times (Chris Buckley, Alexandra Stevenson and Keith Bradsher): “After micromanaging the coronavirus strategy for nearly three years, the country’s leader, Xi Jinping, has suddenly left the populace to improvise. The southwestern city of Chongqing was the latest frontline of Xi Jinping’s ‘zero Covid’ war, until it came to epitomize China’s potentially devastating about-face that has cracked the Communist Party’s edifice of absolute control. The city last month was enduring one of the biggest outbreaks cropping up across China, when the national leader, Mr. Xi, ordered officials to continue mass testing, lockdowns and quarantines. Chen Min’er, the Chongqing party secretary, devoutly complied, closing off neighborhoods and ordering the instant construction of a quarantine hospital designed to hold up to 21,000 beds. ‘Be resolute in fighting and winning this war of annihilation against the pandemic,’ Mr. Chen, a protégé of Mr. Xi, told officials on Nov. 27. ‘Not a day of delay.’ But 10 days later, China suddenly abandoned the ‘zero Covid’ strategy on which Mr. Xi had staked his reputation. Now the country faces a surge of infections, and Mr. Xi has left officials scrambling to manage the disarray and uncertainty.”

December 22 – Bloomberg: “China is likely experiencing 1 million Covid infections and 5,000 virus deaths every day as it grapples with what is expected to be the biggest outbreak the world has ever seen, according to a new analysis. The situation could get even worse for the country of 1.4 billion people. This current wave may see the daily case rate rise to 3.7 million in January, according to Airfinity Ltd., a London-based research firm that focuses on predictive health analytics and has been tracking the pandemic since it first emerged. There’ll likely then be another surge of infections that will push the daily peak to 4.2 million in March, the group estimated.”

December 20 – Reuters (Bernard Orr and Xinghui Kok): “Cities across China scrambled to install hospital beds and build fever screening clinics on Tuesday as authorities reported five more deaths and international concern grew about Beijing's surprise decision to let the virus run free… ‘Every new epidemic wave in another country brings the risk of new variants, and this risk is higher the bigger the outbreak, and the current wave in China is shaping up to be big,’ said Alex Cook, vice-dean for research at the National University of Singapore's Saw Swee Hock School of Public Health.”

December 21 – Reuters (Casey Hall, Martin Quin Pollard and Joe Cash): “As China's massive wave of COVID-19 infections begins its march across a country roughly the size of Europe, the ripple effect on business is accelerating. From its original epicentre in the north, including the capital Beijing, COVID-19 infections are spreading throughout the country and cases are impeding workforces in manufacturing belts… Retail and financial services businesses have been hard hit by a shortage of staff, with manufacturers not far behind, according to an international business organisation operating in China. ‘The retail and client facing sectors are in deep trouble. Obviously, they have limited staff that are available to work because of illness, so many of our large-scale retailers are not even opening their doors,’ said Noah Fraser, managing director at the Canada-China Business Council.”

December 23 – Bloomberg: “China’s soaring Covid infections are keeping people home and causing a slump in travel and economic activity, according to the latest high-frequency data. Several measures of mobility including traffic congestion in major cities, subway usage and the number of domestic flights have all slumped. In recent days subway passenger numbers have plummeted in cities including Shanghai, Guangzhou, Shenzhen, Xi’an and Nanjing as infections surged, while in Beijing… subway usage steadied and picked up slightly over the past four days, although it is still around 80% below the level on the same period in 2019. Congestion levels across 15 major cities are 56% below the level in January 2021…”

December 18 – Financial Times (Eleanor Olcott, Qianer Liu, Gloria Li and Cheng Leng and Joe Leahy): “The coronavirus sweeping across China is causing widespread business disruption as staffing shortages threaten to close down factory production lines and truck drivers fall ill, bringing chaos to supply chains. The Omicron variant of the virus has begun to run rampant through several big cities since the sudden U-turn on president Xi Jinping’s former zero-Covid policy of containment earlier this month. The surge in infections is largest in the capital Beijing, where more than half the 22mn population is infected, according to some estimates. Many office workers have begun to work from home but some factories are becoming thinly staffed as workers call in sick. Business owners and executives said this was causing increasing disruption to production and supply chains.”

December 21 – Bloomberg (Jinshan Hong): “Traffic in China’s biggest cities has dropped to the lowest since the Lunar New Year break in the early part of the year… A measure of congestion levels across 15 major cities is 45% below January 2021… The only other time it’s been lower this year was in early February, when the Lunar New Year period saw factories wind down, restaurants close and people leave big metropolises to return home.”

December 19 – Financial Times (William Langley and Ryan McMorrow): “China’s state media have promised a return to ‘normalcy’ within a few months and rejected western criticism as its censors seek to portray an ‘exit wave’ of coronavirus cases sweeping the country as part of a pre-planned strategy. ‘Virus experts expect normalcy by Spring,’ read a headline in the China Daily…, alongside other articles with headlines such as ‘Experts: Omicron has lower risk of causing severe illness’.”

December 22 – Reuters (Zoey Zhang and Bernard Orr): “A Shanghai hospital has told its staff to prepare for a ‘tragic battle’ with COVID-19 as it expects half of the city's 25 million people will get infected by the end of next week, while the virus sweeps through China largely unchecked… China reported no new COVID deaths for a second consecutive day for Wednesday, even as funeral parlour workers say demand for their services has increased sharply over the past week.”

December 21 – Bloomberg: “Months after Shanghai endured a brutal lockdown to stop the spread of Covid, the virus is starting to make its way virtually unchecked through the megacity’s 25 million-strong population. Hospitals are struggling to cope with the numbers of infected patients, pharmacies are turning customers away empty- handed, businesses are shutting because staff are off sick, most schools have closed and usage of public transport is plummeting.”

December 19 – Bloomberg: “Police and security guards were stationed outside a Beijing crematorium reportedly designated to handle Covid fatalities, as questions over China’s virus death toll mount. Guards pushed journalists to the back of the Beijing Dongjiao Funeral Parlor’s parking lot on Monday, as a line of about a dozen black minivans entered the site on Beijing’s eastern outskirts, used to prepare and process bodies for cremation.”

December 19 – Financial Times (Sun Yu): “China’s blood banks are battling supply shortages as a wave of Covid-19 cases keeps donors away, putting an already strained medical system under further stress. At least seven provincial and municipal governments have reported a drop in blood donations in recent weeks that reduced their inventory to as little as 16% of levels from last year… The outbreak has led many potential blood donors to either become ineligible after testing positive for Covid or reluctant to venture outside for fear of infection.”

December 21 – Financial Times (Sun Yu): “A broad measure of China’s budget deficit hit a record high in the first 11 months of this year as a real estate meltdown and President Xi Jinping’s zero-Covid policy weighed on the world’s second-largest economy. Total fiscal spending by all levels of government exceeded revenue by Rmb7.8tn ($1.1tn) from January through to November… The figure was more than double the Rmb3.7tn reported during the same period of last year. The rise in the government deficit highlights the economic damage from Xi Jinping’s signature Covid-19 elimination policy… as well as a crackdown on housing speculation by his government.”

December 21 – Bloomberg (John Cheng and Alice Huang): “Despite a disastrous year for China’s property sector, markets turned from extreme pessimism to euphoria in just a matter of weeks thanks to Beijing’s policy bazooka. Now there are growing signs the rally is faltering. Real estate shares have entered a technical correction after a runup of 88% over the six weeks through early December. Weak homebuyer confidence and an uncertain economic recovery are threatening to outweigh policy support measures, including expanding a key bond-financing program to private developers and lifting a ban on equity refinancing.”

Central Banker Watch:

December 22 – Bloomberg (Andrew Langley): “European Central Bank Vice President Luis de Guindos said interest-rate hikes like the half-point move seen at this month’s meeting may become the standard as officials maintain their fight with soaring inflation. Despite forecasts for a winter recession in the 19-nation euro zone, monetary-policy tightening must continue, Guindos told France’s Le Monde… ‘Increases of 50 bps may become the new norm in the near term,’ Guindos said. ‘We should expect to raise interest rates at this pace for a period of time.’”

Global Bubble Watch:

December 23 – Bloomberg (Alice Kantor): “Real estate prices around the world have cooled off as higher borrowing costs keep many buyers on the sidelines. South Korea fared the worst, as the Bank of Korea raised interest rates to curb inflation. Average home prices there fell 7.5% in the third quarter compared to the prior year. Hong Kong, Peru, China and New Zealand also experienced declines. Overall, prices of properties across 56 countries and territories rose at a rate of 8.8% in the third quarter, down from 10.9% at their peak in the first three months of the year, according to… Knight Frank.”

December 20 – Bloomberg (Samson Ellis): “Taiwan’s export orders plummeted by the most since the height of the global financial crisis more than a decade ago, a sign of worsening global demand for technology products. Overseas orders to Taiwanese firms fell 23.4% in November from a year earlier, according to a statement from the Economics Ministry Tuesday. That was almost double the 12.8% drop economists had forecast in a Bloomberg survey and was the sharpest decline since March 2009.”

Europe Watch:

December 23 – Wall Street Journal (Chelsey Dulaney): “Investors are bracing for European governments, led by Germany, to flood the market with new debt next year as they spend heavily to shield their economies from high energy costs. Governments in Europe are expected to increase bond issuance by 10% to €1.2 trillion in 2023, equivalent to around $1.27 trillion, according… Danske Bank... Germany last week surprised investors by announcing it would sell roughly €300 billion in bonds in 2023—a record and up by about €70 billion from this year.”

December 18 – Bloomberg (Alice Gledhill and Libby Cherry): “European bondholders are coming to terms with the fact that this year’s devastating losses may have further to run in 2023. The worst-ever year for the region’s bonds is ending with one of the most brutal sell-offs in months… With traders already betting on another 130 bps of hikes, versus barely a half-point increase from the Federal Reserve, a fresh wave of selling looks to be in store. European Central Bank policy makers have made their determination to quash double-digit inflation abundantly clear in recent days, after having long been regarded as one of the world’s most dovish. That’s a shock for traders who had piled into the region’s battered assets with a false sense of security given tentative signs inflation was peaking.”

December 18 – Financial Times (Jasmine Cameron-Chileshe): “Britain is bracing itself for one of the most disruptive weeks of strike action in recent history after the government signalled its determination to face down the unions despite calls for pay negotiations from health leaders and some Conservative MPs. Nurses, ambulance workers, customs and immigration staff, postal and rail workers will all walk out in the coming days. Prime Minister Rishi Sunak faces a mounting challenge in dealing with the strikes.”

December 21 – Reuters (David Milliken): “British public borrowing unexpectedly jumped last month to hit its highest for any November on record, reflecting the mounting cost of energy subsidies, debt interest and the reversal of an increase in payroll taxes, official figures showed… Borrowing rose to 22.0 billion pounds ($26.7bn) from 8.1 billion pounds a year earlier - before Britain was hit by surging natural gas prices that have forced the government to subsidise heating and electricity costs for millions of households and businesses. Economists… had forecast a much smaller increase to 13.0 billion pounds.”

EM Crisis Watch:

December 19 – Reuters (Alexander Villegas and Marco Aquino): “In the South American nation, voter anger has long bubbled close to the surface over years of tumultuous politics that has seen six presidents in five years. Most former leaders have been jailed or investigated for corruption. The situation has exploded in the last two weeks. Protesters have blocked highways, set buildings on fire and taken over airports in the wake of Castillo's Dec. 7 ouster, hours after he illegally tried to shutter Congress to avoid an impeachment vote he feared losing. At least 18 people have died. Many of the protesters - some Castillo supporters and others simply angry - said they felt ignored by political leaders. Castillo, a former teacher and son of peasant farmers, had at least been one of their own, they said, despite his many flaws.”

December 22 – Reuters (Nevzat Devranoglu): “Turkey's monthly minimum wage will be 8,506.80 lira ($455) in 2023, the presidency said… - a 55% increase from the level determined in July and a 100% hike from January… President Tayyip Erdogan said the minimum wage may be hiked again throughout the year if necessary. Annual inflation soared above 85% in recent months but has begun to ease slightly.”

Japan Watch:

December 20 – Bloomberg (Toru Fujioka and Masaki Kondo): “Bank of Japan Governor Haruhiko Kuroda is facing mounting criticism over his latest shock policy decision, with several prominent economists calling it a blow to BOJ credibility and traders rushing to test the central bank’s new red line on bond yields. BOJ watchers including Mitsubishi UFJ Research & Consulting’s Shinichiro Kobayashi say Kuroda erred by appearing to back track on recent policy guidance without warning. Swaps traders are already betting the BOJ will be forced to abandon its new 0.5% yield cap on 10-year bonds, signaling a 0.8% rate may be possible at any time. Growing skepticism toward the central bank’s communications may complicate efforts by Kuroda and his successor to avoid strong waves of market pressure based on speculation rather than policy guidance.”

December 23 – Reuters (Leika Kihara): “Japan's core consumer inflation hit a fresh four-decade high as companies continued to pass on rising costs to households…, a sign price hikes were broadening and could keep the central bank under pressure to whittle down massive stimulus… Japan's core consumer price index (CPI)… rose 3.7% in November from a year earlier…, matching market forecasts and perking up from a 3.6% gain in October. It was the biggest rise since a 4.0% jump seen in December 1981, when inflation was still high from the impact of the 1979 oil shock and a booming economy.”

December 22 – Bloomberg (Yoshiaki Nohara, Isabel Reynolds and Erica Yokoyama): “Japan will again resort to bond issuance to help fund another year of record spending, with the Bank of Japan’s surprise policy move this week set to put pressure on borrowing costs going forward. The government will look to issue bonds worth more than 35.6 trillion yen ($270bn) to finance an initial budget of more than 114.4 trillion yen for the year starting in April…”

December 20 – Reuters (Kaori Kaneko): “Japan will pay close attention to the COVID-19 situation in China, in addition to risks from a global economic slowdown, price hikes and supply constraints, according to its monthly report for December. The economic report from the Cabinet Office comes as Japan… wrestles with sluggish global growth and high import costs that have weighed on its exports and manufacturing activity… ‘If China's infection situation impacts on supply chains or trades, it could also impact on Japan's economy as we've seen earlier this year,’ a Cabinet Office official said.”

Social, Political, Environmental, Cybersecurity Instability Watch:

December 22 – Wall Street Journal (Julie Wernau and Jon Kamp): “Life expectancy in the U.S. fell again last year to the lowest level since 1996…, after Covid-19 and opioid overdoses drove up the number of deaths. Covid-19 was the third-leading cause of death for a second consecutive year in 2021… Overdose deaths have risen fivefold over the past two decades. The death rate for the U.S. population increased by 5%, cutting life expectancy at birth to 76.4 years in 2021 from 77 years in 2020… Before the pandemic, in 2019, life expectancy at birth in the U.S. was 78.8 years. The decline in 2020 was the largest since World War II.”

December 21 – Reuters (Mohammad Yunus Yawar and Charlotte Greenfield): “Female university students in Afghanistan were turned away from campuses on Wednesday after the Taliban-run administration said women would be suspended from tertiary education. The decision to bar women was announced on Tuesday evening in a letter to universities from the higher education ministry, drawing condemnation from foreign governments and the United Nations.”

Leveraged Speculation Watch:

December 20 – Financial Times (Ortenca Aliaj, Katie Martin and Laurence Fletcher): “A trade known as the ‘widow maker’ for its ability to inflict enormous losses on traders has finally paid off after the Bank of Japan shocked investors with a change to the way it controls its government bond market. Traders at firms such as BlueBay Asset Management, Neuberger Berman and hedge fund Caygan Capital have been betting that the BoJ would relax its cap on bond yields… As a result, many investment houses put on a wager that Japanese bonds would fall, nudging yields higher. ‘We had reached the point where that policy was no longer warranted,’ said Mark Dowding, chief investment officer at BlueBay… ‘It was a question of when, not if.’”

Geopolitical Watch:

December 18 – Wall Street Journal (Eric Lipton, Michael Crowley and John Ismay): “The prospect of growing military threats from both China and Russia is driving bipartisan support for a surge in Pentagon spending… Congress is on track in the coming week to give final approval to a national military budget for the current fiscal year that is expected to reach approximately $858 billion — or $45 billion above what President Biden had requested. If approved at this level, the Pentagon budget will have grown at 4.3% per year over the last two years — even after inflation — compared with an average of less than 1% a year in real dollars between 2015 and 2021… Spending on procurement would rise sharply next year, including a 55% jump in Army funding to buy new missiles and a 47% jump for the Navy’s weapons purchases.”

December 22 – Reuters (Hyonhee Shin): “South Korea and the United States are considering staging their first large-scale joint live-fire demonstration in six years in 2023 amid North Korea's growing military threats, Seoul's defence ministry said… The drills have been floated as South Korea and the United States discuss preparations for the 70th anniversary of their alliance next year, ministry spokesperson Jeon Ha-gyu said.”

December 21 – Reuters (Yimou Lee): “Taiwan scrambled combat jets to warn away 39 Chinese aircraft that entered its southeastern air defence zone, the island's defence ministry said… Taiwan has complained of repeated missions by the Chinese air force over the last two years… Thursday's incursion included 21 fighters and four H-6 bombers, as well as early warning, antisubmarine and aerial refuelling aircraft…”

Friday Evening Links

[Reuters] Wall St ends higher, Treasury yields rise after data flurry 

[Reuters] Oil rises $3/bbl after Russia signals output cut due to price cap

[Reuters] Factbox: Over a million without power on U.S. East Coast and Texas due to winter storms

[Reuters] Airlines cancel 5,000 U.S. flights Friday amid fierce winter storms

[Yahoo/Bloomberg] Ukraine Latest: US Congress Approves $47 Billion in Ukraine Aid

[Reuters] Bankman-Fried, FTX execs received billions in hidden loans, ex-Alameda CEO says

[Yahoo/Bloomberg] Finance’s Biggest Winners and Losers in Washington During 2022