Friday, May 19, 2023

Weekend Commentary: Too Loose

“Growing Debt Ceiling Deal Hopes Send Stocks Higher.” The S&P500 gained 1.6% this week, pushing the index to a nine-month high. The Nasdaq100’s 3.5% surge boosted y-t-d gains to 26.2%. The source of all the optimism wasn’t obvious.

May 19 – Bloomberg (Billy House and Steven T. Dennis): “White House and Republican negotiators met Friday night to resume talks to avert a catastrophic US default and conversations are expected to continue through the weekend. The 90-minute meeting in the Capitol came after a Republican walk-out punctured optimism that a debt-limit deal was near... Neither negotiating team commented on progress as they left the meeting. Republican Representative Patrick McHenry, a key ally of Speaker Kevin McCarthy, asked if he was confident the two sides would reach a deal in time to prevent a default, responded, ‘No.’ Another Republican in the meeting, Representative Garret Graves of Louisiana, said it was not a negotiation. ‘This was a candid discussion about realistic numbers, a realistic path forward, and something that truly changes the trajectory of this country’s spending and debt,’ Graves said.”

Markets assume an 11th hour debt ceiling deal is a sure thing. I’ll assume option expiration again helped juice market gains. An ongoing short squeeze generates market fuel. Understandably, all the talk of a fledgling equities “melt-up” rattled the Treasury market. Two-year Treasury yields surged 28 bps this week to a 10-week high 4.27%. Ten-year yields jumped 21 bps to a two-month high 3.67%, and benchmark MBS yields rose 27 bps to a 10-week high 5.47%.

The rates market is still pricing a couple rate cuts between June and December. Market expectations for the Fed funds rate at the December 13th FOMC meeting jumped 25 bps this week to 4.64%. It was as high as 4.73% in early-Friday trading, before “Powell Steers Policy Debate With Clear Signal on June Rate Pause.” Hawkish Fed officials had the market pricing an almost 40% probability for a 25 bps June rate increase, before dovish Powell comments pushed the odds down to 18% by Friday’s close. It will be a divided committee for the June 14th meeting.

While the U.S. stock market’s ability to dismiss myriad risks has been noteworthy, buoyant markets are a global phenomenon. Surging 4.8% this week, “Japan’s Nikkei Powers to 1990 ‘Bubble Era’ High.” German stocks rose 2.3%, as “DAX Nears Record as Wall Street Rally Bubbles Over.” Up 18.1%, Japan’s Nikkei Index has almost doubled the S&P500’s y-t-d gain. Strong 2023 advances in Europe include Germany’s DAX up 16.9%, France’s CAC40 15.7%, Italy’s MIB 16.1%, and Spain’s IBEX 12.4%.

The bottom line: Global financial conditions remain loose. This has been good news so far for risk assets; not so much for containing inflation. “Euro Zone Inflation Ticks Up in April.” “BOE’s Bailey Warns of Risk of Inflation Persistence in UK.” “Canada’s Inflation Unexpectedly Rises in April, Upping Rate-Hike Pressure.”

May 18 – Bloomberg (Takahiko Wada and Leika Kihara): “Japan’s core consumer inflation stayed well above the central bank’s 2% target in April and a key index stripping away the effects of fuel hit a fresh four-decade high… The reading comes a few days after data showed the world's third-largest economy grew faster than expected in the first quarter… The nationwide core consumer price index (CPI)… rose 3.4% in April from a year earlier… An index stripping away the effects of both fresh food and fuel - closely watched by the BOJ as a key barometer of domestic demand-driven price trends - rose 4.1% in April from a year earlier, marking the fastest annual pace since September 1981.”

May 19 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Kazuo Ueda continued to strike a dovish tone hours after data showed underlying inflation accelerating to the fastest pace in more than four decades. ‘The cost of impeding the nascent developments toward achieving the 2% price stability target, which are finally in sight, by making hasty policy changes would likely be extremely high,’ Ueda said in a speech… ‘It is appropriate to take time to decide on adjustments to monetary easing toward a future exit’…”

Global central banker inflation fights will flail until conditions tighten. And it doesn’t take a deep search to find an explanation of loose global conditions. For one, there are the multi-Trillions that central bankers created during the pandemic still circulating about the markets. With borrowing costs remaining near zero in Japan, the size of the (borrow cheap in yen to leverage in higher-yielding international securities) yen “carry trade” is surely in the Trillions. Moreover, the Bank of Japan’s $5.5 TN balance sheet expanded about 5% during Q1. The ECB has made little progress in shrinking its massive $7.5 TN balance sheet.

China’s massive banking system continues to inflate at a double-digit rate. Chinese Credit (Aggregate Financing) expanded $2.45 TN during the first four months of the year.  Repo lending rates are only about 2%, with 10-year Chinese government bond yields at 2.70%. The amount of finance – savings and borrowings – leaving China for greener pastures must be enormous.

May 19 – Bloomberg: “China’s yuan jumped on Friday after the country’s central bank moved to shore up the currency following a recent selloff, vowing to curb speculation and calling for more stability in the foreign exchange market. The People’s Bank of China and the foreign exchange regulator will ‘strengthen market expectation guidance and take actions to correct pro-cyclical and one-way market behaviors when necessary.’ The offshore yuan… pulled away from 7.0750, its weakest level since December.”

And it's difficult to see economies where central bank policy rates are actually restrictive. The European Central Bank’s 3.75% rate is still only about half of current 7% euro zone CPI. Arguably, the Federal Reserve’s 5% policy rate is not sufficiently restrictive to contain inflation. After years of stoking speculation, central banks face the impossible challenge of cautiously deflating speculative Bubbles without tanking the whole system.

The run on U.S. bank deposits has quieted for now. This week’s hearings before the Senate Banking Committee were rather boisterous. The CEOs from SVB, First Republic and Signature Bank came up short in taking responsibility for their banks’ collapses. And, believe it or not, these gentlemen were not excited about returning any of their significant compensation packages.

May 16 - Bloomberg (Allyson Versprille): “The former Silicon Valley Bank executive who’s taken the brunt of criticism for the lender’s collapse is refusing to commit to giving up any of the $10 million he received annually from the failed lender. Former SVB Chief Executive Officer Greg Becker told lawmakers on the Senate Banking Committee… that unprecedented events, interest-rate hikes and negative social media coverage rather than mismanagement were the root causes of the firm’s March demise… Becker has drawn ire from both Democrats and Republicans for selling $3.6 million of company stock under a trading plan less than two weeks before the firm disclosed extensive losses.”

Back from March 23 - Financial Times (Allyson Versprille): “Executive pay at Silicon Valley Bank soared after the bank embarked on a strategy to boost profitability by buying riskier assets exposed to rising interest rates… The jump in pay for chief executive Greg Becker and chief financial officer Daniel Beck was a result of large multiyear bonus awards pegged to the bank’s return on equity (RoE), a key measure of profitability that rose sharply between 2017 and 2021... Becker’s cash bonus peaked at $3mn in 2021, more than double the amount he received four years earlier.”

I didn’t hear a peep on the subject. But perhaps SVB management should not have expanded the bank so recklessly. In the three years ending in 2022, SVB Total Assets surged 198% to $212 billion. Total Loans expanded 124% to $74 billion.

Testimony from First Republic CEO Michael Roffler: “Up until the cataclysmic events of March 10 and the following days…First Republic was in a strong financial position… We could not have anticipated that Silicon Valley Bank and Signature Bank would fail, or that the failure of those banks would trigger substantial deposit outflows at our bank.”

“First Republic’s financial position and strategy were regularly reviewed by our regulators, the California Department of Financial Protection and Innovation and the FDIC… Neither regulator expressed concern regarding First Republic’s strategy, liquidity, or management performance—just the opposite.”

“To be clear, no one at First Republic could have predicted the collapse of Silicon Valley Bank and Signature Bank, the speed at which it happened, or the catastrophic effects these events had on the banking industry and consumer confidence. Instead, First Republic was preparing for reduced profits in 2023 as compared to our record profits in 2022.”

“The run on First Republic was undoubtedly catalyzed by the widespread panic that was inspired by the abrupt failure of Silicon Valley Bank, and then Signature Bank, and exacerbated by traditional media and social media, as well as recent technological advancements that allow depositors to withdraw their money almost immediately.”

Fair enough. But that certainly doesn’t absolve management’s hyper-aggressive growth strategy. Total Assets expanded 83% - from $116 billion to $213 billion – in just three years. Total Loans surged 84% over this period ($91bn to $167bn).

Mr. Roffler was appointed CEO in 2022. “His total yearly compensation is US$7.3m, comprised of 7.5% salary and 92.5% bonuses, including company stock and options.

Testimony from Signature Bank CEO Scott Shay: “‘Within just a few days of SVB collapse, Signature Bank customers withdrew $16 billion in assets. Nonetheless, I was confident Signature Bank could withstand the economic earthquake that occurred that day.”

“Scott Shay, former Chairman and Co-Founder of Signature Bank, made more than $20 million from 2019 to 2023 as the Federal Deposit Insurance Corporation (FDIC) identified 45 liquidity risk issues.”

May 16 - Bloomberg (Allyson Versprille): “During the hearing, Scott Shay, who served as chairman of Signature Bank, also refused to commit to giving back any of his pay."

Shay pointed blame for Signature’s failure to “a series of truly extraordinary and unprecedented events.”

Signature Bank’s growth was certainly extraordinary, with Total Assets surging 118% in three years to $110 billion. Total Loans rose 90% to $75 billion. Few businesses provide the opportunity to achieve booming accounting profits as lending – especially risky lending. Profits can be booked up front, with bad loans and charge-offs often years down the road.

The three CEOs surely understood that such rapid growth put their banks at risk. The long and checkered history of banking is unequivocal on the subject. But human nature is human nature. Of course, these executives were going to push risk to the limit. The incentive was a backdrop with generational wealth for the taking. From 2020 lows to 2021/22 highs, SVB’s stock inflated almost 500%. Signature Bank’s stock was up 440% and First Republic almost 220%. And it’s a “heads I win, tails you lose” dynamic. If their banks don’t fail, the CEOs enjoy fortunes in the tens of millions. Spectacular failure left them with many millions.

Reckless monetary policy created such dangerous incentive structures. Somehow, central bankers presumed zero rates and Trillions of money printing were benign, so long as consumer price inflation remained under control. They ignored the corrosive easy-money impacts of Monetary Disorder and asset inflation/Bubbles. Now we have acute fragility and inflation.

Acute fragility ensures rapid central bank crisis management operations, including the Bank of England in September and the Fed’s $400 billion liquidity support in March. And let’s not forget the herculean FHLB crisis response. In the year up to March 31, 2023, FHLB Total Assets surged $802 billion, or 105%, to a record $1.564 TN. Advances (loans to member institutions) jumped $670 billion y-o-y, or 179%, to $1.045 TN. But FHLB liquidity measures went beyond advances. “Repo” assets gained $56.5 billion, or 83%, to $124 billion. “Federal Funds Sold” jumped 52% y-o-y to $87 billion. This is extraordinary, systemically impactful liquidity creation.

And this week, the Institute of International Finance (IIF) released their Q1 2023 Global Debt Monitor (GDM), highlighting the unprecedented - and ongoing - surge in global debt.

GDM Highlights: “The global debt stock grew by $8.3 trillion to a near-record $305 trillion in Q123; the combination of high debt levels and rising interest rates has pushed up debt service costs, prompting concerns about leverage in the financial system.”

Total debt of emerging markets hit a fresh record high of over $100 trillion (or 250% of GDP) – up from $75 trillion in 2019.”

At close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly.”

Rise of private debt markets: Non-bank financial institutions (NBFLs) continue to gain prominence in global credit intermediation. The so-called ‘shadow banks’ now account for more than 14% of financial markets, with the majority of growth stemming from a rapid expansion of U.S. investment and private debt markets.” And from a chart headline: “The Size of Private Debt Markets Surpassed $2.1 Trillion in 2022, Up From Less Than $0.1 Trillion in 2007.

From the end of Q3 2019 through Q1 2023, Total Global Debt jumped $52.3 TN, or 20.7%, to $305 TN. Over this period, “Mature” economy debt expanded 13.4%, while “Emerging” economy debt surged 38.9%. It’s worth nothing that in the “Emerging” category, “Household” debt surged 41.7%, “Non-Financial Corporate” 35.1%, and “Government” 55.7%. Since 2016, total global debt-to-GDP has surged from 210% to 360%. Global financial conditions remain loose. When they inevitably tighten, be prepared for serious dislocation.

For the Week:

The S&P500 gained 1.6% (up 9.2% y-t-d), and the Dow added 0.4% (up 0.8%). The Utilities sank 4.4% (down 7.5%). The Banks rallied 5.8% (down 23.8%), and the Broker/Dealers rose 3.0% (down 1.4%). The Transports advanced 0.9% (up 3.9%). The S&P 400 Midcaps gained 1.0% (up 1.0%), and the small cap Russell 2000 rallied 1.9% (up 0.7%). The Nasdaq100 jumped 3.5% (up 26.2%). The Semiconductors surged 7.8% (up 26.5%). The Biotechs rose 2.0% (up 2.6%). With bullion down $33, the HUI gold equities index dropped 5.4% (up 9.9%).

Three-month Treasury bill rates ended the week at 5.0825%. Two-year government yields surged 28 bps this week to 4.27% (down 16bps y-t-d). Five-year T-note yields jumped 29 bps to 3.73% (down 27bps). Ten-year Treasury yields rose 21 bps to 3.67% (down 20bps). Long bond yields jumped 14 bps to 3.93% (down 7bps). Benchmark Fannie Mae MBS yields surged 27 bps to a 10-week high 5.47% (up 8bps).

Greek 10-year yields were unchanged at 4.00% (down 57bps y-t-d). Italian yields gained nine bps to 4.27% (down 43bps). Spain's 10-year yields jumped 12 bps to 3.48% (down 4bps). German bund yields rose 15 bps to 2.43% (down 2bps). French yields jumped 15 bps to 3.00% (up 2bps). The French to German 10-year bond spread was little changed at 57 bps. U.K. 10-year gilt yields surged 22 bps to 4.00% (up 32bps). U.K.'s FTSE equities index was unchanged (up 4.1% y-t-d).

Japan's Nikkei Equities Index surged 4.8% (up 18.1% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.40% (down 2bps y-t-d). France's CAC40 gained 1.0% (up 15.7%). The German DAX equities index jumped 2.3% (up 16.9%). Spain's IBEX 35 equities index increased 0.2% (up 12.4%). Italy's FTSE MIB index added 0.6% (up 16.1%). EM equities were mixed. Brazil's Bovespa index rose 2.1% (up 0.9%), while Mexico's Bolsa index declined 1.2% (up 12.0%). South Korea's Kospi index rallied 2.5% (up 13.5%). India's Sensex equities index dipped 0.5% (up 1.5%). China's Shanghai Exchange Index increased 0.3% (up 6.3%). Turkey's Borsa Istanbul National 100 index sank 6.1% (down 18.3%). Russia's MICEX equities index rose 2.4% (up 21.9%).

Investment-grade bond funds posted inflows of $2.163 billion, while junk bond funds reported outflows of $1.151 billion (from Lipper).

Federal Reserve Credit declined $12.4bn last week to $8.448 TN. Fed Credit was down $452bn from the June 22nd peak. Over the past 192 weeks, Fed Credit expanded $4.722 TN, or 127%. Fed Credit inflated $5.637 TN, or 201%, over the past 549 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $8.0bn last week to a near eight-month high $3.390 TN. "Custody holdings" were down $33.2bn, or 1.0%, y-o-y.

Total money market fund assets gained another $13.6bn to a record $5.341 TN, with a ten-week gain of $448bn. Total money funds were up $856bn, or 19.1%, y-o-y.

Total Commercial Paper declined $6.8bn to $1.140 TN. CP was up $18bn, or 1.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose eight bps to 6.51% (up 126bps y-o-y). Fifteen-year rates gained five bps to 5.80% (up 137bps). Five-year hybrid ARM rates surged 26 bps to 5.99% (up 191bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 14 bps to 7.01% (up 164bps).

Currency Watch:

May 16 – Bloomberg: “China is taking a tougher stance on capital flows out of the country as the nation’s two leading cross-border online brokerages decided to remove their trading platforms from app stores in the mainland… China has increased scrutiny of operations that could risk financial stability and national security in recent months, especially as relations with the US worsened and demand rose among mainlanders to move wealth offshore as China reopened from Covid zero. Lines at Hong Kong bank branches had hours-long waiting times in early May during the Golden Week holiday, as tourists from the mainland tried to open an account in the region.”

For the week, the U.S. Dollar Index increased 0.5% to 103.20 (down 0.3% y-t-d). For the week on the upside, the New Zealand dollar increased 1.5%, the South Korean won 0.6%, the Canadian dollar 0.3%, and the Australian dollar 0.1%. On the downside, the Norwegian krone declined 1.8%, the Japanese yen 1.7%, the Brazilian real 1.5%, the Swedish krona 1.5%, the Mexican peso 1.1%, the South African rand 0.6%, the Singapore dollar 0.5%, the euro 0.4%, the Swiss franc 0.2%, and the British pound 0.1%. The Chinese (onshore) renminbi declined 0.75% versus the dollar (down 1.62%).

Commodities Watch:

May 14 – Bloomberg (Eddie Spence): “The World Platinum Investment Council raised its 2023 forecast deficit for platinum to a record high as investors bet on the metal’s supply declining. Platinum consumption will outstrip supply by 983,000 ounces in 2023, WPIC wrote in its quarterly report... That would be the biggest shortfall in records going back to the 1970s, and compares with a deficit of 556,000 ounces the council projected in March.”

The Bloomberg Commodities Index was little changed (down 10.4% y-t-d). Spot Gold declined 1.6% to $1,978 (up 8.4%). Silver slipped 0.5% to $23.85 (up 0.4%). WTI crude recovered $1.51, or 2.2%, to $71.55 (down 11%). Gasoline rallied 6.0% (up 5%), and Natural Gas surged 14.1% to $2.59 (down 42%). Copper was little changed (down 2%). Wheat dropped 4.7% (down 23%), and Corn sank 5.4% (down 18%). Bitcoin gained $155, or 0.5%, this week to $26,890 (up 62%).

Global Bank Crisis Watch:

May 16 – Reuters (Ken Sweet): “The Federal Reserve will unveil its plan to ratchet up capital rules for banks this summer and will ensure supervisors more aggressively police lenders following several recent bank failures, its top regulatory official told Congress… Fed Vice Chair for Supervision Michael Barr said the agency was ‘carefully considering’ rule changes for larger regional banks of over $100 billion in assets. He said he expects to lay out his plan for overhauling the Fed's capital and liquidity rules sometime this summer, which would kick off an ambitious rule rewriting process for banking regulators. That effort could include several tougher rules on those larger banks, including requiring them to account for unrealized losses on their books when considering capital levels.”

May 16 – Associated Press (Ken Sweet): “Top executives at Silicon Valley Bank and Signature Bank largely avoided taking responsibility for their banks’ dramatic failures at a Senate hearing Tuesday, instead using their time to assign blame to events they said were largely out of their control. The arguments got little traction with senators on both sides of the aisle. Democrats and Republicans on the Senate Banking Committee criticized the executives for taking risky actions or missing obvious problems that directly led to the demise of their banks, while still accepting lucrative pay packages and bonuses… ‘You were paying out bonuses until literally hours before regulators seized your assets,’ said Sen. Sherrod Brown, the Democratic chair of the Senate Banking Committee. ‘To most Americans, a lack of Wall Street accountability tracks with their entire experience with our economy. Workers face consequences; executives ride off into the sunset.’ More than a handful of senators asked if the executives would consider returning part of their compensation, since bank failures are shouldered by the Federal Deposit Insurance Corporation and other banks in the system. Each of the three executives testifying demurred.”

May 16 – Financial Times (Joshua Franklin, Stephen Gandel and Colby Smith): “Top executives from Silicon Valley Bank and Signature Bank refused to commit to voluntarily handing back the millions of dollars they were paid before the collapse of their banks triggered a US regional banking crisis. In their first public appearances since the two lenders were shut down by regulators in March, former SVB chief executive Greg Becker, alongside ex-Signature executives Scott Shay and Eric Howell, were quizzed by members of the Senate banking committee over their roles in the recent failures. Lawmakers including Elizabeth Warren, the progressive Democratic senator from Massachusetts, repeatedly asked Becker and Shay if they would return their pay to the Federal Deposit Insurance Corporation, which shouldered billions of dollars of losses following the collapse of the two banks.”

May 17 – Bloomberg (Jennifer Schonberger and David Hollerith): “The former CEO of First Republic told House lawmakers… that his bank ‘was contaminated’ by the widespread panic that followed the March 10 fall of Silicon Valley Bank, a development ‘no one’ at his company could have anticipated. ‘Everything changed overnight,’ said Michael Roffler, in testimony before the House Subcommittees on Financial Institutions and Monetary Policy and Oversight and Investigations.”

May 17 – Reuters (Nilutpal Timsina): “The former chief executive of the First Republic Bank Michael Roffler blamed the bank's collapse on the contagion from the failures of other regional banks and said regulators did not express concerns regarding the bank's strategy, liquidity, or management performance. A total of over $100 billion in deposits were withdrawn from the bank over the course of weeks in response to an industry-wide panic about the soundness of regional banks, Roffler said in his prepared testimony to a House Financial Services sub-committee… ‘We could not have anticipated that Silicon Valley Bank and Signature Bank would fail, or that the failure of those banks would trigger substantial deposit outflows at our bank," he said.”

May 17 – Reuters (Kane Wu): “UBS Group AG was rushed into buying cross-town rival Credit Suisse Group AG (CSGN.S) in a deal it did not want, as a global bank crisis worsened the latter's finances and prompted authorities to take swift action, a regulatory filing showed. UBS, in a… filing to the U.S. Securities and Exchange Commission, told investors it had less than four days to conduct due diligence given the ‘emergency circumstances’.”

May 13 – Wall Street Journal (Frances Yoon): “Two months after the failure of Silicon Valley Bank, the lender’s depositors in the Cayman Islands have been left out in the cold. The… bank’s American depositors were protected when the Federal Deposit Insurance Corp. took control of SVB on March 10 and guaranteed all of their funds… It has been a vastly different story for customers of SVB’s Cayman Islands branch, which was left out of the First Citizens deal and placed under FDIC receivership. The branch in the offshore tax haven was set up to primarily support the bank’s activities in Asia, according to SVB. Its depositors, which include multiple Chinese investment firms, haven’t been able to access their funds—and have been in limbo since SVB’s collapse.”

May 17 – Reuters (Matt Tracy): “Many U.S. regional lenders may have to consider selling off commercial real estate (CRE) loans at a steep discount after breaching key regulatory thresholds for exposure to the troubled sector, according to new data and market sources. Regional banks, the largest lenders to the beleaguered U.S. CRE and construction markets, have reduced their exposure to the sector by tightening standards and making fewer loans, especially in the weeks after the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank.”

Debt Ceiling Watch:

May 16 – Reuters (David Lawder and Andrea Shalal): “The U.S. Treasury Department reiterated Monday it expects to be able to pay the U.S. government's bills only through June 1 without a debt limit increase… In her second letter to Congress in two weeks, Treasury Secretary Janet Yellen confirmed that the agency will be unlikely to meet all U.S. government payment obligations by early June, triggering the first-ever U.S. default. The debt ceiling could become binding by June 1, she said.”

May 18 – CNBC (Christina Wilkie): “House Speaker Kevin McCarthy said Thursday that he is optimistic that congressional negotiators could reach a deal to raise or suspend the debt ceiling in time to hold a House vote on it next week. ‘I see the path that we can come to an agreement,’ McCarthy told reporters… ‘And I think we have a structure now and everybody’s working hard, and I mean, we’re working two or three times a day, then going back getting more numbers.’”

Market Instability Watch:

May 17 – Reuters (Rodrigo Campos): “A measure of debt across the globe rose in the first quarter to almost $305 trillion, and the rising cost to service that debt is triggering concern about the financial system's leverage, a widely tracked study showed. The Institute of International Finance… said… global debt rose by $8.3 trillion in the first three months of this year compared to the end of 2022 to $304.9 trillion, the highest since the first quarter of last year and second-highest quarterly reading ever. ‘Global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly,’ said the IIF in its quarterly Global Debt Monitor.”

May 19 – Bloomberg (Justina Lee): “Deep in the bowels of Wall Street there’s a surprisingly successful counterfeiting operation underway: The world’s largest banks have created a booming business churning out imitation quant trades. JPMorgan…, Goldman Sachs…, and Morgan Stanley are among those hawking the products, which are known by the deceptively dreary name ‘quantitative investment strategies,’ or QIS. It’s the latest chapter in the ongoing demystification of high finance. These trades — numbering in their thousands and supplied to pension funds, family offices and the like — replicate strategies pioneered by Ivy League academics and systematic fund managers like AQR Capital Management.”

May 13 – Financial Times (Nicholas Megaw): “While human portfolio managers fret over economic uncertainty and the health of the US banking system, some algorithmically driven hedge funds have been buying stocks at one of the fastest rates in a decade… Quant funds have been piling into US stock markets in response to falling volatility, helping to prop up the market as active managers sit on the sidelines. ‘Systematic reallocation has really been the [main] source of demand outside of corporate buybacks’ this year, said Charlie McElligott, an equity derivatives strategist at Nomura.”

Bursting Bubble and Mania Watch:

May 15 – Bloomberg (Libby Cherry): “At least seven large companies filed for Chapter 11 bankruptcy protection in less than 48 hours, a breakneck pace of restructurings that included once-hot digital-broadcaster Vice Media LLC and KKR & Co.-backed Envision Healthcare Corp. That’s the largest number of filings on record during a two-day period since at least 2008, according to… data on companies with at least $50 million of liabilities.”

May 17 – Bloomberg (Rich Miller): “US commercial real estate prices fell in the first quarter for the first time in more than a decade, according to Moody’s Analytics, heightening the risk of more financial stress in the banking industry. The less than 1% decline was led by drops in multifamily residences and office buildings, data culled by Moody’s… showed. ‘Lots more price declines are coming,’ Mark Zandi, Moody’s Analytics chief economist, said. The danger is that will compound the difficulties confronting many banks at a time when they are fighting to retain deposits in the face of a steep rise in interest rates over the past year. Excluding farms and residential properties, banks accounted for more than 60% of the $3.6 trillion in commercial real estate loans outstanding in the fourth quarter of 2022, with smaller institutions particularly exposed, according to the Federal Reserve’s semi-annual Financial Stability Report…”

May 16 – Wall Street Journal (Berber Jin): “Venture-capital-fund performance is languishing amid the broader downturn for tech startups, denting returns for university endowments, pensions and other investors that increased their exposure to the sector during the bull market. For the first time in more than a decade, returns for venture funds were negative for three consecutive quarters last year, according to… PitchBook Data, as investors finally began to mark down startups that had ballooned in value. Initial data for the fourth quarter also show a negative quarterly return. The data also show that the yearly internal rate of return hit minus 7% in the third quarter… the lowest value for those three months since 2009.”

May 14 – Financial Times (Jonah Crane): “US regulators have been stepping up their scrutiny of decentralised finance, a burgeoning marketplace for crypto assets that operates without meaningful regulatory oversight. The Securities and Exchange Commission issued a revised proposal last month clarifying that DeFi crypto trading systems should be regulated like stock exchanges. And the US Treasury also issued a paper in April that pointed out the illicit finance risks in DeFi.”

May 16 – Wall Street Journal (Peter Grant): “Property owners are starting to unload troubled office buildings at fire-sale prices, a sign that the office market slump is moving into a new phase where more landlords are ready to capitulate. In recent weeks, Blackstone sold the Griffin Towers office complex in Santa Ana for $82 million, or about 36% less than the firm paid in 2014… Principal Financial Group sold a Parsippany, N.J., office building for $14.3 million, down from the $52 million it paid in 2008… The tower at 350 California in San Francisco, valued at $300 million in 2019, is expected to trade at about $60 million, or roughly 80% below that previous valuation.”

May 15 – Bloomberg (Isis Almeida and Shruti Date Singh): “In the heart of Chicago’s financial center, a seven-story building occupying much of a city block was once home to the world’s largest options exchange. Now, it’s collecting dust. The property, for decades home to the floor where options traders jostled and screamed orders at each other, has been on the market since 2019, but owner Cboe Global Markets Inc. can’t find a buyer. The Chicago Board of Trade building, once a key commodities hub, has fared even worse, with lenders handing the keys over to Apollo Global Management Inc. Over on the Magnificent Mile, the famed shopping strip that runs north of the Chicago River on Michigan Avenue, empty storefronts dot the streets, with vacancies at a record.”

May 18 – Bloomberg (Laura Nahmias, Natalie Wong and Dayana Mustak): “The atrium at 60 Wall Street was once a thoroughfare for thousands of Deutsche Bank AG employees. These days it’s eerily quiet even during rush hour on a weekday morning… The 47-story skyscraper, owned by Singapore’s sovereign wealth fund and Paramount Group, has sat empty since 2021, when Deutsche Bank — its only tenant — relocated to Columbus Circle. The owners are using the opportunity for an expensive renovation in a bid to lure new tenants... So far, there haven’t been any takers… It’s contributing to unprecedented amounts of unused office space in New York. Vacancies reached a record 22.7% this year, after decades of an average rate that never surpassed 11% a year.”

May 16 – Financial Times (Chris Flood): “Fund managers have cut their allocations to commercial real estate to their lowest level since the 2008 global financial crisis… Bank of America’s monthly fund manager survey showed that a net 19% of managers globally were underweight the sector in May, the lowest level of exposure since December 2008. In a sign of how quickly investors’ attitudes towards the sector have changed, investors’ allocations had hit their highest in at least 16 years in April last year, with a net 19% of managers overweight the sector.”

May 14 – Financial Times (Harriet Agnew and Eric Platt): “Howard Marks, the co-founder of $172bn investment group Oaktree Capital Management, has warned that the boom in private credit will soon be tested as higher interest rates and slower economic growth heap pressure on corporate America. The… billionaire told the Financial Times that big asset managers had competed aggressively to lend to the largest private equity groups as money poured into their coffers in 2020 and 2021, raising questions over the due diligence the funds conducted when they agreed to provide multibillion-dollar loans. ‘[Warren] Buffett says it’s only when the tide goes out that you discover who has been swimming naked,’ he said. ‘The tide has not gone out yet on private lending, meaning the portfolios haven’t been tested.’ He added: ‘Did the managers make good credit decisions, ensuring an adequate margin of safety, or did they invest fast because they could accumulate more capital? We’ll see.’”

Ukraine War Watch:

May 15 – Reuters: “Russia's defence ministry scrambled a fighter jet… after it said it detected French and German patrol aircraft flying towards Russian airspace… France and Germany said its planes - a French Atlantic 2 maritime patrol aircraft and a German P-3C Orion - were conducting regular flights as part of a NATO exercise and behaved in accordance with international law.”

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

May 13 – Associated Press (Karl Ritter and David Keyton): “Japanese Foreign Minister Yoshimasa Hayashi expressed concern Saturday about Russian and Chinese military cooperation in Asia and said the security situation in Europe could not be separated from that in the Indo-Pacific region since Moscow’s full-scale invasion of Ukraine… Hayashi said Russia’s war in Ukraine had ‘shaken the very foundation of the international order’ and must face a united response by the international community. ‘Otherwise, similar challenges will arise in other regions and the existing order which has underpinned our peace and prosperity could be fundamentally overturned,’ Hayashi said.”

May 15 – Reuters (Ryan Woo): “Drawing lessons from the Ukraine crisis, a top Chinese general urged greater integration of novel capabilities, including artificial intelligence, with conventional warfare tactics ahead of any confrontation with the West. A new genre of hybrid warfare has emerged from the Ukraine conflict, with the intertwining of ‘political warfare, financial warfare, technological warfare, cyber warfare, and cognitive warfare,’ General Wang Haijiang, commander of the People's Liberation Army's (PLA) Western Theatre Command, wrote in a front-page article in an official newspaper…”

May 13 – Reuters: “The head of Russia's federal crime agency… suggested that key sectors of the economy should be returned to state ownership to support Moscow's war in Ukraine. Moscow has already seized assets or acquired them at a heavy discount from some Western firms that have quit Russia or scaled back their activities since the invasion. ‘We are essentially talking about economic security in a war,’ Alexander Bastrykin, head of the Investigative Committee, told a conference… ‘Let's go along the path of nationalising the main sectors of our economy.’”

De-globalization and Iron Curtain Watch:

May 13 – Reuters (Philip Blenkinsop): “Washington and the EU will pledge joint action to tackle concerns focused on China about non-market practices and coordinate their export controls on semiconductors and other goods at a meeting this month… U.S. Secretary of State Antony Blinken, European Commission Vice-President Margrethe Vestager and other senior officials are due to meet for the fourth edition of the EU-U.S. Trade and Technology Council (TTC) in Lulea, Sweden, on May 30-31.”

May 17 – Financial Times (Leo Lewis and Kana Inagaki): “Seven of the world’s largest semiconductor makers have set out plans to increase manufacturing and deepen tech partnerships in Japan as western allies step up efforts to reshape the global chip supply chain amid rising tensions with China. At an unprecedented meeting in Tokyo with Japanese prime minister Fumio Kishida, the heads of chipmakers including Taiwan Semiconductor Manufacturing, South Korea’s Samsung Electronics and Intel and Micron of the US described plans that could transform Japan’s prospects of re-emerging as a semiconductor powerhouse. Micron said it expected to invest up $3.7bn… to build a plant to produce cutting-edge extreme ultraviolet lithography technology in Hiroshima.”

May 16 – Financial Times (Alexandra Prokopenko): “Russia’s economic confrontation with the west following the Kremlin’s invasion of Ukraine is entering a dangerous new stage. Until now, Moscow had mostly focused its retaliatory measures on squeezing European energy markets. But after a string of court decisions in Europe freezing Russian assets there, the Kremlin has begun escalation and created a legal framework for the temporary nationalisation of foreign assets in the country. Projects that have cost billions of dollars and taken years of hard work are at stake, and it is likely the Russian government will exercise a personalised approach to every foreign stakeholder, trying to stoke new divisions in the west while benefiting interest groups inside Russia. The first victims of the new policy — the Russian assets of two European energy firms, Finland’s Fortum and Germany’s Uniper — were recently put under provisional management…”

May 15 – Financial Times (Max Seddon and Anastasia Stognei): “Russia’s prime minister Mikhail Mishustin is to head a high-profile delegation to a business forum in China next week as Moscow’s economic dependency on Beijing grows… Mishustin and Russia’s top energy official Alexander Novak… will be the most prominent Russian figures at the Russia-China Business Forum in Shanghai on May 23rd… Top state company officials including Sberbank’s Herman Gref and Rostelecom’s Mikhail Oseevsky, who are also sanctioned, plan to attend, they added, as does a group of businessmen from Russian industrial companies.”

Inflation Watch:

May 17 – Bloomberg (Alexandre Tanzi): “More Americans struggle to meet expenses now than in the immediate aftermath of the Covid-19 pandemic, when millions lost their means of employment, a Census Bureau survey showed. About 38.5% of American adults — or 89.1 million people — faced difficulty in paying for usual home expenses between April 26 and May 8, according to the latest Household Pulse Survey. That’s up from 34.4% a year ago and 26.7% during the same period in 2021.”

May 17 – Reuters (Lisa Baertlein): “The U.S. supply chain is healing from early pandemic shocks that sent shipping costs skyrocketing and squeezed supplies of everything from toilet paper to pasta, but more than three years later, material shortages and hiring woes linger. Rates for trucking, ocean shipping and other transportation tumbled after U.S. consumers shifted spending from big-ticket items… to travel and other entertainment… However, ‘there's still a pretty big mess out there,’ said Ryan Patel, senior fellow at Claremont Graduate University's Drucker School of Management. The labor market remains tight, fueling costs. Elsewhere, machine parts shortages persist and cement has become difficult to find as automakers and other manufacturers catch up with demand and the U.S. ramps up infrastructure projects. U.S. supply chains are suffering from a ‘long-term hangover,’ said Dean Croke, principal analyst at DAT Freight and Analytics…”

May 17 – Yahoo Finance (Pras Subramanian): “With spring car-buying season in full swing, those looking for a deal in the used-car market are not likely going to find one. According to a new report, ‘Used Market Enters Uncharted Territory Post-Pandemic,’ released from car-shopping site, though used car prices softened a bit recently they still remain historically high. Edmunds’ data scoured from dealer retail pricing finds that the average used vehicle transaction price in Q1 slipped 6.4% year-over-year, but is still up 44% from five years ago.”

May 17 – Bloomberg (Jennifer Epstein): “New York apartment hunters are facing higher rents than ever before and having a hard time finding bargains anywhere. The median rents on new leases in Manhattan, Brooklyn and northwest Queens reached records in April as confident landlords pushed up prices…, according to… Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. In Manhattan, the median rent hit $4,241, 8.1% higher than a year ago and $66 more than the previous record set in March… The Brooklyn median of $3,500 was up almost 15% from last year, while the median in the section of Queens that includes Astoria and Long Island City rose nearly 13% from a year earlier to $3,525.”

May 17 – Reuters (Balazs Koranyi): “Euro zone inflation accelerated last month…, confirming preliminary data pointing to increasingly stubborn price growth among the 20 nations sharing the euro. Overall price growth accelerated to 7.0% in April from 6.9% a month earlier, as rising services and energy costs offset a slowdown in food price growth. Although underlying price growth, the key focus of European Central Bank policymakers in recent months, slowed a touch, the crucial services component continued to accelerate, pointing to mounting wage pressures that could get inflation stuck above the ECB's 2% target.”

May 16 – Reuters (David Lawder and Andrea Shalal): “Canada's annual inflation rate rose in April for the first time in 10 months, adding pressure on the central bank to raise interest rates again after having paused its tightening campaign since January. Annual inflation unexpectedly rose to 4.4% in April… Analysts… had expected the annual rate to edge down to 4.1% from 4.3% in March. Month-over-month, consumer prices gained 0.7% from March, higher than the forecast 0.4% increase.”

Biden Administration Watch:

May 17 - Associated Press (Darling Superville): “An optimistic President Joe Biden declared Wednesday he is confident the U.S. will avoid an unprecedented and potentially catastrophic debt default, saying talks with congressional Republicans have been productive. He left for a G-7 summit in Japan but planned to return by the weekend in hopes of approving a solid agreement… ‘I’m confident that we’ll get the agreement on the budget and America will not default,’ Biden said…”

May 17 – Reuters (Susan Heavey, Doina Chiacu and Andrea Shalal): “President Joe Biden and top U.S. congressional Republican Kevin McCarthy on Wednesday underscored their determination to reach a deal soon to raise the federal government's $31.4 trillion debt ceiling and avoid an economically catastrophic default. After a monthslong standoff, the Democratic president and the speaker of the House of Representatives on Tuesday agreed to negotiate directly on a deal… ‘We're going to come together because there's no alternative,’ Biden told reporters…, saying he would cut short his trip to Asia…, but staff-level discussions would continue in Washington. ‘To be clear, this negotiation is about the outlines of the budget, not about the whether or not we're going to (pay our debts),’ Biden said. ‘The leaders (of Congress) have all agreed: We will not default. Every leader has said that.’”

Federal Reserve Watch:

May 16 – Bloomberg (Mark Niquette): “Former Vice President Mike Pence is calling for an end to the Federal Reserve’s dual mandate, saying the central bank should focus solely on fighting inflation and leave creating jobs to Congress and the president. The Fed’s dual mandate for price stability and maximum sustainable employment doesn’t serve the US well, Pence said… ‘We would do well as a nation to return the Federal Reserve to its historic mission of ensuring sound monetary policy and look after the strength of our currency and let elected officials worry about full employment,’ Pence said…”

May 19 – Bloomberg (Craig Torres): “Federal Reserve Chair Jerome Powell said tighter credit conditions stemming from strains in the banking system could mean interest rates don’t have to rise as high as would otherwise be the case. ‘While the financial stability tools helped to calm conditions in the banking sector, developments there on the other hand are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation,’ Powell told a Fed conference... ‘As a result our policy rate may not need to rise as much as it would have otherwise to achieve our goals. Of course, the extent of that is highly uncertain’…”

May 16 – Reuters (Padraic Halpin): “Federal Reserve Bank of Cleveland President Loretta Mester said… she does not think the U.S. central bank is at a point yet where it can hold interest rates steady for a period of time, given how stubborn inflation is… ‘The approach I’m taking is that I would like the policy rate to get to a point where, when I'm thinking about what would the next policy change be, I want it to be equally a potential increase versus a decrease,’ Mester told a conference... ‘When we get the policy to that rate, I think we're going to be holding for a while in order to make sure that the interest rate is coming back down. So I don't put it in terms of a pause, I put it in terms of a hold. Have we gotten to that rate yet? At this point, given the data we've gotten so far, I would say no.’”

May 15 – Financial Times (Colby Smith): “The Federal Reserve should not be deterred from raising interest rates to battle high inflation because of the potential for financial instability, a top official at the US central bank has said. Thomas Barkin, president of the Federal Reserve Bank of Richmond, said that while policymakers should always be ‘sensitive’ to financial stability, those concerns should not take precedence over the central bank’s fight against persistent inflation. ‘If inflation persists, or God forbid accelerates, there’s no barrier in my mind to further increases in rates,’ he told the Financial Times…”

May 15 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic pushed back against bets in financial markets that the central bank will cut interest rates this year and cautioned against taking further hikes off the table if inflation doesn’t cool. ‘My baseline case is we won’t really be thinking about cutting until well into 2024,’ Bostic said… ‘If you look at most measures of inflation, they’re still two times where our target is. And so that’s a long distance still to go.’”

May 16 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic and his Chicago counterpart Austan Goolsbee voiced optimism they could achieve a soft landing for the US economy, but Bostic warned officials will face a stern test if it turns out they are wrong. ‘We haven’t gotten to the hard part yet,’ he said…, describing the enormous pressure central bankers would face if they were unable to bring down inflation without causing significant harm to employment. ‘We are going to have to be super strong and detached.’ he said.”

May 15 – Reuters (Howard Schneider): “Richmond Federal Reserve President Thomas Barkin… said he is not convinced inflation is on a steady decline back to the U.S. central bank's 2% target or that overall demand in the economy has been curbed enough to ensure it gets there. Barkin said he remained open-minded on whether the Fed at its June 13-14 policy meeting should raise the benchmark policy rate… ‘You could tell yourself a story where inflation comes down relatively quickly ... with only a modest economic slowdown,’ Barkin said… ‘But ‘I'm not yet convinced ... I do wonder whether we're not going to need more impact on demand to bring inflation down to where we need to go,’ Barkin said…”

May 17 – Reuters (Howard Schneider): “Changing interest rates in ‘smaller, less frequent steps’ can make it less likely that U.S. Federal Reserve monetary policy causes financial instability, Dallas Fed President Lorie Logan said… ‘Gradual policy adjustments can be helpful,’ Logan said… While not commenting on an upcoming Fed decision on whether to raise rates an 11th straight time, Logan said that ‘financial conditions can sometimes deteriorate nonlinearly, doing damage to the broader economy, but the risk of a nonlinear reaction can be mitigated by raising interest rates in smaller, less frequent steps.’”

U.S. Bubble Watch:

May 18 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for jobs benefits fell more than expected last week…, suggesting the labor market remains tight. The steep decline in weekly unemployment claims… reversed the surge in the prior week… That increase was largely blamed on an unusual jump in applications for unemployment insurance in Massachusetts… Initial claims for state unemployment benefits dropped 22,000 to a seasonally adjusted 242,000 for the week ended May 13.”

May 17 – CNBC (Diana Olick): “Higher mortgage rates and a severe shortage of homes for sale are taking their toll on mortgage demand. Mortgage applications to purchase a home dropped 4.8% last week, compared with the previous week, according to the Mortgage Bankers Association... Volume was 26% lower than the same week one year ago.”

May 18 – CNBC (Diana Olick): “Sales of previously owned homes fell 3.4% in April from March to a seasonally adjusted, annualized pace of 4.28 million units, according to the National Association of Realtors. Sales were 23.2% lower than April of 2022. There is still strong demand, but several factors are weighing on potential homebuyers… ‘Home sales are bouncing back and forth but remain above recent cyclical lows,’ said Lawrence Yun, NAR’s chief economist. ‘The combination of job gains, limited inventory and fluctuating mortgage rates over the last several months have created an environment of push-pull housing demand.’ There were 1.04 million homes for sale at the end of April, an increase of 1% compared with April of last year. At the current sales pace, that represents a 2.9-month supply. A six-month supply is considered a balanced market…”

May 16 – CNBC (Diana Olick): “Homebuilders are getting a big boost from the lack of existing homes for sale, and that appears to be outweighing some of the challenges they’re facing from financial markets. Builder confidence in the market for newly built single-family homes rose 5 points in May to 50, according to the National Association of Home Builders… Housing Market Index (HMI). It’s the fifth straight month of gains and the first reading of builder sentiment since July that wasn’t negative, which would be a reading below 50. Sentiment stood at 69 in May of last year… Of the index’s three components, current sales conditions rose 5 points to 56, sales expectations in the next six months increased 7 points to 57, and buyer traffic climbed 2 points to 33.”

May 16 – Yahoo Finance (Gabriella Cruz-Martinez): “Elevated mortgage rates are still keeping some homeowners from listing this spring, despite market conditions tipping in their favor. According to, there were 21.3% fewer homes listed for sale in April compared with the same month last year, largely due to potential sellers feeling 'rate-trapped' by their current mortgage. A separate study by Altos Research revealed that inventory of single-family homes for sale in the U.S. fell to 419,000 for the week ending May 8… Said Redfin chief economist Daryl Fairweather…: ‘Homeowners are quiet quitting the housing market.’”

May 15 – CNBC (Jeff Cox): “Total consumer debt hit a fresh new high in the first quarter of 2023, pushing past $17 trillion even amid a sharp pullback in home borrowing. The total for borrowing across all categories hit $17.05 trillion, an increase of nearly $150 billion, or 0.9% during the January-to-March period, the New York Federal Reserve reported... That took total indebtedness up about $2.9 trillion from the pre-Covid period ended in 2019. That increase came even though new mortgage originations, including refinancings, totaled just $323.5 billion, the lowest level since the second quarter of 2014.”

May 16 – Wall Street Journal (Joe Pinsker): “More Americans are having a harder time keeping up with their car, credit-card and mortgage payments compared with a year ago. The share of debt balances that became at least 90 days delinquent in the first quarter of 2023 was 1.08%, up from 0.71% a year earlier, according to… the Federal Reserve Bank of New York… About 4.57% of consumers’ credit-card debt transitioned to 90-plus days delinquent last quarter, compared with 3.04% in the first quarter of 2022. That transition rate also increased year-over-year for auto-loan debt, to 2.33% from 1.61%, and mortgage debt, to 0.59% from 0.34%.”

May 16 – CNBC (Jeff Cox): “Consumers barely kept up with inflation in April, as retail sales increased but fell short of expectations… The advanced sales report showed an increase of 0.4%, below the… estimate for 0.8%. Excluding auto-related figures, sales increased 0.4%, which was in line with expectations… On an annual basis, sales were up just 1.6%, well below the 4.9% CPI pace. A 0.8% drop in gasoline sales held back the spending figures. Sporting goods, music and book stores posted a 3.3% decline, while furniture and home furnishings saw a 0.7% drop. Miscellaneous store retailers led gainers with a 2.4% increase, while online sales rose 1.2% and health and personal care retailers saw a 0.9% rise. Food and drink sales climbed 0.6% and were up 9.4% on a 12-month basis.”

May 15 – Bloomberg (Eliyahu Kamisher): “California’s tax revenue could drop by $11 billion more than Governor Gavin Newsom projected in the event of an economic downturn, exacerbating deficit woes, the state’s nonpartisan budget adviser said. The new forecast by the Legislative Analyst’s Office comes after Newsom on Friday forecast a $32 billion budget hole — $9.3 billion more than a January forecast — due to sharp drops in income for the state’s wealthiest residents who pay the bulk of income taxes.”

May 15 – Bloomberg (Martin Z. Braun): “New York City faces wider-than-projected budget gaps in future years as spending on labor contracts and education climbs while federal pandemic aid dries up, the city’s independent budget monitor said… The largest US city faces a $5.8 billion deficit in the fiscal year beginning July 1, 2024, or $1.6 billion more than Mayor Eric Adams projected in… April…, the Independent Budget Office said... The IBO projected gaps of $7.1 billion and $7.7 billion the following fiscal years. While the IBO’s projection of tax revenue growth is rosier than the mayor’s, the executive budget understates spending by $10.9 billion over the four-year financial plan, the IBO said.”

May 17 – Bloomberg (Elise Young): “New Jersey lowered its gross-income tax revenue forecasts by $2.3 billion. In testimony before the Assembly budget committee…, Treasurer Elizabeth Muoio said that New Jersey expects $1.1 billion less for 2023 and $1.2 billion less for the fiscal year that starts on July 1. April collections declined by 27%, more than double the original forecast, following last year’s record receipts. Muoio said ‘certain taxpayers realized income losses far exceeding expectations.’”

May 15 – Reuters (Paul Lienert): “Americans in the waning days of the COVID pandemic are keeping their combustion-engine vehicles longer, according to a new study. The average age of U.S. cars and light trucks this year climbed to a record 12.5 years, reflecting the impact of supply constraints on dealer inventories of new vehicles in 2022, as well as reduced consumer demand from higher inflation and interest rates, according to… S&P Global Mobility.”

Fixed Income Watch:

May 17 – Bloomberg (Carmen Arroyo and Lisa Lee): “The $1.3 trillion market for reselling leveraged loans is facing its lowest profitability in years, potentially making it harder for lower-rated companies to refinance debt. The collateralized loan obligation market — the biggest buyer of leveraged loans — is getting squeezed as funding costs rise relative to the returns on investments. That’s making it less attractive for money managers to issue new CLOs. It all comes down to the arbitrage opportunity from the gap between the yields that CLO managers can earn on the loans they buy, and what they pay to finance themselves with the riskiest securities they issue known as equity. For US CLOs, that spread narrowed to just 200 basis points at the end of April, the lowest since 2020, according to Citigroup research. It’s a big change from this time last year, when the spread was closer to 260 basis points…”

May 15 – Bloomberg (Jill R. Shah): “Lower-rated companies looking to refinance loans are running into a serious hurdle: some of their biggest investors are restricted from putting money to work now. Managers of collateralized loan obligations, or loans packaged into bonds, face a limited period of buying and selling more freely in their portfolio. Usually, they can reset that period, but doing so has been more difficult lately as pricing on the bonds they sell has widened. Around 40% of CLOs are running up against time limits by the end of this year if spreads on CLO liabilities stay wide, according to… Barclays Plc.”

China Watch:

May 15 – Financial Times (Thomas Hale, Hudson Lockett and Andy Lin): “China’s industrial output and consumer spending have fallen short of expectations, fuelling doubts over the strength of the country’s rebound after it dismantled its zero-Covid policy. Youth unemployment hit a record while a key measure of investment also lagged estimates, casting a shadow over the outlook for the world’s second-largest economy. Industrial production added 5.6% last month from a year earlier, well below forecasts of a 10.6% rise. Retail sales expanded 18.4% year on year, also missing forecasts. The high rates of growth partly reflect a contrast with lockdowns last year in Shanghai, the country’s biggest city.”

May 16 – Bloomberg: “China’s economic recovery is losing momentum after an initial burst in consumer and business activity early in the year, prompting calls for more policy stimulus to bolster growth. Official data… showed industrial output, retail sales and fixed investment grew at a much slower pace than expected in April. The figures were disappointing even though the low base of comparison from last year, when Shanghai was in lockdown, helped to boost the data. A major worry was the jump in the unemployment rate for young people to a record high of 20.4%...”

May 18 – Bloomberg (Tom Hancock): “China’s economy is at risk of being caught in a confidence trap as the post-Covid recovery loses steam, presenting Beijing with a problem that can’t easily be solved with traditional tools such as interest rate cuts and infrastructure stimulus. Evidence of low business and consumer confidence was everywhere in this week’s official data… Private firms barely increased investment, while households curbed their spending on goods like appliances. That raises the prospect of a vicious cycle as firms and households hold back on spending, slowing the pace of the recovery, which in turn lowers confidence even further, said Michael Hirson, China economist at 22V Research LLC and a former US Treasury attache in Beijing. Citigroup Inc. economists described China as being ‘on the brink of a confidence trap.’”

May 14 – Bloomberg: “China’s central bank injected more long-term liquidity into the financial system for the sixth month in a bid to bolster economic growth after multiple indicators revealed faltering recovery momentum. The People’s Bank of China offered 125 billion yuan ($18bn) of medium-term lending facility, 25 billion yuan more than the amount maturing in May.”

May 16 – Bloomberg: “China’s home price growth slowed in April, underscoring the challenges the market is facing following a brief recovery. New-home prices in 70 cities… rose 0.32% last month from March, when they grew 0.44%, National Bureau of Statistics figures showed... Price gains slowed to just 0.01% in the secondary market, after climbing 0.26% a month earlier. Signs of weakness are emerging in the residential property market after sales and prices rebounded briefly following a historical slump of about 18 months. High-frequency indicators in recent weeks show momentum in home purchases has fizzled, despite Beijing’s effort to prop up the market.”

May 18 – Bloomberg: “China’s real estate developers have debt worth 12% of the nation’s gross domestic product at risk of default, Bloomberg Economic estimates, a massive burden that could curb growth in the world’s second-largest economy for years to come. An analysis of China’s 186 listed developers shows that about 48% of total borrowing is held by companies that either already defaulted on public bonds during the 2021-2022 property rout or are at ‘significant’ risk of missing repayment... Assuming that share applies to the whole industry — which had 28.1 trillion yuan ($4 trillion) in total debt as of the end of last year — Chinese developers would have 13.6 trillion yuan of debt at risk of default. That’s equal to 11.9% of national GDP… ‘This poses a risk to financial stability,’ it said. ‘And the burden could drag on growth for years, as developers direct resources to repairing their balance sheets.’ The actual size of risky debt could be even higher…, as unlisted firms may be in an even worse condition than the sample companies.”

May 14 – Bloomberg (Dorothy Ma): “Pressure is mounting for China’s dollar bond defaulters to present disgruntled creditors concrete restructuring plans, as another firm that has failed to do so now faces court-ordered liquidation. Dangdai International Investments Ltd., a debt issuance vehicle of Wuhan Dangdai Science & Technology Industries (Group) Co., received an order to dissolve from a Hong Kong court after being denied a requested three-month adjournment of the case…”

May 19 – Bloomberg (Dorothy Ma and Alice Huang): “A practice that Chinese borrowers have long used to raise hundreds of billions of dollars in bond markets is under threat, after a court ruling in Hong Kong this week. In a court decision Thursday, three of four lawsuits involving so-called keepwell deeds on notes from a major Chinese defaulter were thrown out. A keepwell is basically a gentleman’s agreement from the parent company of a unit issuing a bond to maintain the issuer’s solvency, while stopping short of guaranteeing payment. The court ruling is the latest indication that creditors trying to recover at least some of their money after defaults shouldn’t bank on much help from the keepwells.”

May 17 – Reuters (Laurie Chen): “China has notified foreign embassies and international organisations not to exhibit ‘politicised propaganda’ on their buildings, an instruction diplomats say is aimed at missions that have displayed Ukrainian flags since Russia's invasion. Several foreign missions in China raised the Ukrainian flag, or displayed its image in posters and lights, following the February 2022 invasion that sparked international condemnation of Russia, a close ally of China. ‘Do not use the building facilities' exterior walls to display politicised propaganda to avoid inciting disputes between countries,’ China's foreign ministry said…”

May 16 – Bloomberg (Cathy Chan): “More than three years after China’s grand financial opening, it’s becoming clear to Wall Street giants that their dreams of windfall profits from the $60 trillion market are more elusive than ever. Goldman Sachs… and Morgan Stanley are among banks scaling back ambitious expansion plans and profit goals as a deteriorating geopolitical climate and President Xi Jinping’s willingness to sacrifice economic priorities for security concerns rock the private sector and throttle dealmaking. More drastic jobs cuts are being eyed at the biggest banks, according to senior executives… Goldman Sachs… has revised projections on its five-year plan after the country’s business environment drastically changed.”

May 18 – BBC: “A Chinese comedian who told a joke comparing the behaviour of his dogs to a military slogan has been arrested. The company that hired Li Haoshi was also fined 4.7m yuan (£1.7m), and Mr Li could face time in prison. Police in Beijing said they had opened an official investigation into his performance, which they said ‘caused a severe social impact’. Mr Li has apologised for his comment, saying he felt ‘deeply shamed and regretful’. The offending remark was made during a stand-up performance in Beijing…, when Mr Li alluded to two dogs he had adopted which were chasing a squirrel. ‘Other dogs you see would make you think they are adorable. These two dogs only reminded me of... 'Fight to win, forge exemplary conduct’,’ said Mr Li... The punchline is part of the slogan that President Xi unveiled in 2013 as a goal for the Chinese military… ‘We will never allow any company or individual use the Chinese capital as a stage to wantonly slander the glorious image of the PLA [People's Liberation Army],’ said… China's culture ministry.”

May 18 – Bloomberg: “Chinese authorities have arrested a woman for insulting the People’s Liberation Army, after she defended a comedian’s joke about a Xi Jinping military slogan that caused a national outcry. The 34-year-old woman, identified by her last name Shi, was detained… for posting inappropriate remarks about the military… The dignity of Chinese soldiers must be respected, added the statement posted to… Weibo. Shi had questioned the suspension of comedian Li Haoshi, known as House, for likening the behavior of two wild dogs to the work ethic described by a military slogan... ‘Why should HOUSE be banned? Aren’t all soldier brothers just dog brothers?’ Shi wrote on Weibo…”

Central Banker Watch:

May 17 – Bloomberg (Lucy White): “Bank of England Governor Andrew Bailey said he was ‘unwavering’ in his commitment to the UK’s 2% inflation target, as he warned that higher food prices and a tight labor market could cause the cost-of-living crunch to persist… Bailey said inflation was due to fall sharply from its current 10.1% level ‘over the coming months,’ as lower energy costs helped to bring the headline rate of price rises down. But in a question-and-answer session following his speech, Bailey said the ‘unprecedented times’ in which the UK economy currently found itself were the ‘biggest test’ yet of the inflation-targeting regime.”

Bursting Global Bubble Watch:

May 18 – Associated Press (Bernard Condon): “A dozen poor countries are facing economic instability and even collapse under the weight of hundreds of billions of dollars in foreign loans, much of them from the world’s biggest and most unforgiving government lender, China. An Associated Press analysis of a dozen countries most indebted to China — including Pakistan, Kenya, Zambia, Laos and Mongolia — found paying back that debt is consuming an ever-greater amount of the tax revenue needed to keep schools open, provide electricity and pay for food and fuel. And it’s draining foreign currency reserves these countries use to pay interest on those loans… Behind the scenes is China’s reluctance to forgive debt and its extreme secrecy about how much money it has loaned and on what terms, which has kept other major lenders from stepping in to help. On top of that is the recent discovery that borrowers have been required to put cash in hidden escrow accounts that push China to the front of the line of creditors to be paid.”

Europe Watch:

May 15 – Bloomberg (Craig Stirling): “The European Commission raised its euro-zone inflation outlook and warned of ‘persistent challenges’ even as it acknowledged the resilience of the region’s economy. Citing the strength of underlying pressures, European Union officials lifted their projections for consumer-price growth to 5.8% this year and 2.8% in 2024 from 5.6% and 2.5% respectively. Forecasts for economic expansion were also increased throughout the horizon.”

Japan Watch:

May 17 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japan's economy emerged from recession and grew faster than expected in the first quarter as a post-COVID consumption rebound offset global headwinds, shoring up hopes for a sustained recovery… The world's third-largest economy grew an annualised 1.6% in January-March…, far exceeding market forecasts for a 0.7% gain and marking the first rise in three quarters.”

May 17 – Reuters (Tetsushi Kajimoto): “Japan's export growth hit its weakest pace in more than two years in April as China-bound shipments slumped amid lingering worries about faltering global economic demand. Exports rose 2.6% in April from a year earlier…, slower than a 3.0% increase expected… and a 4.3% rise in March. It also marked the weakest gain since February 2021 when exports declined 4.5%.”

EM Crisis Watch:

May 18 – Bloomberg (Selcuk Gokoluk): “Investors are demanding the highest risk premium for Turkey’s sovereign dollar bonds in almost 10 months, as the prospect of a runoff election damps some hopes for an end to unorthodox economic policies. At 661 bps over US Treasury yields, Turkey is now paying a higher premium than some similarly-rated countries such as Honduras, Iraq and Mongolia… The spread was at 456 bps on the last day of trading before the inconclusive presidential vote at the weekend.”

Leveraged Speculation Watch:

May 17 – Bloomberg (Jessica Park): “Carl Icahn told FT… that he was wrong to make a huge bet that the market would crash after the trade cost his firm about $9b over roughly six years. ‘I’ve always told people there is nobody who can really pick the market on a short-term or an intermediate-term basis,’ Icahn told the outlet. Firm lost about $1.8b in 2017 on hedging positions that would have paid out if asset prices fell before losing an additional $7b between 2018 and 1Q of 2023.”

Social, Political, Environmental, Cybersecurity Instability Watch:

May 17 – Associated Press (Mark Sherman and Emily Swanson): “Confidence in the Supreme Court sank to its lowest point in at least 50 years in 2022 in the wake of the Dobbs decision that led to state bans and other restrictions on abortion... The divide between Democrats and Republicans over support for abortion rights also was the largest ever in 2022, according to the General Social Survey. The long-running and widely respected survey conducted by NORC at the University of Chicago has been measuring confidence in the court since 1973… In the 2022 survey, just 18% of Americans said they have a great deal of confidence in the court, down from 26% in 2021, and 36% said they had hardly any, up from 21%. Another 46% said they have ‘only some’ confidence in the most recent survey.”

May 17 – CNBC (Melissa Repko): “Target said… that organized retail crime will fuel $500 million more in stolen and lost merchandise this year compared with a year ago. Target’s inventory loss, called shrink, totaled about $763 million last fiscal year, based on calculations from the company’s financial filings. With the anticipated increase, shrink this year would surpass $1 billion. CEO Brian Cornell called out the challenge on the company’s fiscal first-quarter earnings call… He described retail theft as ‘a worsening trend that emerged last year,’ and said violent incidents have increased at Target’s stores.”

May 17 – Reuters (Gloria Dickie): “For the first time ever, global temperatures are now more likely than not to breach 1.5 degrees Celsius (2.7 degrees Fahrenheit) of warming within the next five years, the World Meteorological Organization (WMO) said... With a 66% chance of temporarily reaching 1.5C by 2027, ‘it's the first time in history that it's more likely than not that we will exceed 1.5C,’ said Adam Scaife, head of long-range prediction at Britain's Met Office Hadley Centre, who worked on the WMO's latest Global Annual to Decadal Climate Update.”

May 17 – Bloomberg (Naureen S. Malik): “The risk of summer blackouts from heat waves has extended into the US Southeast and Ontario for the first time, according to the regulatory body overseeing power grid stability, in a sign of spreading threats to electrical systems in the US and Canada… ‘Going back at least five years, the reliability assessments have noted a steady deterioration in the risk profile of the grid,’ John Moura, NERC’s reliability assessment director, told reporters in a briefing. Winter and summer assessments show ‘the system is close to its edge.’”

May 16 – Bloomberg (Sheela Tobben): “Shifting fires across Canada’s main energy-producing province are prompting drillers to throttle back production once again, more than a week after the spate of blazes began, and officials have warned of worsening conditions in the days ahead… While the total number of active wildfires in Alberta declined to 87 on Tuesday morning, down from 90 on Monday afternoon, the number of out-of-control blazes ticked up by one to 24.”

Geopolitical Watch:

May 16 – Associated Press: “China’ is prepared to ‘resolutely smash any form of Taiwan independence,’ its military said… as the U.S. reportedly prepares to accelerate the sale of defensive weapons and other military assistance to the self-governing island democracy. A recent increase in exchanges between the U.S. and Taiwanese militaries is an ‘extremely wrong and dangerous move,’ Defense Ministry spokesperson Col. Tan Kefei said… China’s People’s Liberation Army ‘continues to strengthen military training and preparations and will resolutely smash any form of Taiwanese independence secession along with attempts at outside interference, and will resolutely defend national sovereignty and territorial integrity,’ Tan said, in a reference to Taiwan’s closest ally, the United States.”

Friday Evening Links

[Reuters] Wall St slips on debt ceiling uncertainty

[Yahoo/Bloomberg] Stocks Waver as Traders Weigh Debt Talks, Fed Path: Markets Wrap

[Yahoo/Bloomberg] Oil Posts First Weekly Gain Since April as Markets Embrace Risk

[AP] Debt limit talks resume at Capitol as Republicans, White House face ‘real differences’

[Yahoo/Bloomberg] McCarthy Puts Debt-Limit Talks on ‘Pause’ as Clock Ticks Down

[Reuters] US debt ceiling talks pause; negotiators stuck as default date nears 

[Yahoo/Bloomberg] Treasury’s Cash Pile Dwindles to Lowest Since 2021 as Debt-Ceiling Talks Stall

[Yahoo/Bloomberg] US Bank Deposits Fall for a Third Week While Lending Stays Little Changed

[AP] Federal Reserve Chair Powell hints at a pause in rate hikes when central bank meets next month

[Yahoo/Bloomberg] Powell Steers Policy Debate With Clear Signal on June Rate Pause

[Reuters] Fed's Powell says risks more balanced, June policy decision unclear

[Reuters] Inflation fight risks central banks' credibility and autonomy, BIS warns

[Bloomberg] What Powell Has to Say on Credit Stress, Inflation and Interest Rates