Saturday, October 7, 2023

Weekly Commentary: Breaking

Monthly non-farm payroll reports tend to be market moving. Released on the first Friday of the month, the data hits two weeks ahead of options expiration.

Friday’s volatility and upside reversal were not unusual. Especially when market instability has fueled significant hedging and bearish speculative trading, payroll data can be key. With large amounts of outstanding put options, bearish data can spark major selling. But if data is not sufficiently bearish, positioning often leads to a reversal of hedges and bearish positions. And with only two weeks before maturity of front-month options contracts, reversals have the potential to quickly gain momentum as traders rush to liquidate positions quickly losing market value.

I’ll assume the October 20th expiration will again see huge notional value option maturities. With the bond market under major selling pressure and “risk off” gaining momentum, there has surely been huge hedging activity. I would tend to see Friday’s reversal as a short-term technical countertrend move. The stronger-than-expected 336,000 gain in September payrolls was undoubtedly market bearish – though the weaker-than-expected 0.2% gain in Average Hourly Earnings provided a window for a reversal and squeeze dynamics.

Friday’s reversals don’t alter the reality that bond markets are in some serious trouble. Global markets were provided some relief at a critical juncture, but the reversal didn’t erase a week of losses that had traders fearing things were beginning to “break.”

October 4 – Bloomberg (Ye Xie): “Losses on longer-dated Treasuries are beginning to rival some of the most notorious market meltdowns in US history. Bonds maturing in 10 years or more have slumped 46% since peaking in March 2020… That’s just shy of the 49% plunge in US stocks in the aftermath of the dot-com bust at the turn of the century. The rout in 30-year bonds has been even worse, tumbling 53%, nearing the 57% slump in equities during the depths of the financial crisis.”

Ten-year Treasury yields traded Friday at an intraday peak of 4.89% (ended the week at 4.80%), the high since August 2007. The 30-year long-bond traded as high as 5.05%, breaching the 5% level for the first time since August 2007 (before closing the session at 4.97%). Thirty-year fixed mortgage rates jumped 18 bps last week to a 23-year high 7.53%, with a four-week gain of 39 bps.

Market probabilities for a Fed rate increase at the November 1st FOMC meeting jumped to 31% from the previous week’s 19%. But the probability of a hike at the December 13th meeting declined to 17% from 21%. So, odds for one additional rate increased only marginally, remaining near 50%.

October 6 – Bloomberg (Tracy Alloway): “For much of this year, credit investors have largely appeared to shrug off the sell-off in government bonds. While yields in the $10.6 trillion market for corporate debt have been rising alongside those on benchmark US Treasuries, spreads (or risk premiums) had remained relatively sanguine — suggesting credit investors weren’t too worried about the impact of higher rates on this supposedly rate-sensitive asset class. Now, as the yield on the 30-year Treasury reaches heights not seen for decades, that dynamic is changing and a major crack is beginning to emerge in the market’s facade. The correlation between government bond yields and credit spreads on junk-rated debt has turned positive, meaning risk premiums in corporate credit are now moving higher alongside benchmark rates.”

High-yield CDS traded Friday to 516 bps, the high since March, before reversing a notable 24 bps to end the week at 492 bps. High yield CDS had surged 70 bps in 13 sessions. Investment-grade CDS traded up to a four-month high of 82 bps in Friday morning trading, before ending the session at 75 bps.

October 5 – Financial Times (Owen Walker, Ian Smith, Will Louch, Josephine Cumbo, Stephen Gandel, Antoine Gara and Harriet Clarfelt): “A sell-off in global bond markets has pushed borrowing costs to their highest levels in a decade or more. That means potentially heavy losses for banks, insurers, pension funds and asset managers that own trillions of dollars of sovereign and corporate debt after loading up in recent years. Policymakers and investors are wary that the latest round of sharp moves could inflict severe damage on various parts of the financial system. ‘We are watching this . . . very carefully to see if something breaks,’ said Salman Ahmed, global head of macro at Fidelity International.”

Emerging Market CDS traded Friday to a five-month high of 246 bps, before reversing sharply lower to end the week at 232 bps. Mexico CDS traded Wednesday to 140 bps (up from 100bps to begin September), the high since March. After trading as high as 137 bps in early Friday trading, Mexico CDS ended the week at 131 bps. Brazil CDS traded at a four-month high, with prices rising to 201 bps early Friday, only to reverse nine lower to end the week at 192 bps.

De-risking/deleveraging is hammering EM currencies. For the week, the Colombian peso sank 6.3%, the Mexican peso 4.1%, the Russian ruble 3.3%, the Chilean peso 3.3%, the Brazilian real 2.2%, the South African rand 2.0%, the Thai baht 1.7%, and the Indonesia rupia 1.0%.

EM bonds remain under pressure. Colombia yields surged 41bps (12.26%), Romania 28bps (7.16%), Peru 23bps (7.56%), and Hungary 22bps (7.63%).

The spike in EM dollar-denominated bonds runs unabated. Yield surges included Colombia 32 bps (8.70%), Panama 26 bps (7.13%), Saudi Arabia 20 bps (5.76%), Chile 19 bps (6.00%), Turkey 17 bps (8.87%), Indonesia 17 bps (6.02%), Brazil 16 bps (7.00%), Philippines 14 bps (5.62%), Peru 13 bps (6.20%) and Mexico 11 bps (6.56%).

One-month yield spikes include Colombia’s 90 bps, Panama’s 87bps, Chile’s 67bps, Mexico’s 66bps, Peru’s 65bps, Saudi Arabia’s 60bps, Indonesia’s 56 bps, Turkey’s 56 bps, Philippines’ 52 bps and Brazil’s 50 bps.

Global bank CDS prices also confirm escalating “risk off.” Goldman Sachs CDS surged 10 bps to a five-month high 104 bps, Bank of America eight to a four-month high 104 bps, Citigroup five to a five-month high 92 bps, and JPMorgan four to a four-month high 69 bps.

European banks led the global leaderboard for the week. Credit Suisse CDS jumped 11 bps (83bps), Dexia CDS 10 (110bps) and Banco Santander 10 CDS (110bps). The European (subordinated) bank debt CDS index traded up to a five-month high of 196 bps in Friday trading, before reversing sharply to close the week at 182 bps.

“Risk off” continues to pressure European peripheral bonds. Italian 10-year yields traded above 5% last week for the first time since 2012, with yields trading to 5.01% in Friday trading, before reversing 10 bps lower to close the week at 4.91%. Spanish 10-year yields traded above 4% for the first time since 2013, with Portuguese yields rising to a six-year high.

Ominously, Japanese yen trading briefly turned disorderly in Tuesday trading. The dollar/yen pierced the key 150 level, only to reverse violently lower to trade down to 147.43 minutes later. Japanese 10-year JGB yields jumped above 80 bps last week for the first time in a decade.

October 4 – Financial Times (Leo Lewis, Hudson Lockett and William Langley): “Japan’s central bank made unscheduled purchases of government debt on Wednesday as yields on benchmark bonds hit their highest mark in a decade, while a global market sell-off also continued to drive US Treasury yields to 16-year highs. The Bank of Japan offered to buy ¥675bn worth of Japanese government bonds… The BoJ’s offer was part of a total ¥1.9tn ($12.7bn) of JGB purchases across various maturities on Wednesday. The unscheduled part of the offer greatly exceeded market expectations, traders said.”

There was no trading in the onshore renminbi during the Golden Week holiday. The offshore renminbi declined 0.23% versus the dollar, with the Chinese currency less than 1% below multiyear lows.

Notably, China sovereign CDS surged nine to 91 bps, the high since last November. China bank CDS jumped to at least four-month highs. China Construction Bank CDS rose seven to 106 bps, China Development Bank gained seven to 101 bps, Industrial and Commercial Bank rose seven to 106 bps, and Bank of China gained seven to 106 bps.

October 6 – Reuters (Albee Zhang and Zhang Yan and Kevin Yao): “China's foreign exchange reserves fell more than expected in September…, as the U.S. dollar rose against other major currencies. China's reserves - the world's largest - fell $45 billion to $3.115 trillion last month, compared with $3.13 trillion tipped by analysts in a Reuters poll, from $3.16 trillion in August.”

China’s international reserves hoard underpins key market assumptions. Chinese system Credit, bank loans, and M2 money supply have continued to expand at double-digit rates, despite GDP growth slowing to 5% (or less). Moreover, it’s classic late cycle “terminal phase” dynamics, with the runaway expansion of non-productive debt of poor and deteriorating quality.

How can Beijing direct so much risky lending and Credit growth without drawing market angst over the soundness of its Credit and banking systems, the Chinese currency, and financial stability more generally? Because of the perception that China’s massive international holdings provide the resources necessary in the event of a major bank recapitalization and/or problematic capital flight.

Analysts have been much too complacent. The exact numbers are unknown, but China has lent in size to scores of high-risk borrowers around the world (including Sri Lanka, Pakistan, Kenya, and Mongolia to name a few). Beijing has used reserves to capitalize and fund lending institutions that promote China’s global superpower ambitions. How much of their international reserves is available today is an important mystery.

Even assuming most of the $3.115 TN is available, reserve holdings have shrunk significantly compared to overall Credit and the size of China’s economy. For example, in 2014 – with reserves at a peak $4 TN – holdings equated to 39% of GDP and 17% of bank assets. Today, these ratios are down to 16% and about 5%. Or think of it this way: bank loans increased $1.3 TN in 2014, about a third of the $4.0 TN reserve positions. Bank loans expanded $3.3 TN over the past year, somewhat more than the current international holdings.

Unfolding global de-risking/deleveraging clearly has the potential to “break” things. Indeed, an alarming number of dominoes are today aligned. In currency markets, China’s renminbi, Japan’s yen, and EM currencies are vulnerable to disorderly trading. At Wednesday’s intraday highs, 10-year Treasury yields had spiked 30 bps from the previous Friday’s close. At home and abroad, bond trading is turning increasingly disorderly.

It was an ominous week - with the destabilizing trifecta of spiking Treasury (and sovereign) yields, widening Credit spreads (risk premiums), and surging CDS prices. The potential for an escalating war in the Middle East could further darken sentiment. Friday’s 3% intraday rally in the Nasdaq100 came just as the S&P500 was about to penetrate a key technical level. A lot is resting on the shoulders of the big technology stocks, with two weeks to go until October options expiration.

October 4 – Bloomberg (Tatiana Darie): “As the yen continued to weaken over the past week, hitting 150 on Tuesday, hedging costs have soared too. That makes US debt increasingly less attractive, posing yet another threat to plunging bonds. Commonly-used three-month USDJPY hedge cost for yen-based investors have now climbed to ~6%, hovering at the highest in 23 years. That leaves US debt from Treasuries to corporate bonds and CLOs — markets where Japanese investors have typically been big buyers — less attractive.”

For the Week:

The S&P500 recovered 0.5% (up 12.2% y-t-d), while the Dow slipped 0.3% (up 0.8%). The Utilities dropped 3.3% (down 20.6%). The Banks lost 2.8% (down 24.6%), while the Broker/Dealers were unchanged (up 7.7%). The Transports declined 1.1% (up 10.6%). The S&P 400 Midcaps fell 1.9% (up 1.0%), and the small cap Russell 2000 dropped 2.2% (down 0.9%). The Nasdaq100 rallied 1.8% (up 36.9%). The Semiconductors rose 1.2% (up 37.2%). The Biotechs increased 0.4% (down 4.7%). With bullion losing $16, the HUI gold index slipped 0.4% (down 10.4%).

Three-month Treasury bill rates ended the week at 5.3475%. Two-year government yields increased four bps this week to 5.08% (up 65bps y-t-d). Five-year T-note yields jumped 15 bps to 4.76% (up 75bps). Ten-year Treasury yields surged 23 bps to 4.80% (up 92bps). Long bond yields spiked 27 bps to 4.97% (up 100bps). Benchmark Fannie Mae MBS yields surged 21 bps to 6.56% (up 117bps).

Greek 10-year yields increased four bps to 4.38% (down 19bps y-t-d). Italian yields jumped 13 bps to 4.91% (up 21bps). Spain's 10-year yields rose seven bps to 4.01% (up 49bps). German bund yields increased four bps to 2.88% (up 44bps). French yields gained seven bps to 3.47% (up 49bps). The French to German 10-year bond spread widened three to 59 bps. U.K. 10-year gilt yields jumped 14 bps to 4.57% (up 90bps). U.K.'s FTSE equities index fell 1.5% (up 0.6% y-t-d).

Japan's Nikkei Equities Index dropped 2.7% (up 18.8% y-t-d). Japanese 10-year "JGB" yields rose four bps to 0.81% (up 38bps y-t-d). France's CAC40 fell 1.0% (up 9.1%). The German DAX equities index lost 1.0% (up 9.4%). Spain's IBEX 35 equities index dropped 2.0% (up 12.2%). Italy's FTSE MIB index declined 1.5% (up 17.3%). EM equities were mostly lower. Brazil's Bovespa index fell 2.1% (up 4.0%), while Mexico's Bolsa index fell 2.4% (up 2.5%). South Korea's Kospi index lost 2.3% (up 7.7%). India's Sensex equities index increased 0.3% (up 8.5%). China's Shanghai Exchange Index was closed for Golden Week (up 0.7%). Turkey's Borsa Istanbul National 100 index gained 1.6% (up 53.7%). Russia's MICEX equities index increased 0.4% (up 46.0%).

Federal Reserve Credit declined $35.1bn last week to $7.945 TN. Fed Credit was down $956bn from the June 22nd, 2022, peak. Over the past 212 weeks, Fed Credit expanded $4.218 TN, or 113%. Fed Credit inflated $5.134 TN, or 183%, over the past 569 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $12.0bn last week to a four-month low $3.424 TN. "Custody holdings" were up $100bn, or 3.0%, y-o-y.

Total money market fund assets surged $64bn to a record $5.708 TN, with a 30-week gain of $814bn (29% annualized). Total money funds were up $1.130 TN, or 24.7%, y-o-y.

Total Commercial Paper rose $6.8bn to $1.202 TN. CP was down $42bn, or 3.4%, over the past year.

Freddie Mac 30-year fixed mortgage rates jumped 18 bps to 7.53% (up 87bps y-o-y) - the high since December 2000. Fifteen-year rates rose 10 bps to 6.89% (up 99bps) - the high since December 2000. Five-year hybrid ARM rates rose 18 bps to 7.14% (up 178bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 10 bps to 7.88% (up 83bps) - the high since October 2000.

Currency Watch:

October 4 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japanese authorities refrained on Wednesday from disclosing whether they had stepped into the market to prop up the yen and stressed their resolve to act against excess volatility, keeping markets on alert for the chance of yen-buying intervention. After sliding below the psychologically important 150 per dollar mark to its weakest level in a year, the yen strengthened sharply on Tuesday, leading some market participants to believe Tokyo had intervened to support the currency.”

October 4 – Bloomberg (Erica Yokoyama): “Japanese officials are sticking with their strategic silence on currency intervention as speculation swirls over whether the government acted to prop up the yen. The finance minister, the top currency official and the government’s chief spokesman all said Wednesday they wouldn’t comment on whether Japan stepped into markets.”

For the week, the U.S. Dollar Index was about unchanged at 106.12 (up 2.5% y-t-d). For the week on the upside, the Swiss franc increased 0.6%, the British pound 0.3%, the euro 0.1%, and the Singapore dollar 0.1%. On the downside, the Mexican peso declined 4.1%, the Brazilian real 2.2%, the Norwegian krone 2.0%, the South African rand 2.0%, the Australian dollar 0.8%, the Canadian dollar 0.6%, the Swedish krona 0.5%, and the New Zealand dollar 0.1%. The Chinese (offshore) renminbi declined 0.23% versus the dollar (down 5.30%).

Commodities Watch:

The Bloomberg Commodities Index fell 2.2% (down 9.1% y-t-d). Spot Gold dipped 0.8% to $1,833 (up 0.5%). Silver fell 2.6% to $21.60 (down 9.8%). WTI crude sank $7.93, or 8.7%, to $82.86 (up 3%). Gasoline dropped 8.7% (down 11%), while Natural Gas surged 13.7% to $3.33 (down 26%). Copper lost 2.6% (down 10%). Wheat jumped 5.1% (down 28%), and Corn rose 3.3% (down 27%). Bitcoin jumped $1,090, or 4.1%, to $28,000 (up 69%).

Market Instability Watch:

October 2 – Reuters (David Morgan): “The U.S. narrowly dodged its fourth partial government shutdown in a decade…, but the past week exposed the depths of political dysfunction in Washington and particularly within the splintered House Republican caucus. A last-minute decision by Republican House of Representatives Speaker Kevin McCarthy to turn to Democrats to pass a short-term funding bill pushed the risk of shutdown to mid-November… But the mere fact the government came within hours of shutting down - with former President Donald Trump cheering on the idea and just four months after the nation almost defaulted on its $31.4 trillion in debt - raises concerns about Congress' ability to function.”

October 4 – Reuters (Moira Warburton, Richard Cowan and David Morgan): “A handful of Republicans in the U.S. House of Representatives… ousted Republican Speaker Kevin McCarthy, as party infighting plunged Congress into further chaos just days after it narrowly averted a government shutdown. The 216-to-210 vote marked the first time in history that the House removed its leader, with eight Republicans voting with 208 Democrats to remove McCarthy.”

October 4 – Yahoo Finance (Josh Schafer): “The ousting of House Speaker Kevin McCarthy could have ramifications for the stock market. McCarthy's recent moves helped the government reach a short-term deal that delayed a government shutdown and avoided any potential fallout in stocks. Without him, the path to a deal before the new shutdown deadline in November isn't so clear. ‘A leadership vacuum in the House raises the odds of a government shutdown when the current funding extension expires,’ Goldman Sachs' team of economists led by Jan Hatzius wrote… ‘We continue to view a shutdown in Q4 as the base case, likely when funding expires Nov. 17.’”

October 5 – Wall Street Journal (Greg Ip): “The U.S. has long been the lender of last resort to the world. During the emerging-market panics of the 1990s, the global financial crisis of 2007-09 and the pandemic shutdown of 2020, it was the Treasury’s unmatched capacity to borrow that came to the rescue. Now, the Treasury itself is a source of risk. No, the U.S. isn’t about to default or fail to sell enough bonds at its next auction. But the scale and upward trajectory of U.S. borrowing and absence of any political corrective now threaten markets and the economy in ways they haven’t for at least a generation. That’s the takeaway from the sudden sharp rise in Treasury yields in recent weeks.”

October 4 – Bloomberg (Lu Wang): “The US stock selloff is spreading panic among volatility traders at a scale unseen since the regional bank crisis in March. In perverse Wall Street logic, that’s raising hopes that the equity rout is on its last legs. As stock losses gathered pace Tuesday on still-surging Treasury yields, derivatives pros priced in more turbulence in the here and now than in the future. The Cboe Volatility Index, a gauge of implied price swings in the S&P 500 known as the VIX, surged 2.2 points to 19.80, pushing the spot price above that its three-month futures for the first time since the turmoil in US lenders earlier this year.”

October 5 – Bloomberg (Edward Bolingbroke): “Futures traders have record sums riding on the outcome of the Federal Reserve’s November policy meeting. In CME Group Inc.’s federal funds futures market — used to wager on monthly average levels of the interest rate the US central bank sets a target range for — open interest in the November contract soared Wednesday. Defined as the number of contracts in which traders have long or short positions, open interest climbed to nearly 600,000, the most in the market’s three-decade history.”

October 4 – Bloomberg (Yumi Teso and Masaki Kondo): “Japanese government bonds fell further on Wednesday, increasing pressure on the central bank to raise its yield-curve cap and prepare for an end to its negative interest-rate policy… Five-year yields climbed to levels last seen in 2013 and the 10-year equivalent reached 0.8% for the first time since August that year, following similar moves for longer-maturity debt in recent days.”

October 5 – Bloomberg (Felice Maranz): “Investors are increasingly adding a massive surge in the US deficit to their market calculations, further complicating asset calls that have generally been focused on inflation, growth and Fed policy. There’s concern about both supply… and demand... And that dynamic can keep yields elevated and pressure risk assets like stocks and oil. Higher yields are already weighing on equities, particularly growth stocks like big tech. The ‘magnificent seven’ mega-caps — Apple, Microsoft, Amazon, Nvidia, Google, Tesla and Meta —account for nearly a third of the S&P 500 index and are sensitive to moves in 10-year Treasury yields. Bond proxies like utilities and real estate have also been hit.”

September 30 – Wall Street Journal (Spencer Jakab): “Markets can scare even Washington bigwigs straight sometimes, but the latest tumult in stocks and bonds might not get the reaction investors want to see. One time they did was the early 1990s, when bond yields surged during the Clinton administration in response to budget deficits. In fiscal 1992, President George H.W. Bush’s final full year in office, the shortfall hit a then-record $290 billion. Running on a campaign of fiscal rectitude and warning of disaster, Ross Perot shocked the political establishment by winning 19% of the popular vote in that year’s presidential election.”

October 5 – Bloomberg (Garfield Reynolds): “Global bonds are doomed to keep falling unless a sustained slump in equities revives the appeal of fixed-income assets, according to Barclays Plc. ‘There is no magic level of yields that, when reached, will automatically draw in enough buyers to spark a sustained bond rally,’ analysts led by Ajay Rajadhyaksha wrote... ‘In the short term, we can think of one scenario where bonds rally materially. If risk assets fall sharply in the coming weeks.’”

October 6 – Reuters (Sinead Cruise and Iain Withers): “Debt-laden companies across Europe, Middle East and Africa face a $500 billion refinancing scramble in the first half of 2024, a challenge that could kill off many ‘zombie’ businesses even though an expected peak in rates could bring some relief. Businesses facing rising debt costs after years of low rates will have to compete to secure enough cash in the biggest corporate refinancing rush seen for years, just as banks rein in risk ahead of stricter capital rules. Analysis by restructuring consultancy Alvarez & Marsal… shows the value of company loans and bonds maturing in the six-month period is higher than any other equivalent period between now and the end of 2025. A crunch is looming, finance industry experts said…”

Bubble and Mania Watch:

October 6 – Reuters (Samuel Indyk): “The rout in the fixed-income market is causing the ‘greatest bond bear market of all time’, Bank of America Global Research said in a note on Friday, as the peak-to-trough loss in the U.S. 30-year yield hit 50%. In its weekly ‘Flow Show’ report, BofA said bond funds saw $2.5 billion in outflows in the week to Wednesday... Yields on 30-year Treasuries rose above 5% for the first time since 2007 on Wednesday… BoFA's report showed that the current loss in 30-year bonds from the peak in the market in July 2020 to now far outpaces that of any previous bear market, making this one what it calls ‘the greatest of all time’ and the ‘humiliation trade’ right now is buying bonds.”

October 1 – Wall Street Journal (Hardika Singh): “Investors are struggling to make peace with a new reality: Interest rates are likely to remain higher for longer. Stocks have tumbled, government-bond yields have risen and the U.S. dollar has climbed since Federal Reserve officials signaled… they might hold rates near current levels through 2024. Entering the fourth quarter, the S&P 500 is hanging on to a 12% advance for the year, but much of the enthusiasm that characterized markets in the first half has largely disappeared. ‘It’s a whole different mindset,’ said Sandi Bragar, chief client officer at wealth-management firm Aspiriant. ‘Investors knew this was a possibility, but they were choosing to ignore it.’”

October 2 – Bloomberg (Jill R. Shah): “Defaults in corporate private credit will exceed those in the syndicated loan market next year if interest rates remain higher for longer, Bank of America Corp. says. Private debt defaults will reach 5% by early 2024 as portfolios see an estimated one-third of deals come due in the next two-and-a-half years, according to a new report from Bank of America credit strategists Neha Khoda and Dong Ba. That’s compared to an estimated 3% default rate for broadly-syndicated loans in the same environment, they said. ‘Potential problematic situations within private debt remain unaddressed and are likely to surface near term,’ they wrote…”

October 6 – Bloomberg (Olivia Raimonde): “For the past 18 months, Federal Reserve Chair Jerome Powell has frantically been trying to break Americans' borrow-and-spend habits. It’s critical to his fight against inflation. In C-suites across the country, though, CEOs and CFOs aren’t getting the message. Not only have they displayed little desire to pay down debt that's become more expensive after 11 interest-rate hikes, but many of them have heaped more of it on their books, borrowing cash in bond markets to upgrade their operations, expand their businesses and fund share buybacks… even after a spike in long-term bond yields triggered a slowdown in debt sales the last couple weeks, September was still one of the busier months of the year. Companies raised a gross $124 billion in the bond market.”

October 5 – Bloomberg (Katharine Hidalgo and Silas Brown): “Private credit funds have been raking in bonanza profits lately as a result of rocketing interest rates, but their investors are starting to question whether they really deserve so much of the windfall. Firms in this booming $1.5 trillion market typically lend at a floating rate, meaning fund managers get much higher yields from borrowers as base rates soar. This in turn lets funds blast through so-called ‘hurdle rates,’ the point where they can begin to collect profit — or ‘carry’ — on their returns. Now, many investors… are asking for more flexibility on how the carry is calculated because of the perceived unfairness of managers making fortunes just because a central bank hikes rates.”

October 6 – Bloomberg (Janet Lorin): “Massachusetts Institute of Technology’s endowment lost 2.9% on its investments in the year ended in June, the second straight annual drop. The university said… its endowment fund, among the largest of US private colleges, was valued at $23.5 billion, down from $24.6 billion in 2022. The richest colleges, even with their more sophisticated investment operations that include venture capital and hedge funds, performed worse than small endowments in the most recent year.”

Ukraine War Watch:

October 6 – Bloomberg (Natalia Drozdiak, Slav Okov and Irina Vilcu): “The North Atlantic Treaty Organization has an increasingly tricky problem in its backyard: how to confront the spillover from Russia’s war without sparking further escalation. As Ukraine reaps a bumper harvest, Russia is targeting the export routes that run from the ports around Odesa. That’s forcing grain ships on a new path that hugs the Romanian coastline and bringing the threat of attacks closer and closer to NATO’s shores. Romanian radar detected a breach of its territory last weekend, the latest in a string of such incidents, while Bulgaria next door has found drone debris on its soil.”

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

October 6 – Reuters (Guy Faulconbridge): “Russia indicated on Friday that it was moving swiftly towards revoking its ratification of the Comprehensive Nuclear Test Ban Treaty (CTBT) after President Vladimir Putin held out the possibility of resuming nuclear testing. Putin said… Russia’s nuclear doctrine - which sets out the conditions under which he would press the nuclear button - did not need updating but that he was not yet ready to say whether or not Moscow needed to resume nuclear tests.”

De-globalization and Iron Curtain Watch:

October 6 – Wall Street Journal (Chip Cutter, Elaine Yu and Newley Purnell): “Foreign executives are scared to go to China. Their main concern: They might not be allowed to leave. Beijing’s tough treatment of foreign companies this year, and its use of exit bans targeting bankers and executives, has intensified concerns about business travel to mainland China. Some companies are canceling or postponing trips… ‘There is a very significant cautionary attitude toward travel to China,’ said Tammy Krings, chief executive of ATG Travel Worldwide, which works with large employers around the world. ‘I would advise mission-critical travel only.’ Krings said she has seen a roughly 25% increase in cancellations or delays of business trips to China by U.S. companies in recent weeks.”

Inflation Watch:

October 4 – Wall Street Journal (Jean Eaglesham): “Robert Dubie was paying around $1,100 a year to insure his Paradise, Calif., home before it burned down in a wildfire five years ago. He rebuilt it with a host of fire protections, but it costs 10 times as much to insure. He couldn’t get a policy that covers fires, so he turned to California’s insurer of last resort for fire insurance. The cost for that policy is more than $9,600 a year… ‘The insurance is more than my mortgage,’ Dubie said. ‘The cost is astronomical and the coverage is not as good as it used to be.’ He said he and his wife will struggle to keep their home. Hundreds of thousands of people nationally are signing up with state insurers of last resort as home insurers pull back from disaster-prone areas.”

October 3 – Yahoo Finance (Brooke DiPalma): “Another breakfast staple is getting more expensive. Orange juice future prices hit a record high at $3.56 on Tuesday… Since 2020, the cost of frozen orange juice concentrate has soared 270% as weather and disease put citrus in short supply. Florida, the biggest producer of oranges in the US, has been hit especially hard due to the impact of Hurricane Irma and Hurricane Ian in 2022, a freeze last January, and the spread of citrus greening, a bacterial disease…”

Biden Administration Watch:

October 3 – Reuters (David Lawder and Kanishka Singh): “U.S. Treasury Secretary Janet Yellen said… the United States has become overly dependent on China for critical supply chains, particularly in clean energy products and needs to broaden out sources of supply. Yellen… repeated her longstanding view that the United States does not want to decouple economically from China. She said that she has not been ‘a strong believer’ in industrial policy, but that the United States had stood by for too long while other countries built up semiconductor industries with massive subsidies.”

Federal Reserve Watch:

October 6 – Reuters (Ann Saphir): “Federal Reserve officials… indicated little concern that the recent rise in U.S. Treasury yields could imperil a ‘soft landing’ for the economy, and said it could actually help the central bank in its fight against inflation… ‘If we continue to see a cooling labor market and inflation heading back to our target, we can hold interest rates steady and let the effects of policy continue to work,’ San Francisco Fed President Mary Daly told the Economic Club of New York.”

October 3 – Reuters (Howard Schneider): “Federal Reserve officials see rising yields on long-term U.S. Treasury debt as evidence their tight-money policies are working, but for now at least say they are not triggering alarm bells for the economy. Atlanta Federal Reserve President Raphael Bostic agreed the comparatively fast recent rise in the market interest rates paid on U.S. Treasury bonds… was ‘complicated,’ and ‘kind of a funny thing’ that was outside how those rates usually respond to Fed policy.’”

October 4 – Yahoo Finance (Jennifer Schonberger): “Two Fed officials warned Tuesday that interest rates will likely stay high for a long time. Atlanta Fed President Raphael Bostic said… he’s comfortable with rates in the current range of 5.25%-5.5%, but believes rates should be held at current levels well into next year. ‘I think our policy is sufficiently restrictive to get to our 2% target,’ Bostic told reporters. ‘My next decision is not when to cut, but how to assess how rapidly the economy will move to 2%, which is more about monitoring the degree of slope and slowdown and what’s happening on supply side and whether [it's] moving in ways that allow businesses to respond to elevated demands.’”

U.S. Bubble Watch:

October 6 – CNBC (Jeff Cox): “Job growth was stronger than expected in September… Nonfarm payrolls increased by 336,000 for the month, better than the Dow Jones consensus estimate for 170,000 and more than 100,000 higher than the previous month... The unemployment rate was 3.8%, compared to the forecast for 3.7%... Wage increases, however, were softer than expected, with average hourly earnings up 0.2% for the month and 4.2% from a year ago, compared to respective estimates for 0.3% and 4.3%.”

October 3 – Associated Press (Paul Wiseman): “U.S. job openings unexpectedly rose in August, another sign the U.S. labor market remains strong despite higher interest rates — perhaps too strong for the inflation fighters at the Federal Reserve. American employers posted 9.6 million job openings in August, up from 8.9 million in July… Economists had expected only another 8.9 million vacancies. The number of layoffs and of people quitting their jobs — a sign of confidence in their prospects — were both essentially unchanged from July.”

October 4 – CNBC (Jeff Cox): “Private payroll growth tailed off sharply in September, according to an ADP report… that provides a counterweight to other signs that the labor market is still running strong. The payroll processing firm said job growth totaled just 89,000 for the month, down from an upwardly revised 180,000 in August and below the 160,000 estimate from economists…”

October 5 – Reuters (Amina Niasse): “U.S. employers dialed back their planned job cuts in September, especially in the warehousing sector, but workforce reduction intentions were higher on a year-to-date basis amid continued cuts in the technology and retail industries… Announced job cuts by U.S.-based employers totaled 47,457 last month, down about 37% from 75,151 in August, outplacement firm Challenger, Gray & Christmas said... The announced cuts for last month still marked a 58% rise from September 2022.”

October 5 – CNBC (Jeff Cox): “The U.S. labor market held strong as September came to a close, with weekly jobless claims holding around recent lows… Initial filings for unemployment benefits totaled a seasonally adjusted 207,000 for the week ended Sept. 30, up just 2,000 from the previous period and below the… estimate for 210,000. Continuing claims… were little changed at 1.664 million, below the 1.68 million estimate from FactSet. The four-week moving average of claims, which irons out volatility, fell to 208,750, a decline of 2,500.”

October 4 – CNBC (Spencer Kimball): “More than 75,000 workers at Kaiser Permanente — the nation’s largest health-care nonprofit organization — went on strike Wednesday at hospitals and medical offices in five states after the company and labor negotiators failed to resolve a dispute over staffing levels. The Coalition of Kaiser Permanente Unions says the work stoppage is the largest strike of health-care workers in U.S. history.”

October 5 – Bloomberg (Reade Pickert): “The US trade deficit shrank to an almost three-year low in August, reflecting a pullback in American demand for foreign merchandise and a pickup in goods shipments overseas. The shortfall in goods and services trade narrowed 9.9% from the prior month to $58.3 billion… The value of imports declined 0.7%, while exports increased 1.6%.”

October 4 – Bloomberg (Augusta Saraiva): “US mortgage rates last week topped 7.5% for the first since November 2000 and applications for home purchases tumbled to a multi-decade low, illustrating a battered housing market. The contract rate on a 30-year fixed mortgage rose by 12 bps, the most since mid-August, to 7.53%...”

October 4 – CNBC (Diana Olick): “Mortgage rates just continue to climb higher, taking a particularly big leap last week… Applications for a mortgage to purchase a home fell 6% for the week and were 22% lower than the same week one year ago. ‘The purchase market slowed to the lowest level of activity since 1995, as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market’…”

October 4 – Bloomberg (Augusta Saraiva): “Growth in the US service sector moderated in September as a measure of new orders slid to the lowest level this year. The Institute for Supply Management’s overall gauge of services fell by nearly a point to 53.6… While growth in business activity quickened to a three-month high, an almost six-point drop in orders suggests demand for services may be starting to weaken. In August, the measure of bookings reached a six-month high.”

October 3 – Reuters (Nathan Gomes): “Top global automakers… reported a rise in U.S. new vehicle sales for the third quarter, buoyed by resilient demand for latest models and improved supplies. General Motors extended a strong year as it posted an about 21% rise in U.S. sales to 674,336 vehicles, benefiting from demand for its pickup trucks, affordable crossover SUVs and electric vehicles. EV sales jumped 28% in the third quarter from the preceding quarter, the company said. Overall, U.S. new vehicle sales in September were 1.33 million units, with an annual sales rate of 15.67 million units…”

October 5 – Bloomberg (Michael Sasso): “After a brief respite from soaring auto debt, Americans are once again falling deeply underwater on their car loans. Used-car values have tumbled about 16% from the pandemic-driven peaks of early last year, according to the Manheim Used Vehicle Value Index, and negative equity… has been climbing fast. Among new car buyers, those carrying negative equity on their trade-ins were underwater by an average of $5,820 in September. That’s compared to a low of less than $4,100 in late 2021, according to automotive information firm Edmunds.”

Fixed Income Watch:

October 4 – Bloomberg (Carmen Arroyo, Scott Carpenter and Immanual John Milton): “The selloff in government bonds and the Federal Reserve’s tightening message is claiming another victim: the $8 trillion mortgage bond market. Mortgage-backed securities, which repackage home loans backed by the US government, cheapened to some of the widest levels in history in recent weeks… The selloff has brought the asset class near the post-financial crisis record reached in May.”

October 4 – Bloomberg (Amanda Albright): “Investors everywhere grow frustrated by losses, but mom and pop holders in the $4 trillion municipal bond market tend to exacerbate the pain by selling all at once. ‘No market further exemplifies the saying that negative returns beget negative returns better than the muni bond market,’ said Wesly Pate, senior portfolio manager for Boston-based Income Research + Management. He said it’s a ‘self-fulfilling prophecy.’ The problem is that retail investors, unlike institutional buyers who typically have long investment horizons, often start selling municipal bonds when they notice poor performance and then continue unloading securities en masse. Since state and local debt is considered a haven, investors are quick to abandon the sector when they see losses.”

October 3 – Wall Street Journal (Jack Pitcher): “Asset managers have been counting on what BlackRock calls a ‘generational opportunity’ in the bond market, now that yields are at decade-plus highs. Investors ranging from pension funds to retirement savers should be buying longer-term bonds to lock in higher rates, their thinking goes, spurring a flood of inflows to bond funds. BlackRock, for one, has projected assets under management at its bond exchange-traded funds to triple to $2.5 trillion by 2030. There is just one problem: Those flows have yet to materialize. Relentless losses in the bond market have spooked investors who appear hesitant to jump in until they feel more confident that rates have peaked. Investors pulled $78.6 billion from U.S.-based taxable bond funds in the 12 months through August…”

China Watch:

September 30 – New York Times (Keith Bradsher): “China’s giant banking system, the world’s largest, is heavily exposed to the real estate crisis: Nearly 40% of all bank loans are related to property. And pressure is building on those banks as dozens of real estate developers have defaulted or missed payments on overseas bonds, led by China Evergrande, the world’s most indebted developer. The scale of China’s property problems — enormous levels of debt, an oversupply of apartments and consumers increasingly wary of buying — means the government could be forced in the coming years to spend huge sums of money bailing out banks.”

October 5 – Reuters (Xie Yu and Clare Jim): “As developer China Evergrande Group lurched from one crisis to another over the past two years, Beijing avoided directly intervening to rescue what was not too long ago considered one of the country's ‘too big to fail’ enterprises. With the world's most indebted developer now standing at the precipice after authorities launched a criminal investigation into its billionaire founder, some creditors, investors and analysts are now betting on authorities stepping in to manage the fallout.”

October 3 – Bloomberg (John Cheng): “Chinese developer stocks such as Sunac China decline, with analysts saying September’s contracted sales showing no solid recovery and may require more stimulus by authorities. Value of new home sales among the 100 biggest real estate companies fell 29.2% from a year earlier to 404 billion yuan ($55.4bn), narrowing from a 33.9% decline in August, according to preliminary data from China Real Estate Information Corp.”

October 5 – Benzinga: “China SCE Group Holdings Ltd. became the latest in a line of Chinese property developers to default on its debt Wednesday, after the company said that it could not meet interest and principal payments for up to $1.8 billion in senior offshore notes. The bonds were suspended from trading upon the announcement. The company was once ranked 6th in a 2020 survey among China’s mosttrusted property brands.”

October 1 – Financial Times (Edward White and Mercedes Ruehl): “The World Bank has cut its forecast for China’s growth next year and warned that east Asia’s developing economies are set to expand at one of the lowest rates in five decades, as US protectionism and rising levels of debt pose an economic drag. The gloomier 2024 forecasts from the bank underline the mounting concern over China’s slowdown and how it will spill into Asia… Citing a string of weak indicators for the world’s second-biggest economy, the World Bank said it now expected China’s economic output would grow 4.4% in 2024, down from the 4.8% it expected in April.”

October 5 – Wall Street Journal (Dave Sebastian): “Hong Kong’s $4 trillion stock market is having liquidity issues. Trading volumes in the financial hub have slumped over the past three years, reflecting fading investor interest in buying and selling stocks on the city’s exchange. Lower trading activity has also contributed to bigger swings in share prices and has become a sticking point for some Hong Kong-listed companies whose stocks barely trade on some days. That has also made it harder for the exchange to attract listings from global companies. Hong Kong’s stock-exchange operator said in August that ‘the sustained high interest rate environment, continued global economic fragility and weak market sentiment’ were among the reasons for the trading declines.”

October 4 – Bloomberg (Shawna Kwan): “Hong Kong’s government will refrain from selling commercial sites in land tenders this quarter as the office market continues to suffer from high vacancy rates. ‘It’s reasonable for us to pause’ on the sale of commercial plots in the fiscal third quarter ending Dec. 31, Secretary for Development Bernadette Linn told reporters... ‘We see that the vacancy for commercial space is on average at 10% or more.’”

UK Watch:

October 6 – Reuters (William Schomberg): “British house prices fell at the fastest pace since 2009 over the 12 months to September…, echoing other measures of the housing market which have cooled after a jump in interest rates. Halifax said house prices were 4.7% lower last month than in September 2022, compared with a 4.5% annual fall in August. It was the biggest drop since August 2009 when the housing market was still in shock after the global financial crisis.”

Central Banker Watch:

October 6 – Bloomberg (Anup Roy and Ronojoy Mazumdar): “The Reserve Bank of India struck a hawkish policy tone on Friday, saying inflation needs to be tamed and it may take measures to absorb excess cash in the market, sparking a run up in the local bond yields alongside a selloff globally… The jump in India bond yields came alongside worries about surging yields in the US. Treasury yields this week climbed through 5% for the first time since 2007. With inflation still well above the 4% target, Das surprised the market by announcing the RBI was considering selling bonds in order to soak up extra cash.”

Global Bubble Watch:

October 5 – Financial Times (Valentina Romei): “The World Trade Organization has halved its estimate for exports growth around the world this year as manufacturing industries are hit by a slowdown and rising geopolitical tensions cause trade patterns to fragment. The… intergovernmental organisation said… it expected the volume of world merchandise trade to grow by just 0.8%, down from a 1.7% increase which it had forecast in April. Ngozi Okonjo-Iweala, WTO director-general, said the projected slowdown was ‘cause for concern, because of the adverse implications for the living standards of people around the world’.”

October 6 – Bloomberg (Love Liman, Anton Wilen and Christopher Jungstedt): “Sweden’s biggest pension fund parted ways with chairwoman Ingrid Bonde this week, six months after Alecta incurred $2 billion in losses from three failed bets tied to the collapse of Silicon Valley Bank in the US. The departure of Bonde, 63, adds to the growing list of executives who have left the… firm in the wake of the crash.”

Europe Watch:

September 30 – Reuters (Giuseppe Fonte): “Italy aims to raise at least 1% of gross domestic product (GDP), or roughly 21 billion euros ($22.2bn), through asset sales between 2024 and 2026, the Treasury said… The plan is part of Prime Minister Giorgia Meloni's efforts to keep in check the euro zone's second-largest debt pile as a proportion of GDP, while investors keep a close eye on Rome's creaking public finances.”

Japan Watch:

October 5 – Bloomberg (Toru Fujioka and Sumio Ito): “Bank of Japan board members will likely discuss whether to tweak forward guidance along with the yield curve control mechanism when they gather later this month, according to a former executive director in charge of monetary policy. ‘Japan’s long-term yields have already risen to 0.8%,’ Kazuo Momma, currently an executive economist at Mizuho Research & Technologies, said... ‘Even if it’s not stuck at the ceiling of 1%, it will be a topic of discussion whether the current ceiling would be reasonable if there’s more upward pressure going forward.’”

October 2 – Bloomberg (Yoshiaki Nohara and Erica Yokoyama): “Confidence among Japan’s large manufacturers picked up more than expected, while sentiment for non- manufacturers soared to the highest in 32 years in the three months ended in September, as the economy continued to recover from the pandemic.”

EM Watch:

October 4 – Bloomberg (Srinivasan Sivabalan): “A rare anomaly seen during times of extreme stress has returned to emerging markets. The slump in US Treasuries this week has exacerbated a selloff in developing-nation debt, sending the yield on bonds in the Bloomberg EM Aggregate Sovereign Index to a one-year high of 8.93% on Tuesday.”

October 6 – Reuters (Sri Hari N S and Anandita Mehrotra): “Moody's… downgraded Egypt's credit rating by a notch to 'Caa1' from 'B3', citing the country's worsening debt affordability. Egypt has been facing an economic crisis with record inflation and a chronic foreign currency shortage, and a borrowing spree over the last eight years has made external debt repayments increasingly onerous.”

Leveraged Speculation Watch:

September 29 – Financial Times (Laura Noonan and Katie Martin): “Global financial regulators are preparing a clampdown on so-called shadow banking as they confront the unintended consequences of previous waves reform that pushed risks into hidden corners of the financial system. Policymakers have been warning all year — with mounting alarm — about the risks and sizes of bets taken by some hedge funds and private equity houses… In recent weeks, the UK’s top financial regulator has drawn up plans for a probe into private capital valuations, while the Bank of England has declared such ‘non-banks’ to be so important that policymakers should create a new facility to lend directly to them in times of crises. Global watchdogs at the Financial Stability Board have launched a new review that could limit hedge fund leverage and increase transparency on their borrowings. In the US, the Securities and Exchange Commission has brought forward policies on fund transparency so stringent that some are suing in a bid to stop them.”

October 4 – New York Times (Maureen Farrell): “In 2009, as the banking business was on the verge of being reshaped by new regulations in the wake of the great financial crisis, the private equity giant Apollo Global Management found a way to make money off the retirement savings of millions of everyday Americans. Through Athene, an insurer it helped create and later merged with, Apollo acquired portfolios of annuities — a type of insurance policy that guarantees income streams, usually for retirees — from other insurers and used the premiums collected to help expand its lending businesses, from mortgages to aircraft financing. Athene, which now represents about half of Apollo’s business, also issues annuities and has become the biggest U.S. issuer of such policies. Last year, it managed $236 billion of annuity policies and other securities.”

Social, Political, Environmental, Cybersecurity Instability Watch:

October 5 – Reuters (Brian K Sullivan): “Extreme heat is usually associated with drought and wildfires. But across five continents this year, it’s also unleashed a different kind of disaster: deadly flooding. Cities around the world have seen record rainfall 139 times in 2023. A rare hurricane-like storm inundated Libya last month, killing thousands. More than 100 people died across Asia during an intense monsoon season in July. After fatal floods pummeled the US Northeast over the summer, torrential rains paralyzed New York City last week. Soaring temperatures were at the root of all these weather calamities.”

September 30 – Yahoo Finance (Ines Ferré): “Artificial intelligence is expected to have the most impact on practically everything since the advent of the internet. Wall Street sure thinks so. The tech-heavy Nasdaq is up 26% year to date thanks to the frenzy over AI-related stocks. But AI's big breakout comes at a cost: much more energy. Take for example OpenAI's chatbot ChatGPT. Research done at the University of Washington shows that hundreds of millions of queries on ChatGPT can cost around 1 gigawatt-hour a day, or the equivalent energy consumed by 33,000 US households. ‘The energy consumption of something like ChatGPT inquiry compared to some inquiry on your email, for example, is going to be probably 10 to 100 times more power hungry,’ Professor of electrical and computer engineering Sajjad Moazeni told Yahoo...”

October 4 – Financial Times (Attracta Mooney, Steven Bernard, Chris Campbell and Aime Williams): “The world experienced its hottest September ever last month after surpassing the previous record by an ‘extraordinary’ 0.5C, the European earth observation agency said… Scientists at the Copernicus Climate Change Service said 2023 was on course to be the hottest on record, after the average global temperature in September was 1.75C degrees warmer than the pre-industrial period of 1850-1900, before human-induced climate change began to take effect. The monitoring service also found Antarctic sea ice levels remained at record lows for the time of year.”

October 5 – Reuters (Charlotte Van Campenhout): “This year is on track to become the hottest since at least 1940, the European Union's Copernicus Climate Change Service said… Scientists have said climate change, combined with this year's El Nino weather pattern that warms surface waters in the eastern and central Pacific Ocean, have fuelled recent record-breaking temperatures. The Copernicus finding… showed that the global average temperature for January-September was 0.52 degrees Celsius (0.94 degrees Fahrenheit) higher than the average of the climate change service's 1991-2020 reference period, based on its records dating back to 1940.”

Geopolitical Watch:

October 7 – Reuters (Maayan Lubell, Nidal Al-Mughrabi and Ammar Awad): “Gunmen from the Palestinian group Hamas rampaged through Israeli towns on Saturday, killing more than 200 people and escaping with hostages in by far the deadliest day of violence in Israel since the Yom Kippur war 50 years ago. More than 230 Gazans were also killed when Israel responded with one of its most devastating days of retaliatory strikes. ‘We will take mighty vengeance for this black day,’ Prime Minister Benjamin Netanyahu said.”

October 7 – Bloomberg (Ethan Bronner and Gwen Ackerman): “A surprise multifront attack on Israel by the Palestinian group Hamas will likely lead to a massive military retaliation on Gaza and possibly to a wider conflagration with repercussions beyond the Middle East. The flare-up — involving infiltrations, capture of soldiers and civilians, and thousands of rockets — comes at a time of enormous diplomatic sensitivity and a moment of weakness for Israel that analysts have been warning its enemies might seek to exploit. The country is in negotiations with the US and Saudi Arabia on a complex three-way deal in which Washington would offer security guarantees to Riyadh.”

October 6 – AFP: “Train traffic between North Korea and Russia has spiked dramatically following a recent summit between Kim Jong Un and Vladimir Putin, indicating a ‘likely’ transfer of arms... High-resolution satellite imagery reveals at least 70 freight cars at North Korea's border Tumangang Rail Facility…, a number described as ‘unprecedented’ even when compared to pre-Covid levels… The flurry of activity ‘likely indicates North Korea's supply of arms and munitions to Russia’, the report concludes, while adding that tarps covering the shipping containers made it impossible to ‘conclusively identify’ their contents.”