Friday, April 21, 2023

Weekly Commentary: Plan B

It was an interesting week. The S&P500 traded little change and within a narrow range. The VIX (equities volatility) Index traded intraweek to the low (16.17) since January 4, 2022. Friday was option expiration. Both puts and calls lost value. It has been a nice period to write options – and with the banking crisis and all, there have been plenty purchased.

And while all was quiet at home, there were inklings of risk aversion in global markets – especially late in the week. A Friday Bloomberg “Inside EM” headline: “Currencies, Stocks Weaken as Risk-Off Mood Sets In.” EM CDS jumped 10 bps (to 241), fully reversing the previous week’s decline and trading near a one-month high. The Brazilian real fell 2.8%, and the Colombian peso lost 2.2%. The South Korean won dropped 2.0%, “its biggest weekly drop in two months.” Chinese markets were notably weak. Double-digit inflation pushed UK two-year yields up another 13 bps to 3.73%, trading this week to the highs since February. Italian two-year yields rose nine bps to a six-week high of 3.49%.

April 21 – Bloomberg (Alexandre Tanzi and Augusta Saraiva): “US bank deposits fell last week, indicating the financial system remains fragile after a string of bank failures. Deposits decreased by $76.2 billion in the week ended April 12, according to seasonally adjusted data from the Federal Reserve out Friday. The drop was mostly at large and foreign institutions, but they also fell at small banks. Meantime, commercial bank lending rose $13.8 billion last week on a seasonally adjusted basis. On an unadjusted basis, loans and leases fell $9.3 billion.”

Federal Reserve Credit declined $15.5 billion last week, with a three-week drop of $125 billion. Still, Fed Credit remains $266 billion higher than pre-SVB (March 8th) levels. Over recent weeks, the benevolent Fed has not been the dominant liquidity provider.

April 19 – Wall Street Journal (Rachel Louise Ensign, David Harrison and Hannah Miao): “Banks are turning to an obscure government-linked lender to shore up their balance sheets following the industry’s rockiest period in years. The Federal Home Loan Bank system—established during the Great Depression to help promote mortgage lending and now a source of liquidity for banks of all stripes—issued a record $495 billion of debt in March to fund loans, which are called advances, the system’s Office of Finance said. Banks ramped up borrowing that month as customers pulled out deposits… The 11 government-sponsored home-loan banks have drawn scrutiny in recent weeks because Silicon Valley Bank, Signature Bank and Silvergate Capital Corp. borrowed billions from them. Those banks all went out of business in March in a stunning series of collapses.”

I could only chuckle at the WSJ headline, “Banks Leaned on a Little-Known Lender in March as Customers Fled.” Curious how a financial institution whose assets increased $524 billion last year, to $1.247 TN, has remained under the radar. They’re quickly becoming better known. To issue a half a Trillion of debt in a month is an unprecedented feat – even for a GSE.

And speaking of unprecedented feats in the realm of Credit excess, we need to spend some time on China.

Aggregate Financing, China’s metric for system Credit growth, expanded $782 billion during March, up from February’s $459 billion and 20% ahead of estimates. It was a record March, exceeding even pandemic March 2020. At $52.2 TN, Aggregate Financing was up 10.3% over the past year, 22% over two years, and 70% over five years.

A big March put Q1 Aggregate Financing growth at an incredible $2.111 TN. This is the largest three-month growth in China’s history. For perspective, growth was 21% greater than Q1 ‘22, 41% ahead of Q1 ’21, and 17% greater than booming Q1 ‘20.

New Loans expanded $566 billion, 18% above forecast. New Loans surged a record $1.667 TN during Q1, 38% above previous record Q1 2022 – and 62% higher than (record at the time) pandemic Q1 2020. Loans were up 12.2% y-o-y, 21% over two years, 41% over three years, and 80% over five years.

Corporate Bank Loans surged a March record $393 billion. At $1.305 TN, it was a record quarter, 27% ahead of Q1 2022, 68% ahead of Q1 2021, and 59% above pandemic Q1 2020. For perspective, Q1 growth was double pre-pandemic Q1 2019. Corporate Loans expanded 15% over the past year, 29% over two years, and 80% over five years.

Consumer (chiefly mortgage) Loans surged $185 billion in March, the strongest monthly gain since January 2021. At $370 billion, Q1 growth was double Q1 2022 – and just shy of the Q1 record from 2020. A strong March pushed one-year growth to 7.1%, with Consumer Loans up 18% in two years, and 83% over five years.

Government Bonds increased $89 billion, with Q1 growth of $266 billion. Q1 growth was 34% ahead of Q1 2022 and more than double Q1 2021. Government Bonds expanded 14% over the past year, 33% over two years, and 83% over five years.

China’s Q1 GDP was reported at a stronger-than-expected 4.5% y-o-y. Retail Sales jumped a stronger-than-expected 10.6% y-o-y in March. “China March New Home Prices Rise at Fastest Pace in 21 Months” – as the 0.44% March increase had analysts declaring housing recovery is at hand. Year-to-date apartment sales are up 7.1% versus depressed year ago levels.

The China recovery story is generating some buzz. Considering the past year’s double-digit, $5.0 TN Credit surge – results are anything but impressive. There was pent-up demand, which helps explain the surge in retail sales. While also benefiting from some pent-up buying interest, apartment sales remain weak. The great Chinese apartment Bubble has burst and will now be uncharacteristically impervious to reflationary measures.

Interestingly, the Shanghai Composite dropped 2.0% in Friday trading (down 1.1% for the week). China’s growth-oriented ChiNext Index sank 3.6% this week to a one-month low. Slipping 0.32%, China’s renminbi traded to a five-week low versus the dollar. China sovereign and bank CDS traded moderately higher. Despite all the recovery enthusiasm, developer bonds were under heavy selling pressure. Dollar bonds from Evergrande, Sunac, Longfor and Kaisa all traded to the highest yields since at least December.

April 21 – Bloomberg (Dorothy Ma and Lorretta Chen): “China’s junk-bond market is close to erasing all of this year’s early 11% gain, as optimism regarding government efforts to revive the property market clashes with the reality of private developers’ still-weak liquidity. Average note prices hit their lowest level since Jan. 3 on Thursday at 72.7 cents on the dollar… Fresh declines Friday were led by Wanda Properties Global Co., whose bonds’ record tumble this week has topped 20%. Following a three-month surge from all-time lows, China high-yield prices are on pace for a third-straight monthly drop.”

April 21 – Bloomberg (Lorretta Chen): “Dalian Wanda Group Co. has become the latest source of angst in China’s credit market, with dollar bonds of billionaire Wang Jianlin’s conglomerate sinking to distressed levels just months after they were issued. This week’s plunge occurred as investors brace for a potential surge in cash outlays by the group. Wanda and its units could face the equivalent of $1.9 billion in principal and interest payments on loans and public bonds, including put options, the rest of this year… The declines accelerated Friday for two dollar bonds sold by a Wanda unit earlier this year, each falling a record 12 cents… The notes have slumped nearly 30% this week.”

April 16 – Bloomberg (Shuli Ren): “Call it luck or stellar crisis management. China, one of the world’s most indebted nations, has not experienced a full-blown financial crisis, yet. There were a few close calls. In 2019, the government had to seize a regional bank, for the first time in decades, to prevent a run on deposits. Last year, a wave of real estate developer defaults ended up with homebuyers threatening mortgage boycotts. Both scares got defused… But there is one more elephant in the room: Borrowings from local government financing vehicles. For years, municipalities have been relying on these off-balance-sheet entities to fund infrastructure and support the local economy. LGFV debt rose to 57 trillion yuan ($8.3 trillion) in 2022, or 48% of China’s gross domestic product, according to… the International Monetary Fund.”

Excerpts from my Thursday Q1 recap McAlvany Wealth Management Tactical Short conference call presentation:

Beijing has done an about face. They’ve clearly thrown in the towel on reining in credit excess. Caution thrown to the wind. And to dump this amount of new credit on such a deeply maladjusted system is playing with fire; a gamble that makes me uncomfortable. It is, however, consistent with the view that Xi’s global ambitions have become China’s top priority. He needs a stronger economy, as he forges trade and military alliances to counter the U.S. and West. Uninterrupted growth is necessary to further expand his military and global superpower ambitions.

In what was a notable escalation of rhetoric, Xi last month took a direct swipe at the U.S., saying, “Western countries, led by the United States, have implemented all-round containment, encirclement and suppression against us, bringing unprecedentedly severe challenges to our country’s development.”

And the following week Bloomberg reported similar from The People’s Bank of China, where the PBOC will “appropriately respond to the containment and suppression of the US and other Western countries.” And this statement was released following “a meeting to study Xi’s speeches during the National People’s Congress session…”

I can only shake my head. These comments speak to an irreparably damaged China/U.S. relationship. It was the most direct effort by Xi to blame the U.S. for China’s expanding problems. I’ve long feared that China’s bursting bubble would somehow see Beijing holding its U.S. and Japanese adversaries responsible. Well, it’s happening. At the minimum, it’s doubtful that the Fed and PBOC will be on the same page with crisis management cooperation as they were in 2008.

I hope I’m wrong on this. But I’m compelled to share a fear. Beijing is now in full crisis management mode. They are expending tremendous resources to restart their boom - fighting a deflating bubble with all the might the communist party can muster. Beijing is working 24/7 to build alliances to counter U.S. global power and influence.

They are executing a comprehensive plan for economic revival at home and profound change globally. Meanwhile, Beijing is also preparing for “Plan B.” Sure, massive stimulus and state-directed lending can ensure China meets near-term GDP targets. I just don’t see China escaping Bubble Dynamics. Indeed, the more egregious this late-cycle monetary stimulus, the more perilous their predicament.

So, I worry about China’s “Plan B”. Beijing is clearly preparing its military and people for confrontation with the U.S., a conflict I fear will be increasingly likely when China’s economic gambit falters. Xi and the communist party will never accept responsibility for so mismanaging China’s financial system, economy, and international reputation. Crisis will have Beijing pressing the Taiwan issue, deflecting attention and responsibility, increasing the odds for a direct showdown with the U.S.

I’ve discussed previously how boom periods engender perceptions of an expanding global pie. Cooperation, integration, and alliances are seen as mutually beneficial. But when the cycle turns, the pie is increasingly viewed as stagnant or shrinking; zero sum game thinking dominates. Insecurity, animosity, disintegration, fraught alliances, and conflict take hold.

We are in a period of momentous change. A historic global Bubble has begun to deflate. The war in Ukraine has unleashed pernicious forces that will be difficult to control. China’s autocratic communist government has towering ambitions - inflated by a historic Bubble that is now leaking a lot of air. Japan has a new central bank governor that will need to end a historic monetary experiment that was for a decade left to run wild. Across the globe, economies big and small, wealthy and poor alike, confront unprecedented debt overhangs. Policymakers almost everywhere face the predicament of elevated inflation and weakening growth prospects.

We’re at a critical juncture in the global bubble, where acute fragility is forcing another round of desperate measures meant to hold crisis dynamics at bay. Over recent quarters, we've witnessed major instability and volatility. I suspect this has become the new normal. We should be prepared for the environment to turn only more uncertain and tumultuous, with odds rising for a major accident.

In conclusion, I see developments at home and abroad corroborating the new cycle thesis. I just wish I could be more optimistic about future prospects. Much has to go right - and we need some lucky breaks - to avoid a destabilizing downturn. So much is uncertain. However, there’s one thing I am certain about: additional monetary inflation and massive government deficit spending are not the answer. They only make things worse.

For the Week:

The S&P500 was little changed (up 7.7% y-t-d), while the Dow slipped 0.2% (up 2.0%). The Utilities gained 1.0% (down 1.9%). The Banks were about unchanged (down 17.8%), while the Broker/Dealers rose 1.5% (up 2.9%). The Transports advanced 1.2% (up 7.6%). The S&P 400 Midcaps increased 0.4% (up 2.8%), and the small cap Russell 2000 added 0.6% (up 1.7%). The Nasdaq100 declined 0.6% (up 18.8%). The Semiconductors dropped 1.6% (up 19.3%). The Biotechs increased 0.2% (up 2.3%). With bullion down $21, the HUI gold equities index dropped 4.9% (up 13.3%).

Three-month Treasury bill rates ended the week at 4.89%. Two-year government yields rose eight bps this week to 4.18% (down 25bps y-t-d). Five-year T-note yields increased six bps to 3.66% (down 34bps). Ten-year Treasury yields rose six bps to 3.57% (down 31bps). Long bond yield increased four bps to 3.78% (down 19bps). Benchmark Fannie Mae MBS yields jumped seven bps to 5.25% (down 14bps).

Greek 10-year yields were unchanged at 4.29% (down 28bps y-o-y). Italian yields rose six bps to 4.35% (down 35bps). Spain's 10-year yields increased four bps to 3.52% (up 1bp). German bund yields gained four bps to 2.48% (up 4bps). French yields rose four bps to 3.04% (up 6bps). The French to German 10-year bond spread was little changed at 56 bps. U.K. 10-year gilt yields jumped nine bps to 3.76% (up 9bps). U.K.'s FTSE equities index increased 0.5% (up 6.2% y-t-d).

Japan's Nikkei Equities Index added 0.2% (up 9.5% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.47% (up 5bps y-t-d). France's CAC40 increased 0.8% (up 17.0%). The German DAX equities index added 0.5% (up 14.1%). Spain's IBEX 35 equities index increased 0.6% (up 14.4%). Italy's FTSE MIB index declined 0.5% (up 17.0%). EM equities were mostly lower. Brazil's Bovespa index fell 1.8% (down 4.9%), and Mexico's Bolsa index dipped 0.5% (up 11.8%). South Korea's Kospi index fell 1.1% (up 13.8%). India's Sensex equities index lost 1.3% (down 1.9%). China's Shanghai Exchange Index fell 1.1% (up 6.9%). Turkey's Borsa Istanbul National 100 index dropped 1.6% (down 9.0%). Russia's MICEX equities index jumped 3.3% (up 22.6%).

Investment-grade bond funds posted inflows of $1.140 billion, and junk bond funds reported positive flows of $3.064 billion (from Lipper).

Federal Reserve Credit declined $15.5bn last week to $8.571 TN. Fed Credit was down $330bn from the June 22nd peak. Over the past 187 weeks, Fed Credit expanded $4.844 TN, or 130%. Fed Credit inflated $5.760 Trillion, or 205%, over the past 545 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.7bn last week to $3.338 TN. "Custody holdings" were down $108bn, or 3.1%, y-o-y.

Total money market fund assets dropped $68.6bn to $5.209 TN, yet still have a six-week gain of $315 billion. Total money funds were up $740bn, or 16.6%, y-o-y.

Total Commercial Paper gained $15.3bn to $1.161 TN. CP was up $75bn, or 6.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates increased five bps to 6.39% (up 128bps y-o-y). Fifteen-year rates rose 11 bps to 5.72% (up 134bps). Five-year hybrid ARM rates jumped 12 bps to 5.83% (up 208bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up seven bps to 6.93% (up 170bps).

Currency Watch:

For the week, the U.S. Dollar Index increased 0.3% to 101.82 (down 1.6% y-t-d). For the week on the upside, the Swedish krona increased 0.3%, the Swiss franc 0.2%, the Mexican peso 0.2%, and the British pound 0.2%. On the downside, the Brazilian real declined 2.8%, the South Korean won 2.2%, the Norwegian krone 1.9%, the Canadian dollar 1.2%, the New Zealand dollar 1.1%, the Singapore dollar 0.3%, the Japanese yen 0.3%, the Australian dollar 0.2%, the South African rand 0.1%, and the euro 0.1%. The Chinese (onshore) renminbi declined 0.32% versus the dollar (up 0.10%).

Commodities Watch:

April 21 – Reuters (Alexander Villegas and Ernest Scheyder): “Chile's President Gabriel Boric said… he would nationalize the country's lithium industry, the world's second largest producer of the metal essential in electric vehicle batteries, to boost its economy and protect its environment. The shock move in the country with the world's largest lithium reserves would in time transfer control of Chile's vast lithium operations from industry giants SQM and Albemarle to a separate state-owned company.”

April 17 – Bloomberg (James Attwood): “The copper industry isn’t letting tightening credit and slowing growth kill the buzz heading into one of its biggest annual gatherings. Underpinning the quiet confidence of executives, bankers and traders drifting into the Chilean capital for Cesco Week are the lowest stockpiles of the metal in 18 years — standing at less than a week’s worth of consumption.”

April 17 – Bloomberg: “Tin jumped the most in nine months after a key mining region in Myanmar, the world’s third-biggest supplier, moved to curtail digging of the material used in electronics and cans. An economic planning committee in a northern area of the country controlled by the United Wa State Army — Myanmar’s largest ethnic armed organization — ordered a general halt to mining operations…”

April 18 – CNBC (Lee Ying Shan): “From China to the U.S. to the European Union, rice production is falling and driving up prices for more than 3.5 billion people across the globe, particularly in Asia-Pacific – which consumes 90% of the world’s rice. The global rice market is set to log its largest shortfall in two decades in 2023, according to Fitch Solutions. And a deficit of this magnitude for one of the world’s most cultivated grains will hurt major importers, analysts told CNBC. ‘At the global level, the most evident impact of the global rice deficit has been, and still is, decade-high rice prices,’ Fitch Solutions’… Charles Hart said.”

The Bloomberg Commodities Index dropped 2.1% (down 6.4% y-t-d). Spot Gold declined 1.1% to $1,983 (up 8.7%). Silver fell 1.0% to $25.08 (up 4.7%). WTI crude dropped $4.65, or 5.6%, to $77.87 (down 3%). Gasoline sank 8.3% (up 6%), while Natural Gas rose 5.6% to $2.23 (down 50%). Copper dropped 2.9% (up 5%). Wheat fell 2.8% (down 15%), and Corn dropped 3.2% (down 9.3%). Bitcoin sank $3,300, or 10.9%, this week to $27,170 (up 64%).

Global Bank Crisis Watch:

April 21 – Bloomberg (Viktoria Dendrinou and Allyson Versprille): “The top US financial regulators proposed strengthening tools for addressing threats to financial stability, including changes to Trump-era guidance that had made it difficult to tag nonbank firms as systemically important institutions. US Treasury Secretary Janet Yellen… announced a proposal by the Financial Stability Oversight Council that would revise the way nonbank firms are designated. ‘The existing guidance — issued in 2019 — created inappropriate hurdles as part of the designation process,’ Yellen said... ‘These additional steps are not legally required by the Dodd-Frank Act. Nor are they useful or feasible. Some are based on a flawed view of how financial crises begin and the costs that they impose.’”

April 20 – Reuters (Michael S. Derby): “Federal Reserve emergency lending to banks in the wake of last month's financial sector troubles remains high and increased modestly in the latest week… The [Fed] reported that borrowing via three programs aimed at supporting banks moved to $316.5 billion as of Wednesday, from $312 billion on April 12. While the overall sum remains very large and dramatically outstrips lending seen during the peak of the financial crisis, it has been easing over recent weeks after hitting a peak of $343.7 billion on March 22…”

April 19 – Wall Street Journal (Rachel Louise Ensign and Gina Heeb): “The smaller banks that serve a wide swath of America’s consumers and businesses are starting to pay up to keep their deposits. Main Street banks such as Citizens Financial Group Inc. and First Horizon Corp. said in recent first-quarter earnings reports they are having a tougher time hanging onto customer money... To keep those depositors around, some lenders are paying more on savings accounts… Though profits rose at many banks in the first quarter, the deposit declines signal a fundamental change in their business. Deposits were plentiful in the era of superlow rates because customers had little incentive to move their money elsewhere. Banks grew to rely on them as a cheap source of funding that they could use to make loans or buy bonds and other securities.”

April 21 – Wall Street Journal (Andrew Ackerman and Rachel Louise Ensign): “The Federal Reserve may close a loophole that allows some midsize banks to effectively mask losses on securities they hold, a contributing factor in the collapse of Silicon Valley Bank… All told, regulators are considering extending toughened restrictions to about 30 companies with between $100 billion and $700 billion in assets, the people said. A proposal could come as soon as this summer, and any changes would be phased in, potentially over a couple of years. Regional banks such as U.S. Bancorp, PNC Financial Services Group Inc., Truist Financial Corp. and Capital One Financial Corp. could be affected, and could be made to bolster capital.”

April 17 – Bloomberg (Noah Buhayar, Jennifer Surane, Max Reyes and Ann Choi): “In America’s richest enclaves, word spread quickly: A bank was offering loans on sweet terms. Wealthy homebuyers and property investors with high incomes and sterling credit scores could get a mortgage from First Republic Bank with a rock-bottom rate for several years. Better yet, they didn’t have to start repaying the principal for a decade. Across Manhattan, the San Francisco Bay area and Southern California, those terms attracted legions of wealthy clients… as interest rates sank during the pandemic. The loans left borrowers with more cash to invest and spend than if they financed their properties with more conventional mortgages. Demand was so strong that it helped First Republic double its assets in four years, while deposits surged. Now, it's all looking like a colossal mistake.”

April 15 – Wall Street Journal (Eric Wallerstein): “March’s bank collapses rattled the short-term lending that underpins the financial system, known on Wall Street as funding markets. Traces of the shake-up remain. At the first signs of banking tumult, funding-market activity fell to its quietest since the Covid-19 pandemic erupted. On two days in mid-March, less than $2 billion of commercial paper with maturities longer than 80 days was issued… That is well below typical levels for the unsecured debt averaging around $8 billion of issuance a day. ‘Our market completely froze,’ said Ryan Weldon, portfolio manager of the IFM US Dollar Liquidity Fund, which invests in highly rated, short-term corporate debt through commercial paper and certificates of deposit…”

April 19 – Wall Street Journal (Chelsey Dulaney): “A $1.2 trillion liquidity crunch looms for Europe’s lenders, testing their ability to stand on their own after more than a decade of easy money from the European Central Bank. The biggest hurdle will come in late June, when banks will have to pay back about 478 billion euros, equivalent to some $525 billion, of ultracheap loans to the central bank. Those loans were handed out at the height of the pandemic to ensure banks kept lending as lockdowns brought business to a halt.”

]April 17 – Financial Times (Brooke Masters and Madison Darbyshire): “Big US financial groups Charles Schwab, State Street and M&T suffered almost $60bn in combined bank deposit outflows in the first quarter as customers continued to move their money in search of higher returns. The deposit flight has been turbocharged by the collapse last month of Silicon Valley Bank and two other US lenders, with cash moving out of bank accounts at a pace not seen since the aftermath of the 2008 financial crisis. In a fresh sign of the threat to traditional banks, Apple and Goldman Sachs… announced the launch of a new savings account in the US that will pay a market-leading 4.15% a year.”

April 18 – Reuters (Nupur Anand, Niket Nishant and Saeed Azhar): “Goldman Sachs… profit fell 19% as dealmaking and bond trading slumped in the first quarter and it lost money on the sale of some assets in its consumer business… Investment banking activity remains extremely muted, and while there are some green shoots emerging, clients remain cautious, Solomon said... ‘Recent events in the banking sector are lowering growth expectations, and there is a higher risk of credit contractions given the environment is limiting banks' appetite to extend credit,’ Solomon told analysts.”

April 19 – Financial Times (Joshua Franklin): “Morgan Stanley chief executive James Gorman has warned investment banking revenues may not recover until next year after the Wall Street group’s net profits fell almost a fifth in the first quarter. A prolonged slowdown in investment banking activity has hit Morgan Stanley and its rivals as financial turmoil following the collapse of US regional lenders and Credit Suisse in Europe kept dealmakers on the sidelines. Gorman told analysts… that mergers and acquisitions as well as debt and equity underwriting activity ‘remain very subdued’ but argued these revenues would return eventually.”

April 19 – Bloomberg (Tracy Alloway): “Last month’s banking drama means a technical tidal wave may be coming for the biggest slice of the $10 trillion market for corporate bonds. That’s according to TD Securities, where analysts are predicting that banks’ collective higher cost of funding will curb appetite for higher-quality credit and eventually force a spike in risk premiums. At issue are shrinking yields on investment-grade bonds relative to the effective federal funds rate, a proxy for funding costs. This ‘carry spread’ has now reached levels seen only twice before in the past 27 years — the last time being in 2007.”

April 19 – Wall Street Journal (Matt Wirz): “The Federal Deposit Insurance Corp. has begun selling bonds it inherited from Silicon Valley Bank and Signature Bank to recoup the cost of rescuing the failed banks’ depositors. The FDIC put up for auction about $700 million of high-quality mortgage-backed bonds Tuesday in what could prove to be a test of how much the U.S. government recovers on the $114 billion in face value of the bonds it assumed.”

April 19 – Reuters (Elizabeth Howcroft and Hannah Lang): “Crypto firms have been left scrambling to find banking partners after the collapse of three crypto-friendly lenders in the U.S. last month, creating a risk their business will become concentrated in smaller financial institutions. It is a scenario that concerns U.S. regulators, who have expressed doubt about the safety and soundness of bank business models that are highly focused on crypto clients after Silvergate Capital Corp, Signature Bank and Silicon Valley Bank imploded.”

April 19 – Bloomberg (Ayai Tomisawa and Caleb Mutua): “The market for Additional Tier 1 bonds is beginning to reopen just weeks after Credit Suisse Group AG’s collapse set off a global fire sale of the debt. Sumitomo Mitsui Financial Group Inc. sold 140 billion yen ($1bn) of AT1 notes…, the first major global lender to tap the market since Swiss regulators wiped out more than $17 billion of the risky debt as part of Credit Suisse’s forced takeover by UBS Group…”

Market Instability Watch:

April 18 – Reuters (Davide Barbuscia): “The U.S. government's deadline to raise the $31.4 trillion debt ceiling could be sooner than expected, raising the prospect of a short-term debt limit extension, analysts said… Goldman Sachs analysts said weak tax collections so far in April indicate a higher probability that the so-called ‘X-date,’ when the government is no longer able to pay all its bills, would be reached in the first half of June. Analysts at Citi said they expected a short-term deal in June or July… ‘As the debt limit deadline comes into better focus with additional tax receipt data, we expect to see somewhat greater pricing of debt limit risks in financial markets,’ Goldman Sachs analysts said…”

April 17 – Yahoo Finance (Ben Werschkul): “House Speaker Kevin McCarthy (R-CA) traveled to the New York Stock Exchange Monday to deliver a warning to Wall Street about the debt ceiling crisis. There is a growing chance Washington ‘will bumble into the first default in our nation’s history,’ the Republican said on his 100th day as House Speaker, adding that he wanted to raise the alarm for the financial world, which has downplayed the issue in recent months.”

April 20 – Reuters (Karin Strohecker, Dhara Ranasinghe and Davide Barbuscia): “Market jitters over the U.S. debt ceiling lifted the cost of insuring exposure to its debt to the highest level in over a decade…, while JPMorgan warned of a ‘non-trivial risk’ of a technical default on U.S. Treasuries. A showdown over U.S. government efforts to raise the $31.4 trillion debt ceiling for the world's largest economy has sent jitters through global financial markets. Some U.S. Treasury bill yields have hit fresh highs on fears that the deadline to raise the borrowing limit may come sooner than expected.”

April 18 – Bloomberg (Richard Henderson): “Equities and other risk assets will take a hit when central banks withdraw as much as $800 billion of stimulus deployed to prop up the global economy, according to Citigroup... The risk rally has been fueled by the injection of over $1 trillion of central bank liquidity, and high-frequency liquidity indicators suggest this is already stalling, Matt King, Citi’s global markets strategist, wrote… Apart from monetary support deployed by other central banks, the Federal Reserve has also bolstered its balance sheet by $440 billion in the wake of the US banking crisis, he said. Together, this global wave of policy support has ‘held down real yields, propped up equity multiples, and tightened credit spreads in the face of falling earnings expectations,’ King wrote.”

April 18 – Wall Street Journal (Matt Grossman): “Few U.S. banks protected themselves against rising interest rates during the Federal Reserve’s monetary-tightening campaign last year, according to a research paper that says unhedged securities holdings are more widespread than investors might realize. The paper—'Limited Hedging and Gambling for Resurrection by U.S. Banks During the 2022 Monetary Tightening?’—contends that hundreds of other banks share that risk, which played a role in the collapse last month of Silicon Valley Bank. The paper didn’t single out individual institutions, instead presenting an analysis of aggregate data.”

Bursting Bubble and Mania Watch:

April 14 – Reuters (Matt Tracy and Saeed Azhar): “Some of the largest U.S. banks singled out office commercial real estate… as an area of growing concern, with property values falling and more borrowers defaulting on their loans amid rising interest rates and a slowing economy. Faced with questions from analysts about their exposure to commercial real estate (CRE) and potential of losses, executives at Wells Fargo…, Citigroup Inc (C.N) and JPMorgan… said conditions were getting worse for the sector. ‘Weakness continues to develop in commercial real estate office,’ Wells Fargo Chief Executive Charlie Scharf said… Banks represent 54% of the overall $5.7 trillion CRE market, with the small lenders holding 70% of CRE loans… More than $1.4 trillion in U.S. CRE loans will mature by 2027, with some $270 billion coming due this year… Loans backed by offices make up the biggest share of the maturing debt load, followed by multifamily and retail properties.”

April 18 – Wall Street Journal (Leslie Scism and Peter Grant): “Life insurance companies, until recently a reliable source of capital for commercial property developers, are turning their backs on office building owners as tens of billions of dollars in office loans come due this year. Many of these insurers have slowed or stopped making office loans, executives and analysts say, interrupting the sector’s decadelong expansion into commercial property lending. Insurance firms have become skittish about rising vacancy rates and falling rents, reflecting the growing popularity of remote work and return-to-office rates that are still around half the levels workplaces enjoyed prepandemic.”

April 16 – Yahoo Finance (Dani Romero): “Landlords in Houston and Dallas are having a tougher time filling their empty office buildings with new tenants than any other market in the country, according to… CoStar and JPMorgan. Why? One reason: They overbuilt when interest rates were low. Houston and Dallas put up more new office space between 2010 and 2021 than all regions except New York. Despite the disruptions of the pandemic, they still have millions more square feet under construction. Vacancies now are higher than any other metro area… Houston and Dallas had 18.8% and 17.2% of office space sitting empty at the end of 2022…, well above the national average of 12.5%. New York, San Jose, San Francisco, and Chicago had vacancy rates of 12.3%, 12%, 16.4%, and 15.1%...”

April 19 – Bloomberg (John Sage): “Private credit managers are being tested as higher-for-longer interest rates, elevated inflation and the risk of recession ‘raises the specter of defaults,’ according to S&P Global. ‘Given these vehicles’ rapid growth, we expect to see a meaningful rise in credit losses, particularly if economic conditions worsen,’ analysts led by Evan Gunter wrote… Deteriorating asset quality could make it harder for fund managers to deal with problematic credits, spurring ‘reputational risks’ and even potential ‘liquidity challenges’. Private equity investors have holdings in about 75% of corporate borrowers rated B and below and about 50% of all speculative-grade companies.”

Ukraine War Watch:

April 19 – Reuters (Jonathan Landay): “The U.S. and its NATO allies must remain alert for signs Russian President Vladimir Putin could use a tactical nuclear weapon in a ‘managed’ escalation of his war in Ukraine, the second-highest U.S. diplomat said… Deputy Secretary of State Wendy Sherman issued the warning during the opening session of an annual NATO arms control conference that was being held in North America for the first time since its inception in 2004. ‘We have all watched and worried that Vladimir Putin would use what he considers a non-strategic tactical nuclear weapon or use some demonstration effect to escalate, but in an managed risk escalation,’ Sherman said. It is very critical to remain watchful of this.’”

April 16 – Associated Press: “Russian President Vladimir Putin met with China’s defense minister…, underscoring Beijing’s strengthening engagement with Moscow, with which it has largely aligned its foreign policy in an attempt to diminish the influence of the United States and other Western democracies… In comments opening the meeting, Putin praised the general development of Russia-China relations. ‘We are also working actively through the military departments, regularly exchanging information that is useful to us, cooperating in the field of military-technical cooperation, conducting joint exercises, moreover, in different theaters: in the Far East region, and in Europe, and at sea, and on land and in the air,’ he said…”

April 18 – Reuters (James Pearson): “The UK government's cyber defence agency warned… of an emerging threat to Western critical national infrastructure posed by hackers sympathetic to Russia and its war on Ukraine. Russia-aligned ‘hacktivists’ have carried out largely harmless online campaigns that have defaced prominent public websites or knocked them offline. However, some of those groups have been actively plotting ways to do more real-world damage, Britain's National Cyber Security Centre (NCSC), part of the GCHQ eavesdropping intelligence agency, said...”

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

April 20 – Bloomberg (Alberto Nardelli, Alex Wickham and Bryce Baschuk): “Some of Ukraine’s key allies including the US are considering moving closer to an outright ban on most exports to Russia, a potentially significant tightening of economic pressure on President Vladimir Putin over his war. Group of Seven officials are discussing the idea ahead of a leaders summit in Japan in May, according to people familiar… The proposal is still being debated and could change… The approach being discussed by diplomatic envoys would flip the existing sanctions regime around, with all exports banned unless exempted…”

April 17 – Financial Times (Max Seddon and Joe Leahy): “Vladimir Putin has hailed Russia’s military co-operation with China and warned of security threats beyond its war with Ukraine after meeting China’s defence minister in the latest sign of deepening ties between Moscow and Beijing. The Russian president told Li Shangfu that Moscow and Beijing were ‘regularly exchanging useful information, partnering in the sphere of military-technical co-operation and holding joint exercises’. Acclaiming the significance of their partnership, Putin said Russia and China’s defence ministries were ‘working just as actively’ in other areas, including on their economic relationship, where Beijing has thrown the Kremlin a lifeline after western sanctions cut Moscow out of global markets and supply chains.”

April 18 – Associated Press (Foster Klug, Matthew Lee and Mari Yamaguchi): “Top diplomats from the Group of Seven wealthy democracies vowed a unified front against Chinese threats to Taiwan and Russia’s war of aggression in Ukraine, saying at the close of their meetings… they were committed to boosting and enforcing tough sanctions against Moscow… ‘There can be no impunity for war crimes and other atrocities such as Russia’s attacks against civilians and critical civilian infrastructure,’ the ministers said. ‘We remain committed to intensifying sanctions against Russia, coordinating and fully enforcing them,’ the communique said, and would support ‘for as long as it takes’ Ukraine as it defends itself.”

April 16 – Reuters (Humeyra Pamuk and Sakura Murakami): “The relationship between China and Europe will be determined by Beijing's behaviour, including what happens with Taiwan, the European Union's foreign policy chief said… The comments from EU High Representative Josep Borrell, in a remote address at the start of the meeting of the Group of Seven (G7) foreign ministers in Japan, highlighted two of the themes that have come into focus ahead of the three-day gathering: the need for a united approach to China and concerns about Taiwan.”

De-globalization and Iron Curtain Watch:

April 17 – Financial Times (Gideon Rachman): “While Joe Biden was on a sentimental journey to Ireland, Xi Jinping was busy in Beijing. Following a high-profile visit by President Emmanuel Macron of France, the Chinese leader played host to President Luiz Inácio Lula da Silva of Brazil. The messaging to emerge from the Lula-Xi summit was congenial to China and disturbing to the US. Brazil’s leader said that his country wanted to work with China to ‘balance world politics’ and accused America of ‘incentivising’ the war in Ukraine. He also backed a longstanding Chinese goal of undermining the US dollar’s role in the world financial system, remarking: ‘Every night I ask myself why all countries have to base their trade on the dollar.’ China has also made recent headway with its Middle East diplomacy. This month, the foreign ministers of Iran and Saudi Arabia met in Beijing, after China brokered a deal to restore diplomatic relations between the two powers.”

April 16 – Associated Press (Edith M. Lederer): “First the Russians gave the U.N. spotlight to the commissioner of children’s rights accused with President Vladimir Putin of war crimes for deporting Ukrainian children to Russia, sparking a walkout by the U.S. and several others. Then Russia went after the West by claiming it is violating international laws in arming Ukraine… So far, the Russian presidency of the U.N. Security Council has been the most contentious in the memory of longtime U.N. diplomats and officials. And it’s just at the midway point. More fireworks are to come later in the month when Russian Foreign Minister Sergey Lavrov presides over the premier event of the presidency — an open council meeting on defending the principles of the U.N. Charter.”

April 17 – Associated Press (Paul Wiseman): “The fragmentation of the world economy into rival blocs led by the United States and China threatens to destabilize global commerce, increase inflation and weaken growth, Christine Lagarde, the president of the European Central Bank, warned… Lagarde said that economic data dating to 1900 shows that ‘geopolitical risks led invariably to higher inflation.’ Costs tend to mount, she said, as countries stop or reduce trading with rivals and seek supplies at home or from allied countries. She added that it can be difficult to sever ties: Europe, for example, relies on China for 98% of its rare earth minerals, which are used in cellphones and computer hard drives, among other products. If world supply chains were to split along geopolitical lines, Lagarde warned, consumer prices could rise 5% in the near term and 1% in the long run.”

April 17 – Bloomberg (Viktoria Dendrinou): “Christine Lagarde warned that changes in the world economy induced by geopolitics pose a challenge to the European Central Bank and its peers. ‘We are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values,’ the ECB president said… ‘All this could have far-reaching implications across many domains of policymaking,’ she said in a speech at the Council on Foreign Relations in New York, describing potential instability around supply chains, and more ‘multipolarity.’”

April 18 – Financial Times (Bryan Harris and Michael Pooler): “Brazil is facing a backlash from western nations and Ukraine after president Luiz Inácio Lula da Silva claimed Kyiv bore responsibility for the war there and accused Washington of ‘encouraging’ the conflict. Brazil this week rolled out the red carpet for Russia’s foreign minister Sergei Lavrov after Lula said at the weekend that the ‘decision for war [in Ukraine] was taken by both countries’ and that Europe and the US were partly responsible for prolonging the conflict… The White House… responded forcefully, with a spokesperson… accusing Lula of ‘parroting Russian and Chinese propaganda’. ‘It’s deeply problematic how Brazil has substantively and rhetorically approached the decision by suggesting that the US and Europe are somehow not interested in peace,’ said John Kirby, adding that Lula’s remarks were ‘simply misguided’. The dispute points to growing tension between the west and Brazil…”

April 21 – Reuters (Alexander Marrow and Elena Fabrichnaya): “Demand for the Chinese yuan is growing in Russia, the CEO of Sberbank said…, adding that the lender has made use of central bank currency swaps providing yuan liquidity. The dollar was king in Russia for decades after the collapse of the Soviet Union in 1991, but over the past year the yuan has grown significantly in importance.”

April 20 – Reuters (Dave Sherwood): “Russian Foreign Minister Sergei Lavrov met… with Cuban President Miguel Diaz-Canel and Foreign Minister Bruno Rodriguez in Havana, the latest in a series of visits to shore up support among Russia's closest allies in Latin America. Russia… is looking to strengthen political and economic ties with other countries opposed to what it calls U.S. hegemony.”

Inflation Watch:

April 19 – Associated Press (Danica Kirka): “The price of food in the U.K. rose at the fastest pace in 45 years last month in, keeping inflation above 10% for a seventh straight month amid a cost-of-living crisis that has fueled a wave of strikes by government workers. Food prices jumped 19.2% in the 12 months through February, the biggest increase since August 1977… Overall, consumer price inflation eased to 10.1%, from 10.4% the previous month, as the cost of gasoline and diesel fuel fell. The March figure was above the 9.8% rate economists had forecast.”

April 19 – Reuters (Balazs Koranyi): “Euro zone inflation eased last month but underlying readings remained stubbornly high…, confirming preliminary data that raised worries at the European Central Bank... Consumer inflation in the 20 nations sharing the euro eased to 6.9% from 8.5%, primarily on a rapid fall in energy costs as natural gas prices keep declining after their surge a year ago on Russia's invasion of Ukraine… Excluding unprocessed food and fuel, prices accelerated to 7.5% from 7.4%...”

Biden Administration Watch:

April 19 – Reuters (Richard Cowan and Andy Sullivan): “Republican U.S. House Speaker Kevin McCarthy… unveiled a plan to raise the nation's debt ceiling by $1.5 trillion and cut federal spending by three times that amount, laying out an opening position in what is likely to be a tense partisan debate over government borrowing. McCarthy's proposal… would cut the total amount of domestic and military spending to 2022 levels and cap growth at 1% annually in years to come. It would not touch retirement and health programs that are projected to expand dramatically as the population ages. President Joe Biden and the Democratic-controlled Senate are likely to reject the proposals, but McCarthy said they would serve as the basis for negotiations between the two parties over raising the federal government's $31.4 trillion debt limit in the coming weeks.”

April 20 – Reuters (David Lawder and Andrea Shalal): “The U.S. seeks ‘constructive and fair’ economic ties with China, but will protect its national security interests and push back against Chinese actions to dominate foreign competitors, Treasury Secretary Janet Yellen said… Speaking at Johns Hopkins…, Yellen laid out the Biden administration's principal objectives for what she called an ‘essential’ economic relationship between the world's two largest economies, as China strikes a more confrontational posture toward the United States and its allies.”

April 15 – Financial Times (Laura Noonan, Stefania Palma and Katie Martin): “Hedge funds and other parts of the shadow banking system should face greater scrutiny after last month’s upheaval in US government bonds, the country’s top markets regulator has said, reflecting concerns that speculative investors pose a risk to financial stability. Gary Gensler, chair of the Securities and Exchange Commission, told the Financial Times that taming risks from speculative funds and other so-called non-bank financial institutions was now ‘more important than ever’. He added he wanted a better understanding of how bets by such asset managers — often highly leveraged — can spill out across asset classes and into the real economy.”

Federal Reserve Watch:

April 20 – Bloomberg (Jonnelle Marte and Steve Matthews): “Federal Reserve officials backed another interest-rate increase as they monitor economic fallout from bank strains, while fresh emergency loan data showed financial stress continues to linger. Cleveland Fed President Loretta Mester, typically among the more hawkish of policymakers, said she favored getting rates above 5% because inflation was still too high… ‘We are much closer to the end of the tightening journey than the beginning… How much further tightening is needed will depend on economic and financial developments and progress on our monetary policy goals.’”

April 19 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of New York President John Williams said that while the banking sector has stabilized following the second-largest bank collapse in US history, the recent stress may make it more challenging for households and businesses to access credit. ‘The banking system is sound and resilient,’ Williams said… ‘Nonetheless, these developments will likely lead to some tightening in credit conditions for households and businesses, which in turn will weigh on spending.’”

April 18 – Reuters (Howard Schneider): “The U.S. central bank should continue raising interest rates on the back of recent data showing inflation remains persistent while the broader economy seems poised to continue growing, even if slowly, St. Louis Federal Reserve President James Bullard said… Bullard told Reuters…: ‘Wall Street's very engaged in the idea there's going to be a recession in six months or something, but that isn't really the way you would read an expansion like this.’ Investors may see rate cuts in the Fed's near future, part of a recession-breeds-accommodation view of the world, but ‘the labor market just seems very, very strong. And the conventional wisdom is that if you have a strong labor market that feeds into strong consumption... and that's a big chunk of the economy... it doesn't seem like the moment to be predicting that you have a recession in the second half of 2023,’ he said.”

April 20 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of Cleveland President Loretta Mester said policymakers will gauge the impact of banks tightening their lending standards when they meet next month to discuss the peak rate. ‘Even before the stresses in the banking industry in March, banks were already beginning to tighten their credit standards,’ Mester said… ‘The question now going forward is’ ‘Will stresses in the banking industry, those stresses in March, lead banks to move faster to tighten their credit standards,’’she said.”

April 18 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic said he favors raising interest rates one more time and then holding them above 5% for some time to curb inflation that remains too high. ‘There is still more work to be done, and I am ready to do it,’ Bostic said… After the next move, he said, ‘if the data come in as I expect, we will be able to hold there for quite some time.’”

U.S. Bubble Watch:

April 20 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits increased moderately last week, suggesting the labor market was gradually slowing… Though measured, the loss of labor market momentum added to slumping retail sales and manufacturing activity in heightening the risks of a recession as soon as the second half of the year… A measure of future economic activity plunged to the lowest level in nearly 2-1/2 years in March…”

April 21 – Reuters (Lucia Mutikani): “U.S. business activity accelerated to an 11-month high in April… S&P Global said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 53.5 this month. That was the highest level since last May and followed a final reading of 52.3 in March… The survey's measure of new orders received by private businesses surged to 53.2 this month, also the highest reading since last May, from 50.8 in March. The increase, which was across the services and manufacturing sectors, meant inflation pressures picked up this month. The survey's measure of prices paid by businesses for inputs rose to 61.2 from 59.8 in March. ‘This increase helps explain why core inflation has proven stubbornly elevated at 5.6% and points to a possible upturn, or at least some stickiness, in consumer price inflation,’ said Chris Williamson, chief business economist at S&P Global...”

April 19 – CNBC (Diana Olick): “Today’s homebuyers appear to be increasingly sensitive to weekly moves in mortgage rates. While home prices are easing some, affordability is still a major hurdle… Last week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 6.43% from 6.30% the previous week… As a result, mortgage applications to purchase a home dropped 10% from the week before… Buyer demand was 36% lower than… one year ago…”

April 20 – CNBC (Diana Olick): “Sales of previously owned homes declined 2.4% in March compared with February… At a seasonally adjusted, annualized rate, that amounts to 4.4 million units. Sales were 22% lower than March of last year… ‘Home sales are trying to recover and are highly sensitive to changes in mortgage rates,’ said Lawrence Yun, chief economist for the NAR. ‘Yet, at the same time, multiple offers on starter homes are quite common, implying more supply is needed to fully satisfy demand. It’s a unique housing market.’ Supply did increase slightly, but it is still historically low. At the end of March, there were 980,000 homes for sale… At the current sales pace, that represents just a 2.6-month supply. A six-month supply is considered a balanced market…”

April 18 – Reuters (Lucia Mutikani): “U.S. single-family homebuilding increased for a second straight month in March, while permits for future construction surged… Single-family housing starts, which account for the bulk of homebuilding, rose 2.7% to a seasonally adjusted annual rate of 861,000 units last month… February was revised higher to show single-family homebuilding rising to a rate of 838,000 units... Single-family homebuilding increased 4.4% in the Northeast and soared 23.6% in the Midwest. It advanced 4.8% in the densely populated South, but plunged 16.0% in the West. Single-family housing starts dropped 27.7% on a year-on-year basis in March.”

April 17 – Bloomberg (Augusta Saraiva): “US homebuilder sentiment rose for a fourth month in April as limited resale inventory helped drive demand for new houses, suggesting the residential real estate market is slowly recovering. The National Association of Home Builders/Wells Fargo gauge edged up one point to a seven-month high of 45… Even with the recent improvement, the gauge is well below levels seen at the end of 2021… ‘Currently, one-third of housing inventory is new construction, compared to historical norms of a little more than 10%,’ Robert Dietz, NAHB chief economist, said... ‘More buyers looking at new homes, along with the use of sales incentives, have supported new-home sales since the start of 2023.’”

April 19 – Bloomberg (Amy Yee and Alex Tanzi): “US foreclosure filings jumped 22% in the first quarter compared to the same period a year ago, according to a report from real estate data analytics firm ATTOM. While still below pre-pandemic levels, foreclosure activity has increased on an annual basis for 23 straight months… ‘However, with many homeowners still having significant home equity, that may help in keeping increased levels of foreclosure activity at bay,’ Barber said…”

April 18 – CNBC (Steve Liesman): “Amid persistent inflation, higher interest rates and recession worries, Americans have never been more negative about the economy, according to the latest CNBC All-America Economic Survey. A record 69% of the public holds negative views about the economy both now and in the future, the highest percentage in the survey’s 17-year history. The survey of 1,000 people nationwide… found that about two-thirds of Americans say their wages are falling behind inflation, and two-thirds say the nation is headed for recession or already in one.”

April 18 – Bloomberg (Augusta Saraiva and Paulina Cachero): “Faith Smith was already stretching her $500 monthly grocery budget as far as it could go. Then her phone lit up with an imperfect solution. She got a notification that Target Corp. would allow her to use ‘buy now, pay later’ apps, which let consumers pay for goods in chunks over the course of several weeks or months. Smith was all too familiar with the BNPL process: The 34-year-old administrative assistant was already using it to buy clothes and school supplies for her young daughter. ‘I can’t just buy groceries out of pocket like I used to,’ says Smith, who maxes out her credit on BNPL providers such as Afterpay, Klarna and PayPal… US consumers are increasingly using such installment loans to pay for everyday items like groceries, highlighting the financial pain wrought by the worst inflation outbreak in four decades.”

April 19 – Bloomberg (Claire Ballentine): “The repo folks have come to the land of Disney World, “The Happiest Place on Earth,” with an unhappy message for America: Business—their business—is looking up… In March, the percentage of subprime auto borrowers who were at least 60 days late on their bills was 5.3%, up from a seven-year low of 2.58% in May 2021 and higher than in 2009, the peak of the financial crisis, data from Fitch Ratings show. While not all of those borrowers will face repossessions, the risk is high.”

April 15 – CNN (Christopher Hickey): “You’ve managed to buy the car, but can you afford to keep paying for it? Along with soaring car prices, loan rates are the most expensive they’ve been in more than 15 years, with the average monthly payment on a new car at an all-time high… The result of the one-two punch of higher prices and interest rates is that it’s taking Americans much longer to pay off their car loans… High loan rates mean monthly payments are soaring as well. In March, the average monthly payment for financing a new car hit $730 — the highest on record, according to Edmunds. The average payment for financing a used car is now $556 per month, which is up a staggering $147 from June 2020. More new car owners are paying as much as $1,000 a month. In January 2019, new car payments over $1,000/month made up roughly 5% of sales. In March 2023…, four-figure monthly payments ballooned to 17% of the new car market.”

April 17 – Bloomberg (Paulina Cachero): “More than a quarter of Americans have no money saved for retirement. That’s according to a new survey from personal finance site Credit Karma… Nearly one in five people aged 59 and older said they didn’t have a retirement account and 27% of respondents said they haven’t set anything aside for their later years… For those aging Americans who do have retirement accounts, persistent inflation has thwarted their plans, worsening the $7 trillion retirement-savings shortfall. Among baby boomers who are employed and saving for retirement, 17% said they’ve decreased their contributions to their retirement accounts as a result of inflation.”

Fixed Income Watch:

April 19 – Bloomberg (Olivia Raimonde): “Ratings firms are on track to cut the most US corporate bonds to junk since the early part of the pandemic, further boosting funding costs for some companies… In the first quarter, a total of $11.4 billion of bonds were downgraded to high yield status, a figure that’s about 60% of 2022’s full-year total, according to Barclays... Full-year volume is on pace to be the highest since 2020 when the pandemic sparked a massive wave of downgrades, according to the bank’s estimates.”

April 20 – Bloomberg (Ayai Tomisawa, Carmen Arroyo and Jill R. Shah): “Dealmakers in US collateralized loan obligations are counting more than ever on an old friend: Japanese banks. In a sign of how Japan’s influence has grown, its regional banks have become a go-to buyer in the $1.3 trillion market — an important source of financing for junk-rated US companies. Along with bigger lenders and insurers, their loyalty to CLOs is a lifeline as some US buyers pull back.”

China Watch:

April 18 – Bloomberg: “China’s economy grew at the fastest pace in a year in the first quarter, putting Beijing on track to meet its growth goal for the year without adding major stimulus... Gross domestic product expanded 4.5% last quarter from a year earlier… In March, retail sales soared 10.6% from a year earlier, the biggest monthly gain since June 2021. The upbeat data provide a foundation for China’s government to meet or exceed its GDP growth target of about 5% for the year.”

April 17 – Reuters (Joe Cash, Qiaoyi Li and Ellen Zhang): “China's industrial output rose 3.9% in March year-on-year…, accelerating from a 2.4% increase in the first two months but missing expectations slightly amid a post-COVID economic recovery… Fixed asset investment in January-March slowed to 5.1% growth year-on-year, versus expectations for a 5.7% increase. It grew 5.5% in the January-February period.”

April 16 – Bloomberg (Shuli Ren): “Call it luck or stellar crisis management. China, one of the world’s most indebted nations, has not experienced a full-blown financial crisis, yet. There were a few close calls. In 2019, the government had to seize a regional bank, for the first time in decades, to prevent a run on deposits. Last year, a wave of real estate developer defaults ended up with homebuyers threatening mortgage boycotts. Both scares got defused… But there is one more elephant in the room: Borrowings from local government financing vehicles. For years, municipalities have been relying on these off-balance-sheet entities to fund infrastructure and support the local economy. LGFV debt rose to 57 trillion yuan ($8.3 trillion) in 2022, or 48% of China’s gross domestic product, according to… the International Monetary Fund.”

April 16 – Financial Times (James Kynge): “China’s $1tn Belt and Road Initiative infrastructure finance programme has been hit by spiralling bad loans, with more than $78bn-worth of borrowing turning sour over the past three years. The scheme made China the world’s largest bilateral creditor, but the figures suggest it has become a financial millstone for Beijing and its biggest banks. About $78.5bn of loans from Chinese institutions to roads, railways, ports, airports and other infrastructure around the world were renegotiated or written off between 2020 and the end of March this year, according to… the Rhodium Group.”

April 18 – Reuters (Winni Zhou and Tom Westbrook): “Violet Zhu, a Shanghai-based electronic components exporter, has been attending jewellery auctions and chatting on social media forums on the subject this year, looking to invest in rubies and diamonds. ‘I don't have the brain for stock investments, and I am waiting to redeem mutual fund products once they break even. But in the meantime, I have been continuously buying gems,’ says Zhu. Zhu says she is searching for oddly-shaped rubies of higher grades... She is not alone. Jewellery and precious metals consumption in China soared 37.4% in March from a year earlier underpinning a 13.6% jump for the quarter…”

Central Banker Watch:

April 17 – Financial Times (Delphine Strauss): “Policymakers need to abandon the illusion that they can use monetary and fiscal stimulus to engineer economic growth without stoking inflation or breeding financial instability, the head of the Bank for International Settlements has warned. Agustín Carstens, general manager of the BIS…, called… for governments and central banks to stop seeking quick fixes to boost the economy every time recessions hit or growth faltered, and instead embrace the need for deeper reforms. To generate resilient and sustainable growth, there is no alternative to working on the supply side of the economy. Structural reforms are politically difficult, we know. But we also know that there is no free lunch,’ he said…”

April 15 – Bloomberg (Andrew Langley and Alexander Weber): “Within a broad agreement at the European Central Bank on the need to raise interest rates further are enduring preferences among some officials for another big hike. Remarks in the runup to this week’s International Monetary Fund Spring Meetings had focused increasingly on the most forceful bout of monetary tightening in ECB history nearing its conclusion — a process likely hastened by bank failures in the US and Switzerland.”

April 20 – Wall Street Journal (Ben Sharples): “Australia said it would make broad changes to how its central bank operates, as policy makers worldwide have come under fire for failing to keep inflation under control and faced potential curbs to their independence or missions. The biggest change will see the Reserve Bank of Australia adopt a monetary-policy committee structure that has parallels to the setup of the Bank of Canada and the Bank of England, in a move that would weaken the governor’s influence… The overhaul represents the biggest shake-up at the Reserve Bank of Australia in around three decades…”

Bursting Global Bubble Watch:

April 19 – Reuters (Ismail Shakil and Steve Scherer): “About 155,000 federal workers in Canada walked off the job on Wednesday after failing to reach a deal for higher wages and work-from-home guarantees, a strike that affects a range of public services from tax returns to passport renewals.”

April 20 – Bloomberg (Samson Ellis and Chien-Hua Wan): “Taiwan’s export orders in March plunged by the most since the global financial crisis as global demand for semiconductors shows little sign of improving. Overseas orders to Taiwanese companies shrank to $46.6 billion last month, a 25.7% drop compared to a year ago.”

Europe Watch:

April 21 – Bloomberg (Alexander Weber): “The euro area’s economic rebound gained further momentum in April thanks to resurgent service-sector activity, while the business outlook remains resilient to recent banking-sector stress. Growth accelerated to an 11-month high, driven by greater demand and leading to a significant increase in employment, according to business surveys by S&P Global.”

Japan Watch:

April 19 – Bloomberg (Toru Fujioka and Sumio Ito): “Bank of Japan officials are wary of tweaking or scrapping their yield control stimulus at a policy meeting next week so soon after the banking crisis overseas clouded the outlook, according to people familiar… BOJ officials instead see a need to keep their cap on government bond yields in place for now to support the economy while they wait for more progress toward achieving their stable inflation target… The two-day meeting, the first under Governor Kazuo Ueda, finishes on April 28.”

April 16 – Reuters (Leika Kihara): “Japan's new central bank Governor Kazuo Ueda gave a clear message to policymakers gathered for global finance meetings here over the last week: The country will remain a dovish outlier by keeping interest rates ultra-low - at least for now. Since taking the helm a week ago, Ueda has dropped some hints the massive stimulus of his dovish predecessor Haruhiko Kuroda will eventually be phased out. But discussions over when and how to shift away from the ultra-loose policy will take time, giving Ueda every reason to reassure the world any change won't happen quickly.”

April 18 – Bloomberg (Yoshiaki Nohara): “Bank of Japan Governor Kazuo Ueda ruled out any need to change a key accord with the government for now, again pointing to a continuity of policy ahead of his first meeting at the helm of the central bank next week. Responding to questions in parliament…, Ueda said the thinking behind the 2013 joint statement with the government was appropriate. The comment suggests no sudden change of policy direction under the new governor at the April meeting. The joint statement sets out the central bank’s commitment to its 2% price goal as part of a division of labor with the government to reinvigorate the economy.”

April 21 – Reuters (Leika Kihara and Takahiko Wada): “Japan's consumer inflation held steady above the central bank's target in March and an index excluding fuel costs rose at the fastest annual pace in four decades…, indicating broadening price pressure in the world's third-largest economy. The data may keep alive market expectations that the Bank of Japan (BOJ) could begin to phase out later this year a massive stimulus programme that has drawn public criticism for distorting bond markets and crushing financial institutions' margins… The core consumer price index (CPI), which excludes volatile fresh food, but includes energy costs, rose 3.1% in March from a year earlier…”

April 19 – Reuters (Tetsushi Kajimoto): “Japan's export growth slowed in March, dragged down by a drop in China-bound shipments of cars and steel in a slide that underscores concern about slackening global demand amid higher interest rates and Western banking-sector jitters. Import growth outpaced exports in March, due to the hefty cost of coal, crude and oil products, helping bring the annual trade deficit in the world's third-biggest economy to a record 21.7 trillion yen ($161bn). It exceeded the previous record of 13.7 trillion yen in fiscal 2013.”

April 18 – Reuters (Tetsushi Kajimoto): “Big Japanese manufacturers remained pessimistic in April for a fourth straight month as jitters over Western banks added to slowing global growth, the monthly Reuters Tankan survey showed… However, it also showed the service sector mood improved for a second straight month to a four-month high, signalling a post-COVID economic recovery led by inbound tourism, which has boosted restaurants and retailers.”

EM Crisis Watch:

April 17 – Reuters (Lisandra Paraguassu and Anthony Boadle): “Brazilian President Luiz Inacio Lula da Silva drew criticism from the United States… for his recent comments suggesting the West had been ‘encouraging’ war by arming Ukraine, while he was praised by Russian Foreign Minister Sergei Lavrov for his proposal for peace talks. Lavrov, on a visit to Brasilia, met with Lula and thanked Brazil for its efforts to resolve the conflict… But Lula has angered many in the West with comments over the weekend, when he called for Western powers to stop providing arms for the war. The comments came shortly after he returned from China, where he discussed the matter with Chinese President Xi Jinping. ‘The United States needs to stop encouraging war and start talking about peace,’ Lula said…”

Leveraged Speculation Watch:

April 21 – Bloomberg (Hema Parmar, Katherine Burton and Nishant Kumar): “The biggest new hedge funds are raising more money, at levels not seen since before the pandemic, and the 2024 crop could include one of the largest startups in years. At least four new firms are poised to eclipse $1 billion by year-end, collectively bringing in at least $6.5 billion from investors…”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 19 – Axios (Andrew Freedman): “A double whammy of natural climate cycles and human-caused climate change will likely make next year Earth's warmest on record, climate experts tell Axios. The big picture: Forecasters now expect that a moderate El Niño, the climate pattern characterized by warmer-than-usual sea surface temperatures, will develop this summer, bringing sweeping shifts to weather patterns worldwide… Even a relatively weak event could lead to new records for the warmest year in 2023 and 2024. What's happening: Three straight years of La Niña, which features cooler-than-usual sea surface temperatures in the tropical Pacific, have given way to a rapid transition to an El Niño state.”

April 19 – Bloomberg (Ben Sharples): “Scorching temperatures are roasting Asia this week, stretching the region’s power grids and raising health risks as the chances of more extreme events later in the year increase. The worst drought in a decade is impacting a key Chinese aluminum hub, while searing temperatures in India have increased the possibility of deadly heat waves and blackouts. Thailand hit a national record of more than 45C (113F)… While this time of year is typically the hottest for India and parts of Southeast Asia, the soaring temperatures continue a pattern of severe weather over the past several years that’s testing the ability of governments to protect public health and prevent disruptions to recovering economies.”

April 20 – Wall Street Journal (Alyssa Lukpat and Max Rust): “A record number of journalists were imprisoned in 2022, a sign of weakening press freedom worldwide, according to the Committee to Protect Journalists. There were 363 journalists detained in more than 30 countries last year, with the highest number of detainees held in Iran, China and Myanmar, according to the CPJ. The overall figure is nearly double from 2015 and the most since the press-freedom group began tracking imprisonments three decades ago.”

Geopolitical Watch:

April 20 – Reuters (Casey Hall): “China's Foreign Minister Qin Gang said… both sides of the Taiwan Strait belong to China, and that it is right and proper for China to uphold its sovereignty… ‘Recently there has been absurd rhetoric accusing China of upending the status quo, disrupting peace and stability across the Taiwan Strait,’ Qin said. ‘The logic is absurd and the conclusion dangerous.’”

April 17 – Reuters (Ben Blanchard): “The U.S. warship USS Milius sailed through the Taiwan Strait on Sunday, in what the U.S. Navy described on Monday as a ‘routine’ transit, just days after China ended its latest war games around the island. China, which views Taiwan as its own territory, officially ended its three days of exercises around Taiwan last Monday where it practiced precision strikes and blockading the island.”

April 17 – Bloomberg (Anthony Capaccio): “Taiwan will buy as many as 400 land-launched Harpoon missiles intended to repel a potential Chinese invasion, completing a deal that Congress approved in 2020… Taiwan has previously purchased ship-launched versions of the Harpoon, which is made by Boeing Co. Now, a contract with Boeing issued on Taiwan’s behalf by the US Naval Air Systems Command marks a first for the mobile, land-launched version…”

April 17 – Reuters (Hyonhee Shin): “South Korea, the United States and Japan staged joint naval missile defence exercises… to improve responses to North Korean threats, as Pyongyang accused Washington of ramping up ‘nuclear blackmail’ with military drills. The three nations agreed at talks in Washington on Friday to hold regular missile defence and anti-submarine exercises in their efforts to boost diplomatic and military cooperation.”

April 20 – Financial Times (Mehul Srivastava, Felicia Schwartz and Demetri Sevastopulo): “China is building sophisticated cyber weapons to ‘seize control’ of enemy satellites, rendering them useless for data signals or surveillance during wartime, according to a leaked US intelligence report. The US assesses that China’s push to develop capabilities to ‘deny, exploit or hijack’ enemy satellites is a core part of its goal to control information, which Beijing considers to be a key ‘war-fighting domain’.”