The economy has gained a head of steam since the FOMC’s December 13th meeting. Additional stronger-than-expected data this week. Q4 GDP was reported at 3.3%, down from Q3’s blistering 4.9%, but significantly above the 2.0% consensus estimate.
At 50.3 (estimate 47.6), the January Manufacturing PMI Index was the strongest since October ‘22’s 50.4. New Orders rose to 52.2, the high since last June. With a reading of 52.3, the Services PMI also surpassed forecasts (51.5) to a seven-month high.
Mortgage Purchase Applications popped another 8%, while December Pending Home Sales rose 8% to the highest level since July. New Home Sales were stronger-than-expected (664k vs. 649k). The rise (0.7%) in December Personal Spending hasn’t been stronger since last January, with Spending up 5.9% y-o-y.
Robust data had curiously little impact on rate cut expectations. The market is still at about 50% likelihood of a cut at the March 20th meeting and is pricing 33 bps of cuts by the May 1st meeting. Encouraging inflation reports have countered strong economic data. Q4 Core PCE was reported at 2.0%, matching Q3’s level. For perspective, Core PCE was at 4.7% during Q4 ’22 and 5.2% for Q4 ’21. A key Fed inflation gauge, December’s monthly PCE, was reported at 0.2% (2.6% y-o-y), with Core PCE at 0.2% (2.9% y-o-y).
Financial conditions have loosened dramatically, and highly speculative financial markets have performed spectacularly, while key inflation measures confirm an easing of pricing pressures. The backdrop would seem conducive to a return of “Balanced Powell.” Having jumped on the dovish pivot bandwagon, markets anticipate the Fed Chair laying the groundwork for an imminent rate cut. The thinking is that the FOMC will want to ensure it has rate cuts on the books well before November.
Seems the Fed is in a pickle of its own making. It was a mistake to begin talking rate cuts with conditions so loose and markets booming. The economy was administered a shot of adrenaline, pushing the timeline for economic weakness and resulting rate cuts out closer to election time. If the Fed is determined to get cuts underway, it will have to lean hard on weaker inflation data, while disregarding the speculative market Bubble and notably loose financial conditions. That would be a mistake.
Markets have fully embraced their beloved bullish narrative and are ready to impose their will. Powell better focus on inflation and rate cuts, or markets might throw a little tantrum.
There’s all this talk that the Fed must respond to elevated real interest rates with rate cuts or risk economic recession. But this analysis disregards the recent loosening of conditions and collapse of risk premiums. Investment-grade corporate bond spreads (to Treasuries) ended Friday trading at 92 bps. This spread hasn’t been narrower since October 2021. High yield spreads (325bps) are lower today than when the Fed began raising rates in March 2022.
January 21 – Financial Times (Harriet Clarfelt): “US corporate bond markets are ‘on fire’ as companies have sold a record $150bn of debt since the start of this month, the busiest opening to the year for more than three decades. Investment-grade groups have issued $153bn worth of bonds this month…, the highest year-to-date figure for dollar-denominated debt in records going back to 1990. Borrowers are rushing to lock in lower interest costs, while investors are keen to buy new bonds before policymakers start cutting US interest rates later this year. ‘The market is just on fire,’ said Richard Zogheb, head of global debt capital markets at Citi.”
Does the Fed really want to signal an imminent rate cut with equities and corporate debt markets On Fire and the economic boom smoldering?
On the other side of the world, panic has begun to take hold in Beijing. A surprise cut in bank reserve requirements, talk of $278 billion stock market support, and the PBOC announcing a boost in targeted lending (it's worth looking through the “China Watch” items below).
The Shanghai Composite rallied 6% off Wednesday’s trading lows to finish the week up 2.8%. Hong Kong’s Hang Seng Index rallied almost 10% off lows, before closing the week up 4.2%. The Hang Seng China Financials Index rallied 11.5% to end the week up 6.8%. The base metals rallied. Copper gained 1.7%, Aluminum 2.6%, Lead 2.8%, Nickel 4.7%, Zinc 5.4%, and Tin 5.4%. Iron Ore rose 2.6%. EM equities rallied tepidly, while EM currencies and bonds were notably unimpressive.
Beijing has been in denial. But they are likely coming to the recognition that to hold Bubble collapse at bay – let along maintain the growth trajectory necessary to achieve global superpower ambitions – will require massive government spending and PBOC printing. More reports this week of currency support operations. Beijing must by now understand that their fragile currency presents a major risk to system stability.
Chinese banks have been big players in using currency derivatives to support the renminbi. This works to preserve valuable international reserves – but only for so long. I expect more intense selling pressure will have the PBOC liquidating Treasuries to support its currency. And if fear of renminbi and EM currency instability spurs U.S. dollar strength, we could see EM central banks also selling Treasuries to support local currencies. It’s going to be an interesting few weeks.
An excerpt from Thursday’s Q4 Tactical Short conference call, “Prospects After a Market Melt-up.”
Fed officials hold great power to move markets. But asset inflation and speculative bubbles require monetary fuel. The Fed’s balance sheet contracted about $800 billion last year to $7.65 TN – and is today $1.25 TN smaller compared to its July ‘22 peak. Moreover, the M2 monetary aggregate contracted $600 billion last year, as bank lending slowed markedly. Which begs the question: What is the monetary source fueling historic asset inflation?
I believe the answer to this question is at the heart of likely post market melt-up prospects. Was the source of the market fuel of the typical and sustainable variety? Or is something more threatening going on, something abnormal and prone to a destabilizing reversal?
From the perspective of my analytical framework, speculative leverage is highly problematic. When a trader uses a margin loan to purchase stock, this new credit adds liquidity into the market. If large amounts of leverage and resulting liquidity enter the marketplace, this monetary fuel tends to be self-reinforcing. Inflating stock prices induce only more margin-financed speculation. And as the size of this speculative credit and liquidity grow, distortions to the markets, the financial system, and the economy become more structural.
From my studies of the “Roaring Twenties” period, I became convinced that a historic expansion of speculative leverage created vulnerabilities to crash dynamics and economic depression. The speculative melt-up that culminated in the summer of 1929 had left a fragile system acutely vulnerable to a market reversal, the self-reinforcing unwind of speculative credit, illiquidity, market dislocation, and panic.
The historical revisionists, with Ben Bernanke at the forefront, promote the view that the failure of the Federal Reserve to print sufficient money supply and recapitalize the banking system were the root causes of the Great Depression. Contemporaneous analysis appreciated that loose money, credit excess, faith in the Fed backstop, and rank speculation had fueled a protracted bubble with deep structural maladjustment.
Speculative excess during our most prolonged bubble cycle has put “Roaring Twenties” excesses to shame. Margin lending has inflated to record levels. But in today’s world, margin debt accounts for only a sliver of speculative credit. Especially with the proliferation of options trading by institutions and online traders - derivative-related leverage has surely exploded over recent years.
I suspect the “magnificent seven” phenomenon became a major source of late-cycle speculative leverage. Call option buying in the major tech stocks and associated ETFs has been hugely market impactful. And as these stocks and derivatives succumbed to speculative melt-up dynamics, traders and derivative dealers that had sold call options and upside derivatives were forced to aggressively establish leveraged long positions in the underlying instruments - to hedge their exposures. This leveraging generated powerful system liquidity expansion.
But another source of leveraged speculation has likely been an even greater liquidity generator: the so-called “basis trade,” where hedge funds borrow to buy Treasury bonds while shorting corresponding Treasury futures contracts - capturing the tiny spread between the yields on the two instruments. This trade has been around for years. It had reached several hundred billion going into the pandemic. A disorderly unwind of the “basis trade” was a factor that forced repeated Fed announcements of larger liquidity injections necessary to quell the March 2020 panic.
The Fed’s “basis trade” bailout ensured it would later inflate into one of history’s greatest levered speculations - in the world’s most important market. Reports over the summer had the “basis trade” reaching $500 billion, surpassing the pre-pandemic level. By the fall, it was up to $650 billion, with reports in December of a trillion-dollar “basis trade.” And focus on the Treasury “basis trade” overlooks what is surely similar leveraging in Agency securities and MBS. Moreover, huge “carry trade” leverage has accumulated in U.S. corporate debt, along with bond markets around the world. And the U.S. certainly doesn’t hold a monopoly on levered speculation. With the Bank of Japan dragging its heels on policy normalization, a hugely advantageous yen “carry trade” financed massive speculative leverage in the U.S. and globally.
So, when we ponder sources of liquidity fueling market melt-ups in the face of a contracting Fed balance sheet and weakened bank lending, we can safely assume trillions of speculative leveraging – margin debt, derivatives-related leverage, “basis trades,” “carry trades,” and such. Crazy end-of-cycle monetary disorder.
Money market fund assets expanded $1.17 TN last year, or almost 25%, to a record $5.9 TN. This crushed the $729 billion annual growth record set in tumultuous 2007. Moreover, 2023 was an acceleration of already historic ballooning that started pre-pandemic. Since the Fed resumed QE back in September 2019, money fund assets have ballooned $2.56 TN, or 75%.
This historic monetary inflation flies under the radar. Analysts simplistically assume that growth is driven by both flight from bank deposits and general risk aversion. It goes unappreciated that the money fund complex has evolved into a critical funding source for levered speculation. Wall Street firms and major banks tap the “repo” market to fund their securities finance operations. When a hedge fund levers Treasuries as part of a “basis trade” strategy, this borrowing is done through the “repo” market. And the money market fund complex has become the major source of lending into the “repo” marketplace.
This part of the analysis gets more complex. Back during the mortgage finance bubble period, I was focused on the money markets as the key source of financing for ballooning GSE balance sheets. The GSEs would issue new short-term debt instruments to the money funds in exchange for cash, and then use this money to buy debt securities in the open market. This new liquidity would find its way back to the money fund complex, where the GSEs would simply issue more debt instruments and borrow more.
For those familiar with the workings of fractional reserve banking and the “deposit multiplier”, this was unfettered credit creation unconstrained by reserve requirements. I refer to this dynamic as the “infinite multiplier effect.” Basically, funds could be borrowed over and over again – creating the illusion of unlimited marketplace liquidity.
Funding “basis trade” speculation with “repo” borrowings - intermediated through the money fund complex - takes even mortgage finance bubble speculative leverage to dangerous new extremes. For starters, this type of monetary inflation appears miraculous. The Treasury can run $2 TN annual deficits, while the Fed shrinks its balance sheet. Yet markets remain seductively liquid, while general financial conditions loosen. The Citadel hedge fund group is a major “basis trade” operator. Ken Griffin, Citadel’s founder and CEO, is fond of arguing that the “basis trade” is lowering government borrowing costs and supporting economic growth.
The problem today, as it has been for centuries, is that highly levered speculative bubbles neither last forever nor work in reverse. When we ponder post-melt-up prospects, the plight of the “basis trade”, and levered speculation more generally, are at the top of our list of considerations.
In some respects, this Bubble Dynamic enjoys extraordinary stability. At the heart of the financial system, the “basis trade” operators have full confidence that the Federal Reserve will do whatever it takes to maintain Treasury market liquidity. The Fed would, as they’ve done in the past, also move aggressively and swiftly to ensure “repo” market and money fund stability. And unlike risky mortgage debt, markets have no fear of credit issues – no matter the size of deficits or the ballooning amount of outstanding Treasury debt.
Recalling the great American economist Hyman Minsky, “stability can be destabilizing.” Decades of Federal Reserve market backstops and bailouts – “coins in the fuse box” – have incentivized an unprecedented expansion of system leverage and speculative excess. As a student of financial history who analyzed the mortgage finance bubble on a daily basis, I can state without a doubt that the current global government finance bubble has inflated momentously beyond previous bubbles.
Fallout from the so-called “great financial crisis” is not yet too distant of a memory. And we know that it required trillions of Fed QE to thwart financial collapse in 2020. The next serious bout of global de-risking/deleveraging will pose quite a challenge for the Fed and global central bank community. The bigger bubbles inflate, the greater the amount of QE necessary to stabilize market liquidity. To try to keep deleveraging from snowballing, the Fed will surely move quickly and aggressively. And, importantly, the Fed has never faced such a policy challenge with inflation risk as elevated and the bond market as levered.
Market dynamics have been intriguing to start 2024. Opening the year to the downside, weakness in the big Nasdaq stocks seemed to spur global market liquidity concerns. Periphery markets – from the emerging markets to peripheral European bonds to U.S. small cap stocks – signal nascent de-risking/deleveraging concerns. And while the Nasdaq100 reversed course and rallied to new all-time highs into options expiration, markets at the global periphery have been notable underperformers.
I vividly recall how big tech turned unstable to open year-2000, following 1999’s historic bubble year. There was one final big rally into quarterly options expiration, right in the face of deteriorating industry fundamentals. The March 2000 Nasdaq peak was not reached again for 15 years. I am mindful of how a marketplace so conditioned to squeeze both shorts and hedges can extend “Terminal Phase” Bubble excess. As I know better than most, call the demise of a bubble at your own peril.
Meanwhile, economic data to begin the new year are making the Goldilocks “soft landing” crowd nervous. While downshifting from Q3’s blistering 4.9% growth, a strong holiday shopping season, surging consumer confidence, and ongoing labor tightness suggest upside economic risk. Q4 GDP was reported this morning (Thursday) at a much stronger-than-expected 3.3%. After such a dramatic loosening of conditions, such data shouldn’t be surprising.
The Q4 “everything rally,” with market focus shifting to looming rate cuts, brought strong correlations between stocks and bonds. The rates market ended ‘23 pricing at least six rate cuts this year. Last week, bonds globally came under heavy selling pressure, as the market began dialing back rate cut expectations. Two-year Treasury yields jumped 24 bps last week, while MBS yields surged 28 bps.
At this point, ongoing big tech bubble inflation increases the likelihood of upside surprises to both economic growth and inflation. Highly synchronized during the melt-up, bond and stock market performance could now part ways. And I see the bond market especially vulnerable in today’s post-melt-up environment. Market yields and rate expectations traded to levels not supported by underlying fundamentals. And with sentiment turning so bullish, market players extended durations and let hedges expire. This heightens the risk of a surprise bout of aggressive hedging and selling, with negative ramifications for marketplace liquidity.
It is today important to appreciate that melt-ups often conclude the speculative cycle. Inflated prices become unsustainable. Excesses – including speculative leveraging – turn untenable. The underlying monetary disorder becomes increasingly destabilizing, for the markets as well as the real economy. That said, there is an element of George Soros’ “reflexivity” – where perceptions tend to shape reality. As we’ve witnessed again in recent months, news and analysis follow market direction. Surging stock prices feed bullish narratives built on “soft landings,” falling inflation, and rate cuts. Analysts will boost earnings estimates, and company management will do whatever they can to beat them. Loose conditions will ensure easy corporate borrowing, along with more M&A and IPOs.
We see ongoing support for our thesis of a world transitioning to a new cycle. Melt-up dynamics, however, have extended the current transition phase, emboldening those believing the previous cycle bullish market, inflation and economic dynamics will be sustained indefinitely.
The reality is one of a precarious widening gap between bullish perceptions and deteriorating prospects. This discontinuity significantly raises the odds of a disorderly adjustment – both in the markets and within the economy. Importantly, melt-up-induced price gains and liquidity excess mask mounting fragilities. Having disregarded myriad risks, markets became acutely vulnerable to abrupt reversals, de-risking/deleveraging, illiquidity, and destabilizing shifts in market perceptions.
In general, the post melt-up backdrop is one of highly elevated liquidity and de-leveraging risks. And, to begin 2024, there is support for this thesis right where we would expect to initially observe it - at the vulnerable global periphery most sensitive to waning liquidity and tightened conditions.
In recent CBBs, I’ve noted the surge in global yields, especially in dollar-denominated emerging market debt. If the sophisticated global players were beginning to position for an unfolding deleveraging dynamic, this is exactly where they would begin paring exposures. The more vulnerable currencies are underperforming. EM currencies have been sold aggressively to begin the year, while the yen has already lost 4.5%.
It is not atypical for nascent stress at the “periphery” to underpin excess at the “core.” Even as the subprime implosion marked the beginning of the end to the mortgage finance bubble, a big rally in “core” AAA-rated Agency and MBS securities somewhat extended the boom.
These days at the troubled periphery, we have seen Chinese equities in free-fall. Despite ongoing efforts to support stock prices, major Chinese indices have already suffered double-digit y-t-d declines. Talk now is of an almost $300 billion market rescue package, a huge number that analysts view as insufficient. This is a reminder of how incredibly China’s entire system inflated during this long cycle. If $300 billion is inadequate to support Chinese stocks, how much will be required to rescue the nation’s real estate markets, local government debt, the “trust industry,” and their almost $60 TN banking system?
For the Week:
The S&P500 gained 1.1% (up 2.5% y-t-d), and the Dow increased 0.6% (up 1.1%). The Utilities recovered 0.6% (down 3.2%). The Banks rallied 2.4% (up 0.4%), and the Broker/Dealers rose 1.8% (down 1.4%). The Transports advanced 2.0% (unchanged). The S&P 400 Midcaps increased 0.8% (down 0.6%), and the small cap Russell 2000 rallied 1.7% (down 2.4%). The Nasdaq100 added 0.6% (up 3.5%). The Semiconductors declined 0.8% (up 4.0%). The Biotechs declined 0.5% (down 4.5%). While bullion slipped $11, the HUI gold index was unchanged (down 10.2%).
Three-month Treasury bill rates ended the week at 5.1975%. Two-year government yields declined four bps this week to 4.35% (up 10bps y-t-d). Five-year T-note yields slipped a basis point to 4.04% (up 19bps). Ten-year Treasury yields added a basis point to 4.14% (up 26bps). Long bond yields rose four bps to 4.37% (up 34bps). Benchmark Fannie Mae MBS yields declined four bps to 5.51% (up 24bps).
Italian yields declined six bps to 3.82% (up 12bps y-t-d). Greek 10-year yields fell five bps to 3.30% (up 25bps). Spain's 10-year yields declined five bps to 3.20% (up 21bps). German bund yields dipped four bps to 2.30% (up 28bps). French yields declined four bps to 2.79% (up 23bps). The French to German 10-year bond spread was unchanged at 49 bps. U.K. 10-year gilt yields rose four bps to 3.96% (up 43bps). U.K.'s FTSE equities index rallied 2.3% (down 1.3% y-t-d).
Japan's Nikkei Equities Index declined 0.6% (up 6.8% y-t-d). Japanese 10-year "JGB" yields rose five bps to 0.72% (up 10bps y-t-d). France's CAC40 surged 3.6% (up 1.2%). The German DAX equities index recovered 2.5% (up 1.3%). Spain's IBEX 35 equities index gained 0.8% (down 1.6%). Italy's FTSE MIB index increased 0.3% (unchanged). EM equities were mixed. Brazil's Bovespa index rose 1.0% (down 3.9%), and Mexico's Bolsa index rallied 2.5% (down 0.9%). South Korea's Kospi index increased 0.2% (down 6.7%). India's Sensex equities index fell 1.4% (down 2.1%). China's Shanghai Exchange Index rallied 2.8% (down 2.2%). Turkey's Borsa Istanbul National 100 index surged 4.4% (up 11.7%). Russia's MICEX equities index was little changed (up 2.1%).
Federal Reserve Credit declined $10.4bn last week to $7.639 TN. Fed Credit was down $1.250 TN from the June 22nd, 2022, peak. Over the past 228 weeks, Fed Credit expanded $3.913 TN, or 105%. Fed Credit inflated $4.839 TN, or 172%, over the past 585 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $22.0bn last week to a nine-month low $3.357 TN. "Custody holdings" were up $36.3bn, or 1.1%, y-o-y.
Total money market fund assets were little changed at $5.960 TN. Money funds were up $1.156 TN, or 24.1%, y-o-y.
Total Commercial Paper slipped $3.8bn to $1.251 TN. CP was down $60bn, or 4.6%, over the past year.
Freddie Mac 30-year fixed mortgage rates gained nine bps to 6.69% (up 67bps y-o-y). Fifteen-year rates jumped 20 bps to 5.96% (up 81bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 7.02% (up 55bps).
Currency Watch:
January 22 – Reuters: “China's major state-owned banks moved to support the yuan on Monday, tightening liquidity in the offshore foreign exchange market while actively selling U.S. dollars onshore as equities slid… The goal was to prevent the yuan from falling too fast as China's A shares plunged…, with the benchmark Shanghai Composite index, opens new tab posting its biggest one-day drop since April 2022 on Monday, down 2.7%. ‘It is a clear policy signal to stabilise the yuan and counter the negative market sentiment on equities,’ said Gary Ng, senior economist for Asia Pacific at Natixis.”
January 22 – Bloomberg: “The cost to borrow the yuan in Hong Kong rose to the highest in almost two years, signaling its scarcity in the city — and reminding traders of a currency-strengthening tactic once employed by Beijing. So-called overnight Hibor, a gauge measuring the cost for Hong Kong banks to borrow yuan from each other, climbed to a level unseen since April 2022... One- and three-month tenors also climbed, to the highest since late last year. The rapid increase mirrors the impact of intervention measures that China deployed in the aftermath of a yuan devaluation in 2015, which limited the supply of yuan in Hong Kong and squeezed short-sellers.”
January 25 – Wall Street Journal (Rebecca Feng): “Chinese individual investors want to shift their money out of the country—and they are willing to pay a big premium to do so. The best example of their desperation: Some this week have been buying funds that offer exposure to Japanese stocks at a 20% premium to what those stocks are worth. An exchange-traded fund launched by China Asset Management Co. traded at a 14% to 20% premium to its indicative net asset value... The ETF became so popular that China AMC halted its trading for an hour on Thursday, a move also taken by another firm.”
January 23 – Financial Times (Cheng Leng, Sun Yu and Thomas Hale): “Chinese authorities are tightening limits on capital outflows by restricting access to funds that invest in offshore securities as the country battles a brutal market rout. About a third of Chinese funds that invest in foreign securities under a scheme that bypasses strict capital controls have announced in stock exchange notices they have suspended or capped sales to retail investors ‘to maintain stable operations and protect investors’ interests’. The Beijing-based manager of one fund that focuses on US stocks said they had received informal instructions from the Shanghai Stock Exchange to reduce sales of such products targeting overseas markets after demand went ‘through the roof’.”
For the week, the U.S. Dollar Index was up slightly to 103.43 (up 2.1% y-t-d). For the week on the upside, the South African rand increased 1.3%, the Norwegian krone 0.6%, the Swiss franc 0.5%, the Brazilian real 0.4%, the Swedish krona 0.2%, and the South Korean won 0.2%. On the downside, the Mexican peso declined 0.5%, the euro 0.4%, the New Zealand dollar 0.4%, the Australian dollar 0.3%, and the Canadian dollar 0.2% (British pound, Japanese yen and Singapore dollar little changed). The Chinese (onshore) renminbi increased 0.22% versus the dollar (down 1.08%).
Commodities Watch:
The Bloomberg Commodities Index rallied 2.0% (up 0.1% y-t-d). Spot Gold declined 0.5% to $2,019 (down 2.2%). Silver recovered 0.8% to $22.80 (down 4.2%). WTI crude jumped $4.60, or 6.3%, to $78.01 (up 9%). Gasoline rose 6.1% (up 9%), and Natural Gas rallied 7.7% to $2.71 (up 8%). Copper recovered 1.7% (down 1%). Wheat gained 1.2% (down 4%), and Corn increased 0.2% (down 5%). Bitcoin gained $210, or 0.5%, to $41,850 (down 1.5%).
Middle East War Watch:
January 22 – Associated Press (Jon Gambrell): “Iran is ‘very directly involved’ in ship attacks that Yemen’s Houthi rebels have carried out during Israel’s war against Hamas, the U.S. Navy’s top Mideast commander told The Associated Press... Vice Adm. Brad Cooper, the head of the Navy’s 5th Fleet, stopped short of saying Tehran directed individual attacks by the Houthis… However, Cooper acknowledged that attacks associated with Iran have expanded from previously threatening just the Persian Gulf and its Strait of Hormuz into waters across the wider Middle East. ‘Clearly, the Houthi actions, probably in terms of their attacks on merchant shipping, are the most significant that we’ve seen in two generations… The facts simply are that they’re attacking the international community; thus, the international response I think you’ve seen.’”
January 20 – Reuters (Samia Nakhoul and Parisa Hafezi): “Commanders from Iran's Islamic Revolutionary Guards Corps (IRGC) and Lebanon's Hezbollah group are on the ground in Yemen helping to direct and oversee Houthi attacks on Red Sea shipping, four regional and two Iranian sources told Reuters. Iran - which has armed, trained and funded the Houthis - stepped up its weapons supplies to the militia in the wake of the war in Gaza…”
January 26 – Reuters (Enas Alashray, Ahmed Tolba, Arathy Somasekhar, Georgina McCartney, and Mohammed Ghobari): “Yemen's Houthi rebels on Friday stepped up attacks on vessels transiting the Red Sea, including a hit that sparked a fire on a fuel tanker operated on behalf of trading firm Trafigura. Trafigura said a missile struck the fuel tanker Marlin Luanda as it transited the Red Sea. The tanker was carrying Russian naphtha purchased below the price cap in line with G7 sanctions…”
January 26 – Associated Press (Jon Gambrell and Tara Copp): “Yemen’s Houthi rebels launched a missile Friday at a U.S. warship patrolling the Gulf of Aden, forcing it to shoot down the projectile, and struck a British vessel as their aggressive attacks on maritime traffic continue. The attack on the U.S. warship, the destroyer USS Carney, marked a further escalation in the biggest confrontation at sea the U.S. Navy has seen in the Middle East in decades… The Carney attack represents the first time the Houthis directly targeted a U.S. warship…”
January 24 – Associated Press (Tara Copp and Lolita C. Baldor): “The U.S. military struck three facilities in Iraq and two anti-ship missiles in Yemen operated by Iranian-backed militias that have attacked U.S. personnel and ships in the region as the United States tries to keep the Israel-Hamas war from spilling over into a wider conflict. Both the strikes in Iraq and Yemen late on Tuesday targeted sites that the U.S. has said are involved in the attacks against U.S. forces in Iraq and Syria and were threatening U.S. military and commercial vessels in the Red Sea.”
January 24 – New York Times (Helene Cooper and Eric Schmitt): “For years, the scrappy Iran-backed Yemeni rebels known as the Houthis did such a good job of bedeviling American partners in the Middle East that Pentagon war planners started copying some of their tactics. Noting that the Houthis had managed to weaponize commercial radar systems that are commonly available in boating stores and make them more portable, a senior U.S. commander challenged his Marines to figure out something similar. By September 2022, Marines in the Baltic Sea were adapting Houthi-inspired mobile radar systems. So senior Pentagon officials knew as soon as the Houthis started attacking ships in the Red Sea that they would be hard to tame.”
January 24 – Reuters (Phil Stewart and Idrees Ali): “U.S. and British forces carried out a new round of strikes on Monday in Yemen, targeting a Houthi underground storage site as well as missile and surveillance capabilities used by the Iran-aligned group against Red Sea shipping, the Pentagon said. The Houthis, who control the most populous parts of Yemen, have said their attacks are in solidarity with Palestinians as Israel strikes Gaza.”
January 24 – New York Times (Stanley Reed): “For about two months, a barrage of missile and drone attacks in the Red Sea by Houthi militants has posed a difficult choice to shipowners using the Suez Canal: risk an airborne strike and pay sharply higher insurance rates, or forgo the canal and take the longer route around Africa, snarling schedules and entailing higher fuel charges. The attacks — at a choke point that handles 12% of global trade, including nearly one-third of the world’s container ship traffic — have already forced some shutdowns at European auto plants and raised fears of a surge in consumer prices. For shipping companies, costs have already increased. A composite measure of global shipping costs, the Drewry World Container Index, has more than doubled since late last year. The rise is partly tied to a shortage of empty shipping containers, caused by the up to two weeks of additional time for trips going around Africa’s Cape of Good Hope. And using the Red Sea now requires expensive war risk insurance.”
January 23 – Bloomberg (Farah Elbahrawy): “With the Red Sea crisis roiling shipments of everything from cars to energy, it’s a matter of time before soaring costs and supply-chain strains show up in companies’ earnings reports. Several firms are already warning of the impact. Electric-vehicle maker Tesla Inc. plans a two-week production halt at a German plant due shipment delays, while Sweden’s Volvocar AB has announced a three-day stoppage at its Belgian factory.”
January 23 – Reuters (Arafat Barbakh, Emily Rose and Jeff Mason): “Intense international mediation efforts are working toward exchanging Israeli hostages for Palestinian prisoners during a proposed month-long ceasefire in Gaza…, as the White House said its envoy was having active discussions on the issue. Qatar, the U.S. and Egypt have held shuttle diplomacy since Dec. 28 and Israel and Hamas broadly agree in principle to the framework plan, sources said. It is being held up by the two sides' differences over how to bring a permanent end to the Gaza war, sources said.”
Taiwan Watch:
January 24 – Reuters (Lisa Du): “The United States Navy sailed its first warship through the sensitive Taiwan Strait… following presidential and parliamentary elections on the island, drawing the ire of Beijing. The U.S. Navy said the destroyer USS John Finn transited through a corridor in the Taiwan Strait that was ‘beyond the territorial sea of any coastal state’. ‘John Finn's transit through the Taiwan Strait demonstrates the United States' commitment to upholding freedom of navigation for all nations as a principle,’ the U.S. Navy said…”
January 25 – Reuters (Ben Blanchard): “Taiwan President-elect Lai Ching-te said… he hopes the United States can continue to firmly support Taiwan, as he met the first group of U.S. lawmakers to visit Taipei since he won an election... Lai, from Taiwan's ruling Democratic Progressive Party (DPP) and the current vice president, will take office on May 20. China… believes he is a dangerous separatist and has rejected his offers of talks.”
January 21 – Reuters (Ben Blanchard): “Taiwan's defence ministry said it had detected six more Chinese balloons flying over the Taiwan Strait on Sunday, one of which crossed the island, the latest in a spate of such balloons… The ministry earlier this month… accused China of threatening aviation safety and waging psychological warfare on the island's people with the balloons, days before Taiwan's Jan. 13 elections.”
Ukraine War Watch:
January 22 – CNBC (Holly Ellyatt): “Russia and Ukraine traded retaliatory strikes over the weekend after another Russian oil terminal was attacked on Sunday, as were the Russian-occupied city of Donetsk and nine Ukrainian regions. Moscow accused Kyiv of launching a missile strike on a market in Donetsk city… Ukrainian armed forces operating in the region denied they had carried out the strike, stating that they ‘did not conduct any combat operations with means of destruction.’ Elsewhere, a fire broke out at a terminal of Russia’s largest liquefied natural gas producer Novatek on the Baltic Sea, a regional official said…”
January 24 – Reuters (Ronald Popeski and Tom Balmforth): “Ukrainian drones attacked a Rosneft-owned… oil refinery in southern Russia in the latest such strike on Russian energy infrastructure, a Ukrainian source said… The Ukrainian source said the SBU security service hit the refinery with drones and would continue attacking facilities providing fuel for Russia's nearly two-year invasion.”
January 21 – Reuters (Andrew Osborn and Maxim Rodionov): “Russian energy company Novatek… said on Sunday it had been forced to suspend some operations at a huge Baltic Sea fuel export terminal due to a fire started by what Ukrainian media said was a drone attack. The giant Ust-Luga complex, located on the Gulf of Finland about 110 miles west of St. Petersburg, is used to ship oil and gas products to international markets.”
Market Instability Watch:
January 22 – Bloomberg: “A rout in Chinese stocks listed in Hong Kong intensified Monday, pushing their discount to mainland peers to the deepest in fifteen years in the latest sign of growing pessimism among international investors. The Hang Seng China Enterprises Index fell 2.4%, inching closer to a level last seen almost two decades ago, while the onshore benchmark CSI 300 Index finished 1.6% lower. As a result, a gauge tracking mainland stocks’ price gaps versus their dual listings in Hong Kong reached the widest since 2009 — implying a 36% discount for the offshore market.”
January 25 – Financial Times (Cheng Leng): “Chinese retail investors who loaded up on derivatives that rely on calm market conditions have been hit with heavy losses, further undermining confidence in the country’s sputtering equity market. So-called snowballs, which promise a stream of sizeable interest payments as long as stock indices trade within a certain range, have grown to an estimated Rmb320bn ($45bn) market in China. Brokerages and private wealth managers increased sales of such derivatives — named because of the steady returns they can accumulate for holders — in 2021, touting the higher yields on offer at a time when equity markets were relatively placid.”
January 22 – Reuters (Jon Gambrell): “Some Wall Street executives feel a tantrum coming in U.S. short-term financing markets, perhaps as soon as March. It could put pressure on the Federal Reserve to ease policy. A series of events are expected between March and May, some of which will reduce the amount of cash in the financial system, while others increase the demand for liquidity, according to interviews with four banking executives. A Fed lending facility that was put in place after the regional banking crisis last year will expire on March 11, with $129 billion outstanding… Another market backstop, called the standing repo facility (SRF), that Fed officials have held up as a safety net has seen only a few banks sign up so far. At the same time, the demand for cash is likely to increase, with the issuance of massive quantities of U.S. government debt and quarterly tax payments due on March 15 and annual payments due on April 15.”
January 25 – Reuters (Lewis Krauskopf): “Assets in money market funds are rising to start the year, challenging some expectations that investors are set to pour cash on the sidelines into stocks and fixed income, JPMorgan strategists said… So far this year, taxable U.S. money market fund (MMF) balances have increased by $75 billion, JPMorgan fixed income strategists led by Teresa Ho said... By contrast, such funds have seen seasonal outflows at the start of the year in general over roughly the past decade, the strategists said.”
January 26 – Reuters (Yoruk Bahceli and Naomi Rovnick): “Traders on Thursday piled on bets that the European Central Bank will cut interest rates from April as they took the view that policymakers are growing more comfortable with the inflation outlook. After the central bank kept its key rate on hold at a record 4%, ECB chief Christine Lagarde repeated twice in a news conference that it was ‘premature’ to discuss rate cuts. But with the comments it made on inflation and wages, the bank was seen as appearing less concerned about inflation than before.”
Global Bond Watch:
January 25 – Bloomberg (Viktoria Dendrinou): “Former Treasury Secretary Robert Rubin said the US is in a ‘terrible place’ with regard to its federal deficits, and called for tax increases to address the deterioration. ‘The risks are enormous and some of them are materializing already, like higher interest rates,’ Rubin said… The roughly 3-percentage-point surge in longer-term Treasury yields in recent years is due in part to the fiscal outlook and its impact on inflation, he said. Risks are even greater today than in the early 1990s, when incoming President Bill Clinton crafted a budget-tightening package to shrink the deficit, Rubin said. The danger is that when markets are ‘out of sync with reality,’ they can then ‘correct savagely’ — as happened when Greek bond premiums over German ones soared during the euro crisis, he said.”
Bubble and Mania Watch:
January 20 – Financial Times (Josephine Cumbo, and Sun Yu and Antoine Gara): “US public pension plans that manage hundreds of billions of dollars of assets are increasingly turning to risky leverage strategies as burgeoning private market holdings create cash flow strains. At least eight very large US public pension funds are using borrowed cash or other leverage strategies, now that the board of Calstrs… this month voted to allow the fund to borrow as much as $30bn, or 10% of its portfolio. The strategy has risen in prominence as these giant funds have tied up a larger and larger share of their assets in illiquid investments such as private equity, infrastructure and real estate. Using borrowed money and derivatives can help boost returns, rebalance portfolios and give the funds access to cash without having to resort to fire sales of illiquid assets during times of market stress.”
January 23 – Bloomberg (Olga Kharif): “Bitcoin has fallen over 20% since the Jan. 11 launch of the first exchange-traded funds investing directly in the token as speculators become more cautious about the potential impact of the products. The digital asset spiked to $49,021 on the day the ETFs from issuers including BlackRock Inc. and Fidelity Investments went live.”
January 24 – Wall Street Journal (Carol Ryan): “Property investors sat on the sidelines last year waiting for enticing opportunities. But the 2009-style discounts they were hoping for haven’t materialized—at least not for the kinds of buildings they want to own. Just $374 billion of real estate sold in the U.S. last year, according to MSCI… a 51% fall compared with 2022. The deal tally was also 14% lower than in 2020… According to the RCA CPPI National All-Property Index, which tracks the value of property deals that closed, U.S. commercial real estate prices are down 11% from peaks seen around the time the Federal Reserve began raising interest rates in early 2022. Some real estate has certainly become a lot cheaper, but only the riskiest type.”
January 22 – CNBC (Christian Nunley): “Private credit has quickly become one of Wall Street’s most popular investment classes... Alternative data platform Preqin projects this asset class will reach $2.7 trillion by 2027. Several firms such as Apollo Global and Ares Management have grown this market from just $250 billion in 2010. This happened in part due to banks retrenching from the lending market after the Great Financial Crisis in 2008 with new regulations. It also has roots in the Federal Reserve’s monetary policy of holding interest rates near 0% for a decade. ‘We had a banking crisis in this country [and] the Fed drove interest rates to zero,’ said Lafayette Capital founder Damien Dwin. ‘That has created conditions where alternative investments could flourish because of the additional yield that can be delivered.’”
January 26 – Bloomberg (Justina Lee): “Wall Street is turning to its biggest brains as the battle for supremacy in the world of private assets heats up. Quantitative analysts — more usually found in data-heavy parts of the financial ecosystem such as stocks or derivatives — are being deployed by firms like Ares Management Corp. and BlackRock Inc. as they race for an edge in private equity and credit. These opaque markets have grown fourfold over the past decade to command $10 trillion, according to data from alternative-asset consultancy Preqin.”
January 22 – Bloomberg (Eleanor Duncan, Kat Hidalgo, and Francesca Veronesi): “Investment banks including Goldman Sachs…, Citigroup Inc. and Barclays Plc are seeking to poach back leveraged finance deals that were snapped up by direct lenders when markets were more volatile… Bankers in Europe and the US are speaking with buyout firms about private credit loans that were signed when credit spreads were blowing out and banks were preoccupied with hung debt on their balance sheets... Now that leveraged loan markets have calmed down — and interest rate cuts are on the horizon — they want to get some of the business back.”
January 24 – Bloomberg (Ryan Gould): “The world’s private equity firms have cash to burn. First, they want to earn. Buyout houses from Thoma Bravo to Permira are putting portfolio company sales high on the agenda for early 2024, as the industry seeks to return money to investors after a challenging period for exiting holdings. ‘There is certainly more talk, more conversations, with the realization that firms need to sell assets,’ said Holden Spaht, managing partner at Thoma Bravo… The value of private equity firms’ sales as a percentage of their spending dropped below 40% in each of the last three years… That hadn’t previously been the case since 2009 and highlights how falling valuations and tighter credit markets have forced firms to keep assets for longer than typical five-year investment cycles.”
January 24 – Wall Street Journal (Rod James): “The market for secondhand stakes in private funds bounced back in 2023 after a significant year-over-year decline in 2022. Global secondary deals reached roughly $112 billion in 2023, up 4% from $108 billion recorded in 2022, yet still short of a record $132 billion achieved in 2021, according to… Jefferies, one of the largest brokers of such deals. Jefferies’ estimate is in line with that of Evercore, another large broker, which put annual volume at around $114 billion.”
U.S./Russia/China/Europe Watch:
January 24 – Reuters (Idrees Ali and Phil Stewart): “The U.S. Navy dock landing ship Gunston Hall left port on Wednesday to mark the first movement for the largest NATO exercise since the Cold War, officials said. Some 90,000 troops from the United States and fellow NATO allied nations are due to join the Steadfast Defender 2024 drills that will run through May. More than 50 ships from aircraft carriers to destroyers will take part, as well as more than 80 fighter jets, helicopters and drones and at least 1,100 combat vehicles including 133 tanks and 533 infantry fighting vehicles.”
January 24 – Financial Times (Demetri Sevastopulo, Felicia Schwartz and Wenjie Ding): “The US has asked China to urge Tehran to rein in Iran-backed Houthi rebels attacking commercial ships in the Red Sea, but has seen little sign of help from Beijing, according to American officials. Officials have repeatedly raised the matter with top Chinese officials in the past three months…”
January 24 – Associated Press (Edith M. Lederer): “Russia’s top diplomat accused the United States, South Korea and Japan… of preparing for war with North Korea. Foreign Minister Sergey Lavrov told a U.N. news conference that this new military bloc brought together by the United States is building up military activity and conducting large-scale exercises. The United States, South Korea and Japan have described their combined military drills as defensive in nature and necessary to cope with growing North Korean nuclear threats.”
January 20 – Reuters (Hyunsu Yim): “Russian President Vladimir Putin expressed his willingness to visit Pyongyang soon when he met with North Korean Foreign Minister Choe Son Hui in Russia last week, North Korea's state news agency KCNA reported… It would be the Russian leader's first trip to North Korea in more than two decades.”
January 26 – Telegraph (Tony Diver): “The United States is planning to station nuclear weapons in the UK for the first time in 15 years as the threat from Russia increases, Pentagon documents… reveal. Procurement contracts for a new facility at RAF Lakenheath in Suffolk confirm that the US intends to place nuclear warheads three times the strength of the Hiroshima bomb at the air base. The US removed nuclear missiles from the UK in 2008, judging that the Cold War threat from Moscow had diminished. The disclosure comes in the wake of warnings that Nato countries need to ready their citizens for war with Russia.”
De-globalization and Iron Curtain Watch:
January 21 – Reuters (Andrew Osborn): “Russia’s state RIA news agency said… it had calculated that the West stood to lose assets and investments worth at least $288 billion if it confiscated frozen Russian assets to help rebuild Ukraine and Moscow then retaliated. After President Vladimir Putin sent forces into Ukraine in February 2022, the U.S. and its allies prohibited transactions with Russia's central bank and finance ministry, blocking around $300 billion of sovereign Russian assets in the West.”
Inflation Watch:
January 21 – Wall Street Journal (Hyunsu Yim): “Global shipping prices are continuing to rise as Houthi rebels keep up attacks on cargo vessels in and around the Red Sea... Average worldwide costs of shipping a 40-foot container rose 23% in the week through Jan. 18 to $3,777, according to… Drewry Shipping Consultants, more than doubling in the past month.”
January 19 – CNBC (Robert Hum): “A stealth inflationary cost is biting into corporate profits. While some companies are now seeing lower input and freight costs, one expense is not falling: insurance. In its earnings report… Travelers said insurance premiums that it charges are still soaring. Premiums on business policies jumped 14% in the last quarter. Consumers are feeling the pinch, too. Homeowner renewal premiums spiked 21%, while those for auto policies jumped 17%.”
January 25 – Bloomberg (Keith Naughton): “Not that long ago, repairing a car after a crash was pretty straightforward: Replace damaged parts, pound bent metal back into shape, touch up the paint and send the driver on their way... But today’s autos are so loaded with technology and built with such specialized materials that repairing even a minor fender bender can be a tedious and expensive exercise in both computer science and engineering. ‘It’s the complexity of vehicles these days,’ says Ben Clymer, who co-owns a chain of body shops... ‘Repairing a base model Kia is nothing like it was just a few years ago. It might have 10 different computers and all kinds of sensors.’ All that complexity, combined with rising prices for parts, Clymer says, ‘really creates the perfect storm for higher repair costs.’ It’s driving up auto insurance rates at the fastest pace in almost a half-century.”
January 26 – CNBC (Jeff Cox): “An important inflation gauge… showed that the rate of price increases cooled as 2023 came to a close. The… personal consumption expenditures price index for December, an important gauge for the Federal Reserve, increased 0.2% on the month and was up 2.9% on a yearly basis, excluding food and energy. Economists… had been looking for respective increases of 0.2% and 3%. On a monthly basis, core inflation increased from 0.1% in November. However, the annual rate declined from 3.2%. The 12-month rate is the lowest since March 2021.”
Biden Administration Watch:
January 21 – Washington Post (Missy Ryan, John Hudson and Abigail Hauslohner): “The Biden administration is crafting plans for a sustained military campaign targeting the Houthis in Yemen after 10 days of strikes failed to halt the group's attacks on maritime commerce, stoking concern among some officials that an open-ended operation could derail the war-ravaged country's fragile peace and pull Washington into another unpredictable Middle Eastern conflict.”
Federal Reserve Watch:
January 25 – Wall Street Journal (James Mackintosh): “The problem with being independent of politics is that appearances matter. You don’t have to just be independent, you must also appear to be independent—even if that changes what you might otherwise do. Many investors think the Federal Reserve might be pushed to do exactly that, lowering interest rates in March to get the rate-cutting cycle started before the election campaigns really get going. Its desire to avoid political controversy helps explain why traders are still pricing around a 50-50 chance of a March cut, despite stronger than expected jobs and inflation figures and pushback from Fed policymakers against imminent easing. Suspicion of the Fed’s motives is inevitable…”
January 22 – Financial Times (Claire Jones in Washington and Eva Xiao): “Central bankers and Biden administration officials are concerned that the reluctance of companies to lower price rises to pre-pandemic levels risks undermining efforts to cool inflation… Thomas Barkin, the president of the Richmond Fed…, is looking closely at whether retailers regain their ability to force manufacturers of household staples to offer discounts… ‘For 30 years before Covid, inflation had gotten so grounded that companies had gotten conditioned into thinking that they didn’t have any pricing power… You had globalisation, favourable demographics. No one wanted to go into Home Depot with a price increase.’ But now the producers had the upper hand, he said. ‘Big box retailers are pushing back on manufacturers to try to encourage them to begin to do more discounting. But their bargaining power is less than pre-Covid because we still have a lot of back and forth with suppliers on freight costs, on labour costs, on deglobalization… It’s going to take a while for these bigger retailers to negotiate price increases out of the system.’ Procter & Gamble… said on its earnings call in October that ‘labour inflation continues throughout the supply chain and in our costs’.”
January 24 – Bloomberg (Katanga Johnson and Alexandra Harris): “The Federal Reserve raised the interest rate on loans to banks issued under an emergency lending program launched last year, after borrowing surged in recent weeks as institutions took advantage of the attractive financing terms. The Fed’s Bank Term Funding Program, unveiled during the regional banking crisis to ease stress in the financial system, will not be extended beyond its March 11 deadline, top officials had signaled earlier this month.”
U.S. Bubble Watch:
January 25 – CNBC (Jeff Cox): “The economy grew at a much more rapid pace than expected while inflation eased in the final three months of 2023, as the U.S. easily skirted a recession that many forecasters had thought was inevitable… Gross domestic product, a measure of all the goods and services produced, increased at a 3.3% annualized rate in the fourth quarter of 2023… That compared with the Wall Street consensus estimate for a gain of 2%... Core prices for personal consumption expenditures, which the Federal Reserve prefers as a longer-term inflation measure, rose 2% for the period, while the headline rate was 1.7%. On an annual basis, the PCE price index rose 2.7%, down from 5.9% a year ago, while the core figure excluding food and energy posted a 3.2% increase annually, compared with 5.1%.”
January 24 – Bloomberg (Vince Golle): “US business activity expanded in January by the most in seven months, led by stronger orders growth that left service providers and manufacturers more confident about the demand outlook. The S&P Global flash composite output index advanced to 52.3, fueled mainly by stronger services activity… The group’s measure of expected output in the coming year climbed to the highest since May 2022… The composite measure of new orders showed the strongest growth in seven months. That was led by manufacturers, whose bookings climbed to the highest level since May 2022.”
January 24 – Wall Street Journal (Angel Au-Yeung): “From fuel and groceries to hotels and airline tickets, consumers are putting more purchases on credit cards—and taking longer to pay them off. The four biggest U.S. banks reported higher credit card spending in 2023 compared with the previous year. In fact, since 2020, credit card spending has steadily increased at three of the four… At JPMorgan…, the nation’s largest bank, credit card spending was up 9% in 2023 to $1.2 trillion. At Wells Fargo, spending was up 15%. Delinquency rates have also been on a steady rise since 2021. Customers aren’t paying off their charges as quickly as they used to.”
January 24 – Wall Street Journal (Gina Heeb): “The 2023 bank crisis is over, but the worst may be yet to come for some regional and community lenders. Profits dropped sharply at regional banks in the fourth quarter, including at the bigger ones that have generally fared better than their smaller peers. Net income was down roughly 90% from a year earlier at KeyCorp, around 70% at Citizens Financial Group and more than 40% at PNC Financial Services Group. Truist Financial swung to a loss. Midsize players also struggled. Net income was down around 90% at Comerica and more than 50% at Zions Bancorporation…”
January 23 – Reuters (Amina Niasse): “Unemployment rates increased in 15 U.S. states in December, up by three from the prior month, but was unchanged in the majority of states and the District of Columbia, a report showed… Nonfarm payroll employment levels, meanwhile, remained essentially unchanged in all states last month from November, according to Bureau of Labor Statistics data. From a year earlier, employment rose in 30 states while remaining essentially unchanged in 20 others and DC.”
January 22 – Wall Street Journal (Anne Marie Chaker): “American workers are getting restless in their jobs just as the labor market is making it much tougher for them to jump to something new. Millions of workers switched jobs during the past couple of years, enticed by abundant openings and big pay raises from companies desperate to hire. The market for salaried, white-collar jobs has since cooled, but workers’ itchiness to find new work hasn’t. Roughly 85% of 1,000 U.S. professionals polled in a new LinkedIn survey say they are thinking about changing jobs this year, up from 67% a year earlier.”
January 24 – CNBC (Diana Olick): “Mortgage applications to purchase a home rose 8% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Demand, however, was still 18% lower than the same week one year ago, when rates were lower.”
January 23 – Wall Street Journal (Will Parker): “Investor purchases of single-family homes tumbled 29% last year, as higher interest rates and record home prices compelled even deep-pocketed investment firms to pull back. Businesses large and small acquired some 570,000 homes in 2023, down from 802,000 in 2022, according to… Parcl Labs, a real-estate data and analytics firm. Fourth-quarter investor purchases of 123,000 represented the lowest quarterly total in the eight quarters tracked by Parcl… Realtor.com said 2023 was on track for the largest annual drop in investor buying activity in at least 20 years.”
Fixed Income Watch:
January 22 – Reuters (Matt Tracy): “The month is poised to be the busiest January on record for new U.S. corporate bond sales, with two regional banks on Monday adding to what has been a rush of post-earnings debt issuance by banks… The first month of the year has already seen $151 billion in new IG corporate bond supply… On its current course, this month ‘will very likely go down as the heaviest January on record,’ surpassing $175 billion in January 2017, wrote Dan Krieter, BMO director of U.S. investment grade strategy.”
China Watch:
January 23 – Wall Street Journal (Weilun Soon and Rebecca Feng): “China’s most powerful politicians are getting nervous about the stock market. China’s benchmark CSI 300 has lost more than a third of its value since 2020, and is now entering its fourth year of declines. Hong Kong’s Hang Seng Index… has already fallen 10% this year, making it the worst-performing major stock index in Asia. The selloff has fueled capital flight from foreign investors, pushed small investors in the country toward safer assets and encouraged emerging-markets-focused funds to adopt strategies that leave China out of their portfolios. Beijing’s top officials are taking notice. The State Council… said Monday that authorities should take stronger and more effective measures to stabilize markets and boost confidence.”
January 24 – Reuters (Joe Cash): “Chinese Premier Li Qiang went to the World Economic Forum in Davos last week with a mission to present a positive image of the economy and schmooze financial elites: ‘Investing in the Chinese market is not a risk, but an opportunity.’ The message fell flat. As soon as Chinese markets reopened the next day, a years-long sell-off in stocks and other assets accelerated… ‘The news was not the data. It was Li Qiang in Davos,’ said Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis. ‘It was really underwhelming and bewildering. It doesn't show confidence.’ ‘To just give a number that everybody was expecting ... it’s bewildering. Was there anything else?’”
January 24 – Bloomberg: “China said it will cut the reserve requirement ratio for banks within two weeks and hinted at more support measures to come, an unusually early disclosure that shows mounting urgency across President Xi Jinping’s government to shore up the economy and halt a $6 trillion stock-market rout. The RRR — which determines the amount of cash banks have to keep in reserve — will be lowered by 0.5 percentage points on Feb. 5 to provide 1 trillion yuan ($139 billion) in long-term liquidity to the market, the People’s Bank of China’s Governor Pan Gongsheng told reporters…”
January 26 – Bloomberg: “China’s central bank unveiled broad plans to guide money into sectors of national importance to boost the faltering economy this year, after making an unusual reserve requirement ratio announcement. The People’s Bank of China surprised investors on Wednesday by revealing a bigger-than-expected RRR cut weeks in advance, providing markets with a much-needed boost. Economists see the central bank following up that move by steering credit into select areas, along with a handful of trims to the amount of cash banks must hold in reserve and modest policy-rate cuts.”
January 24 – Wall Street Journal (Jason Douglas): “China’s central bank announced new steps to boost bank lending to households and businesses, an early move in what is expected to be a broad but restrained campaign by authorities to prop up growth this year after a lackluster 2023. It comes on the heels of signs of gathering government support for China’s swooning stock market… The cut to banks’ reserve requirements—announced unexpectedly by People’s Bank of China Governor Pan Gongsheng during a press conference… sends a new signal that officials are feeling growing pressure to curb the stock-market selloff, while also stepping up support for the broader economy.”
January 26 – Bloomberg (Ishika Mookerjee and Charlotte Yang): “A tumultuous week for Chinese stocks underscores Beijing’s challenge in reviving a market that’s already suffered a lost decade of equity returns. The MSCI China Index has fallen about 17% since the end of 2013, a period that saw equity gauges in the US and India at least double. It’s a disturbing track record for investors who bought into China’s economic growth story, only to be hammered by sudden flare-ups of geopolitical tensions, unpredictable regulatory clampdowns and the state’s growing control over private enterprises.”
January 23 – Bloomberg: “China’s boldest plan yet to stem the current stock market rout is facing a wall of skepticism as disillusioned investors say any rebound will prove fleeting without a fundamental fix for its ailing economy… China’s history of botched market rescue efforts, the grim state of its economy, and uncertainties over Beijing’s long-term policy roadmap are keeping investors skeptical about the sustainability of these gains… The latest package including about 2 trillion yuan ($278bn) to buy mainland shares via offshore trading links shows a sense of urgency from authorities. It comes after a rout that’s seen Chinese and Hong Kong stocks erase more than $6 trillion in market value since a peak reached in 2021.”
January 26 – AFP: “China will offer more bailout loans for its struggling real-estate sector with the first funds expected to become available in the coming days, its housing ministry said Friday, in the latest move to help kickstart stuttering growth. Troubles in the property industry have been one of the main headwinds facing the world's second-largest economy… ‘In view of the current financing difficulties of some real estate projects,’ the official newspaper of Beijing's housing ministry quoted officials as saying, local governments would ‘propose a list of real estate projects that can be given financing support’.”
January 25 – Bloomberg: “A local government financing vehicle in China’s Shandong province reached an agreement with creditors to partially repay and extend the payment deadline for nearly all of its 479 million yuan ($66.8 million) non-bond debts, highlighting the sector’s liquidity challenges despite government support. Weifang Binhai Investment Development Co., which raises off-balance-sheet debt financing for the province’s infrastructure projects, hadn’t made payments as of Dec. 31, 2023, past the original deadline…”
January 25 – Bloomberg (Yi Wei Wong): “China’s transport-focused local government financing vehicles may soon deal with a spike in stranded assets as Beijing is reported to look to suspend some infrastructure projects to curb further debt growth, S&P Global says... Actions will strain some LGFVs focused on highways and urban rail… Officials’ rising scrutiny of debt-backed infrastructure spending may make it harder for entities to service debt already raised for construction.”
January 25 – Bloomberg (Yi Wei Wong): “Moody’s downgrades ratings of 17 Chinese local government financing vehicles by one notch… Downgrade comes after the 12 regional & local governments’ capacity to support those LGFVs were cut by one notch… Outlook on these LGFVs’ ratings cut to to negative, given negative outlook of China’s sovereign rating.”
January 25 – Reuters (Clare Jim and Scott Murdoch): “A key offshore bondholder group of China Evergrande, opens new tab plans to join a petition to liquidate the developer at a hearing in a Hong Kong court on Monday... The bondholder group owns more than $2 billion in offshore notes guaranteed by Evergrande and its support to a winding-up petition against the world's most indebted developer increases the chances of an immediate liquidation order from the court, lawyers in the industry said. If a liquidation order is issued, a provisional liquidator and then an official liquidator will be appointed to take control and prepare to sell the developer's assets to repay its debts.”
January 26 – Bloomberg (Jackie Cai): “China’s securities regulator has asked some investors to refrain from increasing their exposure to dollar bonds with tenors of less than a year issued by local government financing vehicles… Representatives of the China Securities Regulatory Commission sent the so-called window guidance to some Chinese asset managers in Hong Kong early this week to request that they no longer buy more of these notes… LGFVs face a record amount of maturing bonds this year. And issuing dollar bonds that mature in less than a year has become a popular funding tactic…”
January 22 – Reuters (Liangping Gao and Clare Jim): “The number of foreclosed homes in China rose 43% year-on-year in 2023, according to a private survey…, highlighting a worrying trend of rising mortgage delinquencies amid a sustained property market slump and a patchy economic recovery. The number of foreclosed homes up for auction stood at 389,000 units last year, said China Index Academy, a major independent real estate research firm. A total of 99,000 units worth a combined 150 billion yuan ($20.84bn) were successfully sold at auctions... Total foreclosures, including commercial, residential and industrial properties, land, garages and parking spaces, totalled 796,000 units, a record high. The number was up 36.7% from 2022…”
January 23 – Bloomberg: “China is expanding its net stock selling ban from major mutual funds to some insurers, another sign that authorities are trying to support the slumping stock market, said people familiar with the matter. Regulators issued the so-called window guidance to at least two state-owned insurance firms…, telling them to refrain from selling more onshore shares than they purchased…”
January 24 – Reuters: “China's securities regulators have asked some hedge fund managers to restrict short selling in its stock index futures market…, as authorities seek to stabilise sinking stocks. The blue chip CSI300 Index… plunged to near five-year lows this week, prompting fresh vows by the government to steady capital markets. A hedge fund manager said he received calls from China's financial futures exchange, cautioning against reckless short selling, especially ‘naked’ short selling that is not conducted for hedging purposes.”
Central Banker Watch:
January 25 – Financial Times (Martin Arnold): “European Central Bank president Christine Lagarde said rapid wage growth was already showing signs of slowing in the eurozone, striking a dovish note on the potential for interest rate cuts even as the central bank kept monetary policy on hold. ‘The disinflation process is at work,’ the central banker said… after the ECB kept its key interest rate on hold at a record high of 4% and signalled inflation was falling in line with its expectations. Lagarde said a pick-up in inflation in December had been ‘weaker than expected’ and forecast that price pressures would ‘ease further over the course of the year’. While rapid wage growth and lower productivity were ‘keeping price pressures high’, she said there had already been a slight decline in wage growth that was ‘directionally good from our perspective’.”
January 24 – Reuters (Steve Scherer and Promit Mukherjee): “The Bank of Canada (BoC) held its key overnight rate at 5% on Wednesday and said that while underlying inflation was still a concern, the bank's focus is shifting to when to cut borrowing costs rather than whether to hike again. The BoC governing council has held rates steady at four consecutive policy meetings after last hiking in July. Annual inflation in December accelerated to 3.4%, still higher than the central bank's 2% target… ‘Governing Council's discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level,’ Governor Tiff Macklem said… Later, Macklem told reporters: ‘It is premature to discuss reducing our policy rate.’”
January 25 – Bloomberg (Ott Ummelas): “Norway’s central bank kept borrowing costs at a 16-year high and reiterated the need for durably tight monetary policy to squeeze inflation out of the economy. Norges Bank held the key deposit rate at 4.5% on Thursday, as predicted… That’s the highest since December 2008.”
Global Bubble Watch:
January 24 – Bloomberg (Hannah Benjamin-Cook and Paul Cohen): “After setting a record for Europe’s busiest-ever month on Tuesday, bond sales have now broken the €300 billion ($327bn) mark, led by governments across the region seeking to finance their spending plans.”
January 24 – Reuters (Maiya Keidan, Pablo Mayo Cerqueiro and Iain Withers): “Six of Canada's biggest pension funds managing C$1.3 trillion ($965.47bn) in assets have begun a major expansion into private credit, moving into an area previously dominated by banks.”
Europe Watch:
January 20 – Financial Times (Robert Wright, Laura Onita and Peter Campbell): “Attacks on shipping in the Red Sea threaten to create a ‘chaotic’ period for Europe’s manufacturers and retailers as supply chains are disrupted, logistics experts have warned. Nearly all container ships have been rerouted away from the Suez Canal towards the longer route around the Cape of Good Hope… The shift mainly affects sailings between Asia and Europe, adding up to two weeks to the normal 35-day trip and creating long gaps between the arrivals of vessels in European ports.”
January 24 – Wall Street Journal (Paul Hannon): “Europe’s economy is beginning to feel the pain from supply-chain disruptions caused by the crisis in the Middle East. Data… showed businesses had to wait longer for parts to arrive in January… The attacks persuaded numerous freight carriers to take the safer but longer and more expensive journey around Africa via the Cape of Good Hope. If the added costs pile up and persist, they could translate into fresh inflationary pressure in Europe… Surveys of purchasing managers at European manufacturers and service providers… marked the first time respondents reported an increase in delivery times in more than a year.”
January 24 – Financial Times (Martin Arnold): “The eurozone economy showed signs of a nascent recovery at the start of the year after a contraction in business activity eased slightly and price pressures intensified… S&P Global’s flash eurozone composite purchasing managers’ index, a measure of activity at businesses across the bloc, rose to a six-month high of 47.9, up from 47.6 a month earlier, after an improvement in manufacturing offset a deeper decline in services.”
Japan Watch:
January 23 – Bloomberg (Toru Fujioka): “Bank of Japan Governor Kazuo Ueda kept investors in the dark over when he will scrap the world’s last negative interest rate while leaving little doubt that a move is in the pipeline. The BOJ maintained its -0.1% short-term rate and kept its yield curve control parameters intact Tuesday. It also updated its price and growth forecasts with no overall change to the picture of an economy heading slowly toward its first rate hike since 2007. Speaking after the decision, Ueda said any rate increase would initially aim to leave BOJ policy supportive of the economy and would aim to avoid causing too much disturbance.”
January 23 – Reuters (Leika Kihara): “The Bank of Japan… gave the clearest signal yet that an end to its years-long negative interest rate policy was approaching. In a briefing after keeping ultra-loose policy on Tuesday, governor Kazuo Ueda said the chance of sustainably hitting the central bank's 2% inflation target was increasing. Ueda pointed to encouraging signs in service-sector prices and wages that heightened the BOJ's conviction that conditions for phasing out ultra-loose policy settings are falling into place. Many market players expect negative rates, in place since 2016, to end this year with the most likely timing seen as either at the meeting on March 18-19 or at the next one on April 25-26.”
January 25 – Bloomberg (Mia Glass and Yoshiaki Nohara): “Inflation in Tokyo cooled below 2% for the first time in more than a year and a half, a steeper than forecast slowdown that may generate caution at the Bank of Japan over the timing of a widely expected rate hike in the coming months. Tokyo consumer prices excluding fresh food rose 1.6% in January, compared with 2.1% growth in December…”
January 24 – Bloomberg (Lisa Du): “Tokyo new condo prices jumped to a record for the third straight year in 2023, driven by low supply and rising building costs. The average price of a new apartment for sale in the Japanese capital and surrounding areas surged 29% to a fresh high of 81 million yen ($548,000), according to the Real Estate Economic Institute.... New condo values have now risen for five years in a row… ‘The strongest force driving price growth is construction costs, with the price of raw materials like steel rising rapidly, and wages for construction workers also increasing with the labor shortage,’ said Shun Ogishima, a researcher at Sumitomo Mitsui Trust Research Institute. ‘Under these circumstances, developers who supply condos have no choice but to keep raising prices.’”
January 23 – Reuters (Satoshi Sugiyama): “Japan's exports surged to record highs in December, with shipments to the U.S. soaring to their strongest-ever level while those to China were also robust, logging their first rise in more than a year… Exports from the world's third-largest economy climbed 9.8% to 9.65 trillion yen ($65.1bn) last month from the same period a year earlier…”
EM Watch:
January 24 – Bloomberg (Manuela Tobias): “Argentina’s labor movement is testing popular support for President Javier Milei’s austerity blitz in a national strike less than two months into his presidency. Thousands of Argentines flooded the streets and avenues surrounding congress during a mass protest Wednesday in Buenos Aires organized by the CGT, one of the South American nation’s oldest and most powerful union groups.”
January 23 – Bloomberg (Ashutosh Joshi): “India’s stock market has overtaken Hong Kong’s for the first time in another feat for the South Asian nation whose growth prospects and policy reforms have made it an investor darling. The combined value of shares listed on Indian exchanges reached $4.33 trillion…, versus $4.29 trillion for Hong Kong… That makes India the fourth-biggest equity market globally.”
Social, Political, Environmental, Cybersecurity Instability Watch:
January 23 – Financial Times (Hannah Murphy): “Audio deepfakes are emerging as a powerful new tool in information warfare during a year of big elections around the world, as artificial intelligence-powered voice-cloning tools proliferate online. On Monday, the office of New Hampshire’s attorney-general said it was investigating possible voter suppression, after receiving complaints that an ‘artificially generated’ voice in the likeness of US President Joe Biden was robocalling voters encouraging them not to vote in the state’s presidential primary. Researchers have also warned that the use of realistic but faked voice clips that imitate politicians and leaders are likely to spread, following instances in 2023 of allegedly synthetic audio being created to influence politics and elections in the UK, India, Nigeria, Sudan, Ethiopia and Slovakia.”
January 24 – Reuters (David Stanway): “Groundwater levels across the world have shown widespread and ‘accelerated’ decline over the past 40 years, driven by unsustainable irrigation practices as well as climate change, according to a study published… Groundwater is a major source of fresh water for farms, households and industries, and depletion could pose severe economic and environmental threats, including falling crop yields and destructive land subsidence, particularly in coastal areas, said the study, opens new tab, published in the Nature scientific journal.”
Leveraged Speculation Watch:
January 21 – Financial Times (Costas Mourselas): “The world’s most successful hedge funds made their biggest profits on record last year as punchy bets on stock markets paid off when share prices surged. The top 20 managers made profits for investors of $67bn in 2023, according to… LCH Investments, up from the previous record of $65bn in 2021. This performance cemented their dominance over the rest of the industry — the 20 hedge funds that have performed best since their inception manage 19% of assets but they made around a third of annual profits last year, in dollar terms.”
January 23 – New York Times (Michael J. de la Merced): “As stock markets soared in 2023, so did the fortunes of many of the world’s biggest hedge funds. The 20 best-performing hedge funds made $67 billion in gains last year, triple what they reported in 2022, according to… LCH Investments… The strong performance by elite financiers follows the rally that stock markets have enjoyed over the past year. The S&P 500, Wall Street’s most widely followed benchmark, hit a record last week… Many in the industry have invested heavily in the ‘Magnificent Seven’ tech stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — though some on Wall Street have grown increasingly worried that too many investors are betting on the same companies.”
Geopolitical Watch:
January 24 – Reuters (Manuela Tobias): “North Korea said it tested its new strategic cruise missile on Wednesday…, confirming what the South Korean military said the day before. The missile dubbed ‘Pulhwasal-3-31’ is currently under development and the test-firing had no impact on the security of neighbouring countries, the state media said, adding it had ‘nothing’ to do with the regional situation.”
January 23 – Reuters (Huseyin Hayatsever and Tuvan Gumrukcu): “Turkey's parliament ratified Sweden's NATO membership bid…, clearing the biggest remaining hurdle to expanding the Western military alliance after 20 months of delay. Turkey's general assembly… voted 287-55 to approve the application that Sweden first made in 2022 to bolster its security in response to Russia's full-scale invasion of Ukraine.”
