Friday, June 2, 2023

Weekly Commentary: The Case Against Skip

It’s not a close call. If the Fed “Skips” policy tightening at the June 14th FOMC meeting, it will be yet another big policy mistake. The long string of errors has greatly damaged the Federal Reserve’s inflation-fighting credibility. It has also promoted dangerously dysfunctional market structure. At this point, the Fed should err on the side of demonstrating resolve in reining in inflationary excesses.

The Fed currently faces two major inflationary issues. Consumer price inflation remains highly elevated, with little to indicate that price gains will recede to the Fed’s 2% target anytime soon. Second, rampant securities market inflation is inconsistent with stable prices and financial stability. Markets remain precariously speculative, with resulting loose financial conditions counteracting the Fed’s rate policy tightening.

May 31 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials signaled they are increasingly likely to hold interest rates steady at their June meeting before preparing to raise them again later this summer. Investors in recent days had expected the Fed would lift rates at its meeting June 13-14, prompting two policy makers Wednesday to publicly underscore their preference to forgo a hike… The strategy would give officials more time to study the economic effects of the Fed’s 10 consecutive prior rate rises… They have lifted rates by five percentage points since March 2022 to combat high inflation, most recently on May 3 to a range between 5% and 5.25%, a 16-year high. ‘A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,’ Fed governor Philip Jefferson said… ‘Indeed, skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming.’”

How much more data do the Fed need to see? The April “JOLTS” report underscored the extraordinary nature of today’s jobs market. Job openings surged back above 10 million, coming in 700,000 above forecast. March openings were revised 150,000 higher. For the 20-year period 2000 through 2019, job openings averaged 4.5 million, exceeding eight million for the first time in 2021.

ADP reported an employment increase of 278,000, versus the estimate of 170,000. And Friday’s May non-farm payrolls report once again surprised to the upside, with an increase of 339,000 (previous months revised higher). I don’t buy the “mixed” description of the data. Sure, the 0.3% gain in Average Weekly Hourly Earnings was weaker than some highly elevated prints from 2021 and 2022. But with workers' demands for higher compensation justified, ongoing tight labor markets are poised to sustain inflationary momentum.

May 31 – Reuters (Shankar Ramakrishnan, Matt Tracy and Laura Matthews): “Large U.S. companies have been on a bond issuance binge… Investment-grade rated companies issued $152 billion in May, making it the busiest May since 2020 when the pandemic crisis prompted record debt issuance volumes, according to… Informa Global Markets. Junk-rated companies meanwhile raised $22.1 billion, for the busiest May since 2021 when 73 companies raised $49.1 billion.”

Financial markets are also poised to sustain inflationary pressures. Resurgent Bubble Dynamics have fueled a major loosening of financial conditions. Surveys and anecdotes point to a degree of bank lending tightening. But this has been more than offset by risk embracement, leveraged speculation, and liquidity excess throughout the financial markets.

In a more normal environment, it would be reasonable for the Fed to watch and wait for tighter bank lending to restrain demand and output. Typically, a meaningful tightening of lending standards would be reflected in the financial markets, with risk aversion and deleveraging ensuring waning liquidity excess and tighter conditions. But today’s backdrop is categorically abnormal.

Conventional thinking holds that the banking crisis triggered tighter conditions. But the exact opposite has unfolded over the past couple of months. We know that Fed Assets expanded $364 billion over three weeks in March in banking crisis liquidity operations. Assets remain about $45 billion above the March 1st level. And we also know that FHLB assets expanded an unprecedented $317 billion during Q1 ($802bn over 4 quarters). Indicative of the liquidity surge, money market fund assets inflated $384 billion in the five weeks beginning March 8th.

Most view such a jump in money fund assets as evidence of risk aversion and tightened market conditions. I take a different view. This growth was reflective of a surge in financial sector Credit, in this case aggressive FHLB money market borrowings to finance its massive bank liquidity support operations.

And while the banking liquidity crisis has abated, the extraordinary expansion of money fund assets is ongoing. Money fund assets were up another $31 billion last week, despite risk embracement and record equity fund inflows.

June 2 – Bloomberg (Sagarika Jaisinghani): “The buzz around artificial intelligence has investors pouring a record amount of money into tech stocks, Bank of America Corp. says. A ‘baby bubble’ in AI was the dominant market theme in May, strategist Michael Hartnett said, with tech funds attracting an all-time high of $8.5 billion in the week through May 31, according to… EPFR Global data.”

Money fund assets have expanded an unprecedented $526 billion, or 51% annualized, over 12 weeks to a record $5.420 TN – with one-year growth of $894 billion, or 19.7%. I appreciate that equity bulls salivate at the thought of this “money on the sidelines” making a mad dash for the risk markets. Yet such spectacular monetary inflation deserves serious contemplation.

The March episode was just one more in a long series of aggressive market interventions. While it was not on the scale of March 2020’s pandemic crisis operations, combined Fed and FHLB liquidity operations were not that much smaller than 2008. Importantly, this intervention came after markets had several months to recover from last fall’s heightened risk aversion. It was a notably strong start to the year, with the Nasdaq100 already sporting double-digit gains by early March.

Fed/FHLB liquidity operations lit a fire under a fledgling speculative Bubble. Powerful speculative impulses had taken hold throughout the derivatives marketplace - a potent “inflationary bias” was smoldering. In particular, an options trading craze had enveloped individual and institutional traders alike. Washington liquidity operations stoked speculative excess that developed into a powerful melt-up dynamic. And I believe derivatives markets have become a powerful source of system liquidity creation.

Over the years, Fed/GSE interventions have increasingly distorted market risk perceptions. Why not speculate and leverage, confident that a “Fed put” just below the market would minimize potential losses? Stocks always recover and go higher. And nowhere were market risk distortions more pronounced than in derivatives.

As I’ve highlighted in the past, derivatives markets operate on the assumption of liquid and continuous markets, despite a long history of markets facing recurring bouts of illiquidity and discontinuity (i.e., panics and crashes). Basically, derivatives markets have always assumed Washington would quickly resolve dislocations and thwart collapses. Sellers could price their derivative products confident they would not find themselves on the wrong side of a market crash.

Basically, the Fed/GSE liquidity backstop was integral to the pricing and liquidity dynamics that made derivatives so appealing for both hedging and speculating. And the bigger this complex became – and the more critical to the markets and economy – the more the Fed was compelled to quickly intervene to stabilize markets. Last year’s heightened concerns that the unfolding tightening cycle created ambiguity with respect to the Fed’s liquidity backstop were allayed by the Bank of England’s September and the Federal Reserve’s March interventions.

Today, derivatives markets pose a monumental risk to financial stability. There is clear risk of huge (downside) put option positions sparking cascading sell orders and a crash. Yet repeated market interventions have provided a competitive advantage to buyers of (upside) call options. With speculative impulses already percolating, the March Fed/FHLB intervention sparked a stampede of call buying in the big technology stocks.

March liquidity injections stoked buying of the underlying stocks, including short covering and the unwind of bearish hedges. And then the enormous quantity of outstanding call options (and other upside derivatives) unleashed self-reinforcing buying and associated liquidity excess. Importantly, the sellers of call options were increasingly forced to buy the underlying stocks (chiefly the big tech stocks, ETFs and indexes), in what has developed into a self-feeding FOMO (fear of missing out) “melt-up” dynamic.

It's imperative that the Fed leans against speculative excess. Their repeated market bailouts have been fundamental to the explosive growth in derivative speculation. And we’re at the point where the derivatives complex and associated speculative leverage are a major source of system Credit and liquidity creation. And I’ll go one step further: derivatives are today at the Epicenter of Monetary Disorder – a historic Bubble that poses acute risk to financial and economic stability.

The Bank of England intervened last September to stop a derivatives-induced dislocation in the UK bond market. Surging yields had triggered self-reinforcing liquidation – deleveraging and selling to hedge derivative positions. Central bankers clearly understand this type of derivatives risk.

UK and U.S. bond markets have again begun to indicate vulnerability to a self-reinforcing yield surge. Two-year Treasury yields traded to 4.60% in Tuesday trading. With Fed vice chair nominee Philip Jefferson talking pause, yields ended Wednesday session at 4.40%. The rates market probability for a June hike dropped from 70% to 30% following Jefferson’s comments. MBS yields, often a hotbed of derivative-related hedging activities, saw yields spike 32 basis points last week – only to reverse 29 bps lower this week. I can’t help but wonder whether fear of a derivatives-induced spike in market yields helps explain support for skipping this month’s hike. It's not the data.

May 30 – Bloomberg (Lu Wang and Elena Popina): “Stock investors who planned for one thing in 2023 are getting something else entirely. Now, with the tech-obsessed market at risk of running away from them, the race is on to catch up… With the seven tech behemoths surging a median 44% this year — a gain almost five times that of the S&P 500 — there are signs traders are getting desperate for ways to keep up. It’s visible in the options market, where the expected volatility rose alongside the Nasdaq 100 and the cost of bullish options spiked. ‘There’s FOMO in the tech space,’ said Brent Kochuba, founder of options platform SpotGamma. ‘It’s a clear chase.’ Demand for upside calls on the Nasdaq ETF is surging… ‘The ‘call exuberance’ is so high that it is distorting the options market,’ said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. ‘This is a bit reminiscent of the YOLO/meme craze of call buying we saw during the pandemic.’ Increasingly, traders are opting to use derivatives to gamble on big tech.”

The Fed is indeed trapped. They have not been able to tighten financial conditions sufficiently to cool the labor market or slow demand. Yields have remained relatively low throughout this tightening cycle, with the bond market instinctively pricing in an early dovish pivot. And when surging yields did spark a banking crisis, liquidity operations triggered a major market loosening and resurgent speculative Bubble.

The numbers are big. The Nasdaq100 Index, up a third y-t-d, has added almost $4 TN of market capitalization so far this year. The amount of associated speculative leverage and liquidity-creation, especially from derivative trading and hedging, must be enormous. Moreover, this type of speculative Credit is particularly destabilizing. While fueling Bubble excess on the upside, the system becomes increasingly vulnerable to a downside market reversal and destabilizing collapse in speculative leverage and liquidity.

This is no time to Skip. It is imperative that the Fed demonstrates resolve in tightening financial conditions. Allowing this speculative Bubble to run unchecked poses an extraordinary risk to system stability.

For the Week:

The S&P500 rose 1.8% (up 11.5% y-t-d), and the Dow gained 2.0% (up 1.9%). The Utilities increased 0.8% (down 9.2%). The Banks surged 3.1% (down 20.4%), and the Broker/Dealers gained 1.5% (up 1.0%). The Transports advanced 1.8% (up 5.7%). The S&P 400 Midcaps rose 2.6% (up 3.1%), and the small cap Russell 2000 jumped 3.3% (up 4.0%). The Nasdaq100 gained 1.7% (up 33.0%). The Semiconductors declined 1.2% (up 38.3%). The Biotechs rose 1.5% (up 1.7%). With bullion up $1.50, the HUI gold equities index jumped 2.5% (up 7.0%).

Three-month Treasury bill rates ended the week at 5.1975%. Two-year government yields declined six bps this week to 4.50% (up 7bps y-t-d). Five-year T-note yields fell eight bps to 3.84% (down 16bps). Ten-year Treasury yields fell 11 bps to 3.69% (down 19bps). Long bond yields declined seven bps to 3.89% (down 8bps). Benchmark Fannie Mae MBS yields sank 29 bps to 5.50% (up 12bps).

Greek 10-year yields dropped 21 bps to 3.69% (down 88bps y-t-d). Italian yields sank 32 bps to 4.07% (down 63bps). Spain's 10-year yields fell 29 bps to 3.32% (down 20bps). German bund yields slumped 23 bps to 2.31% (down 13bps). French yields dropped 25 bps to 2.86% (down 12bps). The French to German 10-year bond spread narrowed two to 55 bps. U.K. 10-year gilt yields declined 118 bps to 4.16% (up 48bps). U.K.'s FTSE equities index slipped 0.3% (up 2.1% y-t-d).

Japan's Nikkei Equities Index rose 2.0% (up 20.8% y-t-d). Japanese 10-year "JGB" yields declined a basis point to 0.41% (down 1bp y-t-d). France's CAC40 declined 0.7% (up 12.3%). The German DAX equities index added 0.4% (up 15.3%). Spain's IBEX 35 equities index gained 1.4% (up 13.2%). Italy's FTSE MIB index increased 1.3% (up 14.2%). EM equities were mostly higher. Brazil's Bovespa index advanced 1.5% (up 2.6%), while Mexico's Bolsa index fell 1.5% (up 9.8%). South Korea's Kospi index rose 1.7% (up 16.3%). India's Sensex equities index was little changed (up 2.8%). China's Shanghai Exchange Index increased 0.5% (up 4.6%). Turkey's Borsa Istanbul National 100 index surged 11.7% (down 7.2%). Russia's MICEX equities index gained 1.4% (up 26.2%).

Investment-grade bond funds posted outflows of $2.723 billion, and junk bond funds reported negative flows of $2.174 billion (from Lipper).

Federal Reserve Credit declined $25.9bn last week to $8.380 TN. Fed Credit was down $521bn from the June 22nd peak. Over the past 194 weeks, Fed Credit expanded $4.653 TN, or 125%. Fed Credit inflated $5.569 TN, or 198%, over the past 551 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $12.2bn last week to a one-year high $3.410 TN. "Custody holdings" were up $14bn, or 0.4%, y-o-y.

Total money market fund assets jumped another $31.7bn to a record $5.420 TN, with a 12-week gain of $526bn. Total money funds were up $894bn, or 19.7%, y-o-y.

Total Commercial Paper dropped $15.7bn to $1.112 TN. CP was down $27.5bn, or 2.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 17 bps to a six-month high 6.93% (up 184bps y-o-y). Fifteen-year rates surged 22 bps to 6.31% (up 199bps). Five-year hybrid ARM rates rose 13 bps to 6.41% (up 237bps) - the high since October 2008. Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 22 bps to 6.95% (up 158bps).

Currency Watch:

May 30 – Bloomberg (Go Onomitsu and David Finnerty): “Japan’s top currency official warned that the government would take action if needed in comments that follow a weakening of the yen to its lowest levels since last November. ‘It’s important that currency markets reflect fundamentals and move in a stable manner. Excessive moves aren’t desirable,’ top currency official Masato Kanda told reporters after the first meeting of Japan’s Ministry of Finance, the Bank of Japan and Financial Services Agency since March. ‘The government will continue to closely monitor market moves, and will take appropriate responses if necessary.’”

For the week, the U.S. Dollar Index slipped 0.2% to 104.02 (up 0.5% y-t-d). For the week on the upside, the South Korean won increased 1.5%, the Australian dollar 1.4%, the Canadian dollar 1.4%, the British pound 0.9%, the Brazilian real 0.7%, the South African rand 0.6%, the Norwegian krone 0.6%, the Japanese yen 0.5%, the Mexican peso 0.4%, the Swedish krona 0.4%, the New Zealand dollar 0.3%, and the Singapore dollar 0.1%. On the downside, the Swiss franc declined 0.4% and the euro dipped 0.1%. The Chinese (onshore) renminbi declined 0.49% versus the dollar (down 2.82%).

Commodities Watch:

The Bloomberg Commodities Index slipped 0.3% (down 11.5% y-t-d). Spot Gold was little changed at $1,948 (up 6.8%). Silver recovered 1.3% to $23.61 (down 1.5%). WTI crude declined 93 cents, or 1.3%, to $71.74 (down 11%). Gasoline sank 7.5% (up 2%), and Natural Gas sank 10.1% to $2.17 (down 52%). Copper rallied 1.2% (down 2%). Wheat increased 0.5% (down 22%), and Corn gained 0.8% (down 10%). Bitcoin rose $500, or 1.9%, this week to $27,240 (up 64%).

Global Bank Crisis Watch:

May 31 – Yahoo Finance (David Hollerith): “US banks lost $472 billion in deposits in the first quarter, according to a new quarterly report from the Federal Deposit Insurance Corporation (FDIC) that offers a comprehensive look at how the industry navigated its most challenging period since the 2008 financial crisis. The deposit decline was the largest since the FDIC began collecting quarterly industry data in 1984 and marked the fourth consecutive quarter of industry outflows.”

May 31 – Financial Times (Stephen Gandel): “Turmoil among US banks has depleted the government-backed fund that protects depositors, giving it the least firepower in almost a decade to cover losses from future lender failures. The federal Deposit Insurance Fund contained $116bn in assets at the end of the first quarter, down from $128bn at the end of 2022… The ratio of assets to insured deposits in the US banking system fell to 1.1%, the lowest since 2015 and less than the minimum of 1.35% required by law… The failures of Silicon Valley Bank and Signature Bank in March cost the fund $20bn. The first-quarter figures do not reflect the subsequent failure of First Republic, which cost the fund another $13bn, and would make the fund’s finances look even worse.”

Debt Ceiling Watch:

June 2 – Reuters (Richard Cowan and Gram Slattery): “The U.S. Senate on Thursday passed bipartisan legislation backed by President Joe Biden that lifts the government's $31.4 trillion debt ceiling, averting what would have been a first-ever default. The Senate voted 63-36 to approve the bill that had been passed on Wednesday by the House of Representatives, as lawmakers raced against the clock following months of partisan bickering between Democrats and Republicans.”

Market Instability Watch:

May 28 – Financial Times (Steve Johnson): “Exchange traded funds accounted for a record 30.7% of US stock market turnover last year, a jump of more than a fifth from their 25.3% share in 2021… The data, revealed in the latest report from the Investment Company Institute…, reignites concerns about their influence on the broader market and underlines their increasing use as shorter-term trading instruments for participants looking to rapidly change market exposure, analysts say. Shelly Antoniewicz, senior director… at the ICI, attributed ETFs’ higher share of turnover last year to ‘elevated market volatility’. ‘During periods of market turbulence, ETF secondary market trading [of ETF shares] volumes rise — both in absolute terms and as a share of total stock market trading — as investors, especially institutional investors, turn to ETFs to quickly and efficiently transfer and hedge risks,’ she said.”

May 31 – Financial Times (Martin Arnold): “Eurozone bond markets are at risk of a sell-off caused by a sudden retreat of Japanese investors if the Bank of Japan ends its ultra-loose monetary policy, the European Central Bank has warned. ‘If the Bank of Japan decides to normalise its policy, this might influence the decisions of Japanese investors who have a large footprint in global financial markets, including the euro area bond market,’ the ECB said… The ECB said the risk of ‘Japanese investors withdrawing abruptly from the euro area bond market’ was among the myriad possible threats to the eurozone financial system, while it judged the bloc to be largely resilient… The fallout from a potential policy shift in Japan would be accentuated for eurozone debt markets because it would coincide with the ECB starting to shrink its own bond holdings this year…”

May 31 – Reuters (Balazs Koranyi and Leika Kihara): “Policy normalisation by the Bank of Japan could test the resilience of global bond markets, the European Central Bank warned… in an unusually strong message about policy prospects in another jurisdiction. Bank of Japan (BOJ) Governor Kazuo Ueda has said the central bank is unwavering in its stance of patiently maintaining ultra-loose monetary policy, reassuring markets Japan will be a dovish outlier as its global peers combat stubbornly high inflation… ‘A shift away from the low interest rate environment in Japan could test the resilience of global bond markets,’ the ECB said…, arguing that higher rates at home could lead to a repatriation of vast sums held by Japanese investors overseas… Inflation in Japan has been increasing over the past year, leading market participants to expect the Bank of Japan to start normalising its monetary policy,’ the ECB added.”

May 30 – Financial Times (Martin Arnold): “The largest eurozone lenders are exposed to ‘spillovers’ of stress from outside the banking system, relying on so-called shadow banks for more than 15% of their funding, the European Central Bank has warned. The rapid growth of shadow banks — a group that includes insurers, hedge funds, asset managers and pension funds — since the 2008 financial crisis has left eurozone lenders increasingly vulnerable to ‘liquidity, market and credit risks’, the ECB said… Researchers at the central bank found the 13 largest banks in the eurozone account for about 80% of all borrowing from shadow banks, or non-bank financial intermediaries (NBFI). ‘Any turmoil in the NBFI sector is likely to disproportionately affect large, complex, systemically important banks, as asset exposures, funding linkages and derivative exposures are concentrated in this group,’ the officials said.”

Bubble and Mania Watch:

May 30 – Wall Street Journal (Peter Grant): “Some of New York’s best known real-estate developers are unloading their least viable office buildings at deep discounts… RXR defaulted on the $240 million loan on its 33-story office tower in lower Manhattan. The developer… has said that it will turn over ownership of the office tower at 61 Broadway to whoever buys the defaulted debt. That mortgage is being marketed by commercial real-estate services firm JLL and will likely go for about half the $440 million valuation of the building in 2016… Silverstein Properties… has agreed to sell a 20-story office building on Fifth Avenue near Bryant Park for $105 million, or $66 million less than the amount that Silverstein refinanced the building for in 2020. Giant investment firm Blackstone also recently sold a 49% stake in One Liberty Plaza valuing the tower at $1 billion, down from the $1.5 billion valuation when Blackstone bought the stake in 2017… These cut-rate sales and sales efforts attest to the troubled state of the office market, which is suffering one of its worst downturns since World War II…”

June 1 – Financial Times (Harriet Clarfelt): “The resilience of the $1.4tn US junk bond market is puzzling investors worried about higher interest rates and an economic downturn. Despite concerns over the health of the world’s biggest economy, with some market indicators pointing to recession, yields have fallen since highs last autumn while spreads over government debt have tightened in recent months… Current high-yield spreads ‘are an ongoing mystery’, said Marty Fridson, chief investment officer at investment firm Lehmann, Livian, Fridson Advisors. ‘There’s really no evidence of the market expecting recession at this point.’”

May 30 – Wall Street Journal (Tom McGinty, Shane Shifflett and Amrith Ramkumar): “The SPAC boom cost investors billions. Insiders in the companies that went public were on the other side of the trade. Executives and early investors in companies that went public via special-purpose acquisition companies sold shares worth $22 billion through well-timed trades, profiting before share prices collapsed. Some of the biggest winners were Detroit Pistons owner Tom Gores’s investment firm Platinum Equity, British billionaire Richard Branson and convicted Nikola triangle founder Trevor Milton. They were among many insiders who got shares on the cheap and sold them as they rose in value…”

May 28 – Reuters (Kevin Buckland): “Japan's Nikkei share average rose on Monday to its highest level since July 1990, buoyed by optimism over a U.S. debt ceiling deal and a weaker yen. Shares of Japanese chip-related companies continued to outperform after AI euphoria lifted Wall Street peers.”

Ukraine War Watch:

May 31 – Reuters (Guy Faulconbridge and Pavel Polityuk): “Ukrainian drones struck wealthy districts of Moscow on Tuesday, Russia said in what one politician called the most dangerous attack on the capital since World War Two, while Kyiv was also hit from the air for the third time in 24 hours… Aerial strikes on targets far from the front have intensified amid a ragged stalemate on the ground with Russian forces entrenched along an extended line in Ukraine's east and south.”

May 28 – Reuters (Valentyn Ogirenko and Gleb Garanich): “Russia unleashed waves of air strikes on Kyiv overnight in what officials said was the largest drone attack of the city but crowds poured into the streets later on Sunday to celebrate the anniversary of the Ukrainian capital's founding. Ukrainian military said it had downed 58 of the 59 launched drones, described by the air force as a record assault with the Iranian-made ‘kamikaze’ drones. President Volodymyr Zelenskiy said all 36 drones targeting Kyiv had been destroyed.”

May 31 – Reuters (Guy Faulconbridge and Vladimir Soldatkin): “Drones attacked two oil refineries just 40-50 miles (65-80 km) east of Russia's biggest oil export terminals on Wednesday, sparking a fire at one and causing no damage to the other, according to Russian officials. Drone attacks deep inside Russia have intensified in recent weeks with strikes on Moscow, oil pipelines and even the Kremlin ahead of a Ukrainian counter-offensive.”

May 28 – Reuters (Ron Popeski): “Western countries left Belarus no choice but to deploy Russian tactical nuclear weapons and had better take heed not to ‘cross red lines’ on key strategic issues, a senior Belarusian official was quoted as saying… Alexander Volfovich, state secretary of Belarus' Security Council, said it was logical that the weapons were withdrawn after the 1991 Soviet collapse as the United States had provided security guarantees and imposed no sanctions. ‘Today, everything has been torn down. All the promises made are gone forever’…”

May 30 – Financial Times (Max Seddon and Christopher Miller): “Vladimir Putin has vowed to retaliate against what he claimed were Ukrainian drone strikes on Moscow, which exposed Russia’s growing vulnerability to blowback from his invasion. Russia’s president accused Ukraine of ‘terrorist activity’ and ‘provoking us to respond with tit-for-tat measures’ after strikes hit residential areas in the Russian capital…, which he said were aimed at ‘scaring Russian citizens and hitting residential buildings.’ Although Putin did not say how Moscow would respond and claimed Russia did not attack civilian targets in Ukraine, he made his first reference for several months to a possible nuclear escalation of the war, accusing Ukraine of trying to cause an accident at a nuclear power plant in occupied Zaporizhzhia or use a dirty bomb.”

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

May 30 – Reuters (Lidia Kelly): “Washington is encouraging Kyiv by publicly ignoring the drone attack that struck several districts of Moscow on Tuesday, Russia's envoy to the United States said…, after President Vladimir Putin blamed Ukraine for the strikes. The White House said it did not support attacks inside of Russia and that it was still gathering information on the incident, which Putin called an attempt to scare and provoke Moscow.”

May 27 – Reuters (Guy Faulconbridge): “Russia… dismissed criticism from U.S. President Joe Biden over Moscow's plan to deploy tactical nuclear weapons in Belarus, saying Washington had for decades deployed just such nuclear weapons in Europe. Russia said… it was pushing ahead with the first deployment of such weapons outside its borders since the 1991 fall of the Soviet Union and Belarusian President Alexander Lukashenko said the weapons were already on the move…”

May 31 – CNN (Oren Liebermann and Haley Britzky): “A Chinese fighter jet conducted an ‘unnecessarily aggressive maneuver’ during an intercept of a US spy plane in international airspace over the South China Sea last week… The Chinese J-16 fighter cut directly in front of the nose of the US RC-135 Rivet Joint reconnaissance aircraft on May 26, forcing the US plane to fly through the wake turbulence of the intercepting aircraft. In video of the incident released by the US military, the turbulence is evident as it disturbs the US aircraft along its flight path. The RC-135 was conducting ‘safe and routine operations’ in international airspace, US Indo-Pacific Command said.”

May 31 – Financial Times (Kana Inagaki and Demetri Sevastopulo): “US defence secretary Lloyd Austin has called on Beijing to resume bilateral security talks, warning that incidents could ‘spiral out of control’ if China’s military continues to take provocative action in international waters and airspace… Austin said it was ‘unfortunate’ that Beijing declined the Pentagon’s request for him to meet China’s defence minister Li Shangfu at a security forum in Singapore this week. ‘I’m concerned about . . . having an incident that could very, very quickly spiral out of control,’ Austin said… ‘I think defence departments should be talking to each other on a routine basis.’”

De-globalization and Iron Curtain Watch:

May 27 – Reuters (David Lawder): “The United States ‘won't tolerate’ China’s effective ban on purchases of Micron Technology memory chips and is working closely with allies to address such ‘economic coercion,’ U.S. Commerce Secretary Gina Raimondo said… Raimondo told a news conference after a meeting of trade ministers in the U.S.-led Indo-Pacific Economic Framework talks that the U.S. ‘firmly opposes’ China's actions against Micron.”

May 28 – Reuters (Joe Cash and Bernard Orr): “Chinese Commerce Minister Wang Wentao urged Japan to halt semiconductor export controls, calling it a ‘wrongdoing’ that ‘seriously violated’ international economic and trade rules… China's latest condemnation of the export restrictions was made during Wang's talks with Japanese Trade Minister Yasutoshi Nishimura on May 26 at the Asia-Pacific Economic Cooperation (APEC) conference…”

May 31 – Wall Street Journal (John Keilman): “Fears of military conflict and increasing security worries have some U.S. manufacturers re-evaluating their reliance on China. Executives are plotting alternate supply chains or devising products that can be made elsewhere should China’s hundreds of thousands of factories become inaccessible. That prospect became more conceivable, they said, after the 2022 invasion of Ukraine prompted companies to sever ties with Russia… U.S. companies were further rattled after Chinese authorities recently questioned workers at… consulting firm Bain & Co. and raided the Beijing offices of Mintz Group…”

June 2 – Associated Press: “The United States signed a trade agreement Thursday with Taiwan over opposition from China, which claims the self-ruled island democracy as part of its territory. The two governments say the U.S.-Taiwan Initiative on 21st Century Trade will strengthen commercial relations by improving customs, investment and other regulation.”

May 31 – Financial Times (Kaye Wiggins, Thomas Hale and Joe Leahy): “Tensions between the US and China have upended the international order, making it more complex for business to deal with than during the cold war, JPMorgan chief executive Jamie Dimon has warned. On a day that manufacturing data showed the recovery in the world’s second-largest economy was faltering, Dimon also argued that ‘uncertainty’ about Beijing’s policies would hurt investor confidence. ‘Hopefully, we can work out all these differences, you know, with China and America and what it is doing to other allies, relationships and things like that’…”

June 1 – Bloomberg (S'thembile Cele and John Bowker): “BRICS nations asked the bloc’s specially created bank to provide guidance on a how a potential new shared currency might work, including how it could shield other member countries from the impact of sanctions such as those imposed on Russia. The foreign ministers of Brazil, Russia, India, China and South Africa convened in Cape Town earlier Thursday to discuss how the bloc can win greater global influence and to challenge the US.”

Inflation Watch:

May 27 – New York Times (Martha C. White): “More Americans are raiding their retirement accounts as the cost of living climbs, and experts predict that the number of workers drawing on their 401(k)s to pay for financial emergencies may increase due to a confluence of factors, like new provisions that make withdrawals easier and high inflation that is straining household budgets. ‘It’s just more expensive to live these days, and that’s what’s putting the pinch on participants,’ said Craig Reid, national retirement practice leader at Marsh McLennan Agency... ‘Some of it is still spillover from the Covid pandemic. A lot of it is inflation — just the grind of daily life.’”

May 30 – New York Times (Talmon Joseph Smith and Joe Rennison): “The prices of oil, transportation, food ingredients and other raw materials have fallen in recent months as the shocks stemming from the pandemic and the war in Ukraine have faded. Yet many big businesses have continued raising prices at a rapid clip. Some of the world’s biggest companies have said they do not plan to change course and will continue increasing prices or keep them at elevated levels for the foreseeable future. That strategy has cushioned corporate profits. And it could keep inflation robust, contributing to the very pressures used to justify surging prices.”

May 28 – Financial Times (Editorial Board): “There is perhaps no political variable more important throughout history than the price of food. No government, whether democratic or dictatorial, will be seen as legitimate by people who cannot afford to feed their families. So it is bad news that just as the price of energy is coming down from its extreme peaks last year, and households are beginning to feel that particular pinch loosen, food price inflation in much of the world remains stubbornly high. When UK inflation figures were published last week, the overall 12-month rate dropped as predicted… The cost of food, however, continues to increase: prices were 19% higher than a year ago…”

May 30 – Bloomberg (Rich Miller): “Former Treasury Secretary Lawrence Summers sees US interest rates headed higher in the short-run and US taxes rising significantly in the longer run as the world’s biggest economy comes to grips with a persistent inflation problem and burgeoning government debt… The Harvard University professor said the US seemed stuck with an underlying inflation rate of around 4.5% to 5% that’s more than double the Federal Reserve’s 2% target.”

May 31 – Financial Times (Martin Arnold): “Inflation in Germany and France has fallen faster than economists expected, hitting the lowest levels for at least a year and boosting hopes that cooling price pressures will allow monetary policymakers to stop raising eurozone interest rates soon. The drop in German annual inflation from 7.6% in April to 6.3% in May reflected a sharp slowdown in energy prices as well as lower inflation for food, other goods and services… French inflation fell to 6% in May, down from 6.9%.”

Federal Reserve Watch:

May 31 – Reuters (Howard Schneider and Ann Saphir): “Federal Reserve officials including the vice chair-designate pointed towards a rate hike ‘skip’ in June, prompting a quick reversal of market expectations for another hike as the U.S. central bank weighed the value of caution against still strong inflation data. In what some viewed as a message from the Fed's leadership, Fed Governor and vice chair nominee Philip Jefferson said any decision to hold rates steady should not be viewed as the end of the tightening cycle. ‘Skipping a rate hike at a coming meeting would allow the… Committee to see more data before making decisions about the extent of additional policy firming,’ Jefferson said… Leaning toward what some have called a ‘hawkish pause,’ with rates held steady for now but the door left open for further increases, Jefferson said that ‘a decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle.’”

June 1 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Philadelphia President Patrick Harker said the US central bank is close to the point where it can stop raising interest rates and turn to holding them steady in an effort to further bring down inflation. ‘I do believe that we are close to the point where we can hold rates in place and let monetary policy do its work to bring inflation back to the target in a timely manner,’ Harker said… ‘I think we should pause, because pause says we’re going to hold for a while — and we might,’ he said. ‘We should at least skip this meeting in terms of an increase. We can let some of these things resolve themselves, at least to the extent they can, before we consider — at all — another increase.’”

May 31 – Financial Times (Colby Smith): “A top official at the Federal Reserve said there was no ‘compelling’ reason to wait before implementing another interest rate rise should economic data confirm that more must be done to bring US inflation under control… Loretta Mester, president of the Cleveland Fed, pushed back against recent suggestions from some policymakers who argued the US central bank should forego a rate rise at its next meeting... ‘I don’t really see a compelling reason to pause — meaning wait until you get more evidence to decide what to do… I would see more of a compelling case for bringing [rates] up . . . and then holding for a while until you get less uncertain about where the economy is going.’”

May 31 – Bloomberg (Lucia Mutikani): “Federal Reserve Governor Michelle Bowman said rebounding home prices could impact the US central bank’s work to lower inflation, which Boston Fed President Susan Collins said remains ‘simply too high.’ ‘While we expect lower rents will eventually be reflected in inflation data as new leases make their way into the calculations, the residential real estate market appears to be rebounding, with home prices leveling out recently, which has implications for our fight to lower inflation,’ Bowman said… At the same event, Collins said the Fed is ‘intent on reducing inflation that’s just simply too high… I see price stability as a foundation for maximum employment that’s sustainable with a robust job market.’”

May 31 – Yahoo Finance (Jennifer Schonberger): “Hiring and pricing are still increasing, but at a slower pace, according to the Federal Reserve's Beige Book. The compilation of anecdotal evidence on the economy across the Fed’s 12 bank districts showed the labor market remained tight. The central bank’s contacts had difficulty finding workers across a wide range of skill levels and industries in April and May. But there was evidence the labor market had ‘cooled some’ across the various districts… Many contacts said ‘they were fully staffed, and some reported they were pausing hiring or reducing headcounts due to weaker actual or prospective demand or to greater uncertainty about the economic outlook.’ Inflation rose ‘moderately,’ according to the report, but the rate of increases slowed in many districts.”

U.S. Bubble Watch:

June 2 – CNBC (Jeff Cox): “The U.S. economy continued to crank out jobs in May, with nonfarm payrolls surging more than expected despite multiple headwinds… Payrolls in the public and private sector increased by 339,000 for the month, better than the 190,000… estimate and marking the 29th straight month of positive job growth. The unemployment rate rose to 3.7% in May against the estimate for 3.5%, even though the labor force participation rate was unchanged… Average hourly earnings, a key inflation indicator, rose 0.3% for the month… On an annual basis, wages increased 4.3%... The average workweek fell by 0.1 hour to 34.3 hours.”

May 31 – Reuters (Lucia Mutikani): “U.S. job openings unexpectedly rose in April and data for the prior month was revised higher, pointing to persistent strength in the labor market… The Job Openings and Labor Turnover Survey, or JOLTS report,… also showed layoffs declined significantly last month. There were 1.8 job openings for every unemployed person in April, up from 1.7 in March, and well above the 1.0-1.2 range that is considered consistent with a jobs market that is not generating too much inflation… Job openings…, increased by 358,000 to 10.1 million on the last day of April. Data for March was revised higher to show 9.75 million job openings instead of the previously reported 9.59 million.”

June 1 – CNBC (Jeff Cox): “The U.S. labor market posted another month of surprising strength in May as companies added jobs at a pace well above expectations, according to… ADP. Private sector employment increased by a seasonally adjusted 278,000 for the month, ahead of th… estimate for 180,000 and a bit lower than the downwardly revised 291,000 in April. May’s increase took the payroll growth so far in 2023 to 1.09 million. The ADP report noted that the distribution of job gains was ‘fragmented’ for the month, as increases were concentrated in leisure and hospitality, which added 208,000 positions, and natural resources and mining, which saw a gain of 94,000.”

June 1 – Dow Jones (Jeffry Bartash): “The U.S. labor market remains quite sturdy. The numbers: The number of Americans who applied for unemployment benefits at the end of May edged up to a three-week high of 232,000, but there's no sign of major layoffs and many businesses are still hiring. New jobless claims in the seven days ended May 27 rose by 2,000 from 232,000 in prior week… Layoffs rose early in the year but appear to have leveled off.”

May 30 – CNBC (Diana Olick): “Steep competition in the housing market and low supply are heating up home prices again. Nationally, home prices in March were 0.7% higher than March 2022, S&P CoreLogic Case-Shiller Indices said… ‘The modest increases in home prices we saw a month ago accelerated in March 2023,’ said Craig J. Lazzara, managing director at S&P DJI... ‘Two months of increasing prices do not a definitive recovery make, but March’s results suggest that the decline in home prices that began in June 2022 may have come to an end.’ The 10-city composite, which includes the Los Angeles and New York metropolitan areas, dropped 0.8% year over year, compared with a 0.5% increase in the previous month.”

June 1 – Bloomberg (Prashant Gopal): “US mortgage rates increased for a third straight week, reaching the highest level since November. The average for a 30-year, fixed loan climbed to 6.79%, up from 6.57% last week, Freddie Mac said…”

May 27 – Yahoo Finance (Rebecca Chen): “In many cities across the country, homes are selling for tens of thousands of dollars less — sometimes hundreds of thousands of dollars less — than just one year ago. In San Francisco, the median sales price was $220,000 lower than at the same time last year — the largest decline by dollar amount — wiping out 13.4% in equity. Prices in Oakland, California, saw the biggest drop percentage-wise, falling 16.1% or $174,500 less year over year, according to data published by Redfin.”

May 30 – The Hill (Daniel De Vise): “America’s credit card balance has passed $1 trillion, or it’s about to, depending on whom you ask. The average interest rate on a new card is 24%, the highest figure since the Reaganomics era. A typical American household now carries $10,000 in credit card debt…, another record... At $250 per month, with 24% interest, you’ll be making payments until 2030, and you’ll spend a total of $20,318, twice what you owed. And that assumes you never use the card again. ‘It’s hard to build wealth when you’re paying 20% interest every month,’ said Ted Rossman, a senior industry analyst at The nation’s credit card debt stands at $986 billion, according to the Federal Reserve. The figure has climbed by $250 billion in two years… A WalletHub report put total card debt at $1.2 trillion at the end of 2022.”

June 1 – Yahoo Finance (Jared Mitovich): “More young Americans are late paying their car loans – approaching levels not seen since the Great Recession, according to… the New York Fed. In the last quarter, 4.6% of borrowers under 30 transitioned into serious delinquency – meaning they were at least 90 days overdue on an auto loan payment. This figure is up from a year ago and is the highest percentage since the tail end of the Great Recession in 2009, when it was 4.7%. Across all ages, the number of new auto loans and leases totaled $162 billion last quarter, down from last year, but an increase from the volume before the pandemic.”

June 1 – Bloomberg (David Hollerith): “Bank of America's Brian Moynihan said… US consumer spending ‘has slowed down’ after a series of interest-rate cuts from the Federal Reserve… Moynihan cited less spending on homes and autos as well as restaurants. What consumers spend to dine out, he said, has fallen to 3% year-over-year growth as compared to 17% just three or four months ago.”

May 30 – Reuters (David Shepardson): “U.S. holiday air passenger travel topped 2019 pre-COVID levels over the Memorial Day weekend, which typically marks the start of the busy U.S. summer air travel season… The TSA said nearly 9.8 million passengers were screened or passed though security checks over the four-day weekend, about 300,000 more than over the same holiday period in 2019…”

May 30 – Associated Press (Alexandra Olson): “After ballooning for years, CEO pay growth is finally slowing. The typical compensation package for chief executives who run S&P 500 companies rose just 0.9% last year, to a median of $14.8 million, according to… Equilar. That means half the CEOs in the survey made more and half made less. It was the smallest increase since 2015. Still, that’s unlikely to quell mounting criticism that CEO pay has become excessively high and the imbalance between company bosses and rank-and-file workers too wide… The smaller increase came after CEO pay soared 17% in 2021…”

Fixed Income Watch:

May 29 – Financial Times (Eric Platt): “Wall Street is slowly revving back up its junk debt machine. Banks have agreed to lend billions of dollars to finance leveraged buyouts by Apollo Global, Elliott Management, Blackstone and Veritas Capital in recent months… It is welcome news for the private equity behemoths who are sitting on hundreds of billions of dollars of dry powder and searching for attractive financing options, as higher interest rates eat into their returns. Bankers say that, despite the turmoil that hit the banking sector this spring, underwriting is becoming a more attractive option once again. ‘Silicon Valley Bank and Credit Suisse hit just when we were catching a bid, slowing us down,’ said Chris Blum, the head of corporate finance at BNP Paribas. ‘[But] you’re starting to see the syndicated option come back.’”

China Watch:

May 31 – Bloomberg: “China’s economic recovery weakened in May, raising fresh fears about the growth outlook and prompting calls for more central bank action... Manufacturing activity contracted at a worse pace than in April, while services expansion eased…, suggesting the post-Covid rebound had lost momentum. Investors sold off everything from Chinese shares and the yuan to copper and iron ore… ‘The sharper contraction in the manufacturing PMI suggests that the risk of a downward spiral, especially in the manufacturing sector, is becoming more real,’ Lu Ting, chief China economist at Nomura… wrote…”

June 1 – Reuters (Liangping Gao, Joe Cash and Ryan Woo): “China's factory activity unexpectedly swung to growth in May from decline, a private sector survey showed on Thursday, driven by improved production and demand, helping struggling firms that have been hit by slumping profits. The Caixin/S&P Global manufacturing purchasing managers' index (PMI) rose to 50.9 in May from 49.5 in April…”

June 2 – Bloomberg (Tom Hancock): “Financial stress faced by China’s local governments is limiting fiscal support for the economy’s recovery, with half of cities experiencing difficulty in managing the interest payments on their debt last year. That’s according to a report by Rhodium Group researchers, who examined annual reports from 205 Chinese cities and nearly 3,000 local government financing vehicles, or LGFVs, the state-owned companies that carry out infrastructure investment. Half of cities faced debt service costs above 10% of their total income, a threshold the researchers see as indicating difficulty managing debt servicing costs. That’s up from a third in 2021.”

May 31 – Reuters (Georgina Lee and Tom Westbrook): “China's cash-strapped local governments have suddenly rushed to an unusual corner of the debt market in Shanghai where ambiguous rules offer ways to skirt restrictions on onshore borrowing. Some analysts have described local government financing vehicles (LGFVs) as the ‘black hole’ of China's financial system, with debts of more than $9 trillion and rising. But Beijing is counting on their continued spending to help lift a patchy economic recovery. Sales by LGFVs of so-called ‘pearl bonds’, which are issued as foreign debt in Shanghai's free trade zone, have soared to a record 72 billion yuan ($10bn) so far this year… - nearly double last year's total.”

May 30 – Wall Street Journal (Stella Yifan Xie and Jason Douglas): “China’s era of rapid growth is over. Its recovery from zero-Covid is stalling. And now the country is facing deep, structural problems in its economy… The property boom and government overinvestment that fueled growth for more than a decade have ended. Enormous debts are crippling households and local governments. Some families, worried about the future, are hoarding cash. Chinese leader Xi Jinping’s crackdowns on private enterprise have discouraged risk-taking, while deteriorating relations with the West—exemplified by a new campaign against international due-diligence and consulting firms—are stifling foreign investment.”

May 30 – CNBC (Evelyn Cheng): “New data show China’s massive property sector is still struggling to turn around, despite signs of recovery earlier this year. ‘In a reversal from April, prices accelerated in the housing market but sales slowed,’ the U.S.-based China Beige Book said… That’s based on the research firm’s survey of 1,085 businesses... ‘In commercial property, both pricing and transactions weakened sharply,’ the report said. ‘Poor results in construction and reduced fiscal activity sent copper producers’ May earnings and production into contraction’… New home sales for the week ended May 28 grew by 11.8% from a year ago, a sharp slowdown from 24.8% growth a week earlier, pointed out Nomura’s chief China economist Ting Lu…”

May 31 – Bloomberg: “China’s home sales growth abated in May following a brief rebound, underscoring weakening momentum in the economy. The value of new home sales by the 100 biggest real estate developers rose 6.7% to 485.4 billion yuan ($68.3bn) from a year earlier, according to… China Real Estate Information Corp. That compares with gains of more than 29% in the previous two months. Sales fell 14.3% month-on-month… High-frequency indicators in recent weeks show momentum in home purchases is fizzling, despite Beijing’s effort to prop up the market. The country issued sweeping support measures for the industry in November.”

June 2 – Bloomberg: “China is working on a new basket of measures to support the property market after existing policies failed to sustain a rebound in the ailing sector, according to people familiar... Regulators are considering reducing the down payment in some non-core neighborhoods of major cities, lowering agent commissions on transactions, and further relaxing restrictions for residential purchases under the guidance of the State Council…”

May 31 – Bloomberg (Lulu Yilun Chen): “China Evergrande Group’s money management arm said it fell short on payments for investment products this month due to a liquidity crunch. The Chinese developer said that it’s been disposing assets to raise money for the payments, but due to setbacks it won’t be able to pay the targeted amount to investors…”

May 29 – CNBC (Clement Tan): “As youth unemployment in China rises to a record high, college graduates are caught in a perfect storm — with some forced to take on low-paying jobs or settle for jobs below their skill levels. Official data shows urban unemployment among the 16- to 24-year-olds in China hit a record 20.4% in April… ‘This college bubble is finally bursting,’ said Yao Lu, a professor of sociology at Columbia University... ‘The expansion of college education in the late 1990s created this huge influx of college graduates, but there is a misalignment between demand and supply of high skilled workers. The economy hasn’t caught up.’”

May 31 – Reuters (Laurie Chen): “Applied maths graduate Liang Huaxiao tried to land a job with one of China's tech giants for two years. Then she tried customer service and sales. Then she applied for assistant roles in a bakery and in a beauty parlour. Like a rising number of her highly educated peers, Liang keeps trading down to try and find a source of income in China's worst youth job market on record. ‘Finding a job has been really difficult,’ said the 25-year-old, who lives with her parents… ‘I told my family that I'm willing to take up manual labour and my mum straight-up cried. She felt so sorry for me.’”

Central Banker Watch:

May 31 – Bloomberg (Jana Randow and Nicholas Comfort): “The European Central Bank said that financial markets will be vulnerable to negative shocks as it continues the fight against inflation, with real estate among the sectors at risk. Higher interest rates are testing the resilience of households, companies, governments and property markets, the institution said… in its biannual Financial Stability Review. That’s leaves investors potentially exposed to disorderly adjustments, it cautioned.”

Europe Watch:

May 26 – Bloomberg (William Horobin): “The outlook on France’s credit rating was reduced to negative from stable by Scope Ratings, raising questions about President Emmanuel Macron’s efforts to spur growth and reduce a crisis-swollen debt burden. The Europe-based credit rating firm said it changed the outlook on its AA rating due to weakening public finances and implementation risks to the agenda for economic reforms… The rating actions are sharpening focus on challenges France faces to pare back a budget deficit that ballooned during Covid pandemic and has only decreased slowly as the government spent vast sums limiting energy prices.”

June 1 – Wall Street Journal (Bojan Pancevski): “U.S. and European diplomats are rushing to contain spiraling violence at the heart of Europe and prevent a fresh conflict on a continent shaken by Russia’s invasion of Ukraine. The clashes took place in Kosovo, one of a string of small Balkan nations created after the violent breakup of Yugoslavia in the 1990s… After simmering for months, the confrontation exploded when Kosovo pushed to forcibly install ethnic Albanian mayors in areas populated by ethnic Serbs following a local election largely boycotted by the Serbs and dismissed by international observers as unrepresentative.”

Japan Watch:

May 29 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Bank of Japan Governor Kazuo Ueda said… the central bank will patiently maintain its ultra-loose monetary as there is some distance to sustainably achieve its 2% inflation target, downplaying expectations for a policy change in the near-term. ‘We expect inflation to quite clearly slow below 2%’ toward the middle of the current fiscal year, Ueda told parliament. ‘Inflation is likely to rebound thereafter ... though there is high uncertainty’ on the outlook, he added… ‘(We) will patiently continue monetary easing as there's still distance to achievement of sustainable and stable 2% price hikes together with continued rises in wages,’ Ueda said…”

May 30 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan will refrain from changing its yield curve control program while speculation continues to swirl that Prime Minister Fumio Kishida will call a snap election, according to a former board member. ‘It’s going to be pretty tough’ for the bank to raise rates in July, former board member Makoto Sakurai said…, adding that economists and market watchers may also have underestimated the central bank’s continued concern about the financial sector. ‘The BOJ will probably keep watching developments at least until around the third quarter.’”

May 29 – Reuters (Kentaro Sugiyama): “Japan's jobless rate fell to 2.6% in April from 2.8% in the previous month… The… unemployment rate was below economists' median forecast of 2.7% in a Reuters poll. The jobs-to-applicants ratio stood at 1.32, unchanged from March…”

EM Watch:

May 28 – Reuters (Can Sezer, Ali Kucukgocmen and Huseyin Hayatsever): “President Tayyip Erdogan extended his two decades in power in elections on Sunday, winning a mandate to pursue increasingly authoritarian policies which have polarised Turkey and strengthened its position as a regional military power. His challenger, Kemal Kilicdaroglu, called it ‘the most unfair election in years’ but did not dispute the outcome. Official results showed Kilicdaroglu won 47.9% of the votes to Erdogan's 52.1%, pointing to a deeply divided nation.”

May 30 – Financial Times (Adam Samson): “Turkey’s lira has weakened by the most in almost a year as traders fret over a continuation of President Recep Tayyip Erdoğan’s ‘unsustainable’ economic policies after he swept to victory in this weekend’s election. The lira fell 1.2% to a new record low of 20.36 against the US dollar as trading resumed in London… The currency, which has lost a fifth of its value over the past year, has not ended a day down by such a wide margin since June 2022… Many economists argue that Erdoğan’s policies of low interest rates and emergency measures to prop up the lira cannot continue as Turkey’s stores of currency reserves rapidly decline and other indicators flash warning signs.”

June 2 – Bloomberg (Patrick Gillespie): “China will allow Argentina to freely spend more of a 130 billion yuan currency swap line the nations share after leaders met Friday in Beijing. Chinese officials approved Argentina tapping up to 70 billion yuan ($9.89bn) of the swap line, up from a previous limit of about 35 billion yuan… That gives Economy Minister Sergio Massa more breathing room to battle a peso selloff that’s helping to fuel 100% inflation in cash-strapped Argentina before a presidential election later this year.”

Leveraged Speculation Watch:

June 1 – Bloomberg (Nishant Kumar): “When portfolio manager David Lipner said he was quitting billionaire Izzy Englander’s Millennium Management to join a rival, the hedge fund countered with an unusual proposal: A one-year paid sabbatical and an incentive upon return if Lipner stayed. And stay he did. For Millennium, the $58 billion industry giant known for ruthlessly cutting underperformers, the generous offer was seen as totally worth it… Last year, a senior portfolio manager was lured by a major New York fund with more than $120 million in guaranteed payouts, according to a headhunter who said he’d done several deals paying north of $50 million. Contracts worth $10 million to $15 million are increasingly becoming common for traders... Hedge funds have long been the land of eye-popping rewards, but a few recent trends are converging to take it to new levels.”

Social, Political, Environmental, Cybersecurity Instability Watch:

May 31 – Associated Press (Seth Borenstein): “Earth has pushed past seven out of eight scientifically established safety limits and into ‘the danger zone,’ not just for an overheating planet that’s losing its natural areas, but for the well-being of people living on it, according to a new study. The study looks not just at guardrails for the planetary ecosystem but for the first time it includes measures of ‘justice,’ which is mostly about preventing harm for countries, ethnicities and genders. The study by the international scientist group Earth Commission… looks at climate, air pollution, phosphorus and nitrogen contamination of water from fertilizer overuse, groundwater supplies, fresh surface water, the unbuilt natural environment and the overall natural and human-built environment. Only air pollution wasn’t quite at the danger point globally.”

May 29 – Financial Times (Andrew Edgecliffe-Johnson): “US retailers are warning of a surge in thefts, costing some of them hundreds of millions of dollars as they try to outwit organised criminals with extra security and surveillance. Target has alerted investors that ‘shrink’… will cut its profits this year by $500mn more than in 2022. DIY retailers such as Home Depot and dollar stores including Dollar Tree said shrink had cut their gross margins by several basis points in the first quarter, while Foot Locker was among several retailers citing a ‘significant’ year-on-year increase. Retailers’ concerns about shoplifting grew through the economic and social upheavals of the pandemic, with the industry losing almost $100bn to shrink in 2021…”

June 1 – Reuters (Daniel Trotta): “The state of Arizona… restricted future home-building in the Phoenix area due to a lack of groundwater, based on projections showing that wells will run dry under existing conditions. The action by the Arizona Department of Water Resources stands to slow population growth for the Phoenix Active Management Area, home to 4.6 million people and one of the most rapidly expanding areas of the United States.”

May 30 – Bloomberg (David Stringer): “China, the world’s biggest greenhouse gas emitter, can beat its existing climate targets and hit net zero by 2050 if the nation lifts investment in decarbonization to about $38 trillion.”

Geopolitical Watch:

May 31 – Reuters (Hyonhee Shin and Chang-Ran Kim): “A North Korean satellite launch… ended in failure, sending the booster and payload plunging into the sea, North Korean state media said… The new ‘Chollima-1’ satellite launch rocket failed because of instability in the engine and fuel system, state news… reported. The flight was the nuclear-armed state's sixth satellite launch attempt, and the first since 2016.”

May 30 – Wall Street Journal (Benoit Faucon and Dion Nissenbaum): “The United Arab Emirates has pressed the U.S. to make more muscular moves to deter Iran after the Islamic Republic’s military seized two oil tankers in the Gulf of Oman in recent weeks, U.S. and Gulf officials said. The Emirati complaints… mark another moment of disappointment among America’s Middle East partners with security in the Persian Gulf… Gulf officials say the U.S. has failed to do enough to deter attacks in recent years from Iranian proxies, undermining their faith in Washington’s commitment to the region. This time, U.S. officials said the Emiratis were frustrated by the lack of an American response to Iran’s seizure of tankers on April 27 and May 3.”