Friday, February 2, 2024

Weekly Commentary: Fed Embraces "Immaculate Disinflation"

CNBC’s Jeff Cox: “Just kind of looking to put it all together, you talked about basically the economy looking strong, with 3.3% annualized growth in the fourth quarter. Does the strength of the economy speak more loudly to you now than any inflation threat might? You’re in a position, in other words, to keep rates elevated as long as the economy stays strong, and you’re more tilted towards that. And also, perhaps, are you worried at all that the economy is maybe a little too strong right now and that inflation could come back at some point?”

Chair Powell: “I’m not so worried about that. Again, we’ve had inflation come down without a slow economy and without important increases in unemployment, and there’s no reason why we should want to get in the way of that process if it’s going to continue. So, I think declining inflation - continued declines in inflation - are really the main thing we’re looking at. Of course, we want the labor market to remain strong, too. We don’t have a growth mandate. We’ve got a maximum employment mandate and a price stability mandate, and those are the two things we look at. Growth only matters to the extent it influences our achievement of those two mandates.”

Powell: “So, I guess I would just say this: executive summary would be that growth is solid to strong over the course of last year. The labor market, 3.7% unemployment indicates that the labor market is strong. We’ve had just about two years now of unemployment under 4%. That hasn’t happened in 50 years. So, it’s a good labor market. And we’ve seen inflation come down… The outlook, we do expect growth to moderate. Of course, we have expected it for some time, and it hasn’t happened. But we do expect that it will moderate as supply chain and labor market normalization runs its course.”

Powell: “In terms of growth, we’ve had strong growth. If you take a step back, we’ve had strong growth, very strong growth last year, going right into the fourth quarter. And yet, we’ve had a very strong labor market, and we’ve had inflation coming down. So, I think, whereas a year ago, we were thinking that we needed to see some softening in economic activity, that hasn’t been the case. So, I think we look at stronger growth, we don’t look at it as a problem. I think, at this point, we want to see strong growth. We want to see a strong labor market. We’re not looking for a weaker labor market. We’re looking for inflation to continue to come down, as it has been coming down for the last six months.”

Powell and FOMC’s thinking has gone through quite an evolution. Over recent months, the notion of “immaculate disinflation” has supplanted traditional analysis. The U.S. can have “very strong growth” and we can enjoy “a very strong labor market” without concern for how such a backdrop might impact inflation prospects.

Powell: “Our strong actions have moved our policy rate well into restrictive territory, and we have been seeing the effects on economic activity and inflation… We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”

More remarkable even than having grown comfortable with very strong growth and labor markets, the Fed is willing to disregard extremely loose financial conditions and highly speculative financial markets. It’s the same old asymmetric policy approach. Tight conditions would attract all kinds of attention, while quite loose conditions don’t receive a mention. It’s worth remembering that we’re only 19 months past 9.1% y-o-y CPI inflation. Meanwhile, the Nasdaq100 returned 55% last year, the strongest performance since 1999, with the Semiconductor (SOX) Index returning 67%.

History teaches us that asset inflation and Bubbles pose greater risk to system stability than consumer price inflation. The so-called “great financial crisis” was the result of a mortgage finance Bubble that inflated spectacularly in a backdrop of low CPI and loose financial conditions. Catastrophic “Roaring Twenties” excess evolved during a period of well-contained consumer prices. Japan’s devastating eighties Bubble (still impactful decades later) also inflated in an environment of meager consumer price inflation. And, more recently, low inflation and loose lending were a hallmark throughout China’s Bubble inflation, with the scope of damage wrought upon system stability increasingly on display.

Others had issues, but I welcomed Powell’s modest pushback against aggressive market rate cut expectations (essentially taking March off the table). It was the least he could do following his December “dovish pivot” lapse. I could have lived without, “We believe that our policy rate is likely at its peak for this tightening cycle…” It was inconsistent with “we’re not declaring victory at all at this point. We think we have a ways to go.”

Downplaying the “very strong” economy and labor markets is a misjudgment of consequence. For one, both impact inflationary prospects over time, certainly increasing the risk of an inflationary shock in the event of an unforeseen disruptive event. Moreover, if the Fed doesn’t care, markets won’t care, with corrosive effects on market function. Data that would typically lead to rising market yields and tightening conditions are ignored. Late-cycle speculative Bubbles, already enjoying formidable impunity, become completely unhinged.

Powell again fielded a question on the “neutral rate,” providing an ambiguous response. Fed officials can repeat it as many times as they like, but that won’t change the reality that their aggressive rate increases have not yet resulted in policy “well into restrictive territory.” Perhaps to a few specific sectors, but from a systemic perspective – i.e., Credit expansion, economic growth, marketplace liquidity, asset inflation and speculative excess – policy is decidedly unrestrictive.

This has been such a protracted cycle fueled by a historic Bubble at the heart of perceived safe and liquid government debt and central bank Credit. Late-cycle dynamics today dominate. Financial innovation has ensured a proliferation of non-traditional lenders, including “private Credit,” DeFi (decentralized finance), and scores of new age finance companies. The non-banking sector is in a full-fledged boom.

A late-cycle speculative dynamic is also quite dominant. Everyone knows that stock prices only go higher. The explosive growth in the ETF complex nurtures huge ongoing speculative flows into the markets. Moreover, the long cycle has emboldened options and derivatives traders, institutional and retail alike.

Leveraged speculation has infiltrated all market nooks and crannies. What is more, egregious leverage has accumulated at the heart of the bond market, with a Trillion plus, can’t lose “basis trade” in Treasuries, Agency Securities and MBS. In the face of weakened bank lending, Money Fund Assets have exploded almost $1.2 TN, or 24.5%, over the past year. Importantly, the money fund complex has evolved into the critical late-cycle intermediator of speculative Credit financing the “basis trade” and levered speculation more generally.

There is also the critical issue of now deeply rooted massive deficit spending. Deficits that would have been viewed with alarm early in the cycle are now accepted as routine and innocuous. Upwards of $2 TN annual deficits have become integral to system Credit growth - inflating incomes, spending, and corporate profits throughout the economy.

Traditionally, such deficits would have evoked market angst and rising yields. But the Fed's forceful use of its balance sheet for liquidity injections and market bailouts over this cycle momentously transformed how markets view deficit and debt risks. For now, the current Credit expansion is impervious to Fed rate policy, bolstered instead by loose market conditions. This powerful dynamic raises the level of policy rates required to restrain overall Credit growth, system financial conditions, and economy-wide demand.

The so-called “neutral rate”, at this stage of the cycle, is so much higher than today’s analysts and Fed officials have ever contemplated. Of course, the Fed seeks to avoid breaking things. But tossing the white towel in the face of loose conditions and accompanying runaway speculative Bubbles at this late-cycle phase shirks the Fed’s overarching responsibility for maintaining financial stability.

Today’s systemic propensity for loose conditions ensures a highly elevated “neutral rate.” Further confounding analysts, this rate will also prove highly unstable and non-linear. Tightened financial conditions and deflating speculative Bubbles will profoundly impact the stimulative effects of lower policy rates. I point to the “pushing on a string” dynamic that is laying bare Beijing’s waning control over China’s faltering Bubble economy.

U.S. job openings (JOLTS) were back above nine million in December, 275,000 above estimates. And while seasonal adjustments tend to be a little messy to begin the year, January’s booming 353,000 gain in Non-Farm Payrolls (along with December’s upwardly revised 333k) is hard to dismiss. As is the 0.6% (double estimates) jump in Average Hourly Earnings, the biggest increase since January 2022. An outsized January boosted y-o-y gains to 4.5%.

Powered by Meta and Amazon, the S&P500 gained 1.1% in post-jobs data Friday trading (Nasdaq100 up 1.7%). Bonds were notably less sanguine. Ten-year yields rose 14 bps, partially reversing earlier declines to end the week down 12 bps at 4.02%. Two-year Treasury yields jumped 16 bps Friday to 4.36%. It was another volatile week for the notably unstable MBS marketplace. Benchmark MBS yields were down as much as 33 bps at Thursday's low, only for yields to reverse 26 bps higher in Friday trading to end the week a basis point lower at 5.50%.

Despite more strong data and Powell’s comments, the rates market still ended the week pricing a 22% probability of a March rate cut. The policy rate is expected to decline 24 and 46 bps by the May 1st and June 12th FOMC meetings. The market is pricing a 4.07% rate (126 bps of cuts) by the December 18th meeting, rising only eight bps this week.

Assuming March is a no go, the market is pricing five rate cuts between May and December. There is nothing in the economic data suggestive of the need for aggressive cuts, and one would assume the Fed would prefer to avoid slashing rates into such a pivotal election. This week’s developments and market dynamics corroborate the thesis that the rates market is not pricing typical rate policy dynamics as much as it is discounting the odds of the Federal Reserve forced into aggressive rate cuts.

February 2 – Bloomberg (Subrat Patnaik): “Meta Platforms Inc. just became Wall Street’s top comeback kid… The stock rose 20% Friday to close at an all-time high of $474.99 per share. The gain added $197 billion to its market capitalization, the biggest single-session market value addition, eclipsing the $190 billion gains made by Apple Inc. and Inc. in 2022.”

February 2 – Bloomberg (Kurt Wagner and Spencer Soper): “Meta Platforms Inc. and Inc. shares soared Friday after delivering quarterly earnings and outlooks that far exceeded Wall Street’s expectations… Combined, their stocks added $336 billion in market value.”

With speculative melt-up dynamics much in play in U.S. equities this week, it is not unreasonable for the rates market to price odds of an eventual reversal and downside dislocation. The big tech stocks are one historic “crowded trade,” with the same probably true for global levered speculation. Bond markets could also be factoring in the possibility of disruptive geopolitical developments (the U.S. fired 135 missiles and bombs into Syria and Iraq this evening). And it’s reasonable that bond and rate markets have a watchful eye on ominous Chinese developments.

The Shanghai Composite sank 6.2% this week, while other Chinese markets and indices were under even greater selling pressure. The Shenzhen A Index was clobbered 11.1%, the small cap CSI 500 9.2%, the CSI Small & Midcap Index 7.9%, and the growth-oriented ChiNext Index 7.9%. Hong Kong’s Hang Sang Index fell 2.6% (down 8.9% y-t-d), with the China H-Financials Index down 2.7%. Confidence that Beijing has everything under control is starting to waver.

January 31 – Reuters (Tom Westbrook): “China’s major state-owned banks were heavy sellers of dollars on Wednesday…, steadying the yuan as it came under pressure in currency trade as the economy remains shaky. State banks often act on behalf of China's central bank in the foreign exchange market, but they could also trade on their own behalf or execute clients' orders. One of the people said the selling was ‘very forceful’ to defend the yuan at around 7.1820 per dollar in the onshore spot market.”

Significant firepower is being expended to support China’s vulnerable currency. Yet the renminbi declined 0.22% (offshore down 0.36%) this week to trade near the low back to mid-November. It’s worth noting that most of the week’s loss came in post-payrolls Friday trading. The vulnerable Japanese yen was hit 1.31% Friday.

UK 10-year yields jumped 17 bps Friday, with yields up near double-digits in Canada, France, Germany, Italy, Spain, Netherlands, Poland, Hungary, Turkey, Denmark, and Ireland. Local currency yields were 32 bps higher in Colombia and 21 bps higher in Mexico. Dollar-denominated yields were up 17 bps in Panama, 14 bps in Peru, 14 bps in Mexico and 14 bps in Chile.

Global bond markets are highly synchronized, keying closely off U.S. Treasuries. “Risk on/risk off” is a global phenomenon. At this point, it’s all just one big speculation, a highly levered one at that.

January 31 – Bloomberg (Alice Gledhill): “European regulators are closely following a group of hedge funds with exposure to mortgage bonds and average gross leverage in excess of 2,000%, a position so large it risks impacting markets. The funds predominantly are buyers in rising markets and sellers during a downturn, according to a… report by the European Securities and Markets Authority about the risk posed by leveraged alternative investment funds. It’s an approach to trading that tends to compound market moves and can be an added source of instability. The group represents as much as 15% of trading in the local mortgage-backed note market, the regulator said, without identifying which jurisdictions or specific funds.”

With global speculative dynamics in mind, I have no issue with the market pricing odds of “risk off” liquidity issues forcing the Fed (and central bank community) into aggressive rate cuts. A surprising rise in Treasury yields would be problematic for fragile global markets. As we witnessed Friday, a jump in Treasury yields can immediately spur a spike in MBS yields, along with outsized moves in vulnerable markets such as the UK (2-yr yields up 19 bps) and throughout EM.

Higher Treasury yields also translate quickly into dollar strength. The Dollar Index popped 0.9% on the strong payrolls data, immediately pressuring the vulnerable yen and renminbi. Perhaps it was fear of higher Treasury yields and a stronger dollar triggering global de-risking/deleveraging that played a role in December’s “dovish pivot.”

January 29 – Bloomberg (Caleb Mutua): “Blue-chip firms have sold $188.57 billion of bonds in the US in January, setting a record for the month, as companies look to take advantage of drops in longer-term borrowing costs. The sales broke the prior record for January of around $175 billion, set in 2017... And more sales are probably coming through the end of the month, Wall Street bond syndicate professionals said. ‘We could easily see $200 billion of sales this month,’ said Jonny Fine, head of the investment-grade debt syndicate at Goldman Sachs…”

The risk today is that financial conditions are much too loose and the markets much too speculative, while the U.S. economy enjoys significant momentum. The Fed and speculative markets can ignore strong data and tight labor markets if they choose, while heightened risk at the fragile global “periphery” (i.e., China) supports lower market yields and looser conditions for us at the “core.” It’s a problematic backdrop, one that exacerbates “Terminal Phase” Bubble excess, while increasing the likelihood of an inflationary surprise and raising the odds of a global de-risking/deleveraging outbreak. A singular focus on current inflation readings is regrettably flawed central banking at a most critical juncture.

For the Week:

The S&P500 gained 1.4% (up 4.0% y-t-d), and the Dow rose 1.4% (up 2.6%). The Utilities increased 0.4% (down 2.8%). The Banks fell 1.7% (down 1.3%), while the Broker/Dealers were little changed (down 1.4%). The Transports dipped 0.6% (down 0.6%). The S&P 400 Midcaps were little changed (down 0.5%), and the small cap Russell 2000 declined 0.8% (down 3.2%). The Nasdaq100 advanced 1.3% (up 4.9%). The Semiconductors were about unchanged (up 3.9%). The Biotechs fell 1.4% (down 5.8%). With bullion rising $21, the HUI gold index increased 0.3% (down 9.9%).

Three-month Treasury bill rates ended the week at 5.2075%. Two-year government yields added a basis point this week to 4.36% (up 11bps y-t-d). Five-year T-note yields declined five bps to 3.98% (up 14bps). Ten-year Treasury yields fell 12 bps to 4.02% (up 14bps). Long bond yields dropped 15 bps to 4.22% (up 19bps). Benchmark Fannie Mae MBS yields declined one basis point to 5.50% (up 23bps).

Italian yields dipped one basis point to 3.82% (up 12bps y-t-d). Greek 10-year yields slipped one basis point to 3.30% (up 25bps). Spain's 10-year yields declined three bps to 3.17% (up 18bps). German bund yields fell six bps to 2.24% (up 22bps). French yields declined five bps to 2.75% (up 19bps). The French to German 10-year bond spread widened one to 50 bps. U.K. 10-year gilt yields fell five bps to 3.92% (up 38bps). U.K.'s FTSE equities index slipped 0.3% (down 1.5% y-t-d).

Japan's Nikkei Equities Index rallied 1.1% (up 8.0% y-t-d). Japanese 10-year "JGB" yields declined four bps to 0.67% (up 6bps y-t-d). France's CAC40 declined 0.5% (up 0.7%). The German DAX equities index slipped 0.3% (up 1.0%). Spain's IBEX 35 equities index rose 1.3% (down 0.4%). Italy's FTSE MIB index gained 1.1% (up 1.2%). EM equities were mixed. Brazil's Bovespa index fell 1.4% (down 5.2%), and Mexico's Bolsa index jumped 2.3% (up 1.3%). South Korea's Kospi index surged 5.5% (down 1.5%). India's Sensex equities index rose 2.0% (down 0.2%). China's Shanghai Exchange Index sank 6.2% (down 8.2%). Turkey's Borsa Istanbul National 100 index jumped 3.8% (up 16.0%). Russia's MICEX equities index gained 2.0% (up 4.1%).

Federal Reserve Credit declined $20.2bn last week to $7.619 TN. Fed Credit was down $1.271 TN from the June 22nd, 2022, peak. Over the past 229 weeks, Fed Credit expanded $3.892 TN, or 104%. Fed Credit inflated $4.808 TN, or 171%, over the past 586 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped another $12.7bn last week to a nine-month low $3.344 TN. "Custody holdings" were up $19.4bn, or 0.6%, y-o-y.

Total money market fund assets jumped $42bn to a record $6.001 TN. Money funds were up $1.181 TN, or 24.5%, y-o-y.

Total Commercial Paper jumped $14.3bn to $1.266 TN. CP was down $24.6bn, or 1.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates declined six bps to 6.63% (up 64bps y-o-y). Fifteen-year rates dipped two bps to 5.94% (up 76bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down seven bps to a six-month low 6.95% (up 63bps).

Currency Watch:

January 29 – Bloomberg: “Burned by years of underperformance in Chinese domestic stocks, local investor appetite for overseas equities is running so high that it’s fueling huge price distortions in funds tracking these assets. Chinese traders are willing to pay as much as 40% more than the value of the underlying assets in some exchange-traded funds in order to obtain exposure to foreign stocks. That’s triggering trading halts in a number of ETFs as well as purchase limits.”

For the week, the U.S. Dollar Index increased 0.5% to 103.92 (up 2.6% y-t-d). For the week on the upside, the South Korean won increased 1.1% and the Mexican peso gained 0.2%. On the downside, the Norwegian krone declined 1.7%, the Brazilian real 1.2%, the Australian dollar 1.0%, the euro 0.6%, the South African rand 0.6%, the British pound 0.5%, the Swedish krona 0.5%, the New Zealand dollar 0.4%, the Swiss franc 0.3%, the Japanese yen 0.2%, the Singapore dollar 0.1%, and the Canadian dollar 0.1%. The Chinese (onshore) renminbi declined 0.22% versus the dollar (down 1.30%).

Commodities Watch:

January 31 – Financial Times (Harry Dempsey): “Chinese investors and households have been buying gold as a refuge from local property and stock market mayhem, helping to support record prices for the haven asset. China was the principal bright spot globally for gold jewellery and investment flows in 2023, according to… the World Gold Council’s quarterly report… Together with ‘blistering’ demand from central banks, according to the WGC, Chinese demand helped push the gold price to record highs last month and keep it above $2,000 per troy ounce this year.”

January 31 – Bloomberg (Yvonne Yue Li): “Total gold demand hit a record last year and is expected to expand again in 2024 as the US Federal Reserve moves toward cutting interest rates, potentially aiding prices, according to the World Gold Council. Overall consumption climbed by about 3% to 4,899 tons last year, supported by strong demand in the opaque over-the-counter market, as well as from sustained central-bank buying… That’s the highest total figure in data going back to 2010. ‘The landscape is appropriate for emerging central banks to continue to be net buyers,’ Joseph Cavatoni, chief market strategist at the WGC, said…”

The Bloomberg Commodities Index declined 2.1% (down 2.0% y-t-d). Spot Gold rose 1.1% to $2,040 (down 1.1%). Silver slipped 0.5% to $22.69 (down 4.6%). WTI crude sank $5.73, or 7.3%, to $72.28 (up 1%). Gasoline dropped 6.4% (up 2%), and Natural Gas sank 23.3% to $2.08 (down 17%). Copper declined 0.8% (down 2%). Wheat was little changed (down 5%), while Corn declined 0.8% (down 6%). Bitcoin rallied $1,450, or 3.5%, to $43,300 (up 1.9%).

Middle East War Watch:

February 1 – Associated Press (Jon Gambrell, Tara Copp and Lolita C. Baldor): “Defense Secretary Lloyd Austin said… it’s time to further disable Iran-backed militias that have struck at U.S. forces and ships in the Middle East and the U.S. is preparing to take significant action in response to the deaths of three U.S. service members in Jordan. For days the U.S. has hinted strikes are imminent. While the threat of retaliation for Sunday’s deaths has driven some militant groups to say they were stopping hostilities, as late as Thursday Yemen’s Houthi rebels were still attacking vessels and fired a ballistic missile at a Liberian-flagged container ship in the Red Sea. ‘At this point, it’s time to take away even more capability than we’ve taken in the past,’ Austin said…”

January 27 – Reuters (Muhammad Al Gebaly, Nilutpal Timsina, Krishn Kaushik and Manoj Kumar): “Commodities trader Trafigura said… it was assessing the security risks of further Red Sea voyages after firefighters put out a blaze on a tanker attacked by Yemen's Houthi group a day earlier. The U.S. military said a U.S. Navy ship and other vessels provided assistance after the Marlin Luanda was hit by a Houthi anti-ship missile. ‘No further vessels operating on behalf of Trafigura are currently transiting the Gulf of Aden and we continue to assess carefully the risks involved in any voyage, including in respect of security and safety of the crew, together with shipowners and customers,’ a Trafigura statement said.”

January 29 – Bloomberg (Elizabeth Low): “The Red Sea shipping crisis is sending waves through Asia’s fuel markets, hoisting costs even on routes that don’t use the waterway, while spurring sellers to reduce cargo premiums to offset the higher freight. Rates for shipping products such as gasoline have jumped as some vessels sail longer distances to avoid the Red Sea after attacks by Iran-backed Houthi rebels. That’s tightened the market, first boosting costs of long-distance routes via the Middle East, and now spilling into voyages within Asia.”

January 30 – Financial Times (Raya Jalabi): “For years, Arab and western officials have kept a watchful eye over an arid tract of land in a remote corner of the Middle East, where US troops, Iran-linked militias and the remnants of Isis all operate. Tehran-backed militants sit at checkpoints and makeshift bases along the Baghdad-Damascus highway, which they long ago seized — the centre of a highly prized smuggling network in the border triangle, used by militants and criminal gangs to smuggle drugs and weapons. On Sunday, this corner between Jordan, Syria and Iraq became the latest flashpoint in the widening regional hostilities that have drawn the US back into combat.”

January 29 – Reuters: “The U.S. believes the attack that killed three U.S. troops on the Jordanian-Syrian border has the ‘footprints’ of Iran-backed Iraqi militia Kataib Hezbollah… Who is the Kataib Hezbollah? Founded in the aftermath of the 2003 U.S.-led invasion of Iraq, Kataib Hezbollah is one of the elite Iraqi armed factions closest to Iran. It is the most powerful armed faction in the Islamic Resistance in Iraq, an umbrella group of hardline Shi'ite armed groups that have claimed more than 150 attacks on U.S. forces since the Gaza war began.”

Taiwan Watch:

January 31 – Financial Times (Kathrin Hille): “Taiwan’s armed forces simulated identifying and attacking Chinese naval vessels in drills to reassure the public amid concerns that Beijing could raise pressure on the country after the ruling Democratic Progressive party’s victory in this month’s presidential election. As part of the exercise, a high-speed minelaying vessel laid a dummy sea mine about 10 nautical miles outside Zuoying naval base on Taiwan’s south-west coast on Wednesday. It was accompanied by marines in a group of M109 amphibious assault boats, while four missile speedboats secured the nearby waters and onshore mobile units simulated launching Hsiung Feng anti-ship missiles against enemy vessels.”

January 27 – CNBC (Rebecca Picciotto): “Beijing sent dozens of military aircraft and naval ships toward Taiwan on Friday, the same day of a low-profile meeting between U.S. national security adviser Jake Sullivan and Chinese Foreign Minister Wang Yi aimed at stabilizing U.S.-China relations… China sent 33 military aircraft and six naval vessels toward Taiwan… Thirteen of the planes crossed over the Taiwan Strait. The intensified military pressure comes as the U.S. and China are attempting to steer relations back on track after an icy couple of years.”

January 31 – Reuters (Ben Blanchard): “Taiwan’s government expressed anger after China ‘unilaterally’ changed a flight path close to the sensitive median line in the Taiwan Strait, saying it appeared to be a deliberate attempt to change the status quo for possible military means. China's civil aviation administration said… The median line had for years served as an unofficial barrier between Chinese-claimed Taiwan and China, but China says it does not recognise its existence and Chinese warplanes now regularly fly over it as Beijing seeks to pressure Taipei to accept its sovereignty claims.”

Ukraine War Watch:

February 1 – Reuters (Charlotte Van Campenhout, Andrew Gray and Sabine Siebold): “European Union leaders unanimously agreed… to extend 50 billion euros ($54bn) in new aid to Ukraine, sending a message to the United States split on whether to keep backing Kyiv in its fight against Russia's invasion. The agreement overcomes weeks of resistance from Hungary and comes amid uncertainty over the future of U.S. aid. Kyiv relies heavily on Western support as the war, the biggest conflict in Europe since World War Two, nears its third year.”

January 30 – Associated Press: “The wail of air raid sirens is commonplace in Belgorod, a Russian border city whose residents are on edge following a Ukrainian missile attack on a New Year’s holiday weekend that left dozens of people dead and injured. A spectacular explosion rocked a huge fuel export terminal on the Baltic Sea southwest of St. Petersburg this month from a Ukrainian drone, forcing the energy company Novatek to suspend operations for several days. Last week, an apparent drone attack in the Black Sea port of Tuapse in the southern Krasnodar region hit one of Russia’s largest refineries and ignited a fire, while another big refinery in the Volga River city of Yaroslavl, north of Moscow came under attack early Monday…”

Market Instability Watch:

January 31 – Yahoo Finance (David Hollerith): “New York Community Bancorp played the role of rescuer during a 2023 regional banking crisis by purchasing some assets of the failed Signature Bank. Now it is experiencing some trouble of its own. The stock of the… lender initially fell 46% Wednesday after it reported a surprise net loss of $252 million for the fourth quarter and announced it slashed its dividend. Its 37% decline for the day was the largest one-day percentage drop in the stock’s history. The news sent new shockwaves through the regional banking world…”

January 30 – Bloomberg (Julien Ponthus and Farah Elbahrawy): “The dominance of the 10 biggest stocks in US equity markets is increasingly drawing similarities with the dot-com bubble, raising the risk of a selloff, according to JPMorgan… quantitative strategists. The share of the top ten stocks on the MSCI USA Index, including all of the so-called Magnificent Seven tech stocks, has risen to 29.3% by the end of December, the strategists led by Khuram Chaudhry wrote… That’s just moderately below the historical peak share of 33.2%, which occurred in June 2000.”

February 1 – Bloomberg (Saleha Mohsin and Julia Press): “When the US borrows money, it needs to pay its loans back with interest—just like any other borrower. But America’s national debt is currently $34 trillion and rising. Soon, the US will need to spend more each year paying interest than what it spends on national defense. In the last few weeks, former Treasury Secretary Robert Rubin told Bloomberg TV that the US economy is ‘in a terrible place,’ and Black Swan author Nassim Nicholas Taleb warned that ‘a debt spiral is like a death spiral.’ ‘It’s a slow spiral, but it’s still a spiral—of rising debt and rising payments on the debt,’ Phillip Swagel, director of the Congressional Budget Office, tells the Big Take DC podcast. ‘The situation is unsustainable.’”

Global Bond Watch:

January 29 – Reuters (Gertrude Chavez-Dreyfuss): “The U.S. Treasury said… it expects to borrow $760 billion in the first quarter, $55 billion lower than the October estimate primarily due to forecasts for increased net fiscal flows and higher cash balance. The first-quarter financing estimate assumes a cash balance of $750 billion at the end of March… The Treasury also announced it expects to borrow $202 billion in the second quarter, as it projects a cash balance of $750 billion at the end of June.”

January 31 – Bloomberg (Liz Capo McCormick): “The US Treasury boosted the size of its quarterly issuance of longer-term debt for a third straight time, and suggested that no more increases are likely until next year. The Treasury… said… it will sell $121 billion of longer-term securities at its so-called quarterly refunding auctions next week, which span 3-, 10- and 30-year Treasuries."

January 31 – Financial Times (Kate Duguid and Mary McDougall): “The US Treasury will hold some of its largest-ever debt auctions in the coming three months in an effort to fill the yawning federal budget deficit. The Treasury said… it would increase the size of auctions at most maturities for the next three months, with two-year and five-year auctions hitting record sizes. The five-year auction in April, for $70bn, would be the biggest ever for debt with a maturity of two years or more. The US has been increasing its borrowing over the past few quarters, as the gap between government spending and tax revenue has grown.”

January 30 – Bloomberg (Sonali Basak): “Black Swan author Nassim Nicholas Taleb said the US deficit is swelling to a point that it would take a miracle to reverse the damage. ‘So long as you have Congress keep extending the debt limit and doing deals because they’re afraid of the consequences of doing the right thing, that’s the political structure of the political system, eventually you’re going to have a debt spiral,’ he said… ‘And a debt spiral is like a death spiral.’”

February 1 – Bloomberg (Michael Tobin and Jeannine Amodeo): “Chief financial officers hate second-lien loans. They’re really expensive — about 2 percentage points more, give or take, in annual interest-rate costs than traditional first-lien debt. Which explains companies’ sudden rush to take advantage of the booming leveraged loan market and issue new first-lien debt — at falling yields, no less — to help pay down the pricier obligations… More than a dozen companies did something similar last month, and market watchers say it’s only getting started as additional firms look to swap out expensive loans coming due in the next couple years… ‘It’s a sign of things that were unthinkable 12 months ago, but where people are happy to put pen to paper in 2024,’ said Andrzej Skiba, head of BlueBay US fixed income at RBC Global Asset Management.”

January 30 – Bloomberg (Finbarr Flynn, Harry Suhartono and Ameya Karve): “Dollar bond sales in Asia are off to their weakest start in eight years, bucking a strong global trend as regional borrowers raise cheaper funds at home and wait for the Federal Reserve to cut interest rates... Sales in ex-Japan Asia has totaled just $18.2 billion since 2024 began… This is in stark contrast to the US and Europe, where issuers have smashed records amid a deals bonanza.”

Bubble and Mania Watch:

February 1 – Wall Street Journal (Margot Patrick, Eliot Brown and Gina Heeb): “Investors have wondered when the pain from the downturn in commercial property would hit banks. The past 24 hours showed it is happening right now, with lenders on three continents disclosing damage and two bank leaders resigning. Shares of New York Community Bancorp fell 11% Thursday, extending a steep slide that began a day earlier when the company disclosed troubles in its commercial property book… On Wednesday, it closed down 38%, its worst day on record. Tokyo-based Aozora Bank shares fell more than 20% Thursday, the maximum allowed on a single day under stock-market rules, after it said losses in its U.S. office-loan portfolio will likely lead to a net loss for the year… In Switzerland, the private bank Julius Baer said Chief Executive Philipp Rickenbacher resigned after the company took a roughly $700 million provision on loans it said it may not get back from Austrian property landlord Signa Group.”

February 1 – Reuters (Patturaja Murugaboopathy): “Global passive equity funds' net assets surpassed those of their active counterparts for the first time in 2023 as investors increasingly sought lower-cost funds that mirror broad market indices. According to LSEG Lipper, global passive equity funds' net assets stood at a record $15.1 trillion at the end of December while those of active funds was $14.3 trillion.”

January 30 – Bloomberg (Patrick Clark and Anna J Kaiser): “Billionaire Barry Sternlicht sees more than $1 trillion of losses for office real estate, calling the properties ‘one asset class that never recovered’ from the pandemic. ‘The office market has an existential crisis right now,’ which is largely a US phenomenon because workers haven’t gone back to their desks, Sternlicht said… Once a $3 trillion asset class, offices now are ‘probably worth $1.8 trillion,’ said Sternlicht, chief executive officer of Starwood Capital Group. ‘There’s $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is.’”

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

January 30 – Reuters (Michael Martina, Patricia Zengerle and Andrew Goudsward): “Hackers linked to the Chinese government are targeting critical U.S. infrastructure, preparing to cause ‘real-world harm’ to Americans, FBI Director Christopher Wray told a congressional committee… Water treatment plants, the electric grid, oil and natural gas pipelines and transportation hubs are among the targets of state-sponsored hacking operations, he told the House of Representatives Select Committee on competition with China… ‘They're not focused just on political and military targets. We can see from where they position themselves across civilian infrastructure, that low blows aren't just a possibility in the event of conflict, low blows against civilians are part of China's plan,’ Wray said.”

February 1 – Reuters (Christopher Bing and Karen Freifeld): “The U.S. government in recent months launched an operation to fight a pervasive Chinese hacking operation that compromised thousands of internet-connected devices, two Western security officials and a person familiar with the matter said… The Biden administration has increasingly focused on hacking, not only for fear nation states may try to disrupt the U.S. election in November, but because ransomware wreaked havoc on Corporate America in 2023. The hacking group at the center of recent activity, Volt Typhoon, has especially alarmed intelligence officials who say it is part of a larger effort to compromise Western critical infrastructure, including naval ports, internet service providers and utilities.”

January 28 – Washington Post (Catherine Belton): “Russia is increasingly confident that deepening economic and diplomatic ties with China and the Global South will allow it to challenge the international financial system dominated by the United States and undermine the West, according to Kremlin documents and interviews with Russian officials and business executives. Russia has been buoyed by its success in holding off a Western-backed Ukrainian counteroffensive followed by political stalemates in Washington and Brussels over continued funding for Kyiv. In Moscow's view, the U.S. backing of Israel's invasion of Gaza has damaged Washington's standing in many parts of the world. The confluence of events has led to a surge of optimism about Russia's global position.”

January 29 – Reuters (Lidia Kelly): “Russia's Pacific Fleet frigate Marshal Shaposhnikov has conducted an anti-submarine exercise in the South China Sea, Russian news agency reported… After detecting a mock enemy submarine and confirming its coordinates from a helicopter crew, the warship fired torpedoes and depth charges - anti-submarine warfare weapons… A detachment of the Russian Pacific Fleet warships… are on a ‘long-distance voyage,’ which includes the Asia-Pacific region, Interfax reported.”

De-globalization and Iron Curtain Watch:

January 29 – Wall Street Journal (Andrew Duehren and Kim Mackrael): “President Biden’s 2021 declaration that ‘America is back’ was welcomed by European officials eager to move past their trade troubles with the Trump administration. Yet instead of reversing policies driven by Donald Trump’s protectionist view, Biden has advanced many of them. The president has kept trade barriers in place, left European companies out of subsidies designed to bolster U.S. manufacturing and surprised allies with tighter restrictions on Chinese access to American technology. Many Europeans fear that Trump, seemingly en route to the Republican nomination, might abandon Ukraine and the North Atlantic Treaty Organization, as well as inject chaos into global trade. They have nonetheless come to believe that regardless of the winner of the expected Biden-Trump rematch, U.S. economic policies have tilted from their favor.”

January 29 – Reuters (Joe Cash and Christoph Steitz): “Swiss solar panel maker Meyer Burger is facing the brunt of competition from China and is warning it may have to close its loss-making production plant in Germany unless the government steps in with financial support. ‘Chinese manufacturers are deliberately selling goods in Europe far below their own production costs,’ chief executive Gunter Erfurt told Reuters. ‘They can do this because the solar industry in China has been strategically subsidised with hundreds of billions of dollars for years.’ Growing alarm over Chinese industrial overcapacity flooding the European Union with cheap products is opening a new front in the West's trade war with Beijing… Brussels' trade policy is now also turning increasingly protective against the global ramifications of China's production-focused, debt-driven development model.”

January 29 – Financial Times (Joe Leahy, James Kynge and Sun Yu): “In a speech that delivered China’s assessment of world trade conditions in 2024, commerce minister Wang Wentao last week warned the ‘environment is poor’. ‘Rising trade protectionism’ and ‘intensified geopolitical conflicts’ were among the main challenges, he told reporters… But in China’s favour, he reassured his audience, were record exports from its ‘new three’ industries: electric vehicles, solar energy products and lithium batteries… But for its developed country trading partners, the prospect of China’s low-cost imports flooding their markets and wiping out jobs in important industries such as the automotive sector and solar and wind power is prompting growing alarm.”

Inflation Watch:

February 2 – Washington Post (Abha Bhattarai and Jeff Stein): “Americans are finally getting a break from inflation, with prices for gasoline, used cars and health insurance all falling over the past year… But prices painfully remain high for one particularly frequent purchase: groceries. Grocery prices have jumped by 25% over the past four years, outpacing overall inflation of 19% during the same period. And while prices of appliances, smartphones and a smattering of other goods have declined, groceries got slightly more expensive last year, with particularly sharp jumps for beef, sugar and juice, among other items.”

January 31 – Bloomberg (Gerson Freitas Jr.): “The US cattle herd shrank to the lowest level in more than seven decades as ranchers continue to send their cows to slaughter, threatening to keep beef prices at stubbornly high levels for consumers for at least another couple of years while eroding profits for meat processors. There were 87.2 million cattle as of January 1, down about 2% from a year ago and less than anticipated by analysts…That’s the smallest animal count since 1951…”

Biden Administration Watch:

January 29 – Reuters (Phil Stewart and Idrees Ali): “The killing of three U.S. troops and wounding of dozens more on Sunday by Iran-backed militants is piling political pressure on President Joe Biden to deal a blow directly against Iran, a move he's been reluctant to do out of fear of igniting a broader war. Biden's response options could range anywhere from targeting Iranian forces outside to even inside Iran, or opting for a more cautious retaliatory attack solely against the Iran-backed militants responsible, experts say. Republicans accused Biden of letting American forces become sitting ducks… In response, they say Biden must strike Iran. ‘He left our troops as sitting ducks,’ said Republican U.S. Senator Tom Cotton. ‘The only answer to these attacks must be devastating military retaliation against Iran's terrorist forces, both in Iran and across the Middle East.’”

Federal Reserve Watch:

January 31 – Reuters (Michael S. Derby): “U.S. Federal Reserve Chair Jerome Powell said… that officials have begun discussing what it would take for them to stop the ongoing run-off of the central bank's balance sheet. Balance sheet run-off ‘has gone very well,’ Powell said at his press conference… He was referring to a process known as quantitative tightening, or QT, which involves the Fed allowing its holdings of cash and bonds to contract by way of allowing Treasury and mortgage bonds it owns to mature and not be replaced. QT, which has seen the Fed shrink its holdings by over $1.3 trillion to $7.7 trillion, has run independently from the Fed's rate hike cycle but nevertheless complements it.”

February 1 – Bloomberg (Carter Johnson): “Economists are taking Jerome Powell’s words to heart and erasing the last of their forecasts for a March interest-rate cut as they set their sights on May. Goldman Sachs..., Bank of America Corp. and Barclays Plc — among the last Wall Street holdouts expecting the Federal Reserve to start lowering their benchmark rate as soon as March — have pushed back their forecasts for cuts after the conclusion of the central bank’s policy meeting...”

January 30 – New York Times (Jeanna Smialek): “The Federal Reserve is widely expected to leave interest rates unchanged at the conclusion of its meeting on Wednesday, but investors will be watching closely for any hint at when and how much it might lower those rates this year. The expected rate cuts raise a big question: Why would central bankers lower borrowing costs when the economy is experiencing surprisingly strong growth?”

U.S. Bubble Watch:

February 2 – CNBC (Jeff Cox): “Job growth posted a surprisingly strong increase in January… Nonfarm payrolls expanded by 353,000 for the month, much better than the… estimate for 185,000… The unemployment rate held at 3.7%, against the estimate for 3.8%. Wage growth also showed strength, as average hourly earnings increased 0.6%, double the monthly estimate. On a year-over-year basis, wages jumped 4.5%, well above the 4.1% forecast. The wage gains came amid a decline in average hours worked, down to 34.1, or 0.2 hour lower for the month… The report also indicated that December’s job gains were much better than originally reported. The month posted a gain of 333,000, which was an upward revision of 117,000 from the initial estimate.”

January 30 – Bloomberg (Mark Niquette): “US consumer confidence increased in January to the highest level since the end of 2021 as Americans grew more upbeat about the economy and the job market amid more sanguine views about inflation. The Conference Board’s gauge of sentiment increased to 114.8 from a revised 108 a month earlier... A gauge of current conditions surged to the highest since March 2020. The measure of expectations rose to a six-month high. Consumers expected the inflation rate to average 5.2% in the next 12 months, the lowest level since March 2020… The third-straight monthly increase in confidence suggests at least some of the momentum in household spending late last year will endure.”

January 30 – Bloomberg (Augusta Saraiva): “US job openings unexpectedly rose in December to the highest level in three months while fewer Americans quit their jobs… Vacancies increased to 9 million from an upwardly revised 8.9 million reading in the prior month, the… Job Openings and Labor Turnover Survey, known as JOLTS, showed... The December figure exceeded all estimates... At the same time, the number of people who voluntarily quit their job fell to 3.4 million, the lowest in nearly three years.”

February 1 – Bloomberg (Jarrell Dillard): “Initial and recurring applications for US unemployment benefits both rose to a two-month high… Initial claims increased by 9,000 to 224,000 in the week ending Jan. 27... The median forecast… called for 212,000. Continuing claims, a proxy for the number of people receiving unemployment benefits, rose to 1.9 million in the week ending Jan. 20.”

January 31 – CNBC (Jeff Cox): “Private payroll growth declined sharply in January, a possible sign that the U.S. labor market is heading for a slowdown this year, ADP reported… Companies added 107,000 workers in the first month of 2024, off from the downwardly revised 158,000 in December and below the… estimate for 150,000… Only one sector — information services (-9,000) — reported a decline, but hiring was slow across virtually all sectors. Leisure and hospitality posted the biggest increase, with an addition of 28,000 workers, while trade, transportation and utilities added 23,000, and construction rose by 22,000. Services-providing companies were responsible for 77,000 jobs…”

February 1 – Reuters (Amina Niasse): “Job cut announcements in January increased to its highest level in 10 months as employers in the financial and technology sectors launched restructuring efforts… Announced layoffs reached 82,307 in January, a 136% surge from December’s 34,817, according to… Challenger, Gray & Christmas… It was the highest monthly total since March 2023.”

January 31 – Reuters (Lucia Mutikani): “U.S. labor costs rose less than expected in the fourth quarter and the annual increase was the smallest in two years, signs of moderating wage inflation that could give the Federal Reserve room to start cutting interest rates by June… The Employment Cost Index (ECI), the broadest measure of labor costs, increased 0.9% last quarter… That was the smallest quarterly gain since the second quarter of 2021 and followed a 1.1% advance in the July-September period. Economists polled… had forecast the ECI rising 1.0%. Labor costs increased 4.2% year-on-year, the smallest rise since the fourth quarter of 2021, after climbing 4.3% in the third quarter.”

January 31 – Dow Jones (Jeffry Bartash): “The numbers: The cost companies pay to employ workers rose 0.9% in the fourth quarter to mark the smallest increase in two and a half years, another sign that rapid wage growth after the pandemic is waning. The rise in the employment cost index was the smallest since the spring of 2021. Compensation had climbed at least 1% for 10 straight quarters for the first time since the late 1980s.”

February 1 – Yahoo Finance (Josh Schafer): “Declines in the US manufacturing sector appear to have bottomed in a positive sign for the economy. On Thursday, the January ISM Manufacturing PMI index registered a reading of 49.1…, up from 47.1… in the month prior and above Wall Street's estimates for a reading of 47.2… The reading was the strongest since October 2022. Additionally, the ISM's new orders index increased to 52.5 from 47.1 in the month prior. Economists had expected the index to hit 48.2 in January.”

February 1 – Associated Press (Alex Veiga): “A closely watched housing market barometer shows U.S. home prices in November posted their biggest annual gain in more than a year. S&P Dow Jones Indices’ CoreLogic Case-Shiller national home price index rose 5.1% over the 12 months ended in November. That’s the index’s fifth straight annual gain and the biggest since December 2022, according to data released this week. The jump ‘is pretty strong, given where mortgage rates have been and the impact on affordability,’ said Selma Hepp, chief economist at CoreLogic.”

January 31 – CNBC (Diana Olick): “After rising for several weeks, mortgage demand fell last week as buyers faced increased competition for a limited supply of homes… applications for a mortgage to purchase a home fell 11% last week from the previous week and were 20% lower than the same week a year ago. ‘Low existing housing supply is limiting options for prospective buyers and is keeping home-price growth elevated, resulting in a one-two punch that continues to constrain home purchase activity,’ said Joel Kan, an MBA economist.”

January 31 – Wall Street Journal (E.B. Solomont): “It has been nearly 20 years since the country’s first $100 million home sale, but in some ways the market is just taking off: Since 2020, at least 24 homes nationwide have traded for $100 million and up, more than the total number of nine-figure sales during the entire prior decade combined. The 24 homes, and their uber-wealthy owners, also tell the compelling story of massive wealth creation and migration in the U.S. since the onset of the pandemic, with a dramatic surge in nine-figure deals in Florida… Since 2020, three homes over $100 million have changed hands in New York City compared with six in and around Palm Beach… ‘People’s wealth has grown so substantially and there’s such limited product,’ said Chris Leavitt of Douglas Elliman in Palm Beach. ‘There are more billionaires than there are oceanfront, sprawling estates.’”

January 31 – Bloomberg (Paulina Cachero): “What really matters anyway? That’s what Nia Holland, 24, thought after spending $2,500 on a vintage Chanel bag, draining her savings. Earning little money with campus research jobs during graduate school, she knew her money could be better spent, saved or invested. But at the same time, she said it didn’t feel irresponsible. With traditional milestones — like homeownership and a life with kids — so far out of reach, denying herself ‘little luxuries’ wasn’t going to make a difference. And if anything, the lambskin tote with a 24-carat chain made her feel better. ‘The economy sucks, there’s global warming, there’s constant political and social unrest globally,’ said Holland, who is getting financial support from her family as she pursues a doctorate in education and psychology at the University of Michigan. ‘It’s just easier to spend money on things that will bring you immediate fulfillment.’”

China Watch:

February 1 – Bloomberg: “China pledged to keep spending this year despite a property market slump weighing on key government revenue sources, raising hopes that fiscal expansion can provide more support for a slowing economy. Fiscal spending in 2024 will be maintained at a ‘necessary intensity,’ Ministry of Finance officials said…. Hours later, data showed that Beijing withdrew stimulus last year, with 2023’s overall deficit at 8.84 trillion yuan ($1.2 trillion).”

January 30 – New York Times (Daisuke Wakabayashi and Claire Fu): “The unwavering belief of Chinese home buyers that real estate was a can’t-lose investment propelled the country’s property sector to become the backbone of its economy. But over the last two years, as firms crumbled under the weight of massive debts and sales of new homes plunged, Chinese consumers have demonstrated an equally unshakable belief: Real estate has become a losing investment. This sharp loss of faith in property, the main store of wealth for many Chinese families, is a growing problem for Chinese policymakers who are pulling out all the stops to revive the ailing industry — to very little effect.”

January 31 – Reuters (Daisuke Wakabayashi and Claire Fu): “China’s top intelligence agency issued an ominous warning last month about an emerging threat to the country’s national security: Chinese people who criticize the economy. In a series of posts on its official WeChat account, the Ministry of State Security implored citizens to grasp President Xi Jinping’s economic vision and not be swayed by those who sought to ‘denigrate China’s economy’ through ‘false narratives.’ To combat this risk, the ministry said, security agencies will focus on ‘strengthening economic propaganda and public opinion guidance’… Beijing has censored and tried to intimidate renowned economists, financial analysts, investment banks and social media influencers for bearish assessments of the economy and the government’s policies. In addition, news articles about people experiencing financial struggles or the poor living standards for migrant workers are being removed.”

January 30 – Bloomberg: “China is embarking on its biggest consolidation in the banking industry by merging hundreds of rural lenders into regional behemoths amid growing signs of financial stress. After engineering mergers of rural cooperatives and rural commercial banks in at least seven provinces since 2022, policymakers pinpointed tackling risks at the $6.7 trillion sector as one of its top priorities for this year. That means another wave of consolidation is on the way... The 2,100 banks in the rural cooperative system saw their bad-loan ratio stand at 3.48% at the end of 2022, more than twice as high as that for the whole sector.”

January 31 – Reuters (Ellen Zhang and Ryan Woo): “China's manufacturing activity contracted for the fourth straight month in January…, suggesting the sprawling sector and the broader economy were struggling to regain momentum at the start of 2024. The official purchasing managers' index (PMI) rose to 49.2 in January from 49.0 in December, driven by a rise in output but still below the 50-mark separating growth from contraction.”

January 31 – Bloomberg: “The sharp slowdown in China’s home sales dragged on in January, even after policymakers stepped up efforts to arrest the slump. The value of new home sales from the 100 biggest real estate companies slid 34.2% from a year earlier to 235 billion yuan ($33bn), following a 34.6% decline in December, according to… China Real Estate Information Corp. January’s sales were down 48% from the previous month, a record low in recent years… ‘Policymakers doubled down the pressure on banks to increase their property loans, but the credit risks banks are willing to take is limited,’ according to Larry Hu, head of China economics at Macquarie Group Ltd.”

January 29 – Financial Times (Editorial Board): “The order by a Hong Kong court… to wind up China Evergrande, once the world’s most valuable property company, represents a cautionary tale for investors, other indebted businesses and China’s own leadership. Most immediately, the liquidation process is set to highlight the sparse legal protection afforded to offshore investors in Chinese assets. A raft of competing international and domestic claims on Evergrande assets bedevils the restructuring of a company with more than $300bn in liabilities. If — as expected — domestic claims take precedence, investor confidence in Chinese assets trading in Hong Kong may be further undermined. More broadly, it stands as a test of Hong Kong’s authority with mainland China. It is not clear to what extent — if at all — local government entities, courts and creditors across the mainland will acquiesce to orders from Hong Kong to transfer assets they currently possess to a liquidator. On a national scale, the implications are yet more fundamental. The bursting of China’s property bubble, along with deteriorating demographics and a huge debt overhang, raises the spectre of ‘Japanification’, under which the world’s second-largest economy may slip into the type of low-growth malaise suffered by Japan in the 1990s.”

January 29 – Financial Times (Thomas Hale and Kaye Wiggins): “When Hong Kong judge Linda Chan ordered China Evergrande into liquidation…, she opened a critical new phase in the slow-motion collapse of the world’s most indebted property developer — and set up a high-profile test of the reach of the former British colony’s courts… Almost all of the company’s homebuilding activity takes place in the Chinese mainland, where most of its more than $300bn in liabilities are also owed and a property slowdown has become one of the government’s most pressing challenges… ‘It definitely won’t be straightforward to get money out of mainland China,’ said Nigel Trayers, a restructuring and insolvency specialist at Grant Thornton in Hong Kong. ‘It’s fairly clear that the priority is delivering properties that have been sold.’”

January 31 – Bloomberg (Felix Tam): “Evergrande’s winding-up will highlight the arduous task of liquidation of a large corporate, and reset expectations about recovery rates on defaulted Chinese speculative-grade bonds in the offshore market, S&P says… ‘We assume offshore bondholders will get a few cents on the dollar once the liquidation plays out. Moreover, they will likely yet have to wait years even for this thin payout,’ China corporates specialist Chang Li says.”

January 31 – Bloomberg (Dorothy Ma): “Jiayuan International Group Ltd., one of the first Chinese developers to be wound up by offshore creditors in Hong Kong, is hitting roadblocks in its liquidation, foreshadowing similar obstacles China Evergrande Group may face… The company’s liquidators said in a Jan. 30 filing that they plan to consult legal advisers after discovering that Jiayuan’s controlling stake in an onshore property project had been ‘transferred’ to a local firm, further shrinking assets available to creditors. Writing on behalf of Jiayuan, the liquidators also said they haven’t found sufficient funding needed for restructuring and are running into onshore creditors who are taking ‘more vigorous actions’ to recover their claims.”

February 1 – Bloomberg (Shawna Kwan): “If the lack of buyers for a prime office tower and a mansion in Hong Kong are any guide, China Evergrande Group’s liquidators are in for a long road ahead. Alvarez & Marsal, the company chosen this week to unwind the fallen Chinese property developer, is still trying to sell Evergrande’s $1.6 billion former Hong Kong headquarters building after it was seized in separate proceedings in 2022… Residential distressed assets aren’t any easier to offload. A luxury house formerly owned by Evergrande’s founder Hui Ka Yan remains on the market following a foreclosure in 2022.”

January 29 – Bloomberg: “China’s benchmark government bond yield fell to its lowest in nearly 22 years on mounting expectations for further monetary easing amid a fragile economic recovery and stock-market selloff. The yield on the 10-year sovereign note slipped to 2.47%, a level unseen since 2002.”

February 1 – Bloomberg: “China’s stock market faces the risk of forced selling by leveraged stakeholders as shares pledged as collateral shrink in value. The number of filings announcing that a firm’s shareholder is boosting the amount of holdings booked as collateral for loans reached 60 last month, the highest since April 2022… The pledges, popular among company founders and other major shareholders in need of cash, have emerged as a new source of market concern following a similar scare during the 2018 rout. Lenders are demanding increased collateral after an extended slump in Chinese stocks…”

January 30 – Bloomberg (Tom Hancock): “Nearly a third of Chinese office workers reported falling salaries last year, the highest share in at least six years, underscoring persistent deflationary pressures in the world’s second-largest economy. About 32% of white-collar workers in China surveyed by the online recruitment platform Zhaopin Ltd said their wages dropped last year. That’s the largest proportion going back to at least 2018… The survey published this month suggests that more Chinese employers are holding back from increasing wages, a dynamic that can prolong deflation.”

January 27 – Bloomberg (Rebecca Picciotto): “China will halt the lending of certain shares for short selling from Monday, the securities regulator announced Sunday, in a move to support the country’s slumping stock markets. Strategic investors won’t be allowed to lend out shares during agreed lock-up periods, the Shanghai Stock Exchange and Shenzhen Stock Exchange said…”

January 28 – Bloomberg: “China’s official Xinhua News Agency deleted a report saying that Beijing plans to ‘merge’ three of its biggest bad debt managers into China Investment Corp. The short report… stated without elaborating that China Cinda Asset Management Co., China Orient Asset Management Co. and China Great Wall Asset Management Co. would be ‘merged’ into the country’s $1.24 trillion sovereign wealth fund. The move would be part of China’s plan to reform institutions, according to the report.”

February 1 – Bloomberg (Xinyi Luo and Kiuyan Wong): “The value of mortgages in Hong Kong that have exceeded the worth of the homes surged to a two-decade high amid a prolonged slump in what’s forecast to be one of the world’s worst property markets this year. The value of negative-equity loans jumped to HK$131.3 billion ($17bn) at the end of December, up from HK$59.3 billion in September and the highest level since 2003…”

January 30 – Wall Street Journal (Selina Cheng): “Hong Kong outlined a new national security law that would broaden laws covering sedition and expand the range of material considered state secrets, bringing it more in line with mainland China… The new law would expand the definition of national security to include economic matters and define new crimes including treason, foreign interference and seditious intention… The release kicks off a four-week comment period, after which the law will be voted on by the legislature, which is dominated by Beijing loyalists.”

Central Banker Watch:

February 1 – Bloomberg (Eric Martin): “The head of the International Monetary Fund said the Federal Reserve and other major central banks face more risks by easing monetary policy too early rather than too late, but stressed the Fed shouldn’t hesitate to cut interest rates when the data says the time is right. ‘Central banks need to be guided by data, not by exuberant expectations of markets,’ Managing Director Kristalina Georgieva said... ‘At this time in the cycle, there is risk of premature loosening.’”

February 1 – Bloomberg (Philip Aldrick and Irina Anghel): “The Bank of England opened the door to interest-rate cuts for the first time since the pandemic struck — affirming predictions that inflation will fall to target this spring — while warning that price pressures could reemerge. The UK central bank removed key guidance that borrowing costs may have to rise again, with Governor Andrew Bailey acknowledging that keeping rates unchanged would push inflation ‘significantly’ below the target of 2%.”

January 30 – Bloomberg (Bastian Benrath and Zoe Schneeweiss): “European Central Bank President Christine Lagarde declined to give a timeline for interest-rate cuts but emphasized that wage data will be vital in deciding when to begin monetary easing. The comments suggest a first reduction in borrowing costs will only be feasible toward mid-2024 — later than the April meeting that markets are fully pricing. ‘We are not there yet’ on inflation, Lagarde told CNN… ‘We need all sorts of data, but one of which is critically important — it’s the data concerning wages.’”

January 28 – Reuters (Bart Meijer): “The European Central Bank (ECB) will need to see proof of slowing wage growth in the euro zone before interest rates can be lowered, ECB governing council member Klaas Knot said… ‘We now have a credible prospect that inflation will return to 2% in 2025. The only piece that's missing is the conviction that wage growth will adapt to that lower inflation’, the Dutch central bank governor said…”

Europe Watch:

February 1 – Bloomberg (Mark Schroers): “Euro-zone inflation eased less than anticipated at the start of the year — testing investor expectations that the European Central Bank will begin lowering interest rates as soon as the spring. After a pick-up in December driven by base effects, consumer prices rose 2.8% from a year ago in January… That’s above the 2.7% median estimate… Core inflation, which omits volatile components such as food and energy, also abated less than envisaged, to 3.3%.”

January 31 – Reuters (Gus Trompiz and Christian Levaux): “The French government… sent armoured vehicles to protect a wholesale food market in Paris in a sign of escalating tensions as farmers blocked highways in France and Belgium and protests spread elsewhere in Europe. Spanish and Italian farmers said they were joining the protest movement that has also hit Germany, aiming to press governments to ease environmental rules and shield them from rising costs and cheap imports.”

February 1 – Bloomberg (Yves Herman and Marco Trujillo): “Two of France's main farming unions on Thursday urged protesters who have staged hundreds of tractor blockades across the country to go back home, after the government announced measures to try to quell the anger in a movement that has spread across Europe. While some local grievances vary, the unrest, also seen in Belgium, Portugal, Greece and Germany, has exposed tensions over the impact on farming of the EU's drive to tackle climate change, as well of opening the door to cheap Ukrainian imports to help Kyiv's war effort.”

January 30 – Bloomberg (Alexander Weber, William Horobin and Sonja Wind): “The euro zone unexpectedly avoided a first recession since the pandemic in the latter half of 2023 as firmer growth in Italy and Spain offset the malaise in Germany. Gross domestic product stagnated in the last three months of the year — dodging a two-quarter downturn once again by the slimmest of margins following the 0.1% decline between July and September.”

January 29 – Reuters (Gergely Szakacs, Jason Hovet and Maria Martinez): “The sickly state of the German economy is the next big challenge for the export-reliant countries of central Europe, which are still recovering from some of the world's worst inflation spikes in the wake of the COVID-19 pandemic. Close trade ties with Germany and its once-mighty auto sector were for years a boon for the region since the collapse of communism. But now those ties risk becoming a drag on the economies of Hungary, Czech Republic and Slovakia.”

January 30 – Bloomberg (Giulia Morpurgo): “The number of companies going bust in the UK jumped to the highest level in 30 years as businesses were hit by a combination of high borrowing costs, surging inflation and weakening consumer demand. In 2023, there were 25,158 registered company insolvencies across England and Wales… That’s the most recorded since 1993.”

Japan Watch:

January 29 – Reuters (Yoshifumi Takemoto and Leika Kihara): “The Bank of Japan must immediately end its negative interest rate policy as it has allowed companies to delay efforts to boost productivity by keeping borrowing costs ultra-low, said ruling party heavyweight Shigeru Ishiba. ‘It's an extreme policy that shouldn't exist in the first place,’ Ishiba said of negative interest rates, adding that ultra-low rates can be justified only in times of crisis. When asked whether he meant the BOJ should end negative rates as soon as possible, Ishiba said: ‘Yes, I believe so.’”

January 30 – Bloomberg (Toru Fujioka and Yumi Teso): “The Bank of Japan’s summary of last week’s meeting signal it is stepping closer to raising its interest rate for the first time since 2007, with one member even warning against missing the opportunity to act… ‘It seems that conditions for policy revision, including the termination of the negative interest rate policy, are being met,’ one of nine board members said, according to a summary of opinions. The official cited the likelihood of better results in this year’s annual wage negotiations and signs of improvement for the economy and inflation.”

January 30 – Bloomberg (Isabel Reynolds): “Japanese Prime Minister Fumio Kishida pressed forward with his campaign for higher wages as a slide in his support rate seems to have halted and speculation re-emerges that he may opt to call a general election this year. Kishida underscored the need for pay rises to bolster the economy in a speech to parliament… ‘We will do everything possible to achieve income hikes that exceed price rises this year. We must make this a reality,’ Kishida said... ‘The government will do all it can to keep up the momentum,” he added.’”

January 30 – Bloomberg (Erica Yokoyama): “Japan’s labor market showed further signs of tightness in December, driven by a manpower shortage across a swath of sectors in a closely-watched development as companies engage in annual wage negotiations with unions. The unemployment rate fell to 2.4%... The number of people with jobs rose by 380,000 from a year earlier, a 17th consecutive increase.”

January 31 – Reuters (Kaori Kaneko): “Japan's factory activity shrank for an eighth straight month in January as output and new orders declined due to the subsiding economy at home and overseas… The final au Jibun Bank Japan manufacturing purchasing managers' index (PMI) rose to 48.0 in January from 47.9 in December…”

Social, Political, Environmental, Cybersecurity Instability Watch:

February 1 – Bloomberg (David Pan): “Bitcoin miners in the US are consuming the same amount of electricity as the entire state of Utah, among others, according to a new analysis by the US Energy Information Administration. And that’s considered the low end of the range of use. Electricity usage from mining operations represents 0.6% to 2.3% of all the country’s demand in 2023… It is the first time EIA has shared an estimate. The mining activity has generated mounting concerns from policymakers and electric grid planners about straining the grid during periods of peak demand, energy costs and energy-related carbon dioxide emissions. ‘This estimate of U.S. electricity demand supporting cryptocurrency mining would equal annual demand ranging from more than three million to more than six million homes,’ the report said.”

January 29 – Reuters (Sabrina Valle): “It is the end of an era for Big Oil in California, as the most populous U.S. state divorces itself from fossil fuels in its fight against climate change. California's oil output a century ago amounted to it being the fourth-largest crude producer in the U.S., and spawned hundreds of oil drillers, including some of the largest still in existence. Oil led to its car culture of iconic highways, drive-in theaters, banks and restaurants that endures today.”

Leveraged Speculation Watch:

January 28 – Bloomberg (Alice Atkins): “Looming European interest-rate cuts have set the euro up as a prime candidate for funding carry trades, adding further pressure on the common currency. Goldman Sachs… and JPMorgan… are recommending borrowing the euro to buy riskier, higher-yielding currencies. Money managers at Allspring Global Investments and Ninety One Asset Management favor the trade against emerging-market currencies, while Allspring is also betting the euro will fall against the US dollar.”

January 30 – Reuters (Nell Mackenzie): “Investors withdrew over $100 billion from hedge funds last year in a second consecutive year of outflows of this scale, according to a Nasdaq eVestment report…, against a backdrop of volatile markets and changing investor preferences. In December alone, investors removed roughly $26 billion from hedge funds, the largest monthly amount in 2023. This tipped the total outflows for last year to $103 billion, compared to $112 billion in 2022…”

Geopolitical Watch:

February 1 – Wall Street Journal (Drew Hinshaw and Daniel Michaels): “The modern economy rests on a rule so old that hardly anybody alive can remember a time before it: Ships of any nation may sail the high seas. Suddenly, that pillar of the international order shows signs of buckling. In the Red Sea, Houthi rebels have stormed onto cargo ships, causing freight rates to quadruple and setting a precedent that American vessels aren’t welcome across one of the world’s most vital transport lanes. Russia’s invasion of Ukraine has turned the Black Sea into a gauntlet of warships and mines… Near the Horn of Africa or the Strait of Malacca, pirates who had once seemed quelled have roared back, crimping sea traffic. In the South China Sea, Beijing has asserted sovereign control over parts that have long been international waters, while its push to reunite Taiwan with the mainland raises questions about future transit through the Taiwan Strait.”

February 2 – Bloomberg (Jon Herskovitz): “North Korean leader Kim Jong Un called for stepping up ‘war preparations’ during a visit to a naval shipyard near a South Korean island that was once the scene of deadly confrontation, adding to the bellicose rhetoric he’s used recently… The strengthening of the naval force presents itself as the most important issue in reliably defending the maritime sovereignty of the country,” it cited him as saying.”