Friday, February 3, 2023

Weekly Commentary: Powell is No Volcker

After beginning 1968 at 3.6%, (y-o-y) CPI jumped to 6.2% to end 1969. “Disinflation” took hold, with CPI down to 2.7% by June 1972. What had been festering geopolitical risk erupted in 1973. In response to the Yom Kippur War, OPEC announced in October 1973 an embargo on oil exports to those countries supporting Israel.

Spiking energy prices fueled an inflationary surge, with CPI ending 1974 at 12.3%. The crisis subsided, with y-o-y CPI all the way back down to 4.9% by November 1976. But CPI shot back to 7.0% in April 1977, before settling back to 6.5% one year later. Another geopolitical crisis ignited what had evolved into an inflationary tinderbox, with CPI spiking to 14.8% by March 1980.

History is not kind to Federal Reserve Chairman Arthur Burns. Fed funds were at 9% when he became Fed Chairman, only for him to then slash rates to 3.5% by early 1971. Slow to respond to the inflationary surge, the Burns Fed belatedly hiked rates to 11.0% by August 1973. Rates were then slashed to as low as 4.75% to start 1976.

Fed funds were at 6.75% when G. William Miller was appointed Fed Chairman in March 1978. Miller is viewed as having been only somewhat less soft on inflation than his predecessor. His gradual rate increases to 10.5% by August 1979 (the month Paul Volcker replaced him) were ineffective in containing an inflationary spiral. The Iranian revolution, the Iraq/Iran War, and other factors combined for the painful 1979 oil shock.

With inflation deeply ingrained, it took Volcker’s punishing tightening measures to finally quash pricing pressures and inflationary psychology. Rates almost doubled in eight months to 20%. Deflecting political pressure, Volcker radically shifted the Fed’s focus from managing policy interest rates to directly targeting money and Credit.

A Volcker quote from a 1979 Board of Governors meeting days before public announcement of the policy shift: “I would emphasize that the broad thrust is to bring monetary expansion and credit expansion within the ranges that were established by the Federal Reserve a year ago.” And in a speech three days following the historic Saturday, October 6th announcement: “Those measures were specifically designed to provide added assurance that the money supply and bank credit expansion would be kept under firm control.

Why is this history pertinent? For one, I believe we’re early in a new cycle of elevated inflation risk. General pricing pressures ebb and flow. And as much as we would like to believe the Fed can manage inflation with moderately higher (from a historical perspective) interest rates, they have limited control.

Especially in the current backdrop, inflation is a global phenomenon. The pandemic made it clear that factors beyond U.S. policies can trigger profound inflationary consequences. And Russia’s invasion of Ukraine underscores today’s extraordinary geopolitical risks and inflationary impacts. The U.S. is not today dependent on oil imports as it was in the past, and energy prices don’t have quite the overall inflationary impact as before. At the same time, inflationary risks associated with climate change weren’t factors in the seventies and eighties. And I would further argue that U.S. monetary policy command over inflation dynamics has diminished as financial conditions and inflationary effects have become more global phenomena. For example, Beijing policymaking - along with Chinese Credit and economic dynamics - now exert major influences on global inflation dynamics. It’s nice to imagine painless Fed rate tinkering doing the trick.

From history, we know that once unmoored, inflation tends toward a cycle of unpredictability and destabilizing volatility that can extend for years and even decades. Burns and Miller have lots of company when it comes to ineffective half-measure responses to escalating price pressures. There are huge longer-term costs associated with failing to employ aggressive measures to quickly contain bursts of inflation. And, importantly, Volcker demonstrated how a focus on money and Credit becomes critical for effective inflation containment.

If there was any doubt, there’s now clarity: Powell is No Volcker. In fairness to Powell, he’s demonstrating typical early-cycle, wishful inflation-fighting timidity. Time will tell if he is viewed as ineffective in thwarting a nascent inflationary spiral, callously grouped with the likes of Burns and Miller.

If I had to venture a guess, Powell believed his press conference remarks were balanced. He strived for balance.

Hawkish Powell: “It would be very premature to declare victory or to think that we've really got this.” “We believe ongoing rate hikes will be appropriate to attain a sufficiently restrictive stance of policy to bring inflation back down to 2%.” “Reducing inflation is likely to require a period of below trend growth and some softening of labor market conditions.” “The labor market remains very, very strong, and that's job creation - that's wages.” “The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.” “We see ourselves as having a lot of work left to do.” “And why do we think that's probably necessary? We think because inflation is still running very hot.” “We're going to be cautious about declaring victory and sending signals that we think that the game has won because we've got a long way to go.”

But Powell was not cautious, especially considering the extraordinary market backdrop. Dovish Powell provided a highly speculative marketplace all the signals it fancied that the Fed is happy to soon conclude this brief monetary tightening cycle. Goldilocks, soft-landing and resumption of perpetual bull markets. It all fits – it’s coming together as planned!!!

Powell’s hawkish gab was effortlessly brushed aside after his response to the initial question from AP’s Christopher Rugaber: “As you know, financial conditions have loosened since the fall, with bond yields falling, which has also brought down mortgage rates, and the stock market posted a solid gain in January. Does that make your job of combating inflation harder? And could you see lifting rates higher than you otherwise would to offset the easing of financial conditions?”

Powell: “So, it is important that overall financial conditions continue to reflect the policy restraint that we're putting in place in order to bring inflation down to 2%. And, of course, financial conditions have tightened very significantly over the past year. I would say that our focus is not on short-term moves, but on sustained changes to broader financial conditions. And it is our judgment that we're not yet at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes will be appropriate. Of course, many things affect financial conditions, not just our policy. And we will take into account overall financial conditions along with many other factors as we set policy.”

Instant market relief: “And, of course, financial conditions have tightened very significantly over the past year.” No pushback. Additional confirmation was forthcoming. “Financial conditions didn't really change much from the December meeting to now. They mostly went sideways or up and down - but came out in roughly the same place.” “We think we've covered a lot of ground, and financial conditions have certainly tightened.”

Speculative markets, luxuriating in arguably the loosest financial conditions since the Fed began raising rates last March, were bewildered. Commentators used “strange”. Markets had no idea what measure of financial conditions Powell was using; and whatever it was, it surely lacked credibility. But they loved it! No more worry that tight financial conditions might be a Fed inflation fight prerequisite. No more fretting that the Fed would put the kibosh on things. And with markets now really in the mood, Powell proceeded to deliver more pillow talk.

I will say that it is gratifying to see the disinflationary process now getting underway, and we continue to get strong labor market data.” “So, I would say it is a good thing that the disinflation that we have seen so far has not come at the expense of a weaker labor market. But I would also say that that disinflationary process that you now see underway is really at an early stage.”

It was market fantastic! Not only was the Fed keen to turn a blind eye to the return of market froth, but the marketplace could now rest assured that strong jobs data wouldn’t cause a Fed rethink of the level required for a restrictive policy rate (Friday’s stunning report of 517k jobs added in January forced a little market rethink).

And why on earth would Powell use “disinflation” 11 times during his 45-minute press conference – after stating that inflation was “still running very hot.” Balanced Powell strayed into Tangled Powell.

But there was more to love: “At the same time, if the data come in in the other direction, then we'll make data dependent decisions at coming meetings, of course.” “If we feel like we've gone too far, we can certainly - and inflation is coming down faster than we expect, then we have tools that would work on that.”

It was kind of crazy. Rather than pushing back against market expectations of a pivot later in the year, the Chair several times seemed to suggest the Fed would be willing to consider cutting rates if inflation comes in below the committee’s forecast.

Greg Robb from MarketWatch: “In the minutes of the December meeting, there was a couple of sentences that struck people as important. When the committee said participants talked about this unwarranted easing of financial conditions was a risk and it would make your life harder to bring inflation down… So, I was wondering, has that concern eased among members or is that still something you're concerned about?”

After stating that conditions “didn't really change much from the December meeting,” Powell added: “As we've discussed a couple of times here, there's a difference in perspective by some market measures on how fast inflation will come down. We're just going to have to see. I'm not going to try to persuade people to have a different forecast. But our forecast is that it will take some time and some patience - and that we'll need to keep rates higher for longer. But we'll see.”

Ten-year Treasury yields traded down to an almost five-month low of 3.33% during Powell’s press conference. It’s worth noting that the last time (prior to the current spike) inflation was at today’s level (up 6.5% y-o-y), Treasury yields were at double-digits. Ten-year Treasuries traded at an average yield of 10.57% during the eighties, 6.65% through the nineties, and 4.70% during the period 2000 through 2007.

Is the divergence between Fed rate forecasts and market rate expectations really about diverging views on the path of inflation? Why might Treasury yields remain so low today, considering recent inflation dynamics and the elevated risk of future inflationary shocks? And are today’s market yields sufficient to restrain what has been several years of historic Credit expansion?

Suffice it to say that these are critical and incredibly complex questions. My view is that markets are broken, and now hopelessly so. Prospects for - and actual - QE have fundamentally altered market perceptions and pricing for Treasuries, and this fundamental market distortion has led to artificially depressed term and risk premiums for fixed-income securities generally – which has fed through to inflated asset prices and speculative Bubbles (i.e. stocks, real estate, etc.) generally.

And, importantly, central bank-induced distortions have unleashed historic borrowing, both in the public and private sectors, along with unprecedented speculative leverage throughout global markets. This has ensured a massive accumulation of debt and financial leveraging that is unsustainable at more normalized (higher) market yields. Essentially, the Fed and global central bankers are these days trapped, a reality that is well-appreciated in the markets. Powell served soothing confirmation.

Listening to Powell and watching markets lurch to the upside, my thoughts returned to “The Maestro” Alan Greenspan. I had major issues with his monetary management, including what I believe was his penchant for obfuscation. For Powell, my feelings Wednesday vacillated between disappointment and a degree of sadness. I titled my November 4th CBB “Powell Building Credibility.” As central bankers go – and definitely compared his predecessors – Powell has been more the straight shooter. But does he believe what he was saying Wednesday, and if so, how does he explain major inconsistencies in his comments compared to just three months ago (November 1st)? I have lost confidence that the Chair is up to the challenge.

Greenspan was the original architect of “asymmetrical” monetary policy. He would raise rates gingerly, not to upset beloved markets. But he would then aggressively slash rates when markets found themselves in trouble. The free-markets advocate was in reality the master market operator. And what made Greenspan’s experimental policymaking so dangerous was that he was tinkering with the markets as the fledgling leveraged speculating community and Wall Street finance were rapidly becoming powerful players throughout the markets, Credit system and economy. He monkeyed with market incentives at the wrong time, with momentous and ongoing consequences.

And as the markets and Credit system became increasingly unstable, policymakers only doubled down with lower rates, bailouts and, later, QE. And let there be no doubt, without the 1994 bond market rescue and the 1995 Mexican bailout, there would not have been the terminal phase excess that culminated with the devastating 1997 Asian Tiger Bubble collapses and the 1998 Russia/LTCM implosion – and subsequent additional bailouts. The Fed and GSEs ensured excessively loose financial conditions through much of the nineties, accommodation that fueled the so-called “tech” Bubble. That bursting Bubble spurred perilous policy asymmetry – and the resulting much more systemic mortgage finance Bubble. And that bust sparked a previously unthinkable $1 TN of QE and years of zero rates.

Bernanke’s inflationist policies coerced savers out of their deposits and into equities and corporate bond ETFs, among other risky things – raising the risk of a disorderly reversal of speculative flows. And he took Greenspan’s asymmetrical approach to a dangerous new level with his 2013 declaration, “If financial conditions were to tighten to the extent that they jeopardized the achievement of our inflation and employment objectives, then we would have to push back against that.”

Understandably, markets interpreted Bernanke’s comment as an overt confirmation of the Fed’s market backstop (“Fed put”) – no market downdrafts tolerated. In one of history’s spectacular speculative Bubbles, the S&P500 surged from 1,600 to almost 3,400 and the Nasdaq Composite from 3,000 to 8,000, in six years, with the more speculative stocks and sectors greatly outperforming. The Bubble was bursting in March 2020, only to be resuscitated by $5 TN of Fed QE, along with unprecedented fiscal deficits. The S&P ended 2021 at 4,766 – though the S&P’s gain paled in comparison to manias in crypto, tech and growth stocks, “meme stocks,” SPACs and such.

Powell Wednesday needed to push back firmly against speculative markets, against the legacies of Greenspan and Bernanke. After printing $5 TN, he should have demonstrated a modicum of policy symmetry by at least leaning against the “echo Bubble.” It was astonishing to see Powell instead throw fuel on a major short squeeze and dangerous market instability.

The Goldman Sachs Most Short Index surged 5% on Powell’s comments – and was then up another 8% intraday in Thursday’s chaotic trading session. The Goldman Short Index was up 30.5% y-t-d as of Thursday’s close (ended the week up 27.4%). Don’t underestimate the ramifications of the great January 2023 cross-market short squeeze.

Powell’s assertion notwithstanding, financial conditions have loosened dramatically since the Fed’s December 14th meeting. Squeezes loosen conditions, while unleashing self-reinforcing speculative excess and leveraging. Corporate Credit spreads have significantly narrowed. After trading to 1.65 percentage points in October, corporate investment-grade spreads to Treasuries (from Bloomberg) were down to 1.30 on December 14th – and traded Thursday at a nine-month low of 1.15. High-yield spreads also narrowed to almost nine-month lows post-Powell.

Bank CDS prices are near the top of my list of financial conditions indicators. JPMorgan CDS closed December 14th at about 74 bps – down from October’s high of 130 bps. JPMorgan CDS ended this week at 60 bps, the low since February 2022 (before the Fed began raising rates). Also closing at lows back to last February were Goldman Sachs (78bps), Bank of America (63), Citigroup (72), and Morgan Stanley (66). The KBW Bank index sports a year-to-date gain of 13.6%, with the Broker/Dealers (XBD) up 10.5%. Why would the recent loosening of conditions not prolong the historic lending boom?

I have been pushing back against the Wall Street narrative that the bond market was pricing recession risk and for a resulting Fed pivot. I find Powell’s assertion that bond pricing reflects Wall Street’s constructive view of inflation even less convincing. There was certainly nothing this week that has me shying away from my view that the Treasury market is instead discounting the probability of an accident. These markets are an accident in the making.

The spectacular equities short squeeze is indicative of mounting trouble for the leveraged speculating community. In particular, long/short strategies have been hammered to begin the year by losses on short portfolios overwhelming gains on longs. And with the abrupt reversal in stocks, Treasuries, corporate Credit, British gilts, European and global equities and bonds, and emerging market currencies and bonds, it’s hard to believe last year’s big macro and quant hedge fund winners are not off to a bad start for 2023. Meanwhile, many of the funds that performed poorly last year were surely caught underexposed for January’s big rally – compounding their performance agony.

Markets are a mess. Squeeze dynamics have been causing mayhem. Meanwhile, waning Fed hawkishness and dollar weakness have supported precious metals and some commodity prices. And then Friday’s blowout payroll gain spurred a dollar reversal, with the yen, Australian dollar, New Zealand dollar and South African rand all down about 2% (euro down 1.1%). The Bloomberg Commodities Index sank 2.1%. Treasury yields reversed sharply higher Friday, with two-year yields surging 19 bps.

The backdrop is set for an especially challenging year for the leveraged speculating community. And as the marginal source of global market liquidity, a rattled zigging and zagging speculator community suggests market volatility, instability and uncertainty. And the longer the squeeze and market rallies are sustained, the more vulnerable markets are to a destabilizing downside reversal. In the meantime, the combination of unsettled fundamentals and capricious trading dynamics ensures extremely challenging performance dynamics. Furthermore, there’s China uncertainty, Bank of Japan uncertainty, Ukraine war uncertainties, and geopolitical uncertainties – not to mention financial and economic vulnerabilities.

I worry about Market Structure, and these concerns (including leveraged speculation, derivatives, and the ETF complex) will only grow if FOMO takes over, everyone gets bulled up and markets go into Bubble melt-up mode. At the end of the day, the existing structure – dominated by derivatives and “delta hedging,” risk obfuscation, leveraged speculation and trend-following flows – is not sustainable. From this perspective, the Fed being forced into rate cuts later this year seems more than plausible.

For the Week:

The S&P500 rose 1.6% (up 7.7% y-t-d), while the Dow slipped 0.2% (up 2.3%). The Utilities fell 1.4% (down 4.4%). The Banks jumped 2.2% (up 13.6%), and the Broker/Dealers added 1.8% (up 10.5%). The Transports surged 7.1% (up 15.9%). The S&P 400 Midcaps rose 3.4% (up 11.4%), and the small cap Russell 2000 jumped 3.9% (up 12.7%). The Nasdaq100 advanced 3.3% (up 14.9%). The Semiconductors surged 4.6% (up 21.7%). The Biotechs were little changed (up 6.0%). With bullion sinking $63, the HUI gold equities index dropped 5.7% (up 6.2%).

Three-month Treasury bill rates ended the week at 4.5225%. Two-year government yields rose nine bps this week to 4.29% (down 14bps y-t-d). Five-year T-note yields gained five bps to 3.66% (down 35bps). Ten-year Treasury yields increased two bps to 3.53% (down 35bps). Long bond yields slipped a basis point to 3.62% (down 35bps). Benchmark Fannie Mae MBS yields gained four bps to 4.89% (down 50bps).

Greek 10-year yields sank 25 bps to 4.00% (down 57bps y-o-y). Italian yields declined seven bps to 4.03% (down 67bps). Spain's 10-year yields fell 11 bps to 3.12% (down 40bps). German bund yields declined five bps to 2.19% (down 25bps). French yields fell six bps to 2.64% (down 34bps). The French to German 10-year bond spread narrowed one to 45 bps. U.K. 10-year gilt yields sank 25 bps to 3.06% (down 62bps). U.K.'s FTSE equities index rallied 1.8% (up 6.0% y-t-d).

Japan's Nikkei Equities Index increased 0.5% (up 5.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.50% (up 7bps y-t-d). France's CAC40 gained 1.9% (up 11.7%). The German DAX equities index rose 2.2% (up 11.2%). Spain's IBEX 35 equities index added 1.8% (up 12.1%). Italy's FTSE MIB index gained 1.9% (up 13.7%). EM equities were mixed. Brazil's Bovespa index sank 3.3% (down 1.0%), and Mexico's Bolsa index fell 1.4% (up 11.5%). South Korea's Kospi index was little changed (up 10.9%). India's Sensex equities index rallied 2.5% (unchanged). China's Shanghai Exchange Index was little changed (up 5.6%). Turkey's Borsa Istanbul National 100 index fell 3.7% (down 9.3%). Russia's MICEX equities index rose 2.7% (up 4.4%).

Investment-grade bond funds posted outflows of $582 million, and junk bond funds reported negative flows of $1.497 billion (from Lipper).

Federal Reserve Credit fell $23.2bn last week to $8.423 TN. Fed Credit was down $477bn from the June 22nd peak. Over the past 177 weeks, Fed Credit expanded $4.697 TN, or 126%. Fed Credit inflated $5.613 Trillion, or 200%, over the past 534 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $4.3bn to $3.325 TN. "Custody holdings" were down $133bn, or 3.8%, y-o-y.

Total money market fund assets increased $2.1bn to $4.821 TN. Total money funds were up $194bn, or 4.2%, y-o-y.

Total Commercial Paper dropped $21.2bn to $1.290 TN. CP was up $267bn, or 26.1%, over the past year.

Freddie Mac 30-year fixed mortgage rates declined three bps to 5.99% (up 244bps y-o-y). Fifteen-year rates increased three bps to 5.18% (up 241bps). Five-year hybrid ARM rates fell five bps to 5.42% (up 271bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 15 bps to 6.32% (up 257bps).

Currency Watch:

For the week, the U.S. Dollar Index increased 1.0% 102.92 (down 0.6% y-t-d). For the week on the upside, the South Korean won increased 0.2%. On the downside, the Norwegian krone declined 3.2%, the British pound 2.6%, the New Zealand dollar 2.5%, the Australian dollar 2.5%, the Swedish krona 2.2%, the South African rand 1.7%, the Mexican peso 1.1%, the Japanese yen 1.0%, the Singapore dollar 0.8%, the euro 0.7%, the Canadian dollar 0.6%, the Swiss franc 0.6% and the Brazilian real 0.5%. The Chinese (onshore) renminbi declined 0.2% versus the dollar (up 1.48% y-t-d).

Commodities Watch:

January 30 – Financial Times (Harry Dempsey): “Demand for gold surged to its highest in more than a decade in 2022, fuelled by ‘colossal’ central bank purchases that underscored the safe haven asset’s appeal during times of geopolitical upheaval. Annual gold demand increased 18% last year to 4,741 tonnes, the largest amount since 2011, driven by a 55-year high in central bank purchases, according to the World Gold Council… Central banks hoovered up gold at a historic rate in the second half of the year, a move many analysts attribute to a desire to diversify reserves away from the dollar after the US froze Russia’s reserves denominated in the currency… Retail investors also piled into the yellow metal in a bid to protect themselves from high inflation.”

February 1 – CNBC (Elliot Smith): “Gold demand soared to an 11-year high in 2022 on the back of ‘colossal central bank purchases, aided by vigorous retail investor buying,’ according to the World Gold Council. Annual gold demand jumped 18% to 4,741 tons across the year, the largest annual figure since 2011, fueled by record fourth-quarter demand of 1,337 tons. Key to the surge was a 55-year high of 1,136 tons bought by central banks across the year…, noting that the majority of these purchases were ‘unreported.’ This marked a 152% increase from 2021, when central banks bought just 450 tons of gold, and the World Gold Council attributed the spike to geopolitical uncertainty and high inflation.”

January 29 – Financial Times (Leslie Hook): “High interest rates, volatile prices and the war in Ukraine have made it significantly more expensive to finance commodity trade, forcing the industry to hunt for an extra $300bn to $500bn in working capital to keep raw materials moving around the world. Changing trade patterns have made the global flow of raw materials less efficient and more costly to finance and are also likely to push up the price of commodities for consumers, according to… McKinsey. ‘Since the end of 2020, we have seen a doubling of the working capital requirements in the commodity trading sector,’ said Roland Rechtsteiner, McKinsey partner and lead author of the report. ‘We could see a similar increase by the end of next year, if [further] changes in trade flows materialise.’”

The Bloomberg Commodities Index sank 4.1% (down 5.1% y-t-d). Spot Gold lost 3.3% to $1,865 (up 2.2%). Silver dropped 5.3% to $22.35 (down 6.7%). WTI crude sank $6.29, or 7.9%, to $73.39 (down 9%). Gasoline lost 10.3% (down 6%), and Natural Gas sank 22.5% to $2.41 (down 46%). Copper dropped 3.9% (up 7%). Wheat increased 0.9% (down 5%), while Corn slipped 0.8% (unchanged). Bitcoin gained $260, or 1.1%, this week to $23,345 (up 40.8%).

Market Instability Watch:

February 2 – Reuters (Ann Saphir and Lindsay Dunsmuir): “Federal Reserve Chair Jerome Powell had a clear message on Wednesday: as ‘gratifying’ as it is that inflation has begun to slow, the central bank is nowhere near to reversing course or declaring victory. ‘It's going to take some time’ for disinflation to spread through the economy, Powell said in a news conference following the Fed's latest quarter-point interest rate increase. He said he expects a couple more rate hikes still to go, and, ‘given our outlook, I just I don't see us cutting rates this year.’ Investors ignored him, keeping bets on just one more rate hike ahead and piling further into bets that rates will be lower by year's end than they are now.”

February 1 – Bloomberg (Tatiana Darie): “The rally in credit has been remarkable, leaving spreads on investment-grade bonds tighter than they were in March, when the Fed started raising interest rates. Further supporting the strength in this market, US high-grade bond sales volumes surged to a record on Tuesday in data going back to 2005... IG total returns totaled 4% in January, its best start to the year since 1975. Junk bonds have also fared impressively, with returns exceeding 3.8% only three other times since 1994. Spreads have tightened about 47bp this year so far, sitting well below levels seen in previous economic slowdowns, let alone recessions.”

February 1 – Bloomberg (Abhishek Vishnoi, Josyana Joshua and P R Sanjai): “Gautam Adani’s beleaguered empire is spiraling into crisis, as the fallout from a short-seller’s fraud allegations leads to a worsening meltdown in the indebted conglomerate’s securities. Bonds of the Indian billionaire’s flagship firm plunged to distressed levels in US trading, and the company abruptly pulled a record domestic stock offering after the Adani group suffered a $92 billion market crash. Banks either want more collateral for loans, or are scrutinizing the value of the company’s debt to lend against. The question now is what Adani will do to prevent the turmoil from getting out of control…”

February 1 – Financial Times (Benjamin Parkin): “A decade ago Gautam Adani outlined the strategy behind the rapid rise of his business empire: leverage one company to fund another’s expansion. ‘Either you sit on the pile of cash or you continue to grow,’ he told the Financial Times. ‘There is no other way you can do it.’ It is a method that has served the Indian entrepreneur well as his Adani Group scaled up and diversified in industries from ports to power. He has become one of the world’s richest people in the process, with a fortune of more than $100bn by the start of this year. The pace of borrowing has only increased as Adani laid out ever more ambitious pushes into areas such as 5G and green hydrogen, with the group’s debt doubling to about $30bn in the past four years.”

January 31 – Financial Times (Nikou Asgari): “Liquidity is no longer the biggest worry for traders in financial markets… Instead, volatility has climbed to the top of the list of traders’ concerns in 2023, as rising global interest rates and geopolitical tensions spark big moves in markets, according to a survey of traders by JPMorgan. Traders and investors had for the previous six years listed liquidity as their biggest concern, with many worrying about the risk of a financial accident caused by a breakdown in the functioning of important markets, including in US Treasuries that form the bedrock of global finance.”

Bursting Bubble and Mania Watch:

February 1 – Bloomberg (Denise Wee and Joyce Koh): “Citigroup Inc.’s wealth arm has stopped accepting securities of Gautam Adani’s group of firms as collateral for margin loans as banks ramp up scrutiny of the Indian tycoon’s finances following allegations of fraud by short seller Hindenburg Research.”

February 1 – Financial Times (Robin Wigglesworth): “Blackstone’s BREIT says it is ready to ‘play offence’ now that it has the University of California on its roster, but some investors still seem to want to take their ball and go home... The $69bn Blackstone Real Estate Income Trust has just released its latest update on investor redemptions, and it looks like another $5.3bn requests for repurchases were submitted, but only $1.3bn will be allowed out… A reminder: BREIT is non-traded, private real estate investment trust that handles investors’ inflows and outflows by selling or repurchasing shares on a monthly basis. But given the illiquid nature of property, BREIT stipulates that investors can only withdraw up to 2% of its net asset value in any given month, and max 5% in any quarter (and even that can be halted) to ‘prevent a liquidity mismatch and maximise long-term shareholder value’.”

February 2 – Bloomberg (Lu Wang): “President Joe Biden dislikes them. The taxman is coming after them. And Wall Street strategists warn the boom won’t last. Yet against all odds, Corporate America continues to splurge on its own shares — a force that has fueled the new year rally. In the first month of 2023, announced buybacks more than tripled to $132 billion from a year ago, reaching the highest total ever to start a year, according to… Birinyi Associates. The planned repurchases surpassed the previous January record, set two years ago, by more than 15%.”

February 2 – Bloomberg (Emily Graffeo and Carol Massar): “Cathie Wood’s funds had a scorching start to the year and she wants investors to know it. In an interview with Bloomberg’s Carol Massar and Tim Stenovec, the founder and chief executive officer of ARK Investment Management said her flagship fund now gives investors better exposure to long-term innovation than most of the market’s most popular growth stock benchmarks. ‘We are the new Nasdaq,’ Wood said.”

February 1 – Bloomberg (Fareed Sahloul): “The world’s dealmakers are enduring their worst start to a year in two decades, as economic and financing headwinds continue to prevent a bounceback in mergers and acquisitions. Global deal values ended January at about $124 billion… That was down roughly two thirds year-on-year and the worst tally for an opening month since 2003... While all major regions and sectors ended January lower compared with the same point in 2022, there were less severe falls in areas such as industrials.”

January 30 – New York Times (Neal E. Boudette): “About a year ago, the used-car business was a rollicking party. The coronavirus pandemic and a global semiconductor shortage forced automakers to stop or slow production, pushing consumers to used-car lots. Prices for pre-owned vehicles surged. Now, the used-car business is suffering a brutal hangover. Americans, especially people on tight budgets, are buying fewer cars… And improved auto production has eased the shortage of new vehicles. As a result, sales and prices of used cars are falling and the dealers that specialize in them are hurting.”

January 29 – Wall Street Journal (Heather Gillers): “North American pension-fund investment in private-market loans reached an eight-year high in 2022, even as banks pulled back on lending and default rates inched upward. The average share of these retirement funds parked in the illiquid, typically unrated debt has crept up steadily to 3.8%, the highest on record, according to… Preqin. Though a fraction of the overall portfolio, private credit now amounts to more than $100 billion in the retirement savings of U.S. and Canadian teachers, police and other public workers…”

Crypto Bubble Collapse Watch:

January 31 – Reuters (Rae Wee, Elizabeth Howcroft, Alun John and Dietrich Knauth): “Bankrupt crypto lender Celsius Network used investor money and customer deposits to prop up its own token while two of its founders made millions of dollars from token sales, a U.S. court-ordered examiner report… showed. Crypto lenders such as Celsius boomed during the COVID-19 pandemic, drawing customers by promising high interest rates on their cryptocurrency deposits… Celsius filed for U.S. bankruptcy in July after freezing customer withdrawals.”

February 1 – Yahoo Finance (David Hollerith): “Hackers stole $3.8 billion from crypto investors in 2022, a 13% increase from 2021 and marking a new all time high for annual theft of digital coins. This rise in crypto hacks is just the latest indicator to underscore how security within the digital asset market, especially Decentralized Finance (DeFi), remains a major obstacle... According to a new report by blockchain forensics firm Chainalysis, DeFi protocols accounted for $3.1 billion, or 82%, of all crypto stolen by hackers, up 9% from 2021.”

Ukraine War Watch:

February 1 – Wall Street Journal (Jared Malsin): “Russia is preparing to launch a major new offensive against Ukraine in the coming weeks, a top Ukrainian security official said, adding to mounting concerns in Kyiv and the West that the Kremlin is preparing a renewed push to seize large areas of the country. ‘Russia is preparing for maximum escalation,’ said Oleksiy Danilov, the secretary of Ukraine’s National Security and Defense Council… ‘It is gathering everything possible, doing drills and training.’ The warning comes after weeks in which Ukrainian and Western officials have pointed to the risk of a possible new offensive by Russia in the months ahead. Within Russia, the military is under pressure to regain battlefield momentum after it lost swaths of territory to a Ukrainian offensive during the second half of last year.”

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

February 3 – CNN (Jennifer Hansler, Kevin Liptak, Jeremy Herb, Kylie Atwood, Jim Sciutto and Oren Liebermann): “US Secretary of State Antony Blinken has postponed his upcoming trip to China in response to the flying of a suspected Chinese spy balloon over the United States, in what marks a significant new phase in the tensions between Washington and Beijing. Blinken, who was due to depart Friday night for Beijing, said… that the high-altitude surveillance balloon flying over the continental United States ‘created the conditions that undermine the purpose of the trip.’… ‘In my call today with Director Wang Yi, I made clear that the presence of this surveillance balloon in US airspace is a clear violation of US sovereignty and international law, that it’s an irresponsible act, and that the (People’s Republic of China) decision to take this action on the eve of my planned visit is detrimental to the substantive discussions that we were prepared to have,’ Blinken told reporters…”

January 27 – Financial Times (Demetri Sevastopulo): “A top American air force general has predicted that the US and China will probably go to war in 2025, in the most dramatic warning yet from a senior military officer about the likelihood of a conflict over Taiwan. General Mike Minihan, head of US Air Mobility Command, said the two military powers were likely to end up at war because of a series of circumstances that would embolden Chinese president Xi Jinping. ‘I hope I am wrong. My gut tells me we will fight in 2025,’ Minihan wrote in a private memo to his top commanders…”

January 31 – Reuters (Sakura Murakami and Kentaro Sugiyama): “NATO chief Jens Stoltenberg and Japanese premier Fumio Kishida pledged… to strengthen ties, saying Russia's invasion of Ukraine and its growing military cooperation with China had created the most tense security environment since World War Two. The comments came… during Stoltenberg's trip to Japan following a visit to South Korea on which he urged Seoul to increase military support to Ukraine and gave similar warnings about rising tension with China. ‘The world is at a historical inflection point in the most severe and complex security environment since the end of World War II,’ the two leaders said… It also raised concerns about Russia's nuclear threats, joint military drills between Russia and China near Japan, and North Korea's development of nuclear weapons.”

February 2 – Associated Press (Jim Gomez): “The United States and the Philippines announced an expansion of America’s military presence in the Southeast Asian country…, with U.S. forces granted access to four more military camps, effectively giving Washington new ground to ramp up deterrence against China. The agreement between the longtime allies was made public during the visit of U.S. Secretary of Defense Lloyd Austin, who has led efforts to strengthen America’s security alliances in Asia in the face of China’s increasing assertiveness toward Taiwan and territorial disputes in the South China Sea.”

January 30 – BBC: “Boris Johnson has said Vladimir Putin threatened him with a missile strike in an ‘extraordinary’ phone call in the run-up to Russia's invasion of Ukraine. The then-prime minister said Mr Putin told him it ‘would only take a minute’. Mr Johnson said the comment was made after he warned the war would be an ‘utter catastrophe’… ‘He threatened me at one point, and he said, 'Boris, I don't want to hurt you but, with a missile, it would only take a minute' or something like that. Jolly.’”

De-globalization and Iron Curtain Watch:

January 31 – Reuters (Joe McDonald and Aamer Madhani): “China’s government accused Washington… of pursuing ‘technology hegemony,’ as the United States has begun stepping up pressure on tech giant Huawei by blocking access to American suppliers. The Biden administration has stopped approving renewal of licenses to some U.S. companies that have been selling essential components to the Chinese company…”

January 30 – Reuters: “Iran and Russia have connected their interbank communication and transfer systems to help boost trade and financial transactions, a senior Iranian official said…, as both Tehran and Moscow are chafing under Western sanctions. Since the 2018 reimposition of U.S. sanctions on Iran after Washington ditched Tehran's 2015 nuclear deal with world powers, the Islamic Republic has been disconnected from the Belgium-based SWIFT financial messaging service, which is a key international banking access point. Similar limitations have been slapped on some Russian banks... ‘Iranian banks no longer need to use SWIFT… with Russian banks, which can be for the opening of Letters of Credit and transfers or warranties,’ Deputy Governor of Iran's Central Bank, Mohsen Karimi, told the… Fars news agency.”

January 30 – Reuters (Liz Lee): “China's new foreign minister Qin Gang wants to build stronger ties with Saudi Arabia and set up a China-Gulf free trade zone ‘as soon as possible’, according to a ministry statement… Qin… made the suggestion in a telephone conversation with his Saudi Arabian counterpart, Prince Faisal bin Farhan Al Saud, adding that China highly appreciates Saudi Arabia's consistent firm support on issues involving China's core interests. He said the sides should further expand cooperation on economy, trade, energy, infrastructure, investment, finance, and high technology.”

Inflation Watch:

January 30 – Bloomberg (Michelle Jamrisko): “Inflation remains a big challenge for policymakers worldwide, a top International Monetary Fund official said after the lender raised its global economic growth outlook... ‘We are far from having won the fight against inflation,’ IMF Chief Economist Pierre-Olivier Gourinchas said… ‘We’ve had a few good prints. It’s encouraging. It’s in the right direction.’… It will still be a ‘challenging year,’ with growth below the average of the past two decades and inflation only starting to come off its peak while core prices could remain persistent, he said.”

January 30 – Bloomberg (Enda Curran, Chang Shu, Bjorn Van Roye and Tom Orlik): “China’s reopening is set to provide a welcome boost to global growth, offsetting weakness in Europe and a looming recession in the US. But unlike in 2009, when China’s four-trillion-yuan stimulus helped kickstart a recovery from the Lehman slump, in 2023 there’s a catch — a boost to inflation at exactly the moment the Federal Reserve and other central banks race to bring it back under control. That’s why Kristalina Georgieva, the head of the International Monetary Fund, said this month that China’s pivot from Covid Zero is probably the single most important factor for global growth in 2023… ‘What if the good news of China growing faster translates into oil and gas prices jumping up, putting pressure on inflation?’ she said at the World Economic Forum in Davos.”

January 28 – Financial Times (Emiko Terazono): “Fertiliser and crop prices have fallen sharply since their peaks after last year’s Russian attack on Ukraine. Yet agriculture specialists and analysts have warned that the world’s food supplies are still under threat. Food prices were already elevated before Russia’s full-scale invasion of Ukraine early last year, due to droughts and coronavirus pandemic-related hoarding… Then crop nutrient prices soared as a result of Moscow’s position as the world’s largest fertiliser exporter, while the jump in natural gas prices, a critical ingredient for nitrogen fertilisers, also piled pressure... Last year’s Black Sea grain deal between Moscow and Kyiv played a crucial role in subduing prices, along with plentiful supplies from Russia, while lower natural gas prices have calmed fertiliser markets. However, analysts warn the grain deal could unravel, while volatile energy prices and climate change also threaten to undermine crop production.”

January 28 – Financial Times (Harry Dempsey and George Steer): “Industrial metals have ripped higher since November on bets that China’s reopening will boost demand for raw materials. A group of ‘base metals’ led by tin, zinc and copper have surged more than 20% in three months, further supported by the US Federal Reserve signalling a slowdown in the pace of interest rate rises and a softening in the US dollar, which importers use to buy commodities. Star performer tin has rocketed almost 80% to $32,262 per tonne, the highest level since June, while copper prices have rallied by a tenth this month to $9,329 per tonne…”

January 31 – Bloomberg (Michael Hirtzer and Elizabeth Elkin): “Steaks and hamburgers will likely be more expensive in the next few years with US cattle shrinking to its lowest herd since 2014. There were almost 89.3 million cattle as of Jan. 1, down 3% from a year ago, according to a US Department of Agriculture cattle-inventory report... While the drop wasn’t unexpected… a bigger decline in beef output may still be ahead in 2025 or 2026. ‘With fewer cattle supplies becoming available, beef production is expected to undergo a sizable decline over the next few years,’ said Courtney Shum, a livestock-market reporter at Urner Barry…”

Biden Administration Watch:

February 1 – Reuters (Trevor Hunnicutt and Jeff Mason): “President Joe Biden and Republican House Speaker Kevin McCarthy held initial talks on Wednesday about raising U.S. government borrowing limits in a first test of how the two will work together, with both sides agreeing to talk more. The White House said after the meeting that Biden told McCarthy he was eager to work with Republicans ‘in good faith.’ McCarthy said the two men could find common ground. But, as expected, there was no sign of an immediate breakthrough. ‘The president and I had a good first meeting,’ McCarthy told reporters… ‘I think at the end of the day, we can find common ground,’ he said.”

January 31 – Reuters (Andy Sullivan): “A Democratic president. A new Republican majority in the U.S. House of Representatives pushing for sharp spending cuts. A rapidly growing pile of debt - and a showdown that threatens to throw the global economy into turmoil. Sound familiar? Those elements driving the debate over raising the federal government's $31.4 trillion debt ceiling were also in place back in 2011, taking the country to the brink of default and prompting a downgrade of the country's top-notch credit rating. Veterans of that battle warn that this time around the politics and math are tougher, making it more difficult to find a resolution until the government is about to run out of money - or after it has. ‘This year is going to be much harder than 2011, because of the shrill nature of the political discourse,’ said Charlie Bass, a Republican who served in the House during that time.”

January 30 – Bloomberg (Ross Colvin and David Lawder): “A top Republican in the U.S. Congress said… the odds of conflict with China over Taiwan ‘are very high’ after a U.S. general caused consternation with a memo that warned that the United States would fight China in the next two years. In a memo dated Feb. 1 but released on Friday, General Mike Minihan, who heads the Air Mobility Command, wrote to the leadership of its roughly 110,000 members, saying, ‘My gut tells me we will fight in 2025.’”

January 31 – Reuters (Karen Freifeld, Alexandra Alper and Stephen Nellis): “The Biden administration has stopped approving licenses for U.S. companies to export most items to China's Huawei, according to three people familiar... Huawei has faced U.S. export restrictions around items for 5G and other technologies for several years, but officials in the U.S. Department of Commerce have granted licenses for some American firms to sell certain goods and technologies to the company. Qualcomm Inc in 2020 received permission to sell 4G smartphone chips to Huawei.”

Federal Reserve Watch:

February 1 – Financial Times (Colby Smith and Kate Duguid): “The US Federal Reserve increased its benchmark interest rate by a quarter of a percentage point… but warned ‘ongoing increases’ would be needed to bring inflation under control. The shift down to a quarter-point increase marked a return to a slower, more orthodox pace of rate rises… However…, the Fed maintained that ‘ongoing increases in the target range will be appropriate’ in order to ensure it is restraining activity enough to bring price pressures under control… Powell signalled that Fed officials remained chiefly concerned about the risks of doing too little to tame inflation rather than squeezing the economy too much… He added: ‘You know, the job is not fully done… so I think it would be premature… very premature to declare victory.’ He also appeared to rule out pausing rate rises and restarting them at a later date… Despite Powell’s comments, markets rallied sharply during and after the press conference as traders focused on a smattering of dovish notes from the Fed chair, including the fact he could say ‘for the first time the disinflationary process has started’.”

January 31 – Reuters (Michael S. Derby): “Federal Reserve officials believe their effort to shrink the U.S. central bank's bond holdings is far from done, pushing back against some economists' idea that dwindling financial sector liquidity would bring the drawdown to a close in coming months. Instead, Fed officials reckon there remains a lot of liquidity, properly measured, for them to remove as part of their push to tighten financial conditions and bring down inflation. These officials also noted the Fed at some point could even lower short-term interest rates as it continues to draw down the roughly $8.5 trillion balance sheet, and that such a move would not be at odds with wider monetary policy. ‘I am confident that we have room to continue running off our assets for quite some time,’ Dallas Fed President Lorie Logan said…’Exactly how long that is will depend on a careful assessment of the financial environment.’”

February 1 – Financial Times (Aziz Sunderji): “There have been a lot of red faces in the asset management industry lately, with Tiger Global alone incinerating almost $18bn in 2022. But you know who really sucks at investing? Central banks. Take the Federal Reserve, for example. Chair Jay Powell had the Fed gobbling up almost every bond in sight ($4.5tn worth) at the start of the pandemic while rates were already close to all-time lows. There was only one way for yields to go. What was he thinking? Unsurprisingly, the Fed’s portfolio has stunk. The Fed’s last financial update, in September 2022, reveals paper losses of almost $1.3tn during the first three quarters of that year.”
U.S. Bubble Watch:

February 3 – Associated Press (Paul Wiseman): “For nearly a year, the Federal Reserve has been on a mission to cool down the job market to help curb the nation’s worst inflation bout in four decades. The job market hasn’t been cooperating. Consider what happened in January: The government said Friday that employers added a sizzling 517,000 jobs last month and that the unemployment rate dipped to 3.4%, the lowest level since 1969. The job gain was so large it left economists scratching their heads and wondering why the Fed’s aggressive interest rate hikes haven’t slowed hiring at a time when many foresee a recession nearing.”

February 1 – CNN (Alicia Wallace): “Despite the looming threat of recession and the cacophony of mass layoff announcements, US businesses still need workers — 11.01 million of them. The number of available jobs unexpectedly rose in December, climbing from a revised 10.44 million openings in November and exceeding economists’ expectations… The 11 million openings for December is the highest since July. The largest increases in job openings were in accommodation and food services, which were up 409,000; retail trade, up 134,000; and construction, up 82,000, according to the BLS report. The latest Job Openings and Labor Turnover Survey, or JOLTS, showed the labor market that entered 2022 red-hot had finished up the year still balmy: There were 1.9 available jobs for every person looking for one.”

February 1 – CNBC (Jeff Cox): “Job creation in the private sector plunged in January as weather-related issues sent workers to the sidelines, payroll processing firm ADP reported… Companies added just 106,000 new workers for the month, down from an upwardly revised 253,000 the month before. Economists… had been looking for a gain of 190,000. Most of the growth came in the hospitality industry, as bars, restaurants, hotels and the like added 95,000 positions. Other growth industries included financial activities (30,000), manufacturing (23,000), and education and health services (12,000).”

February 2 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits dropped to a nine-month low last week as the labor market remains resilient… ‘Some day soon economists will have to take down those calls for recession in 2023 because the labor market refuses to budge from the lowest unemployment rate in decades,’ said Christopher Rupkey, chief economist at FWDBONDS... Initial claims for state unemployment benefits dropped 3,000 to a seasonally adjusted 183,000 for the week ended Jan. 28, the lowest level since April 2022. It was the third straight weekly decline in applications.”

February 1 – Bloomberg (Reade Pickert): “The US manufacturing downturn deepened last month, fueled by a further pullback in orders and factory production. The Institute for Supply Management’s gauge of factory activity fell for a fifth straight month in January to 47.4, the weakest since May 2020… The ISM gauges of both orders and production slipped further into contraction territory in January, also falling to their lowest levels since mid-2020. Fifteen manufacturing industries reported contraction last month, led by wood products, textiles, paper products and furniture. Only two — miscellaneous manufacturing and transportation equipment — reported growth… The ISM’s measure of prices paid for materials increased for the first time in nearly a year, to 44.5.”

February 1 – CNBC (Diana Olick): “After a stronger start to the year, mortgage demand plunged last week, despite another drop in interest rates. Total mortgage application volume fell 9% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index… Even with rates well off their recent highs, applications to refinance a home loan fell 7% for the week and were 80% lower than the same week one year ago… Mortgage applications to buy a home fell 10% for the week and were 41% lower year over year.”

January 31 – Fox Business (Megan Henney): “Home prices declined again in November as higher mortgage rates continued to weigh on consumer demand for new houses. Prices slid 0.6% nationally in the period from October to November, the fifth consecutive monthly decline, the S&P CoreLogic Case-Shiller index showed… On an annual basis, the index climbed 7.7% in November. ‘The home price data released today do not account for the full impact of rising mortgage rates, which were above 7% early in November, and led to a significant pullback in buyer activity,’ said Lisa Sturtevant, the chief economist at Bright MLS. ‘In many local markets across the country, home prices have fallen precipitously from their summer peaks as buyers were forced out of the market due to affordability challenges.’”

January 31 – Bloomberg (Prashant Gopal): “The US housing slump stretched into a fifth month, sending a measure of prices down 2.5% from a peak in June. Prices also fell roughly 0.3% in November from a month before, according to… S&P CoreLogic Case-Shiller. Last year’s run-up in mortgage rates cast a chill on the housing market, leading to the worst annual slide in sales of previously owned homes in more than a decade. That’s pressured prices, particularly in parts of the country such as San Francisco where affordability was already stretched. Prices in that California city were down 1.6% from a year earlier, its biggest year-over-year price decline in more than a decade.”

January 31 – Reuters (Lucia Mutikani): “U.S. labor costs increased at their slowest pace in a year in the fourth quarter as wage growth slowed… The Employment Cost Index, the broadest measure of labor costs, rose 1.0% last quarter... That was the smallest advance since the fourth quarter of 2021 and followed a 1.2% gain in the July-September period… Labor costs increased 5.1% on a year-on-year basis after climbing 5.0% in the third quarter.”

January 31 – Bloomberg (Alex Tanzi): “The share of Americans who say they live paycheck-to-paycheck climbed last year, and most of the new arrivals in that category were among the country’s higher earners... Some 64% of US consumers — equivalent to 166 million people — were living paycheck-to-paycheck at the end of 2022, according to the survey by… and LendingClub Corp. That’s an increase of 3 percentage points from a year earlier, or 9.3 million Americans. And out of that group, some 8 million were people earning more than $100,000 a year. More than half of that income cohort said they lived paycheck-to-paycheck in December, up 9 percentage points from a year earlier.”

February 2 – Wall Street Journal (Anne Tergesen): “Squeezed by higher prices and short on cash, more Americans are tapping their 401(k)s for financial emergencies. A record 2.8% of the five million people in 401(k) plans run by Vanguard Group tapped their retirement savings in 2022 to cope with hardships… That is up from 2.1% in 2021 and a prepandemic average of about 2%. This increase in the number of people taking hardship withdrawals is partly driven by several government moves since 2018 that have loosened the rules for taking such distributions from retirement accounts.”

February 2 – The Hill (Jana Randow and Alexander Weber): “In a new survey, two-fifths of millennials say their parents still pick up one or more of their monthly bills. And the most common parental subsidy is the largest: housing. Twenty-four percent of millennials say Mom or Dad pay their rent, and 17% say parents cover a mortgage. Smaller shares of the 26-to-41 demographic reported parental help with groceries (22%), utility bills (19%), auto insurance (18%), car payments (16%) or streaming services (12%). ‘It’s just really expensive to be a young person now,’ said Kimberly Palmer, a personal finance expert at NerdWallet. ‘The cost of housing, of food: across the board, everything is expensive, especially in big cities. It can be a huge asset to be able to turn to your parents.’”

January 30 – Bloomberg (Lauren Coleman-Lochner): “Millions of Americans are likely to lose Medicaid coverage this year. That’s bad news for hospitals as well as patients. Hospitals will likely see bad debt soar when a pandemic-era rule expires allowing states to kick patients off Medicaid April 1, according to a January report from Moody’s…”

February 1 – Bloomberg (Vildana Hajric and Jonathan Ferro): “The disappointments around Corporate America profits could ‘accelerate,’ with the recent rally in equities potentially becoming a head-fake, according to Morgan Stanley’s Mike Wilson. ‘Earnings are disappointing everywhere, OK? This is one of the worst streaks in earnings we’ve seen in quite a while,’ Wilson said… ‘People are now saying, ‘Oh, it’s better than feared,’ and this, that and the other. That’s like saying a tornado ripped through your house and saying, ‘Oh well, it only knocked out the bedroom.’ The earnings are bad.’”

China Watch:

January 31 – Reuters (Joe Cash): “China's economic activity swung back to growth in January, after a wave of COVID-19 infections passed through the country faster than expected following abandonment of pandemic controls… The official purchasing managers' index (PMI), which measures manufacturing activity, rose to 50.1 in January from 47.0 in December… A rebound in non-manufacturing activity was more decisive than expected by economists - but helped by a seasonal surge in spending for the Lunar New Year holiday. That index, which covers services, leapt to 54.4, from 41.6 in December.”

January 29 – Bloomberg (Jill Disis): “China’s economy showed a few signs of improvement in January as the country charted a path through its second month without Covid Zero curbs, though a major holiday season kept a lid on some activity. Bloomberg’s aggregate index of eight early indicators showed a slight uptick in activity in January. That compared with a contraction in December as the economy slowed in response to a massive Covid-19 outbreak.”

January 30 – Bloomberg: “China’s budget deficit jumped to a record $1.3 trillion last year, showing the strain put on local government finances by the spending needed to implement and offset the ultimately futile Covid Zero policy. The overall deficit of 8.96 trillion yuan puts local governments in an increasingly poor fiscal position and could make the central government reluctant to support the economy with fiscal spending after last year’s slump in growth. The deficit was larger than the previous record of 8.72 trillion yuan in 2020, when the economy was battered by the initial Covid outbreak, and was 51% higher than in 2021…”

January 29 – Financial Times (Primrose Riordan): “The Chinese government has vowed to make consumption the ‘main driving force’ of the economy as hope grows that Beijing’s abandonment of zero-Covid policies will unleash a flood of spending by Chinese consumers, fuelling a global rebound. ‘The greatest potential of the Chinese economy lies in the consumption by the 1.4 billion people,’ Li Keqiang, China’s premier, said during a meeting of the State Council, China’s cabinet… ‘Boosting consumption is a key step to expand domestic demand. We need to restore the structural role of consumption in the economy.’”

January 29 – Reuters (Kevin Yao): “China's central bank said… it will roll over three lending tools to increase support for targeted sectors of the economy. The People's Bank of China will roll over a lending tool for supporting carbon emission reduction to the end of 2024, and extend a relending tool for promoting the clean use of coal to the end of 2023, the bank said… The central bank will also extend a relending tool for the transport and logistics sector to June 2023, it said.”

February 2 – Bloomberg: “China’s banks may ratchet up financing to support the country’s economic restructuring, targeting low-carbon development, technological innovation, farming, SMEs and elderly care services, in expectation of more monetary easing this year, the China Securities Journal reports... Banks may direct lending in response to Beijing’s call to avoid flooding the system with liquidity without clear targets, according to Lou Feipeng, a researcher with the Postal Savings Bank of China…”

February 2 – Bloomberg: “China’s foreign trade environment is ‘extremely severe’ and the outlook for investment is also challenging this year as the global economy slows and faces uncertainty, according to Ministry of Commerce officials. Issues include the rising risk of a global economic recession, slowing growth in external demand and the changing landscape of global supply chains, Li Xingqian, head of the ministry’s foreign trade department, said… The country also needs to ‘stabilize the role of exports in supporting the national economy,’ Li said.”

January 31 – Bloomberg: “China’s home sales continued to slump in January, even after policy makers expanded stimulus for the sector and the nation abandoned its Covid restrictions faster than expected. The 100 biggest real estate developers saw new home sales drop 32.5% from a year earlier to 354.3 billion yuan ($52.4bn), according to preliminary data from China Real Estate Information Corp. The decline came two months after a policy shift to rescue the industry… Local authorities have since been stepping up efforts to revive demand, including by cutting mortgage rates and easing down-payment requirements.”

January 31 – Bloomberg: “China’s top 100 developers saw their combined contract sales down 32.5% on year to 354.3b yuan in January, according to data released by China Real Estate Information Corp. It was a decline of 48.6% from a month earlier. New home sales in 30 Chinese key cities are expected to have fallen 41% on year in January; It was a decline of 41% from a month earlier…”

February 1 – Bloomberg: “The drought of new dollar bonds from Chinese firms persisted last month, with the slowest January since 2012 despite a surge of debt issuance globally to start this year. There was $5.46 billion of such debt priced last month…”

January 30 – Reuters (Xinghui Kok and Chen Lin): “Like many rich Chinese, graduate student Zayn Zhang thinks Singapore could be ideal to park his family's wealth. He's hoping that studying at a university in the Asian financial hub will lead to permanent residency and while the 26-year-old hits the books, his wife is out looking for a S$5-7 million ($4-5 million) penthouse. ‘Singapore is great. It is stable and offers a lot of investment opportunities,’ Zhang told Reuter... His family might establish a Singapore family office to manage its wealth in the future, he added.”

Central Banker Watch:

February 2 – Bloomberg (Jana Randow and Alexander Weber): “The European Central Bank lifted interest rates by a half-point, with President Christine Lagarde saying another such move is almost certain next month, despite conceding that the inflation outlook is improving. Policymakers, as expected, raised the deposit rate to 2.5%, the highest since 2008. Lagarde warned that the most aggressive bout of monetary tightening in ECB history isn’t done — even as energy prices plunge and the Federal Reserve moderates the pace of its own hikes… The Governing Council said it ‘intends’ to raise rates by another 50 bps at its March meeting, then “evaluate the subsequent path of its monetary policy.”

February 2 – Bloomberg (Andrew Atkinson and Philip Aldrick): “The Bank of England signaled the fastest pace of interest-rate hikes in three decades may be drawing to a close after it raised its benchmark lending rate a half point. Policy makers led by Governor Andrew Bailey voted 7-2 to raise the benchmark lending rate to 4%, the highest since 2008. The majority said strong pay growth and an ongoing shortage of workers were driving price pressures in the economy. But the BOE’s latest forecasts showed that inflation is likely to fall sharply this year to around 4% from a four-decade high of 11.1% last October, and it could be below the 2% target in 2024.”

Europe Watch:

February 1 – Bloomberg (Jana Randow): “Euro-area inflation slowed more than expected, suggesting a more heated debate to come at the European Central Bank over how much further interest rates must rise. January’s reading came in at 8.5%..., less than economist estimates for a slowdown to 8.9%. The third monthly retreat was driven by energy. But a gauge of underlying inflation that excludes volatile items like that held at an all-time high of 5.2%.”

January 31 – Reuters (Balazs Koranyi): “The euro zone eked out growth in the final three months of 2022, managing to avoid a recession even as sky-high energy costs, waning confidence and rising interest rates took a toll on the economy that is likely to persist into this year. Gross domestic product across the currency bloc expanded by a tiny 0.1% in the fourth quarter… Compared to a year earlier, growth was 1.9%, just beating expectations of 1.8%.”

January 30 – Reuters (Jan Strupczewski): “Euro zone economic sentiment rose to a seven-month high in January on more optimism across all sectors except construction, with inflation expectations among consumers and companies both sharply down… The European Commission's Economic Sentiment Index (ESI) rose to 99.9 this month, above an upwardly revised 97.1 in December -- the highest value of the index since June 2022.”

January 30 – Reuters (Miranda Murray and Rene Wagner): “The German economy unexpectedly shrank in the fourth quarter…, a sign that Europe's largest economy may be entering a much-predicted recession, though likely a shallower one than originally feared. Gross domestic product decreased 0.2% quarter on quarter…”

January 31 – Associated Press (Sylvia Hui): “Thousands of schools in the U.K. closed some or all of their classrooms, train services were paralyzed and delays were expected at airports on the biggest day of industrial action Britain has seen in more than a decade, as unions stepped up pressure on the government… to provide better pay amid a cost-of-living crisis. The Trades Union Congress, a federation of unions, estimated that up to a half-million workers, including teachers, university staff, civil servants, border officials and train drivers, went on strike across the country. More walkouts, including by nurses and ambulance workers, are planned for the coming days and weeks.”

January 31 – Financial Times (Valentina Romei): “Demand for housing loans in the eurozone fell at the fastest pace on record, according to European Central Bank data that showed how rising interest rates and declining consumer confidence are taking a toll on the property market. Banks reported that demand for housing loans decreased at its largest rate on record — a net percentage of minus 74%, according to the January eurozone bank lending survey. The figure was the lowest since records began in 2003…”

Global Bubble Watch:

February 1 – Bloomberg (Prashant Gopal, Swati Pandey and Tracy Withers): “Shaky property markets across much of the world pose another risk to the global economy as higher interest rates erode household finances and threaten to exacerbate falling prices. Reports this week have shown the US housing slump stretched into a fifth month, China’s home sales slide continued and price declines persisted in both Australia and New Zealand. In Britain, prices are now in their worst losing streak since 2008… In the last three housing busts, inflation-adjusted house prices have retraced about half of their previous gains, according to Oxford Economics. Prices have risen about 40% around the world since 2012 and the consultancy said in an October report that in a worst-case scenario, housing market weakness could knock global economic growth to around zero this year.”

February 1 – Reuters (Lucia Mutikani and Jonathan Cable): “Manufacturing activity across the United States, Europe and Asia contracted again last month, underscoring the fragility of the global economic recovery, although factories in the euro zone at least may have passed the trough, surveys showed… U.S. manufacturing sunk further in January with the Institute for Supply Management (ISM) reporting its manufacturing Purchasing Managers' Index (PMI) dropped to 47.4 from 48.4 in December. The third straight monthly contraction pushed the index to the lowest level since May 2020 and below the 48.7 mark viewed as consistent with a recession in the broader economy.”

EM Crisis Watch:

February 2 – Reuters (Tom Westbrook and Vidya Ranganathan): “As Indian tycoon Gautam Adani's woes deepen and force him to drop a share sale, foreign investors and Indian regulators are abandoning any pretence that the conglomerate's troubles are contained and domestic markets will be spared contagion. Foreign investors, many of them already underweight what they consider an overpriced stock market, are reducing exposure. India's central bank and stock market regulator have sprung into action more than week after U.S. shortseller Hindenburg Research's report on the Adani Group spurred a rout in its shares, saying they were looking into irregularities and local bank exposures.”

January 29 – Bloomberg (Netty Ismail, Marcus Wong and Ronojoy Mazumdar): “The start of 2023 was meant to be India’s. The nation’s fast-growing economy and rapidly expanding equity markets had convinced money managers from Morgan Stanley Investment Management to State Street Global Advisors to call it a top investment destination. Then came the $66 billion selloff in billionaire Gautam Adani’s corporate empire. It’s a shock that forces Wall Street to reexamine its confidence on India’s expansion and its pro-business government…”

February 1 – Reuters (Jayshree Pyasi): “India's market regulator is examining a recent crash in shares of Adani Group and looking into any possible irregularities in a share sale by its flagship company, a source with direct knowledge of the matter told Reuters… The Securities and Exchange Board of India's (SEBI) examination comes on a day when Adani Group shares plunged, extending losses in seven listed companies to $86 billion in the wake of a U.S. short-seller report.”

January 31 – Bloomberg (Kerim Karakaya and Beril Akman): “Turkey was the biggest buyer of gold among central banks last year, with households also rushing to buy the commodity to shield from geopolitical uncertainty and rampant inflation. The central bank’s gold reserves were at the highest level on record, the World Gold Council said... ‘Despite the rise in the local gold price during 4Q, soaring consumer inflation brought the investment motive to the fore,’ the WGC said.”

Japan Watch:

January 29 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda… stressed the importance of maintaining ultra-loose monetary policy to support the economy and prod companies to raise wages. ‘Japan's trend inflation is likely to gradually accelerate ... but that will take some more time,’ Kuroda told parliament. ‘Uncertainty regarding Japan's economy is extremely high. It's therefore important now to support the economy, and create an environment where companies can raise wages,’ he said.”

February 1 – Bloomberg (Toru Fujioka): “Bank of Japan Deputy Governor Masazumi Wakatabe signaled there will be no policy change next month shortly before the end of his term and warned against further adjustments to the central bank’s yield curve control program. The remarks by one of the strongest easing advocates of the nine-member board come after the BOJ’s surprise December decision to double the movement range around its yield target… ‘The modification was done with the aim of enhancing the sustainability of monetary easing under yield curve control,’ Watakabe said... ‘The bank’s commitment to continuing with monetary easing has not changed at all.’”

Social, Political, Environmental, Cybersecurity Instability Watch:

February 1 – Reuters (Liliana Salgado and Temis Tormo): “The Colorado River, which provides drinking water to 40 million people in seven U.S. states, is drying up, straining a water distribution pact amid the worst drought in 12 centuries, exacerbated by climate change. California split from the six states of Arizona, Colorado, Nevada, New Mexico, Utah and Wyoming… in the face of a U.S. government deadline to negotiate their own supply cuts or face possible mandatory cutbacks by the federal government… When the states struck their agreement 100 years ago, it envisaged the river could provide 20 million acre-feet of water a year. An acre-foot of water is generally considered enough to supply two urban households per year. But over the last two decades, the actual flow has dwindled to 12.5 million acre-feet on average…”

Leveraged Speculation Watch:

January 30 – Bloomberg (Garfield Reynolds): “Hedge funds are betting this year’s stellar start for Treasuries is too good to last, quietly building up the biggest bearish bet on bond futures on record. An aggregate measure of net-short non-commercial positions across all Treasuries maturities has hit 2.4 million contracts, according to the latest data from the Commodity Futures Trading Commission as of Jan. 24.”

Geopolitical Watch:

February 2 – Reuters (Josh Smith): “North Korea said… drills by the United States and its allies have reached an ‘extreme red-line’ and threaten to turn the peninsula into a ‘huge war arsenal and a more critical war zone.’ The Foreign Ministry statement, carried by state news agency KCNA, said Pyongyang was not interested in dialogue as long as Washington pursues hostile policies. ‘The military and political situation on the Korean peninsula and in the region has reached an extreme red-line due to the reckless military confrontational manoeuvres and hostile acts of the U.S. and its vassal forces,’ an unnamed ministry spokesperson said…”

January 29 – Reuters (Parisa Hafezi and Phil Stewart): “Israel appears to have been behind an overnight drone attack on a military factory in Iran, a U.S. official said… Iran claimed to have intercepted drones that struck a military industry target near the central city of Isfahan, and said there were no casualties or serious damage. The extent of damage could not be independently ascertained. Iranian state media released footage showing a flash in the sky and emergency vehicles at the scene.”

Friday Evening Links

[Yahoo/Bloomberg] Stocks Post Weekly Gain With Focus on Fed, Profits: Markets Wrap

[Reuters] Wall Street ends down after stunning jobs growth raises Fed questions

[Yahoo/Bloomberg] Treasury Yields Surge on Blockbuster January Employment Growth

[Yahoo/Bloomberg] Brent Tumbles Below $80 as Swelling Supplies Outweigh Jobs Data

[Reuters] Fed seen hiking policy rate above 5% as job gains surge

[Yahoo/Bloomberg] Fed’s Daly Says December Dot Plot Still Good Signal for Rates

[CNBC] U.S. credit card debt jumps 18.5% and hits a record $930.6 billion

[Reuters] Blinken postpones China trip over 'unacceptable' Chinese spy balloon

[Reuters] Arctic blast barrels into U.S. Northeast, threatening record lows

[Reuters] Lula's latest attack on Brazil's central bank weighs on markets

[FT] The Adani affair: the fallout for Modi’s India