Friday, July 28, 2023

Weekly Commentary: Nirvana Scenario

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It’s incredible what a mess central bankers have made of things.

July 24 – Bloomberg (Liz Capo McCormick, Michael Mackenzie and Ye Xie): “Listen to Wall Street’s top economists and you’ll hear the same message again and again: The risk of a recession is fading fast. And yet, in the bond market, the traditional warning that a downturn is near — an inversion of the yield curve — keeps getting louder. Ed Yardeni, an economist who’s been covering the market since the 1970s, has an explanation. The yield curve, he posits, is signaling the slowdown in inflation that typically accompanies a recession but not the actual recession itself. He calls this the ‘Nirvana scenario’ — all the gain (an end to nasty price increases for consumers) without much pain (a spike in unemployment or a major hit to the stock market).”

“Nirvana,” “Goldilocks,” “soft-landing” and “immaculate disinflation.” It’s all talk befitting of loose conditions and market exuberance. “Permanently high plateau.” Yet the Fed is keen to wrap up its “tightening” cycle.

Evan Ryser, Market News International: “Financial conditions have been loosening at a fairly steady clip in recent weeks—the dollar, the stock market, et cetera. What does that mean for the Fed being sure that inflation will come down to target?”

Powell: “So, we monitor, of course, financial conditions—broad financial conditions. You’re right, it’s the dollar and equities but—and we’re, of course, very focused on rates and our own policy. We’re going to use our policy tools to—working through financial conditions—to get inflation under control. The implication is we will do what it takes to get inflation down. And in principle, that could mean that if financial conditions get looser, we have to do more. But what tends to happen, though, is financial conditions get in and out of alignment with what we’re doing. And ultimately, over time, we get where we need to go.”

Coming into Wednesday, I thought how Chair Powell handled the financial conditions issue would be the most important facet of this Fed policy meeting. He referred to “tighter Credit conditions” and “pretty tight Credit conditions in the economy.” “The overall picture is of tight and tightening lending conditions.”

There has been some tightening from egregiously easy bank lending. But “pretty tight Credit conditions” for the overall economy is quite a stretch. Indicative of easy Credit Availability, investment-grade spreads (to Treasuries) traded this week to near 17-month (pre-tightening) lows, with high yield spreads declining to 15-month lows.

July 27 – Financial Times (Harriet Clarfelt, Kate Duguid and Nicholas Megaw): “Rising stock prices and falling bond yields have made it so much easier for US companies to raise funds that much of the impact of the Federal Reserve’s interest rate rises has been neutralized… The degree to which the environment has improved in recent weeks is reflected in the National Financial Conditions Index, compiled by the Chicago Fed, touching its lowest point in 16 months… ‘The reality is that financial conditions have loosened — we have [effectively] unwound roughly 450 bps of rate hikes. Financial conditions are enough to take us back to March of last year,’ said Sonal Desai, chief investment officer for Franklin Templeton Fixed Income.”

The Fed Chair stuck with “Balanced Powell.” Relaxed and seemingly carefree – just as markets had hoped. “The inter-meeting data came in broadly in line with expectations.” “I would say monetary policy is working about as we expect.” “The overall resilience of the economy, the fact that we’ve been able to achieve disinflation so far without any meaningful negative impact on the labor market, the strength of the economy, overall that’s a good thing.” “It is a very positive thing that actually the unemployment rate is the same as it was when we lifted off in March of ’22, at 3.6%. So that’s a real blessing, that we’ve been able to achieve some disinflation.”

But hasn’t the economy maintained more momentum than expected? Aren’t higher policy rates having significantly less impact on overall financial conditions than anticipated? And doesn’t economic resilience – and persistently tight labor markets in particular – heighten the risk of second-round inflationary effects? Many of Powell’s comments struck me as inappropriate for the head of a central bank confronting serious inflation and financial stability risks.

The Nasdaq100 ended the week with a y-t-d gain of 44.6%. The Semiconductors (SOX) have returned 53.2%. The Goldman Sachs Short Index has surged 36%. The Nasdaq Industrial Index sports a 2023 gain of 28.8%, the S&P100 25%, the Dow Transports 24.7%, and the S&P500 19.3%. It’s a full-fledged “A.I. Everywhere” and “Magnificent Seven” mania.

The backdrop beckoned for a tougher Powell. He should have directly addressed the significant loosening of conditions, and at least acknowledged signs of market excess. This was certainly not the time to corroborate expectations from such a highly speculative marketplace.

Powell: “The federal-funds rate is at a restrictive level now. So, if we see inflation coming down credibly, sustainably, then we don’t need to be at a restrictive level anymore. We can move back to a neutral level and then below a neutral level at a certain point… And you’d start cutting before you got to 2% inflation too. Because we don’t see ourselves getting to 2% inflation until—you know, all the way back to 2 until 2025 or so.”

Indicative of his hear, speak, and see no evil press conference, Powell punted on what is certainly a pertinent question: “Are you concerned then about a trend of series of big unions, these contracts, pushing wage inflation up?

Powell: “Not for us to comment on contract negotiations. Not our job. Not our role. You know, we monitor these things, and we’ll keep an eye on them. But really, that’s something that’s handled at that level.”

Rising compensation is today a predominant risk to price stability. The Fed’s inability to tighten financial conditions, weaken demand, and cool the hot labor market accommodates “knock-on” secondary inflationary effects.

Powell: “So there’s a long-running debate about the lags between changes in financial conditions and the response to those changes from economic activity and inflation, right? So, we know that in the modern era financial conditions move in anticipation of our decisions, and that has clearly been the case in this cycle. So, in a sense, the clock starts earlier than it used to. But that doesn’t necessarily change the process from that point on, and it’s not clear that it has.”

This is critical subject matter. In his original quote, Friedman stated that “monetary changes” have long and variable lags. Powell in June: “So it’s a challenging thing in economics. It’s sort of standard thinking that monetary policy affects economic activity with long and variable lags. Of course, these days, financial conditions begin to tighten well in advance of actual rate hikes.”

Explaining contemporary dynamics, we can say that monetary policy has highly uncertain and variable effects on financial conditions. Meanwhile, financial conditions, which exert immediate and powerful influence on market perceptions and pricing, have longer and more variable effects on economic activity. More than ever before, the transmission mechanism between monetary policy and the real economy travels through the vagaries of wildly speculative financial markets.

And I would strongly argue that central bank interventions over time have pervasive effects on market perceptions and prices, creating distortions that impair market function. More directly, long periods of artificially low interest rates and repeated market liquidity bailouts (Trillions of QE) crystallize market expectations for ongoing rate cuts and additional rounds of QE.

Powell notes the tightening “clock starts earlier.” More importantly, the loosening clock these days is set off before rate policies have exerted their typical restrictive effects. And this has become fundamental to Bubble Dynamics. The bond market has been conditioned to respond to loose conditions and resulting stock market (and other) excess by pricing probabilities for crisis-response rate slashing and QE purchases. In short, acute system fragility ensures bond yields remain artificially depressed and financial conditions loose irrespective of Fed tightening measures.

The reality is that the Fed has lost further control over monetary management. The March banking crisis confirmed that the so-called “Fed put” would be employed more quickly than ever – irrespective of Fed “tightening.” The resulting short squeeze and unwind of hedges effectively concluded system tightening, unleashing a torrent of liquidity into a highly speculative marketplace.

That financial conditions are now dictated by market Bubble Dynamics comes with major ramifications. I would argue that inflation risks remain elevated, boosting odds that the Fed will be forced to extend rate hikes. And with the inmates running the asylum, the risk of a market melt-up and crash scenario is alarmingly high.

I also expect heightened global market instability. Trillions of speculative leverage globally is positioned based on relatively certain policy and interest-rate differentials. When the major central banks move predictably and in unison, the levered players can operate with the necessary degree of policy clarity. But with markets now increasingly calling the shots, there becomes a problematic degree of uncertainty.

As expected, the ECB raised rates 25 bps this week to 3.75%. President Lagarde scrapped her tough inflation-fighting persona for flighty meeting-by-meeting data dependency. Impressionable markets were quick to price in the likely end to the ECB’s tightening cycle. In contrast to the U.S., European financial conditions are dictated more by traditional bank lending than market-based finance. Tighter European bank lending is not to the same degree offset by market loosening, ensuring greater near-term economic vulnerability. This creates considerable uncertainty regarding prospective policy and interest-rate differentials.

But when it comes to policy uncertainly, the Ueda Bank of Japan is king of the mountain.

July 28 – Financial Times (Kana Inagaki, Leo Lewis and Hudson Lockett): “The Bank of Japan has eased controls on its government bond market, altering a cornerstone of its ultra-loose monetary policy and prompting a surge in the country’s benchmark bond yields to the highest level in nine years. In an unexpected move, the BoJ said it would offer to buy 10-year Japanese government bonds at 1% in fixed-rate operations, in effect widening the trading band on long-term yields. The central bank added that it was technically maintaining its previous 0.5% cap on 10-year bond yields, but this level would be a ‘reference’ rather than a ‘rigid limit’. The move triggered confusion about whether the central bank would make further moves to unwind its easing policy, which has come under pressure this year from inflation that has hit four-decade highs. But the BoJ held its overnight rate at minus 0.1%, saying more time was needed to sustainably achieve its 2% inflation target.”

It's reasonable that the Bank of Japan and its new Governor felt compelled to not let a meeting go by without doing something. So, it tinkered with YCC (yield curve control), cleverly achieving some flexibility without unleashing a panic. Markets nonetheless feel crossed, with Ueda adjusting a policy after signaling no move would be forthcoming. Worse yet, there was a leak the day before the meeting. Ueda only dug a deeper hole, stating the YCC tweak “didn’t represent a step toward normalization” and the “BOJ still sees a long way to achieving price goal.”

With Nasdaq up almost 2% Friday - and the bond market posting solid gains – it’s easy to dismiss the importance of BOJ policymaking. Not so fast. The Nikkei newspaper scoop that the BOJ was to discuss its yield curve control policy broke during Thursday afternoon U.S. trading. Already under pressure, market yields jumped higher. After closing Wednesday at 5.58%, benchmark MBS yields surged to an intraday high of 5.86% on the YCC report, before closing the session up 23 bps to 5.81%.

I’m reminded of a quote from none other than Paul Newman: “If you’re playing a poker game and you look around the table and can’t tell who the sucker is, it’s you.” I can imagine the bond market, these days increasingly contemplative, warily scanning the table.

Powell is essentially telling us he’s fine with loose conditions and a stock market Bubble. Definitely no need for either a jump in unemployment or a recession. Emboldened labor unions and a backdrop conducive to rising compensation expectations are not in the Fed’s purview. The Fed Chair is nailing the key elements of “immaculate disinflation.”

The bond market over recent decades became so conditioned to champion loose conditions that it lost sight that it’s the big loser from entrenched inflation. No amount of “easy money” has been too easy. No deficit too big. No stock market Bubble too extreme. Only faded memories of the old, revered vigilantes.

I’ve been waiting for the backlash. We witnessed last September in the U.K. how quickly bond market deleveraging can spiral out of control. I believe today’s loose conditions and booming stock market raise the odds of upside growth and inflation surprises. This would really gum up Fed policymaking - and bond market stability.

While we’re thinking this through, we can consider the possibility of inflationary Chinese stimulus. I don’t see why speculative fervor won’t return to the commodities space, reversing some disinflationary benefits as speculation shifted decidedly back to financial assets. And there’s the unfolding train wreck in Japan that at any time could unleash global deleveraging.

When I ponder the world, a few choice words come to mind. Nirvana is not among them. It’s frightening to see a major stock market Bubble inflate at this phase of the cycle. We’ve all become numb. On a weekly basis, there are developments that provide reminders of how dramatically the geopolitical backdrop has deteriorated.

July 28 – Reuters (Josh Smith and Hyunsu Yim): “Chinese and Russian officials stood shoulder to shoulder with North Korean leader Kim Jong Un as they reviewed his newest nuclear-capable missiles and attack drones at a military parade in the capital, North Korean state media showed… The widely anticipated parade in Pyongyang the previous day commemorated the 70th anniversary of the end of the Korean War, celebrated in North Korea as ‘Victory Day’… Their appearance at events with the North's nuclear-capable missiles - banned by the U.N. Security Council with Chinese and Russian support - was in contrast from previous years, when Beijing and Moscow sought to distance themselves from their neighbour's nuclear weapons and ballistic missile development.”

For the Week:

The S&P500 gained 1.0% (up 19.3% y-t-d), and the Dow added 0.7% (up 7.0%). The Utilities dropped 2.2% (down 6.1%). The Banks rose 1.5% (down 11.7%), while the Broker/Dealers were little changed (up 14.2%). The Transports jumped 2.9% (up 24.7%). The S&P 400 Midcaps increased 0.4% (up 11.8%), and the small cap Russell 2000 added 1.1% (up 12.5%). The Nasdaq100 advanced 2.1% (up 44.0%). The Semiconductors surged 4.1% (up 52.1%). The Biotechs declined 1.3% (up 1.1%). With bullion slipping $3, the HUI gold equities index dropped 2.7% (up 3.3%).

Three-month Treasury bill rates ended the week at 5.2525%. Two-year government yields increased four bps this week to 4.88% (up 45bps y-t-d). Five-year T-note yields rose nine bps to 4.18% (up 17bps). Ten-year Treasury yields jumped 12 bps to 3.96% (up 8bps). Long bond yields gained11 bps to 4.01% (up 5bps). Benchmark Fannie Mae MBS yields rose seven bps to 5.68% (up 29bps).

Greek 10-year yields increased two bps to 3.81% (down 76bps y-t-d). Italian yields rose four bps to 4.11% (down 58bps). Spain's 10-year yields gained four bps to 3.52% (unchanged). German bund yields added two bps to 2.49% (up 5bps). French yields gained four bps to 3.03% (up 5bps). The French to German 10-year bond spread widened two bps to 54 bps. U.K. 10-year gilt yields rose five bps to 4.33% (up 65bps). U.K.'s FTSE equities index added 0.4% (up 3.3% y-t-d).

Japan's Nikkei Equities Index gained 1.4% (up 25.5% y-t-d). Japanese 10-year "JGB" yields surged 12 bps to 0.57% (up 15bps y-t-d). France's CAC40 increased 0.6% (up 15.5%). The German DAX equities index jumped 1.8% (up 18.3%). Spain's IBEX 35 equities index rose 1.2% (up 17.7%). Italy's FTSE MIB index rose 2.2% (up 24.4%). EM equities were mixed. Brazil's Bovespa index was unchanged (up 9.5%), while Mexico's Bolsa index jumped 2.3% (up 13.4%). South Korea's Kospi index was little changed (up 16.6%). India's Sensex equities index declined 0.8% (up 8.7%). China's Shanghai Exchange Index rallied 3.4% (up 6.0%). Turkey's Borsa Istanbul National 100 index surged 5.7% (up 28.3%). Russia's MICEX equities index rose 3.9% (up 39.7%).

Investment-grade bond funds posted inflows of $1.151 billion, while junk bond funds reported outflows of $376 million (from Lipper).

Federal Reserve Credit declined $28.5bn last week to $8.221 TN. Fed Credit was down $680bn from the June 22nd, 2022, peak. Over the past 202 weeks, Fed Credit expanded $4.495 TN, or 121%. Fed Credit inflated $5.410 TN, or 192%, over the past 559 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $1.2bn last week to $3.430 TN. "Custody holdings" were up $71.4bn, or 2.1%, y-o-y.

Total money market fund assets jumped $28.4bn to $5.487 TN, with a 20-week gain of $593bn (32% annualized). Total money funds were up $897bn, or 19.5%, y-o-y.

Total Commercial Paper declined $6.6bn to $1.174 TN. CP was up $25.1bn, or 2.2%, over the past year.

Freddie Mac 30-year fixed mortgage rates declined eight bps to 6.80% (up 150bps y-o-y). Fifteen-year rates jumped 13 bps to 6.20% (up 162bps). Five-year hybrid ARM rates fell 16 bps to 6.43% (up 214bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 20 bps to 7.38% (up 217bps).

Currency Watch

For the week, the U.S. Dollar Index increased 0.6% to 101.69 (down 1.7% y-t-d). On the upside, the South African rand increased 1.9%, the Mexican peso 1.8%, the Brazilian real 1.1%, the South Korean won 0.5%, and the Japanese yen 0.4%. On the downside, the Swedish krona declined 1.6%, the Australian dollar 1.2%, the Norwegian krone 1.2%, the euro 1.0%, the Swiss franc 0.5%, the New Zealand dollar 0.2%, the Canadian dollar 0.2% and the Singapore dollar 0.1%. The Chinese (onshore) renminbi increased 0.55% versus the dollar (down 3.50%).

Commodities Watch:

July 26 – Bloomberg (Sybilla Gross): “JPMorgan… sees an opportunity in gold ahead of a likely US recession, predicting prices will push past $2,000 an ounce by year-end and hit fresh records in 2024 as interest rates start to fall. Falling real yields in the US will be a ‘significant driver’ for the precious metal when the Federal Reserve starts to deploy rate cuts, which should play out in the second quarter of next year, Greg Shearer, executive director of global commodities research, said…”

The Bloomberg Commodities Index gained 1.0% (down 4.9% y-t-d). Spot Gold was little changed at $1,959 (up 7.4%). Silver declined 1.1% to $24.35 (up 1.6%). WTI crude surged $3.53, or 4.6%, to $80.60 (unchanged). Gasoline jumped 5.3% (up 20%), while Natural Gas fell 2.5% to $2.65 (down 41%). Copper rallied 3.0% (up 3%). Wheat increased 0.9% (down 11%), while Corn declined 0.9% (down 23%). Bitcoin fell $590, or 2.0%, to $29,340 (up 77%).

Global Bank Crisis Watch:

July 27 – Reuters (Pete Schroeder): “U.S. regulators launched an ambitious effort that would order large banks to set aside billions more in capital to guard against risk…, although a lukewarm response from the head of the Federal Reserve raised questions about how the plan might change before its completion. The proposal to raise capital by 16% overall, put forward by a trio of U.S. bank regulators, would overhaul how banks measure the riskiness of their behavior, and in turn how much capital they must hold as a cushion. The Fed, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency all agreed to put the over 1000-page proposal out for public feedback, which the banking industry is already hotly criticizing.”

July 24 – Wall Street Journal (Peter Grant): “Bank regulators are taking a page from their playbook of the 2008-09 financial crisis to help lenders weather the approaching tidal wave of troubled commercial real-estate loans. In a new policy statement issued last month, the Federal Reserve, Federal Deposit Insurance Corp. and other regulators gave banks a road map of how to extend and restructure loans without necessarily having to take losses. The 90-page statement reiterates guidance already in place but also adds to it with a section about short-term workouts. Much of the policy urges flexibility… Banks can work out loans in this way if borrowers have the willingness and ability to repay their debts, the policy states. Regulators are encouraging ‘financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations during periods of financial stress,’ says the policy statement.”

July 25 – Reuters (Niket Nishant, Nupur Anand and David French): “Banc of California and PacWest Bancorp will merge in an all-stock deal to create a bank with $36 billion in assets…, coming together just months after the regional banking sector was mired in crisis. To help fund the combination, the lenders have also agreed to sell $400 million of new shares to private equity firms Warburg Pincus and Centerbridge Partners.”

July 26 – Reuters (Iain Withers, Valentina Za and Jesús Aguado): “Europe's major banks, including Deutsche Bank and Lloyds Banking Group, …pointed to the rising risk of bad loans as the global economy struggles with slow growth and high inflation… The latest flurry of bank earnings in Europe highlighted broader trends in global banking, where investment banks are under pressure due to a deal drought, while higher interest rates are helping profitability in retail banking. Lloyds took a higher charge for troubled loans and missed first-half profit expectations as Britain's economic chills weighed on its finances and upped pressure on management to do more to help savers.”

UK Crisis Watch:

July 24 – Financial Times (Mary McDougall): “The UK is on track to incur the highest debt interest costs in the developed world this year as persistently high inflation and an unusually large proportion of government bonds linked to price rises damage the public finances. The Treasury will spend £110bn on debt interest in 2023, according to… Fitch. At 10.4% of total government revenue, that would be the highest level of any high-income country… Roughly a quarter of UK government debt is in the form of so-called index-linked bonds, whose payouts fluctuate in line with inflation, making the country a huge outlier internationally. Italy has the next highest share with 12% of its bonds tied to inflation, while most countries have less than 10%.”

July 23 – Bloomberg (Jill Namatsi): “UK job vacancies rose for a fifth month, boosting salaries and signaling tightness in the labor market that’s likely to fan inflation… The jobs search site listed 1.06 million vacancies across the UK in June, up 0.78% from the month before but 12% lower than a year ago. It said advertised salaries rose 3.6% from a year ago to £37,807, and the number of days to fill open positions fell to a record low. The figures indicate companies are still struggling to hire the staff they need and are likely to bid up wages, adding to the risks of an inflationary spiral.”

Market Instability Watch:

July 25 – Wall Street Journal (Chelsey Dulaney): “Governments and companies around the world spent decades loading up on trillions of dollars of debt whose interest costs rise and fall alongside inflation. But what served as cheap funding when prices were stagnant has rapidly become more expensive… Governments will pay roughly $2.2 trillion in overall debt interest this year, Fitch Ratings estimates. The U.S. Treasury’s interest cost grew 25% to $652 billion in the nine months through June. Germany’s debt-servicing bill is expected to soar to 30 billion euros this year, or some $33.2 billion, from €4 billion in 2021. Governments had $3.5 trillion in outstanding inflation-linked debt at the end of 2022…, equivalent to about 11% of their total borrowings.”

July 28 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan jolted financial markets by loosening its grip on bond yields in Governor Kazuo Ueda’s first surprise move since taking the helm, a step that will likely spur talk of potential policy normalization to come. The BOJ kept its target for 10-year yields at around 0% but said its 0.5% ceiling was now a reference point, not a rigid limit as it sought to make its ultra-loose monetary policy program more flexible. The bank said it will offer to buy 10-year debt at 1% each day, suggesting an effective doubling of the movement range for yields.”

July 27 – Bloomberg (Lydia Beyoud and Austin Weinstein): “Wall Street’s top watchdog is re-invigorating his push to boost regulation of leveraged trading in US Treasuries, which he says poses an acute risk to financial stability… He called Treasuries the ‘base of what everything else is built on in our capital markets.’ He said that driving more trading to clearinghouses could reduce risk. ‘We keep seeing jitters in this market,’ he said. ‘What we’re looking at is ensuring that the firms making markets, acting as dealers, actually register as dealers.’ Since the 2008 financial crisis, clearinghouses have been a growing fixture of US financial markets. Still, despite their growth, only a fraction of Treasuries transactions go through them, Gensler has said.”

July 24 – Bloomberg (Alex Harris): “Wall Street’s ravenous appetite for government bills is about to be tested once again, as the Treasury is likely to further ramp up the size of oncoming auctions to rebuild its decimated cash buffer. In the wake of Washington’s agreement last month to suspend the debt limit until 2025, Treasury has issued roughly $814 billion in securities on net in order to juice its cash balance. So far, investors have easily digested the first wave of supply, with money-market mutual funds absorbing roughly two thirds of the issuance by yanking $400 billion from the Federal Reserve’s overnight reverse repurchase agreement facility. Combined with the record amount sitting on primary dealers’ balance sheets, it’s allowed Treasury to sell so much paper without distorting the very front end of the curve.”

July 25 – Financial Times (Brooke Masters): “US retirement plan participants have become markedly more gloomy in the past two years about their ability to save for old age, according to a new BlackRock study… The report by the $9.4tn money manager found that the share of US retirement savers who feel they are ‘off track’ has more than doubled since 2021 to 24%. The share who feel ‘on track’ has fallen 13 percentage points from a 2021 peak to 56%, the lowest level since the survey began eight years ago. Nearly 30% of all retirement savers now plan to work for longer because of economic conditions, according to the survey.”

Bubble and Mania Watch:

July 25 – Bloomberg (Farah Elbahrawy): “There are so many bulls in the US stock market that any disappointment on the economy or earnings poses a risk to the rally, according to Citigroup Inc. strategists. Investor exposure to the S&P 500 remains extended and one-sided, even after bullish momentum has waned in recent weeks, a team including Chris Montagu said. About $10.7 billion of long positions on futures closed out last week, leaving net long positions at over $70 billion…”

July 27 – Bloomberg (Sonali Basak): “An ‘explosion of private debt’ is starting to fuel transactions after a prolonged dealmaking slump, according to Lazard Ltd. Chief Executive Officer Ken Jacobs… ‘You have this massive source of capital in private capital now,’ Jacobs said… ‘The growth of the private credit markets has really supercharged the ability of companies to get financing.’ Lazard is betting that a boom in companies raising money for private debt vehicles will help fill the void left by banks with constrained lending capacity. Jacobs said he expects that more readily available financing will fuel an uptick in mergers, while companies restructuring their finances may avoid bankruptcy, given the willingness of private debt firms to provide more capital.”

July 27 – Bloomberg (John Sage): “Demand for private credit rebounded globally in the second quarter, with 34 new funds raising $71.2 billion, more than double the previous three months, according to… Preqin. European managers stood out, luring $33.8 billion, a nearly seven-fold increase compared to last quarter and just shy of the $36.4 billion raised by North American funds…”

July 24 – Wall Street Journal (Corrie Driebusch): “IPO investors have moved from a fear of losing money to a fear of missing out. Last week, Oddity Tech, the parent of direct-to-consumer beauty brand Il Makiage, staged a wildly successful stock-market debut, signaling that after an 18-month quiet period, the IPO market could be on the cusp of a revival. In the past several weeks, the major barriers to a resurgence in initial public offerings have lifted. U.S. stocks are climbing toward new 52-week highs, volatility is down, inflation has eased and, perhaps most important, investors are making speculative bets again.”

July 26 – Wall Street Journal (By Chris Cumming): “Private equity’s fundraising slump deepened in the second quarter, as tighter financial conditions made investors reluctant to commit more money to debt-fueled buyouts. Private-equity firms globally raised $106.7 billion in the three months ended June 30, down 35% from the same period last year, according to… Preqin. Firms closed 166 funds during the period, a 53% decline. The amount raised is the industry’s lowest quarterly total since the second quarter of 2018.”

July 24 – Bloomberg (Natalie Wong): “Blackstone Inc.’s $68 billion real estate trust agreed to sell Simply Self Storage to Public Storage for $2.2 billion as the property vehicle grapples with investor withdrawals and upheaval in the commercial real estate sector.”

July 24 – Bloomberg (John Gittelsohn and Patrick Clark): “Cerberus Capital Management and Highgate missed two months of payments on a $415 million loan for 30 Courtyard by Marriott hotels, another sign of spreading trouble in commercial real estate.”

Ukraine War Watch:

July 24 – Reuters (Andrew Osborn): “Russia spoke of taking harsh retaliatory measures against Ukraine after two drones damaged buildings in Moscow early on Monday, including one close to the Defence Ministry's headquarters, in what it called a brazen act of terror. Nobody was hurt in the attack, of which a senior Ukrainian official said there would be more, but one drone struck close to the Moscow building where the Russian military holds briefings on what it calls its ‘special military operation’, a symbolic blow which underscored the reach of such drones.”

July 24 – New York Times (Jenny Gross and Patricia Cohen): “For shipping companies looking for a way to bring Ukrainian grain to global markets, the options keep dwindling, escalating a trade crisis that is expected to add pressure on global food prices. Russia last week pulled out of an agreement that had allowed for the safe passage of vessels through the Black Sea. On Monday it threatened an alternative route for grain, attacking a grain hangar at a Ukrainian port on the Danube River that has served as a key artery for transporting goods while the Black Sea remains blockaded. ‘It’s opening a new front in the targeting of Ukrainian grain exports,’ said Alexis Ellender, an analyst at Kpler, a commodities analytics firm, adding that the route had been considered safe because of its proximity to Romania, a NATO member. ‘This will potentially close off that route,’ he said. It could also raise rates for shipping insurance and further cripple Ukraine’s ability to export grain.”

July 24 – Bloomberg (Áine Quinn, Kateryna Choursina and Daryna Krasnolutska): “Wheat and corn prices surged after Russia attacked one of Ukraine’s biggest Danube river ports, ramping up the risks facing Kyiv’s last major grain export route and global food trade… Reni, along with Izmail, is one of Ukraine’s biggest river ports for grain and is located on the Danube at the border with Romania. Local traders had been expanding capacity there in response to Russia’s sea blockade.”

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

July 26 – Wall Street Journal (Michael R. Gordon and Nancy A. Youssef): “While the world’s attention has been focused on Russia’s invasion of Ukraine, new Russian attacks against U.S. drones have made Syria a fraught arena for military competition between Moscow and Washington. The risk of confrontation was underscored Wednesday when two Russian fighters approached a U.S. MQ-9 Reaper from behind as it flew over northwest Syria. One of the Russian planes then dropped flares that struck the left wing of the drone… Wednesday’s incident followed one on Sunday… ”

July 25 – Wall Street Journal (Michael R. Gordon): “A Russian jet fighter damaged a U.S. MQ-9 Reaper drone over Syria by releasing flares close to the American aircraft, the U.S. military said… The confrontation took place Sunday morning local time and follows similar episodes that U.S. officials say are part of a Russian campaign to pressure American forces to cut back on their military operations in the region.”

July 27 – Reuters (Hyunsu Yim and Josh Smith): “Russia's defence minister accompanied North Korean leader Kim Jong Un to a defence exhibition that featured North Korea's banned ballistic missiles as the neighbours pledged to boost ties… Sergei Shoigu, and a Chinese delegation led by a Communist Party Politburo member arrived in North Korea this week for the 70th anniversary of the end of the Korean War, celebrated in North Korea as ‘Victory Day’.”

July 26 – Financial Times (Christian Davies): “Russia’s defence minister has vowed to strengthen military ties with North Korea on a visit to Pyongyang to mark the 70th anniversary of the Korean war armistice, as the two countries seek to deepen relations in the wake of Moscow’s invasion of Ukraine… After meeting his North Korean counterpart on Wednesday, Shoigu noted the two countries’ ‘common border and rich history of co-operation.’ ‘I am convinced that today’s talks will help strengthen co-operation between our defence agencies,’ he said…”

July 26 – Reuters (Josh Smith): “After years of pandemic isolation, North Korea has invited its friends back this week, hosting senior Chinese and Russian delegations for 70th anniversary commemorations of the Korean War and the struggle against the United States and its allies. The visiting dignitaries, which include Russian Defence Minister Sergei Shoigu and Chinese Communist Party Politburo member Li Hongzhong, are expected to be presented with one of North Korea's signature events: a massive military parade showcasing its latest weaponry. Analysts say the spectacle will likely include the North's nuclear-tipped missiles banned by the United Nations Security Council, where Russia and China are permanent members. The visits… come as Pyongyang has looked to deepen its ties with Beijing and Moscow, finding common ground in their rivalries with Washington and the West.”

De-globalization and Iron Curtain Watch:

July 27 – Financial Times (Attracta Mooney, Aime Williams and Edward White): “China has obstructed G20 climate negotiations, refusing to debate crucial issues such as greenhouse gas emissions targets, according to several people familiar... The people said Beijing’s stance was backed up by Saudi Arabia, putting in jeopardy hopes of concluding an agreement on ending fossil fuel use and boosting renewable energy. ‘I’ve never seen such wrecking tactics employed at a multilateral meeting before,’ said one person at the negotiations… Another person familiar with the talks described the Chinese negotiator at the talks… as a ‘one-man wrecking ball’.”

July 28 – Wall Street Journal (Chun Han Wong and Drew Hinshaw): “After three years of Covid isolation, Chinese leader Xi Jinping is planning a blowout bash for his signature Belt and Road infrastructure initiative. The R.S.V.P.s aren’t exactly rolling in. European countries, in particular, are skipping the festivities, a reflection of souring relations between the continent and China. Beijing had hoped that Europe would plug into its Belt and Road network of global trade and transportation links, but European leaders are backing away, sharing Washington’s wariness about increasing their economic dependence on China.”

July 27 – Financial Times (Sarah White and Nic Fildes): “French president Emmanuel Macron has warned against ‘a new imperialism’ in the Pacific on a visit to the region, where China has been extending its influence with security and trade pacts. In a speech on the island of Vanuatu…, Macron said the Indo-Pacific region’s sovereignty was being undermined by ‘predatory big powers’ and that their interference was growing. ‘In the Indo-Pacific and especially in Oceania a new imperialism is appearing, and new power logics which threaten the sovereignty of numerous states, often the smallest and most fragile,’ Macron said.”

Inflation Watch:

July 28 – Bloomberg (Paulina Cachero): “Affordable homes for first-time buyers have disappeared from the US real estate market. With mortgages rates near 7%, affording the record $243,000 price tag on the average entry-level home in the US is increasingly out of reach for first-time buyers — and that’s if a starter home can even be found. First-time homebuyers must now earn $64,500 a year to ensure the cost of an average entry-level home doesn’t exceed 30% of their income... That’s up from $57,222 a year ago.”

July 27 – Bloomberg (Chunzi Xu): “Gasoline prices in the US surged to their highest level since November, a blow to drivers and a challenge for President Joe Biden. Average retail gasoline prices have increased almost 12 cents in the past three days to $3.714 a gallon…, the second-highest for this time of year over the past decade, lower than only last year… The gains have been spurred by an extended outage at a major Gulf Coast refinery that’s threatening to drain already-low stockpiles.”

July 26 – Bloomberg (Elizabeth Low, Chunzi Xu and Rachel Graham): “The price of gasoline is starting to surge everywhere, an inflationary omen for central banks and governments the world over. Futures just soared to a nine-month high in New York, sending shock waves through to the pump, while prices have also been rising in Asia. Markets for the motor fuel have tightened worldwide due to a combination of unexpected refinery outages plus lower-than-normal stockpiles in key storage hubs such as the US Gulf Coast and Singapore for this time of the year. In global energy markets, it’s telling that while crude oil futures are little changed year-to-date, US gasoline contracts have rallied by more than 20%.”

July 28 – CNBC (Jeff Cox): “Inflation showed further signs of cooling in June, according to a gauge released Friday that the Federal Reserve follows closely. The personal consumption expenditures price index excluding food and energy increased just 0.2% from the previous month, in line with the Dow Jones estimate… So-called core PCE rose 4.1% from a year ago, compared with the estimate for 4.2%. The annual rate was the lowest since September 2021 and marked a decrease from the 4.6% pace in May. Headline PCE inflation including food and energy costs also increased 0.2% on the month and rose 3% on an annual basis. The yearly rate was the lowest since March 2021 and moved down from 3.8% in May.”

July 27 – Reuters (Scott Disavino): “U.S. power prices rose to their highest in months in a couple of markets as homes and businesses cranked up their air conditioners to escape a brutal heatwave blanketing much of the country this week, stressing electric grids… Grid operators across the country declared hot weather alerts this week and told energy companies to put off unnecessary maintenance so all available generating plants and power lines would ready for service. The California Independent System Operator (ISO) issued an energy emergency alert for Wednesday night, the third in a week…”

July 22 – Bloomberg (Agnieszka de Sousa, Flavia Rotondi, and Tarso Veloso Ribeiro): “As scorching temperatures ravage farms from the US to China, crop harvests, fruit production and dairy output are all coming under pressure. That extreme weather is just one of threats to food supplies that are once again mounting around the world. This week, top rice exporter India banned some shipments of the commodity… Russia quit a deal that allowed Ukrainian grain to flow safely across the Black Sea. On top of that is the recent arrival of the El Niño weather pattern that may cause further damage to agriculture. All of this is renewing concerns about food security and prices, creating a risk that rampant inflation on supermarket shelves will stick around for longer.”

July 24 – Wall Street Journal (Patrick Thomas): “Livestock and crops are sweltering under high temperatures across much of the U.S., adding to the agriculture industry’s costs and threatening production. Chicken and pork producers in southern states are using mist and foggers to keep birds and hogs cool. Cattle are eating less feed in the heat, packing on fewer pounds and potentially costing producers money. Ranch hands and workers are tackling tasks before the sun gets too strong, or after dark. Brad Cotton, a Texas rancher outside of San Antonio, said his cattle have hunkered under shade to stay cool. After a cool and wet spring helped ranchers in the region regrow grass for grazing cattle, the heat is burning up his pastures again, and some of his neighbors are spending more on expensive supplemental feed... ‘It’s been so hot and dry, people are starting to be concerned there may not be enough hay again,’ Cotton said.”

July 25 – Bloomberg (Keira Wright and Anuradha Raghu): “India’s move to ban certain rice exports has sparked some panic buying in various countries, with videos on social media showing bags of the staple food flying off the shelves and long lines outside grocery stores. From the US to Canada and Australia, reports of overseas Indians stocking up are going viral. Some shops have imposed buying limits, while others hiked prices to cash in on the frenzy. Indian restaurants worry about a shortage.”

July 26 – Bloomberg (Elizabeth Low, Chunzi Xu and Rachel Graham): “Rice prices in Asia jumped to the highest level in more than three years after top shipper India banned a hefty chunk of its exports, raising concerns about supplies of the food staple for people around the world. Thai white rice 5% broken, an Asian benchmark, soared to $572 a ton, the most expensive level since April 2020… That’s a 7% increase from two weeks ago. Rice is vital to the diets of billions in Asia and Africa…”

July 22 – Wall Street Journal (Wendy Guzman): “Soaring prices and sugar shortages have makers of candy canes, peanut brittle and lollipops feeling sour. Tight sugar supplies are pushing up candy companies’ costs and, in some cases, cutting into production of sweets, executives said. Candy producers said the root of the problem lies with U.S. agriculture policy requiring that at least 85% of U.S. sugar purchases come from domestic processors, leading to tight supplies and high prices when demand rises.”

Federal Reserve Watch:

July 26 – Bloomberg (Steve Matthews): “The Federal Reserve resumed raising interest rates and Chair Jerome Powell left open the possibility of further hikes, which he emphasized will depend on incoming data… After pausing rate increases in June, policymakers lifted borrowing costs again at their policy meeting on Wednesday for the 11th time since March 2022 to curb inflation. The quarter percentage-point hike, a unanimous decision, boosted the target range for the… funds rate to 5.25% to 5.5%, the highest level in 22 years. While Powell pointed to encouraging signs that the Fed’s rate hikes are working to curb price pressures, he reiterated that policymakers have a long way to go to return inflation to their 2% goal.”

July 26 – Financial Times (Colby Smith): “Federal Reserve chair Jay Powell had a message for global markets… after the US central bank raised interest rates again: no one should doubt its resolve to snuff out stubbornly-high inflation in the world’s biggest economy. That could mean more rate rises this year, Powell insisted… It was a stern warning, but economists and investors were largely unmoved… ‘Nothing in the policy statement or the press conference led me to doubt our view that this will be the last hike of the cycle,’ said Ellen Zentner, chief US economist at Morgan Stanley. ‘The consumer is slowing, jobs are slowing, inflation is slowing and all those big pieces of the economy have been coming in line with our expectations.’”

U.S. Bubble Watch:

July 27 – CNBC (Jeff Cox): “The U.S. economy showed few signs of recession in the second quarter, as gross domestic product grew at a faster-than-expected pace during the period… GDP… increased at a 2.4% annualized rate for the April-through-June period, better than the 2% consensus estimate... GDP rose at a 2% pace in the first quarter… Consumer spending powered the solid quarter, aided by increases in nonresidential fixed investment, government spending and inventory growth… Consumer spending, as gauged by the department’s personal consumption expenditures index, increased 1.6% and accounted for 68% of all economic activity during the quarter.”

July 25 – Yahoo Finance (Josh Schafer): “Consumers are feeling increasingly confident about the current state of the US economy and what's coming in the near future. The Conference Board's Consumer Confidence Index for July hit a reading of 117, the highest level in two years… Economists… had expected a reading of 112. The Expectations Index, which measures consumers' short-term outlook for income, business, and labor market conditions, increased to 88.3 in July from 80 in June… ‘Assessments of the present situation rose in July on brighter views of employment conditions, where the spread between consumers saying jobs are 'plentiful' versus 'hard to get' widened further,’ the Conference Board's chief economist Dana Peterson said... ‘This likely reflects upbeat feelings about a labor market that continues to outperform.’”

July 26 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes fell in June after three straight monthly increases, but the trend remained strong as an acute shortage of previously owned homes underpins demand. New home sales dropped 2.5% to a seasonally adjusted annual rate of 697,000 units last month… May's sales pace was revised lower to 715,000 units from the previously reported 763,000 units. May's sales pace was the highest since February 2022… Last month, new home sales jumped 20.6% in the Northeast and 4.3% in the densely populated South. But they declined 13.9% in the West and tumbled 28.4% in the Midwest… The median new house price in June was $415,400, a 4.0% drop from a year ago. The average house price was nearly $500,000. There were 432,000 new homes on the market at the end of last month, up from 429,000 in May. Houses under construction made up 60.2% of inventory, with those yet to be started accounting for 23.1%. At June's sales pace it would take 7.4 months to clear the supply of houses on the market…”

July 25 – CNBC (Diana Olick): “Home prices in May rose for the fourth straight month on the S&P CoreLogic Case-Shiller home price index, but regional differences are widening… Prices nationally rose 0.7% month to month... The index’s 10-city composite gained 1.1%, and the 20-city composite gained 1%. Prices nationally were still down 0.5% compared with May 2022, but they are just 1% below their June 2022 peak… The 20-city composite dropped 1.7%, the same as the annual decline in April. ‘Home prices in the U.S. began to fall after June 2022, and May’s data bolster the case that the final month of the decline was January 2023,’ said Craig Lazzara, managing director at the S&P DJI.”

July 26 – CNBC (Diana Olick): “Mortgage rates didn’t move at all last week, and are still sitting near a recent high. With home prices continuing to rise, that pushed more potential homebuyers to the sidelines… Applications for a mortgage to purchase a home dropped 3% for the week and were 23% lower than the same week one year ago, when rates were in the mid 5% range. The decline in purchase activity was driven partly by a 10% drop in FHA applications.”

July 24 – Bloomberg (Jonnelle Marte): “Home prices in the US are again on the rise after a brief dip last year, complicating the Federal Reserve’s effort to contain inflation and raising questions about how much further policymakers will have to hike interest rates. Demand for homes around the country continues to outpace supply… While signs of easing price pressures have some policymakers eyeing the end of their tightening campaign, they could end up having to increase rates higher or hold them there for longer if the resilient housing market leads to slower progress on inflation, economists and Fed officials say.”

July 25 – Reuters (Lisa Baertlein and Priyamvada C): “UPS and its Teamsters union have signed a tentative contract deal for about 340,000 U.S. workers at the parcel delivery firm, one week ahead of a threatened strike that could have cost the economy billions and disrupted a quarter of the nation's package shipments. Tuesday's agreement, which must be ratified by union members, cinches another win for transportation labor groups. Railroad, airline and West Coast seaport workers have all seen their bargaining hand strengthened by labor shortages and public support for those who risked their lives early in the pandemic… ‘This contract sets a new standard in the labor movement and raises the bar for all workers,’ International Brotherhood of Teamsters General President Sean O'Brien said.”

July 22 – CNBC (Leslie Josephs): “American Airlines raised its offer for a new pilot contract by more than $1 billion to match a preliminary deal last week between rival United Airlines and that carrier’s aviators. The new offer from American Airlines would bring the four-year offer’s value to around $9 billion, and match United pay rates, backpay and other benefits such as sick time and life insurance… Airlines and pilot unions had been negotiating new deals for years. Unions have won more bargaining power in the wake of Covid as the industry grapples with a prolonged pilot shortage just as travel demand recovered. Delta Air Lines pilots approved a new agreement in March for a deal that includes 34% raises over four years.”

July 22 – Financial Times (Myles McCormick): “Oilfield services groups are feeling the squeeze from a slowdown in activity in the US shale patch as companies scale back on oil and gas drilling. The world’s biggest oilfield services providers…, reported a hit to North American revenues this week amid dwindling demand. ‘During the second quarter, we saw reduced frack activity that resulted in increased white space in our calendar,’ said Chris Wright, chief executive of Liberty Energy… The slide in business for oilfield services providers — seen as a bellwether for the health of the oil and gas industry — is the latest sign of a deceleration in activity in America’s energy heartlands that stretch from west Texas to North Dakota.”

July 26 – Associated Press (Cora Lewis and Tom Krisher): “Consider: A study by the New York Federal Reserve has found that 14% of applicants for auto loans were rejected over the past year — the highest such proportion since the New York Fed began tracking the figure in 2013 — up from 9% in February. Auto-loan applicants, of course, aren’t the only borrowers being turned down in larger numbers these days. In that same June 2022-June 2023 period, applicant rejections for credit cards, mortgages, mortgage refinancings and higher credit card limits all rose, too, according to the New York Fed. Overall, the rejection rate for credit applicants reached 21.8%, the highest level since June 2018.”

July 27 – Wall Street Journal (Rachel Louise Ensign): “Americans locked in ultralow rates on debt such as mortgages and auto loans in the decade-plus that followed the 2008 financial crisis. Though rates on some loans such as credit cards are rising with the Fed’s hikes, a huge chunk of consumer debt carries the low yields on offer a few years ago. That has allowed many households to continue spending… As of the first quarter, only 11% of outstanding household debt carried rates that fluctuated with benchmark interest rates, according to Moody’s Analytics. That metric has hovered around this historically low level for over a decade.”

Fixed Income Watch:

July 23 – Financial Times (Harriet Clarfelt): “America’s $1.4tn risky corporate loan market has been hit by the biggest slew of downgrades since the depths of the Covid crisis in 2020, as rising borrowing costs strain businesses piled high with floating-rate debt. US junk loan downgrades numbered 120 in the quarter to June, according to… JPMorgan, amounting to $136bn — the highest total in three years. Leveraged loans are issued by heavily-indebted companies with non-investment-grade credit ratings, and typically have floating coupons that move with prevailing interest rates.”

July 27 – Bloomberg (Lisa Lee): “Some of the biggest buyers in the $1.3 trillion CLO market are piling into securitizations stuffed full of private debt, propelling a transformation in the asset class that industry observers say is only poised to accelerate. Already investors including Japan’s Norinchukin Bank, one of the world’s biggest buyers of collateralized loan obligations, and NatWest Group Plc are scooping up so-called private credit CLOs… More new entrants are expected to follow suit. That’s a significant change from just a few years ago, when limited visibility into underlying borrowers and a lack of secondary-market liquidity scared off all but the most specialized money managers.”

China Watch:

July 22 – New York Times (Li Yuan): “In the darkest moments of the financial crisis in 2008, former Chinese Premier Wen Jiabao lectured a group of U.S. government officials and business executives in New York. ‘In the face of economic difficulties,’ he said, ‘confidence is more precious than gold.’ The Chinese economy then was teetering. Today it’s sputtering, facing the dimmest prospects in decades, and China’s leaders are learning the hard way exactly what Mr. Wen meant. Beijing unveiled a 31-point set of guidelines on Wednesday to bolster the confidence of the private sector… By now it’s obvious that the country’s economic problems are rooted in politics. Restoring confidence would require systemic changes that offer real protection of the entrepreneur class and private ownership.”

July 27 – Bloomberg (Tom Hancock): “China’s debt-to-GDP ratio rose to a record in the second quarter, although consumers and businesses are borrowing at a slow pace, reflecting low confidence... Total debt — combining the household, corporate and government sectors — climbed to 281.5% of gross domestic product in the second quarter... That was up from 279.7% in the first quarter.”

July 27 – Bloomberg: “China’s economic recovery continued to lose momentum in July, high frequency indicators show, with consumers pulling back on spending and the property market showing no signs of a rebound. Housing sales in the country’s biggest cities continued to fall, car sales contracted and business sentiment, especially among smaller firms, weakened, the data showed. Heat waves and deadly floods hitting various parts of the nation pose another threat to growth, as they could strain power supply and disrupt logistics and production.”

July 24 – Financial Times (Joe Leahy, Ryan McMorrow and Sun Yu): “China’s leaders have vowed to spur consumer spending, tackle unemployment and give more support to the ailing property sector as the world’s second-largest economy makes a ‘tortuous’ recovery from the coronavirus pandemic. But the promises of more stimulus in the second half of the year from the Communist party’s ruling politburo were light on details and unlikely to reassure investors… A readout from a keenly awaited meeting of the 24-member politburo… said it believed that the economic recovery was making ‘tortuous progress’ and it was ‘necessary to actively expand domestic demand’ and ‘expand consumption by increasing residents’ income’… It is necessary to boost the consumption of automobiles, electronic products and home furnishing, and promote the consumption of services such as sports, leisure, and cultural tourism’…”

July 25 – Financial Times (Joe Leahy, Cheng Leng and Andy Lin): “Chinese stocks staged their biggest one-day rally since November after a call by China’s leaders for strong ‘countercyclical’ measures to support the world’s second-largest economy, despite what economists said was a lack of detail in Beijing’s plans. President Xi Jinping’s 24-member politburo, the Communist party’s leading decision-making body, flagged the highly indebted property sector and local governments, as well as lagging domestic demand, at its quarterly meeting… But while the overall message was supportive, economists said it provided few details and no sign of the kind of ‘big bang’ stimulus China has implemented in the past.”

July 23 – Reuters (Ellen Zhang and Bernard Orr): “China's state planner… unveiled measures that seek to promote, encourage and spur private investment in some infrastructure sectors and said it will strengthen financing support for private projects. The latest announcement comes as China last week pledged to improve the private sector, releasing guidelines by the Communist Party and the cabinet as authorities vowed to make it ‘bigger, better and stronger’ amid a flagging post-pandemic economic recovery. The National Development and Reform Commission (NDRC) said… it wants to attract more private capital to participate in the construction of national major projects. The NDRC said a list of sectors ranging from transport, water, clean energy, new infrastructure to advanced manufacturing and modern agriculture will be available for private investors to participate in…”

July 27 – Bloomberg: “China’s central bank called on the financial sector to help fund technology research and M&A deals, the latest in a string of promises to revive a private sector devastated by a two-year regulatory crackdown. A plethora of Beijing officials have in recent weeks talked about measures to prop up private firms, regarded as key to resuscitating a sputtering economy. On Thursday, the central bank asked lenders and financial markets to provide more support for innovation and tech-related acquisitions, and to boost investment in startups.”

July 23 – Bloomberg: “China is seeking private investment in thousands of projects worth a total of 3.2 trillion yuan ($445bn) in Beijing’s latest efforts to improve business sentiment and boost the faltering economy. The National Development and Reform Commission has compiled a list of more than 2,900 projects from local governments that private investors can participate in, Luo Guosan, head of the NDRC’s investment department, told reporters on Monday. The NDRC also promised to improve funding support for the projects.”

July 26 – Wall Street Journal (Brian Spegele): “More than one in five young people in China are jobless. The government casts much of the blame on the job seekers themselves, insisting that their expectations have gotten too high. Young people need to stiffen their spines and embrace hardship, says leader Xi Jinping, who labored in the countryside in China’s Cultural Revolution. If they can’t find jobs they want, they should work on factory lines or engage in poverty relief in rural China. The government’s guidance is ringing hollow with many young people. Growing up in a period of rising prosperity, they were told that China was strong, the West was declining and endless opportunities awaited them. Now, with the urban youth unemployment rate hitting a record of 21.3% in June, their employment frustrations are posing a new challenge to Xi and his vision for a more powerful China. For the estimated 11.6 million college graduates in 2023, having heeded calls by the state to study hard, the prospect of resorting to the physical labor that many of their parents performed is distinctly unappealing.”

July 26 – Reuters (Ethan Wang, Qiaoyi Li and Ryan Woo): “China's industrial profits extended this year's double-digit pace of declines into a sixth month as waning demand took a toll on companies' profit margins… The year-to-date 16.8% fall followed an 18.8% profit decline in January-May, and reinforced a frail economic recovery…”

July 24 – Reuters (Yew Lun Tian and Laurie Chen): “China named veteran diplomat Wang Yi its new foreign minister…, removing former rising star Qin Gang after a mysterious one-month absence from duties barely half a year into the job. Qin, 57, a former aide to President Xi Jinping and envoy to the United States, took over the ministry in December but has not been seen in public since June 25 when he met visiting diplomats in Beijing. The ministry has said he was off work for health reasons…”

July 26 – Bloomberg: “China’s newly appointed central bank Governor Pan Gongsheng comes with a strong record of tackling financial risks, showing he’s unafraid to sacrifice economic growth in order to achieve longer-term stability. From managing the currency to cracking down on the property market, Pan will now have to draw on his decade of experience at the central bank to steer the economy through its current downturn. A key challenge will be balancing calls for more monetary stimulus against the risk of driving up debt in the economy. A former deputy governor at the People’s Bank of China since 2012, Pan, 60, was promoted to the top post on Tuesday…”

July 28 – Bloomberg (Paulina Cachero): “China’s home market has continued to contract, with the total amount of money lent out to buy homes shrinking from a year earlier for the first time on record. The outstanding amount of individual mortgages fell to 38.6 trillion yuan ($5.4 trillion) at the end of June, down 260 billion yuan from the same period a year earlier… That’s the first year-on-year drop in the data going back to 2011. The amount of mortgages also fell almost 1% from the end of March…”

July 27 – Bloomberg: “China Evergrande New Energy Vehicle Group Ltd., reporting financial results for the first time in two years, announced a loss amounting to $11.7 billion for 2021 and 2022 and warned of its ability to continue as a going concern. The electric-vehicle unit of China Evergrande Group suffered a net loss of 27.7 billion yuan ($3.9bn) in 2022, on top of a 56.6 billion yuan deficit a year earlier…”

July 22 – Financial Times (Ryan McMorrow, Joe Leahy and Nian Liu in Beijing and Eleanor Olcott): “Top US consultancies are struggling to attract business in China as Beijing’s national security raids scare away local clients and global investors pull back from dealmaking in the country. Management consultancy Bain is telling new China hires to wait until as late as 2025 to start their jobs, while roughly half of McKinsey staff do not have paid client projects to work on. Boston Consulting Group’s China team has been holding strategy sessions on how to revive its flagging business... In May, China’s state security services said they were investigating the industry for jeopardising national security after they carried out raids on Bain’s Shanghai office and Capvision…”

Central Banker Watch:

July 27 – Financial Times (Martin Arnold in Frankfurt and George Steer): “The European Central Bank has raised interest rates back to their record high, but signalled that eurozone borrowing costs may have peaked. The ECB’s decision… to raise its benchmark deposit rate by a quarter-percentage point to 3.75% matches a high last reached in 2001… Thursday’s widely expected move… came a day after the US Federal Reserve raised rates by the same amount. Yet despite Fed chair Jay Powell’s insistence… that there could be more tightening ahead, investors are increasingly betting these increases will be the central banks’ last… ‘We reiterate our call that in the base case, the ECB — like the Fed — is done raising rates, though there is certainly still a material risk of a further hike,’ said Krishna Guha of Evercore ISI.”

July 27 – Bloomberg (Ben Sills, Alice Gledhill and William Horobin): “Christine Lagarde is confronting how tighter monetary policy is driving the euro-zone economy into the ground in her bid to bring inflation under control. The European Central Bank president… offered a downbeat assessment of a ‘deteriorated’ economic outlook as she delivered a ninth consecutive interest-rate increase and said that the Governing Council is open minded on another potential hike in September. In contrast to the Federal Reserve’s sanguine view…, ECB officials are signaling a more worried tone as they recognize more than ever how their actions are hitting activity.”

Global Bubble Watch:

July 24 – Wall Street Journal (Stella Yifan Xie and Jason Douglas): “Just a few years ago, Chinese money was rippling across the rich world. Chinese investors were making blockbuster deals and snapping up trophy assets, from luxury homes and five-star hotels in New York to a Swiss chemical company and a German robotics giant. That era is over. Chinese investment is retreating from the West as hostility to Chinese capital has grown. Increasingly, Chinese companies are instead spending money on factories in Southeast Asia and mining and energy projects in Asia, the Middle East and South America, as Beijing seeks to cement alliances in those places and secure access to critical resources. The biggest recipient of Chinese investment so far this year is nickel-rich Indonesia… The shift in investment flows shows how China is responding to souring relations with the U.S.-led West, and is strengthening trade and investment links with other parts of the world, in ways that could create new fault lines in the global economy.”

July 28 – Bloomberg (Randy Thanthong-Knight): “Canadian economic momentum decelerated in the second quarter after an unexpectedly strong start to the year. Preliminary data suggest gross domestic product decreased 0.2% in June, the first contraction this year, led lower by the wholesale and manufacturing sectors…”

Europe Watch:

July 24 – Bloomberg (Zoe Schneeweiss): “The euro-area private-sector economy contracted more than anticipated in July, with order inflows and output expectations pointing to the downturn deepening in the coming months, according to S&P Global. The flash Purchasing Managers’ Index for the region stayed below the 50 threshold that indicates growth for a second month, dropping to 48.9 in July from 49.9 a month earlier. That’s the lowest reading since November…”

July 25 – Bloomberg (Alexander Weber): “Demand for loans among companies in the euro zone plunged by the most on record in the second quarter — a clear signal that the European Central Bank’s yearlong campaign of interest-rate hikes is feeding through to the 20-nation economy. The drop, which was ‘substantially stronger’ than lenders expected, came alongside a further decline in demand for mortgages and other consumer borrowing, according to the ECB’s Bank Lending Survey…”

July 28 – Reuters (Maria Martinez and Miranda Murray): “The German economy stagnated in the second quarter of 2023, missing forecasts for modest growth, as weak purchasing power, higher interest rates and low factory order books all weighed on the euro zone's largest economy… There was no quarter-on-quarter change in gross domestic product in seasonally adjusted terms.”

July 24 – Financial Times (Barney Jopson): “Spain was facing an uncertain political future on Monday as the right and left failed to secure a clear path to forming a government even though the opposition People’s party won the most seats in parliament. The deadlock leaves the EU’s fourth-largest economy in limbo and opens the door to weeks or months of messy negotiations over voting alliances — or repeat elections, as occurred in 2015-16 and 2019. Defying the odds, Socialist prime minister Pedro Sánchez put up enough resistance to prevent Alberto Núñez Feijóo’s PP from securing a conservative parliamentary majority in alliance with the hard-right Vox party.”

Japan Watch:

July 25 – Bloomberg (Toru Fujioka): “The International Monetary Fund said Japan’s inflation risks are on the upside, and it recommends the Bank of Japan to be flexible and perhaps move away from its yield curve control program. ‘Our advice for the Japanese authorities is that right now monetary policy can remain accommodating, but it needs to prepare itself for the need to maybe start tightening,’ IMF Chief Economist Pierre-Olivier Gourinchas said… ‘Our recommendation is to be bit a more flexible, and maybe move away from the yield curve control that it has…’”

Leveraged Speculation Watch:

July 21 – Financial Times (Rupak Ghose): “Hedge-fund managers can congratulate themselves: Their industry has matured to the point that they’ve become a cash cow for the rest of the financial sector. Even as dealmaking, commercial real estate and tech sectors have fallen fallow this year, the latest round of bank earnings show that it’s a good business to serve traditional hedge funds. Prime brokerage businesses, which provide financing, capital introduction and other services to hedge funds, have been resilient. Nowhere is this more evident than in the results of prime-brokerage market leader Goldman Sachs. The latter generated around half its revenues in equities in the second quarter from ‘financing’. As the bank said… ‘Equities financing net revenues were a record and primarily reflected significantly higher net revenues in prime financing’. Looking at both equities and its fixed-income, commodities and currencies (FICC) business, Goldman’s markets-financing revenues are on pace for around $8bn this year. To compare, they were $2.6bn in 2013.”

July 23 – Wall Street Journal (Matt Wirz): “Big fund managers that specialize in distressed investing have eagerly watched the yearlong selloff in commercial real estate. Now, they are snapping up battered shares of real-estate investment trusts, historically the province of mom-and-pop investors. The influx of these funds is lifting prices, benefiting individual investors who held on. It is also sparking conflict as hedge funds bid against one another for shares and butt heads with management teams.”

Social, Political, Environmental, Cybersecurity Instability Watch:

July 27 – Bloomberg (Brian K. Sullivan): “New York City and the Northeast are in for their hottest day of the year as oppressive temperatures descend on the eastern and central US, affecting about half the country’s population. Thursday’s high in New York, where an excessive heat warning is in effect, will reach into the mid- to upper 90s and humidity temperatures will feel closer to 106F (41C), the National Weather Service said. Washington’s high is forecast at 99 on Thursday and 100 Friday…”

July 27 – Reuters (Brendan O'Brien): “An intensifying heat wave descended on the eastern United States on Thursday, prompting warnings about the dangers presented by the sweltering heat and humidity in the final days of a record-smashing July around the world. Some 180 million Americans - about half the population of the United States - are under heat watches and warnings, with temperatures and heat index values well above 100 degrees… until at least Saturday…”

July 27 – CNBC (Anmar Frangoul): “Coal consumption increased by 3.3% to hit a fresh record high of 8.3 billion metric tons in 2022, the International Energy Agency said… According to the… organization’s Coal Market Update, demand increased ‘despite a weaker global economy, mainly driven by being more readily available and relatively cheaper than gas in many parts of the world.’ Overall, the IEA said 10,440 terawatt hours were generated from coal in 2022, a figure that accounted for 36% of the planet’s electricity generation. Looking ahead, the IEA said coal consumption in 2023 would remain near last year’s record levels.”

July 25 – Bloomberg (Brian K Sullivan): “Heat searing enough to knock out mobile phones. Wildfire smoke that turns the skies an apocalyptic orange. Flash floods submerging towns in upstate New York and Vermont. This grim procession of recent disasters is being driven in part by climate change. But there’s one particular facet of global warming that’s providing potent fuel to make extreme weather even more intense: record-hot oceans. Global ocean surface temperatures in June were the highest in 174 years of data, with the emergence of the El Niño weather pattern piling onto the long-term trend.”

July 26 – Reuters (Maria Cardona): “The surface ocean temperature in and around the Florida Keys soared to typical hot tub levels this week, amid recent warnings from global weather monitors about the dangerous impact of warming waters on ecosystems and extreme weather events. A water temperature buoy located inside the Everglades National Park in the waters of Manatee Bay hit a high of 101.19 degrees Fahrenheit late Monday afternoon, U.S. government data showed, while other buoys nearby topped 100F and the upper 90s.”

Geopolitical Watch:

July 23 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “On June 24, eight Chinese fighters flew across the Taiwan Strait. Taiwan’s air force scrambled their jets in response, as they do almost every day. But this time, the People’s Liberation Army aircraft flew closer than they have before: right up to what is known as Taiwan’s contiguous zone, a buffer area just 12 nautical miles outside its sovereign airspace, before turning back. The country’s defence ministry warned that any forceful entry into its sovereign airspace or waters would be met with a ‘counterattack in self-defence’… The flights are part of a gradually tightening squeeze the PLA is putting on Taiwan, which both Taipei and Washington, its only quasi-ally, have been incapable of stopping or even slowing down.”

July 24 – Reuters (Jack Kim, Chang-Ran Kim and Kanishka Singh): “North Korea fired two ballistic missiles into the sea off its east coast late on Monday, South Korea's military said, hours after a U.S. nuclear-powered submarine arrived in a naval base in the South. Japan's defence ministry also reported the launch of what it said were two ballistic missiles by North Korea… The launches come amid heightened tensions on the Korean peninsula as South Korea and the United States take steps to increase their military readiness against North Korea's weapons programme with the deployment of U.S. strategic military assets.”

July 23 – Wall Street Journal (Mike Cherney): “At this military firing range in Australia’s north, American jet fighters dropped 500-pound bombs on a hillside. Korean, Australian and American artillery units opened fire soon after. A Japanese surface-to-air missile system stood nearby. The demonstration over the weekend, which involved more than a dozen artillery pieces and aircraft firing for about an hour, helped to kick off a major two-week biennial training exercise involving the U.S. and its allies that officials say is the most expansive in the exercise’s history. The broader scope and increasing complexity of the exercise, called Talisman Sabre, reflect the latest U.S. planning as Washington seeks to deter Beijing from launching military action against Taiwan... To do that, the U.S. is looking to bolster its network of alliances in the region, while improving the ability of the U.S. military to operate seamlessly with friendly nations.”

July 27 – Financial Times (Kana Inagaki): “Japan has warned that deepening military co-operation between China and Russia is of ‘grave concern’ for its security, in the country’s first defence white paper since it set out plans to expand defence spending last year. Beijing and Moscow kicked off their largest joint naval and air exercise in the Sea of Japan earlier this month, underscoring how their collaboration has gained pace following Russia’s invasion of Ukraine. The white paper, which was approved by Prime Minister Fumio Kishida’s cabinet on Friday, also noted that the overall military balance between China and Taiwan was ‘rapidly tilting’ in Beijing’s favour.”

July 23 – Reuters (Ryan Woo): “The Chinese embassy in Japan said on Monday that NATO's plan to expand into the Asia-Pacific violates U.N. rules and hoped Japan, in its interaction with NATO, would refrain from actions that undermine trust among countries in the region.”