Friday, October 20, 2023

Weekly Commentary: “The Last, Best Hope of Earth”

Please join David McAlvany, Doug Noland, and the McAlvany Wealth Management team for a timely discussion, “Discover the Hard Asset Difference.” Thursday, October 26th, 10:00 am Mountain/Noon Eastern. Click here to register.


Through the fog of war can emerge a degree of clarity. Things seem clearer this week, sadly.

The Israeli/Hamas war is an unmitigated disaster for Gaza, even before what will surely be incredibly intense urban warfare. Already, the human toll suffered by Gaza’s Palestinian population is sufficient to unleash regional unrest and conflict. More warnings from Iran, along with evidence these threats are credible. Tit-for-tat confrontations along Israel’s northern border with Lebanon, as Hezbollah ratchets up sporadic ground attacks and missile strikes into Israel.

Israeli and U.S. militaries this week confronted Iranian-backed militant groups on multiple fronts. Israel struck deeper into Lebanon, while the U.S. military fought off drone attacks in Iraq and Syria, while the Navy neutralized drone and cruise missiles fired from Yemen.

Markets were struck on multiple fronts. Ten-year Treasury yields surged 30 bps this week (to 4.91%), trading early Friday at 4.99% - the high back to July 2007. Alarmingly, the previous week’s safe haven buying completely evaporated. The iShares Treasury Bond ETF (TLT) was hammered 5.0%, while gold bullion surged 2.5% and silver jumped 2.9%. In the conflict’s first two weeks, gold’s 8.1% gain brightly outshines the TLT’s 1.8% decline. As the prospect of global turmoil came into clearer focus this week, the depth of Treasury market troubles turned all the more alarming.

Long-bond yields spiked 32 bps this week to 5.08%, the high back to July 2007. MBS yields surged 29 bps to 6.78%, the high since July 2001. Mortgage rates (daily) reached 8% for the first time since 2000. The iShares Corporate Bond ETF (LQD) lost 2.7%, and the iShares High-Yield ETF (HYG) declined 1.1%.

The ongoing bond rout is global. UK 10-year yields surged 27 bps to 4.65%, with Italian yields trading above 5% for the first time since the 2012 debt crisis. German bund yields jumped 15 bps to 2.89%, the high back to 2011. Australian yields rose 28 bps to 4.46% - also the high since 2011.

The EM dollar-denominated bond bloodbath was unrelenting. Yields were up 33 bps in the Philippines (5.82%), 33 bps in Peru (6.29%), 32 bps in Turkey (9.05%), 32 bps in Panama (7.21%), 31 bps in Mexico (6.65%), 30 bps in Chile (6.15%), 29 bps in Indonesia (6.20%), 28 bps in Colombia (8.70%), and 27 bps in Brazil (7.06%). Notable local currency EM yield spikes included Lebanon 803 bps (109%), Hungary 39 bps (7.63%), Indonesia 35 bps (7.06%), and Czech Republic 33 bps (4.82%).

Everything points to destabilizing de-risking/deleveraging. Yet, most U.S.-based analysts remain narrowly fixated on Fed policy, economic fundamentals, and corporate profits. “Is the Fed done or one more hike?” “Soft or no landing?” It was as if the conventional framework this week shriveled into triviality. There is today momentous geopolitical upheaval unfolding before our eyes, with broadly negative ramifications for securities markets and financial assets – not to mention stability more generally.

If the enemy of my enemy is my friend, what is the “dear friend” “no limits” partner of my enemy? There was more clarity this week. Use of “competitor” to describe our disintegrating relationship with China has lost credibility.

I’m not paranoid, it’s just that everyone’s out to get me. So, Xi transforms his beloved “belt and road” summit into the Xi/Putin “Anti-America, Anti-Democracy Initiative”. Why would Xi Jinping so ardently embrace Vladimir Putin before an audience representing 130 countries? Following Xi’s keynote, Putin spoke in the opening ceremony, before the two dictators shared private meetings. Putin: “All these external factors are common threats, and they strengthen Russian-Chinese cooperation.”

October 18 – Reuters (Guy Faulconbridge): “Rare footage was shown on Wednesday of Russian President Vladimir Putin in Beijing accompanied by officers carrying the so-called nuclear briefcase which can be used to order a nuclear strike. Putin, after a meeting with Chinese President Xi Jinping in Beijing, was filmed walking to another meeting surrounded by security and followed by two Russian naval officers in uniform each carrying a briefcase. The camera zooms in on one of the briefcases. Russia's nuclear briefcase is traditionally carried by a naval officer. Known as the ‘Cheget’ (named after Mount Cheget in the Caucasus Mountains), the briefcase is with the president at all times but is rarely filmed.”

It's worth noting that Russian Foreign Minister Sergei Lavrov was also in Beijing for high-level meetings, and upon departure flew directly to North Korea to meet Kim Jong Un. BBC: “At an official reception on Wednesday, Mr. Lavrov pledged Moscow’s ‘complete support’ for Mr. Kim and accused the US and its allies of unleashing a ‘war against the Russian federation’. He also said he was there to discuss implementing the arrangements made when Mr. Putin and Mr. Kim met last month…”

Team Xi and Putin were out this week to intimidate the U.S., while bolstering their anti-America alliance in the Middle East (and the “global south” more generally). Recall that Iran joined China and Russia’s Shanghai Alliance in July, with the Russian military now equipped with Iranian drones in Ukraine. And a September headline: “China’s Xi Hails ‘Strategic Partnership’ with Syria in Bashar al-Assad Visit.” Mirroring Putin, China has refused to condemn Hamas. Chinese Foreign Minister: “Israel’s actions have gone beyond the scope of self-defense,” calling for an end to “collective punishment.” Putin: “I think that many people will agree with me that this is a vivid example of the failure of United States policy in the Middle East.”

Beijing didn’t receive a market vote of confidence for its big “belt and road” (anti-U.S.) party. The Shanghai Composite sank 3.4% to lows since November. The growth oriented ChiNext Index lost 5.0%, trading to lows since April 2020. The Hang Seng China Financials Index sank 4.5%

October 20 – Bloomberg (Iris Ouyang): “China injected a record amount of liquidity into the markets via a short-term tool, as an indicator for funding costs surged to the highest since April. The onshore yuan edges lower. The People’s Bank of China granted lenders a net 733 billion yuan ($100bn) of cash with the so-called reverse repurchase contracts on Friday. The seven-day repo rate, a gauge of interbank funding costs, surged 24 bps to a six-month high of 2.31%. The PBOC might be seeking to calm sentiment in China’s bond market through its cash injections Friday, said Zhou Hao, chief economist at Guotai Junan International… China bonds have come under pressure recently due to tighter funding conditions.”

At 4.9% (y-o-y), China’s Q3 GDP exceeded expectations. Double-digit Credit growth-induced GDP matters little at this point. China’s Bubble deflation is accelerating and broadening. “China Tells Banks to Roll Over Local Government Debts as Risks Mount.” “China Tells Banks to Extend Local Government Loans Amid Crunch.” “Country Garden Default Is All But Official, Restructuring Looms.” “China Sells Most US Securities in Four Years Amid Yuan Weakness.”

Numbers not easy to comprehend: China’s developers have $12.4 TN of liabilities (Bloomberg) – of which $124bn are currently in default. Local government debt totals $12.6 TN (Reuters).

This week from the Wall Street Journal: “A Financial Crisis in China Is No Longer Unthinkable.” Well, crisis appears probable and perhaps imminent. Bubble deflation is accelerating and broadening.

October 20 – Bloomberg (George Lei): “The exodus of money from China has intensified in September with few signs of abating in recent weeks… China’s FX regulator, SAFE, released a disturbing set of data on Friday: onshore banks net sold foreign currencies worth $19.4 billion to their clients in September, the most since November 2018… Banks sent a net of $53.9 billion abroad on behalf of clients, the biggest monthly outflow since January 2016, shortly after PBOC engineered a one-off depreciation in August 2015.”

With the Xi/Putin agenda now unambiguous, why would western finance even view China as investable? And as Middle East developments expose the threat posed by the China/Russia/Iran/North Korea anti-U.S. axis, I’m not sure why money wouldn’t head for the exits? Links have become clearer. China’s wealth bolsters Russia and its war machine, while Putin bolsters North Korea, Syria, and Iran - with Iran propagating the likes of Hamas, Hezbollah, Islamic Jihad, the Houthis, and myriad militias throughout Syria and Iraq. Why would the West be content to bolster China the Enabler?

Actual amounts and liquidity profiles are unclear, but China still has formidable international reserves to support its currency. But for how long will Beijing be willing to burn through valuable holdings before resorting to onerous capital controls and other measures?

October 15 – Reuters (Leika Kihara): “Hiroshi Watanabe, Japan's former top currency diplomat, recalls how Chinese policymakers eagerly studied ways to avert a Japan-style burst of an asset bubble that led to prolonged deflation and economic stagnation - until around 2015. ‘Then they stopped. In the past seven to eight years, they seem to be ignoring everything they learned,’ said Watanabe, who retains close ties with incumbent policymakers. ‘Under the Xi administration, China probably shifted its attention away from economics,’ he told Reuters.”

Xi should have carefully studied Karl Marx’s theses on Credit (i.e., “Credit and Fictitious Capital”). Fixated on achieving global superpower status, Xi Jinping accommodated history’s greatest Bubble. There will be momentous fallout, for China and the world. At the Bubble’s apex, Xi and his dear friends have suffered delusions of grandeur. And as the Bubble now deflates, impetus for New World Disorder will grow only more forceful.

October 19 – Bloomberg (Hema Parmar): “Elliott Investment Management founder Paul Singer said the world is much more perilous than markets are pricing in and that investors should be more worried. ‘The world is now completely dependent on the good sense of leaders to avoid an Armageddon,’ he said, questioning just how much ‘good sense’ is coming from Russia, China and Iran… Compared to the geopolitical chaos of recent weeks, Singer said, the markets have remained relatively calm. ‘It’s hard to avoid the conclusion that investors aren’t nearly as worried as they should be,’ he said.”

“I picked up on the initial words of the President when he said that we were at an ‘inflection point’. And from someone who spent four decades in uniform, I firmly believe this is one of the most dangerous times in our history. The things he pointed out: first of all, in just summary, others are seeking our help. He tied both Israel’s actions and Ukraine’s actions to a fight for survival; a fight for protection of their people; a fight for freedom and dignity. And then what he also said was that others are watching: our friends, our foes, our competitors. What he then did – which I found very moving – was he tied all of that, not to the money, not to what’s expected, and not to the capacity of Americans to help. But he tied it all to what should be our values: our human dignity, our respect for one another, our religious freedoms, and our freedoms writ large. This is an appeal, certainly, and it’s a warning that he’s going to send ‘packages,’ as he called it, to Congress to fund. What it really is – tying back to that inflection point – is saying, this is a time for action. People in Ukraine, people in Israel are depending on us as that beacon of hope he just described. And it’s important that we turn the light on, and we support them as best as possible. Because they reflect who we are as a people.” Lieutenant General (retired) Mark Hertling, commenting after President Biden’s Oval Office address to the American people, CNN, October 19, 2023.

Joe Biden last night made one of the most important speeches we have heard from the Oval Office for years. It was speech that could only have come from that desk, and a message that could not have been broadcast from any other capital but Washington DC. It was a speech in which the Commander-in-Chief of the United States acknowledged what I believe is the reality, that in spite of all its faults, all its anguished introspection, all its absurdities, America is still the world’s greatest power and the last, best hope of Earth. In accepting the responsibilities that go with that role, the president channelled his heroic wartime Democrat predecessor Franklin D. Roosevelt. ‘American leadership is what holds the world together,' he said. He set out to explain why American leadership matters, and why, in Roosevelt’s phrase, the U.S. must once again be the arsenal of democracy…” Boris Johnson, October 20, 2023 (UK Daily Mail)


For the Week:

The S&P500 dropped 2.4% (up 10.0% y-t-d), and the Dow declined 1.6% (down 0.1%). The Utilities fell 2.2% (down 19.5%). The Banks sank 3.7% (down 27.3%), and the Broker/Dealers dropped 2.9% (up 2.7%). The Transports lost 1.7% (up 7.9%). The S&P 400 Midcaps slumped 2.0% (down 1.5%), and the small cap Russell 2000 fell 2.3% (down 4.6%). The Nasdaq100 dropped 2.9% (up 33.1%). The Semiconductors sank 4.0% (up 31.0%). The Biotechs stumbled 4.2% (down 9.8%). With bullion surging $49, the HUI gold equities index advanced 2.3% (down 0.5%).

Three-month Treasury bill rates ended the week at 5.29%. Two-year government yields added two bps this week to 5.07% (up 64bps y-t-d). Five-year T-note yields jumped 22 bps to 4.86% (up 85bps). Ten-year Treasury yields surged 30 bps to 4.91% (up 104bps). Long bond yields spiked 32 bps to 5.08% (up 111bps). Benchmark Fannie Mae MBS yields surged 29 bps to 6.78% (up 139bps).

Greek 10-year yields gained seven bps to 4.36% (down 21bps y-t-d). Italian yields jumped 15 bps to 4.93% (up 23bps). Spain's 10-year yields rose 12 bps to 4.00% (up 49bps). German bund yields jumped 15 bps to 2.89% (up 45bps). French yields rose 15 bps to 3.51% (up 53bps). The French to German 10-year bond spread was little changed at 62 bps. U.K. 10-year gilt yields surged 37 bps to 4.65% (up 98bps). U.K.'s FTSE equities index dropped 2.6% (down 0.7% y-t-d).

Japan's Nikkei Equities Index slumped 3.3% (up 19.8% y-t-d). Japanese 10-year "JGB" yields jumped eight bps to 0.84% (up 42bps y-t-d). France's CAC40 fell 2.7% (up 5.3%). The German DAX equities index lost 2.6% (up 6.3%). Spain's IBEX 35 equities index declined 2.2% (up 9.7%). Italy's FTSE MIB index fell 3.1% (up 15.4%). EM equities were under pressure. Brazil's Bovespa index dropped 2.2% (up 3.1%), and Mexico's Bolsa index fell 2.2% (down 0.4%). South Korea's Kospi index lost 3.3% (up 6.2%). India's Sensex equities index declined 1.3% (up 7.5%). China's Shanghai Exchange Index slumped 3.4% (down 3.4%). Turkey's Borsa Istanbul National 100 index sank 7.4% (up 36.3%). Russia's MICEX equities index dropped 2.4% (up 51.8%).

Federal Reserve Credit declined $9.5bn last week to $7.905 TN. Fed Credit was down $996bn from the June 22nd, 2022, peak. Over the past 214 weeks, Fed Credit expanded $4.179 TN, or 112%. Fed Credit inflated $5.094 TN, or 181%, over the past 571 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $8.0bn last week to $3.433 TN. "Custody holdings" were up $98bn, or 2.9%, y-o-y.

Total money market fund assets dropped $99bn to $5.608 TN, with a 32-week gain of $714bn (24% annualized). Total money funds were up $1.022 TN, or 22.3%, y-o-y.

Total Commercial Paper gained $6.5bn to $1.216 TN. CP was down $71bn, or 5.5%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose eight bps to 7.71% (up 77bps y-o-y) - the high since November 2000. Fifteen-year rates jumped 11 bps to 7.12% (up 89bps) - the high since December 2000. Five-year hybrid ARM rates gained 12 bps to 7.39% (up 168bps) - the high in data back to 2005. Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 22 bps to 8.03% (up 85bps) - the high since September 2000.

Currency Watch:

October 18 – Bloomberg (Yumi Teso and Masaki Kondo): “Options traders are preparing for turbulent yen trading. Fluctuations are likely to increase amid growing concerns the Japanese authorities will intervene to support the weakening currency. At the same time, the yen may come under upward pressure amid speculation of a potential tweak to the Bank of Japan’s monetary policy and escalation of the Israel-Hamas conflict, said Tsutomu Soma, a… trader at Monex Inc. One-month dollar-yen butterfly positions, which reflect views of the likelihood of large swings in the currency pair over that period, touched their highest level since November last year.”

October 15 – Bloomberg (Marcus Wong and Matthew Burgess): “Policymakers in Asia’s emerging markets are turning to unconventional tools to protect their currencies as fears over higher-for-longer US interest rates and rising global tensions drag down risk assets. Asian currencies are especially exposed to outflows as benchmark rates in the region are generally lower than their emerging peers… With the central banks holding off on interest rate increases, policymakers are intervening through the bond market. The Reserve Bank of India said this month it’s looking to sell more bonds to soak up cash, which should bolster the rupee. Their Indonesian peers in September issued a new line of debt to attract inflows. China is selling a record amount of local-currency sovereign debt offshore to raise yuan demand.”

For the week, the U.S. Dollar Index declined 0.5% to 106.16 (up 2.6% y-t-d). For the week on the upside, the Swiss franc increased 1.1%, the Brazilian real 0.9%, the euro 0.8%, the Swedish krona 0.5%, the Australian dollar 0.3% and the British pound 0.2%. On the downside, the Norwegian krone declined 1.1%, the New Zealand dollar 1.0%, the Mexican peso 0.8%, the Canadian dollar 0.4%, the Singapore dollar 0.2%, the Japanese yen 0.2%, and the South Korean won 0.2%. The Chinese (onshore) renminbi declined 0.14% versus the dollar (down 5.69%).

Commodities Watch:

The Bloomberg Commodities Index increased 0.5% (down 6.2% y-t-d). Spot Gold advanced 2.5% to $1,981 (up 8.6%). Silver rose 2.9% to $23.37 (down 2.4%). WTI crude added $1.06, or 1.2%, to $88.75 (up 11%). Gasoline jumped 4.8% (down 4%), while Natural Gas sank 10.4% to $2.90 (down 35%). Copper slipped 0.2% (down 7%). Wheat recovered 1.1% (down 26%), and Corn increased 0.5% (down 27%). Bitcoin jumped $2,770, or 10.3%, to $29,700 (up 79%).

Middle East War Watch:

October 17 – Bloomberg (Sylvia Westall): “Rockets rain on Israel; Gaza is bombarded. Anger erupts on Middle Eastern streets, and there’s squirming in the Gulf Arab capitals. The Oct. 7 Hamas attack on Israel—which killed more than a thousand Israelis, with some 200 more snatched as hostages—has already upended the region. Israel has responded by pummeling the impoverished Gaza Strip, killing thousands of Palestinians, while Hezbollah has attacked from Lebanon. Meanwhile the promising diplomatic overtures between Israel and Saudi Arabia are as good as frozen. What was supposed to be a ‘new’ Middle East—one that ended old enmities between Israel and the Arab world in the pursuit of stability—is now looking like something else that’s horribly familiar. And things may only get worse, perhaps much more so.”

October 18 – Bloomberg (Ethan Bronner): “As Arab leaders lined up to condemn a deadly explosion that fueled concerns a humanitarian crisis is escalating in Gaza, Israel’s Prime Minister Benjamin Netanyahu made clear Israel will push ahead with its plans to target militants in the territory… ‘The objective is clear and remains unchanged — to dismantle Hamas — and that is what we are going to do,’ Ophir Falk, a close aide to Netanyahu, said…”

October 18 – DPA (Hema Parmar): “Iranian President Ebrahim Raisi called on the Islamic world to break off relations with Israel on Wednesday, in view of the war in the Middle East. Islamic states should expel Israeli ambassadors and close their missions, Raisi demanded during a speech... Referring to diplomatic relations with some Arab countries, he said: ‘The issue of normalization has lost its shine.’ Israel has been considered Iran's arch-enemy since the 1979 Islamic revolution. Tehran has expanded its political and military ties in the region since the 1990s, forming a so-called ‘axis of resistance’.”

October 15 – Financial Times (Najmeh Bozorgmehr and Bita Ghaffari): “As Israeli forces pound Gaza, Iran has been pursuing its own diplomatic mission: rallying the region behind the Palestinians and the Hamas militant group responsible for the October 7 deadly assault. With stops in Beirut, Damascus and Baghdad, Iran’s foreign minister Hossein Amirabdollahian spent the past week locked in talks with the powerful Shia militant forces his regime backs with arms, training and money. Amirabdollahian also met the Hamas leader in the Qatari capital Doha… The tour underscored Iran’s muscular influence — and why Israel and western states believe the Islamic republic’s role could be crucial amid fears Israel’s war with Hamas could escalate into a broader regional conflict.”

October 17 – Dow Jones (Summer Said): “A senior Iranian Revolutionary Guard Corps commander warned Israel on Wednesday of ‘another shockwave’ if it doesn't put an end to what the commander described as atrocities in Gaza. Ali Fadavi was quoted by Iranian news agency Fars as saying, ‘The resistance Front’s shocks against the Zionist regimes will continue until this ‘cancerous tumor’ is eradicated from the world map’… The Wall Street Journal has reported that officers of the IRGC had worked with Hamas since August to devise the air, land and sea incursions--the most significant breach of Israel's borders since the 1973 Yom Kippur War.”

October 18 – Reuters (Tom Perry, Laila Bassam and Henriette Chacar): “Lebanon’s Hezbollah warned its adversaries… it was ‘thousands of times stronger’ than before, as its fighters exchanged fire at the border with Israeli forces in violence fuelled by the war between Hamas and Israel… Hezbollah official Hashem Safieddine, in a speech to thousands of supporters, said U.S. President Joe Biden, Israeli Prime Minister Benjamin Netanyahu and ‘malicious Europeans’ should be careful. ‘The response to the mistake you might make with our resistance will be resounding,’ he said.”

October 17 – Financial Times (Mai Khaled in Gaza, Guy Chazan, Mehul Srivastava and Felicia Schwartz): “Jordan has warned that the Middle East is at the edge of an ‘abyss, as the death toll increases in the Israel-Hamas war and diplomatic activity intensifies to prevent it from spiralling into a regional conflict. King Abdullah of Jordan delivered his warning — together with a call for humanitarian assistance to the Gaza Strip and a refusal to take in Palestinian refugees — ahead of a summit with US president Joe Biden in Amman… ‘The whole region is on the brink of falling into the abyss,’ the king told a press conference… ‘The threat that this conflict spreads is real; the costs are too high for everyone.’”

October 17 – Bloomberg (Zaid Sabah and Jennifer Jacobs): “President Joe Biden will not visit Jordan after the country canceled plans for a summit with Egyptian and Palestinian leaders…, a blow to diplomatic efforts to contain a war between Israel and Hamas that threatens to engulf the region. The decision was made after consulting with King Abdullah II of Jordan and in light of the days of mourning that Palestinian Authority President Mahmoud Abbas announced following an explosion at a Gaza hospital… Jordan’s Foreign Minister Ayman Safadi announced earlier… the proposed summit between Biden, Abdullah II, Abbas and Egyptian President Abdel Fattah El-Sisi was canceled…”

October 19 – Financial Times (Felicia Schwartz): “A US warship deployed to the Middle East shot down three cruise missiles and several drones fired by Iranian-backed rebels in Yemen that may have been aimed at targets in Israel... The USS Carney, a US navy destroyer sailing in the northern Red Sea, intercepted the missiles that had been fired by Houthi forces, which have been fighting an insurgent war against Yemen’s Saudi-backed regime for several years.”

October 19 – Reuters (Idrees Ali): “U.S. troops have been repeatedly attacked in Iraq and Syria in recent days…, as Washington is on heightened alert for activity by Iran-backed groups with regional tensions soaring during the Israel-Hamas war. President Joe Biden has sent naval power to the Middle East in the past two weeks, including two aircraft carriers, other warships and about 2,000 Marines… On Wednesday, a drone hit U.S. forces in Syria resulting in minor injuries, while another one was brought down.”

October 19 – AFP: “The US and British embassies in Beirut on Thursday advised citizens to leave Lebanon while flights ‘remain available’ as border tensions between Israel and Hezbollah intensify over Israel's war with Hamas… ‘We recommend that US citizens in Lebanon make appropriate arrangements to leave the country; commercial options currently remain available,’ a US embassy statement said.”

Market Instability Watch:

October 16 – Bloomberg (Elizabeth Stanton and Garfield Reynolds): “The Treasury market is serving up levels of volatility last seen during the pandemic-era turbulence of March 2020. The US 30-year yield shifted by almost 13 bps a day over the last five trading days, the highest in more than three years and more than three times a much as the daily average over the past decade.”

October 20 – Reuters (David Lawder): “The U.S. government… posted a $1.695 trillion budget deficit in fiscal 2023, a 23% jump from the prior year as revenues fell and outlays for Social Security, Medicare and record-high interest costs on the federal debt rose. The… deficit was the largest since a COVID-fueled $2.78 trillion gap in 2021… For the 2023 fiscal year, total revenues fell $457 billion, or 9% from fiscal 2022, to $4.439 trillion, largely due to a drop in non-withheld individual income tax payments amid a worse performance in stocks and other financial assets… Other revenue declines included a $106 billion drop in Federal Reserve earnings as interest paid on bank reserves ate up any portfolio income… Social Security spending rose 10% to $1.416 trillion due to cost of living adjustments for inflation, and spending for the Medicare senior healthcare program rose 4% to $1.022 trillion. Interest costs on the more than $33 trillion in federal debt also rose sharply, up 23% to $879 billion, a record.”

October 18 – Wall Street Journal (James Freeman): “Stung by historic losses in recent years, long-term bond investors are showing a diminishing desire to lend to the U.S. government. Or maybe it’s just that the government is trying to borrow too damn much. Even in the congressional chamber controlled by Republicans, the leadership debate revolves around how many spending expansions the next speaker will jam into another debt-fueled bill. Interest-rate math hasn’t yet intruded into politics even though it has already meted out severe punishment in the markets. Investors are now demanding more compensation in return for financing Washington’s historic fiscal recklessness.”

October 18 – Wall Street Journal (Sam Goldfarb): “Investors and Federal Reserve officials scrambling to make sense of surging U.S. Treasury yields have a new obsession: a number that exists only in theory. Known as the term premium, the number is typically defined as the component of Treasury yields that reflects everything other than investors’ baseline expectations for short-term interest rates set by the Federal Reserve. That could include anything from an increase in the supply of bonds to harder-to-pin down variables such as uncertainty about the long-term inflation outlook. In recent weeks, debate around the term premium has intensified because some financial models have suggested that it has been rising sharply—driving much of a recent surge in longer-term Treasury yields that has carried the yield on the 10-year note above 4.9% for the first time since 2007.”

October 18 – Bloomberg (Tracy Alloway): “The surge in benchmark interest rates is hammering the $10.6 trillion market for US corporate bonds once again. To get a sense of the damage, look no further than a hypothetical portfolio of high-quality debt created by data provider BondCliQ Inc. These are investment-grade corporate securities sold by some of America’s best-known and highest-rated companies — think Coca-Cola, Boeing Co., Microsoft Corp. and more — yet they’ve all been ensnared by the dramatic moves in rates this year. The illustrative portfolio was worth $1 million as recently as early 2022, but its mark-to-market value has since dwindled to $612,863 — eclipsing the $614,000 low reached in October last year, when benchmark bonds were staging another big selloff.”

October 17 – Bloomberg (Isabelle Lee and Sagarika Jaisinghani): “Even as the conflict in the Middle East threatens to escalate, Wall Street traders remain squarely focused on ever-soaring Treasury yields and corporate America’s profit trajectory — with limited appetite to pay up for hedges. While the darkening geopolitical climate poses challenges for everything from the supply of oil to appetite for risky assets, the Cboe Volatility Index – known as a fear gauge – has yet to close above the widely watched level of 20 during the crisis and is on track for its longest lull in five years.”

October 17 – Bloomberg (Hidenori Yamanaka and Yumi Teso): “The weak outcome of Japan’s 20-year bond auction is pointing to a lack of demand from domestic banks and life insurers. The ¥1.2 trillion ($8bn) sale of sovereign debt Tuesday indicated poor investor appetite by three major measures… Japanese major banks and regional lenders have dumped super-long Japanese government bonds for nine straight months through August…”

October 17 – Bloomberg (Yumi Teso and Masahiro Hidaka): “The Bank of Japan announced an unscheduled bond-purchase operation on Wednesday, reminding the market of its determination to slow the pace of increases in sovereign yields. The operation had no immediate impact on the benchmark 10-year yield, which earlier in the day touched 0.815%, a fresh decade high.”

October 18 – Bloomberg (Farah Elbahrawy): “Any potential equity market rally is at risk if geopolitical uncertainty escalates further, according to Goldman Sachs... Their outlook comes as an extension in the Israel-Hamas conflict threatens to hit the supply of oil and crimp appetite for risky assets. At the same time, investors remain concerned about the path of monetary policy and rising bond yields. While renewed geopolitical risk could bring ‘some relief’ on rates and raise the possibility of more dovish central bank policies, ‘a prolonged period of geopolitical uncertainty, coupled with a still inflationary macro environment, is likely to eventually trigger growth concerns,’ a Goldman Sachs team including Cecilia Mariotti wrote…”

Bubble and Mania Watch:

October 18 – Reuters (Ann Saphir): “American families on average saw large gains in income and wealth from 2019 to 2022…, a Federal Reserve survey… showed. But the income gains were largest among the highest-earning families, and fastest among white families, with income at the median actually registering small declines for both Hispanic and Black families, the Fed found in its latest Survey of Consumer Finances, conducted every three years. Median net worth rose sharply for all ethnic and income groups, the survey showed, though the lowest-earning 20% of households fared the worst, with a 2% decline on average over the period versus double-digit increases for all other income groups.”

October 18 – Bloomberg (John Gittelsohn): “The value of distressed US commercial real estate neared $80 billion in the third quarter, its highest level in a decade, as rising interest rates and sagging office demand shook the property market. The value of buildings in bankruptcy, repossessed by lenders or in the process of liquidation increased by a net $5.6 billion in the quarter, MSCI Real Assets reported. Office properties accounted for 41% of the $79.7 billion total. The office sector, battered by remote work and declining tenant demand for space, “continued to be the driving force behind growing distress, providing 93% of the additional balance for the quarter,” MCSI said…”

October 16 – Bloomberg (Farah Elbahrawy): “The outlook for earnings is weakening and could remain subdued, according to strategists from Morgan Stanley to JPMorgan... As the reporting season kicks off, Morgan Stanley’s Michael Wilson said the earnings revisions breadth — referring to the number of stocks seeing upgrades versus downgrades — for the S&P 500 has fallen sharply over the past couple of weeks.”

October 19 – Bloomberg (Masaki Kondo and Ruth Carson): “Chinese investors offloaded the most US bonds and stocks in four years in August, fueling speculation the authorities may have moved to beef up their war chest to defend a weakening yuan. The bulk of the $21.2 billion of sales were in Treasuries and US equities, with funds in the Asian nation also cutting holdings of agency debt, according to data from the US… Treasury... In August, the onshore yuan tumbled to its lowest against the dollar since November, prompting Beijing to tell state-owned banks to step up intervention in the currency market.”

October 17 – Bloomberg (John Gittelsohn): “A joint venture tied to a Pacific Investment Management Co. fund surrendered a portfolio of 20 hotels with a $240 million mortgage. The properties, located in cities including San Antonio and Carmel, Indiana, were forfeited in a deal that closed in September… The Pimco portfolio, valued at $326 million when the debt was originated in 2017, was cut 16% to $272.8 million in a December appraisal.”

October 19 – Reuters (Abhirup Roy and Ben Klayman): “Tesla… joined General Motors and Ford in being cautious about expanding electric vehicle (EV) production capacity, citing economic uncertainties and underscoring fears of a slowdown in demand. Tesla CEO Elon Musk said he was worried that higher borrowing costs would prevent potential customers from affording its vehicles despite substantial price cuts, and that he would wait for clarity on the economy before ramping up its planned factory in Mexico.”

Banking Crisis Watch:

October 17 – Reuters (Saeed Azhar and Nupur Anand): “Bank of America reported unrealized losses of $131.6 billion on securities in the third quarter, growing from the second quarter, but the bank does not expect the portfolio will generate actual losses in the long-term. Unrealized losses have come under closer scrutiny by investors since March. At the time, Silicon Valley Bank sold a portfolio of its holdings at a sharp loss, precipitating its collapse and fueling the worst industry turmoil since the 2008 financial crisis… Bank of America, the second-biggest U.S. lender had about $603 billion in held-to-maturity securities…, shrinking from $614 billion in the second quarter.”

October 17 – Yahoo Finance (David Hollerith): “Goldman Sachs CEO David Solomon told analysts Tuesday that after five years as boss ‘I’ve never felt more optimistic about the firm.’ The new results released by the Wall Street giant make it clear that his challenges are far from over. Third quarter profits fell 33% from a year ago as Goldman continued a costly retreat from consumer banking and tried to recover from a prolonged slump in dealmaking.”

Ukraine War Watch:

October 17 – Financial Times (Christopher Miller): “Ukraine has used long-range US ATACMS missiles that were secretly shipped to Kyiv to strike nine Russian military helicopters and airfields deep inside occupied territory, marking what Kremlin bloggers said was one of the most devastating bombardments of the war so far. ‘Our agreements with President [Joe] Biden are being implemented. And very accurately. ATACMS have proven themselves,’ said President Volodymyr Zelenskyy, confirming the first use of the US-supplied weapon system against occupied regions of Ukraine…”

October 18 – Reuters (Mark Trevelyan): “Russian President Vladimir Putin said… the United States was wading deeper into the Ukraine conflict and making a mistake by providing Kyiv with long-range ATACMS missiles. He told a news conference during a visit to China that he had briefed President Xi Jinping ‘in some detail’ about Ukraine. He said ‘external factors’ and ‘common threats’ served only to strengthen Russia-Chinese cooperation. The Kremlin chief said Washington's decision to supply the Army Tactical Missile System (ATACMS)… ‘just prolongs the agony’ for Ukraine. ‘Firstly, this of course causes harm and creates an additional threat. Secondly, we will of course be able to repel these attacks. War is war,’ Putin said. ‘But most importantly, it fundamentally lacks the capacity to change the situation on the line of contact at all… This is another mistake by the United States.’”

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

October 19 – Reuters: “Russia said… it was coordinating its policy in the Middle East and North Africa with China, an increasingly close ally that President Vladimir Putin visited this week. Russia said Deputy Foreign Minister Mikhail Bogdanov had held talks in Doha with Zhai Jun, China's special envoy for the Middle East, in which they exchanged views on the conflict between Israel and the Palestinian Hamas group that runs the Gaza Strip.”

October 15 – Axios (Bethany Allen-Ebrahimian): “Beijing is trying to use the outbreak of violence between Israel and Hamas to curry favor among Arab states and gain their support for China's global agenda. Why it matters: The Chinese government is seeking to legitimize authoritarian practices and erode human rights protections on the international stage. ‘China is trying to promote alternative norms in global politics, and China sees Arab states as a natural constituency for China to try to attract,’ said Jonathan Fulton, a senior non-resident fellow at the Atlantic Council. ‘By appealing to Arab countries, they'll get more support for the reforms they want to push through in the international system,’ Fulton said.”

October 16 – Wall Street Journal (Yaroslav Trofimov): “The war between Israel and Hamas isn’t just risking a regional conflagration. It is also affecting the global balance of power, stretching American and European resources while relieving pressure on Russia and providing new opportunities to China. The long-term effect of the Middle East flare-up is hard to predict. It depends, first of all, on whether Israel is ultimately successful in its stated goal of eliminating Hamas as Gaza’s main military and political force. Another critical issue is whether Israel’s diplomatic relationships in the region and the global standing of its Western supporters can survive the rising civilian casualties in Gaza and the looming horrors of urban warfare in the densely populated enclave.”

October 18 – Financial Times (Joe Leahy in Beijing and Max Seddon): “China’s president Xi Jinping lauded record high trade with Russia and stressed his ‘deep friendship’ with Vladimir Putin, as the two leaders met in Beijing to reaffirm a partnership that has grown steadily closer since the Ukraine war… Xi told Putin annual bilateral trade between their countries had reached a ‘historic high’ of nearly $200bn. ‘Over the past decade, from 2013 to the present, I have had 42 meetings with Mr President, establishing a strong working relationship and deep friendship,’ Xi told Putin, who was visiting Beijing for the first time since he ordered the invasion of Ukraine...”

October 17 – Bloomberg (Rebecca Choong Wilkins and Colum Murphy): “The last time Vladimir Putin set foot on Chinese soil he went home with the promise of a ‘no limits’ partnership from President Xi Jinping. Less than a month later he launched the invasion of Ukraine. He returned to Beijing on Tuesday in a diminished state, needing the economic support of China and a route out of his self-inflicted political isolation. The meeting between the two presidents will inevitably be overshadowed by Israel's conflict with the Gaza-based militant group Hamas, designated a terrorist organization by the US and the European Union. US Secretary of State Antony Blinken urged China at the weekend to use its friendly ties with Iran — which supports Hamas — and broader influence in the Middle East to prevent the conflict from escalating. The pressure on Xi, and indirectly Putin, who is also close to Tehran, to act over the crisis is likely to intensify.”

October 19 – Wall Street Journal (Timothy W. Martin and Dasl Yoon): “Russia said it supports holding regular security talks with North Korea and China to address the threat posed by the U.S. on the Korean Peninsula, as Moscow draws closer to its partners and attempts to counter Western isolation. Russian Foreign Minister Sergei Lavrov backed the idea during his two-day trip to North Korea that ended Thursday… Lavrov said Moscow had been pursuing the trilateral dialogue, which would be frequent and unconditional, with both Beijing and Pyongyang… The trip came on the heels of Russian President Vladimir Putin’s visit to China…”

October 19 – Bloomberg (Jon Herskovitz): “Russian Foreign Minister Sergei Lavrov expressed support for North Korea’s policies in a speech commemorating the 75th anniversary of the establishment of diplomatic ties between Pyongyang and Moscow… ‘Russia fully supports all the policies of the DPRK government’ that leader Kim Jong Un has adopted to defend his national interests… Lavrov is in North Korea for his first visit in about five years. Lavrov flew to Pyongyang… from Beijing where he took part in the Belt and Road Initiative forum along with President Vladimir Putin…”

October 19 – Reuters (Soo-Hyang Choi): “Russian Foreign Minister Sergei Lavrov has met North Korean leader Kim Jong Un, Russia's foreign ministry said on Thursday, as the two countries forge closer ties in the face of what they see as a hostile and aggressive U.S.-led Western camp… Lavrov… earlier thanked North Korea for backing Russia's military actions in Ukraine and pledged Moscow's ‘complete support and solidarity’ for Kim…”

October 18 – Wall Street Journal (Alastair Gale): “Chinese jet fighters have performed reckless maneuvers close to American and other military aircraft almost 300 times in the past two years under a centrally directed campaign of coercion, the Pentagon said. Offering new video footage and photos, the U.S. gave the most detailed account yet of dangerous encounters involving Chinese jet fighters and leveled its most direct accusation that the incidents are orchestrated by senior Chinese leaders. In maneuvers over the East China Sea and South China Sea this summer, one Chinese jet fighter deployed flares near a U.S. aircraft and another performed an aerobatic roll around a U.S. aircraft. Several flew as close as a few dozen feet to U.S. planes… American military officials say aggressive behavior by Chinese fighter pilots reflects a pattern of increasing assertiveness by China across the Asia-Pacific region.”

October 18 – Reuters (Nerijus Adomaitis and Anne Kauranen): “A Norwegian Navy ship shadowed a Chinese container ship investigated over damage to a gas pipeline in the Gulf of Finland for about 15 hours as it sailed along the western coast of Norway on Monday… Finnish investigators… said they were looking into the Chinese vessel, the NewNew Polar Bear, and a Russian-flagged ship, the Sevmorput, as well as other vessels, present in the area when a Baltic Sea pipeline was damaged on Oct. 8.

October 19 – Reuters (Andrew Gray and Andrius Sytas): “NATO is stepping up patrols in the Baltic Sea following recent damage to undersea infrastructure in the region, the transatlantic military alliance said… ‘The increased measures include additional surveillance and reconnaissance flights, including with maritime patrol aircraft, NATO AWACS planes, and drones. A fleet of four NATO minehunters is also being dispatched to the area,’ NATO said…”

De-globalization and Iron Curtain Watch:

October 18 – Wall Street Journal (Brian Spegele and Wenxin Fan): “With one war raging in Ukraine and another unfolding in the Middle East, Chinese leader Xi Jinping is promoting his signature foreign-policy project as a force for unity, cooperation and prosperity around the globe. At a summit convened to celebrate the Belt and Road Initiative, a crucial building block in China’s rivalry with the West, the picture looked more fractured. The prominence given to Russian President Vladimir Putin at the summit, and the near absence of Western representation among the roughly two-dozen world leaders who attended, underlined how geopolitical divisions have deepened since Xi first proposed Belt and Road a decade ago. Fissures that worsened with Russia’s invasion of Ukraine are becoming even more stark as the Mideast crisis unfolds… During a keynote speech… inside Beijing’s Great Hall of the People, Xi positioned China as a leader of a new, more inclusive global order and promised that his country’s rise would benefit any that wanted to participate.”

October 15 – Financial Times (Editorial Board): “Rarely since the 1970s has the global economy seemed so turbulent. The march of globalisation has slowed. The dual shocks of the Covid-19 pandemic and Russia’s invasion of Ukraine have muddied monetary policy and upset energy markets and supply chains. Economic nationalism, US-China tensions, and fragmentation have taken root. Governments are taking a bigger role in economic management, particularly faced with the urgency of the climate transition. The tragic return of conflict to the Middle East only underscores the pattern of rising geopolitical risk.”

October 15 – Bloomberg (Malcolm Scott, Eric Martin and Alister Bull): “A world economy struggling with record debt, expensive credit and increasingly dysfunctional or inadequate institutions now faces new dangers from war in the Middle East. The fighting between Israel and Hamas added significant risk to an already fragile economic outlook… ‘We are living in a world with alarming challenges but at a time of intensifying polarization and extremes,’ World Bank President Ajay Banga said…, acknowledging ‘understandable’ frustration in the Global South. ‘They’re concerned promised resources will never manifest, they feel energy rules aren’t applied universally, and they’re worried a burgeoning generation will be locked into a prison of poverty.’”

October 20 – Reuters (Siyi Liu and Dominique Patton): “China said… it will require export permits for some graphite products to protect national security, in its latest move to control supplies of critical minerals in response to challenges over its global manufacturing dominance. China is the world's top graphite producer and exporter. It also refines more than 90% of the world's graphite into the material that is used in virtually all EV battery anodes, which is the negatively charged portion of a battery.”

October 19 – Bloomberg: “President Xi Jinping’s signature infrastructure gambit was supposed to connect Asia, Africa and Europe through a network of railroads and trade deals, cementing China’s global influence. A decade on, it’s run into a diplomatic wall at the European border. The lack of European leaders at this week’s Belt and Road Forum in Beijing pointed to growing skepticism among Western democracies about what Xi once described as a ‘project of the century.’ Instead of making friends and scoring political points across Europe, the Chinese leader appears to have reformed the initiative as a club for emerging economies known as the Global South that can challenge the US-led world order.”
October 18 – Washington Post (Christian Shepherd and Lyric Li): “Chinese leader Xi Jinping… laid out a vision for a revamped version of his signature ‘Belt and Road’ investment initiative and promised continued economic support for nations that sign on to China's remade world order. With guest of honor Russian President Vladimir Putin, who shares his discontent with the Western-led world order, Xi presented the plan as an alternative route to riches than that offered by the United States and other industrial democracies, which he accused of holding back developing nations with trade sanctions and demands for political reform. ‘We do not engage in ideological confrontation, geopolitical games, or form confrontational political cliques,’ Xi said from the Great Hall of the People, where representatives from more than 140 countries, largely from the Global South, were in attendance.”

Inflation Watch:

October 18 – Bloomberg (Cailley LaPara): “Health insurance premiums jumped this year amid a post-pandemic spike in costs of care, adding to the burden on employers and workers as inflation erodes broader buying power. The average employer-sponsored health insurance premium for US families rose 7% to almost $24,000 this year, according to an annual KFF survey of more than 2,000 US companies... Premiums for the estimated 153 million people in the US who get coverage through their employers go up each year, but the acceleration in 2023 is particularly threatening to employers amid rising prices for other goods and services.”

October 18 – Bloomberg (Kelsey Butler): “Child-care prices have risen at a break-neck clip in the US — and that’s before daycare centers start to really feel the impact of the end of federal funding that kept them afloat through the pandemic. Average monthly payments for child care in September were 32% higher than the 2019 annual average, according to an analysis by Bank of America Institute of the lender’s customer data.”

October 17 – Wall Street Journal (Robbie Whelan and Anne Steele): “The rising cost of fun is becoming a drag. Ticket prices for live entertainment events, from Taylor Swift concerts to National Football League games and high-season Disney theme-park visits, rose at a startling rate this year, triggering a phenomenon that analysts have dubbed ‘funflation.’ Families coughed up large sums saved during the pandemic to attend live events and parks this year. Friends treated themselves to memorable performances. Mothers took their daughters to stadiums packed with friendship-bracelet-clad concertgoers to see Swift’s Eras Tour. Now, some Americans are feeling tapped out.”

October 17 – Wall Street Journal (Deborah Acosta): “James and Laura Molinari left Chicago for a two-story stucco home in this city’s historic Flamingo Park neighborhood. The four-bedroom house was a short bridge away from Palm Beach island and walking distance to downtown West Palm Beach. ‘We love it here,’ said James… Then the renewal for his home insurance arrived. The new rate for the year starting in September was around $121,000—more than seven times what the Molinaris said they paid last year, and more than 13 times what they paid when the family moved to Florida in 2019. While they found a better rate from another insurer, at about $33,000 it is still nearly double what they paid last year.”

Biden Administration Watch:

October 20 – Bloomberg (Jordan Fabian, Jennifer Jacobs and Roxana Tiron): “President Joe Biden directly appealed to the American people to support funding for Israel and Ukraine’s war efforts, warning that Hamas and Russian President Vladimir Putin pose parallel threats to US democracy. The roughly 15 minute Oval Office address precedes a formal White House request that Congress provide approximately$100 billion in resources for Israel, Ukraine, Taiwan and the US southern border. Biden argued that supporting Ukraine and Israel in their fights against Russia and militant groups, respectively is ‘vital for America’s national security.’ ‘I know these conflicts can seem far away, and it’s natural to ask why does this matter to America,’ Biden said... ‘Hamas and Putin represent different threats. They share this in common: they both want to completely annihilate a neighboring democracy.’”

October 17 – Reuters (Alexandra Alper, Karen Freifeld and Stephen Nellis): “The Biden administration plans to halt shipments to China of more advanced artificial intelligence chips designed by Nvidia and others, part of a raft of measures… that seek to stop Beijing from receiving cutting-edge U.S. technologies to strengthen its military. The rules… restrict a broader swathe of advanced chips and chipmaking tools to a greater number of countries including Iran and Russia, and blacklist Chinese chip designers Moore Threads and Biren.”

Federal Reserve Watch:

October 18 – Bloomberg (Rich Miller): “The Federal Reserve faces potential policy pitfalls ahead as it wrestles with how to respond to investor angst about the US government’s $33.5 trillion mountain of debt. Concerns about America’s fiscal future have already contributed to a run-up in US bond yields that has surprised policymakers and prompted them to consider postponing for now plans for another interest-rate increase. Worries on Wall Street about the US budgetary morass pose risks to both sides of the central bank’s dual mandate. The disquiet over deficits and debt puts upward pressure on long-term interest rates, threatening to slow growth... At the same time, it can also act as kindling for higher inflation, especially if the Fed is perceived as downplaying its goal of price stability in order to limit the federal government’s borrowing costs.”

October 19 – Associated Press (Christopher Rugaber): “Federal Reserve Chair Jerome Powell said… inflation remains too high and that bringing it down to the Fed’s target level will likely require a slower-growing economy and job market… ‘We certainly have a very resilient economy on our hands,’ Powell said in a discussion at the Economic Club of New York. ‘Many forecasts called for the U.S. economy to be in recession this year. Not only has that not happened; growth is now running for this year above its longer-run trend. So that’s been a surprise.’”

October 18 – Bloomberg (Steve Matthews): “The outlook for the US economy is stable or may show softer expansion, the Federal Reserve said in its Beige Book survey of regional business contacts. ‘The near-term outlook for the economy was generally described as stable or having slightly weaker growth,’ , the Fed said… ‘Labor-market tightness continued to ease across the nation.’ Most districts indicated little to no change in economic activity since the September report, according to the Beige Book compiled by the St Louis Fed using information gathered on or before Oct. 6.”

October 18 – Reuters (Ann Saphir, Michael S. Derby and Dan Burns): “Federal Reserve policymakers are signaling a pause in hiking interest rages for another couple months as they wait for a resolution of mixed signals: strong economic data, signs of progress on still-stubbornly high inflation, and the potential for the recent rise in longer-term borrowing costs to do some of their work for them. ‘I believe we can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate,’ Fed Governor Christopher Waller told the European Economics & Financial Center Seminar in London.”

U.S. Bubble Watch:

October 19 – CNBC (Jeff Cox): “Initial filings for unemployment benefits dipped last week, indicating that the U.S. labor market remains tight and a potential factor in persistent inflation. Weekly jobless claims totaled a seasonally adjusted 198,000 for the period ended Oct. 14… That marked a decline of 13,000 from the previous week and… was the lowest weekly level since Jan. 21. Claims have been in a general deceleration pattern since the summer…”

October 17 – Reuters (Lucia Mutikani): “U.S. retail sales increased more than expected in September as households stepped up purchases of motor vehicles and spent more at restaurants and bars, cementing expectations that economic growth accelerated sharply in the third quarter… Goldman Sachs raised its gross domestic product growth estimate for the third quarter by three-tenths of a percentage point to a 4.0% annualized rate, which would be the fastest since the end of 2021.”

October 18 – CNBC (Diana Olick): “Mortgage rates last week rose for the sixth straight week, causing demand for home loans to drop to the lowest level since 1995… Applications for a mortgage to purchase a home dropped 6% week to week and were 21% lower than the same week one year ago. Applications to refinance a home loan fell 10% for the week and were 12% lower than a year ago.”

October 18 – CNBC (Diana Olick): “The average rate on the popular 30-year fixed mortgage rate hit 8% Wednesday morning, according to Mortgage News Daily. That is the highest level since mid-2000. The milestone came as bond yields soar to levels not seen since 2007. Mortgage rates follow loosely the yield on the 10-year U.S. Treasury.”

October 19 – CNBC (Diana Olick): “Sales of previously owned homes dropped 2% in September from August to a seasonally adjusted, annualized rate of 3.96 million units, according to the National Association of Realtors. Sales were 15.4% compared with September 2022. This is the slowest sales pace since October 2010… There were 1.13 million homes for sale at the end of September, down more than 8% from a year ago. Inventory is now at a 3.4-month supply… Adding to higher mortgage rates, the median price of a home sold in September was $394,300, up 2.8% year over year. Roughly 26% of home sold above list price, due to the lack of supply which is resulting in bidding wars. First-time buyers made up just 27% of sales. Historically, they make up about 40%.”

October 18 – Reuters (Lucia Mutikani): “U.S. single-family homebuilding rebounded in September… Single-family housing starts, which account for the bulk of homebuilding, increased 3.2% to a seasonally adjusted annual rate of 963,000 units last month… Single-family starts rose in the Midwest, West and the densely populated South, but plunged 19.0% in the Northeast.”

October 16 – Wall Street Journal (Nicole Friedman): “The highest mortgage rates in 23 years are dragging down home sales to their lowest levels since the subprime crisis period. Sales of previously owned homes in 2023 are expected to dwindle to a rate not seen since at least 2011Chen Zhao, economics research lead at real-estate brokerage Redfin, estimated that total existing-home sales in 2023 would amount to around 4.1 million, which would mark the smallest number of sales since about 2008, the year that Lehman Brothers collapsed and sparked the global financial crisis.”

October 16 – Yahoo Finance (Janna Herron): “Homebuilder pessimism deepened this month as mortgage rates reached 23-year highs. But the downcast outlook may not be shared equally among developers. More builders again classified housing conditions as poor rather than good in October, according to a monthly sentiment index from the National Association of Home Builders (NAHB)... The index reading dropped to 40 from a downwardly revised 44 in September, marking the second straight month it fell below the crucial breakeven measure of 50 — and the lowest point since January.”

October 18 – CNBC (Diana Olick): “Architecture firms reported a sharp drop in business in September, indicating that the commercial real estate market could experience even more pain in the next year. The AIA/Deltek Architecture Billings Index dropped to 44.8 in September, the lowest score since December 2020, during the height of the Covid-19 pandemic.”

October 17 – Bloomberg (Vince Golle): “An index of US industrial production rose in September to the highest level in nearly five years, led by strength in the mining and manufacturing sectors. The gauge rose 0.3% to 103.6, the highest since December 2018…”

October 17 – Financial Times (Steff Ch├ívez and Felicia Schwartz): “US arms manufacturers are preparing to accelerate weapons supplies to Israel at a time when they are already under pressure to arm Ukraine and replenish depleted Pentagon stocks, a challenge analysts say will add strain to a stretched defence industrial base. Unlike Ukraine…, Israel is primarily seeking munitions, with interceptors for its Iron Dome missile defence system at the top of its wish list. Precision air-to-ground munitions and 120mm calibre tank rounds are also among its needs.”

October 16 – Reuters (Joseph White and David Shepardson): “Ford executive chairman Bill Ford… urged the United Auto Workers union to end a 32-day strike and reach a new labor agreement, and warned of the growing impact to the automaker and the U.S. economy. ‘We can stop this now,’ Ford said of the strike that expanded last week… ‘I call on UAW colleagues ... We need to come together to bring an end to this acrimonious round of talks.’”

Fixed Income Watch:

October 16 – Bloomberg (Olivia Raimonde): “The amount of double-digit yielding debt for investors to choose from in the US junk bond market has swelled over the last six months as higher borrowing costs and a weakening economy weigh on credit quality. Bonds yielding at least 10% grew by about $45 billion to $325 billion, or about 30% of the speculative-grade index, according to Bloomberg Intelligence analyst Mike Holland. Almost $139 billion of that lot come from the communications sector…”

China Watch:

October 16 – Bloomberg: “When President Xi Jinping first assembled world leaders to map out his vision for expanding Chinese soft power via a web of infrastructure investment in 2017, he called the Belt and Road the ‘project of the century.’ As the Chinese statesman opens the third Belt and Road Forum this week, the future of his brainchild looks uncertain. While the project has drawn $1 trillion in its first decade…, the momentum has tapered off in recent years. China’s overall activity in BRI countries is down about 40% from its 2018 peak as the world’s second-biggest economy slows. Beijing faces accusations of being an irresponsible lender driving countries to default. Fractured ties with the US have made association with Xi’s pet project increasingly divisive…”

October 20 – Bloomberg (Siyi Liu and Dominique Patton): “China took a fresh step to ensure funding costs in its financial markets are sufficiently low so a tentative pickup in the nation’s economy can take hold. The People’s Bank of China handed lenders a record sum of cash via a short-term liquidity tool on Friday, as an indicator for funding costs surged to the highest since April… The PBOC injected a net 733 billion yuan ($100bn) of cash with the so-called reverse repurchase contracts on Friday. The seven-day repo rate, a gauge of interbank funding costs, surged 25 bps to a six-month high of 2.32%.”

October 16 – Bloomberg (Iris Ouyang): “China’s central bank stepped up efforts to support the nation’s economic recovery and debt sales by delivering the largest cash injection since 2020 with one-year policy loans. The People’s Bank of China added a net 289 billion yuan ($39.6bn) into the financial system via the so-called medium-term lending facility, the largest monthly injection since December 2020.”

October 16 – Reuters: “China has told state-owned banks to roll over existing local government debt with longer-term loans at lower interest rates, two sources… said, as part of Beijing's efforts to reduce debt risks in a faltering economy. Debt-laden municipalities represent a major risk to the world's second-largest economy and its financial stability, economists say, amid a deepening property crisis, years of over-investment in infrastructure and huge bills to contain the COVID-19 pandemic. Local government debt reached 92 trillion yuan ($12.58 trillion), or 76% of the country's economic output in 2022, up from 62.2% in 2019.”

October 17 – Bloomberg: “China’s financial regulators told its policy banks and biggest lenders to issue new loans to cover offshore debt issued by local governments maturing this year and in 2024, ramping up efforts to ease a credit crunch for highly indebted municipalities. After earlier urging banks to roll over debt and extend maturities, regulators, including the National Administration of Financial Regulation, recently issued clearer directives to extend local government debt at lower interest rates, people familiar… said... The lenders were also told to issue loans to replace non-standard, high-interest rate debt of local government financing vehicles as a way of supporting 12 especially at risk regions, the people said. The central bank is setting up an emergency loan facility to provide support for local governments with repayment difficulties.”

October 18 – Bloomberg: “Distressed Chinese builder Country Garden... signaled it’s set for a first-ever default as a grace period ends for dollar-bond interest, in the latest sign of a deepening crisis that’s shaken the nation’s financial markets… ‘The company expects that it won’t be able to meet all of its offshore payment obligations on time, due to a deep correction in China’s home market and its subdued sales,’ the developer said…”

October 16 – Bloomberg (Dorothy Ma): “A hearing for China Evergrande Group in a Hong Kong insolvency court later this month will lay bare the once-unthinkable possibility of liquidating the property developer’s assets. A wind-up order from Judge Linda Chan after the Oct. 30 hearing would wreak havoc on the struggling company that’s trying to finalize a restructuring plan to pay back creditors. Any efforts to wind up the world’s most indebted developer — even if difficult to enforce in mainland China — would provide a roadmap for other developers and creditors on how a liquidation of such magnitude may play out.”

October 17 – Reuters (Liangping Gao and Ryan Woo): “China's property sales and investment posted double-digit declines as efforts to support big cities failed to bolster confidence in an industry struggling to emerged from crisis… Property sales by floor area fell 19.77% year-on-year, narrowing from a 23.95% fall in August… In September, home sales were 64.73 million square metres lower than in September 2019, the highest in three months, showing a deepening sector…”

October 19 – Reuters (Liangping Gao and Ryan Woo): “China's new home prices fell for the third straight month in September…, dashing hopes of a turnaround in demand during a traditionally peak home buying period despite efforts to revive the crisis-hit property sector. New home prices fell 0.2% month-on-month but narrowed from a 0.3% drop in August… Prices were down 0.1% from a year earlier…”

October 18 – Bloomberg (John Cheng): “Chinese property stocks tumbled to close at the lowest level in 14-years, as weak home sales and rising debt woes for major developers deepened. A Bloomberg Intelligence gauge of developer shares fell 2.5% Wednesday, with China Evergrande Group and Times China Holdings Ltd. leading the decline. The gauge has plunged 44% so far this year…”

October 16 – New York Times (Alexandra Stevenson): “When China’s housing boom seemed like a one-way bet, Gary Meng’s parents bought an apartment from China Evergrande, the country’s biggest developer. Soon the company called with another pitch: to manage their wealth. It was a good deal with little risk, the family thought. Evergrande had global recognition and was a politically important company at the heart of China’s growing economy. They invested all their savings. Then the unthinkable happened. In 2021, Evergrande defaulted, representing the start of a real estate meltdown that has shaken China’s economy, felled some of its biggest companies and left home buyers waiting on more than a million apartments.”

October 15 – Bloomberg: “China’s local authorities are finding it more expensive to sell bonds, the latest sign of rising stress as policymakers ramp up borrowings to stimulate growth and defuse short-term payment risks. Of the local government yuan bonds sold so far this year, 50 carry coupons with a premium of more than 25 bps with comparable sovereign debt… That’s the most since 2020.”

October 18 – Bloomberg (Tom Hancock): “China’s latest economic data put the government’s growth goal of about 5% well within reach and lessened the likelihood for more stimulus before the end of 2023. But the ongoing housing crisis remains a serious drag, clouding the outlook for next year. While third-quarter gross domestic product figures… surpassed expectations on strong consumer spending, the data points to difficult months ahead for the world’s second-largest economy as efforts by President Xi Jinping’s government to stabilize the property sector and avert deflation have shown little effect.”

October 16 – Reuters (Engen Tham and Julie Zhu): “Chinese civil servants and employees of state-linked enterprises are facing tighter constraints on private travel abroad and scrutiny of their foreign connections, according to official notices and more than a dozen people familiar with the matter, as Beijing wages a campaign against foreign influence.”

Central Banker Watch:

October 14 – Bloomberg (Jana Randow): “The European Central Bank can’t declare that its fight against inflation is over just yet, according to Governing Council member Joachim Nagel. Price pressures remain ‘too high’ across the 20-nation euro zone, and ‘upside risks are still pretty present,’ the Bundesbank president said… It’s ‘too early to celebrate victory.’”

Global Bubble Watch:

October 16 – Reuters (Yoruk Bahceli, Dhara Ranasinghe and Maria Martinez): “Record debts, high interest rates, the costs of climate change, health and pension spending as populations age and fractious politics are stoking fears of a financial market crisis in big developed economies. A surge in government borrowing costs has put high debt in the spotlight, with investors demanding increased compensation to hold long-term bonds and policymakers urging caution on public finances. Over 80% of the $10 trillion rise in global debt in the first half to a record $307 trillion came from developed economies… The United States…, Italy and Britain are of most concern, more than 20 prominent economists, former policymakers and big investors told Reuters.”

October 14 – Bloomberg (Craig Stirling and Eric Martin): “Now that the higher-for-longer interest-rate era has arrived, global finance officials are getting worried about the consequences… Multiple attendees at the International Monetary Fund’s meetings… cautioned that the wholesale tightening now risks inflicting a shock to a world economy already on edge as war rages in the Middle East. ‘Debt levels are at record high levels at the same time that we’re in this higher-for-longer interest-rate environment,’ Gita Gopinath, the No. 2 official at the IMF, told a panel… ‘There is a lot for us to watch carefully — and that could go wrong.’”

October 16 – Bloomberg (Erik Hertzberg and Randy Thanthong-Knight): “Canadian business sentiment fell to its weakest level since the Covid recession of 2020, but inflation expectations of both firms and consumers remain high, Bank of Canada surveys show. Business executives said economic activity has slowed across a broad range of indicators… Still, firms are planning to make larger and more frequent price increases than they did before the pandemic, even as they expect to slow hiring.”

UK Watch:

October 18 – Reuters (David Milliken and Andy Bruce): “British consumer price inflation (CPI) unexpectedly held at 6.7% in September, remaining the highest of any major advanced economy and keeping alive the possibility of another rise in interest rates. A rise in petrol prices between August and September was the main factor stopping a fall in the annual rate… But two other less volatile measures closely watched by the Bank of England (BoE) - core inflation and services prices - were also robust, which is likely to leave some policymakers worried about longer-term price pressures.”

Japan Watch:

October 19 – Bloomberg (Erica Yokoyama and Emi Urabe): “Japan’s largest labor union federation demanded higher pay increases for next year, potentially providing the key element needed for the central bank to move toward policy normalization. Rengo, the country’s biggest trade union federation, called for companies to raise wages by ‘at least 5%’ in principle Thursday, as part of its basic vision for wage negotiations that culminate in the spring.”

EM Watch:

October 19 – Bloomberg (Selcuk Gokoluk): “Losses in emerging-market stocks and bonds deepened as the rise in US Treasury yields and concern about a wider conflict in the Middle East pushed investors to unload riskier assets. This week’s losses on the MSCI benchmark equity index have reached 2%, with most currencies trading weaker. Foreign-exchange markets most correlated with the global macroeconomic outlook - the South Korean won and the South African rand — led losses.”

Social, Political, Environmental, Cybersecurity Instability Watch:

October 19 – Wall Street Journal (By Gabriel T. Rubin): “Rep. Jim Jordan’s passionate Republican supporters were supposed to help his campaign for House speaker. Instead, they may be sinking his chances, with lawmakers opposing his run complaining of bullying calls and even death threats. For days, outside allies, including party activists and media personalities, have turned up the heat on recalcitrant Republican lawmakers, pressing them to back Jordan. But their campaign may have backfired, hardening the opposition of holdout Republicans… ‘I will not be pressured, intimidated,’ said Rep. Mario Diaz-Balart… ‘I have no intention of moving.’”

October 16 – Reuters (Bruno Kelly and Jake Spring): “The Amazon River fell to its lowest level in over a century on Monday at the heart of the Brazilian rainforest as a record drought upends the lives of hundreds of thousands of people and damages the jungle ecosystem. Rapidly drying tributaries to the mighty Amazon have left boats stranded, cutting off food and water supplies to remote villages…”

October 16 – Bloomberg (Jason Gale): “Covid may trigger complex biological reactions from the bowel to the brain, leading to persistent neurological symptoms in some people, according to a study that points the way toward a treatment. Viral vestiges in the gastrointestinal tracts of a subset of long-Covid patients may drive chronic inflammation that interferes with a key chemical messenger involved in nerve activity, brain function and memory, researchers at the University of Pennsylvania reported Monday in the journal Cell. The findings provide an explanation for poor concentration, memory problems and other neurocognitive symptoms in long Covid, they said.”

Geopolitical Watch:

October 15 – Bloomberg (Cecilia Yap): “The Philippines asked China to stop ‘dangerous maneuvers and aggressive actions’ in the South China Sea, warning of potential collision in the disputed waters. A Philippine military vessel, the BRP Benguet, warned off and issued radio challenges to a Chinese navy ship on Oct. 13, which shadowed it and attempted to cross its bow…”

October 19 – Associated Press (Rob Gillies): “Canada’s foreign minister said… the country has recalled 41 of its diplomats from India after the Indian government said it would revoke their diplomatic immunity, escalating a spat over the slaying of a Sikh separatist in Canada. The moves come after Canada’s allegations that India may have been involved in the June killing of Canadian citizen Hardeep Singh Nijjar in suburban Vancouver. India has accused Canada of harboring separatists and ‘terrorists,’ but dismissed the allegation of its involvement in the killing as ‘absurd’…”

Friday Afternoon Links

[Reuters] Wall St ends sharply lower with tech, financials; Mideast fears increase 

[Yahoo/Bloomberg] Stock Losses Deepen as S&P 500 

[Yahoo/Bloomberg] Oil Rises for Second Week Amid Israel-Hamas War Developments

[Yahoo/Bloomberg] Rates Selloff Seeps Through All Corners of the Credit Market

[Reuters] Muslims protest around world to demand end to Israel's Gaza campaign

[CNN] Incident involving US warship intercepting missiles near Yemen lasted 9 hours

[Axios] Behind the Curtain: Rattled U.S. government fears wars could spread

[Reuters] U.S. budget deficit jumps 23% to nearly $1.7 trillion as Social Security, health costs rise

[Reuters] Republicans drop Jim Jordan's US House speaker bid after third failed vote

[Yahoo/Bloomberg] Summers Says Fed Will Have to Engage on Growing US Debt Pile

[Reuters] US intelligence report alleging Russia election interference shared with 100 countries

[Reuters] Russia says it is coordinating Middle East policy with China

[Reuters] Chinese, Russian vessels in vicinity of Baltic Sea links damage -vessel tracking data

[FT] Biden’s vast diplomatic challenge in the Middle East

[FT] US-China trade tensions regain momentum

[FT] Chinese ship becomes focus of inquiry into Baltic pipeline damage