Friday, January 13, 2023

Weekly Commentary: Market Messaging

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December 31. It’s just a day on the calendar. But what a difference a day makes. The final day of the tax year. And, especially after 2022 losses, there was surely atypically large year-end tax-related selling.

Probably even more significant, the 31st ended the quarter and year for fund performance purposes. There’s less focus on the “window dressing” phenomenon than in the past, but it’s almost human nature to do a little trading that might on the margin present returns in a more favorable light. It can help bonuses. And price tinkering can be more important for hedge funds and other players, where (up to billions of) “incentive compensation” is generated by taking a percentage (traditionally 20%) of fund investment returns.

The beginnings of years present analytical challenges. Attempting to read the tea leaves. Reassessment. Strategies in flux. Money on the move.

There is every reason to approach early 2023 with an intense analytical focus. December 31st concluded a historic Bubble year inflection point. It was certainly an extraordinary year in the markets – stocks, Treasuries, corporate bonds, commodities and currencies. Policy was remarkable, with global central banks orchestrating a concerted hawkish pivot. The launching of the most aggressive U.S. tightening cycle in decades. The bursting of China’s epic Bubble. Russia invades Ukraine. And in the face of myriad headwinds, historic U.S. and Chinese Credit booms were unrelenting.

It’s an intriguing first two weeks of the New Year, to say the least. The S&P500 gained 4.20% in the first nine trading sessions of the year, strong yet significantly lagging the broader market. The small cap Russell 2000 enjoys a y-t-d gain of 7.10%, and the S&P400 Midcap Index 6.20%. The “average stock” Value Line Arithmetic Index has surged a notable 7.50%. The Nasdaq100 is up 5.50%.

At the top of the sector leaderboard, the Philadelphia Gold & Silver Index has an early-2023 gain of 13.11%, the Philadelphia Semiconductor Index (SOX) 10.61%, the Philadelphia Oil Services Index 9.24%, the Nasdaq Transports 9.00%, the NYSE TMT Index 8.38%, and the Nasdaq Telcom Index 7.96%. The KBW Bank Index is up 6.72%, the NYSE Financial Index 6.75%, and the Bloomberg REIT Index 6.45%.

Despite all the talk of recession and rapidly waning inflation, Gold has gained a quick $96 (5.3%) to start the year. Copper has jumped 10.6%. Tin is up 16%, Zinc 12%, and Aluminum 9%.

After a timid start, the Goldman Sachs Most Short Index caught fire this week with a 15.7% surge (up 14.3% y-t-d) – the strongest weekly gain since April 2020.

Markets are in the throes of a major short squeeze. While the majority of hedge funds lost money last year, some large macro funds (i.e. Millennium, AQR, Rokos) enjoyed a banner year. Hedge Fund Research’s index of macro hedge funds posted a 14.2% 2022 return. Popular 2022 macro trades included shorts in bonds, U.S. Bubble stocks, European equities and the yen. Key markets have reversed abruptly and significantly, catching poorly positioned funds with quick losses to begin 2023.

The yen has a two-week gain versus the dollar of 2.54%. As a proxy, the U.S. iShares Treasury Bond ETF (TLT) has surged 7.22% to begin the year, with the iShares Investment-Grade Corporate ETF (LQD) up 4.78% (largest 2-wk gain since April 2020) and the iShares High Yield ETF (HYG) gaining 4.09%. What is surely a huge short in the bond market is suddenly inflicting painful losses. And after benefiting from Treasury bond underperformance in 2022, those leveraged long in corporate debt while hedged (short) with Treasuries are suffering an abrupt reversal of fortune.

In European equities, the Euro Stoxx 50 Index already sports a y-t-d gain of 9.42%. Germany’s DAX has jumped 8.35%, France’s CAC40 8.49%, Italy’s MIB 8.76% and Sweden’s OMX 8.50%. In Asia, Hong Kong’s Hang Seng Index has gained 9.89%, South Korea’s KOSPI 6.69%, China’s CSI300 5.24%, Taiwan’s TAIEX 4.86%, and Australia’s ASX200 4.11%.

Ten-year government yields are already down 69 bps in Italy, 46 bps in Greece, 36 bps in Portugal, and 35 bps in Spain. French yields are 35 bps lower, with German yields 28 bps lower. Ten-year yields are down 193 bps in Hungary, 90 bps in Colombia, 86 bps in Poland, 73 bps in Czech Republic, 66 bps in Romania, 57 bps in Mexico, 49 bps in South Africa, and 43 bps in South Korea.

It matters that some big macro funds are suffering early losses. When leveraged, losses dictate a risk management focus. Widening “leveraged speculating community” losses would boost the odds of problematic de-risking/deleveraging dynamic reemerging later in the year. But for now, this big, cross asset short squeeze (buying to unwind shorts and hedges) is a major liquidity-generating event.

Financial conditions indicators are flashing risk embracement and loose conditions. Investment-grade CDS traded this week to the low (70bps) since last April, with high yield CDS near lows (421bps) since April. JPMorgan, Bank of America, Citigroup, Goldman and Morgan Stanley CDS all traded Friday at nine-month lows. Investment-grade corporate spreads to Treasuries traded to the narrowest margin since April (high yield near lows since April).

“One has to be careful of false dawns. I would stick with my view that a recession this year is more likely than not,” commented Larry Summers Friday on Bloomberg television. “Bond king” Jeffrey Gundlach this week said the yield curve was “screaming recession” – “there’s so many recession indicators that are now flagging.” This follows last month’s, “I think the odds are probably greater than 75% that there’s a rate cut in 2023.”

Market optimism is likely a false dawn, and the big cross asset short squeeze could certainly prove one dazzling flash in the pan. Yet financial conditions this loose should not be ignored. I would expect recessionary forces to be held at bay.

Squeezes have long been a fixture of markets, and the more speculation, the more prominent squeeze dynamics become. Markets have been so speculative in recent years that squeezes have become commonplace. The current one is uncommon.

Importantly, this squeeze can act as the system’s major source of marginal liquidity at a critical juncture. There have been indications of tightening bank lending standards, with some waning momentum for the historic lending (bank, non-bank, “private Credit,” etc.) boom. Rallying securities markets and associated loosening hold the potential to spur market-based Credit growth while extending lending excess – working to essentially extend “Terminal Phase” Credit Bubble excess.

Gundlach: “My 40 plus years of experience in finance strongly recommends that investors should look at what the market says over what the Fed says.” And from a recent tweet: “There is no way the Fed is going to 5%. The Fed is not in control. The bond market is in control.”

A major loosening of market financial conditions creates a tailwind for inflation and the economy, significantly boosting the odds the Fed surpasses 5%. The Federal Reserve may not be in control, but they should be expected to push back. Fed officials surely recognize that celebratory Wall Street assertions of mission accomplished in the war on inflation are dangerously premature.

I’m always trying to discern messages from the markets, especially bonds. Bond messaging was notably amiss one year ago, with 10-year Treasury yields at 1.70% (2-yr 98bps). Yields almost reached 3.5% in June, were back down to about 2.58% in August, and were back up to 4.25% by October. Ten-year yields ended this week at 3.50%. A hefty dose of skepticism regarding bond messaging is appropriate.

Conventional thinking has the bond market – yields and the yield curve – signaling 2023 recession. Rate markets basically have Fed funds peaking at 4.91% at the Fed’s May 3rd meeting, only to reverse course, with rates reduced to 4.47% by the December 13th meeting.

Rates markets are clearly at odds with Fed messaging. Powell and other members have been unambiguous. Rates are going higher for longer – and expect hesitancy to pivot to looser monetary policy. Bond market messaging is fuzzy. If rates were reflective of recession expectations, then yields should be responding to loosened conditions. One would think bonds would view the equities squeeze and “risk on” dynamic with growing apprehension. Yet the expected Fed funds rate at the May 3rd meeting was down three bps this week and six bps year-to-date. Two-year yields were 19 bps lower over two weeks – in the face of “risk on.”

If, on the other hand, messaging from the bond market is more to prepare for some type of accident, things are making more sense. The gilt market accident spurred an abrupt Bank of England pivot. While I’m skeptical there’s sufficient recession risk over the next six months to induce a Fed pivot, some type of market accident forcing the Fed’s hand this year seems perfectly reasonable.

And from this “accident” perspective, the rate and bond markets’ disregard for squeezes and loosened conditions seems rational. After all, the instability and speculative dynamics unleashed only work to raise the odds of a subsequent accident: An everything squeeze and upside dislocation increases the likelihood of an eventual everything reversal and downside dislocation (“crash”). If everyone gets all bull up - boosting exposures and leverage while unwinding shorts and hedges – then everyone (on the same side of the boat) might later in the year simultaneously rush to sell and hedge in a destabilizing bout of de-risking/deleveraging/illiquidity.

The Federal Reserve faces a major dilemma. Markets are doing precisely what they didn’t want. Fed officials were hoping to tone down the aggressive rate hikes, while maintaining the pressure necessary to convince the markets not to loosen. It just didn’t work; market structure wouldn’t allow it.

And officials are now making a mistake by essentially pre-committing to small rate increases. Philadelphia Fed president Patrick Harker: “Hikes of 25 bps will be appropriate going forward.” Atlanta Fed President Raphael Bostic, Richmond Fed president Tom Barkin and others have suggested a 25 bps increase next month. Especially at the beginning of the year when market conditions are markedly loosening, Fed officials should be leaning hawkish and leaving the door wide open to more aggressive tightening measures.

And I understand why Chair Powell would choose to avoid discussing monetary policy in his Tuesday speech at the Riksbank. But he missed an opportunity to lean against loosening at what was potentially a critical market juncture.

January 8 – Financial Times (Steve Johnson): “Last year may have been one of the worst years ever for global markets, but sections of the exchange traded fund industry stormed to new records in a generally strong year... ETFs attracted net inflows of $867bn globally during the year, the second-highest on record after 2021’s $1.29tn peak, according to… BlackRock… But a number of asset classes went one better and chalked up their highest ever flows... Government bond ETFs saw net inflows of $181bn, more than in the three previous years combined…, with records broken across the curve, in short, intermediate, long and blended maturity funds. And while aggregate flows to equity ETFs slowed to $598bn from $1tn in 2021, emerging market equities set a fresh record, sucking in $110bn. Some defensive sectors also shattered their previous bests in 2022, such as healthcare ($20bn) and utilities ($6bn).”

2022 was a Bubble inflection point year. Things could have been a whole lot worse. Rather than destabilizing outflows, the ETF complex enjoyed another year of banner inflows. The hedge fund industry had some performance issues, but it was nothing close to panic deleveraging, mass redemptions, and industry crisis of confidence. The derivatives industry had a scare (September), but dislocation was saved for another day. And that hidden $65 TN of global speculative leverage that has the BIS worried remained snugly hidden.

After more than a decade of spectacular asset inflation, last year’s bear market was not enough to quash speculative impulses. The ETF complex, the leverage speculating community and derivatives markets inflated only larger.

There’s ample support for the thesis that we’re in the initial stage of what will be a most protracted and grueling bear market. From this perspective, it’s fitting to see a recovery in bullishness and speculative excess. Bull market expectations are deeply ingrained. The Crowd will buy the dips and commit more financial resources to the market all the way down – until the shock.

And while powerful squeezes captivate the marketplace, potential accident catalysts make steady headway.

January 13 – Reuters (Kevin Buckland and Junko Fujita): “The yield on Japan’s benchmark 10-year government bonds breached the central bank’s new ceiling on Friday in the market’s most direct challenge yet to decades of uber-easy monetary policy, before a wave of emergency bond buying reined it back in. Swirling speculation that the Bank of Japan’s policy of yield curve control (YCC) could be revised, or even abandoned, as early as next week had investors rushing for the exits. That catapulted 10-year Japanese government bond yields as much as 4 bps higher to 0.54%, the highest since mid-2015 and above a recently widened band of -0.5% to +0.5% set by the BOJ in a shock decision just three weeks ago. The stress was evident across the yield curve, forcing the BOJ to announce two separate rounds of emergency buying worth around 1.8 trillion yen ($13.9bn) combined. The central bank already holds 80% to 90% of some bond lines.”

January 11 – Associated Press (Fatima Hussein and Josh Boak): “The federal government is on track to max out on its $31.4 trillion borrowing authority as soon as this month, starting the clock on an expected standoff between President Joe Biden and the new House Republican majority that will test both parties’ ability to navigate a divided Washington… Once the government bumps up against the cap — it could happen any time in the next few weeks or longer — the Treasury Department will be unable to issue new debt without congressional action. The department plans to deploy what are known as ‘extraordinary measures’ to keep the government operating. But once those measures run out, probably mid-summer, the government could be at risk of defaulting unless lawmakers and the president agree to lift the limit on the U.S. government’s ability to borrow.”

January 13 – Bloomberg: “Revelations of a growing number of Chinese local government financing vehicles with overdue payments for a type of short-term debt are aggravating concerns about this group of risk-laden state borrowers. Over 100 LGFVs and their units across 22 provinces have left their maturing commercial bills unpaid since November 2021, indicating heavy debt pressure and tight cash flows, GF Securities analysts including Liu Yu wrote… The yuan-denominated local debt instrument typically carries tenors of less than one year. The financial health of LGFVs, which are mostly tasked to build infrastructure projects, has come under renewed scrutiny after one such borrower from an underdeveloped province recently extended its bank loans by two decades.”

Coincidentally, 10-year Treasury yields are today at about the same level as just before the 2008 crisis. Today’s inflation, policy, and global backdrops diverge significantly from ’08. What’s similar is bond messaging, which seems to suggest that market structure is untenable.

For the Week:

The S&P500 rose 2.7% (up 4.2% y-t-d), and the Dow gained 2.0% (up 3.5%). The Utilities added 0.3% (up 3.5%). The Banks increased 2.2% (up 6.7%), and the Broker/Dealers jumped 4.0% (up 7.1%). The Transports advanced 3.5% (up 7.3%). The S&P 400 Midcaps jumped 3.7% (up 6.2%), and the small cap Russell 2000 surged 5.3% (up 7.1%). The Nasdaq100 rose 4.5% (up 5.5%). The Semiconductors surged 6.2% (up 10.6%). The Biotechs gained 2.4% (up 4.6%). With bullion surging $55, the HUI gold equities index rose 3.4% (up 13.3%).

Three-month Treasury bill rates ended the week at 4.4625%. Two-year government yields slipped a basis point this week to 4.24% (down 19bps y-t-d). Five-year T-note yields dropped nine bps to 3.61% (down 39bps). Ten-year Treasury yields declined six bps to 3.50% (down 37bps). Long bond yields fell eight bps to 3.61% (down 36bps). Benchmark Fannie Mae MBS yields dropped 14 bps to 4.85% (down 54bps).

Greek 10-year yields sank 23 bps to 4.10% (down 46bps y-o-y). Italian yields dropped 21 bps to 4.01% (down 69bps). Spain's 10-year yields fell 10 bps to 3.17% (down 35bps). German bund yields declined four bps to 2.17% (down 28bps). French yields dropped nine bps to 2.63% (down 35bps). The French to German 10-year bond spread narrowed five to 46 bps. U.K. 10-year gilt yields dropped 11 bps to 3.37% (up 31bps). U.K.'s FTSE equities index gained 1.9% (up 5.3% y-t-d).

Japan's Nikkei Equities Index increased 0.6% (up 0.1% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.51% (up 9bps y-o-y). France's CAC40 gained 2.4% (up 8.5%). The German DAX equities index rose 3.3% (up 8.4%). Spain's IBEX 35 equities index advanced 2.1% (up 7.9%). Italy's FTSE MIB index jumped 2.4% (up 8.8%). EM equities were mostly higher. Brazil's Bovespa index rallied 1.8% (up 1.8%), and Mexico's Bolsa index surged 3.5% (up 10.5%). South Korea's Kospi index surged 4.2% (up 6.7%). India's Sensex equities index increased 0.6% (down 1.0%). China's Shanghai Exchange Index gained 1.2% (up 3.4%). Turkey's Borsa Istanbul National 100 index sank 6.7% (down 9.5%). Russia's MICEX equities index rose 2.0% (up 2.1%).

Investment-grade bond funds posted inflows of $6.557 billion, and junk bond funds reported positive flows of $2.510 billion (from Lipper).

Federal Reserve Credit declined $30.5bn last week to $8.471 TN. Fed Credit was down $429bn from the June 22nd peak. Over the past 174 weeks, Fed Credit expanded $4.745 TN, or 127%. Fed Credit inflated $5.661 Trillion, or 201%, over the past 531 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.9bn last week at $3.316 TN. "Custody holdings" were down $102bn, or 3.0%, y-o-y.

Total money market fund assets slipped $8.9bn to $4.805 TN. Total money funds were up $131bn, or 2.8%, y-o-y.

Total Commercial Paper jumped $22.6bn to $1.304 TN. CP was up $257bn, or 24.5%, over the past year.

Freddie Mac 30-year fixed mortgage rates sank 26 bps to 6.18% (up 273bps y-o-y). Fifteen-year rates fell 23 bps to 5.54% (up 292bps). Five-year hybrid ARM rates declined four bps to 5.49% (up 292bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 19 bps to a four-month low 6.28% (up 277bps).

Currency Watch:

January 9 – Bloomberg (Ruth Carson): “Hedge funds are growing ever more bearish on the dollar, underscoring speculation the Federal Reserve will slow the pace of its interest-rate hikes… ‘Pillars of dollar strength are starting to recede,’ said John Bromhead, a strategist at Australia & New Zealand Banking Group... ‘Last week’s minutes show the Fed is approaching terminal rate and will be pausing soon.’”

For the week, the U.S. Dollar Index declined 1.6% to 102.20 (down 1.2% y-t-d). For the week on the upside, the Japanese yen increased 3.3%, the Brazilian real 2.4%, the South Korean won 2.2%, the Mexican peso 2.1%, the euro 1.8%, the South African rand 1.7%, the Singapore dollar 1.6%, the Australian dollar 1.3%, the Swedish krona 1.2%, the British pound 1.1%, the Norwegian krone 1.0%, New Zealand dollar 0.4%, the Canadian dollar 0.4% and the Swiss franc 0.1%. The Chinese (onshore) renminbi gained 1.90% versus the dollar (up 2.95% y-t-d).

Commodities Watch:

January 6 – Bloomberg (Sing Yee Ong): “China reported an increase in its gold reserves for a second straight month, topping up holdings again after its first reported purchase in more than three years. The People’s Bank of China raised its holdings by 30 tons in December… This follows November’s addition of 32 tons, and brings the nation’s holdings to a total of 2,010 tons. Central bank purchases of bullion hit a record in the third quarter of last year at almost 400 tons, with only a quarter going to publicly identified institutions…”

The Bloomberg Commodities Index rallied 3.2% (down 1.1% y-t-d). Spot Gold jumped 2.9% to $1,920 (up 5.3%). Silver gained 1.8% to $24.26 (up 1.3%). WTI crude surged $6.09 to $79.86 (down 1%). Gasoline jumped 12.8% (up 3.0%), while Natural Gas sank 7.8% to $3.42 (down 24%). Copper surged 7.8% (up 11%). Wheat was little changed (down 6%), while Corn rallied 3.2% (down 1%). Bitcoin rallied $2,860, or 16.8%, this week to $19,830 (up 19.6%).

Market Instability Watch:

January 12 – Bloomberg (Christopher Condon): “The US government’s budget deficit widened by 12% for the first quarter of the fiscal year, presaging what’s set to be an intense political battle over fiscal policy. The budget gap for October through December reached $421 billion, with the increase from the previous year largely driven by rising expenses linked to higher inflation… Interest payments on public debt rose by $57 billion, or 37% over the same period a year before, to $210 billion. The Treasury has been forced to pay investors higher rates on new debt as the Federal Reserve ratchets up its benchmark interest rate to combat inflation.”

January 12 – Financial Times (Kana Inagaki, Leo Lewis and Hudson Lockett): “Long-term Japanese government bond yields and the yen surged on Friday as markets increased pressure on the central bank to further adjust a core tenet of its ultra-loose monetary policy. Analysts said the sharp moves underscored deepening dysfunction in the market for Japanese government bonds over the past month and raised uncertainty ahead of the Bank of Japan’s policy board meeting next week. Traders in Tokyo described the widening range of possible outcomes from the two-day event as ‘brutal’ for investors accustomed to a decade of predictability under governor Haruhiko Kuroda’s quantitative easing programme.”

January 13 – Bloomberg (Kevin Buckland and Junko Fujita): “Traders are gearing up for the Bank of Japan’s first policy review of the year, with bets rising that Governor Haruhiko Kuroda may enact another shift as early as next week… Bets are growing that the BOJ will exit its ultra-dovish settings as inflation accelerates, in a move that’s likely to unleash a bout of volatility on global currency and bond markets. Citigroup Inc. now expects the central bank to terminate its yield curve control next week, and hedge funds have been shorting sovereign bonds. ‘Unfortunately, the BOJ has little to show for all their efforts and there seems little reason for the market to back off either,’ said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities... ‘Rip the band-aid now or throw more money at the problem and delay the exit. An exit is coming, it’s just a question of when.’”

January 9 – Bloomberg (Alexandra Harris): “The US is expected to run up against its statutory borrowing cap later in the year, and the risk is that lawmakers may resort to a series of can-kicking measures that wind up roiling financial markets. That’s the view of Wrightson ICAP economist Lou Crandall. He said the past week’s chaotic developments around choosing a House speaker make it more likely efforts to raise or suspend the government’s limit will result in a series of short-term agreements until a longer deal can be reached. ‘A dysfunctional Congress could force the Treasury to live hand-to-mouth through a series of interim debt-ceiling increases for weeks or even months,’ Crandall wrote…”

January 11 – Bloomberg (Liz Capo McCormick and Craig Torres): “Federal Reserve officials are making a full-court-press effort to convince investors they won’t be slashing their benchmark interest rate before year’s end. It’s not working. Money markets are pricing a rate peak around 4.9%, followed by nearly half a percentage point of rate cuts by the end of 2023. That’s despite multiple officials in recent days delivering a sharply contrasting message: Rates are heading above 5% and will stay there all year. Just last month, Chair Jerome Powell highlighted that history warns against ‘prematurely loosening policy.’ With traders effectively rejecting his narrative, the risk is that exuberance over monetary easing causes Fed officials to tighten even more…”

January 12 – Bloomberg (Ruth Carson): “Traders piled into bets on another hawkish pivot from the Bank of Japan following a report that the central bank will review the side effects of its policy as soon as next week. The yen surged more than 2% versus the US currency to hit its highest level since June and Japanese bond futures slid after the Yomiuri newspaper said the BOJ will consider adjusting bond purchases or other policy changes to counter turbulence caused by tweaks to its yield-curve control settings last month.”

January 13 – Bloomberg (Maria Elena Vizcaino): “The world is at risk of a crisis as governments, households and financial institutions binge on debt, a habit that S&P Global Ratings warns could push overall leverage to 366% of global gross domestic product by 2030. That would mark a sharp increase from the world’s $300 trillion pile of debt — or 349% of global GDP — as of June 2022, as leverage rises slightly faster for mature economies than emerging peers, S&P’s Terry Chan and Alexandra Dimitrijevic wrote in a report.”

January 10 – Bloomberg (Eva Szalay): “Some of the world’s largest asset managers such as BlackRock Inc., Fidelity Investments and Carmignac are warning markets are underestimating both inflation and the ultimate peak of US rates, just like a year ago. The stakes are immense after Wall Street almost unanimously underestimated inflation’s trajectory. Global stocks saw $18 trillion wiped out, while the US Treasury market suffered its worst year in history. And yet, going by inflation swaps, expectations are again that inflation will be relatively tame and drop toward the Federal Reserve’s 2% target within a year…”

January 10 – Bloomberg (Lu Wang): “A disaster for bulls, the yearlong tumble in American stocks has in some respects been almost as rough for the other side of the trade. The hardships of being short were made vivid Tuesday as a Goldman Sachs Group Inc. basket of most-hated stocks climbed more than 4%, saddling bears with losses. While the S&P 500 have alternated between gains and losses into 2023, each up day overpowered the previous down session, resulting in an overall gain that marked the market’s best start to a year since 2019.”

Bursting Bubble and Mania Watch:

January 10 – Associated Press (Adam Beam): “From a budget perspective, the first four years of California Gov. Gavin Newsom’s time in office has been a fairy tale: A seemingly endless flow of money that paid to enact some of the country’s most progressive policies while acting as a bulwark against a tide of conservative rulings on abortion and guns from the U.S. Supreme Court. But just days into his second term, that dream appeared to be ending. Tuesday, Newsom announced California likely won’t collect enough money in taxes to pay for all of its obligations, leaving a $22.5 billion hole in its budget.”

January 10 – Bloomberg (Natalie Wong): “Salesforce Inc. is paring its real estate as part of sweeping cost cuts. Compass Inc., reeling from a housing slowdown, has put its New York headquarters up for sublease. Meta Platforms Inc. is giving up Manhattan offices that it recently built out. Major US office markets were already struggling with empty buildings as flexible work becomes the norm. Now, mounting layoffs and corporate cost cuts threaten to worsen the glut, particularly in New York and San Francisco… Both cities ended 2022 with a rising supply of space and leasing demand still far below historical averages, according to… CBRE Group Inc. In San Francisco, the office-vacancy rate soared to a record 27.6%, compared with just 3.7% before the pandemic.”

January 11 – Reuters (Davide Barbuscia): “BlackRock's iShares exchange traded funds (ETFs) gained more net flows than Vanguard's ETFs last year…, putting the world's biggest asset manager in the lead for the first time since 2019. BlackRock and Vanguard are the world's two biggest asset managers as well as the largest providers of ETFs… Total estimated net flows into ETFs globally amounted to about $745 billion last year, down from $1.2 trillion in 2021, when COVID-19 stimulus measures pushed retail investors to pile their growing cash balances into such products. Net flows into U.S.-domiciled ETFs have also come down year on year, according to Morningstar…, to about $590 billion last year from $911 billion in 2021.”

January 11 – Bloomberg (James Tarmy): “In the last half of 2022 the market for homes priced at $10 million and more fell precipitously in New York and South Florida, according to… brokerage Serhant. ‘The second half of the year was more affected at the super-prime level than most people initially believed,’ says Garrett Derderian, Serhant’s director of market intelligence. ‘The big takeaway is that this year the market is going to slow considerably, and it could be one of the slowest years in the super-prime market in the last decade.’”

Crypto Bubble Collapse Watch:

January 12 – Financial Times (Nikou Asgari): “Crypto broker Genesis owes creditors more than $3bn, prompting its owner Digital Currency Group to explore selling assets in its large venture portfolio to raise money, according to people familiar with the matter. DCG, a conglomerate that controls crypto media outlet CoinDesk and investment manager Grayscale, is seeking to raise fresh cash after its Genesis unit was wrongfooted in November by the collapse of FTX.”

January 9 – Bloomberg (David Pan): “Cash-strapped Bitcoin miners are reducing loans and scaling back their operations as the crypto-mining industry continues to weather a plunge in the digital asset’s price. During the historic bull run in late 2021, miners raised billions of dollars in debt financing to fund their expanding operations. But since the crash early last year, publicly traded miners are refinancing and selling coin reserves as well as equity to repay loans and cover operational costs. ‘Miners are trying to deleverage to avoid margin calls or an imminent liquidity crunch if Bitcoin drops below a certain price point,’ Wolfie Zhao, an analyst at crypto-consulting firm BlocksBridge, said.”

January 10 – Reuters (Manya Saini and Niket Nishant): “Coinbase Global Inc said… it will cut about 950 jobs, or 20% of its workforce, as part of a restructuring plan that marks the third round of layoffs for the cryptocurrency exchange since last year… ‘The entire industry is going through a crisis of confidence and trading volume remains very weak. This job cut is a reflection of the current challenging environment,’ Oppenheimer analyst Owen Lau said.”

January 13 – Bloomberg (David Pan): “Bitfarms Ltd. warned one of its subsidiaries may default on a loan with bankrupt Blockfi Inc., becoming the latest Bitcoin mining company seeking relief as the industry reckons with a plunge in the digital asset.”

January 12 – Reuters (Elizabeth Howcroft): “Illicit use of cryptocurrencies hit a record $20.1 billion last year as transactions involving companies targeted by U.S. sanctions skyrocketed, data from blockchain analytics firm Chainalysis showed… The cryptocurrency market floundered in 2022, as risk appetite diminished and various crypto firms collapsed. Investors were left with large losses and regulators stepped up calls for more consumer protection.”

Ukraine War Watch:

January 10 – Bloomberg (Guy Faulconbridge): “One of President Vladimir Putin's closest allies said… that Moscow was now fighting the U.S.-led NATO military alliance in Ukraine and that the West was trying to wipe Russia from the political map of the world. Putin casts the war in Ukraine as an existential battle with an aggressive and arrogant West, and has said that Russia will use all available means to protect itself and its people against any aggressor. Russian Security Council Secretary Nikolai Patrushev is seen by diplomats as one of the major hardline influences on Putin… ‘The events in Ukraine are not a clash between Moscow and Kyiv - this is a military confrontation between Russia and NATO, and above all the United States and Britain,’ Patrushev told the Argumenti i Fakti newspaper…”

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

January 8 – Financial Times (Kathrin Hille): “The US and Japanese armed forces are rapidly integrating their command structure and scaling up combined operations as Washington and its Asian allies prepare for a possible conflict with China such as a war over Taiwan, according to the top Marine Corps general in Japan. The two militaries have ‘seen exponential increases . . . just over the last year’ in their operations on the territory they would have to defend in case of a war, Lieutenant General James Bierman… told the Financial Times… Bierman said that the US and its allies in Asia were emulating the groundwork that had enabled western countries to support Ukraine’s resistance to Russia in preparing for scenarios such as a Chinese invasion of Taiwan.”

January 12 – Bloomberg (Isabel Reynolds and Courtney McBride): “The US and Japan announced plans to strengthen defense cooperation on land, at sea and in space as they expressed growing concern about the growing challenge posed by China and its ties with Russia… Officials said… the two sides were set to sign an agreement that will strengthen cooperation in space, including the US agreeing to defend against an attack on Japan’s space assets in some cases. They also committed to more bilateral military training and a realignment of US forces in the region to be able to better respond to any threat by China.”

January 9 – Bloomberg (Tony Capaccio): “A hypothetical Chinese invasion of Taiwan ‘quickly founders’ but exacts high costs on the island democracy and the US Navy, according to the results of an extensive set of war games… by a Washington think tank. Despite ‘massive Chinese bombardment, Taiwanese ground forces stream to the beachhead, where the invaders struggle to build up supplies and move inland’ as ‘US submarines, bombers, and fighter aircraft, often reinforced by Japan Self-Defense Forces, rapidly cripple the Chinese amphibious fleet,’ in the ‘most likely’ scenario, the Center for Strategic and International Studies concluded.”

De-globalization and Iron Curtain Watch:

January 8 – Reuters (Jorge Otaola): “Argentina and China have formalized the expansion of a currency swap deal, allowing the South American country to increase its depleted foreign currency reserves, the Argentine central bank said… Argentina's government needs to rebuild reserves to cover trade costs and future debt repayments, and more reserves are a key objective of a major debt deal with the International Monetary Fund (IMF).”

Inflation Watch:

January 12 – Financial Times (Jeff Cox): “Inflation closed out 2022 in a modest retreat, with consumer prices in December posting their biggest monthly decline since early in the pandemic… The consumer price index… fell 0.1% for the month, in line with the Dow Jones estimate… Even with the decline, headline CPI rose 6.5% from a year ago, highlighting the persistent burden that the rising cost of living has placed on U.S. households. However, that was the smallest annual increase since October 2021. Excluding volatile food and energy prices, co-called core CPI rose 0.3%, also meeting expectations. Core was up 5.7% from a year ago, once again in line.”

January 9 – Reuters (Michael S. Derby): “U.S. households see weaker near-term inflation and are expecting notably less spending, even as they foresee their incomes continuing to rise, the New York Federal Reserve said… in its December Survey of Consumer Expectations. The bank reported that respondents to its monthly survey said they see inflation a year from now at 5%, from 5.2% in November, for the lowest reading since July 2021. Meanwhile, respondents’ expectations for inflation three years from now were unchanged at 3% while projections of inflation in five years’ time stood at 2.4%, up from 2.3% in November.”

January 9 – Wall Street Journal (Jennifer Williams-Alvarez and Dean Seal): “After a year of significant price increases, companies are trying to figure out how far they can go in 2023. Companies in 2022 increased sale prices to offset higher costs for everything from freight to wages to raw materials such as lumber and steel, with little pushback from customers. Net profit margins at S&P 500 companies hit 11.6% during the third quarter of 2022, down from 12.7% the same period a year earlier but still higher than the same period in 2020 and before the pandemic, according to… Refinitiv.”

Biden Administration Watch:

January 7 – Associated Press (Lisa Mascaro and Farnoush Amiri): “Republican Kevin McCarthy was elected House speaker on a historic post-midnight 15th ballot early Saturday, overcoming holdouts from his own ranks and floor tensions that boiled over after a chaotic week that tested the new GOP majority’s ability to govern. ‘My father always told me, it’s not how you start, it’s how you finish,’ McCarthy told cheering fellow Republicans. Eager to confront President Joe Biden and the Democrats, he promised subpoenas and investigations. ‘Now the hard work begins,’ the California Republican declared.”

January 9 – Wall Street Journal (Jinjoo Lee): “It took less than a year to draw 180 million barrels of oil out of the U.S. Strategic Petroleum Reserve. Replacing those barrels will likely take a lot longer, if it happens at all. After President Biden authorized a historic emergency release last year, there were roughly 372.4 million barrels left in the SPR as of Dec. 30, the lowest level in 39 years. No wonder the Energy Department is pivoting toward a refill: In mid-December, the agency announced that it would start repurchasing crude for the SPR. It is taking baby steps, starting with a 3-million-barrel pilot program under which it would offer market participants a fixed price for future delivery.”

Federal Reserve Watch:

January 10 – CNBC (Jeff Cox): “Federal Reserve Chairman Jerome Powell… emphasized the need for the central bank to be free of political influence while it tackles persistently high inflation. In a speech delivered to Sweden’s Riksbank, Powell noted that stabilizing prices requires making tough decisions that can be unpopular politically. ‘Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy,’ the chairman said... ‘The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors,’ he added.”

January 12 – Bloomberg (Steve Matthews and Jonnelle Marte): “Federal Reserve Bank of St. Louis President James Bullard said the US central bank should raise interest rates above 5% expeditiously to ensure price pressures are subdued. Noting the median projection of the Fed’s last forecast showed policymakers favoring raising rates to 5.1% this year, Bullard said… ‘it would be appropriate to get there as soon as possible’ and then go on hold. ‘The Fed is going to have to maintain rates at high enough levels’ to bring inflation down and keep it down, he told a virtual event…”

January 12 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of Philadelphia President Patrick Harker said the central bank should lift interest rates in quarter-point increments ‘going forward’ as it approaches the end point in its most aggressive tightening campaign in decades. ‘I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 bps at a time have surely passed,’ Harker said… ‘In my view, hikes of 25 bps will be appropriate going forward.’”

January 10 – Bloomberg (Hannah Levitt): “Jamie Dimon said the Federal Reserve’s rate hikes might need to go beyond what’s currently expected, but he’s in favor of a pause to see the full impact of last year’s increases. There’s a 50% chance current expectations are correct in assuming the Fed will boost its benchmark rate to about 5%, and a 50% chance that the central bank will have to go to 6%, the JPMorgan… chief executive officer said… ‘I’m on the side that it may not be enough,’ Dimon said. ‘We were a little slow getting going. It caught up. I don’t think there’s any harm done by waiting three or six months.’”

U.S. Bubble Watch:

January 8 – Wall Street Journal (Dana Mattioli and Miles Kruppa): “A new wave of tech layoffs signals how executives in the industry are pivoting from a growth-above-all mindset to protecting their bottom line. After a bruising 2022 in which companies from small startups to tech giants slammed the brakes on expansion, some of the biggest names in the sector are demonstrating that an era of austerity is only beginning, with expenses scrutinized and moonshot projects abandoned. Inc.; and Salesforce Inc. both announced plans for layoffs in the past week.”

January 10 – CNBC (Jessica Dickler): “With day-to-day expenses staying high due to inflation, more Americans are relying on credit cards to make ends meet. As the personal savings rate sank near an all-time low, credit card balances jumped 15% year over year, according to… the Federal Reserve Bank of New York, notching the largest increase in more than 20 years… Nearly half, or 46%, of credit cardholders carry debt from month to month on at least one card, up from 39% last year, according to… ‘People are hanging in there for now, but some of the cracks are starting to show,’ said Ted Rossman, senior industry analyst at Bankrate.”

January 10 – The Atlantic (Mac Schwerin): “As familiar as Americans are with the concept of credit, many of us, upon encountering a sandwich that can be financed in four easy payments of $3.49, might think: Yikes, we’re in trouble. Putting a banh mi on layaway—this is the world that ‘buy now, pay later’ programs have wrought. In a few short years, financial-technology firms such as Affirm, Afterpay, and Klarna, which allow consumers to pay for purchases over several interest-free installments, have infiltrated nearly every corner of e-commerce. People are buying cardigans with this kind of financing. They’re buying groceries and OLED TVs. During the summer of 2020, at the height of the coronavirus pandemic, they bought enough Peloton products to account for 30% of Affirm’s revenue.”

January 10 – Reuters (Dan Burns): “U.S. small-business confidence slid to a six-month low in December, according to a survey…, which also showed that inflation and worker shortages remained major issues for firm owners. The National Federation of Independent Business (NFIB) said its Small Business Optimism Index fell 2.1 points to 89.8 last month - the lowest since June - amid a decline in the share of owners who expected better business conditions over the next six months… 32% of owners reported that inflation was their single most important problem, unchanged from November and 5 points lower than July's reading, which was the highest since the fourth quarter of 1979. On net, about 43% of owners reported raising average selling prices, down 8 points from November and the lowest since May 2021.”

January 9 – CNBC (Diana Olick): “Mortgage rates are still twice what they were a year ago, but home prices have been falling since June, and that’s finally making consumers feel better about what had been an overheated, highly competitive housing market. A monthly housing sentiment index from Fannie Mae showed sentiment improving from November to December. The index is still lower than it was a year ago and just slightly off its record low set in October and November. The share of respondents saying now is a good time to buy a home was still low, at just 21%, but it was up from 16% in October.”

January 11 – CNBC (Diana Olick): “Mortgage applications to purchase a home fell 1% for the week and were 44% lower than the same week one year ago. That was the lowest reading since 2014. Buyers today are not only contending with higher interest rates but falling supply. They are also seeing prices come down and may be waiting to see how low they go.”

January 10 – CNBC (Hugh Son): “Wells Fargo is stepping back from the multitrillion-dollar market for U.S. mortgages amid regulatory pressure and the impact of higher interest rates. Instead of its previous goal of reaching as many Americans as possible, the company will now focus on home loans for existing bank and wealth management customers and borrowers in minority communities... Dual factors of a lending market that has collapsed since the Federal Reserve began raising rates last year and questions about the long-term profitability of the business led to the decision, said consumer lending chief Kleber Santos.”

January 10 – Bloomberg (Maxwell Adler): “US state and local pensions funds’ unfunded liabilities climbed to $1.45 trillion last year, according to estimates from the… nonprofit Equable Institute. That compares to $986.6 billion in 2021, Equable said… Poor investment returns last year drove down the average funded ratio for top state and local pension plans to 77.3% from 83.9% in 2021, according the report. The drop reflects almost a half trillion dollar increase in the gap between assets and what’s owed to retirees.”

January 12 – Wall Street Journal (Justin Lahart): “Earnings at big public companies haven’t been growing all that much lately… Earnings season is getting under way, and results for the final quarter of last year look to be underwhelming. Analysts’ latest estimates are for earnings per share for members of the S&P 500 to have shrunk by 2.2% in the fourth quarter from a year earlier—a figure that is flattered by an expected 65% gain in energy-sector earnings. Exclude those, and analysts estimate earnings fell by 6.7%.”

January 10 – Reuters (Lisa Baertlein): “U.S. imports of goods in ocean shipping containers in December fell to levels approaching those last seen before the COVID-19 pandemic, a new report said… Demand for kitchen appliances, furniture, big-screen TVs, apparel and other retail goods softened late last year as record inflation bit into disposable income and consumers shifted spending back to travel and other previously restricted activities. December 2022 U.S. container import volume topped 1.9 million 20-foot equivalent units (TEUs), according to Descartes Systems Group. That was down 19% from the year earlier, but 1% above December 2019…”

Fixed-Income Watch:

January 12 – Bloomberg (Lisa Lee, Claire Ruckin, and Jill R Shah): “One of the most lucrative money-making machines in the world of finance is all clogged up, threatening a year of pain for Wall Street banks and private-equity barons as a decade-long deal boom goes bust. After driving a flurry of mega buyouts that contributed to a $1 trillion profit haul in the good times, some of the world’s largest banks have been forced to take big writedowns on debt-fueled mergers and acquisitions underwritten late in the cheap-money era. Elon Musk’s chaotic takeover of Twitter Inc. is proving especially painful, saddling a Morgan Stanley-led cohort with around $4 billion in estimated paper losses…”

January 9 – Bloomberg (Katie Greifeld): “Exchange-traded fund investors are piling into bets on junk bonds as the securities start the year with a strong comeback. More than $1.7 billion flooded the $18 billion iShares iBoxx High Yield Corporate Bond ETF (ticker HYG) last week as it rallied 2.6%. It was the biggest weekly haul since November 2020…”

January 7 – Financial Times (Kate Duguid): “Companies have rushed to borrow money in the US corporate bond market in the first week of the year, taking advantage of easier financial conditions… In the first seven days of 2023, companies from Credit Suisse to Ford issued $63.7bn worth of US-marketed debt, according to data from Dealogic, compared to a total of $36.6bn in the last five weeks of 2022. While this week’s issuance is lower than the $73.1bn issued in the first week of January 2022, interest rates have jumped from near zero to a range of 4.25-4.5% since then.”

January 10 – Bloomberg (Ameya Karve): “Debt-heavy Asian companies are headed for a reckoning this year when $314 billion of bonds come due, just as refinancing costs for lower-rated firms have risen close to historic highs… The risk is that surging borrowing costs may make it a challenge for companies with weaker credit ratings to raise funds to repay maturing debt.”

China Watch:

January 12 – Reuters (Bernard Orr and Eduardo Baptista): “People in China worried… about spreading COVID-19 to aged relatives as they planned returns to their home towns for holidays that the World Health Organization warns could inflame a raging outbreak. The Lunar New Year holiday, which officially starts on Jan. 21, comes after China last month abandoned a strict anti-virus regime… That abrupt U-turn unleashed COVID on a population of 1.4 billion which lacks natural immunity, having been shielded from the virus since it first erupted in late 2019, and includes many elderly who are not fully vaccinated. The outbreak spreading from China's mega-cities to rural areas with weaker medical resources is overwhelming some hospitals and crematoriums.”

January 7 – Associated Press: “China has suspended or closed the social media accounts of more than 1,000 critics of the government’s policies on the COVID-19 outbreak, as the country moves to roll back harsh anti-virus restrictions. The popular Sina Weibo social media platform said it had addressed 12,854 violations including attacks on experts, scholars and medical workers and issued temporary or permanent bans on 1,120 accounts.”

January 10 – Bloomberg: “China’s banks lent more to companies last month amid increasing support for the property sector… Aggregate financing, a broad measure of credit, was 1.31 trillion yuan ($193bn) last month, the People’s Bank of China said... That was below the median estimate of 1.85 trillion yuan in a Bloomberg survey… and compares with 2.4 trillion yuan in the same month a year ago. Growth in the broad M2 measure of money supply slowed to 11.8% from 12.4%. Loan data was more promising: New loans for all borrowers including non-bank financial institutions reached 1.4 trillion yuan in the month, better than a projection among economists of 1.2 trillion yuan.”

January 11 – Reuters (Liangping Gao, Joe Cash and Liz Lee): “China's annual consumer inflation rate accelerated in December, driven by rising food prices even as domestic demand wavered amid restrained economic activity. Economists expect inflation to continue to pick up in the first quarter of 2023. The consumer price index (CPI) in December was 1.8% higher than a year earlier, rising faster than the 1.6% annual gain seen in November…”

January 12 – Reuters (Ellen Zhang and Joe Cash): “China's exports shrank sharply in December as global demand cooled, highlighting risks to the country's economic recovery this year… Exports contracted 9.9% year-on-year in December, extending a 8.7% drop in November... The drop was the worst since February 2020. Reflecting faltering world demand, outbound shipments to the United States shrank 19.5% in December, while those to the EU fell 17.5%... Despite the sharp falloff in shipments in the last few months, China's total exports rose 7% in 2022… Still, growth was a far cry from a 29.6% gain in 2021.”

January 11 – Financial Times (Thomas Hale, Sun Yu and Cheng Leng): “China is moving away from its ‘three red lines’ policy of limiting leverage in the property sector, after its effort to reduce risky lending and real estate speculation helped fuel a wave of defaults and triggered a slump in the property market. Beijing is now easing constraints on developer credit and even rolling out potential loans following a severe downturn that saw housing and land sales collapse… Officials at multiple state-owned banks said they had effectively shelved the leverage curbs — whose three red lines refer to targets for debt, equity and assets for individual companies — in their assessment of borrowers.”

January 8 – Reuters (Yingzhi Yang and Brenda Goh): “Chinese property companies raised a total of 101.8 billion yuan ($14.9bn) in December, up 33.4% year on year, driven by more state support for the highly indebted sector, according to market researcher CRIC… The figure for the year 2022 was 824 billion yuan, decreasing by 38% year over year... The central bank said on Thursday that for cities where the selling prices of new homes fall month-on-month and year-on-year for three consecutive months, the floor on mortgage rates can be lowered or abolished for first-time home buyers in phases.”

January 9 – Bloomberg (Abhishek Vishnoi): “Country Garden… and its sister company have both seen their stocks triple in value since late October, underscoring optimism about China’s top developer after a series of fundraising and as Beijing widens a property rescue campaign. Country Garden… has risen about 190% from a record low on Oct. 31, while Country Garden Services… has jumped over 200% in the same period.”

January 9 – Bloomberg: “Deflationary pressure in China worsened in the fourth quarter as the economy slumped, with price-growth likely to be subdued even when the economy rebounds later this year, according to China Beige Book International. Companies recorded the weakest growth in wages and input costs in the final three months of 2022 since mid-2020, CBBI said... Growth in sale prices also slowed to the worst level since late 2020, it said… ‘Short term disinflation is already here, with sales price growth slowing to a crawl,’ it said. ‘The Covid blow to retail could push this into deflation in the first quarter.’”

January 11 – Bloomberg: “China shouldn’t bail out the debt that local governments take off their balance sheets so as to discourage them from allowing hidden liabilities to snowball out of control, according to former Finance Minister Lou Jiwei. The central government has refrained from providing help to troubled local governments, opting instead to leave it to them to clean house and meet repayment obligations through debt restructuring, cutting general spending and selling state-owned assets, Lou said…”

January 10 – Bloomberg: “China’s population likely started shrinking last year for the first time in decades, experts say, a significant milestone that will have long-term repercussions for the economy. The government’s official data for total number of births in 2022… will probably show a record low of 10 million, according to independent demographer He Yafu. That would be less than the 10.6 million babies born in 2021, which was already the sixth straight year of declines and the lowest since the founding of the People’s Republic of China in 1949.”

January 12 – Bloomberg (Hallie Gu): “Pests that destroy crops could pose a bigger threat to China’s food output this year. State researchers predict that warmer weather in the spring could spur a higher incidence of pestilence across major food crops including wheat, rice and corn, which could result in output losses of 175 million tons or more if no effective steps are taken. Last year, China harvested 687 million tons of grain for consumption by humans and livestock.”

Central Banker Watch:

January 10 – Bloomberg (Alexander Weber, Niclas Rolander and Jana Randow): “European Central Bank Executive Board member Isabel Schnabel said borrowing costs must be lifted much further, with inflation only just having dipped back into single digits. ‘Interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target,’ she said… ‘Inflation will not subside by itself,’ Schnabel told a Riksbank conference…”

January 9 – Reuters (John Revill): “The Swiss National Bank posted an annual loss of 132 billion Swiss francs ($143bn) in 2022, it said…, the biggest in its 115-year history as falling stock and fixed-income markets hit the value of its share and bond portfolio… Monday's provisional figure, which marked a reverse from a 26 billion franc profit in 2021, was far bigger than the previous record loss of 23 billion francs chalked up in 2015.”

Global Bubble Watch:

January 10 – Financial Times (Jonathan Wheatley): “The global economy is ‘on a razor’s edge’ and risks falling into recession this year, World Bank officials have warned…The… organisation expects the world economy to grow by just 1.7% this year, a sharp fall from an estimated 2.9% in 2022, according to the latest edition of its twice-yearly Global Economic Prospects report... ‘The risks that we warned of six months ago have materialised and our worst-case scenario is now our baseline scenario,’ said Ayhan Kose, the World Bank economist responsible for the report. ‘The world’s economy is on a razor’s edge and could easily fall into recession if financial conditions tighten.’”

January 10 – Bloomberg (Philip Aldrick): “The threat of recession, the cost-of-living crisis and mounting debt distress will dominate the global economy in the next two years as it struggles to move on from the pandemic and war in Ukraine, according to a survey by the World Economic Forum. Its Global Risks Report, an annual poll of 1,200 government, business and civil society professionals compiled by the… foundation, suggests there will be little respite as countries grapple with ‘energy, inflation, food and security crises.’ Almost seven in 10 respondents reckon the near term will be characterized by volatile economies and multiple shocks, while a fifth of them fear ‘catastrophic outcomes’ within a decade.”

January 10 – Bloomberg (Hannah Benjamin-Cook, Priscila Azevedo Rocha and Olga Voitova): “A deluge of debt sales in Europe has pushed issuance for the year beyond $150 billion in the quickest time ever. More than 80 predominantly high-grade borrowers have piled in to the market in January to lock in funding that’s around the cheapest since the summer… It’s the fastest start to a year for Europe’s publicly-syndicated debt sales on record…”

January 9 – Reuters (Lisa Baertlein): “Prices in the most volatile segment of ocean shipping are collapsing, but top retailers like Walmart and Home Depot should not expect relief until the spring contract renegotiation season... Spot rates, which cover anywhere from 10% to 40% of ocean container shipments and are considered a key indicator of the industry's health, are in free fall as recession looms and the pandemic-fueled U.S. import bubble deflates.”

January 13 – Reuters (Naomi Rovnick): “Central bank rate rises could land global borrowers with $8.6 trillion in extra debt servicing costs in coming years, S&P Global estimated… Major central banks have delivered a record 2,700 bps of rate hikes in 2022… ‘Higher interest expenses are already straining less-creditworthy governments and corporates, and lower-income households,’ S&P Global… said in a report. Businesses' required returns on new projects were rising along with debt costs, S&P Global added, in a trend that would ‘dampen future business activity volumes’. ‘Rising interest rates and slowing economies are making the debt burden heavier,’ S&P Global added…”

January 9 – Bloomberg (Ann Koh): “Labor unrest took an unusually heavy toll on ports around the world last year, and the outlook for continued economic instability could bring even more upheaval to global supply chains in 2023. There were at least 38 instances of protests or strikes affecting port operations last year, more than four times as many as in 2021 when the pandemic upended global trade, according to Crisis24…”

Europe Watch:

January 8 – Bloomberg: “Russian President Vladimir Putin’s plans to squeeze Europe by weaponizing energy look to be fizzling at least for now. Mild weather, a wider array of suppliers and efforts to reduce demand are helping, with gas reserves still nearly full and prices tumbling to pre-war levels.”

January 12 – Bloomberg (Hannah Benjamin-Cook and Priscila Azevedo Rocha): “Europe’s debt market is enjoying its busiest week ever, with borrowers issuing $107 billion in just four days as they seize on a start-of-year rally to bring deals early. Italy, Pirelli & C SpA and Deutsche Bank AG are among more than 80 borrowers to raise funds this week…”

January 11 – Bloomberg (Hannah Benjamin-Cook and Tasos Vossos): “Demand for Europe’s debt sales has topped half a trillion euros already this year as investors seek to put money to work in bonds offering some of the highest yields in years. Investors have bid €530 billion ($570bn) — more than three times the €168 billion of issuance in Europe’s syndicated primary market this month through Wednesday…”

January 12 – Reuters (Maria Martinez): “More than half Germany's companies are struggling to fill vacancies due to a lack of skilled workers, the German Chambers of Commerce and Industry (DIHK) said…, in the latest sign of growth headwinds belabouring Europe's largest economy. The proportion of companies facing difficulties hiring was at its highest ever level, the DIHK found in its survey of 22,000 companies, with 53% reporting shortages.”

EM Crisis Watch:

January 12 – Financial Times (Tommy Stubbington): “Emerging market governments have raised more than $40bn on international bond markets so far this year, as an easing of global inflationary pressures and hopes of an economic rebound in China clear the way for the fastest January borrowing spree on record. A bruising sell-off that swept global fixed income last year, as big central banks responded to runaway inflation by sharply raising interest rates, effectively shut many borrowers in the developing world out of bond markets for long periods. But money has flooded back into bonds in the new year…, with countries including Mexico, Hungary, and Turkey launching large bond sales.”

January 8 – Reuters (Adriano Machado): “Supporters of Brazil's far-right former President Jair Bolsonaro invaded and defaced the country's Congress, presidential palace and Supreme Court on Sunday, in a grim echo of the U.S. Capitol invasion two years ago by fans of former President Donald Trump. There were no immediate reports of deaths or injuries from their rampage, but the invaders left a trail of destruction, throwing furniture through the smashed windows of the presidential palace, flooding parts of Congress with a sprinkler system and ransacking ceremonial rooms in the Supreme Court.”

January 10 – Reuters (Gabriel Araujo, Anthony Boadle and Jamie McGeever): “Far-right former Brazilian President Jair Bolsonaro was admitted to a hospital in Florida… with stomach pains as 1,500 of his supporters were rounded up in Brasilia after storming key buildings in the capital over the weekend. President Luiz Inacio Lula da Silva, a leftist who took office on Jan. 1 after defeating Bolsonaro in an October election, vowed to bring those responsible to justice. He accused rioters of trying to overthrow democracy, and questioned why the army had not discouraged calls for a military coup outside their barracks.”

Japan Watch:

January 7 – Bloomberg (Isabel Reynolds): “Japanese Prime Minister Fumio Kishida said careful explanation and communication with markets would be part of consideration on monetary policy, when asked about possible future changes in the Bank of Japan’s ultra-loose policy… ‘We need a firm grasp on the outlook,’ Kishida said... ‘We will consider the situation, including careful explanation and communication with markets.’”

January 7 – Reuters (Leika Kihara): “Japanese Prime Minister Fumio Kishida said… his government and the central bank must discuss their relationship in guiding economic policy after he names a new Bank of Japan (BOJ) governor in April. The remark heightens the chance the government may revise its a decade-long blueprint with the central bank that focuses on beating deflation, a move that would lay the groundwork for an exit from the BOJ's ultra-loose monetary policy… ‘The government and the BOJ must work closely together, but also each play its own role’ in achieving price stability and higher wage growth, Kishida said… ‘Under the new BOJ governor, we must discuss the relationship between the government and the BOJ,’ said Kishida…”

January 11 – Bloomberg (Toru Fujioka): “More than half of Japanese households said their livelihoods have worsened in a Bank of Japan survey, sending a clear signal that the hottest inflation in four decades is eating into people’s confidence. Some 53% of households said their economic livelihood has worsened compared with a year ago, the highest percentage in almost 13 years, according to the latest quarterly BOJ survey… Only 3.7% said things have improved, with another 42.4% saying it’s difficult to judge.”

January 9 – Bloomberg (Erica Yokoyama and Toru Fujioka): “Tokyo’s inflation outpaced forecasts to hit 4% for the first time since 1982, suggesting the underlying price trend is stronger than expected by economists, a factor that could further fuel speculation the Bank of Japan will adjust policy again. Consumer prices excluding fresh food climbed 4% in the capital in December as food and energy costs continued to mount and a majority of tracked items got more expensive…”

Social, Political, Environmental, Cybersecurity Instability Watch:

January 11 – Associated Press (David Koenig and Michelle Chapman): “Thousands of flights across the U.S. were canceled or delayed Wednesday after a government system that offers safety and other information to pilots broke down, stranding some planes on the ground for hours. The White House said there was no evidence that a cyberattack triggered the outage, which upended travel plans for millions of passengers… The breakdown showed how much American air travel depends on an antiquated computer system that generates alerts called NOTAMs — or Notice to Air Missions — to pilots and others.”

January 11 – Bloomberg (Brian K. Sullivan): “California’s flooding rains and heavy snows that killed at least 17 people have likely caused more than $30 billion in damages and economic losses, according to AccuWeather Inc. The Pacific storms, known as atmospheric rivers, are estimated to have caused $31 billion to $34 billion of economic impacts through major flooding, widespread power outages, landslides, fallen trees and road closures, the commercial weather forecaster said…”

January 10 – Bloomberg (Stephan Kahl): “The insurance industry is struggling to adapt to a new normal in which losses fueled by climate change are now regularly exceeding $100 billion a year. Insured losses from natural disasters hit about $120 billion in 2022, most of which was weather related, according to… Munich Re. Hurricane Ian… was responsible for about half that. Including uninsured losses, the total cost of storms, droughts, earthquakes and fires last year was $270 billion. ‘There is no denying that climate change is driving losses from natural catastrophes,’ Ernst Rauch, chief climate scientist at Munich Re, said... ‘Insured losses of more than $100 billion a year are the new normal.’”

January 11 – Bloomberg (Naureen S. Malik): “The largest US grid operator saw almost one-fourth of power plants serving 65 million people shut down during the Christmas weekend storm, pushing the region to the brink of blackouts. In the first autopsy of the winter freeze that strained PJM Interconnection LLC last month, the grid operator saw 23% of its power-generation fleet shut down on the morning of Dec. 24… PJM manages the electrical network that stretches from New Jersey to Illinois.”

Leveraged Speculation Watch:

January 13 – Financial Times (Laura Noonan): “The European Central Bank has warned Europe’s lenders they will face regulatory intervention unless they urgently fix ‘material shortcomings’ in managing risks from trading counterparties such as hedge funds, family firms and commodity traders. The ECB’s supervisory chief Andrea Enria delivered the warning in a blog post outlining counterparty credit risks, calling on them to make a range of improvements… The ECB’s call reflects growing regulatory unease about the potential for contagion…”

January 10 – Reuters (Svea Herbst-Bayliss): “Some hedge funds that bet on macroeconomic trends boasted eye-popping double and even triple digit gains for 2022, investors said, while other prominent firms that were long on technology stocks got clobbered with deep losses in volatile markets… Many macro managers sidestepped tumbling equity markets rocked by fast-paced interest rate hikes and geopolitical turmoil including the war in Ukraine to rank among the hedge fund industry's best performers, data from Hedge Fund Research show. The firm's macro index gained 14.2% while the overall hedge fund index dropped 4.25%, its first loss since 2018.”

January 11 – Bloomberg (Nishant Kumar and Saijel Kishan): “It has been a rocky start to the year for famed oil trader Pierre Andurand. His main Andurand Commodities Discretionary Enhanced hedge fund slumped 19% last week, according to an investor letter seen by Bloomberg. It was one of the best performing hedge funds in the world last year.”

January 9 – Bloomberg (Amanda L Gordon and Natalie Wong): “Ken Griffin’s Citadel, fresh off a banner year, is sketching out plans for a massive new Manhattan tower that will give his financial empire a concentrated New York footprint alongside Wall Street’s biggest firms. Initial proposals call for a skyscraper that could rise to roughly 1,350 feet with 51 office floors and seven terraces…”

Geopolitical Watch:

January 8 – Reuters (Sarah Wu and Liz Lee): “Taiwan condemned China… for holding its second military combat drills around the island in less than a month, with the defence ministry saying it had detected 57 Chinese aircraft… The Eastern Theatre Command of the People's Liberation Army said its forces held ‘joint combat readiness patrols and actual combat drills’ in the sea and airspace around Taiwan, focused on land strikes and sea assaults. The aim was to test joint combat capabilities and ‘resolutely counter the provocative actions of external forces and Taiwan independence separatist forces’, it added…”

January 11 – Wall Street Journal (James T. Areddy and Joyu Wang): “The U.S. and Taiwan intend to focus on five areas this weekend during their first round of negotiations toward a trade agreement and indicated readiness to break out subset deals as the sides make progress, according to U.S. and Taiwan officials… The coming meeting in Taipei, between Jan. 14 and Jan. 17, will kick off actual negotiations over proposed texts for an ultimate agreement.”

January 11 – Bloomberg (Courtney McBride and Isabel Reynolds): “The US supports Japan’s effort to build military deterrence against China, a senior State Department official said… Japan needs the ability to strike back, the US official told reporters… Developing that capacity is expected to be a focus of the one-day security dialogue between the top US and Japanese foreign and defense officials. The meeting of the US-Japan Security Consultative Committee on Wednesday is a precursor to Prime Minister Fumio Kishida’s visit to Washington.”

Friday Evening Links

[Reuters] Wall St ends higher as banks climb in earnings season kickoff 

[Reuters] Yellen warns of U.S. default risk by June, urges debt limit hike

[Yahoo/Bloomberg] US Banks See Consumers Piling On Debt, Boosting Bottom Lines

[Reuters] Wall St banks stockpile funds, see uncertain outlook and competition for deposits

[Reuters] U.S. strongly committed to Japan's defense, Biden tells Kishida, hails military boost

[Bloomberg] Defiant Bulls Stand Up to Fed With Trillion-Dollar Stock Rally

[FT] JPMorgan says it may have to pay more for deposits in ‘warning shot’ for industry