Saturday, July 8, 2023

Sunday's News Links

[Reuters] Yellen sees 'progress' in rocky U.S.-China ties, expects more communication

[Yahoo/Bloomberg] Bruised Bond Investors Face Long Road Beyond Fed’s July Decision

[Yahoo/Bloomberg] Blue-Chip Debt Problems Are Just Getting Started: Credit Weekly

[Yahoo/Bloomberg] US, Mexico Face Major Heat Wave That’s Set to Tax Electric Grid

[WSJ] Recharged Bond Rout Unnerves Investors

[WSJ] Last Mile of the Inflation Fight Will Be the Hardest

[WSJ] Wall Street Soothsayers Are Bewildered About What’s Next

Saturday's News Links

[AP] US Treasury chief Yellen appeals to China for cooperation on climate and other global challenges

[Yahoo/Bloomberg] Summers Warns on Inflation Complacency, Sees More Bond Declines

[CNBC] The 10 U.S. cities where rent has increased the most in the last year—No. 1 isn’t New York or San Francisco

[Yahoo/Bloomberg] Markets Turn Against UK as Inflation and Growth Outlook Darkens

[Yahoo/Bloomberg] Ukraine Recap: Zelenskiy Marks 500th Day of War on Snake Island

[Reuters] US to send Ukraine cluster munitions, NATO makes membership pledge

[AP] South Koreans protest Japan’s plans to release treated wastewater from damaged Fukushima plant

[Bloomberg] Stock Market Short Sellers That Helped Fuel This Year’s Rally Are Finally Giving Up

[NYT] Why China Has a Giant Pile of Debt

[WSJ] The Supermarket Aisle Where Prices Are Still Soaring

[FT] Surging real yields spark worries over buoyant stock market

Weekly Commentary: Thursday

Wednesday, July 5, 2023: ISI’s Ed Hyman speaking on Bloomberg Television:

“Inflation is coming down around the world. They just reported this morning the PPI for the Eurozone was now in deflation… Last week, Spain's CPI went below 2% for the first time. I try and connect the dots the best I can, and it looks to me like inflation is really going down. And with that policy backdrop I mentioned, it’s going to keep going down.”

“At this point, the one more (rate hike) is baked in the cake. I think anything (hikes) from now is a mistake – they’re just creating a deeper recession… Five and a quarter (Fed funds rate) with the bond yield at 3.80% - they’re pretty much done - and inflation is slowing… Near as I can tell, by the time they cut rates, inflation will be so far down it will make them look a little wrong footed again.”

A Google search returns “legendary economist” and “ranked the Street’s top economist for an extraordinary 42 years.” Mr. Hyman’s reputation speaks for itself. He is widely recognized as the preeminent economic forecaster throughout what I refer to as the “previous cycle.”

Pointing to the “really” inverted yield curve, a contraction in money supply growth (“most since the 1930s”), and significant Fed tightening (rates and QT), Hyman sees mild recession on the horizon. Yet he remains constructive on stocks (until recession hits).

I am compelled to note that the yield curve has been inverted for a year, inversion I see more related to the bond market discounting the odds of an accident and panicked Fed response than a recession forecast. And my analytical framework deemphasizes the contraction in M2 when money fund assets have expanded $581 billion (36% annualized) over the past 17 weeks, with one-year growth of $917 billion, or 20.1%. The bottom line is that the Fed/FHLB liquidity surge in response to the March banking crisis unleashed major speculative and liquidity excesses. Bursting Bubbles today pose extreme systemic risk.

I highlight Ed Hyman’s Wednesday comments, as they encapsulate the consensus bullish view for financial assets. Contracting money supply ensures inflation is no longer an issue; the yield curve signals the nearing conclusion to the Fed’s tightening cycle; and an economic slowdown will be constructive for bonds and stocks.

That was Wednesday. Things looked different Thursday.

July 6 – CNBC (Jeff Cox): “The U.S. labor market showed no signs of letting up in June, as companies created far more jobs than expected, payroll processing firm ADP reported… Private sector jobs surged by 497,000 for the month, well ahead of the downwardly revised 267,000 gain in May and much better than the 220,000… estimate. The increase resulted in the biggest monthly rise since July 2022. From a sector standpoint, leisure and hospitality led with 232,000 new hires, followed by construction with 97,000, and trade, transportation and utilities at 90,000. Annual pay rose at a 6.4% rate…”

And then stronger-than-expected service sector data hit. The ISM Services Index rose three points to a stronger-than-expected 53.9, underscoring notably broad-based strength. The June Business Activity component surged to 59.2 from May’s 51.5, the strongest reading since January. Employment rose to 53.1 from 49.2 (strongest since February), while New Orders gained from 52.9 to 55.5. Fifteen of the 18 industries surveyed reported a June boost in activity.

Also Thursday, persistent labor market strength was confirmed by JOLTS (job vacancies), Challenger Job Cuts, and weekly jobless claims data.

Market reaction was swift and forceful. Two-year Treasury yields traded up as much as 16 bps to 5.11% - the high back to July 2006. Ten-year Treasury yields rose to 4.08%, the high since November 9th. Benchmark MBS surged a notable 25 bps at Thursday’s intraday high to 6.05%, nearing the 6.10% peak during October bond market tumult (which was the high since pre-GFC July 2008). Indicative of mounting stress in interest-rate hedging markets, MBS yields surged 31 bps this week to 5.95%. Ten-year Treasury yields jumped 23 bps this week to close Friday at 4.06%. The rates market now prices peak Fed funds of 5.43% at the November 1st FOMC meeting.

Thursday’s market action appeared important. Booming ADP and strong Service ISM – that followed earlier reports of strengthened housing, construction and auto sales – basically blew apart the thesis of imminent economic weakening. And with the consumer ready to travel and spend for the summer – and the Atlanta Fed’s GDPNow indicator back above 2% - third quarter growth could easily surprise to the upside. Moreover, ongoing strong wage gains and services pricing pressures threw cold water on the view of consumer inflation on a trajectory to return to the Fed’s 2% target.

There was market recognition Thursday that perhaps all bets are off. If 500 bps of Fed rate hikes (and $600bn of QT) haven’t meaningfully tightened financial conditions, slowed demand or reined in inflation, what might it take to get the job done?

July 6 – CNBC (Anmar Frangoul): “The Bank of England could increase interest rates to 7% as it tries to tame inflation, according to JP Morgan, which said the risks of a hard landing for the economy are also rising. The… bank expects rates to peak at 5.75% by November, but cautions that they could go higher ‘under some scenarios,’ hitting as much as 7%. The analysis from JP Morgan Economist Allan Monks comes as U.K. homeowners face a significant jump in borrowing costs as they’re usually linked to the central bank’s main interest rate.”

Global central bankers must monitor deteriorating UK circumstances with heightened anxiety. UK 10-year yields surged 26 bps this week to 4.65%, blowing through the September 27th 4.50% closing high (BOE crisis intervention on the 28th). Two-year UK yields added five bps to 4.95%, the high since July 2007.

UK 10-year yields were up 16 bps Thursday to 5.54%, with two-year yields surging as much as 18 bps to a 15-year high 5.54%. Reminiscent of last fall, UK yields were pulling global yields higher – even before the jolt from strong U.S. data. Italian 10-year yields surged 21 bps Thursday (4.37%), while Greek yields jumped 18 bps (3.97%). Ten-year yields rose 17 bps in Spain (3.70%) and Portugal (3.36%).

Canadian 10-year yields surged 30 bps this week to an eight-month high of 3.57%. Australian 10-year yields jumped 23 bps this week to 4.26% - the high since January 2014. New Zealand yields rose 22 bps to 4.85% - the high since July 2011.

Emerging Market (EM) bond yields reversed sharply higher. Local currency yields rose 33 bps in Hungary (7.33%), 32 bps in South Africa (12.07%), and 25 bps in Mexico (8.93%). Dollar denominated EM debt was under notable pressure. Dollar yields jumped 25 bps in Chile (5.13%), 25 bps in Indonesia (5.05%), 25 bps in Colombia (8.26%), 24 bps in the Philippines (5.00%), 23 bps in Panama (6.04%), and 22 bps in Turkey (8.89%). The EM bond ETF (EMB) dropped 1.43% Thursday and 2.25% for the week – the largest daily and weekly losses since February. Ominously for “carry trade” levered speculation, EM bond losses were compounded by an abrupt rally in the (popular financing currency) Japanese yen. This week’s 1.46% yen gain versus the dollar was the biggest since December.

In the U.S. and abroad, markets have been content to disregard “higher for longer.” It was as if markets were convinced that higher for longer would break things – so it just wouldn’t happen. The bond market Thursday was forced to start reckoning with the possibility of higher for longer.

The iShares Investment Grade Corporate ETF (LQD) declined 1.01% Thursday, the largest loss since May 1st. The 2.40% loss for the week was the largest since February. The iShares High Yield ETF (HYG) declined 0.73% Thursday, also the largest decline since May 1st. This ETF lost 1.63% for the week, the worst weekly performance since early-March. Friday Bloomberg headlines: “HYG ETF Daily Outflows $1.13 Bln, Biggest Move Since March 28th.” “Two Giant Credit ETFs Hit by $2 Billion Exit on Hawkish Fed Bets.”

Higher for longer is a big problem. Surging market yields are a serious issue for a banking system loaded with long duration securities portfolios. It will be a push over the cliff for troubled commercial real estate. It will be a major blow for leveraged lending and leveraged finance more generally. There are Trillions of floating rate loans that will pose a much bigger issue than Wall Street has assumed. So many borrowers – individuals, speculators, businesses, and countries – planning to ride out a short and sweet tightening cycle are in for rude awakenings.

And it all portends trouble for a stock market speculative Bubble. And while equities were under some pressure Thursday, losses for the week were meager.

July 7 – Bloomberg (Lu Wang): “A worrisome thought for the stock faithful: You won’t have the bears to kick around anymore. Fresh off the strongest first half for the S&P 500 in five years, the rooting out of unbelievers has shown signs of picking up speed. A source of anxious buying when the tide turned upward, short sellers who came into 2023 preparing to feast have been backing away from positions as stocks rally. Shifting sentiment can be seen in data showing bearish positions in exchange-traded funds slipped to three-year lows while shorts in S&P 500 futures were unwound at the fastest pace since 2020. Meanwhile, the population of optimists is exploding, with bullish newsletter writers in Investors Intelligence survey outstripping bearish ones by 3-to-1, the highest level since late 2022.”

The bear market rally has worked its magic. Gaining 1.6% this week, the Goldman Sachs Short Index evaded weaker stock prices. The Goldman Short Index was up 9.0% over the past nine trading sessions, crushing the 1.6% gain in the S&P500. Not surprisingly, the Fed’s “skip” threw gas on a fire of speculation.

Greed and Fear – and the stock bulls have really had the bears running for their bloody lives. Of course, bullish market operators will not be keen to surrender control. And it certainly helps that it’s summer. Nonetheless, I suspect Thursday marked the beginning of what will evolve into a challenging de-risking/deleveraging episode.

As I’ve explained in recent CBBs, there are major lurking market liquidity issues. Short squeezes tend to reverse abruptly. Months of liquidity excess and buoyant markets surely have left stock and bond portfolios less than adequately hedged. The leveraged speculating community – having covered shorts and unwound hedges – will be uncomfortably long when “risk off” erupts. Assuming massive speculative leverage (derivatives and margin debt) accumulated during this rally in the big tech stocks and related indices, there’s clear potential for a destabilizing reversal and de-risking/deleveraging. It brings back memories of the culminating squeeze and derivatives melt-up that marked a 15-year high in the Nasdaq100 back in Q1 2000.

Meanwhile, Crisis Dynamics have gained momentum in China (see “China Watch”).

July 7 – Bloomberg (Dorothy Ma): “Chinese high-yield dollar bonds are on course for their biggest weekly loss since November, as a plunge involving state-backed builder Sino-Ocean fueled worries for the embattling market as new-home sales are again falling. The company’s offshore notes have lost nearly 50% this week…”

The Chinese developer bond collapse has accelerated. Number one developer Country Garden bond yields surged 25 percentage points this week to a record 80%. Everything points to a rapid – and decisive - loss of confidence in the housing recovery. Meanwhile, Beijing and the state-directed banks are being forced to move aggressively to support troubled local governments – including LGFV (local government financing vehicles) debt. And Beijing has also moved to support the vulnerable renminbi. How long can Beijing suppress the great unraveling?

July 6 – Bloomberg (John Cheng): “A state-owned Chinese newspaper issued a rare rebuttal of Goldman Sachs… research after the securities firm’s analysts recommended selling shares of local banks, the latest sign of official attempts to counter negative sentiment in markets as the economy slows… The public rebuke is a fresh sign of Beijing’s growing unease with eroding investor confidence…”

July 6 – Reuters (Samuel Shen, Winni Zhou, Georgina Lee and Summer Zhen): “Chinese investors are rushing offshore to make dollar deposits and buy Hong Kong insurance in a signal domestic confidence is languishing and that the ailing yuan faces more pressure. The outflows highlight deep-seated concern about the state of China's economy as its much-awaited pandemic recovery stalls… Brokers say individuals are responsible for the surge and it shows no sign of letting up, which analysts warn could put further pressure on the yuan as it teeters at eight-month lows.”


For the Week:

The S&P500 declined 1.2% (up 14.6% y-t-d), and the Dow fell 2.0% (up 1.8%). The Utilities dipped 0.3% (down 8.4%). The Banks increased 0.6% (down 20.0%), and the Broker/Dealers added 0.2% (up 5.2%). The Transports increased 0.2% (up 16.2%). The S&P 400 Midcaps dipped 0.7% (up 7.1%), and the small cap Russell 2000 lost 1.3% (up 5.9%). The Nasdaq100 declined 0.9% (up 37.5%). The Semiconductors fell 2.6% (up 41.3%). The Biotechs dropped 2.0% (down 0.6%). While bullion gained $6, the HUI gold equities index fell 2.4% (down 0.6%).

Three-month Treasury bill rates ended the week at 5.22%. Two-year government yields gained five bps this week to 4.95% (up 52bps y-t-d). Five-year T-note yields rose 21 bps to 4.36% (up 35bps). Ten-year Treasury yields surged 23 bps to 4.06% (up 18bps). Long bond yields jumped 19 bps to 4.05% (up 8bps). Benchmark Fannie Mae MBS yields surged 31 bps to 5.95% (up 56bps).

Greek 10-year yields surged 30 bps to 3.95% (down 61bps y-t-d). Italian yields jumped 28 bps to 4.36% (down 34bps). Spain's 10-year yields surged 30 bps to 3.69% (up 17bps). German bund yields jumped 25 bps to 2.64% (up 19bps). French yields rose 26 bps to 3.19% (up 21bps). The French to German 10-year bond spread widened one to 55 bps. U.K. 10-year gilt yields surged 26 bps to 4.65% (up 98bps). U.K.'s FTSE equities index sank 3.6% (down 2.6% y-t-d).

Japan's Nikkei Equities Index dropped 2.4% (up 24.1% y-t-d). Japanese 10-year "JGB" yields added three bps to 0.43% (up 1bp y-t-d). France's CAC40 sank 3.9% (up 9.9%). The German DAX equities index lost 3.4% (up 12.1%). Spain's IBEX 35 equities index slumped 3.6% (up 12.4%). Italy's FTSE MIB index declined 1.6% (up 17.2%). EM equities were mixed. Brazil's Bovespa index increased 0.7% (up 8.4%), and Mexico's Bolsa index added 0.7% (up 11.2%). South Korea's Kospi index fell 1.5% (up 13.0%). India's Sensex equities index increased 0.9% (up 7.3%). China's Shanghai Exchange Index slipped 0.2% (up 3.5%). Turkey's Borsa Istanbul National 100 index surged 7.4% (up 12.3%). Russia's MICEX equities index gained 1.3% (up 31.5%).

Investment-grade bond funds posted inflows of $1.620 billion, while junk bond funds reported outflows of $283 million (from Lipper).

Federal Reserve Credit declined $48.9bn last week to $8.269 TN. Fed Credit was down $632bn from the June 22nd, 2022, peak. Over the past 199 weeks, Fed Credit expanded $4.542 TN, or 122%. Fed Credit inflated $5.458 TN, or 194%, over the past 556 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $0.6bn last week to $3.442 TN. "Custody holdings" were up $55.1bn, or 1.6%, y-o-y.

Total money market fund assets surged $43.7bn to a record $5.475 TN, with a 17-week gain of $581bn (36% annualized). Total money funds were up $917bn, or 20.1%, y-o-y.

Total Commercial Paper declined $13.3bn to $1.150 TN. CP was down $14bn, or 1.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 17 bps to 6.87% (up 157bps y-o-y). Fifteen-year rates rose 16 bps to 6.27% (up 182bps). Five-year hybrid ARM rates surged 22 bps to 6.44% (up 225bps) - the high in data back to 2005. Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 14 bps to 7.34% (up 165bps) - the high since November 2008.

Currency Watch:

July 5 – Bloomberg: “China’s central bank extended support for the yuan via a stronger daily reference rate, a day after its flagship newspaper reassured investors that authorities have sufficient ammunition to stabilize the weakening currency. The People’s Bank of China set its so-called yuan fixing at 7.2098 per dollar Thursday, 360 pips stronger than the average estimate… The move came after a commentary in PBOC-backed Financial News said Beijing has ample tools to stabilize the currency market even if the yuan suffers ‘panic’ selling.”

July 4 – Reuters (Winni Zhou and Ryan Woo): “China's major state banks have lowered their dollar deposit rates for the second time in a month, seven banking sources with direct knowledge of the matter said, as authorities have stepped up efforts to arrest a slide in the yuan. Interest rates offered by the ‘Big Five’ state-owned lenders on most dollar deposits are now capped at 2.8%, down from 4.3% previously…”

July 6 – Bloomberg (Ruth Carson, Yumi Teso and Erica Yokoyama): “The yen may fall through the more-than three-decade low it reached last year amid Japan’s widening monetary policy divergence with the US, according to Eisuke Sakakibara. Known as ‘Mr. Yen’ for his ability to influence the currency when he was Japan’s vice finance minister from 1997-1999, Sakakibara said the yen may weaken more than 10% from current levels as the Bank of Japan clings to ultra-easy policy while the Federal Reserve raises interest rates to tame inflation.”

For the week, the U.S. Dollar Index declined 0.7% to 102.27 (down 1.2% y-t-d). On the upside, the Japanese yen increased 1.5%, the New Zealand dollar 1.4%, the Norwegian krone 1.1%, the British pound 1.1%, the South Korean won 1.0%, the Swiss franc 0.8%, the euro 0.5%, the Singapore dollar 0.4% and the Australian dollar 0.4%. On the downside, the Brazilian real declined 1.8%, the Canadian dollar 0.2%, the Swedish krona 0.2%, the Mexican peso 0.1%, and the South African rand 0.1%. The Chinese (onshore) renminbi increased 0.39% versus the dollar (down 4.52%).

Commodities Watch:

July 7 – Bloomberg (Sybilla Gross): “China added to its gold reserves for an eighth consecutive month… People’s Bank of China holdings of bullion rose by 680,000 troy ounces last month, according to official data released Friday. That’s equivalent to 23 tons. Total stockpiles now sit at 2,330 tons, with around 183 tons added in the run of buying from November. China has been an enthusiastic buyer of gold, partly due to its desire to chip away at the dominance of the dollar in global market.”

July 5 – Bloomberg (Lars Mucklejohnrons): “McKinsey & Co. joined the growing chorus warning that metals considered key to the clean-energy transition face shortages in coming years, potentially suppressing the adoption of electric cars, wind turbines and solar panels. These deficits likely will slow global decarbonization efforts by raising supply-chain costs and, consequently, the prices of lower-carbon products, McKinsey said…”

The Bloomberg Commodities Index increased 0.4% (down 9.7% y-t-d). Spot Gold added 0.3% to $1,925 (up 5.5%). Silver rallied 1.5% to $23.09 (down 3.6%). WTI crude recovered $3.39, or 4.8%, to $73.83 (down 8%). Gasoline fell 1.7% (up 5%), and Natural Gas dropped 7.2% to $2.58 (down 42%). Copper increased 0.5% (down 1%). Wheat recovered 0.5% (down 19%), and Corn increased 0.8% (down 17%). Bitcoin was little changed this week at $30,350 (up 83%).

Global Bank Crisis Watch:

July 5 – Wall Street Journal (Jonathan Weil): “Unrealized losses on bonds and loans held by U.S. banks are expected to have grown in the second quarter, potentially reanimating an issue that made investors nervous earlier this year… Unrealized losses ‘should be pretty close to back to where we were at the end of 2022 for the vast majority of banks,’ said Richard Sbaschnig, an analyst at the investment-research firm CFRA. ‘It still feels like there’s some liquidity pressure on the banks, although obviously the risk of an immediate failure seems to have dropped precipitously.’”

July 6 – Bloomberg (John Gittelsohn): “Ashford Hospitality Trust failed to repay or refinance $982 million of mortgages on a hotel portfolio before the debt’s maturity in June. A special servicer who is managing the debt has hired counsel and is in talks for a workout agreement to extend the loan and delay a so-called ‘balloon payment’ that is owed, according to a June filing of data compiled by Computershare.”

UK Crisis Watch:

July 7 – Bloomberg (Eamon Akil Farhat): “Southern Water Ltd doesn’t expect to pay a dividend until at least 2025 after payments to service inflation-linked debt ballooned amid a deepening crisis for the sector. In the first sign of distress beyond Thames Water Ltd, Southern said net financing costs had increased more than 40% to £278.6 million ($355 million) in the year to April 1, largely due to higher indexation on inflation-linked debt. Ratings company Fitch downgraded Southern Water on Friday due to a reduced ability to pay off its debts.”

July 7 – Reuters (Andy Bruce): “British house prices fell last month in annual terms at the fastest rate in 12 years and soaring interest rates are likely to herald more weakness in the housing market, mortgage lender Halifax said… House prices dropped 2.6% year-on-year in June, after a 1.1% fall in May, Halifax said. It was the largest such fall since June 2011.”

July 6 – Financial Times (Valentina Romei): “UK businesses expect to raise their prices at a fast pace in the coming year in response to workers’ demands for higher wages, according to a survey by the Bank of England that reinforces concerns about high inflation. The BoE decision maker panel… showed that in the three months to June businesses expect output price inflation to be 5.3% in the next year. This was only marginally down from the 5.4% recorded in the poll in the three months to May.”

July 1 – Bloomberg (Tasos Vossos): “A normally boring corner of the UK investment market is wobbling, highlighting the potential trouble ahead for corporate debt exposed to inflation. Thames Water, Britain’s largest water supplier, is in talks with government officials about its options for dealing with its more than £14 billion ($17.8bn) debt pile. Its burden has grown more onerous in large part because of its use of inflation-linked bonds, which account for more than half of its senior debt… As central banks hike rates to tame inflation, companies have faced immediate hits in at least two ways: they’re paying more interest on their floating-rate debt, and their inflation-linked obligations are growing bigger. There’s more than $1.8 trillion of this kind of debt outstanding worldwide that was sold in capital markets, most of which is leveraged loans, but also corporate floating-rate notes, and inflation-linked securities.”

Market Instability Watch:

July 3 – Reuters (Napat Kongsawad): “A widely watched section of the U.S. Treasury yield curve hit its deepest inversion on Monday since the high inflation era of Fed Chairman Paul Volcker… The closely-watched spread between the 2-year and 10-year U.S. Treasury note yields hit the widest since 1981 at -109.50 in early trade, a deeper inversion than in March during the U.S. regional banking crisis. The gap was last at -108.30 bp.”

July 7 – Bloomberg (Isabelle Lee and Vildana Hajric): “A pair of exchange-traded funds tracking corporate credit saw a nearly $2 billion flight after data underscoring jobs strength solidified bets the Federal Reserve will resume its interest-rate hikes. The $13 billion iShares iBoxx High Yield Corporate Bond ETF (ticker HYG) saw outflows to the tune of $1.13 billion... That’s the biggest withdrawal since March… Investors also pulled some $760 million from the $35.5 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).”

July 7 – Reuters (Lucy Raitano): “Investors globally ploughed more money into cash funds in the week to Wednesday, with total cash assets under management reaching a ‘monster’ $7.8 trillion, according to… Bank of America (BofA) Global Research. Inflows into cash funds totaled $29 billion in the week to Wednesday, while global investors also bought $13 billion of equity funds and $9.8 billion of bonds, BofA said citing figures from funds data provider EPFR.”

July 1 – Financial Times (Mary McDougall and Katie Martin): “The world’s largest active bond fund manager says markets are too optimistic about central banks’ ability to dodge a recession as they battle inflation in the US and Europe. Daniel Ivascyn, chief investment officer at Pimco…, said he was preparing for a ‘harder landing’ than other investors… ‘The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks,’ Ivascyn said… He noted that when rates have risen in the past, a lag of five or six quarters for the impact to be felt has been ‘the norm’. ‘We would argue that the market may still be too confident in the quality of central bank decisions and their ability to engineer positive outcomes,’ he said. ‘We think the market is a bit too optimistic about central banks’ ability to cut policy rates as quickly as the yield curves are implying.’”

July 4 – Wall Street Journal (Jon Sindreu): “There is an old joke: An optimist jumps from the roof and shouts ‘so far, so good!’ when passing the first-floor window. Corporate-debt markets are at risk of a similar delusion, particularly where private equity is involved. Companies will find it expensive to refinance debts they took on during a decade of ultralow interest rates, perhaps more so than expected. And, as troubles surrounding British utility Thames Water show, it isn’t always the sectors that investors and ratings firms usually consider risky that are most vulnerable. The belief that rates will soon start coming back down—despite messages to the contrary from the world’s top central bankers at a meeting in Portugal last week—still pervades the corporate-bond ecosystem.”

Bubble and Mania Watch:

July 7 – Bloomberg (Claire Ruckin and Silas Brown): “Private equity firms are having to reduce the leverage in buyouts to get deals done, as the cost of debt has spiraled and banks remain cautious about how much they’ll lend. Traditionally, buyout firms would load up the companies they acquire with debt in order to maximize returns, with leverage of six or more times earnings typical in deals… But recent deals have had much less generous financing. A $9.4 billion debt package being lined up to back GTCR’s purchase of a majority stake in Worldpay Inc. — set to be the largest buyout financing in over a year — is expected to be just above 4 times earnings…”

July 5 – Bloomberg (Sarah McBride): “Venture capitalists are funding fewer startups, especially at the earliest stages of a company’s life, according to… PitchBook. In the US, investors financed 3,011 startup funding deals last quarter, about a third fewer than a year ago. And they spent a lot less cash: $39.8 billion, down by nearly half from the same period last year. Take out the more than $6.5 billion investors spent on payments company Stripe, and the total looks even worse… The biggest drop came in angel or seed deals, which is financing for startups usually still at the concept stage.”

July 7 – Wall Street Journal (Isabelle Bousquette): “Businesses are facing an influx of new artificial-intelligence tools, many of which overlap and cause confusion for employees, as corporate-technology sellers race to capitalize on the generative AI trend. ‘Since the ChatGPT excitement, I must have had at least 20 to 25 vendors in my portfolio reach out to me saying, ‘Hey, let us tell you about our generative AI co-pilot strategy,’’ said Milind Wagle, chief information officer at Equinix, one of the world’s biggest data-center landlords.”

July 3 – Bloomberg (Dawn Lim): “Blackstone Inc.’s giant real estate trust for wealthy individuals limited withdrawals for an eighth straight month with signs that the backlog of redemption requests is easing. Investors asked to cash out $3.8 billion in June from Blackstone Real Estate Income Trust... BREIT returned about $628 million, or about 17% of what was requested. Redemption requests were down 29% from the peak in January and were the lowest this year. The $68 billion fund’s rapid growth turned it into a crown jewel for Blackstone.”

July 7 – Bloomberg (Jeran Wittenstein): “With the Nasdaq 100 flirting with its highest level in more than a year, more insiders at technology companies are taking the opportunity to head for the exit. The number of tech executives and other insiders selling stocks rose to 441 in June, according to… the Washington Service. That’s the highest level since December 2021…”

July 3 – Bloomberg (Muyao Shen): “The nonfungible-token market witnessed a dramatic selloff over the last week, as prices of major collections tumbled amid growing investor doubts over just on how valuable NFTs should be. Data from crypto data platform Parsec shows that the floor price of Azuki has dropped by more than 60% in the past week, while that of other well-known NFT collections like Bored Ape Yacht Club, Mutant Ape Yacht Club and Pudgy Penguins dropped in a range of 14% to 31%.”

July 7 – Bloomberg (Sohee Kim and Yoolim Lee): “Samsung Electronics Co. reported its worst decline in quarterly revenue since at least 2009, stoking uncertainty over when a year-long electronics and memory chip demand slump will end. Operating profit plunged 96% in the three months ended June…”

July 3 – Bloomberg (Annie Massa and Jack Witzig): “The world’s 500 richest people added $852 billion to their fortunes in the first half of 2023. Each member of the Bloomberg Billionaires Index made an average of $14 million per day over the past six months… It was the best half- year for billionaires since the back half of 2020, when the economy rebounded from a Covid-induced slump.”

Ukraine War Watch:

July 4 – Politico (Veronika Melkozerova): “The Russian regions of Belgorod and Kursk came under fire from across the Ukrainian border in the early hours of Wednesday, according to local governors. Both officials blamed Ukraine for the attack — claims which have not been independently verified.”

July 4 – Financial Times (Max Seddon, James Kynge, John Paul Rathbone, and Felicia Schwartz): “Xi Jinping personally warned Vladimir Putin against using nuclear weapons in Ukraine, indicating Beijing harbours concerns about Russia’s war even as it offers tacit backing to Moscow, according to western and Chinese officials. The face-to-face message was delivered during the Chinese president’s state visit to Moscow in March… Since then, Chinese officials have privately taken credit for convincing the Russian president to back down from his veiled threats of using a nuclear weapon against Ukraine, the people said.”

July 2 – Reuters (Lidia Kelly): “Russia's envoy to the United Nations in Geneva said there were no grounds to maintain the ‘status quo’ of the Black Sea grain deal that is set to expire on July 18… In a wide ranging interview, envoy Gennady Gatilov told the outlet that the implementation of Russia's conditions for the extensions of the agreement was ‘stalling.’ Those conditions included, among others, the reconnection of the Russian Agricultural Bank (Rosselkhozbank) to the SWIFT banking payment system.”

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

July 7 – Bloomberg (Andreo Calonzo): “The US has expressed concern over China’s recent behavior towards Philippine vessels in the South China Sea, as the Southeast Asian nation reported Chinese vessels ‘swarming’ south of an oil and gas-rich area in contested waters.’ US Defense Secretary Lloyd Austin… called Beijing’s conduct in the disputed sea ‘coercive and risky.’ Austin also reiterated the US’ ‘ironclad’ commitment to defend the Philippines…”

July 6 – Reuters (Jonathan Saul): “Chinese President Xi Jinping… urged the military to deepen war and combat planning to increase the chances of victory in actual combat, Xinhua news agency said, renewing his call to troops to safeguard China's sovereignty and territory. Xi said the world has entered a new period of turmoil and change and China's security situation has become more unstable and uncertain, according to state-run Xinhua, in comments he made to troops while on an inspection tour of the Eastern Theater Command.”

June 30 – Reuters (Kantaro Komiya): “Japan's defence ministry said… it had spotted two Russian Navy ships in the waters near Taiwan and Japan's Okinawa islands in the previous four days… Taiwan's defence ministry said on Tuesday it had spotted two Russian frigates off its eastern coast and send aircraft and ships to keep watch. Japan's government said last month that repeated Russian military activity near Japanese territory, including joint drills with Chinese forces, posed ‘serious concern’ for Japan's national security.”

July 3 – Associated Press: “The U.S. recommended Americans reconsider traveling to China because of arbitrary law enforcement and exit bans and the risk of wrongful detentions. No specific cases were cited, but the advisory came after a 78-year-old U.S. citizen was sentenced to life in prison on spying charges in May. It also followed the passage last week of a sweeping Foreign Relations Law that threatens countermeasures against those seen as harming China’s interests.”

De-globalization and Iron Curtain Watch:

July 5 – Reuters (Brenda Goh, Amy Lv, Yew Lun Tian and Nick Carey): “China's export controls on metals used in semiconductors are ‘just a start’, an influential Chinese trade policy adviser said…, as Beijing ramps up a tech fight with Washington days before a visit from U.S. Treasury Secretary Janet Yellen. Shares in some Chinese metals companies rallied for a second session as investors bet that higher prices for gallium and germanium, which Beijing's export restrictions target, could boost revenues… On Wednesday, former Vice Commerce Minister Wei Jianguo told the China Daily newspaper that countries should brace for more should they continue to pressure China, describing the controls as a ‘well-thought-out heavy punch’ and ‘just a start’. ‘If restrictions targeting China's high-technology sector continue then countermeasures will escalate,’ added Wei, vice commerce minister 2003-2008…”

July 7 – Wall Street Journal (Jon Emont): “China’s decision this week to restrict the export of two minerals used in semiconductors, solar panels and missile systems was more than a trade salvo. It was a reminder of its dominant hold over the world’s mineral resources—and a warning of its willingness to use them in its escalating rivalry with the U.S. Around two-thirds of the world’s lithium and cobalt—essential for electric cars—is processed in China. The country is the source of nearly 60% of aluminum, also used in EV batteries, and 80% of polysilicon, an ingredient in solar panels. It has an even tighter grip on rare-earth minerals that go into crucial technologies, like making smartphone touch screens and missile-defense systems, accounting for 90% of their refining… Chinese companies also often control processing that isn’t done at home.”

July 5 – Reuters (Brenda Goh): “China's move to restrict the exports of two metals crucial for making some types of semiconductors and electric vehicles is a warning that China will not be passively squeezed out of the global chips supply chain, the Global Times said. In an editorial…, the Chinese state media tabloid said the imposition of controls on exports of some gallium and germanium products was a ‘practical way’ of telling the U.S. and its allies that their efforts to curb China from procuring more advanced technology was a ‘miscalculation’.”

July 4 – Reuters (Amy Lv and Brenda Goh): “Companies caught out by China's decision to restrict exports of two metals widely used in semiconductors and electric vehicles were racing to secure supplies… as some industry suppliers worried that curbs on rare earth exports could follow. Monday's abrupt announcement of controls from Aug. 1 on exports of some gallium and germanium products has ramped up a trade war with the United States and could potentially cause more disruption to global supply chains. Analysts saw the move, which the Chinese commerce ministry said was to protect national security, as a response to escalating efforts by Washington to curb China's technological advances. ‘China has hit the American trade restrictions where it hurts,’ said Peter Arkell, chairman of the Global Mining Association of China.”

July 4 – Financial Times: “Trade officials were assessing the fallout from the latest escalation in the US-China technology battle after Beijing said it would impose curbs on exports of metals used in chipmaking. South Korea’s commerce ministry convened an emergency meeting to discuss China’s decision to control exports of gallium and germanium… ‘We can’t rule out the possibility of the measure being expanded to other items,’ said Joo Young-joon, South Korea’s deputy commerce minister. Japanese trade minister Yasutoshi Nishimura said Tokyo was studying the impact on its companies as well as checking Beijing’s plans for implementing the controls. Tokyo kept the door open for action at the World Trade Organization…”

July 4 – Reuters (Rachel More and Hakan Ersen): “German industry… warned that Europe must become more self-reliant in the hunt for raw materials needed for cleaner, more digital economies, after China caused alarm by announcing restrictions on some metals used for semiconductors… In a position paper, the group said that Germany's and Europe's dependency on mineral raw materials such as rare earths from China was ‘already greater than that of oil and natural gas from Russia’.”

July 3 – Reuters (Nidhi Verma): “Indian refiners have begun paying for some oil imports from Russia in Chinese yuan…, as Western sanctions force Moscow and its customers to find alternatives to the dollar for settling payments. Western punishments over Russia's invasion of Ukraine have shifted global trade flows for its top export, with India emerging as the largest buyer of seaborne Russian oil even as it casts about for how to pay for it amid shifting sanctions.”

Inflation Watch:

July 1 – Wall Street Journal (Patrick Thomas): “The most widespread drought in a decade is dividing the U.S. farm sector into winners and losers. With more than half of U.S. corn and soybean acreage facing drought conditions, some farmers are calculating whether insurance payments will cover the cost of the crops they have sown this year. As of June 27, 65% of the Midwest was in a moderate drought or worse, the broadest area in a decade… The U.S. Department of Agriculture said 70% of the country’s corn production area and 63% of soybeans were affected by drought….”

July 3 – Reuters (Carolyn Cohn and Noor Zainab Hussai): “U.S. property catastrophe reinsurance rates rose by as much as 50% at a key July 1 renewal date, broker Gallagher Re said…, with states such as California and Florida increasingly hit by wildfires and hurricanes. Reinsurers insure insurance companies, and have been raising rates in recent years because of steepening losses, which industry players put down in part to the impact of climate change. Higher reinsurance rates can affect the premiums which insurers charge to their customers.”

July 5 – Reuters (Rajendra Jadhav): “Global rice prices, now at their highest in 11 years, are set to rally further after India moved to boost payments to farmers, just as El Nino threatens yields in key producers and alternative staples get costlier for poor Asians and Africans. India accounts for more than 40% of world rice exports…, but low inventories mean any cut in shipments will fuel food prices driven up by Russia's invasion of Ukraine last year and erratic weather.”

July 3 – Bloomberg (Mumbi Gitau, Tolani Awere and Baudelaire Mieu): “Cocoa soared to a 13-year high as heavy rain across West Africa accelerated the spread of a rot-causing disease, threatening output in some of the world’s biggest producers… The disease can be catastrophic for supply, according to Fuad Mohammed Abubakar, head of Ghana Cocoa Marketing Co.”

Biden Administration Watch:

July 7 – Reuters (Andrea Shalal and Joe Cash): “U.S. Treasury Secretary Janet Yellen called… for market reforms in China and criticized the world's second-largest economy for its recent tough actions against U.S. companies and new export controls on some critical minerals. Yellen arrived in Beijing… to try to repair fractious U.S.-Chinese relations, but made clear in her public remarks that Washington and its Western allies will continue to hit back at what she called China's ‘unfair economic practices’… ‘We seek healthy economic competition that is not winner-take-all but that, with a fair set of rules, can benefit both countries over time,’ Yellen told Chinese Premier Li Qiang…”

July 4 – Wall Street Journal (Yuka Hayashi and John D. McKinnon): “The Biden administration is preparing to restrict Chinese companies’ access to U.S. cloud-computing services, according to people familiar…, in a move that could further strain relations between the world’s economic superpowers. The new rule, if adopted, would likely require U.S. cloud-service providers such as Amazon.com and Microsoft to seek U.S. government permission before they provide cloud-computing services that use advanced artificial-intelligence chips to Chinese customers, the people said.”

Federal Reserve Watch:

July 6 – Associated Press (Christopher Rugaber): “Some Federal Reserve officials pushed to raise the Fed’s key interest rate by one-quarter of a percentage point at their meeting last month to intensify their fight against high inflation, though the central bank ultimately decided to forgo a rate hike. In a sign of growing division among the policymakers, some officials favored a quarter-point increase or said they ‘could have supported such a proposal,’ according to the minutes of the June 13-14 meeting...”

July 6 – Reuters (Valentina Romei): “Federal Reserve Bank of New York President John Williams said… it was the right move for the central bank to hold rates steady three weeks ago, while hinting at some point it may have to raise rates again amid ongoing economic strength. ‘We still have more work to do’ to balance supply and demand and get inflation down, Williams said... He said he’ll be ‘data dependent’ in thinking about future steps for the central bank but added the data support the idea the Fed may need to raise rates further at some point.”

July 6 – Financial Times (Colby Smith): “A top official at the US central bank has called on the Federal Reserve to immediately resume raising interest rates after forgoing an increase last month, citing scant evidence that inflationary pressures are easing as needed. Lorie Logan, president of the Dallas Fed…, disclosed… she was among the officials who thought a quarter-point interest rate rise at the June meeting was ‘entirely appropriate’ in light of strong incoming data… Logan said it was ‘important’ for the Fed to ‘follow through’ given her concerns about ‘whether inflation will return to target in a sustainable and timely way’ amid what she described as ‘clearly pretty hot’ data. ‘If we lose ground in our effort to restore price stability, we will need to do more later to catch up,’ she warned.”

U.S. Bubble Watch:

July 6 – Wall Street Journal (Ben Glickman): “U.S. services sector activity grew at a faster rate in June compared with the previous month, indicating strength in the sector even as businesses fear deteriorating economic conditions. The Institute for Supply Management said… its services activity index for June rose to 53.9 from the May reading of 50.3. Economists polled by The Wall Street Journal had expected the services index to rise to 51.3… Strength in employment, new orders and business activity drove the growth rate in the sector, Nieves said… In June, ISM's business activity index rose to 59.2 from 51.5 in May. The new orders index rose for the sixth straight month, to 55.5 from 52.9 in May. The employment index also edged up in June to 53.1 from 49.2 in May, indicating hiring in the service sector picked up last month. Fifteen of 18 industries evaluated by ISM expanded in June…”

July 7 – Bloomberg (Steve Matthews ): “A solid employment report with stronger-than-expected wage growth for June keeps the Federal Reserve on track to raise interest rates this month and mull another hike as soon as September. Nonfarm payrolls increased 209,000 last month, less than economists expected, and job gains over the prior two months were revised lower… The unemployment rate fell to 3.6%. Average hourly earnings rose 4.4% from a year earlier, and the average work week edged up.”

July 6 – Reuters (Safiyah Riddle): “American employers slowed downsizing in June, announcing the lowest number of layoffs since October 2022. According to the latest job cuts report from employment firm Challenger, Gray & Christmas…, U.S.-based employers said they were cutting 40,709 jobs in June, down 49% from the number of cuts announced in May. The planned pace of layoffs in June was well above the 32,517 cuts announced in June 2022. There are 458,209 cuts so far this year, a 244% increase from the 133,211 layoffs announced through June 2022…”

July 6 – Wall Street Journal (Rajendra Jadhav): “The surge in Americans quitting their jobs has abated since peaking during the pandemic… Americans voluntarily left four million jobs in May… That marked a drop of around 500,000 from 4.5 million in November 2021, the highest level in Labor Department records back to 2000. The so-called quits rate—the number of resignations as a share of total employment—averaged 2.5% from March to May, down from 3% as recently as April 2022…”

July 6 – Bloomberg (Natalie Wong): “US mortgage rates rose for a second straight week, reaching the highest since November. The average for a 30-year, fixed loan increased to 6.81% from 6.71% last week, Freddie Mac said… Mortgage rates are inching closer to 7%, a level not crossed since late 2022.”

July 6 – CNBC (Diana Olick): “Mortgage rates last week hit their highest level since the end of May, which in turn weighed on mortgage demand… As a result, mortgage demand to purchase a home, which had been rising for three straight weeks, dropped 5% for the week and was 22% lower than the same week one year ago.”

July 6 – Associated Press (Alex Veiga): “Would-be homebuyers are willing to take on sharply higher mortgage payments, even as home prices have begun to pull back this year. The median monthly payment listed on applications for home purchase loans jumped 14.1% in May from a year earlier to an all-time high $2,165… The May figure also represents a 2.5% increase from April.”

July 6 – Reuters (Ananta agarwal): “Small U.S. homebuilders are backing off from bringing more houses to the market, discouraged by a banking crisis-led credit squeeze and rising borrowing costs, industry experts said, exacerbating the shortage of new homes. The housing market, which is one of the biggest casualties of the fastest rate-hike cycle in the U.S. since the 1980s, is also reeling with an acute supply squeeze due to a shortage of building materials and labor.”

July 5 – Wall Street Journal (Nora Eckert): “American car shoppers have been flocking to dealerships so far this year, shaking off concerns about rising interest rates and inflationary pressures. The auto industry is expected to have notched a 12%-to-14% rise in new vehicle sales for the first half of this year, a pace far ahead of industry forecasts heading into 2023… Dealers and car executives point to pent-up demand from shoppers who have been on the sidelines for three years as vehicle shortages resulted in slim pickings and high prices.”

July 5 – Reuters (Pratyush Thakur and Shivansh Tiwary): “New vehicle sales in the United States for top global automakers rose in the second quarter on improving supply and strong demand, signaling that rising interest rates have not yet had a meaningful impact on purchases. Vehicle production took a hit after the pandemic disrupted supply of semiconductor chips and other raw materials… Companies are now rushing to make up for the lost production as supply chain snags gradually ease. ‘The jobs market has remained healthy, and consumers have found a way to buy new wheels,’ said Cox Automotive's Chief Economist Jonathan Smoke.”

July 3 – Reuters (Arshreet Singh): “U.S. Chapter 11 bankruptcy filings jumped 68% in the first half of 2023 from a year earlier, Epiq Bankruptcy… said... SVB Financial Group, Envision Healthcare Corp, Bed Bath & Beyond, Party City Holdco, Lordstown Motors and Kidde-Fenwal were among some casualties of decades-high interest rates and sticky inflation as the era of easy money drew to a close… ‘The growth in filings is reflective of more families and businesses facing surging debt loads due to rising interest rates, inflation, and increased borrowing costs,’ American Bankruptcy Institute's executive director Amy Quackenboss said…”

July 3 – Financial Times (Taylor Nicole Rogers and Colby Smith): “This October, after a three-year break, 27mn Americans with student debt will once again have payments due. One of them is Jacque Adams, a Dallas public school teacher who owes $103,000 in student debt. ‘I’m an underpaid teacher,’ said Adams, 45. ‘I have three kids; one is starting on her own college [degree]. I’m going to take these loans to the grave with me.’ The Department of Education paused student loan repayments when the Covid crisis began in March 2020, and extended it nine times in an effort to provide financial relief to US households throughout the pandemic.”

July 3 – Wall Street Journal (Justin Lahart): “Congress passed two measures last year that aimed, in part, to build America’s manufacturing capacity back up. While the ultimate economic ramifications of these moves will take years to play out, this much is certain: If you spend it, they will build. On Monday, the Commerce Department reported May construction spending figures, with overall spending rising… 0.9%... Once again, an important piece of that was spending on construction of manufacturing facilities. This was up 1% in May from April, putting it up an eye-popping 76.3% from a year earlier… In the second quarter, that GDP share looks destined to be higher. Chalk it up to the CHIPS and Science Act and the Inflation Reduction Act, both passed in August last year.”

July 4 – Reuters (Steve Gorman and Gabriella Borter): “Thousands of Los Angeles-area hotel workers went on strike… demanding pay hikes and improved benefits in a region where high housing costs make it difficult for low-wage earners to live close to where they hold jobs, union officials said. Unite Here Local 11, which represents 15,000 workers at more than 60 major hotels in Los Angeles and Orange counties, declared the strike a day after the workers' contract expired. It marks one of the largest strikes to hit the U.S. hospitality industry in recent years.”

July 5 – Reuters (Abhijith Ganapavaram): “The Teamsters Union said… United Parcel Service ‘walked away’ from negotiations over a new contract, a claim the shipping giant denied, lobbing its own accusation that the union had stopped negotiating. The two sides traded salvos in early morning statements as they attempt to come to an agreement to prevent a strike when the current contract, which covers some 340,000 workers, expires at the end of the month.”

July 3 – Bloomberg (Shruti Date Singh): “Chicago’s pension burden climbed last year after the city’s retirement funds lost money due to volatile markets… The net pension liability across the city’s four retirement funds rose about 5% to $35.4 billion as of Dec. 31 from $33.7 billion a year earlier, according to Chicago’s annual financial report…”

Fixed Income Watch:

July 5 – Reuters (Naomi Rovnick and Chiara Elisei): “A financial stream that helped fund the world's riskiest companies and grew into a market estimated at $1.5 trillion in the low interest rate years is drying up, as aggressive rate hikes bring tougher borrowing conditions and uncertainty. The pace of issuance of so-called collateralised loan obligations (CLOs), which bundle loans of the weakest corporates and repackage them as bonds, has stalled. Specialist asset managers minted CLOs worth more than half a trillion dollars in 2021, a year of heavy post-pandemic monetary stimulus. Almost $69 billion worth were launched or refinanced during the first half of this year, down 41% on the same period in 2022... These vehicles, popular with hedge funds, insurers and asset managers when borrowing costs are low and investors hunt for yield, account for up to 60% of demand for the junk loans rated single B or below, according to S&P Global Ratings.”

July 7 – Bloomberg (John Gittelsohn): “Ashford Hospitality Trust Inc. expects to return 19 hotels to lenders in cities including Las Vegas and Atlanta, declining to pour more cash into the properties, which are part of a $982 million mortgage pool that missed a repayment deadline in June. Keeping the hotels would have required a paydown of about $255 million to extend the financing and $80 million in capital expenditures through 2025… The equity in the properties is already negative…”

July 5 – Bloomberg (Carmen Arroyo): “The collapse of two US auto dealers and a growing pile of delinquent car loans are threatening to deliver losses in a corner of Wall Street that, until now, has been a sea of calm: the asset-backed securities market. Bonds backed by car loans made by U.S. Auto Sales and American Car Center, two used-car dealers that shut their doors earlier this year, have been veering into distress in recent weeks. Borrowers have been falling behind on payments, and Citigroup believes that some of the riskiest parts of three different asset-backed deals could fail to return principal to investors. Any lost principal would be a rare event in the ABS market, where subprime auto bonds haven’t failed to return investors’ money since the 1990s, Citigroup said.”

July 3 – Bloomberg (Jordan Fitzgerald): “Municipal-bond issuance started to recover in June, marking the first month in 2023 where new sales rose year-over-year. Long-term muni sales climbed roughly 10% in June from a year ago, to about $36 billion… Total long-term issuance last month reached the highest since last August…”

China Watch:

July 4 – Reuters (Ellen Zhang and Ryan Woo): “China's services activity expanded at the slowest pace in five months in June, a private-sector survey showed…, as weakening demand weighed on post-pandemic recovery momentum. The Caixin/S&P Global services purchasing managers' index (PMI) eased to 53.9 in June from 57.1 in May, the lowest reading since January when COVID-19 swept through the country after authorities ditched anti-virus curbs… Business activity and new orders both expanded at notably slower rates last month than in May… New export business growth also slowed but maintained a brisk pace.”

July 3 – Reuters (Ellen Zhang and Ryan Woo): “China's factory activity growth slowed in June, a private sector survey showed…, with sentiment waning and recruitment cooling as firms grew increasingly concerned about sluggish market conditions. The Caixin/S&P Global manufacturing purchasing managers' index (PMI) eased to 50.5 in June from 50.9 in May, indicating a marginal expansion in activity.”

July 6 – Bloomberg (Evelyn Yu): “China Premier Li Qiang pledged to ‘spare no time’ in implementing a batch of targeted policies to strengthen the economy’s recovery from the pandemic. China is at a critical stage of economic recovery and industrial upgrading, Li said… A slew of targeted, comprehensive and well-coordinated measures must be implemented quickly to stabilize growth and employment while preventing risks, CCTV cited Li as saying…”

July 7 – Bloomberg: “Chinese authorities are weighing plans to support cash-strapped cities and counties by allowing additional local bond issuance to help pay down hidden debt in higher-risk areas, according to people familiar... The proposals… could help address one of the biggest financial worries in the world’s second-largest economy: strains in debts at local-government financing vehicles.”

July 4 – Bloomberg: “China’s biggest state banks are offering local government financing vehicles loans with ultra-long maturities and temporary interest relief to prevent a credit crunch amid growing tension in the $9 trillion debt market, according to people familiar… Banks including Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. have started to ramp up loans that mature in 25 years, instead of the prevailing 10-year tenor for most corporate lending, to qualified LGFVs with high creditworthiness in recent months… Some came with waivers on any interest or principal payments in the first four years…”

July 4 – Financial Times (Cheng Leng, Joe Leahy and Edward White): “Pan Gongsheng, the new head of the People’s Bank of China, is set to take the helm at an uncertain moment for the world’s second-largest economy — and for the central bank itself. The bank will be fighting to reset China’s post-Covid recovery, which is suffering from weak investor confidence that many experts believe cannot easily be remedied by monetary policy. It will also be doing so with its own authority weakened after a regulatory shake-up, with some supervisory functions hived off to another regulator. Analysts said the technocrat’s appointment this weekend as the PBoC’s powerful Communist party chief… was nevertheless welcomed by market participants because of his extensive experience in the sector and western contacts and training.”

July 5 – Bloomberg: “Fresh signs emerged Wednesday that China is facing yet more challenges in its property debt crisis. Defaulted developer Shimao Group Holdings Ltd. failed to find a buyer for a $1.8 billion project at a forced auction, even at a heavy discount. Sino-Ocean Group Holding Ltd. saw its bonds tumble on news that the state-backed builder told some creditors it’s been working with two major shareholders on its debt load. They’re the latest indications that China’s two-year real estate crisis is likely to remain one of the biggest drags on the world’s second-largest economy.”

July 3 – Bloomberg: “China’s second-largest developer by sales said the nation’s home market is currently ‘worse than expected,’ joining a chorus of investors and analysts who have become bearish on the country’s real estate sector. China Vanke Co. Chairman Yu Liang backtracked his neutral assessment from March, changing to the view that the property industry is ‘indeed seeing pressure in the short-term’…”

July 6 – Reuters (Ella Cao, Bernard Orr and Ziyi Tang): “Goldman Sachs' downgrade of some major Chinese lenders to ‘Sell’ ratings is based on ‘pessimistic assumptions,’ state-backed Securities Times said…, as worries over the banking sector deepen amid a rocky economy. ‘It is not advisable to be bearish on the fundamentals of Chinese banks based on pessimistic assumptions, and to a large extent there is a misinterpretation,’ the newspaper said. Goldman… downgraded Agricultural Bank of China (AgBank) from ‘Neutral’ to ‘Sell’, while cutting Industrial and Commercial Bank of China (ICBC) and Industrial Bank from ‘Buy’ to ‘Sell’.”

July 6 – Bloomberg: “Chinese banks have stopped buying bonds issued in the Shanghai free trade zone after regulators increased scrutiny of the $18 billion market mostly used by the nation’s local government financing vehicles, according to people familiar... The People’s Bank of China in May told lenders that they can only buy notes sold in the China (Shanghai) Pilot Free Trade Zone if the issuers have genuine business operations in the Area…”

July 7 – Dow Jones: “China's foreign-exchange reserves rose in June from a month earlier, following a one-month decline… Foreign-exchange reserves rose by $16.5 billion to $3.193 trillion in June, said the People's Bank of China.”

Central Banker Watch:

July 4 – Reuters (Karin Strohecker and Vincent Flasseur): “The world's major central banks delivered in June the biggest number of monthly interest rate hikes year-to-date, surprising markets and flagging more tightening ahead as policy makers grapple to get the upper hand in their battle against inflation. Seven of the nine central banks overseeing the 10 most heavily traded currencies that met in June hiked rates, while two opted for no change… Both Norway and the Bank of England surprised markets last month with a larger-than-expected 50 bps move, while Canada and Australia resumed their rate hiking cycles. Sweden, Switzerland and the European Central Bank also tightened policy…”

July 6 – Bloomberg (Alexander Weber and Sonja Wind): “The European Central Bank will have to keep interest rates at restrictive levels for an extended period to get inflation under control, Governing Council member Joachim Nagel said. While it’s too soon to say how much further borrowing costs will have to rise, it’s clear that the ECB’s historic tightening campaign must continue, the Bundesbank President said… ‘Interest rates will probably have to remain at a higher level for longer,’ he said, with underlying inflation in the euro zone remaining a source of concern. Where exactly they will settle will be decided ‘based on the data.’”

July 4 – Reuters (Stella Qiu): “Australia's central bank… held interest rates steady saying it wanted more time to assess the impact of past hikes, but reiterated its warning that further tightening might be needed to bring inflation to heel. Wrapping up its July policy meeting, the Reserve Bank of Australia (RBA) kept its cash rate at an 11-year high of 4.10%...”

Global Bubble Watch:

July 7 – Bloomberg (Randy Thanthong-Knight): “Canada’s labor market bounced back in June, more than offsetting losses from a month earlier, keeping pressure on the Bank of Canada to raise interest rates again next week. The country added 60,000 jobs…, while the unemployment rate rose to 5.4%, the highest since February 2022… The figures beat expectations for a gain of 20,000 Positions…”

July 7 – Bloomberg (Jennifer Creery): “Taiwan’s exports plunged in June at the fastest pace since 2009, exacerbating concerns about the slump in global demand for electronics and its impact on the economy. Overseas shipments plummeted 23.4% to $32.3 billion last month compared to a year earlier…”

July 4 – Bloomberg (Tracy Withers): “New Zealand house prices fell by the most in eight months in June… Values fell 1.2% from May and have now declined for 15 straight months, CoreLogic New Zealand said... From a year earlier, prices dropped 10.6% compared with 10.2% through May. Rising home-loan interest rates and a slowing economy have pushed buyers to the sidelines, driving property prices sharply lower over the past year and a half.”

Europe Watch:

July 3 – Financial Times (Leila Abboud and Adrienne Klasa): “Fires of unrest burned across France, protests gripped cities over the fatal police shooting of a teenager but, for Marine Le Pen’s far-right party, the moment had arrived for a recruitment drive. ‘Restore order to France!’ said one email attempting to attract new members on Sunday, illustrated with a photograph of policemen in riot gear marching through smoke. The Rassemblement National party message was part of a push by Le Pen and her allies to capitalise on the crisis, attack Emmanuel Macron’s government and showcase their long-held hardline policies on crime and immigration.”

July 5 – Reuters (Jonathan Cable): “Euro zone business activity slipped into contractionary territory last month in a broad-based downturn across the bloc's dominant services industry and a deepening decline of factory output, a survey showed. HCOB's final Composite Purchasing Managers' Index (PMI), compiled by S&P Global and seen as a good gauge of overall economic health, slumped to 49.9 in June from May's 52.8.”

July 5 – Bloomberg (Steven Arons): “Germany’s market for commercial real estate plunged to the lowest level since at least 2017 in the latest sign of the turmoil triggered by soaring interest rates. Deal volumes in the first half of 2023 declined 50% from the previous six months to $16.2bn… The figure was about two-thirds below the average over the past five years. The standstill in Germany mirrors developments across European countries such as Sweden, Ireland and the UK. Commercial property markets have seized as buyers and sellers struggle to agree on pricing.”

Japan Watch:

July 6 – Reuters (Satoshi Sugiyama and Kantaro Komiya): “Japan’s nominal base salary grew at the fastest pace in 28 years in May…, adding fuel to the debate over when the central bank will unwind its ultra-loose monetary stimulus. Global financial markets have been closely watching Japan's wage data, as Bank of Japan Governor Kazuo Ueda regards pay growth as a key gauge to consider in deliberations about a shift in policy. Regular wages rose 1.8% in May from a year before…, the biggest gain since February 1995. The strong base pay growth boosted worker's total cash earnings, or nominal wages, by 2.5% in May…”

July 4 – Reuters (Satoshi Sugiyama): “Japan's service activity maintained a brisk pace of growth in June as the relaxation of pandemic-related restrictions revived consumer demand, a private-sector survey showed… The final au Jibun Bank Japan Services purchasing managers' index (PMI) fell to a seasonally adjusted 54.0 last month from a record-high 55.9 in May.”

Emerging Market Watch:

July 3 – Bloomberg (Kerim Karakaya and Asli Kandemir): “Turkey’s state-run banks re-entered the foreign-currency market on Monday, selling as much as $1 billion by midday to prop up the lira, according to traders. As the currency’s decline deepened after last week’s public holidays, state banks stepped in to prevent it from falling much past 26.07 per dollar, the traders said…”

July 5 – Bloomberg: “The ruble has crashed through what a top government official recently called Russia’s ‘comfort’ zone after a mutiny that briefly threatened President Vladimir Putin’s power compounded months of capital outflows. Russia’s currency weakened on Wednesday to trade close to 91 per dollar after depreciating almost 2% to levels last seen a month after the invasion of Ukraine in February 2022. It’s among the worst performers in emerging markets this year with a loss of about 18%.”

July 6 – Bloomberg (Srinivasan Sivabalan): “As global bond markets sell off once again, investors are landing on emerging markets. The extra yield that traders demand to buy investment-grade dollar bonds in the developing world rather than Treasuries has narrowed to 123 bps, the lowest since October 2007, according to JPMorgan...”

July 6 – Bloomberg (Anuchit Nguyen): “The near implosion of a $2 billion company in Thailand is fueling calls from investors for tighter oversight of the country’s capital markets. In recent months, Thailand’s financial markets have been convulsed by a spate of scandals involving some mid-sized listed companies, a tainted crypto exchange and unexplained gyrations in share prices. Now, a sudden default by wire maker Stark Corp. is leaving holders of about $1.1 billion worth of liabilities facing imminent losses…”

July 3 – Bloomberg (Napat Kongsawad): “Thailand is preparing contingency plans to deal with a potential drought that could last years and squeeze global supplies of sugar and rice. Rainfall across the nation may be as much as 10% below average this monsoon season, and the onset of the El NiƱo weather pattern could lower precipitation even further over the next two years… Thailand is facing widespread drought conditions from early 2024... The dire outlook has prompted Thai authorities to ask farmers to restrict rice planting to a single crop to conserve water…”

Leveraged Speculation Watch:

July 3 – Reuters (Kerim Karakaya and Colleen Goko): “Carry traders betting on emerging-market currencies have been racking up winnings this year. A Bloomberg index that measures carry-trade returns from eight emerging markets, funded by short positions in the dollar, climbed 4.7% in the first half, and is now on track for the best yearly gain since 2017. Mexico’s peso has notched up carry-trade gains of 18%, while Hungary’s forint returned 15.4% and Brazil’s real 14%. The carry trade is a strategy that involves borrowing in countries with low interest rates to invest in higher-yielding assets and currencies.”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 7 – Bloomberg (Aaron Clark): “Global temperatures have hit records for three days this week, raising concerns over the impact of extreme heat and the rapid pace of climate change. The average worldwide temperature reached 17.23C (63F) on Thursday, exceeding records hit on Monday and Tuesday, data from the National Centers for Environmental Prediction showed.”

July 3 – Reuters (Antony Currie): “Just when you thought it was safe to hope interest rates might soon peak, along comes more bad news. It looks likely that the El Nino weather phenomenon has returned, according to… the U.S. National Oceanographic and Atmospheric Administration... Its appearance usually results in, or exacerbates, floods, heatwaves, water scarcity and wildfires, especially in the southern hemisphere. The damage these inflict on crops and infrastructure is inflationary, putting pressure on central banks to tighten monetary policy. If climate change makes such events stronger and more frequent, supply shocks will become embedded.”

July 3 – Bloomberg (Shoko Oda and Isabel Reynolds): “Japan is set to win approval to discharge more than a million cubic meters of treated water from the Fukushima nuclear disaster site into the Pacific Ocean, a contentious plan that’s soured ties with neighbors including China.”

July 4 – Reuters: “Japan is set to begin pumping out more than a million tonnes of treated water from the destroyed Fukushima Daiichi nuclear power plant this summer, a process that will take decades to complete. The water was distilled after being contaminated from contact with fuel rods at the reactor, destroyed in a 2011 earthquake. Tanks on the site now hold about 1.3 million tonnes of radioactive water - enough to fill 500 Olympic-sized swimming pools.”

June 27 – Bloomberg (Naureen Malik): “In the 15 years since the American fracking boom unleashed a torrent of abundant, cheap and domestically available natural gas, the country has leaned into the fuel — and hard. Hundreds of new, state-of-the-art gas power plants have come online with tens of billions in Wall Street backing in what’s now the biggest gas-producing nation in the world… This year, it will make up a record 41% of power production, more than solar, wind, hydro and coal combined. The grid’s newfound reliance on natural gas was for more than a decade hailed as a breakthrough. It’s now one of its biggest vulnerabilities. Although natural gas is often promoted as a ‘bridge fuel’ to span the transition from coal power to renewable energy, the country’s vast network of gas plants, pipelines and the regulations that govern them was largely built without the realities of extreme weather in mind.”

Geopolitical Watch:

July 4 – Associated Press: “China’s Defense Ministry accused the United States of turning Taiwan into a powder keg… with its latest sales of $440 million in military equipment to the self-governing island democracy. The U.S. State Department approved of the sale of 30 mm ammunition and related equipment, along with spare parts for Taiwan’s vehicles, small arms, combat weapon systems, and logistical support items. Chinese Defense Ministry spokesperson Col. Tan Kefei responded that ‘the U.S. ignores China’s core concerns, crudely interferes in China’s internal affairs, and deliberately escalates tensions across the Taiwan Strait.’”

July 6 – Reuters (Lisa Barrington and Jonathan Saul): “The U.S. Navy said it had intervened to prevent Iran from seizing two commercial tankers in the Gulf of Oman…, in the latest in a series of attacks on ships in the area since 2019… The U.S. Navy said that… an Iranian naval vessel had approached the Marshall Islands-flagged oil tanker TRF Moss in international waters in the Gulf of Oman. ‘The Iranian vessel departed the scene when U.S. Navy guided-missile destroyer USS McFaul arrived on station,’ the statement said…”

July 6 – Wall Street Journal (Benoit Faucon): “Iran’s oil exports have hit a five-year high in recent months as the country sells more to China and other countries, adding large volumes of discounted crude to a global energy market already struggling amid concerns over demand. The surge in Iran’s oil supply threatens to upend efforts by Saudi Arabia and other major crude producers to prop up prices by cutting output.”