Friday, November 17, 2023

Weekly Commentary: A Wolf in Panda's Clothing

Good to see U.S./China tensions ease. It’s clearly in both countries' interest. Especially with war raging in Gaza, President Biden could sure use a boost. And China’s faltering Bubble is in more desperate need of a boost than even the President’s poll numbers. The Xi Jinping charm offensive was a thing of beauty. “Planet Earth is big enough for the two countries to succeed.” “China is pursuing high-quality development, and the United States is revitalizing its economy. There is plenty of room for our cooperation.”

November 16 – Reuters (Trevor Hunnicutt, Jeff Mason and Steve Holland): “U.S. President Joe Biden and Chinese leader Xi Jinping agreed on Wednesday to open a presidential hotline, resume military-to-military communications and work to curb fentanyl production, showing tangible progress in their first face-to-face talks in a year. Biden and Xi met for about four hours on the outskirts of San Francisco to discuss issues that have strained U.S.-Chinese relations. Simmering differences remain, particularly over Taiwan.”

Sticking with Biden/Xi deliverables, how about the Panda news - “envoys of friendship between the Chinese and American peoples.” WSJ: “The business leaders applauded Xi’s speech several times, including when he indicated the possibility of China sending new Pandas to the U.S... ‘We are ready to continue our cooperation with the United States on panda conservation,’ Xi said.”

For a country these days held in such low regard by the American public, recalling all the beloved Pandas was a dim-witted move. China should fire its PR firm.

NYT on Xi’s dinner with American business leaders: “Mr. Xi spoke of pandas. He spoke of Ping-Pong. He spoke of Americans and Chinese working together during World War II to battle the Japanese.” It all sounds so warm and nice - and almost embarrassingly superficial. Bloomberg headline: “Xi Pledges ‘Heart-Warming’ Steps to Attract Foreign Capital.”

November 16 – Reuters (Trevor Hunnicutt, Jeff Mason and Steve Holland): “Chinese President Xi Jinping told U.S. President Joe Biden during their four-hour meeting on Wednesday that Taiwan was the biggest, most dangerous issue in U.S.-China ties, a senior U.S. official told reporters. The official quoted Xi as saying China’s preference was for peaceful ‘reunification’ with the Chinese-claimed island of Taiwan… ‘President Xi ... underscored that this was the biggest, most potentially dangerous issue in U.S.-China relations, laid out clearly that, you know, their preference was for peaceful reunification but then moved immediately to conditions that the potential use of force could be utilized,’ the senior U.S. official told reporters… ‘President Biden responded very clearly that the long-standing position of the United States was ... determination to maintain peace and stability,’ the official said. ‘President Xi responded: look, peace is… all well and good but at some point we need to move towards resolution more generally,’ the official said.”

While following Wednesday evening developments, my thoughts kept returning to a Monday NYT article (Chris Buckley): “Speeches by the Chinese leader show how he was bracing for an intensifying rivalry with the United States from early in his rule. When President Xi Jinping of China made his first state visit to the United States in 2015, he wrapped his demands for respect in reassurances. He courted tech executives, while defending China’s internet controls. He denied that China was militarizing the disputed South China Sea, while asserting its maritime claims there. He spoke hopefully of a ‘new model’ for great power relations, in which Beijing and Washington would coexist peacefully as equals. But back in China, in meetings with the military, Mr. Xi was warning in strikingly stark terms that intensifying competition between a rising China and a long-dominant United States was all but unavoidable, and that the People’s Liberation Army should be prepared for a potential conflict.”

“Despite his assurances to President Obama not to militarize the South China Sea, Mr. Xi told his senior commanders in February 2016 that China must bolster its presence there.” “In Mr. Xi’s worldview, the West has sought to subvert the Chinese Communist Party’s power at home and contain the country’s influence abroad. The Communist Party had to respond to these threats with iron-fisted rule and an ever-stronger People’s Liberation Army.”

Panda talk was a nice touch. But it seems obvious that Beijing has decided to play nice only because the nice guy act is today a necessary expedient for the tough guy to be in the most advantageous position to later impose his will. Wolf Warrior in Panda’s Clothing.

At least for a day, we could forget about Xi’s “no limits partnership” pact with Putin, a dictator brotherhood appearing only to have strengthened since Russia’s Ukraine invasion (and associated atrocities). And we can overlook Team Xi/Putin, these days burning the midnight oil assembling their anti-U.S. alliance with a motley crew of countries deserving of the “axis of evil” moniker. No reason to dwell on Hong Kong repression, the crazy Chinese surveillance state and eradication of basic freedoms, or the Uyghur tragedy. Sure will be fun to welcome the Pandas back.

I hope I’m wrong on Xi’s China; hope my views on lots of things are wrong. At lot has gone right for the markets of late. While the war in Gaza is horrendous, escalation has been limited so far. There is little to indicate that Hezbollah and Iran were initially prepared for a concerted war effort with Hamas. Crude prices declined $1.28, or 1.7%, this week, capping an almost 19% drop from October 20th highs ($90).

The release of better-than-expected October CPI data provoked a significant market response. Headline CPI was flat for the month, versus expectations of 0.1% (“core” 0.2% vs. 0.3%). Ten-year Treasury yields sank 19 bps on CPI Tuesday, with yields at that point down 45 bps in 11 sessions (55bps from the 10/19 high). MBS yields dropped 27 bps, with a 64 bps 11-session collapse (77bps from 10/19). The market immediately priced zero chance of an additional Fed rate hike (from Monday’s 28%).

Equities went a little nuts, with short squeeze dynamics playing an integral role. The Goldman Sachs most short index surged 7.2% in Tuesday trading, the largest one-day gain in a year (11/10/22). Indicative of squeeze dynamics, the year’s underperformers sprang to life. The KBW Bank Index jumped 7.5%, the biggest gain in almost six months (5/17). The Bloomberg REIT Index rose 5.4%, also the strongest in a year. The small cap Russell 2000 rallied 5.4%, the largest one-day gain in over a year (11/10/22). The “average stock” Value Line Arithmetic Index rose 4.1% Tuesday (also strongest in a year).

Market reaction recalled the June CPI report, with consumer inflation reported a tenth below expectations at 0.2% for the month. After trading at 4.07% on July 7th, yields were down 32 bps in eight sessions to 3.75%. June non-farm payrolls (209k) were reported weaker-than-expected, while yields dropped aggressively on the release of the tenth less-than-forecast increase in June CPI (reported on July 12th). That inflation “all’s clear” proved premature, with yields reversing sharply higher – to trade to 5.00% in mid-October.

History informs us that inflation is not easily contained once the Genie has escaped from the bottle. Inflation will ebb and flow, while retaining a powerful bias for upside surprises.

CPI (y-o-y) began 1968 at 3.6% and traded as high as 6.2% during December 1969. CPI had dropped back down to 2.7% by June 1972, only to shoot to 12.3% to end 1974. Inflation then reversed sharply lower, with a reading of 4.9% during November 1976. Despite market and policymaker optimism, the inflation fight was anything but mission accomplished. CPI reached 9.0% in 1978, 12.2% in 1979, and then peaked at 14.7% in April 1980.

The Fed funds rate began 1968 at 4.6%, only to reach 9.2% by August 1969. It was back down to 3.50% by February 1971, before reversing higher, with the policy rate surpassing 10% in July 1973. Fed funds began 1976 below 5%, jumped back to 10% in late-1978, and reached 15.5% in October 1979 – only to peak at 20% in Q1 1980. Fed officials are well aware of inflation’s resilient and cyclical nature – along with the dangers of “stop-start” policy tightening.

November 15 – Financial Times (Colby Smith): “The US Federal Reserve would put its credibility at risk if it prematurely declared victory in its fight against inflation and then had to raise interest rates again, one of the central bank’s top officials warned... Mary Daly, president of the Federal Reserve Bank of San Francisco, told the Financial Times that recent economic data showing a further deceleration in inflation was ‘very, very encouraging’ and indicated that the Fed’s policies are proving effective. But Daly refused to rule out another interest rate increase… ‘What I worry about is that without a sufficient amount of information about whether we’re really on that disinflationary process that brings us back to 2, we have to ‘stop-start’,’ she said… ‘People need to plan and if you’re in a ‘stop-start’ mentality, then that’s really disruptive. It also ultimately tears at credibility.’”

Deficit spending and bank lending were the key drivers of monetary inflation in the seventies and early eighties. I would argue that market structure these days adds a critical element to inflation risk. Market-based finance is the marginal source of monetary fuel that can either stoke inflation or spur disinflation. Since the March bank bailout, I have chronicled how “risk on” and resulting loosened financial conditions usurped the Fed’s tightening cycle.

Financial conditions have loosened meaningfully over recent weeks. High yield CDS prices collapsed 112 bps over three weeks, the largest three-week drop since coming out of the Covid pandemic crisis in July 2020. The 18 bps three-week fall in investment-grade CDS was the largest since October 2022. MBS yields collapsed 82 bps in a month (10/19 high). Treasury yields have sunk 55 bps over the past month, while corporate spreads (to Treasuries) have narrowed to September levels.

Unless it proves ephemeral, I would expect this latest loosening to underpin economic activity, while providing inflation only a greater opportunity to establish deeper roots. Tentative signs of somewhat looser labor market conditions bear watching. But at 9.55 million job openings, JOLTS data still point to extraordinary demands for labor.

A few snippets from the week: “Hyundai has joined Honda and Toyota in raising factory worker wages… said Monday it will raise factory worker pay 25% by 2028…” “California Highway Patrol officers are getting a 7.9% wage increase, marking their biggest raise in 20 years. Last year, they received a 6.2%...” “The National Defense Authorization Act (NDAA) for 2024 has been approved by the House of Representatives, allocating an impressive 5.2% pay increase to military members.” “Alaska’s minimum wage will increase on Jan. 1, 2024 from $10.85 to $11.73 an hour…” “Starbucks workers stage ‘Red Cup Day’ strike.”

The Nasdaq100 (NDX) ended the week with a y-t-d return of 45.9%, with the S&P500 returning 19.3%. The NDX is now only 4.4% from all-time highs, with the S&P500 less than 6% away. High yield bonds (the HYG ETF) have returned 6.74% y-t-d, with investment-grade bonds returning 2.46% (LQD).

I believe tighter financial conditions will be necessary to reduce inflation risk. And conditions were tightening throughout September and October. But, once again, when tighter conditions begin to translate into softer market and economic backdrops, markets become susceptible to powerful squeeze dynamics – the unwind of short positions and the reversal of hedges. And in this hyper-speculative marketplace, squeezes quickly entice aggressive “FOMO” performance-chasing buying.

This week provided further evidence of extraordinary correlations – across various markets and globally. Whether it’s “risk on” or “risk off” – it is a highly synchronized world. Major equities indices this week were up 4.5% in Germany, 4.2% in Spain, 3.5% in Italy, 3.5% in Brazil, 3.1% in Japan, and 2.8% in Mexico. Ten-year yields dropped 23 bps in the UK and 22 bps in Italy. EM (local currency) yields dropped 36 bps in Chile, 34 bps in South Africa, 30 bps in Colombia, 28 bps in Brazil, and 24 bps in Hungary. EM currencies were squeezed higher, as dollar bulls took one on the chin. In China, Asia, Europe and the U.S., bank CDS prices have moved sharply lower.

Stocks are always good for upside surprises. And with all the derivatives, hedging, speculating, and leveraging, we shouldn’t be surprised by wild CDS and currency market volatility. But it’s the bond market that I find most fascinating. There will be ebbs and flows. Treasuries and MBS were overdue for a “rip your face off” squeeze. But there will be a couple more Trillion of Treasuries to sell over the coming year, in the face of additional QT and waning international demand. And “risk on” only heightens the risk of upside surprises in economic growth and inflation.

The bottom line is that when the bond market approaches the point of imposing some desperately needed discipline (in the markets and Washington), a confluence of squeezes, unwind of hedges, speculative flows and leveraging spurs looser conditions. Enjoying the whole loosening experience, Gold jumped 2.1% this week and Silver surged 6.5%.

But I expect the bond market to push back against “risk on.” With $2 TN annual deficits as far as the eye can see, it's either begin imposing discipline or watch inflation and supply eat away at system stability.

For the Week:

The S&P500 rose 2.2% (up 17.6% y-t-d), and the Dow gained 1.9% (up 5.4%). The Utilities rallied 2.8% (down 14.2%). The Banks surged 6.9% (down 17.3%), and the Broker/Dealers added 2.1% (up 9.2%). The Transports jumped 3.5% (up 11.5%). The S&P 400 Midcaps rose 4.0% (up 4.4%), and the small cap Russell 2000 surged 5.4% (up 2.1%). The Nasdaq100 advanced 2.0% (up 44.8%). The Semiconductors jumped 4.4% (up 48.0%). The Biotechs recovered 3.2% (down 9.4%). With bullion up $41, the HUI gold equities index rallied 4.3% (down 4.8%).

Three-month Treasury bill rates ended the week at 5.23%. Two-year government yields dropped 18 bps this week to 4.89% (up 46bps y-t-d). Five-year T-note yields sank 24 bps to 4.44% (up 44bps). Ten-year Treasury yields dropped 22 bps to 4.44% (up 56bps). Long bond yields fell 17 bps to 4.59% (up 62bps). Benchmark Fannie Mae MBS yields collapsed 38 bps to 6.03% (up 64bps).

Italian yields sank 22 bps to 4.36% (down 34bps). Greek 10-year yields fell 13 bps to 3.84% (down 73bps y-t-d). Spain's 10-year yields dropped 18 bps to 3.60% (up 8bps). German bund yields fell 13 bps to 2.59% (up 14bps). French yields dropped 15 bps to 3.15% (up 17bps). The French to German 10-year bond spread narrowed two to 56 bps. U.K. 10-year gilt yields sank 23 bps to 4.10% (up 43bps). U.K.'s FTSE equities index rallied 2.0% (up 0.7% y-t-d).

Japan's Nikkei Equities Index jumped 3.1% (up 28.7% y-t-d). Japanese 10-year "JGB" yields dropped nine bps to 0.76% (up 33bps y-t-d). France's CAC40 rose 2.7% (up 11.7%). The German DAX equities index surged 4.5% (up 14.3%). Spain's IBEX 35 equities index jumped 4.2% (up 18.6%). Italy's FTSE MIB index rose 3.5% (up 24.4%). EM equities were mostly higher. Brazil's Bovespa index jumped 3.5% (up 13.7%), and Mexico's Bolsa index gained 2.8% (up 8.7%). South Korea's Kospi index rose 2.5% (up 10.4%). India's Sensex equities index gained 1.4% (up 8.1%). China's Shanghai Exchange Index increased 0.5% (down 1.1%). Turkey's Borsa Istanbul National 100 index gained 1.1% (up 42.6%). Russia's MICEX equities index declined 1.1% (up 48.8%).

Federal Reserve Credit declined $2.6bn last week to $7.819 TN. Fed Credit was down $1.081 TN from the June 22nd, 2022, peak. Over the past 218 weeks, Fed Credit expanded $4.093 TN, or 110%. Fed Credit inflated $5.009 TN, or 178%, over the past 575 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $1.2bn last week to $3.431 TN. "Custody holdings" were up $122bn, or 3.7%, y-o-y.

Total money market fund assets expanded $21.9bn to a record $5.734 TN, with a 36-week gain of $840bn (25% annualized). Total money funds were up $1.109 TN, or 24.0%, y-o-y.

Total Commercial Paper increased $2.1bn to $1.243 TN. CP was down $61bn, or 4.6%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell 10 bps to 7.25% (up 69bps y-o-y). Fifteen-year rates dropped eight bps to 6.71% (up 73bps). Five-year hybrid ARM rates slipped two bps to 7.01% (up 148bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 12 bps to 7.77% (up 92bps).

Currency Watch:

November 14 – Bloomberg (Yumi Teso and Daisuke Sakai): “The yen’s rebound from the cusp of a 33-year low versus the dollar has only served to highlight the increased pressure it faces with other major currencies. It touched the weakest in 15 years against the euro on Wednesday, depreciated to a record level to the Swiss franc and registered a drop versus ever other Group-of-10 currency. In fact, Bloomberg’s measure of the yen’s relative strength against its G-10 peers fell to the lowest since 2007.”

November 13 – Reuters (Tetsushi Kajimoto and Kaori Kaneko): “Japanese Finance Minister Shunichi Suzuki said… that the government would take all possible steps necessary to respond to currency moves, repeating his usual mantra that excessive swings were undesirable. Suzuki made the remarks when asked about impacts from the weak yen on households which have been pressured by rising living costs due to higher import prices for fuel and food.”

For the week, the U.S. Dollar Index dropped 1.8% to 103.92 (up 0.4% y-t-d). For the week on the upside, the Swedish krona increased 3.6%, the Norwegian krone 2.8%, the Australian dollar 2.4%, the euro 2.1%, the South African rand 2.0%, the British pound 1.9%, the Swiss franc 1.9%, the New Zealand dollar 1.7%, the South Korean won 1.6%, the Singapore dollar 1.3%, the Japanese yen 1.3% and the Canadian dollar 0.6%. The Chinese (onshore) renminbi increased 0.99% versus the dollar (down 4.38%).

Commodities Watch:

November 13 – Bloomberg (Swansy Afonso): “Gold jewelers made brisk sales in India on the Diwali weekend with consumers’ interest riding on a recent drop in prices… The world’s second-largest gold consumer saw an 8% growth in demand on Dhanteras, the first day of the Diwali period… Coins made for about a third of the sales and the rest was jewelry…”

The Bloomberg Commodities Index increased 0.3% (down 9.6% y-t-d). Spot Gold rallied 2.1% to $1,981 (up 8.6%). Silver silver surged 6.5% to $23.72 (down 1.0%). WTI crude fell $1.28, or 1.7%, to $75.89 (down 5.4%). Gasoline slipped 0.2% (down 11%), and Natural Gas dropped 2.4% to $2.96 (down 34%). Copper rallied 5.1% (down 1%). Wheat sank 4.3% (down 31%), while Corn increased 0.6% (down 31%). Bitcoin declined $870, or 2.3%, to $36,500 (up 120%).

Middle East War Watch:

November 14 – Reuters (Parisa Hafezi, Laila Bassam and Arshad Mohammed): “Iran's supreme leader delivered a clear message to the head of Hamas when they met in Tehran in early November, according to three senior officials: You gave us no warning of your Oct. 7 attack on Israel and we will not enter the war on your behalf. Ayatollah Ali Khamenei told Ismail Haniyeh that Iran - a longtime backer of Hamas - would continue to lend the group its political and moral support, but wouldn't intervene directly, said the Iranian and Hamas officials with knowledge of the discussions… The supreme leader pressed Haniyeh to silence those voices in the Palestinian group publicly calling for Iran and its powerful Lebanese ally Hezbollah to join the battle against Israel in full force, a Hamas official told Reuters.”

November 12 – The Hill (Ellen Mitchell): “As attacks on U.S. troops and assets continue to stack up in the Middle East, Washington has turned to targeted retaliatory strikes on assets belonging to Iran and its proxies. The tit for tat comes as regional tensions flare over the Israel-Hamas war… But the exchange of fire has already injured dozens of U.S. troops and adds to the dangerous landscape facing the Biden administration in the Middle East… ‘I’m sure there is a hope that [the U.S. strikes] would have a deterrent effect, but clearly they have not,’ said Jonathan Lord, the director of the Middle East Security Program at the Center for a New American Security. ‘I don’t suspect that they would because these groups that are conducting these strikes are trying to [get] the U.S. into a larger conflict. That is their purpose in targeting the U.S. forces at this point.’”

November 14 – Reuters (Phil Stewart): “The U.S. believes its latest air strikes on Sunday against Iran-linked militia in Syria killed up to seven people, a U.S. official said… The deaths would be the first since the U.S. started carrying out retaliatory strikes in the past month against militia who Washington blames for attacking American troops at bases in Iraq and Syria. The other strikes have hit unoccupied facilities… U.S. and coalition troops have been attacked at least 55 times in Iraq and Syria since Oct. 17, injuring 59 personnel, though all have returned to duty.”

November 11 – Reuters (Laila Bassam, Maya Gebeily and Maayan Lubell): “The head of Lebanon’s powerful Hezbollah party said… its armed wing had used new types of weapons and struck new targets in Israel, and pledged that the front against its sworn enemy would remain active. It was Sayyed Hassan Nasrallah's second speech since the war between Israel and Hamas began in October. In his first, he said there was a possibility of fighting on the Lebanese front turning into a fully-fledged war. On Saturday, in a televised address, he said Hezbollah had shown ‘a quantitative improvement in the number of operations, the size and the number of targets, as well as an increase in the type of weapons’. He said it had used a ‘Burkan’ missile that carries an explosive payload of 300-500 kg, as well as weaponised drones for the first time.”

November 16 – Reuters (Parisa Hafezi): “The top commander of Iran's Quds force said the resistance front supported the Tehran-backed Hamas militant group in its war with Israel in Gaza. ‘Your brothers in the Axis of Resistance stand united with you… the resistance will not allow the enemy to achieve its dirty goals in Gaza and Palestine,’ Esmail Qaani… Iran, which refers to its aligned armed groups around the Middle East as being part of the ‘Resistance Axis’, has warned Israel of escalation if it failed to end aggressions in the Gaza Strip.”

Ukraine War Watch:

November 13 – Reuters (Ron Popeski and Maria Starkova): “President Volodymyr Zelenskiy warned Ukrainians…. to prepare for new waves of Russian attacks on infrastructure as winter approached and said troops were anticipating an onslaught in the eastern theatre of the war… ‘We are almost half way through November and must be prepared for the fact that the enemy may increase the number of drone or missile strikes on our infrastructure… Russia is preparing for Ukraine. And here, in Ukraine, all attention should be focused on defence, on responding to terrorists on everything that Ukraine can do to get through the winter and improve our soldiers' capabilities.’”

Market Instability Watch:

November 17 – Wall Street Journal (Chelsey Dulaney and Megumi Fujikawa): “Foreigners no longer have an insatiable appetite for U.S. government debt. That’s bad news for Washington. The U.S. Treasury market is in the midst of major supply and demand changes. The Federal Reserve is shedding its portfolio at a rate of about $60 billion a month. Overseas buyers who were once important sources of demand—China and Japan in particular—have become less reliable lately. Meanwhile, supply has exploded. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record when excluding the pandemic borrowing spree of 2020. ‘U.S. issuance is way up, and foreign demand hasn’t gone up,’ said Brad Setser, senior fellow at the Council on Foreign Relations. ‘And in some key categories—notably Japan and China—they don’t seem likely to be net buyers going forward.’”

November 13 – Bloomberg (Skylar Woodhouse): “The interest the US pays on its debt soared in October from a year before, showcasing the rising cost to the government of higher yields on Treasuries. Interest on the public debt was $88.9 billion in the first month of the fiscal year, up 87% from the figure in October 2022… Despite the surge, the budget deficit for the month of October was notably smaller than a year ago — down 24% to $66.6 billion from $87.9 billion. Adjusting for calendar differences, the deficit shrank by 4%.”

November 15 – Wall Street Journal (Chelsey Dulaney, Andrew Duehren and Peter Santilli): “The world spent the past decade-plus taking advantage of rock-bottom interest rates to binge on debt. An unprecedented bill is coming due. Governments are expected to spend a net $2 trillion paying interest on their debt this year as higher interest rates make borrowing more expensive, up more than 10% from 2022… By 2027, it could top $3 trillion, according to Teal Insights. The surge in interest costs leaves governments with difficult choices. As debt servicing takes up more revenue, politicians face unpopular decisions to raise taxes, cut spending or keep running deficits that will add to interest costs. That comes as they face higher military spending amid escalating geopolitical uncertainty, as well as the costs of responding to extreme and costly weather events and caring for rapidly aging populations.”

November 16 – Bloomberg (Vince Golle): “China’s holdings of US Treasuries slumped in September by the most in a year, and currently stand at the lowest level since mid-2009. China’s stockpile — the largest foreign holdings behind Japan’s — fell by $27.3 billion to $778.1 billion… The decline was the sixth-straight and extends a more than two-year downtrend. Japan’s holdings decreased, as well, falling $28.5 billion to nearly $1.09 trillion — the lowest since March. Total overseas holdings of US Treasuries decreased by nearly $102 billion, to around $7.61 trillion in September. That was the largest monthly decline this year…”

November 15 – Financial Times Costas Mourselas, Kate Duguid and Cheng Leng): “As they patch up their bond trading operations following the hack of Industrial and Commercial Bank of China, brokers are also piecing together how China’s largest lender became such a significant player in US Treasuries that the attack on its systems could disrupt the $26tn market. The impact of the attack was still being felt days after the ransomware was found… The company confirmed it was helping clients suffering from the impact of the hack. ‘The unexpected thing we uncovered was that [market] exposure to ICBC was significantly higher than what we expected,’ said a senior executive in fixed-income prime brokerage at a large US bank.”

November 12 – Bloomberg (Swati Pandey): “The US fiscal position is on an ‘unsustainable trajectory’ due to a lack of political will to resolve the crisis at a time when debt costs are soaring, former Federal Reserve Bank of New York President Bill Dudley said. ‘The situation is going to get worse because the government’s debt is going to be repriced at much higher interest rates than what we’ve had over the last 15 years’ Dudley… said… He also pointed to ballooning costs of healthcare and social security as the baby-boomer generation retires, further exacerbating the fiscal outlook. ‘A final problem we have is the political problem. We do not have a very functional government in the United States right now in terms of getting things done… We’re absolutely on an unsustainable trajectory.’”

November 16 – Reuters (David Morgan): “A group of hardline Republicans has put new U.S. House Speaker Mike Johnson on notice that he can no longer count on their support for legislation, signaling a possible early end to his ‘honeymoon’ period. Three weeks after the Louisiana lawmaker won the gavel of the House of Representatives, 19 House Republicans - including 15 hardliners - voted to block debate on their party's bill to fund federal programs on commerce, justice and science for fiscal 2024... ‘We want the message to be clear,’ said Representative Scott Perry, chairman of the hardline conservative House Freedom Caucus. ‘We’re not going to pass bills that don’t address the problems that America faces.’”

November 14 – Bloomberg (Farah Elbahrawy): “Investors turned the most bullish on bonds since the global financial crisis on ‘big conviction’ that rates will move lower in 2024, according to the latest Bank of America Corp. fund manager survey. The monthly survey showed investors were dumping cash to hold the biggest overweight position in bonds since 2009. BofA’s Michael Hartnett said the ‘big change’ was not the macro outlook, but expectations that inflation and yields will move lower in 2024.”

Bubble and Mania Watch:

November 17 – Bloomberg (Katie Greifeld): “At first blush, a record $100 billion flood into actively managed exchange-traded funds this year raises a tantalizing prospect: A revival of stockpicking… Yet, a look under the hood of popular ETFs shows the boom is almost entirely taking place in passive-looking trades. Active strategies have attracted nearly 25% of the $423 billion that’s flowed to US ETFs so far in 2023 — a record share… But those billions aren’t being sent to the likes of traditional bond- and stockpickers. Rather, firms like Dimensional Fund Advisors and JPMorgan Asset Management have led the charge. Dimensional, the largest active ETF issuer with roughly $100 billion in assets, is known for its systematic funds. Meanwhile, JPMorgan has struck gold with its suite of covered-call ETFs, which employ options overlay strategies to generate additional yield.”

November 13 – Wall Street Journal (Jon Sindreu): “Wall Street’s doom-mongers spent years warning that private lenders would be the next bubble to burst when central banks tightened policy. Instead, the funds are becoming even more ubiquitous as companies scramble to refinance debt in a higher interest-rate environment… In the middle ground between debt and equity sit other private-credit firms. Among them is… Park Square Capital, which said earlier this month it would commit over $100 million in preferred equity to the deal. This is an example of the ‘mezzanine’ strategies keeping the private-credit boom alive… Private debt—where funds extend credit directly to companies—has ballooned from about $280 billion of assets under management in 2007 to $1.5 trillion in 2022… Private-equity firms such as KKR, Apollo and Blackstone are channeling an increasing share of their assets into these markets. This year, asset-management behemoths such as BlackRock, Fidelity and PGIM, owned by Prudential, have also invested heavily in the sector.”

November 15 – Financial Times (Eric Platt): “Blackstone is planning to borrow hundreds of millions of dollars to give its flagship private credit fund added investment firepower, as the asset manager taps a new source of leverage that it and rivals aim to increasingly exploit in the years to come. The private equity behemoth is in the final stages of raising just under $400mn through a so-called collateralised loan obligation secured by the very loans held by its $52bn Blackstone Private Credit Fund, known as BCRED… Blackstone’s ability to clinch the financing package underscores how big credit investors are comfortable with the risks in this opaque but rapidly growing corner of financial markets…”

November 13 – Wall Street Journal (Konrad Putzier): “Foreclosures are surging in an opaque and risky corner of commercial real-estate finance, offering one of the starkest signs yet that turmoil in the property market is worsening. Lenders this year have issued a record number of foreclosure notices for high-risk property loans… Many of these loans are similar to second mortgages and commonly known as mezzanine loans. Mezzanine loans have high interest rates and offer a faster and easier path to foreclose than mortgages. The Journal analysis found notices for 62 mezzanine loans and other high-risk loans this year through October. That is more than double the number for all of last year, and likely the highest total ever for a single year, as higher interest rates and rising vacancies punish the property sector.”

Banking Crisis Watch:

November 11 – Financial Times (Stephen Gandel): “The four biggest US lenders grabbed almost half of all banking profits in the third quarter, highlighting their growing advantage in the new era of higher-for-longer interest rates. Earnings at JPMorgan…, Bank of America, Wells Fargo and Citigroup were up 23% according to BankRegData… Of the nation’s almost 4,400 banks, the big four made 45% of the industry’s overall profits in the third quarter. That was up from 35% a year ago, and well above the 10-year average of 39%.”

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

November 14 – New York Times (Peter S. Goodman): “For more than a quarter century, the fortunes of the United States and China were fused in a uniquely monumental joint venture. Americans treated China like the mother of all outlet stores, purchasing staggering quantities of low-priced factory goods. Major brands exploited China as the ultimate means of cutting costs, manufacturing their products in a land where wages are low... As Chinese industry filled American homes with electronics and furniture, factory jobs lifted hundreds of millions of Chinese from poverty. China’s leaders used the proceeds of the export juggernaut to buy trillions of dollars of U.S. government bonds, keeping America’s borrowing costs low and allowing its spending bonanza to continue. Here were two countries separated by the Pacific Ocean, one shaped by freewheeling capitalism, the other ruled by an authoritarian Communist Party, yet conjoined in an enterprise so consequential that the economic historian Niall Ferguson coined a term: Chimerica, shorthand for their ‘symbiotic economic relationship.’”

November 13 – Financial Times (Kathrin Hille): “The US is rushing to strengthen Taiwan’s defences against a potential Chinese attack, including by training its troops, Taipei’s top national security official has said in remarks that are likely to rankle Beijing… Washington’s security co-operation with Taiwan covered ‘all aspects’, said Wellington Koo, secretary-general of President Tsai Ing-wen’s National Security Council… ‘They are not just discussing it with us but taking action.’ ‘[Our] relationship on these security issues is so close, but we must keep a low profile,’ said Koo. ‘I can only say, they are using all possible ways to help us, no matter if it’s in training or the build-up of asymmetric fighting capabilities.’”

November 15 – Reuters (Ben Blanchard and Yimou Lee): “Lai Ching-te, the frontrunner for Taiwan's presidency, has picked Taipei's envoy to the United States - a fluent English speaker with deep connections in Washington - to be his running mate for January's election, sources… said. Lai, vice president and the ruling Democratic Progressive Party's (DPP) presidential candidate, has almost consistently led opinion polls ahead of an election taking place amid increased Chinese pressure on Taiwan to accept Beijing's sovereignty claims. Hsiao Bi-khim, 52, who has been Taiwan's de facto ambassador to the United States since 2020, has been considered by party officials, diplomats and Taiwanese media for months to the most likely running mate for Lai.”

Inflation Watch:

November 15 – Wall Street Journal (Greg Ip): “Two weeks ago, I asked why Americans were in such a rotten mood when the data said the economy is in such good shape. The disconnect has only grown since. Inflation, we just learned, eased in October, extending a two-week rally in stocks and bonds. And yet the University of Michigan’s index of consumer sentiment keeps falling. It’s clear readers cared less about inflation dropping, which only meant prices were rising more slowly, than about the fact that the level of prices is painfully high compared with three years ago. It is also clear that not all inflation is equal. Three things in particular have our attention: gasoline, food and houses.”

November 14 – CNBC (Jeff Cox): “Inflation was flat in October from the previous month, providing a hopeful sign that stubbornly high prices are easing their grip on the U.S. economy… The consumer price index… increased 3.2% from a year ago despite being unchanged for the month… Economists surveyed… had been looking for respective readings of 0.1% and 3.3%. The headline CPI had increased 0.4% in September. Excluding volatile food and energy prices, the core CPI increased 0.2% and 4%, against the forecast of 0.3% and 4.1%. The annual level was the lowest in two years, down from 4.1% in September, though still well above the Federal Reserve’s 2% target.”

November 15 – Associated Press (Paul Wiseman): “U.S. wholesale prices fell sharply last month as inflationary pressure continued to ease after a year and a half of higher interest rates. The… producer price index… dropped 0.5% in October from September, the first decline since May and biggest since April 2020. On a year-over-year basis, producer prices rose 1.3% from October 2022, down from 2.2% in September and the smallest gain since July. Excluding volatile food and energy costs, so-called core consumer prices were unchanged from September to October and rose 2.4% from a year earlier. The year-over-year gain in core producer prices was the smallest since January 2021.”

November 13 – Bloomberg (Michael S. Derby): “The expected path for inflation softened on balance in October amid rising expectations for future gasoline price increases and a largely stable outlook for employment and personal finances, the Federal Reserve Bank of New York reported… Respondents to the bank’s latest Survey of Consumer Expectations project inflation a year from now will stand at 3.6% from September’s 3.7%, with inflation three years from now seen at 3%, the same level as the prior month, while five years from now inflation is forecast to stand at 2.7%, from September’s 2.8%.”

November 13 – Reuters (David Shepardson): “Hyundai Motor said… it will hike wages for nonunion production workers at its Alabama factory by 25% by 2028, weeks after the United Auto Workers won new contracts with the Detroit Three automakers. The Korean automaker joins Toyota Motor and Honda Motor in raising U.S. factory wages after the UAW won a new contract with General Motors, Ford Motor and Chrysler parent Stellantis that will result wage increases of 25% through 2028. The Detroit Three wage hikes amount to 33% when expected cost-of-living adjustments are factored in.”

November 15 – Reuters (Howard Schneider): “As families in the U.S. prepare to gather for their Thanksgiving dinners next week, food prices have largely flatlined for months, gasoline prices are about 10% lower than a year ago, and the average cost of much of what goes into a shopping cart has been roughly unchanged for a year. But the steady ebbing of inflation hasn't translated into good news for either President Joe Biden or the Federal Reserve when it comes to public opinion. Attitudes towards both have kept slipping in light of one unchanging fact: Stuff remains pricier than it was before the coronavirus pandemic, and will likely stay that way… ‘Inflation falls ... but prices don't come down. They're just going up at a slower rate,’ Fed Governor Christopher Waller said… ‘What people have in their mind right now is ... prices to go back to where they were in 2021. That's not going to happen. These prices are probably there forever.’”

Biden Administration Watch:

November 17 – Reuters (Trevor Hunnicutt and Gokul Pisharody): “U.S. President Joe Biden signed… a stopgap spending bill to avert a government shutdown, a day after the Senate passed it… Biden signed the document on the sidelines of a dinner at the Legion of Honor museum in San Francisco, where leaders are attending the Asia Pacific Economic Cooperation (APEC) summit. The Senate's 87-11 vote on Wednesday marked the end of this year's third fiscal standoff in Congress that saw lawmakers bring Washington to the brink of defaulting on its more than $31 trillion in debt this spring and twice within days of a partial shutdown that would have interrupted pay for about 4 million federal workers.”

November 10 – Reuters (David Lawder and Ann Saphir): “U.S. Treasury Secretary Janet Yellen… said the U.S. government had seen evidence that Chinese firms may be aiding in the flow of equipment to Russia's war effort despite Western sanctions, and said she had urged China to crack down. Yellen said she raised the issue during two days of meetings with Chinese Vice Premier He Lifeng, expressing concern that equipment ‘helpful to Russia's military’ was evading sanctions and getting to Moscow to aid its war against Ukraine.”

Federal Reserve Watch:

November 16 – Reuters (Michael S. Derby): “The three newest Federal Reserve governors, including Vice Chair Philip Jefferson, have told a U.S. senator it's unclear how much further the central bank's balance sheet wind-down process will run, but said it is likely the process faces no imminent end. ‘The size of our balance sheet ultimately will depend on the public's demand for our liabilities, particularly currency and reserves and we cannot specify in advance what that demand will be, hence we are not targeting any particular dollar value for our balance sheet,’ Jefferson wrote in a letter to Republican U.S. Senator Rick Scott.”

November 13 – Bloomberg (Alexandra Harris): “The Federal Reserve should stop cutting its bond holdings before a key liquidity facility is completely emptied so it can ensure that banks have sufficient reserves, according to Wrightson ICAP. There’s uncertainty surrounding the level of reserves that the banking system needs before they become scarce and institutions rely more heavily on short-term funding markets. Fed officials see those reserves — currently at $3.36 trillion — as sufficient and have been allowing the central bank’s bond holdings to drop by not buying new securities to replace those that mature. That’s pulling excess cash from the system as others buy the newly issued Treasuries instead. The process, known as quantitative tightening, helped to drain over $1 trillion since June from the Fed’s reverse repurchase facility, where money-market funds go to earn interest on extra cash, leaving about $1 trillion parked there.”

November 14 – Bloomberg (Katherine Burton and Sonali Basak): “Citadel founder Ken Griffin said the Federal Reserve risks a hit to its reputation if it cuts interest rates too quickly. ‘The Fed needs to have the message that they will put the inflation genie back in the bottle,’ Griffin said… ‘If they cut too soon, I think they risk losing credibility around their commitment to a 2% inflation target.’”

U.S. Bubble Watch:

November 16 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits increased to a three-month high last week, suggesting that labor market conditions continued to ease… Initial claims for state unemployment benefits rose 13,000 to a seasonally adjusted 231,000 for the week ended Nov. 11, the highest since August… The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 32,000 to 1.865 million during the week ending Nov. 4, the highest level since November 2021…”

November 16 – Bloomberg (Alicia Clanton): “Mortgage rates in the US fell for a third week, easing to the lowest in more than a month. The average for a 30-year, fixed loan was 7.44%, down from 7.5% last week, Freddie Mac said… The drop brings slight relief to homebuyers that have been facing the highest borrowing costs in decades.”

November 15 – CNBC (Diana Olick): “Current homeowners and potential homebuyers are responding to lower mortgage rates, albeit slowly… Applications for a mortgage to purchase a home increased 3% from the previous week and were 12% lower than the same week a year ago. Lower rates may help a little, but still-rising home prices and the still-low supply of homes are bigger hurdles for today’s potential buyers.”

November 15 – Associated Press (Anne D’Innocenzio and Christopher Rugaber): “Americans cut back on retail spending in October, ending six straight months of gains, though the decline was partly driven by falling prices for both gasoline and cars. Retail sales fell 0.1% last month after jumping a strong 0.9% in September… September’s figure was revised higher from an initial 0.7% gain. Excluding sales of gas and autos, retail sales ticked up 0.1%. The figures reflect a slowdown in consumers’ willingness to spend after a blowout summer.”

November 14 – Wall Street Journal (Ruth Simon): “With borrowing costs double their levels from just two years ago, many small businesses are pulling back… Some entrepreneurs are postponing equipment purchases and expansion plans, while others are delaying hiring, rethinking loan terms or stepping up efforts to collect payments on time. Keeping borrowing costs in check and managing cash flow is an added challenge for business owners already dealing with labor shortages, inflation and economic uncertainty. The average interest rate small businesses paid on short-term loans has stood at 9% or higher over the past three months, according to the National Federation of Independent Business, up from 6.7% a year earlier and 4.6% in August 2021.”

November 16 – Reuters (Lucia Mutikani): “Production at U.S. factories dropped more than expected in October as strikes by the United Auto Workers (UAW) union against Detroit's ‘Big Three’ automakers depressed motor vehicle production, but manufacturing elsewhere continued to hold up. Manufacturing output fell 0.7% last month…”

November 16 – Bloomberg (Laura Nahmias): “New York City will hold off on hiring new police officers, reduce trash pickups and slash spending on services for migrants in an effort to cut 5% from the city’s $107 billion budget. Those are among the cuts Mayor Eric Adams and Budget Director Jacques Jiha will reveal on Thursday… Adams warned in September that he would have to cut 15% from the city’s budget between this month and April 2024.”

November 13 – Bloomberg (Kathrin Hille): “The District of Columbia had its outlook revised to negative from stable by Moody’s…, just days after the credit-rating company did the same to the US. ‘The revision of DC’s outlook to negative reflects the District’s unique exposure as the nation’s capital to the federal government through economic, financial, capital market and governance linkages,’ Moody’s said…”

Fixed Income Watch:

November 16 – Bloomberg (Ethan M Steinberg): “Companies are rushing to borrow in US junk bond markets while investor demand is still strong, taking advantage of what could be the last window of opportunity this year. High-yielding issuers have sold more than $13 billion of fresh debt so far this month, tapping markets as Treasury yields retreat from October’s peaks and optimism mounts that the Federal Reserve’s interest-rate hiking cycle is over. Already, November sales are outstripping all of last month’s issuance by over 40%...”

November 14 – Bloomberg (Nina Trentmann): “Some of the largest US companies face billions of dollars in additional interest costs and hits to their profit if they refinance their 2024 maturities at current rates, with a third of them lacking the cash to repay upcoming debt. Non-financial companies in the S&P 500 have a combined $107.7 billion in debt coming due next year, with an average interest rate of 2.8%, according to a Calcbench analysis... Refinancing at 5.44% – the rate of the one-year Treasury bill in early November – would add another $3.09 billion in collective interest expense…”

China Watch:

November 14 – Bloomberg (Tania Chen): “China stepped up its support for the economy by pumping the most cash since late 2016 into the financial system with one-year policy loans. The People’s Bank of China offered 1.45 trillion yuan ($200bn) of cash through its medium-term lending facility — 600 billion yuan more than the amount coming due in November. The net injection was the most in nearly seven years… Beijing faces a dilemma as it seeks to bolster an economy reeling from a weak property while also shielding the yuan from further depreciation due to an already wide monetary policy gap with the US.”

November 13 – Bloomberg: “China’s credit growth remained steady in October, with a big jump in government bond sales to finance stimulus compensating for weak business and household borrowing as well as a large contraction in shadow financing. The flow of aggregate financing, a broad measure of credit, was 1.85 trillion yuan ($254bn)… That missed economists’ expectations of a 1.95 trillion yuan increase. October’s credit expansion relied mainly on issuance of government debt, which took up the biggest share since 2018, showcasing weakness in the private sector. The stock of aggregate financing last month rose 9.3% from a year before, capping the longest string of sub-10% growth rates on record.”

November 17 – Bloomberg (Evelyn Yu): “China’s regulators told the country’s biggest banks and asset managers to meet all ‘reasonable’ funding needs from property firms, in the government’s latest bid to arrest the protracted slump in the real estate market. In a meeting on Friday, the People’s Bank of China, the National Administration of Financial Regulation and the China Securities Regulatory Commission told financial institutions to support property developers in receiving loans, issuing bonds and ensuring reasonable equity financing from capital markets.”

November 17 – Bloomberg: “China told a handful of nationwide lenders to cap interest rates on interbank funding, people familiar… said, a move that dovetailed with a sizable cash injection intended to calm the market after last month’s unexpected liquidity crunch. At least two national banks were told last week by regulators to offer

November 17 – Bloomberg: “There’s a 1.5 trillion yuan ($207bn) question weighing on Chinese bond traders’ minds right now: How will Beijing sell that much debt with just six weeks left in the year? The answer is the People’s Bank of China, the world’s only major central bank on a policy easing path, and a slowing economy that sustains voracious appetite for risk-free assets. China has issued 9.6 trillion yuan of government bonds so far in 2023, against an estimated annual target of 11.1 trillion yuan…. This year’s issuance plan, which would be a record…”

November 15 – Reuters (Tetsushi Kajimoto): “China's new home prices fell for the fourth straight month with dozens of cities hit by declines, the most since the peak of the COVID-19 pandemic last year, suggesting a broader weakening in the sector… New home prices in October dropped 0.3% month-on-month after a 0.2% dip in September… ‘The most important reason for the bearish home prices is that demand is weak, buyers don't know if pre-sold homes they buy will be delivered on the dates promised by the developers,’ said Ma Hong, senior analyst at Zhixin Investment Research Institute. Nomura estimated there are around 20 million pre-sold units that are either not yet constructed or delayed.”

November 14 – Bloomberg: “China plans to provide at least 1 trillion yuan ($137bn) of low-cost financing to the nation’s urban village renovation and affordable housing programs in its latest effort to shore up the struggling property market… The People’s Bank of China would inject funds in phases through policy banks with the money ultimately trickling down to households for home purchases… Officials are considering options including the so-called Pledged Supplemental Lending and special loans… The plan, part of a new initiative by Vice Premier He Lifeng, would mark a major step-up in authorities’ efforts to put a floor under the biggest property downturn in decades…”

November 14 – Reuters (Ellen Zhang and Kevin Yao): “China's industrial output and retail sales growth beat expectations in October, but the underlying economic picture highlighted significant pockets of weakness with the crisis-hit property sector continuing to forestall a full-blown revival… China's industrial output grew 4.6% in October year-on-year, accelerating from the 4.5% pace seen in September… It also marked the strongest growth since April. Retail sales rose 7.6% in October with improvement in both auto and restaurant sales growth, quickening from a 5.5% gain in September and hitting the fastest pace since May. Analysts had expected retail sales to grow 7.0% due to the low base effect in 2022 when COVID curbs disrupted consumers and businesses.”

November 12 – Bloomberg (Tom Hancock): “China’s consumption rebound slowed and private business confidence lost momentum in October, according to independent surveys and alternative data that suggested the economic recovery remains bumpy. An indicator of Chinese consumer demand for recreation and transport published by Paris-based QuantCube Technology, along with an independent survey of consumer sentiment by US company Morning Consult, both fell in October... A poll of private business sentiment from the Cheung Kong Graduate School of Business also declined in the month.”

November 12 – Reuters (Konrad Putzier): “China's leaders, determined to upgrade manufacturing, are steering money toward makers of high-tech products, from semiconductors to EVs, raising fears that overcapacity will fuel a new wave of cheap exports. Lending data from China's central bank offers a glimpse of government priorities: as of the end of September, outstanding loans to the troubled property sector fell 0.2% year-on-year but lending to the manufacturing sector jumped 38.2%. Economists caution that this wave of investment differs in key respects from an earlier capital investment surge… But the trend has alarmed some key trading partners... ‘There is lower consumption in China right now but you have massive overcapacity that is being pushed out to the world, including in batteries, solar and chemicals,’ said Jens Eskelund, president of the European Chamber of Commerce in Beijing.”

November 14 – Bloomberg: “Chinese regulators have told securities firms to stop expanding their over-the-counter derivatives operations involving individual stocks, limiting a profitable business for the brokerage industry and dealing another setback to hedge funds that deploy long-short strategies. Regulators last week told multiple major brokerages to cap OTC businesses including total return swaps and options at the current levels... Similar restrictions were imposed on lending of shares for short selling, as well as some proprietary trading activities, the people said…”

November 14 – Reuters (Kevin Yao and Ziyi Tang): “China has ordered its local governments to halt public-private partnership projects identified as ‘problematic’ and replaced a 10% budget spending allowance for these ventures with a vetting mechanism by Beijing as it tries to curb municipal debt risks… The State Council has issued detailed guidelines to reform the public-private partnership (PPP) model for the first time since its launch in 2014, and comes as worries grow about the impact of ballooning local government debt on the economy. Local government debt reached 92 trillion yuan ($12.6 trillion), or 76% of China's economic output in 2022, up from 62.2% in 2019…”

November 13 – Reuters (Ellen Zhang and Marius Zaharia): “Having failed to find his dream job at a Chinese internet company upon graduation, Peter Liu settled for a role in a state library where there is so little need for his participation that he spends his time studying for a change in his career path. ‘It's really hard to get work at big companies,’ said the 24-year-old who majored in TV production at a Beijing university before moving back home in the central Henan province. Liu got the librarian job after a government-led campaign to secure temporary work for graduates, which analysts describe as a short-term solution to preserve social stability in a slowing economy with little on offer for young Chinese. Such ‘welfare jobs,’ as they are known in China, include roles as receptionists, office administrators, security guards and community workers.”

Central Banker Watch:

November 17 – Bloomberg (Sonja Wind): “A cut in European Central Bank interest rates won’t be happening in the near future, according to Bundesbank President Joachim Nagel. Borrowing costs ‘have to remain at a high level for a sufficient period,’ Nagel said... ‘While it is impossible to predict exactly how long this period will be, it is highly improbable that it will end anytime soon.’ While Governing Council members have emphasized that the deposit rate will remain at 4% well into 2024, money markets are betting on a reduction as soon as April and now price in a full percentage point of rate cuts next year.”

Europe Watch:

November 14 – Reuters (Jan Strupczewski): “The euro zone economy contracted marginally quarter-on-quarter in the third quarter…, but employment still rose. The European Union's statistics office Eurostat confirmed its estimate from Oct 31 that gross domestic product in the 20 countries sharing the euro fell 0.1% quarter-on-quarter in the July-September period for a 0.1% year-on-year rise… But contrary to the usual trend when the economy weakens, employment in the euro zone rose 0.3% quarter-on-quarter in the same period, for a 1.4% year-on-year increase.”

Japan Watch:

November 15 – Reuters (Leika Kihara): “The Bank of Japan has stepped up its drum beat of hawkish comments over the past week, in a series of communications that insiders say is priming markets for an end to negative interest rates, which could happen in the first few months of next year. The distinct change in BOJ commentary is a part of Governor Kazuo Ueda's plan to dismantle the controversial monetary stimulus of his dovish predecessor Haruhiko Kuroda... The hawkish tilt follows the BOJ's decision last month to relax its cap on long-term rates by tweaking its yield curve control (YCC) policy and contrasts with the rhetoric of Ueda shortly after he took the helm this year, which seemed to call for a continuation of Kuroda-era stimulus.”

November 14 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japan's economy contracted in July-September, snapping two straight quarters of expansion on soft consumption and exports, complicating the central bank's efforts to gradually phase out its massive monetary stimulus amid rising inflation. The data suggests stubbornly high inflation is taking a toll on household spending… ‘Given the absence of a growth engine, it wouldn't surprise me if the Japanese economy contracted again in the current quarter. The risk of Japan falling into recession cannot be ruled out,’ said Takeshi Minami, chief economist at Norinchukin Research Institute.”

November 15 – Reuters (Liangping Gao and Ryan Woo): “Japanese exports grew for a second straight month in October but at a sharply slower pace due to slumping China-bound shipments of chips and steel… Exports rose 1.6% in October from a year earlier…, faster than a 1.2% increase expected… but slower than the 4.3% rise in September… ‘With China's economy crawling at the bottom and demand from the United States and Europe slowing, we need to wait until the middle of next year for exports to bottom out,’ said Atsushi Takeda, chief economist at Itochu Economic Research Institute.”

EM Watch:

November 13 – Bloomberg (Patrick Gillespie): “Consumer prices in Argentina rose last month at their fastest pace since the country was exiting hyperinflation more than three decades ago, highlighting the dire state of the economy ahead of Sunday’s presidential election. Prices rose 8.3% in October on a monthly basis, a notch below September’s figure… Annual inflation accelerated to 142.7%...”

Levered Speculation Watch:

November 17 – Wall Street Journal (Gregory Zuckerman and Peter Rudegeair): “Wall Street’s best-known bear is going into hibernation. After nearly four decades, Jim Chanos is shutting down hedge funds he manages that wager against companies he believes are overpriced or fraudulent. His career as a short seller spanned a contrarian bet against Enron that paid off when the energy trader collapsed as well as yearslong, money-losing campaigns against Tesla and AOL. More recently, Chanos has struggled to turn his pessimistic positions into profits while markets generally moved higher. His firm, Chanos & Co., manages less than $200 million today, down from $6 billion in 2008… ‘The marketplace for what I do has changed,’ Chanos, 65, told The Wall Street Journal.”

Social, Political, Environmental, Cybersecurity Instability Watch:

November 14 – Wall Street Journal (Amrith Ramkumar): “The U.S. now experiences an extreme weather event in which damages and costs top $1 billion every three weeks. That compares with every four months in the 1980s, when adjusted for inflation, according to… the U.S. National Climate Assessment... For the first time, the assessment includes a separate chapter on the economic impacts associated with climate action. Such events cost the U.S. nearly $150 billion each year and disproportionately hurt poor and disadvantaged communities.”

November 14 – Bloomberg (Kendra Pierre-Louis, Eric Roston and Zahra Hirji): “The floods, heat waves, storms and fires fed by global warming are getting worse across the US and will pose increasing danger to Americans unless greenhouse gas emissions are cut sharply and swiftly… Called the Fifth National Climate Assessment, the report ‘is the authoritative, definitive assessment of how our country is doing on climate change,’ Arati Prabhakar, the director of the White House Office of Science and Technology Policy, said... Not only does it make clear that ‘climate change is here,’ she said, it also highlights how ‘America’s stepping up to meet this moment.’”

Geopolitical Watch:

November 15 – Reuters (Soo-hyang Choi): “Russian and North Korean officials held talks in Pyongyang to discuss expanding cooperation in economy, science and technology to follow up on the agreements reached by their leaders in September, the North's state media reported… The meeting took place on Wednesday…, led by North Korea's minister of external economic relations Yun Jong Ho and Russia's natural resources minister Alexander Kozlov… ‘The meeting discussed and confirmed in detail the measures for revitalizing and expanding the multi-faceted bilateral exchange and cooperation in different fields, including trade, economy, science and technology,’ the news agency said.”

November 15 – Reuters (Hyunsu Yim and Josh Smith): “A Russian delegation led by natural resources minister Alexander Kozlov is visiting Pyongyang…, as the politically isolated state announced new progress in its banned ballistic missile programme. Kozlov arrived on Tuesday, as U.S. Defense Secretary Lloyd Austin met with U.N. member states enforcing the Korean War armistice in Seoul and said they were concerned that China and Russia are helping North Korea expand its military capabilities by enabling Pyongyang to evade U.N. sanctions.”

November 15 – Reuters (Soo-Hyang Choi): “North Korea… criticised a recent visit to South Korea by top U.S. defence officials and vowed more ‘offensive’ responses to what it called military threats from the United States and its allies… A spokesperson for the North's defence ministry blamed the United States for raising tensions in the region, referring to U.S. Secretary of Defense Lloyd Austin's Seoul visit this week. ‘The armed forces of the DPRK will strongly control and manage all threats to its national security and interests with more offensive and overwhelming counteraction capabilities and through visible strategic deterrent military actions’…”

November 16 – Reuters (Guy Faulconbridge and Olzhas Auyezov): “Russia's rocket forces loaded an intercontinental ballistic missile equipped with the nuclear-capable ‘Avangard’ hypersonic glide vehicle into a launch silo in southern Russia… President Vladimir Putin announced the Avangard hypersonic glide vehicle in 2018, saying it was a response to U.S. development of a new generation of weapons and a U.S. missile defence system that it could penetrate.”

November 12 – Reuters (Ryan Woo and Lidia Kelly): “The Chinese and Pakistani navies are holding weeklong drills in the Arabian Sea days after the Russian Pacific Fleet and Myanmar practised repelling attacks in their first maritime exercise, while India and the United States pledged security cooperation. At a naval base in Karachi…, the Chinese and Pakistani navies kicked off the exercise in the waters and airspace of the northern Arabian Sea… During the exercise, China and Pakistan will conduct joint maritime patrols for the first time… The exercise follows what Moscow describes as ‘the first Russian-Myanmar naval exercise in modern history’… in the Andaman Sea on the northeastern fringe of the Indian Ocean, a milestone for Russia's naval presence in a sea that the United States counts as one of its global security interests.”

Friday Evening Links

[Reuters] Wall Street barely gains as traders digest earlier gains, Fed comments

[Yahoo/Bloomberg] ‘Epic’ Stock Rally Fades Amid Signs of Overheating: Markets Wrap

[Yahoo/Bloomberg] Oil Rebounds on Expectations OPEC Will Move to Support Prices

[Reuters] US debt risks to become a 'fact of life' for investors, says Citi

[Reuters] US jobs data may be miscounting millions of 'gig' workers, research suggests

[Reuters] What China's Xi gained from his Biden meeting

[WSJ] Jim Chanos, Short Seller Who Took on Enron and Tesla, to Close Hedge Funds

[FT] A hint of thaw in the new cold war

Friday's News Links

[Yahoo/Bloomberg] Stocks, Bonds Rise as Rate-Cut Conviction Builds: Markets Wrap

[Yahoo/Bloomberg] Oil Collapses Into Bear Market as Robust Supply Pressures OPEC+

[Yahoo/Bloomberg] Treasuries Suffer First Outflows Since 2021 in September Rout

[Reuters] Biden signs stopgap spending bill to avert government shutdown - White House

[Reuters] US single-family housing starts rise slightly in October

[Yahoo/Bloomberg] APEC Latest: Biden Says World’s History Will Be Written in Asia

[Yahoo/Bloomberg] Powell’s Fed Sticks Together in Fight Against Inflation Despite Differences

[Reuters] Biden, Trump unpopularity buoys third party hopes for 2024 US election

[Reuters] US equity funds draw heavy inflows on expectations for Fed pause

[Yahoo/Bloomberg] A $100 Billion ETF Flood Offers Little Solace to Active Managers

[Yahoo/Bloomberg] Muni Bond Blowup Exposes Flaws in $600 Billion Corner of Market

[Yahoo/Bloomberg] Israel Latest: Hezbollah Targets Army Posts on Lebanon Border

[Reuters] Insight: Forever war? Israel risks a long, bloody insurgency in Gaza

[Yahoo/Bloomberg] Xi’s Warm Words Jar With Reality for Foreign Companies in China

[Yahoo/Bloomberg] China Is Sailing Its Way Through a Record Year of Debt Sales

[Reuters] Cheap yuan catapults China to second-biggest trade funding currency

[Yahoo/Bloomberg] China Asks Some Big Banks to Cap Rates on Short-Term Funding

[Reuters] BOJ will debate easy-policy exit when inflation nears target -Gov Ueda

[Yahoo/Bloomberg] ECB Rate Cut Anytime Soon Is ‘Highly Improbable,’ Nagel Says

[Reuters] Russia's Putin sees political, economic upside to Israel's war with Hamas

[NYT] China Wants to Bulldoze Old Neighborhoods to Revive the Economy

[WSJ] Where Have All the Foreign Buyers Gone for U.S. Treasury Debt?

[FT] Leave Treasury basis trade hedge funds alone!