Friday, April 7, 2023

Weekly Commentary: U.S. Economy Slowing, Kuroda Going

April 7 – Bloomberg (Alexandre Tanzi): “US bank lending contracted by the most on record in the last two weeks of March, indicating a substantial tightening of credit conditions in the wake of several high-profile bank collapses... Commercial bank lending dropped nearly $105 billion in the two weeks ended March 29, the most in Federal Reserve data back to 1973. The more than $45 billion decrease in the latest week was primarily due to a drop in loans by small banks… Friday’s report also showed commercial bank deposits dropped $64.7 billion in the latest week, marking the 10th-straight decrease that mainly reflected a decline at large firms… The Fed’s report showed that by bank size, lending decreased $23.5 billion at the 25 largest domestically chartered banks in the latest two weeks, and plunged $73.6 billion at smaller commercial banks over the same period.”

The U.S. economy is slowing. It’s likely the long-delayed start of a major down-cycle. There’s always an ebb and flow to economic activity. Repeatedly, the U.S. economy proved resilient. The prevailing dynamic has been one of a bond market reacting forcefully to nascent signs of waning economic momentum, with sinking market yields spurring “risk on” and resulting looser market conditions. And any loosening of conditions then poured fuel on a historic bank lending boom feasting on powerful inflationary biases (i.e. surging demand; rising consumer, producer and asset prices; inflating profits, incomes and investment…)

So, today’s key question: Is the U.S. bank lending boom still intact, or has that Bubble been pierced? This touches on a fundamental Bubble dynamic: A Bubble maintaining an inflationary bias will demonstrate a powerful response to stimulus. Importantly, however, as this same bubble deflates, it will develop increasing resistance to stimulus measures.

The “tech” Bubble demonstrated powerful inflationary biases during the late nineties, exemplified by the doubling of Nasdaq the year following 1998 post-Russia/LTCM stimulus measures. Tech then turned largely immune to aggressive Fed stimulus measures in the post-Bubble 2001/2002 backdrop. Later, housing markets for years proved impervious to extreme post-Bubble reflationary monetary stimulus.

April 6 – Bloomberg (Jonnelle Marte): “Federal Reserve Bank of St. Louis President James Bullard said steps taken to ease financial strains were working and the central bank should keep raising interest rates to fight high inflation. ‘Financial stress seems to be abated, at least for now,’ Bullard told reporters… ‘And so it’s a good moment to continue to fight inflation and try to get on that disinflationary path.’ The St. Louis Fed chief said he doesn’t think tighter credit conditions stemming from the recent banking turmoil will be substantial enough to tip the US economy into recession, noting that demand for loans is still strong.”

James Bullard might be right. And I’m the first to proclaim “Bubbles go to unimaginable extremes – then double” and “call the end of a Bubble at your own peril.” They tend to show extraordinary resilience – until they suddenly don’t. And there remain strong inflationary biases throughout the economy that will work to sustain loan demand.

But I don’t believe Bullard, the Fed or any of us should dismiss ramifications of a significant tightening of bank lending standards following years of lending and Credit excess. We witnessed not that many years ago how a tightening of lending for subprime mortgages marked the beginning of the end to the great mortgage finance Bubble. At the time, subprime was dismissed by the Fed, Wall Street analysts, pundits and about everyone.

April 3 – Reuters (Chibuike Oguh): “Blackstone Inc said… it had again blocked withdrawals from its $70 billion real estate income trust in March as the private equity firm faced a flurry of redemption requests. Blackstone has been exercising its right to block investor withdrawals from BREIT since November after requests exceeded a preset 5% of the net asset value of the fund. BREIT fulfilled March withdrawal requests of $666 million, representing only 15% of the $4.5 billion in total redemption requests for the month, the firm said in a letter to investors.”

When market financial conditions tightened in 2022, the pullback in corporate debt issuance was more than offset by booming bank and non-bank lending. So-called “private Credit” was expanding rapidly, a new Wall Street darling viewed as less susceptible to rising rates and market volatility. The bloom is off the rose. Investors in Blackstone’s BREIT and similar new investment vehicles understood they were making somewhat of a compromise with liquidity. But I doubt they had any idea they would be left waiting months to get their money out.

A major tightening of real estate lending is now unfolding. Tighter bank lending will be compounded by a pullback in “private Credit” and other non-bank lenders. This is particularly problematic for earnings and loan quality for small and mid-sized banks that have operated so aggressively in real estate finance over recent years. Office buildings are an obvious trouble spot, but commercial real estate in general is vulnerable. Moreover, cracks are appearing in the booming nationwide apartment marketplace, and there are indications of waning institutional interest in residential housing.

Ten-year Treasury yields declined eight bps this week (though futures yields popped on Friday’s payrolls data) to a 2023 low of 3.39%. At 5.00%, the rates market is pricing a 70% probability for a 25 bps rate hike on May 3rd. But between then and the FOMC’s December 13th meeting, markets anticipate a dovish pivot with three 25 bps rate cuts.

The stock market will do what the stock market wants to do. But I wouldn’t dismiss the warning signaled by bond and rate markets. SVB will be one of scores of “accidents.”

When I contemplate the scope of boom-time excess, serious market structure issues, financial system fragilities and economic maladjustment, I don’t see how a major crisis can be averted. But I’m mindful that this could play out differently than 2008.

During the (2005 to 2007) peak of mortgage finance Bubble excess, mortgage Credit accounted for upwards of half of total U.S. Non-Financial Debt growth. And much of this risky Credit was intermediated through Wall Street’s securitization and derivatives markets. Directly and indirectly, there were enormous amounts of mortgage-related speculative leverage. The Lehman Brothers panic and market dislocation caused an abrupt and dramatic lending shutdown and Credit collapse for the marginal source of finance fueling the U.S. Bubble economy and financial markets.

Over the past three years, mortgage Credit has accounted for about a quarter of total Non-Financial Debt. Non-mortgage bank loans over the past three years ($1.5 TN) are almost double the 2005-2007 level. Asset-backed Securities (chiefly riskier non-GSE mortgage securities) surged $1.9 TN over the three years ’05-’07. ABS increased about $300 billion over the past three years. GSE MBS expanded $1.1 TN in ’05-’07 versus $280 billion 2019-2022.

Bank Assets ballooned $5.5 TN over the past three years – versus $3.0 TN for the period ’05 to ’07. The point is that the banking system has been playing a greater role in financing this Bubble – and securitizations much less. The system would appear these days to be less acutely vulnerable compared to 2008 for an abrupt stoppage of key sources of finance for the U.S. economy.

Unlike 2008, securitization and derivatives markets might not today be the epicenter of systemic vulnerability. Instead, the banking system is sitting on much greater Credit risk than when mortgage risks were offloaded to the markets during the mortgage finance Bubble. At $25.6 TN, Banking System Assets ended 2022 almost double the 2007 level.

From Fed Z.1 data, Financial Sector debt growth jumped to a 9.66% rate last year, the strongest since 2007’s 13.50%. Most macro analysts disregard Financial Sector debt, believing that incorporating it in analysis would be “double counting” borrowings already included elsewhere (i.e. mortgage and business). Especially late in the Credit cycle, a jump in Financial Sector borrowings signals a surge in risk intermediation – fateful late-cycle intermediation that will come back to haunt the financial sector and economy when the Bubble bursts.

GSE Assets expanded an unprecedented $2.094 TN, or 29.4%, over the past three years to a record $9.224 TN. I’ve previously noted that FHLB Assets surged $524 billion, or 72%, in 2022 – with indications for Q1 growth upwards of (a stunning) $400 billion.

I highlight the GSEs because they play an instrumental role in system stability. With implicit and explicit Treasury backing, their Trillions of debt obligations provide a pillar of stability for the Credit system. Their three-decade role as quasi-central bank emergency liquidity providers has thwarted many liquidity crises, ensuring a major Bubble evolved into a historic one.

The GSEs are highly leveraged and vulnerable. That Fannie and Freddie were incapacitated (from accounting scandals) in 2008 was a major factor in how the crisis unfolded. As for today, we can think of the GSEs as a stabilizing force - until they’re not. The FHLB has been playing a pivotal role – last year prolonging the lending boom and last month stabilizing bank liquidity. But how sustainable is the ballooning of FHLB balance sheets? A slowdown in growth would have major consequences for the banking system, just as it heads into challenging times. A GSE in trouble would have immediate and far-reaching systemic ramifications.

I’m uncomfortable that the GSE’s have become such dominant borrowers in the money market. Moreover, there are alarming Bubble elements in the massive expansion of money fund assets. Money Funds have inflated $663 billion, or 33% annualized, since the end of October (to a record $5.247 TN). Since the start of the pandemic, Money Funds have expanded $1.630 TN, or 45%. My baseline analysis views the situation as an unfolding banking system crisis that will over time envelope the non-bank sectors. Instability in the money fund complex would spark something more like 2008.

So many lessons, including that amiable central bankers with infectious smiles are the most dangerous. I have a difficult time believing Haruhiko Kuroda would have been left unchecked to run his fateful experiment for a full decade if he wasn’t so likable. Such a nice guy wouldn’t ever fleece Japan’s savers and jeopardize Japanese and global stability. If only Haruhiko was an a-hole.

April 7 – Bloomberg (Toru Fujioka and Sumio Ito): “Haruhiko Kuroda spoke to reporters one last time as the Governor of the Bank of Japan on Friday, ending a decade-long term filled with surprises that shook global financial markets and transformed the image of the central bank previously known for doing too little, too late. He ended his 10 years expressing regret that his goal ultimately wasn’t achieved, but said the possibility of reaching stable price growth is higher. ‘The time for achieving the 2% stable price goal is now getting close,’ Kuroda said. ‘The norms surrounding prices are changing’… After being picked by Abe, Kuroda opened a new chapter for central banking with aggressive easing.”

April 3 – Xinhua: “The Bank of Japan (BOJ) bought a record 135,989 billion yen (1.02 trillion U.S. dollars) in Japanese government bonds in fiscal 2022, almost double the amount a year earlier, the central bank said. To counter increased bond sales in the market caused by its yield control policy, the BOJ actively bought 10-year and other government bonds in the year through March, the largest amount on record, topping the previous high of 115,800.1 billion yen marked in fiscal 2016.”

April 5 – Bloomberg (Toru Fujioka): “Within weeks of taking office a decade ago, Bank of Japan Governor Haruhiko Kuroda fired his ‘shock and awe’ stimulus targeting a return to steady 2% inflation in around two years. As his tenure ends, the original ‘time horizon’ remains largely that — something within sight but out of reach. Through 10 years of experimental policy that rewrote the rules of global central banking, Kuroda’s BOJ forked out 1.55 quadrillion yen ($11.7 trillion) on bonds, stock funds and corporate debt. Deflation was tamed though not vanquished; businesses were kept afloat and zombie companies plodded on; workers kept their jobs even as productivity flat lined; the government funded vast spending programs and the deficit deepened; and the economy eked out modest expansions, though only Italy grew slower among major economies. The staggering cost has economists asking: ‘Was it all worth it?’”

Inflationism is always such a slippery slope. History is strewn with measured and transitory bouts of money printing (monetary inflation) morphing into around-the-clock and around calendars. Was it worth it? No way.

The ratio of Bank of Japan Assets-to-GDP was about 32% when Kuroda was nominated for BOJ Governor in February 2013. It is today at a staggering 131%. BOJ Assets inflated from 160 TN yen to 735 TN – or about $5.6 TN dollars. The BOJ holds $4.4 TN of Japanese government bonds, a now dysfunctional “market” that trades with little liquidity and completely divorced from underlying fundamentals. Japanese debt has inflated to 264% of GDP. One dollar bought 93 yen in February 2013. Today it will get you 132 sharply devalued Japanese yen.

Kuroda back in 2013 unleashed the Abenomics “bazooka.” It’s now up to the disarming Kazuo Ueda to attempt to negotiate an armistice. It’s anything but clear why the markets would be willing to participate. They’ve been waiting years for the BOJ to either run out of ammo or the will to fight.

There is never a convenient time to burst a Bubble. Today is an especially inopportune juncture. Global markets are fragile and global leveraged speculation vulnerable. It’s worth reminding readers that Japan’s serious structural issues date back to its eighties Bubble period. In contrast to Beijing these days, Tokyo appreciated in 1989 that its runaway Bubble posed a grave risk to Japan’s future - economically and socially.

For the first two post-Bubble decades, patient Japanese policymakers refrained from doing anything stupid. But Bernanke and others publicly berated their stupidity for not massively inflating. And with the Fed, ECB and other central banks’ inflationary measures seemingly bearing fruit, eventually this criticism could no longer be deflected. A decade later, the Kuroda BOJ’s inflationary experiment has been a monumental failure - the scope of which will be exposed as Ueda attempts the wretched duty of repressing the printing presses.

The biggest lesson from Kuroda’s rein: No individual (or small group) should ever have such absolute power to inflate – in Tokyo, Washington, Frankfurt, Beijing or elsewhere.

For the Week:

The S&P500 was little changed (up 6.9% y-t-d), while the Dow increased 0.6% (up 1.0%). The Utilities jumped 3.2% (down 1.5%). The Banks fell 2.0% (down 20.3%), and the Broker/Dealers sank 4.9% (down 2.3%). The Transports lost 3.3% (up 4.3%). The S&P 400 Midcaps slumped 2.6% (up 0.7%), and the small cap Russell 2000 fell 2.7% (down 0.4%). The Nasdaq100 declined 0.9% (up 19.4%). The Semiconductors sank 4.9% (up 21.3%). The Biotechs gained 1.6% (up 2.1%). With bullion jumping another $39, the HUI gold equities index surged 6.1% (up 18.3%).

Three-month Treasury bill rates ended the week at 4.635%. Two-year government yields declined four bps this week to 3.98% (down 45bps y-t-d). Five-year T-note yields dropped eight bps to 3.50% (down 51bps). Ten-year Treasury yields fell eight bps to 3.39% (down 49bps). Long bond yields declined four bps to 3.61% (down 35bps). Benchmark Fannie Mae MBS yields rose three bps to 5.08% (down 31bps).

Greek 10-year yields dropped 12 bps to 4.07% (down 49bps y-o-y). Italian yields declined seven bps to 4.03% (down 67bps). Spain's 10-year yields fell eight bps to 3.23% (down 29bps). German bund yields declined 11 bps to 2.18% (down 26bps). French yields fell nine bps to 2.70% (down 28bps). The French to German 10-year bond spread widened two to 52 bps. U.K. 10-year gilt yields declined six bps to 3.43% (down 26bps). U.K.'s FTSE equities index rose 1.4% (up 3.9% y-t-d).

Japan's Nikkei Equities Index fell 1.9% (up 5.5% y-t-d). Japanese 10-year "JGB" yields surged 12 bps to 0.47% (up 5bps y-t-d). France's CAC40 was unchanged (up 13.1%). The German DAX equities index slipped 0.2% (up 12.0%). Spain's IBEX 35 equities index increased 0.9% (up 13.2%). Italy's FTSE MIB index added 0.4% (up 14.8%). EM equities were mixed. Brazil's Bovespa index declined 1.0% (down 8.1%), and Mexico's Bolsa index dipped 0.8% (up 10.4%). South Korea's Kospi index increased 0.5% (up 11.4%). India's Sensex equities index gained 1.4% (down 1.7%). China's Shanghai Exchange Index rose 1.7% (up 7.7%). Turkey's Borsa Istanbul National 100 index rose 2.3% (down 10.6%). Russia's MICEX equities index jumped 2.4% (up 16.4%).

Investment-grade bond funds posted inflows of $1.793 billion, and junk bond funds reported positive flows of $3.773 billion (from Lipper).

Federal Reserve Credit dropped $96.9bn last week to $8.599 TN. Fed Credit was down $301bn from the June 22nd peak. Over the past 185 weeks, Fed Credit expanded $4.873 TN, or 131%. Fed Credit inflated $5.788 Trillion, or 206%, over the past 543 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $25.3bn last week to $3.319 TN. "Custody holdings" were down $140bn, or 4.0%, y-o-y.

Total money market fund assets jumped another $49.1bn to a record $5.247 TN, with a four-week gain of $353 billion. Total money funds were up $688bn, or 15.1%, y-o-y.

Total Commercial Paper dipped $3.0bn to $1.135 TN. CP was up $68bn, or 6.3%, over the past year.

Freddie Mac 30-year fixed mortgage rates gained three bps to 6.27% (up 155bps y-o-y). Fifteen-year rates declined two bps to 5.53% (up 162bps). Five-year hybrid ARM rates slipped a basis point to 5.55% (up 199bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates bps down 19 bps to 6.75% (up 192bps).

Currency Watch:

April 3 – Bloomberg (Chester Yung and Matthew Burgess): “The Hong Kong Monetary Authority intervened to prop up the local dollar for the first time since February as carry trades against the currency push it past the weak end of its trading band. The HKMA bought HK$7.1 billion ($905 million) worth of the city’s dollars on Monday, shrinking the city aggregate balance, a measure of interbank liquidity, to HK$69.9 billion.”

For the week, the U.S. Dollar Index declined 0.4% to 102.09 (down 1.4% y-t-d). For the week on the upside, the Swiss franc increased 1.1%, the British pound 0.7%, the euro 0.6%, the Japanese yen 0.5%, the Brazilian real 0.1%, and the Singapore dollar 0.1%. On the downside, the South African rand declined 2.2%, the South Korean won 1.1%, the Swedish krona 0.6%, the Mexican peso 0.5%, the Norwegian krone 0.3%, the Australian dollar 0.2%, and the New Zealand dollar 0.2%. The Chinese (onshore) renminbi increased 0.08% versus the dollar (up 0.45%).

Commodities Watch:

April 7 – Bloomberg: “China boosted its gold reserves for a fifth straight month, extending efforts by the world’s central banks to boost their holdings of the precious metal. The People’s Bank of China raised its holdings by about 18 tons in March… Total stockpiles now sit at about 2,068 tons, after growing by about 102 tons in the four months before March. Nations have been building up stockpiles of bullion amid heightened geopolitical risks and high inflation.”

The Bloomberg Commodities Index increased 0.7% (down 5.8% y-t-d). Spot Gold rose 2.0% to $2,008 (up 10.1%). Silver jumped 3.6% to $24.98 (up 4.3%). WTI crude surged $5.03, or 6.6%, to $80.70 (up 1%). Gasoline rose 4.2% (up 14%), while Natural Gas dropped 9.3% to $2.01 (down 55%). Copper declined 1.9% (up 5%). Wheat fell 2.4% (down 15%), and Corn dropped 2.6% (down 5%). Bitcoin lost $690, or 2.4%, this week to $27,900 (up 68%).

Global Bank Crisis Watch:

April 6 – Bloomberg (Jonnelle Marte): “Banks once again reduced their borrowings from two Federal Reserve backstop lending facilities in the most recent week, a sign the financial stresses that emerged following a string of bank collapses last month may be stabilizing. US institutions had a combined $148.7 billion in outstanding borrowings in the week through April 5, compared with $152.6 billion the previous week. Emergency borrowing retreated for the third straight week, suggesting liquidity demand continues to ease following the second-largest bank failure in US history.”

April 4 – Reuters (Tatiana Bautzer): “The U.S. banking crisis is ongoing and its impact will be felt for years, JPMorgan… CEO Jamie Dimon wrote in a letter to shareholders… ‘The current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come,’ Dimon wrote in a 43-page annual message… ‘The market's odds of a recession have increased… And while this is nothing like 2008, it is not clear when this current crisis will end. It has provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative…’ Dimon also took aim at nonbank financial firms, which have become increasingly competitive with banks in providing mortgages, credit cards and market-making services. ‘Would nonbank credit-providing institutions be able to provide credit when their clients need them the most?’ he asked. ‘I personally doubt that many of them could.’”

April 3 – Bloomberg (Catarina Saraiva): “The Federal Reserve Bank of Dallas reported that demand for bank loans in its district slumped to the weakest since the spring 2020 Covid crisis, a potential harbinger of a broader tightening of credit in the wake of interest-rate hikes and turmoil in the banking sector. The Dallas Fed’s index for overall loan demand fell to minus 45.6 in the latest Banking Conditions Survey... That’s the lowest reading since May 2020 for the series…”

April 6 – Bloomberg (Rich Miller): “US credit conditions for consumers and businesses are expected to deteriorate in the next six months to their worst level since the pandemic, according to a survey of chief economists at 15 of the nation’s biggest banks. The American Bankers Association said… its credit conditions index fell to 5.8 in the second quarter from 12.5 in the first quarter. A reading below 50 in the gauge… indicates that the economists forecast weaker credit conditions in the coming six months. The economists ‘expect banks to tighten credit standards this year in reaction to still-elevated inflation and higher interest rates leading to weaker growth in consumer spending and business investment,’ the ABA said…”

April 3 – Bloomberg (John McCrank): “Credit Suisse… faced imminent failure if it hadn’t been sold to UBS Group AG in an emergency rescue last month, according to the Swiss central bank. Without the government-brokered takeover, it’s ‘very, very likely a financial crisis in Switzerland and worldwide would have happened,’ Swiss National Bank Vice President Martin Schlegel told broadcaster SRF… Credit Suisse ‘would then have been bankrupt.’”

April 2 – Wall Street Journal (Alexander Saeedy and Laura Cooper): “Recent turmoil in the banking industry has made the already-difficult task of selling off tens of billions of risky buyout debt even harder for Wall Street firms. Bank of America Corp., Barclays PLC, Morgan Stanley and others together currently hold $25 billion to $30 billion of ‘hung debt’ on their balance sheets, according to leveraged-finance analytics firm 9fin. The unsold debt is tied to leveraged buyouts that banks agreed to finance before worsening credit conditions last year sapped investor appetite for the paper.”

April 5 – Financial Times (Jennifer Hughes): “Investors are holding back from the $11tn US mortgage-backed securities market because of uncertainty over how regulators plan to dispose of the roughly $91bn portfolio they acquired from the collapses of Silicon Valley Bank and Signature Bank… Analysts calculate that the US Federal Deposit Insurance Corporation now holds some $69bn in MBS from SVB with another $22bn from Signature, based on fourth-quarter earnings reports. Once holdings of other bonds such as Treasuries, municipal debt and commercial MBS are included, the FDIC has $120bn to liquidate.”

April 3 – Bloomberg (Jill R. Shah, Michael Tobin, Gowri Gurumurthy and Olivia Raimonde): “A group of banks led by Goldman Sachs… launched a $3.84 billion deal to offload the riskiest chunk of financing from last year’s Citrix Systems Inc. buyout… After being saddled with the debt for months, the banks are offering the 6.5-year second-lien notes at a coupon of 9%, said the people, who asked not to be named discussing a private transaction. The bonds are initially being marketed at a heavily discounted price of 78 cents, bringing the all-in yield to roughly 14%...”

April 4 – Bloomberg (Hannah Levitt): “Silicon Valley Bank’s blunders were encouraged by US regulation, went untested by the Federal Reserve and were ‘hiding in plain sight’ until Wall Street and depositors grew alarmed… ‘Ironically, banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements,’ [Jaimy] Dimon said. ‘Even worse,’ he added, the Federal Reserve didn’t stress-test banks on what would happen as rates jumped.”

Market Instability Watch:

April 4 – Bloomberg (Toru Fujioka and Sumio Ito): “A recent drop in global bond yields has created favorable conditions for the Bank of Japan to scrap its yield curve control program this month, according to a former BOJ executive director... ‘There’s a possibility in April if you consider the current circumstances objectively,’ former director Kazuo Momma said... ‘Long-term yields won’t rise abruptly even if the YCC is scrapped’ as long as the market environment continues to have little momentum for higher yields. The remarks suggest new BOJ Governor Kazuo Ueda’s first policy meeting could result in surprise changes as he inherits a decade’s worth of massive monetary easing…”

April 6 – Wall Street Journal (Joseph C. Sternberg): “Once and for all: The problem isn’t ‘the banks.’ The most visible recent manifestations of global financial distress have been in banks—Silicon Valley Bank, Signature and First Republic in the U.S., Credit Suisse in Europe. This is giving rise to a comforting myth (or cynical lie, if you’re so inclined) that the damage from the current monetary tightening cycle is containable and now contained… If you believe that, best to whistle past the International Monetary Fund’s latest Global Financial Stability Report… The conclusion is that banks, for all the risks they still face, represent a smaller portion of the global financial system than they did at the time of the 2008 panic and that proliferating nonbanks present a new array of financial dangers. Nonbank financial intermediaries—insurers, pension funds, hedge funds, money-market funds, asset managers and plenty of others—now hold some 50% of global financial assets, the IMF notes, up from 40% in 2008.”

April 5 – Wall Street Journal (Eric Wallerstein and Nick Timiraos): “Banks are under pressure from depositors’ embrace of money-market funds, pushing a popular Federal Reserve-sponsored financing program into the spotlight. Money-market fund assets are increasing at a record clip. Much of that cash is making its way to the Fed’s overnight reverse repurchase facility, which borrows from money funds and other firms in exchange for securities such as Treasurys… The program, known on Wall Street as reverse repo, allows financial firms and others to earn interest on large cash balances. But some analysts contend it also is effectively draining funds from the banking system… As of Wednesday, more than $2.2 trillion sat in the Fed’s reverse repo facility, paying a 4.8% annualized rate. That is well above the rates on offer at most banks.”

April 3 – Reuters (John McCrank): “Rising interest rates are eating into the reserves that U.S. life insurers must hold to deal with rate fluctuations, ratings agency Fitch Ratings said on Monday, creating an accounting issue that could impact insurers' income. Interest maintenance reserves (IMRs) smooth insurers' balance sheets by showing interest-related capital gains and losses on fixed-income assets, and amortizing those gains and losses into income over the remaining life of the investments sold.”

Bursting Bubble and Mania Watch:

April 5 – Yahoo Finance (Alexandra Garfinkle): “Venture capital funding worldwide declined 53% in the first quarter of this year, according to… Crunchbase… In the same quarter last year, global VC funding shook out to $162 billion; by Q1 2023 that number was $76 billion. This decline is also flattered by Microsoft’s $10 billion investment in ChatGPT-developer OpenAI and Stripe's $6.5 billion round. ‘We have likely not yet hit the bottom of this down cycle yet,’ Crunchbase senior data editor Gené Teare told Yahoo Finance. ‘If the two largest fundings in OpenAI ($10B) and Stripe ($6.5B) were removed from this past quarter, funding would have been down more than 20% quarter over quarter and more than 60% year over year.’”

April 3 – Financial Times (Antoine Gara and Mark Vandevelde): “Blackstone clients asked to pull $4.5bn from a closely followed real estate fund in March, even as the company’s executives were promoting investment opportunities in the sector that they said would arise from US economic turbulence. Withdrawal requests at the $70bn Blackstone Real Estate Income Trust (Breit) rose 15% in March after the collapse of Silicon Valley Bank, to $4.5bn. It was the fifth straight month that the group has limited redemptions… Blackstone launched Breit in 2017 to offer real estate investments to wealthy individuals. The fund’s terms allow clients to redeem 2% of their net assets each month, with a maximum of 5% each calendar quarter.”

April 2 – Wall Street Journal (Hannah Miao): “Individual investors are losing their appetite for U.S. stocks, leaving equity markets without a dependable leg of support after a rocky first quarter. They bought beaten-down shares with a fury at the start of 2023 and chased the momentum as the S&P 500 climbed. Net purchases of U.S. equities by individuals reached a monthly record in February, according to Vanda Research data going back to 2014. But individuals’ stock purchases have slowed sharply in recent weeks, falling to levels not seen since November 2020…”

April 4 – Bloomberg (Jacqueline Poh and Josyana Joshua): “Faced with soaring interest rates and market whiplash, companies are turning away from the loan market in a way that hasn’t been seen this decade. Companies are delaying borrowing if they can, given how quickly rates have climbed in recent months, analysts say. Global sales of syndicated loans fell 43% in the first quarter to $493 billion, the lowest since 2010.”

April 4 – Wall Street Journal (Carol Ryan): “Rented homes were supposed to be the safest nook in the U.S. real-estate market. It isn’t turning out that way. Rising interest rates are taking the air out of bubbly property valuations. Apartment prices are down 21% over the past year, according to the Green Street Commercial Property Price Index. This makes them the second-worst performing category of real estate after offices, which have lost 25%… Last year, investors spent $294 billion on multifamily housing in the U.S., on top of a record $353.5 billion in 2021, according to… Newmark Group Inc. These levels were far above annual norms in the years leading up to the pandemic.”

April 4 – Wall Street Journal (Will Parker): “Sales of rental apartment buildings are falling at the fastest rate since the subprime-mortgage crisis, a sign that higher interest rates, regional banking turmoil and slowing rent growth are undercutting demand for these buildings. Investors purchased $14 billion of apartment buildings in the first quarter of 2023, according to… CoStar Group. That represents a 74% decline in sales from the same quarter a year earlier and would be the largest annual sales decline for any quarter going back to a 77% drop in the first quarter of 2009. The $14 billion in first-quarter sales was the lowest amount for any quarter since 2012, with the exception of the second quarter of 2020 when pandemic lockdowns effectively froze the market.”

Ukraine War Watch:

April 2 – Reuters (Lidia Kelly): “Russia will move its tactical nuclear weapons close to the western borders of Belarus, the Russian envoy to Minsk said…, placing them at NATO's threshold in a move likely to further escalate Moscow's standoff with the West. In one of the Russia's most pronounced nuclear signals since the beginning of its invasion of Ukraine 13 months ago, President Vladimir Putin said on March 26 that Russia will station tactical nuclear weapons in Belarus.”

April 2 – Wall Street Journal (Stephen Fidler): “Russia’s tactical nuclear weapons, some of which President Vladimir Putin has said he plans to move into neighboring Belarus, are a central pillar of Moscow’s defense philosophy… Moscow’s force of these nonstrategic nuclear weapons has already shown its utility in Russia’s war in Ukraine. The veiled threats that they could be used in Ukraine have been a factor in limiting the direct involvement of North Atlantic Treaty Organization members in the conflict… ‘Nonstrategic nuclear weapons are a game changer for them,’ said Christopher Yeaw, a specialist in nuclear deterrence at the National Strategic Research Institute… Moscow has pursued development of these weapons ‘with rigor,’ he said.”

April 4 – Associated Press (Lorne Cook and Matthew Lee): “Finland joined the NATO military alliance…, dealing a major blow to Russian President Vladimir Putin with a historic realignment of Europe’s post-Cold War security landscape triggered by Moscow’s invasion of Ukraine. The Nordic country’s membership doubles Russia’s border with the world’s biggest security alliance. Finland had adopted neutrality after its defeat by the Soviets in World War II, but its leaders signaled they wanted to join NATO after Moscow’s invasion of Ukraine sent a shiver of fear through its neighbors. ‘The era of nonalignment in our history has come to an end -– a new era begins,’ President Sauli Niinistö said before his country’s blue-and-white flag was raised outside NATO headquarters.”

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

April 5 – Financial Times (Alexandra Garfinkle): “Taiwan’s president Tsai Ing-wen urged continued support for her country and warned ‘democracy is under threat’ after meeting US House Speaker Kevin McCarthy in California… In brief public remarks following the meeting, Tsai joined McCarthy, the most high-profile US official to meet a Taiwanese president on US soil, in front of Ronald Reagan’s presidential aircraft and invoked the late president’s role in protecting and fortifying US-Taiwan relations. She said: ‘We once again find ourselves in a world where democracy is under threat, and the urgency of keeping the beacon of freedom shining cannot be understated.’ Tsai said in her talks with the US lawmakers she had ‘highlighted a belief which president Reagan championed, that to preserve peace, we must be strong’. ‘I would like to add that we are stronger when we are together,’ Tsai said…”

April 6 – Bloomberg (Belinda Cao): “Chinese President Xi Jinping said no one should expect China to compromise on the Taiwan issue during his meeting with European Commission President Ursula von der Leyen in Beijing, according to China Central Television. Xi said Taiwain issue is the core of China’s core interests, and it would be ‘fantasies’ for those who expect China to make compromises on this.”

April 4 – Associated Press (Raf Casert and Samuel Petrequin): “On the eve of a major European Union diplomatic foray into China, the bloc’s foreign policy chief… lashed out at Beijing for its support of Russia amid the invasion of Ukraine, and called it ‘a blatant violation’ of its United Nations commitments. ‘There cannot be siding with the aggressor,’ Josep Borrell said… ‘There is a clear expectation from a permanent member of the (U.N.) Security Council to stand up in defense of international rules-based order and China as a moral duty to contribute to a fair peace.’ Standing alongside visiting U.S. Secretary of State Antony Blinken, Borrell was unusually blunt in his condemnation of a nation that has increasingly moved from being an EU partner to being a rival on the global stage.”

April 6 – Washington Post (Cate Cadell): “Chinese military researchers are calling for the rapid deployment of a national satellite network project to compete with SpaceX's Starlink, over concerns that Elon Musk's internet-beaming satellites pose a major national security threat to Beijing following their successful use in the Ukraine war. Recent Chinese research papers and people familiar with the program say plans are underway to deploy a national mega-constellation of almost 13,000 low-orbit satellites, while military scientists are pursuing research on how to ‘suppress’ or even damage Starlink satellites in wartime scenarios.”

April 2 – Wall Street Journal (Louise Radnofsky, Warren P. Strobel and Aruna Viswanatha): “More Americans in recent years have been detained by foreign governments on what the U.S. considers to be bogus or politicized charges than have been taken captive by terrorism groups or criminal gangs… The latest is Wall Street Journal reporter Evan Gershkovich, who was arrested last week by Russian authorities and charged with espionage… John Bolton, who was national security adviser to former President Donald Trump, called Mr. Gershkovich’s arrest ‘an act of state terror,’ calculated to put pressure on President Biden. ‘This is as targeted a hostage-taking as you can imagine,’ he said.”

April 4 – Financial Times (Editorial Board): “For years Evan Gershkovich shone a light on Russia’s oppressive descent. He has now become a victim of it himself. Last week the Wall Street Journal correspondent… was captured and detained by Russia’s security service on bogus espionage charges. He could face up to 20 years in prison. His arrest is a cowardly act: it marks Moscow’s first detention of a foreign journalist since its invasion of Ukraine and the first time it has put a US reporter behind bars on spying charges since the cold war. With Russian-language media already stifled, the detainment of a prominent foreign journalist is a chilling signal that Putin is now setting out to cow international news organisations.”

De-globalization and Iron Curtain Watch:

April 5 – Financial Times (Darren Dodd): “Geopolitical tensions and increasing protectionism are reshaping global investment, threatening to depress growth and lead to more financial instability, according to a flurry of reports ahead of the spring meetings of the World Bank and IMF. The IMF said that the rise of ‘friendshoring’ — foreign direct investment flowing more between countries that are political allies than those that are geographically close — was likely to increase the risk of economic downturns and could cut long-term global output by 2%. ‘The estimated large and widespread long-term output losses show why it’s crucial to foster global integration — especially as major economies endorse inward-looking policies,’ the reports’ authors said. The message comes as governments increasingly take to protectionist rhetoric, from US Treasury secretary Janet Yellen’s call for prioritising supply chains ‘with countries we can count on’ to Washington’s export restrictions on Chinese semiconductor technology.”

April 5 – Financial Times (Editorial Board): “Beijing’s ‘no-limits partnership’ with Moscow during Russia’s war of aggression against Ukraine has hammered home to many Europeans what it means for China to become a systemic rival. Russia has violated Ukraine’s sovereignty and territorial integrity with barbaric force. Rather than uphold these fundamental tenets of the global order and the UN charters, China looks like it wants to subordinate them to its own ambitions. As Xi Jinping told Vladimir Putin in Moscow last month: ‘Right now, there are changes, the likes of which we have not seen for 100 years. And we are the ones driving these changes together.’ Beijing has helped bankroll the Kremlin’s war machine by buying vast quantities of Russian oil and gas at knockdown prices.”

April 1 – Financial Times (Thomas Hale): “China launched a review into US chip manufacturer Micron Technology on ‘national security’ grounds, as Beijing retaliates against Washington’s increasing curbs on Chinese access to semiconductor technology. In a statement…, the Cyberspace Administration of China said it would review imports of Micron’s products in order to maintain national security, ensure the security of its information infrastructure and prevent risks caused by product problems.”

April 4 – Associated Press (Joe McDonald): “Furious at U.S. efforts that cut off access to technology to make advanced computer chips, China’s leaders appear to be struggling to figure out how to retaliate without hurting their own ambitions in telecoms, artificial intelligence and other industries. President Xi Jinping’s government sees the chips that are used in everything from phones to kitchen appliances to fighter jets as crucial assets in its strategic rivalry with Washington and efforts to gain wealth and global influence. Chips are the center of a ‘technology war,’ a Chinese scientist wrote in an official journal... China has its own chip foundries, but they supply only low-end processors used in autos and appliances.”

April 1 – Bloomberg (Áine Quinn and Megan Durisin): “Russia’s grip on global food supply is tightening after two of the biggest international traders said they would halt grain purchases for export from the country. The exit of Cargill Inc. and Viterra means Russia, the world’s largest wheat exporter, will have more control over its food shipments and reap more of the revenues. Russia’s dominance in the global grain market was laid bare by the war in Ukraine, with prices surging last year amid supply disruptions. Archer-Daniels-Midland Co. is also weighing options to quit its main Russian operations…”

April 3 – Reuters (Aziz El Yaakoubi): “Saudi Arabia's unpredictable crown prince is pushing hard to realign Middle East dynamics, engaging with old foes and orchestrating OPEC oil cuts like the ones on Sunday which took the global market by surprise. Crown Prince Mohammed Bin Salman, known as MbS, has signalled he is prepared to go it alone without the help of the United States to pursue Saudi interests, whether it means re-establishing ties with U.S. adversaries like Iran, or removing supplies from the oil market and angering consumers.”

Inflation Watch:

April 3 – Bloomberg (Natalia Kniazhevich): “The surprise OPEC+ production cut will undoubtedly bring higher gasoline bills to US drivers as energy markets climb on tighter supplies. For pump prices, the move could add more than 50 cents a gallon to the US average, said Kevin Book, managing director of ClearView Energy Partners. The national average is now at about $3.50.”

Biden Administration Watch:

April 3 – Reuters (David Lawder): “U.S. Treasury Secretary Janet Yellen… said deposit outflows from small and medium-sized banks were diminishing, but she was watching the situation closely and was ‘not willing to allow contagious runs to develop’ in the U.S. banking system. Yellen told reporters… that confidence in the banking system was strengthened by actions taken by the Treasury, Federal Reserve and Federal Deposit Insurance Corp after the failures of Silicon Valley Bank and Signature Bank.”

April 3 – Bloomberg (Ari Natter): “OPEC+’s surprise move to cut 1 million barrels a day of oil production is poised to raise US fuel prices just as President Joe Biden is expected to launch his re-election campaign. He has a limited range of options with which to respond… Biden may go for another release of oil from the Strategic Petroleum Reserve. The emergency stockpile was created in the 1970s after the Arab oil embargo. It’s holding about 371 million of barrels, according to Energy Department data, around half the SPR’s capacity, largely due to a historic release of 180 million barrels last year to tame surging gasoline prices in the wake of the war in Ukraine.”

Federal Reserve Watch:

April 4 – Reuters (Michael S. Derby): “Federal Reserve Bank of Cleveland President Loretta Mester said… that the U.S. central bank likely has more interest rate rises ahead amid signs the recent banking sector troubles have been contained. To keep inflation on a sustained downward path to 2% and keep inflation expectations anchored, Mester said she sees monetary policy moving ‘somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time.’”

U.S. Bubble Watch:

April 7 – CNBC (Jeff Cox): “Nonfarm payrolls rose about in line with expectations in March as the labor market showed increased signs of slowing… Payrolls grew by 236,000 for the month, compared to the Dow Jones estimate for 238,000 and below the upwardly revised 326,000 in February. The unemployment rate ticked lower to 3.5%, against expectations that it would hold at 3.6%, with the decrease coming as labor force participation increased to its highest level since before the Covid pandemic… Along with the payroll gains came a 0.3% increase in average hourly earnings, pushing the 12-month increase to 4.2%, the lowest level since June 2021. The average work week edged lower to 34.4 hours.”

April 4 – Bloomberg (Reade Pickert): “Vacancies at US employers dropped in February to the lowest since May 2021, suggesting a cooling in labor demand in some industries but still indicative of a job market that’s too tight for the Federal Reserve. The number of available positions decreased to 9.9 million from a downwardly revised 10.6 million a month earlier, the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed... Vacancies were below all estimates… The ratio of openings to unemployed people slid to 1.67 in February, the lowest since November 2021, from almost 1.9 in the prior month. In the firm labor market that preceded the pandemic, that ratio was about 1.2.”

April 5 – CNBC (Jeff Cox): “Private sector hiring decelerated in March, flashing another potential sign that U.S. economic growth is heading for a sharp slowdown or recession, payroll processing firm ADP reported… Company payrolls rose by just 145,000 for the month, down from an upwardly revised 261,000 in February and below the… estimate for 210,000. That took first-quarter hiring to an average of just 175,000 jobs a month, down from 216,000 in the fourth quarter… ‘Our March payroll data is one of several signals that the economy is slowing,’ said ADP’s chief economist, Nela Richardson. ‘Employers are pulling back from a year of strong hiring and pay growth, after a three-month plateau, is inching down.’”

April 6 – CNBC (Jeff Cox): “Companies announced nearly 90,000 layoffs in March, a sharp step up from the previous month and a giant acceleration from a year ago, outplacement firm Challenger, Gray & Christmas reported… Planned layoffs totaled 89,703 for the period, an increase of 15% from February. Year to date, job cuts have soared to 270,416, an increase of 396% from the same period a year ago.”

April 6 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits fell last week, but annual revisions to the data showed applications were higher this year than initially thought… Initial claims for state unemployment benefits dropped 18,000 to a seasonally adjusted 228,000 for the week ended April 1. Data for the prior week was revised to show 48,000 more applications received than previously reported.”

April 6 – Bloomberg (Reade Pickert): “The share of US small-business owners who plan to add workers in coming months slipped in March to the lowest since May 2020… Some 15% of firms said they plan to create jobs in the next three months, down two percentage points from February, according to… the National Federation of Independent Business. A net 43% reported vacancies they could not fill, down from 47% in the prior month.”

April 5 – Bloomberg (Reade Pickert): “The US service sector expanded in March at a much slower pace than projected on considerably weaker new orders growth and softer business activity. The Institute for Supply Management’s index fell nearly four points to a three-month low of 51.2… The group’s index of new orders at service providers dropped more than 10 points to a three-month low of 52.2. While still consistent with expansion, the scale of the drop suggests a significant slowing... The business activity measure… slipped to 55.4. ‘There has been a pullback in the rate of growth for the services sector, attributed mainly to a cooling off in the new orders growth rate, an employment environment that varies by industry and continued improvements in capacity and logistics,’ Anthony Nieves, chair of the ISM Services Business Survey Committee, said…”

April 3 – Reuters (Lucia Mutikani): “U.S. manufacturing activity slumped in March to the lowest level in nearly three years as new orders plunged, and analysts said activity could decline further due to tighter credit conditions. The Institute for Supply Management (ISM) survey… showed all subcomponents of its manufacturing PMI below the 50 threshold for the first time since 2009… The ISM's manufacturing PMI fell to 46.3 last month, the lowest level since May 2020, from 47.7 in February. Outside the COVID-19 pandemic, it was the weakest reading since mid-2009.”

April 5 – Diana Olick (Jeff Cox): “Mortgage rates fell last week, but demand for home loans didn’t move higher as a result. Other aspects of today’s housing market are outweighing the benefit of lower mortgage rates right now, namely a lack of supply… Mortgage applications to purchase a home… dropped 4% last week compared with the previous week… Demand was 35% lower than the same week one year ago… ‘Spring has arrived, but the housing market is missing the customary burst in listings and purchase activity that typically mark the season…,’ said Mike Fratantoni, MBA’s chief economist. New listings were down 20% year over year in March, according to, and total inventory was about half of what it was in March 2019, pre-Covid pandemic.”

April 2 – Bloomberg (Biz Carson, Karen Breslau and John Gittelsohn): “The worst was meant to be over for San Francisco. Coders were returning from Lake Tahoe and Miami, ChatGPT was all the rage and a downtown emptied out by the pandemic was showing signs of life. Then came an old-school bank run. In a matter of weeks, a city better known as a tech hub has become a center of the financial turmoil that’s sent shockwaves around the world. Silicon Valley Bank’s sudden failure shattered the preeminent lender to the venture-capital firms and startups that help fuel the region’s economy. First Republic Bank, a San Francisco institution for almost four decades, has seen its stock plunge as investors worry it’s next. Now San Francisco, where the next new thing was always around the corner, is struggling to figure out its future. With the spigot of easy money that propelled its tech and finance industries turned off, the city is facing a constellation of economic challenges unlike any in its boom-and-bust history.”

April 1 – Bloomberg (Keith Naughton): “Just when it seemed like things were getting back to normal at Rhett Ricart’s Columbus, Ohio, car dealerships — after pandemic-induced inventory shortages and runaway price inflation — a new obstacle emerged to keep buyers from closing the deal: soaring interest rates on auto loans. ‘They get interest shock,’ said Ricart, who owns stores that sell models by Ford…, General Motors Co., Nissan… and others. ‘Customers aren’t shocked by the increased cost of the vehicle, they’re shocked that they’ve got to pay 7% or 8% to finance it. You’re talking tons of money.’”

April 6 – Bloomberg (Farah Elbahrawy): “The approaching US earnings season is expected to be the gloomiest since the pandemic, according to Goldman… strategists. Analyst consensus expectations are for S&P 500 earnings-per-share to fall 7% in the first quarter from a year earlier, marking the sharpest decline since the third quarter of 2020 and a low point in the profit cycle, strategists including Lily Calcagnini and David Kostin wrote…”

April 4 – Bloomberg (Augusta Saraiva and Amanda Albright): “Southern California’s Inland Empire, the warehousing mecca that’s home to Inc. and Walmart Inc. facilities, is showing signs of trouble. Just last year, the region was hiring workers faster than California and the rest of the US… Now, the gush of cargo that once flowed through the 27,000-square-mile area, stretching from east Los Angeles to the Nevada and Arizona borders, has dwindled to almost three-year lows and jobs are harder to come by. It’s an ominous sign for California, already reeling from the tech collapse and a banking crisis, and a glimpse into what may lie ahead for the rest of the US as it stares down a potential recession.”

April 4 – CNBC (Robert Frank): “Manhattan real estate sales fell 38% in the first quarter, as buyers and sellers battled over prices and mortgage rates remained volatile… Total sales volume fell to $4.4 billion in the quarter, with 2,242 apartments and townhouses sold, compared to 2,546 sales in the first quarter of 2022, according to… Douglas Elliman and Miller Samuel. The average sales price fell 5% to $1.95 million and the median sales price fell 10% to $1.075 million…”

March 31 – Reuters (David Lawder): “The U.S. Social Security system's main trust fund's reserves will be depleted in 2033, one year earlier than estimated last year, while Medicare's finances have improved slightly, reports from the programs' trustees showed… The Medicare Hospital Trust Fund reserves are now expected to be depleted in 2031 compared to an estimate of 2028 made last year, due in part to new estimates showing higher revenue...”

Fixed Income Watch:

April 3 – Bloomberg (Josyana Joshua): “The US investment-grade loan market is off to its slowest start in three years. Companies raised $224.4 billion of syndicated corporate loans over the quarter, down about 16% year-over-year as of March 31… That number compares to $269.5 billion issued in the first quarter of 2022. It marks the lowest first quarter volume since 2020.”

April 6 – Wall Street Journal (Sam Goldfarb): “Prices of bonds backed by commercial mortgages have recently dropped to levels not seen since the early days of the pandemic, pointing to a growing economic threat stemming from office vacancies and rising interest rates… As of Wednesday, the average extra yield, or spread, above U.S. Treasurys that investors were demanding to hold CMBS with a triple-B rating—the lowest broad investment-grade tier—was 9.52 percentage points, according to an ICE BofA index. That was up from 7.6 percentage points at the end of February and approaching the 10.8 percentage point level reached in March 2020…”

China Watch:

April 3 – Reuters (Liangping Gao and Ryan Woo): “China's sprawling manufacturing sector, accounting for a third of the world's second-largest economy by value, lost momentum in March amid still-weak export orders… The Caixin/S&P Global manufacturing purchasing managers' index (PMI) fell to 50.0 in March. That followed February's reading of 51.6, which indicated the first monthly activity expansion in seven months… ING… slashed its first-quarter gross domestic product (GDP) forecast to 3.8% annual growth from 4.5%, citing slower external demand. ‘The recovery is not smooth and we note that external demand is still fragile, which could pose a risk to domestic demand,’ the Dutch bank said…”

April 3 – Bloomberg (David Qu): “March’s bigger-than-expected drop in the Caixin manufacturing PMI reinforces our view that China’s recovery after the exit from Covid Zero remains patchy. The main drivers of growth — services spending and government investment — don’t appear to be boosting the smaller businesses and exporters tracked in the Caixin survey. The Caixin manufacturing PMI dropped to 50 — the threshold between contraction and expansion — from 51.6 in February. This was significantly lower than the consensus forecast of 51.4... Exporters are facing weaker external demand due to slowing growth in the US, Europe and Japan.”

April 6 – Bloomberg: “China’s services activity accelerated in March, a private survey showed, adding to expectations that stronger demand will bolster the economy’s recovery this year. The Caixin China services purchasing managers’ index rose to 57.8 in March, the strongest level since November 2020, Caixin and S&P Global said…”

April 5 – Bloomberg: “China’s provincial governments are facing unprecedented debt burdens following a collapse in land sales, a slowing economy and increased spending on Covid testing and lockdowns over the years. Investors are becoming increasingly worried about the massive debt pile, which Goldman Sachs… estimated this week has reached $23 trillion — or 126% of GDP — if off-budget borrowing by local governments are included. Curbing local debt risks was also highlighted by President Xi Jinping as a key challenge officials must tackle this year.”

April 3 – Bloomberg: “Chinese authorities warned the nation’s top banking executives that the crackdown on the $60 trillion industry is far from over in a private meeting late Friday, just as they were about to announce the probe of the most senior state banker in nearly two decades. Officials from the China Banking and Insurance Regulatory Commission and the Central Commission for Discipline Inspection called in top executives from at least six big state-owned banks to address the probe of Bank of China Ltd.’s former Chairman Liu Liange…”

April 4 – Bloomberg: “Chinese authorities have launched a probe into the former chairman and party chief of state-owned China Everbright Group, the latest sign that the country’s crackdown on corruption in the financial sector is picking up pace. Li Xiaopeng is suspected of ‘serious violations of discipline and law,’ the Central Commission for Discipline Inspection and the State Supervision Commission said… The announcement came after the anti-graft body said last week it will start a fresh round of checks at more than 30 state-owned companies. As part of the inspection, they will also ‘look back’ at five financial firms that had been previously targeted… China’s $60 trillion finance industry is being rocked by a clampdown that has become its most extensive since beginning in late 2021.”

April 7 – Bloomberg: “China’s local traders are borrowing a record amount of short-term cash, in a sign they are leveraging up returns in a stable bond market. Turnover in so-called pledged repurchase trades surged past 8 trillion yuan ($1.2 trillion) to an all-time high Thursday… The figures are used as a gauge of leveraged activity in bonds, even if the transactions also include the day-to-day financing needs of firms in the market.”

April 4 – Wall Street Journal (Stella Yifan Xie): “China’s property market appears to have stabilized after a two-year downturn. But one problem continues to hold back its recovery: a major oversupply of unsold apartments. China had 3.5 billion square feet of finished but unsold apartments in February… That is equivalent to around 4 million homes, according to some estimates. It is also the worst oversupply in China since 2017, when it was in the midst of a ‘slum clearance’ program meant to boost demand for new housing by tearing down old, dilapidated buildings. Around a third of all newly completed apartments in 2022 were unsold, the highest percentage since 2015…”

April 4 – Bloomberg: “At least 15 Chinese real estate companies that were suspended this year have delayed earnings, adding to a long list of property businesses facing similar challenges. CIFI Holdings Group Co. and Jiayuan International Group Ltd. join China Evergrande Group among at least 28 suspended real estate operators that have yet to disclose results to the Hong Kong stock exchange as of April 3…”

April 2 – Bloomberg: “China Renaissance Holdings Ltd. said it’ll suspend trading of its shares from Monday and delay the release of its audited results for 2022, as the investment bank failed to get in touch with Chairman Bao Fan who was cooperating in an investigation by Chinese authorities.”

Central Banker Watch:

April 5 – Reuters (Lucy Craymer): “New Zealand's central bank unexpectedly raised interest rates by 50 bps to a more than 14-year peak of 5.25%..., saying inflation was still too high and persistent and kept the door open to further tightening. The central bank's hawkish stance saw a number of economists revise their expectations… to a peak of 5.5%. It has hiked rates by 500 bps since October 2021, undertaking its most aggressive tightening streak since the OCR was introduced in 1999.”

April 3 – Bloomberg (Marton Eder and Alexander Weber): “European Central Bank Governing Council member Robert Holzmann said another half-point increase in borrowing costs is ‘still on the cards’ if the turmoil that’s rocked the global banking system doesn’t worsen. While acknowledging that the episode, sparked by the collapse of Silicon Valley Bank, could have a comparable effect to interest-rates hikes by curbing credit, Holzmann said his ‘feeling would be to stay on course.’”

April 2 – Financial Times (Martin Arnold): “The European Central Bank has called for a clampdown on commercial property funds to tackle the risk that a downturn in the €1tn sector could trigger a liquidity crisis if investors rushed to withdraw their money. The ECB’s proposals reflect concern among regulators and investors that the recent turmoil in the banking industry could exacerbate strains in the commercial property market and push the sector closer to crisis. Funds that invest in illiquid property assets and allow investors to pull out their money at short notice are exposed to a ‘liquidity mismatch’ that could force them into ‘fire sales’, ECB officials warned in a macroprudential bulletin…”

Bursting Global Bubble Watch:

April 6 – Bloomberg (Eric Martin): “The International Monetary Fund warned that its outlook for global economic growth over the next five years is the weakest in more than three decades… The emergency lender sees the world economy expanding about 3% over the next half decade as higher interest rates bite, Managing Director Kristalina Georgieva said… That’s the lowest medium-term growth forecast since 1990 and less than the five-year average of 3.8% from the past two decades.”

April 5 – Financial Times (Andy Bounds): “The World Trade Organization has warned that growth in export volumes will slow this year as rising interest rates and financial instability weigh on an environment already hit by a revival of protectionism. Volumes increased by 2.7% over the course of 2022 — a lower than expected figure as the war in Ukraine and sanctions on Russia damaged supply chains… This year growth is expected to be even slower, at just 1.7% — well below the average level for the past decade of 2.6%. ‘The lingering effects of Covid-19 and the rising geopolitical tensions were the main factors impacting trade and output in 2022 and this is likely to be the case in 2023 as well,’ said Ralph Ossa, chief economist of the WTO.”

Europe Watch:

April 3 – Reuters (Jonathan Cable): “Activity at struggling factories across the euro zone fell further last month as consumers feeling the pinch from rising living costs cut back… S&P Global's final manufacturing Purchasing Managers' Index (PMI) fell to 47.3 in March from February's 48.5, just ahead of a preliminary reading of 47.1 but below the 50 mark separating growth from contraction for a ninth month.”

April 4 – Reuters (Philip Blenkinsop): “Euro zone producer prices fell for a fifth consecutive month and by more than expected in February, almost entirely due to declining energy prices. EU statistics office Eurostat said… prices at factory gates in the 20 countries sharing the euro declined by 0.5% month-on-month in February for a 13.2% year-on-year increase.”

Japan Watch:

April 6 – Bloomberg (Erica Yokoyama): “Japanese workers’ real wages fell for the 11th straight month despite a government push for higher pay, highlighting the challenge awaiting incoming Bank of Japan Governor Kazuo Ueda. Real cash earnings for Japan’s workers dropped 2.6% from a year earlier in February, matching economists’ forecast…”

April 2 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japanese manufacturers' sentiment soured in the first quarter to its worst level in more than two years, eclipsing an uptick in service-sector mood, a central bank survey showed… Corporate inflation expectations hit a fresh high with firms projecting inflation to stay above the Bank of Japan's 2% target five years ahead, the ‘tankan’ showed… Sentiment soured for a broad sector of manufacturers with many firms complaining of the impact of rising raw material and fuel costs, as well as slowing overseas growth and slumping chip demand…”

EM Crisis Watch:

April 1 – Reuters (Asif Shahzad): “Consumer price inflation in Pakistan jumped to a record 35.37% in March from a year earlier, the statistics bureau said…, as at least 16 people were killed in stampedes for food aid. The March inflation number eclipsed February's 31.5%, the bureau said, as food, beverage and transport prices surged up to 50% year-on-year.”

Leveraged Speculation Watch:

April 2 – Financial Times (Nicholas Megaw, Kate Duguid and Laurence Fletcher): “Trend-following hedge funds have suffered one of their worst monthly losses since the dotcom bust in the bond market turmoil that was unleashed by the recent banking crisis. So-called CTA funds, which manage about $200bn in assets, according to eVestment, use algorithms to detect and ride trends…, but many were caught out by a sudden reversal in US Treasuries after Silicon Valley Bank’s failure. Société Générale’s CTA index, which tracks the performance of 20 of the largest such funds, dropped 6% in the space of two days in the wake of the Californian lender’s collapse, and has slid further since. It declined 6.4% in the month to March 30… That would mark its worst monthly performance since November 2001…”

April 3 – Financial Times (Laurence Fletcher): “Hedge funds have hardly been covering themselves in glory during a tumultuous few weeks for markets. Sharp moves in the US government bond market and in bank stocks, driven by failures in the US regional banking sector and the fall of Credit Suisse, have left numerous funds in the red for the year. Many managers were found to be sitting in trades that seemed obvious at the time based on the perfectly rational belief that interest rates had to move higher to combat stubbornly high inflation. Unfortunately, this also meant that these trades became crowded, and therefore dangerous if funds all rushed to the door to reverse them.”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 6 – Associated Press (Isabella O’Malley): “Methane in the atmosphere had its fourth-highest annual increase in 2022, the National Oceanic and Atmospheric Administration reported, part of an overall rise in planet-warming greenhouse gases that the agency called ‘alarming.’ Though carbon dioxide typically gets more attention for its role in climate change, scientists are particularly concerned about methane because it traps much more heat — about 87 times more than carbon dioxide on a 20-year timescale. Methane, a gas emitted from sources including landfills, oil and natural gas systems and livestock, has increased particularly quickly since 2020.”

Geopolitical Watch:

April 6 – Reuters (Hyonhee Shin): “North Korea accused the U.S. and South Korea of escalating tensions to the brink of nuclear war through their joint military drills, vowing to respond with ‘offensive action’, state media KCNA reported… KCNA released a commentary by Choe Ju Hyon, whom it called an international security analyst, criticising the exercises as ‘a trigger for driving the situation on the Korean peninsula to the point of explosion’.”

April 5 – Reuters (Parisa Hafezi and Aziz El Yaakoubi;): “The top envoys for Saudi Arabia and Iran will meet in Beijing on Thursday…, as the two regional rivals work to hash out next steps of their diplomatic rapprochement amid a China-brokered deal. The meeting between Prince Faisal bin Farhan Al Saud and his Iranian counterpart, Hossein Amirabdollahian, will be the first formal meeting between Saudi Arabia and Iran's most senior diplomats in more than seven years.”

Friday Evening Links

[Reuters] U.S. yields climb, S&P futures close higher after jobs report

[Yahoo/Bloomberg] Fed Traders Eye CPI After Jobs Data Boost Odds of a May Hike

[Reuters] West Coast port workers force closure of top U.S. shipping gateway - employer group

[Yahoo/Bloomberg] Ukraine Latest: Russia Is Said to Formally Charge WSJ Journalist

[Reuters] Senior US lawmaker says doing everything possible to speed up Taiwan arms deliveries

[Bloomberg] US Bank Lending Slumps by Most on Record in Final Weeks of March

[Bloomberg] US Consumer Credit Increased in February at a More Moderate Pace

[WSJ] Paul Singer, the Man Who Saw the Economic Crises Coming

[FT] Russia’s foreign minister threatens to scrap Ukraine grain deal

[FT] Opec’s gamble: can the global economy cope with higher oil prices?