Saturday, April 6, 2024

Weekly Commentary: Global Ring of Fire

Money Market Fund Assets (MMFA) surged $70.5 billion last week to a record $6.111 TN. MMFA have ballooned $1.553 TN, or 34.1%, since the Fed initiated its “tightening” cycle in March 2022. In just over four years since the onset of the pandemic, MMFA have inflated $2.477 TN, or 68.2%.

April 5 – Bloomberg (Christopher Anstey): “Former Treasury Secretary Lawrence Summers said that the surge in US payrolls in March illustrates that the Federal Reserve is well off in its estimate of where the neutral interest rate is, and cautioned against any move to lower rates in June. ‘This was a hot report that suggested that, if anything, the economy is re-accelerating,’ Summers said… Alongside other factors including an ‘epic’ loosening in financial conditions, ‘it seems to me the evidence is overwhelming that the neutral rate is far higher than the Fed supposes,’ he said.”

“Epic” loosening in financial conditions, indeed. I find the debate over the so-called “neutral rate” interesting, if not so relevant. The critical debate goes undebated: Are we today in the fateful “terminal phase” of history’s greatest Bubble? Affirmative, with today’s loose conditions and powerful speculative impulses having proved impervious to Fed rate hikes. While extraordinary, today’s backdrop is not without precedent.

For students of market and economic history, there are too many alarming parallels to the waning days of the “Roaring Twenties.” I again this week found my thoughts returning to the conclusion of Ben Bernanke’s November 2002 speech, “On Milton Friedman’s Ninetieth Birthday”: “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

It follows, then, that the height of the recent boom and the depth of the depression are fundamentally the outcome of Federal Reserve credit extension. The recent cycle may therefore properly be designated a central banking phenomenon. The exaggerated character of the last boom and the slump is understandable only in the light of the superimposition of a central banking system upon our former system. And an understanding of what was taking place in our banking system, largely as a consequence of the enactment of the Federal Reserve Act, is essential to an explanation of the causes of the depression. If the recent cycle has proved so puzzling to so many students of its devious course and manifold phases, it is because the full effects of the creation and operation of this central banking system upon the commercial banks have not been widely nor adequately understood; nor, furthermore, have the influences of the changing structure of the American banking system upon the structure of production been fully realized.” Banking and the Business Cycle, C.A. Philips, Ph.D., T.F. McManus, Ph.D. and R.W. Nelson, Ph.D., 1937

Our understanding of the most momentous financial and economic occurrence of the past century has been terribly undermined over the decades. Great contemporaneous insights and analyses of the causes of the Great Depression were repudiated by the historical revisionists. Rather than recognizing the major impact Federal Reserve operations exerted over the historic “Roaring Twenties” Bubble period, revisionists extraordinaire Friedman and Bernanke turned history on its head by blaming the collapse on Fed tightening and their failure to print enough money.

From Bernanke’s speech: “For the early Depression era, Friedman and Schwartz identified at least four distinct episodes... Three are tightenings of policy… The first episode analyzed by Friedman and Schwartz was the deliberate tightening of monetary policy that began in the spring of 1928 and continued until the stock market crash of October 1929. This policy tightening occurred in conditions that we would not today normally consider conducive to tighter money: As Friedman and Schwartz noted, the business-cycle trough had only just been reached at the end of 1927…, commodity prices were declining, and there was not the slightest hint of inflation. Why then did the Federal Reserve tighten in early 1928? A principal reason was the Board's ongoing concern about speculation on Wall Street.”

As Friedman and Schwartz noted, ‘by July [1928], the discount rate had been raised in New York to 5%, the highest since 1921, and the System’s holdings of government securities had been reduced to a level of over $600 million at the end of 1927 to $210 million by August 1928, despite an outflow of gold.’ Hence this period represents a tightening in monetary policy not related to the current state of output and prices -- a monetary policy ‘innovation,’ in today's statistical jargon.

At about 5%, is monetary policy tight today? Was a 5% rate tight in 1929? No and no, with both periods notable for exceptionally loose conditions prevailing in the face of Fed tightening measures. Importantly, prolonged Bubble inflation ensures powerful momentum in Credit expansion and speculative excess, which largely sidesteps tightening measures that would be restrictive in all other environments.

Credit growth remained strong throughout much of 1929, though the expansion was dominated by broker call loans (for speculation) and real estate lending. For the current Bubble, Credit excess has persisted, dominated by Treasury debt and leveraged speculation (i.e., “repo” financed “basis trades” and “carry trades”). There should be no doubt that system stability would have been safeguarded by popping the current Bubble years ago. Bernanke pillories the “Roaring Twenties” analysts (“Bubble poppers”) with similarly sound analytical frameworks.

Prolonged Credit and speculative excess and resulting deep structural maladjustment were chiefly responsible for the crash and subsequent Great Depression. At its September 3, 1929, closing high, the Dow enjoyed a y-t-d gain of 27%. Instead of pointing blame for the crash on 1928/29 “tightening” measures, look instead to the Fed’s aggressive 1927 (NY Fed Pres. Benjamin Strong’s “coup de whiskey”) late cycle stimulus that unleashed perilous “Terminal Phase” excess. From January 1, 1927, to the cycle peak September 3, 1929, high, the Dow Jones Index surged 145%.

I’m rehashing important history because these two cycles seem to have more in common by the month. As the above “Banking and Business Cycle” quote notes, “the full effects of the creation and operation of this central banking system upon the commercial banks have not been widely nor adequately understood.”

For today’s Bubble cycle, the full effects of the contemporary Fed’s monetary tools on market-based finance are not understood at all. History’s greatest Bubble does not inflate, if not for trillions of QE, zero rates, and myriad liquidity support mechanisms. Federal Reserve inflationist policies have made unprecedented peacetime 7%-to-GDP federal deficits possible, spending that has been instrumental in inflating corporate earnings and household incomes. Today’s unmatched speculative leverage is only possible because of the high degree of confidence in the Fed’s liquidity backstop that developed over repeated market bailouts.

And as the dominant global central bank, global stimulus measures and resulting Bubbles have their roots in Federal Reserve policy experimentation and U.S. financial innovation. If there’s no Ben Bernanke, there is no Mario Draghi or Haruhiko Kuroda. And without these three inflationists, I seriously doubt China’s Bubble inflates for so many years. The Fed’s ongoing accommodation of leveraged speculation ensured “carry trades” and such engulfed the entire world (every nook and cranny).

In post blowout March payrolls data punditry, there was more talk of U.S. exceptionalism. I don’t want to dismiss our great nation’s many attributes. AI and tech notwithstanding, we definitely lead the world in our capacity to sustain loose financial conditions. No country can compete in terms of our financial innovation. And with the world’s reserve currency, we have a unique capacity to get away with policy and financial transgressions – for decades.

U.S. “exceptionalism” is perilous. Only a Fed tightening of financial conditions would have restrained Bubble excess before it was too late. Instead, late-cycle excess took control – foolhardy deficit spending, levered speculation, private Credit, consumer “buy now, pay later,” manic stock and options trading, etc. And late-cycle euphoria and boundless speculative finance now unite with AI, a spending black hole open to the wildest of imaginations. Parallels to 1929 are not to be dismissed.

A Friday Evening Bloomberg headline: “Extreme Market Swings Dominate as Hot Economy, Oil Feed Anxiety.” It had the feel of an important week. March’s 303k payrolls gain solidifies the economic overheating thesis, while Powell only reinforced the Fed’s misguided precommitment to rate cuts.

Cracks began to surface this week. Fed Governor Michelle Bowman: “While it is not my baseline outlook, I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse.” Minneapolis Fed President Neel Kashkari: “If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all. There’s a lot of momentum in the economy right now.”

The bullish narrative has been so deeply embraced. From the above Bloomberg article: “Bolstered by optimism that the Fed will be able to bring inflation toward its 2% target without snuffing out growth, $176 billion of fresh money was poured into fixed income and equity ETFs in the first quarter, more than doubled from a year ago.”

From Monday’s high to Tuesday’s trading low, the Nasdaq100 (NDX) dropped 2.1%. From Tuesday’s low to Thursday’s high, the NDX then rallied 2.0% - only to reverse 2.6% lower by Thursday’s close. And from Thursday’s close to intraday Friday highs, the NDX rallied 1.8%.

Coming two weeks ahead of monthly option expirations, payrolls Friday can be pivot sessions for derivatives positioning. This is especially the case when market vulnerability has triggered heavy options hedging and speculating activity.

A strong payrolls report had the potential to hammer bonds, with higher yields and “higher for longer” policy rates bruising bullish sentiment (and highly extended stock prices). And while bond yields jumped nine bps Friday (up 20bps for the week) to a four-month high of 4.40%, there was no carryover from Thursday’s equities selloff. When selling failed to materialize Friday morning, stocks (especially big tech) caught fire, surely fueled by short covering and the unwind of derivative hedges and bearish bets.

Curiously, after jumping from 14.33 to 16.35 in volatile Thursday trading, the VIX (equities volatility) Index retreated little during Friday’s rally (closing week at 16.03). There was some notable volatility in high yield and EM CDS, “periphery” indicators where one would expect incipient risk aversion to surface. But, at the end of the day (week), loose conditions prevailed.

Gold dropped $10 immediately upon the release of the strong payrolls data – as NDX futures fell about 0.5%. And both gold and the NDX wavered for about an hour, before concurrently surging higher. For the day, the NDX rose 1.3%, while Gold surged $39, or 1.7%, to trade to a record high $2,330. For the week, Gold jumped $100, or 4.5%, with Silver surging $2.51, or 10.1%, to $27.48.

The precious metals corroborate the precariously loose financial conditions thesis. I view the huge growth in money market fund assets as an inflationary consequence of levered speculation, in particular the huge expansion of “repo” securities finance. I see “basis trade” leverage as a major source of liquidity creation, along with equities derivatives-related leverage. I suspect huge leverage is associated with the big technology stocks, indices, and derivatives (Nvidia, “mag 7,” NDX, SOX), with speculative melt-up dynamics a major contributor to marketplace liquidity excess.

The Bloomberg Commodities Index jumped 3.4% this week to a five-month high, posting the strongest weekly gain since last June. Crude gained another 4.5% to a six-month high $86.91. Copper surged 5.7% this week to a 14-month high. Platinum rose 2.1%. Lead jumped 6.0%, Nickel 7.1%, Tin 4.6%, and Zinc 8.3%

In an over-liquefied inflationary environment, the precious metals, and commodities more generally, are displaying their store of wealth attributes. Are recent strong gains foreshadowing trouble for financial assets?

It’s worth noting that the currencies were relatively well-behaved this week. I suspect good behavior will be short-lived. With markets on intervention watch, the yen (down 0.18%) and the renminbi (down 0.15%) were still under modest pressure. The relative stability of two acutely vulnerable currencies likely underpinned global markets this week. Calm before the storm.

I anticipate heightened market volatility – stocks, bonds, and the currencies. The big tech stocks are one historic Crowded Trade. The proliferation of option trading (call writing strategies in particular) risks the biggest “Volmageddon” yet. Bond market deleveraging would really catch the market by surprise. And lurking out there is a disorderly unwind of global “carry trade” leverage, a risk that rapidly escalates when currency trading turns disorderly.

Overheated U.S. markets, Credit and economic activity raise the odds of a disorderly rise in bond yields. Simultaneous yen and Japanese government bonds selloffs would pose quite a challenge for the BOJ. A strong dollar would elevate the risk of destabilizing capital flight out of China. China sovereign CDS rose four this week to 74 bps, the high since early November. Chinese bank CDS were moderately higher again this week to five-month highs.

New York was rocked Friday by the most powerful earthquake (4.8) in more than a century. Taiwan’s Monday quake was the strongest (7.4) in 25 years. On many levels, the world seems a shakier place. As for global markets, the dogs were looking anxious this week. Initial little tremors and sparks have me focused on fault lines and the Global Ring of Fire.

For the Week:

The S&P500 declined 1.0% (up 9.1% y-t-d), and the Dow lost 2.3% (up 3.2%). The Utilities slipped 0.7% (up 3.6%). The Banks dropped 2.8% (up 6.1%), and the Broker/Dealers fell 1.7% (up 8.2%). The Transports slumped 1.8% (up 0.1%). The S&P 400 Midcaps fell 1.9% (up 7.5%), and the small cap Russell 2000 lost 2.9% (up 1.8%). The Nasdaq100 declined 0.8% (up 7.6%). The Semiconductors fell 1.8% (up 15.4%). The Biotechs declined 1.8% (down 4.2%). With bullion surging $100, the HUI gold index jumped 7.3% (up 9.0%).

Three-month Treasury bill rates ended the week at 5.2075%. Two-year government yields rose 13 bps this week to 4.75% (up 50bps y-t-d). Five-year T-note yields jumped 18 bps to 4.39% (up 55bps). Ten-year Treasury yields surged 20 bps to 4.40% (up 52bps). Long bond yields jumped 21 bps to 4.55% (up 53bps). Benchmark Fannie Mae MBS yields rose 17 bps to 5.79% (up 52bps).

Italian yields rose 14 bps to 3.82% (up 12bps y-t-d). Greek 10-year yields increased six bps to 3.44% (up 39bps). Spain's 10-year yields gained seven bps to 3.23% (up 24bps). German bund yields jumped 10 bps to 2.40% (up 38bps). French yields rose 10 bps to 2.91% (up 35bps). The French to German 10-year bond spread was unchanged at 51 bps. U.K. 10-year gilt yields jumped 14 bps to 4.07% (up 53bps). U.K.'s FTSE equities index dipped 0.5% (up 2.3% y-t-d).

Japan's Nikkei Equities Index dropped 3.4% (up 16.5% y-t-d). Japanese 10-year "JGB" yields jumped six bps to 0.79% (up 18bps y-t-d). France's CAC40 fell 1.8% (up 6.9%). The German DAX equities index lost 1.7% (up 8.5%). Spain's IBEX 35 equities index declined 1.4% (up 8.1%). Italy's FTSE MIB index dropped 2.1% (up 12.1%). EM equities were mixed. Brazil's Bovespa index declined 1.0% (down 5.5%), while Mexico's Bolsa index gained 1.3% (up 1.2%). South Korea's Kospi index fell 1.2% (up 2.2%). India's Sensex equities index increased 0.8% (up 2.8%). China's Shanghai Exchange Index rallied 0.9% (up 3.2%). Turkey's Borsa Istanbul National 100 index jumped 5.2% (up 28.8%). Russia's MICEX equities index rose 1.9% (up 9.6%).

Federal Reserve Credit declined $36.1bn last week to $7.427 TN. Fed Credit was down $1.463 TN from the June 22nd, 2022, peak. Over the past 238 weeks, Fed Credit expanded $3.700 TN, or 99%. Fed Credit inflated $4.616 TN, or 164%, over the past 595 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $4.7bn last week to $3.345 TN. "Custody holdings" were up $26.2 billion y-o-y, or 0.8%.

Total money market fund assets surged $70.5bn to a record $6.111 TN. Money funds were up $913 billion, or 17.6%, y-o-y.

Total Commercial Paper declined $13.6bn to $1.337 TN. CP was up $202bn, or 17.8%, over the past year.

Freddie Mac 30-year fixed mortgage rates added three bps to 6.82% (up 55bps y-o-y). Fifteen-year rates declined five bps to 6.06% (up 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up three bps to 7.34% (up 59bps).

Currency Watch:

April 2 – Bloomberg: “The yuan is a whisker away from the weak end of its onshore trading band, the latest sign that a recent slew of upbeat economic data hasn’t been enough to bolster the Chinese currency. China’s currency slid to a four-month low against the dollar in onshore trading Tuesday and came within a few pips of the lower end of the trading range permitted by the central bank… Signs of stress are also growing in the options market.”

April 3 – Bloomberg (Iris Ouyang and Tania Chen): “China’s defense of its currency is heading toward a milestone moment that may trigger a more forceful response from authorities to punish short-sellers. Having weakened the yuan to within a whisker of its fixed range against the dollar on Wednesday, traders are now in danger of being slapped with anything from direct intervention to a dramatic liquidity squeeze in the offshore market. Over the past decade, the People’s Bank of China has stepped in aggressively to stabilize the yuan on each of the five occasions it neared that policy red line. In constant conflict trying to keep policy loose enough to stimulate growth but the currency strong enough to avoid disorderly capital outflows, the PBOC has a tendency to react slowly then take sudden action.”

For the week, the U.S. Dollar Index slipped 0.2% to 104.30 (up 2.9% y-t-d). For the week on the upside, the South African rand increased 1.0%, the Norwegian krone 0.9%, the Australian dollar 0.9%, the Mexican peso 0.6%, the euro 0.4%, the Swedish krona 0.4%, and the British pound 0.1%. On the downside, the Brazilian real declined 1.0%, the South Korean won 0.4%, the Canadian dollar 0.4%, and the Japanese yen 0.2%. The Chinese (onshore) renminbi declined 0.15% versus the dollar (down 1.84% y-t-d).

Commodities Watch:

April 3 – Bloomberg (Jack Ryan): “Central banks, led by China and India, continued adding to their gold reserves in February, marking the ninth straight month of growth, according to the World Gold Council. A net 19 tons were purchased, with the People’s Bank of China accounting for 12 tons. The Reserve Bank of India and National Bank of Kazakhstan each increased their holdings by 6 tons.”

April 4 – Bloomberg (Mark Burton and Annie Lee): “Copper rallied to the highest in 14 months as investors flock to the bellwether industrial metal in response to rising supply risks and hopes for a global recovery in demand. Prices climbed as much 1.5% on Thursday after dovish comments from Federal Reserve Chair Jerome Powell added impetus to a rally that began in early February on fast-mounting risks to supply. Disruptions at major mines have left smelters paying historically steep prices to get hold of mined ore, and Chinese plants — which produce more than half of the world’s refined copper — are moving closer to implementing a joint output cut in response.”

March 30 – Financial Times (Harry Dempsey, Joe Leahy and Wenjie Ding): “Traders are betting on a tighter copper market in coming months, as disappointment over China’s stumbling economic growth is overtaken by fears of a squeeze on global supplies. Copper — a key barometer of global economic health given its use in everything from buildings to power lines — for delivery in June is $8,832 per tonne, $105 more expensive than the spot price. The difference between current and future delivery is the largest ever, in records that go back to 1994…”

April 1 – Financial Times (Myles McCormick, Jamie Smyth and Amanda Chu): “A surge in demand for electricity to feed data centres and to power an artificial intelligence revolution will usher in a golden era for natural gas, producers say. AI’s soaring energy needs will rise well beyond what renewable energy and batteries can deliver, executives argue, making more planet-warming fossil fuel supplies crucial even as governments vow to slash their use. ‘It will not be done without gas,’ said Toby Rice, chief executive of EQT, the country’s biggest gas producer, of the coming AI boom.”

The Bloomberg Commodities Index jumped 3.4% (up 4.3% y-t-d). Spot Gold rose 4.5% to $2,230 (up 12.9%). Silver surged 10.1% to $27.48 (up 15.5%). WTI crude jumped $3.74, or 4.5%, to $86.91 (up 21%). Gasoline rose 2.5% (up 32%), and Natural Gas gained 1.2% to $1.79 (down 29%). Copper surged 5.7% (up 9%). Wheat gained 1.2% (down 10%), while Corn fell 1.8% (down 8%). Bitcoin dropped $2,070, or 3.0%, to $67,620 (up 59%).

Middle East War Watch:

April 1 – Reuters (Firas Makdesi, Laila Bassam, Parisa Hafezi, Humeyra Pamuk, Michelle Nichols and Adam Makary): “Suspected Israeli warplanes bombed Iran's embassy in Syria on Monday in a strike that Iran said killed seven of its military advisers, including three senior commanders, marking a major escalation in Israel's war with its regional adversaries. Reuters reporters at the site in the Mezzeh district of Damascus saw emergency workers clambering atop rubble of a destroyed building inside the diplomatic compound, adjacent to the main Iranian embassy building.”

April 1 – Financial Times (Raya Jalabi, Najmeh Bozorgmehr and Andrew England): “Three senior members of Iran’s Revolutionary Guards were killed on Monday in an air strike on the consular section of Iran’s embassy in Damascus… The death of Brigadier General Mohammad-Reza Zahedi, a prominent commander of the Revolutionary Guards, marks a significant escalation in hostilities that have engulfed the region since Hamas’s attack on Israel on October 7… ‘The strike is the most serious escalation with deliberate intent designed to put Iran on the defensive,’ said Sanam Vakil, head of the Middle East programme at the Chatham House think-tank. ‘Israel’s war is not just against Hamas, but very clearly designed to strike across the axis of resistance to weaken and deter the multiple groups.’”

April 2 – Financial Times (Bita Ghaffari and Raya Jalabi): “Iran and Hizbollah… vowed to retaliate after a suspected Israeli air strike on Tehran’s consulate in Damascus killed seven Revolutionary Guard officers, including two ranking commanders. Iran’s president Ebrahim Raisi said the strike in the Syrian capital… would ‘not go unpunished’, as the country’s national security council met over the attack and hit out at what it called ‘Israel’s latest war crime against a foreign mission with diplomatic immunity’. Hizbollah, the Iran-backed Lebanese militia that has traded near-daily missile strikes with Israel, blamed Israel for the ‘assassination’ of the Guard officers and promised ‘punishment and revenge’.”

April 2 – Associated Press (Nasser Karimi and Kareem Chehayeb): “Iran… vowed to respond to an airstrike widely attributed to Israel that destroyed Iran’s Consulate in the Syrian capital of Damascus the previous day and killed 12 people, including two Iranian generals and a member of the Lebanese militant Hezbollah group… Hezbollah, which has been a key ally of both Syrian President Bashar Assad’s government and Iran, also pledged ‘punishment and revenge’ on Israel.”

Ukraine War Watch:

April 4 – Reuters (John Irish): “Ukrainian strikes on Russian refineries may have disrupted more than 15% of Russian capacity, a NATO official said…, adding that the alliance believed Moscow still lacked sufficient munitions and manpower to launch a successful offensive. Russia and Ukraine have both used drones to strike critical infrastructure, military installations and troop concentrations in their more than two-year-old war, with Kyiv hitting Russian refineries and energy facilities in recent months with some strikes entering 620 miles into Russian territory.”

March 30 – Bloomberg (Volodymyr Verbianyi): “Ukraine will keep targeting Russian oil-refining facilities despite US discontent with its campaign, according to President Volodymyr Zelenskiy, who warned that Kyiv’s forces may be forced to retreat ‘step by step’ without more military aid from allies. The drone attacks are in retaliation against Kremlin strikes on Ukraine’s energy grid and part of an effort to compel Moscow to stop them…”

Taiwan Watch:

April 4 – Reuters (Ben Blanchard): “Taiwan on Thursday condemned China as ‘shameless’ after Beijing's deputy ambassador to the United Nations thanked the world for its concern about a strong earthquake on the island. China claims democratically-governed Taiwan as its own territory and also claims the right to speak for it on the international stage, to the fury of Taipei given Beijing's communist government has never ruled the island and has no say in how it chooses its leaders.”

Market Instability Watch:

April 2 – Bloomberg (Julia Fanzeres and Devika Krishna Kumar): “Oil options traders are increasingly looking to protect against rising crude prices as tensions escalate in the Middle East. Near-term market gauges for Brent and US crude have flipped over the past week to reflect more demand for bullish call options than bearish puts. The WTI second-month call skew, which shows what traders will pay for options that profit from a rise in prices versus a decline, switched on Tuesday for the first time since November…”

March 31 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan will probably take its time before raising interest rates again, with October likely being the earliest it might move next, according to a former BOJ official renowned as one of the nation’s leading inflation experts. ‘I don’t think the next move will come so soon,’ Tsutomu Watanabe, the former official…, said... ‘The BOJ is likely to adjust policy by looking at data, and won’t act irrationally.’”

April 2 – Wall Street Journal (Ronnie Harui): “The yen faces rising risks of intervention by Japanese authorities as it approaches the psychologically important 152.00 level against the U.S. dollar, but the impact of any actions could be short-lived. Traders are increasingly wary of potential intervention following recent warnings from Japanese officials… Excluding the weekend, ‘we have heard daily intervention threats from various Japanese officials in the past week,’ Alvin T. Tan, head of Asia foreign-exchange strategy at RBC Capital Markets, said... ‘The market is extremely focused on the 152 level. Given that Tokyo’s credibility is on the line, I would suspect that at least some token intervention would occur if USD/JPY climbs through 152,’ Tan said.”

April 1 – Bloomberg (Daisuke Sakai, Yumi Teso and Saburo Funabiki): “Japanese authorities would probably target a five-yen rally against the dollar if they decide to intervene in foreign exchange markets, according to strategists at some of the country’s biggest brokerages. Officials have ratcheted up their warnings against speculative moves in the yen, which reached the weakest level in about 34 years against the dollar last week. The currency has slipped beyond levels that prompted authorities to enter the market in 2022 to support the yen for the first time since 1998. ‘Should authorities use several trillion yen to intervene, like they did in 2022, that may amount to operations to boost the yen’s value by four to five yen per dollar,’ said Yujiro Goto, head of Japan currency strategy at Nomura Securities Co.”

March 31 – Reuters (Kaori Kaneko, Satoshi Sugiyama and Leika Kihara): “Japanese Finance Minister Shunichi Suzuki said… there were some speculative moves in the currency market that did not reflect economic fundamentals… ‘We will watch currency market developments with a strong sense of urgency, and will respond appropriately against excessive moves without ruling out any options,’ Suzuki told parliament. Suzuki said various factors are driving currency moves such as the Bank of Japan's decision to end negative interest rates, Japan’s current account balance, price moves, geopolitical risks, as well as market players' sentiment and speculative trades.”

Global Credit Bubble Watch:

April 4 – Bloomberg (Bhargavi Sakthivel, Maeva Cousin and David Wilcox): “The Congressional Budget Office warned in its latest projections that US federal government debt is on a path from 97% of GDP last year to 116% by 2034 — higher even than in World War II. The actual outlook is likely worse. From tax revenue to defense spending and interest rates, the CBO forecasts released earlier this year are underpinned by rosy assumptions. Plug in the market’s current view on interest rates, and the debt-to-GDP ratio rises to 123% in 2034. Then assume… that ex-President Donald Trump’s tax cuts mainly stay in place, and the burden gets even higher. With uncertainty about so many of the variables, Bloomberg Economics has run a million simulations to assess the fragility of the debt outlook. In 88% of the simulations, the results show the debt-to-GDP ratio is on an unsustainable path…”

April 2 – Bloomberg (Liz Capo McCormick): “For the first time, a fixed-income sector — private credit — topped the list of favored assets in Goldman Sachs Asset Management’s annual survey of global insurance companies. Of the 359 executives polled, 53% ranked private credit among the top five asset classes in terms of expected 12-month returns. Now in its 13th year, the survey encompassed firms managing roughly $13 trillion combined, or about half of the industry’s balance-sheet assets... ‘One of the most surprising things about this survey was for the first time we’ve been doing the survey, we’re seeing credit or fixed-income assets at the top of the asset-class return expectations,’ Matthew Armas, a managing director in GSAM’s client solutions group, said… ‘Insurers remained aggressively allocating to private credit.’”

April 4 – Bloomberg (Justina Lee): “A trio of academics has a bold take on the booming $1.7 trillion private credit market: after accounting for additional risks and fees, the asset class delivers virtually no extra return to investors. In a new study released by the National Bureau of Economic Research, the professors argued that direct lenders on the whole hardly produce any alpha — or extra compensation over broad market benchmarks. That conclusion is sure to be controversial in a market that has more than doubled in size over the past five years thanks to the allure of higher and steadier returns compared to publicly traded debt. ‘It’s not a panacea for investors where they can earn 15% risk-free,’ said Michael Weisbach, a finance professor at Ohio State University who co-wrote the research with Isil Erel and Thomas Flanagan. ‘Once you adjust for the risk, they basically are getting the amount they deserve, but no more.’”

April 4 – Financial Times (Alexandra Scaggs): “Sovereign borrowers with low credit ratings are back in bond markets. In fact, emerging-market sovereigns have sold more hard-currency bonds in the first quarter of this year than any first-quarter on record, according to… JPMorgan... Côte d’Ivoire, for example, issued bonds in January for the first time in seven years; it also had some of its debt payments suspended between May 2020 and December 2021 to deal with Covid-19 costs. And despite that putative restructuring, the bond sale was three times oversubscribed, said JPM. A trio of countries rated lower than Côte d’Ivoire’s BB-minus (three tiers below investment grade) — Bahrain, Benin and Kenya (all four or five tiers below IG) — have also issued debt.”

Bubble and Mania Watch:

April 1 – Wall Street Journal (Hardika Singh): “The Magnificent Seven trade is beginning to fizzle—and yet, the stock market is still heading higher. The S&P 500 climbed 10% in the first quarter, its best start to a year since 2019, even though two of its biggest constituents suffered double-digit declines. Apple shares fell 11% in the first three months of the year, while Tesla dropped almost 30%. Alphabet shares sputtered for much of the period before making a run in the past three weeks and ending up 8%. The other four big tech stocks in the group known as the Magnificent Seven—Nvidia, Meta Platforms, Microsoft,—continued their meteoric run and outpaced the broader market. Some market strategists have dubbed them the new Fab Four.”

April 1 – Reuters (Gaurav Dogra): “U.S. investors were net buyers of equity funds for a fifth successive week in the seven days to March 27 as they maintained expectations of three interest rate cuts this year… U.S. large cap funds received $6.13 billion during the week after net purchases of $15.3 billion in the prior week. Small-cap funds also gained $1.45 billion but multi-, and mid-cap funds saw outflows of $2.86 billion and $378 million, respectively.”

March 31 – Financial Times (John Thornhill): “The surge of money flooding into artificial intelligence has resulted in some crypto-like hype that is obscuring the incredible scientific progress in the field, according to Sir Demis Hassabis, co-founder of DeepMind. The chief executive of Google’s AI research division told the Financial Times that the billions of dollars being poured into generative AI start-ups and products ‘brings with it a whole attendant bunch of hype and maybe some grifting and some other things that you see in other hyped-up areas, crypto or whatever. Some of that has now spilled over into AI, which I think is a bit unfortunate. And it clouds the science and the research, which is phenomenal… In a way, AI’s not hyped enough but in some senses it’s too hyped. We’re talking about all sorts of things that are just not real.’”

April 1 – Financial Times (Peter Campbell): “As global electric vehicle sales growth slows, carmakers and regulators are asking an existential question: is the current slowdown a blip? One scenario sees mass market buyers, who currently balk at higher prices of EVs, eventually come around and flock to the technology. EVs are silent, accelerate like sports cars and can save money in the long run. Once they are cheaper than petrol cars, and there are enough chargers, most consumers will never turn back. The other scenario is more worrying. If prices do not fall, or legitimate concerns over charging infrastructure are not met, motorists may resist indefinitely. The implications of the second are potentially concerning. Meeting long-term decarbonisation targets without removing all petrol and diesel cars from the roads is impossible.”

April 4 – Reuters (David Shepardson): “Ford Motor… delayed the planned launches of three-row EVs in Canada and its next-generation electric pickup truck built in Tennessee as the slowdown in EV demand globally forces automakers to revise production plans. Ford said separately it was boosting hybrid electric vehicle offerings and by 2030 expects to offer hybrid powertrains across its lineup of gas-powered vehicles.”

April 2 – Financial Times (George Hammond): “Venture capitalists are struggling to raise money, signalling the end of an era of ‘megafunds’ and a slowdown in start-up dealmaking over the coming years. Globally, venture firms raised $30.4bn from university endowments, foundations and other institutional investors in the first three months of this year, a marked slowdown from 2023 — which itself was the worst year for fundraising since 2016… Investors in venture funds… have reined in spending over the past two years, taking a more cautious approach as interest rates have risen, start-up exits including public listings and sales have slowed and returns from venture fund managers have cratered.”

April 3 – Bloomberg (Jack Sidders): “Blackstone Real Estate Income Trust, the alternative asset manager’s flagship fund for wealthy investors, paid out more to investors than it generated last year. BREIT paid out more than $2.8 billion in distributions during 2023, exceeding cash flows of $2.7 billion… The fund’s performance was hit by investor requests for their money back, which prompted it to sell assets and keep cash in liquid investments.”

AI Bubble Watch:

March 30 – CNBC (Hayden Field and Kif Leswing): “Tech giants aren’t doing much acquiring these days, due mostly to an unfavorable regulatory environment. But they’re finding other ways to spend billions of dollars on the next big thing. Amazon’s $2.75 billion investment in artificial intelligence startup Anthropic… was its largest venture deal and the latest example of the AI gold rush that’s prompting the biggest tech companies to fling open their wallets… In 2023, investors pumped $29.1 billion combined into nearly 700 generative AI deals, an increase of more than 260% in value from the prior year, according to PitchBook… Fred Havemeyer, head of U.S. AI and software research at Macquarie, said a fear of missing out is one factor driving their decisions. ‘They definitely don’t want to miss out on being part of the AI ecosystem,’ Havemeyer said. ‘I definitely think that there’s FOMO in this marketplace.’”

April 1 – Wall Street Journal (Deepa Seetharaman): “Companies racing to develop more powerful artificial intelligence are rapidly nearing a new problem: The internet might be too small for their plans. Ever more powerful systems developed by OpenAI, Google and others require larger oceans of information to learn from. That demand is straining the available pool of quality public data online at the same time that some data owners are blocking access to AI companies. Some executives and researchers say the industry’s need for high-quality text data could outstrip supply within two years, potentially slowing AI’s development. AI companies are hunting for untapped information sources, and rethinking how they train these systems.”

Bank Watch:

April 3 – Bloomberg (Ben Bain): “The Federal Reserve’s Michael Barr warned that banks are likely to continue to face stress from the struggling commercial real estate sector for an extended period. The vice chair for supervision said the overall banking system was ‘sound and resilient’ and didn’t face the same kind of pressures that it did in March 2023… However, he said empty office space remains an area of stress. ‘There are pockets of risks in the system,’ Barr said… ‘We’re looking at things like, what’s the level on unrealized losses on the balance sheet from securities? We’re looking at banks that have particular kinds of concentration in commercial real estate.’”

April 1 – Financial Times (Joshua Oliver): “Banks will have to cut their exposure to commercial real estate because of a $2tn ‘wall’ of property debt coming due in the next three years, according to a leading US brokerage. ‘Banks will be under pressure,’ said Barry Gosin, chief executive of Newmark, which handled $50bn of loan sales for failed Signature Bank. Post-financial crisis regulation meant some lenders would need ‘to liquidate their loans or find other ways to reduce their weight in real estate’, he added, whether by syndicating the debt, doing risk transfer deals — where other investors agree to take on the risk of losses — or ceasing new lending to the sector.”

April 2 – Bloomberg (Immanual John Milton): “US office vacancies hit a fresh peak in the first quarter as needs continue to evolve with hybrid work setups. Vacancies rose to a record 19.8%, Moody’s Analytics said…, from 19.6% in the fourth quarter of 2023. Despite the increase, the firm said that the early data points to a stable quarter for commercial real estate. Tenants continue to downsize with the hybrid work model showing more staying power… The Federal Reserve’s interest rate hiking cycle has also wounded commercial real estate. The struggles in the sector have already sent vacancy rates past historic peaks in 1986 and 1991 with possibly room for more, according to Moody’s.”

April 3 – Financial Times (Robin Wigglesworth): “We shared this NBER paper on interest rate hedging by US banks in Further Reading earlier this week, but given FTAV’s interest in the subject we thought it warranted a closer look. The tl;dr is that US banks only rarely use derivatives to hedge the interest rate risk on their massive bond portfolios. Instead, when rates go up they have mostly just reclassified the instruments from ‘available for sale’ to ‘held to maturity’. The former gets marked to market; the latter is marked at par value. The more vulnerable the bank, the more likely they were to engage in a bit of accounting jiggery-pokery, the NBER paper by João Granja, Erica Xuewei Jiang, Gregor Matvos, Tomasz Piskorski and Amit Seru concludes.”

April 2 – Wall Street Journal (Andrew Ackerman): “Banking regulators are scrutinizing whether index-fund giants BlackRock, Vanguard and State Street are sticking to passive roles when it comes to their investments in U.S. banks. The three firms manage more than $23 trillion in total, with much of it in funds that passively mimic indexes such as the S&P 500. BlackRock and Vanguard each hold more than 10% of the shares at many banks, a threshold that normally determines whether an investor is assumed to have a controlling interest in a lender… Regulators have an interest in policing who owns and controls banks because of their special role in the economy.”

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

March 30 – Financial Times (Anastasia Stognei): “It took Anna and her wheelchair-bound teenage son only about 17 minutes to escape from the second floor of the Moscow concert hall after hearing the first automatic gunshots and take a taxi home. Just a few hours later, she had no doubt about who was to blame for one of the deadliest terror attacks in Russia’s modern history. ‘The terrorists were fleeing towards Ukraine, so it seems to have been Ukraine,’ Anna… told the Financial Times. ‘They needed something to divert attention from the front lines. And the deaths of Russians, even those not directly involved in the war, including children, have always been a cause of great joy for Ukrainian patriots.’ Her response to the March 22 Islamist attack on Moscow’s Crocus City Hall… illustrates how the Kremlin immediately seized the opportunity to use the massacre as a propaganda tool in its war against Ukraine. Polling carried out soon after the attack shows most Russians believe Kyiv was behind it…”

De-globalization and Iron Curtain Watch:

April 5 – Wall Street Journal (Jason Douglas and Dave Sebastian): “To revive its economic fortunes, China is flooding the world with cheap goods, a multitrillion-dollar sequel to the China shock that hit global manufacturing more than two decades ago. This time around, the world is fighting back. The U.S. and European Union are threatening to raise trade barriers to Chinese-made electric vehicles and renewable-energy gear. Now, emerging economies including Brazil, India, Mexico and Indonesia are joining the backlash, zeroing in on Chinese imports of steel, ceramics and chemicals that they suspect are being dumped on their domestic markets at knockdown prices. ‘China is too large to export its way to rapid growth,’ Treasury Secretary Janet Yellen said Friday in Guangzhou…”

April 2 – Bloomberg (Tom Hancock): “In Washington and Brussels, there’s a consensus that China is experiencing a surge of excess capacity that could wipe out overseas industries, spurring protectionist measures to stem the damage. ‘China’s overcapacity distorts global prices and production patterns,’ US Treasury Secretary Janet Yellen said ahead of her visit to the country this week, highlighting solar panels, electric vehicles and batteries. There are similar concerns in Europe, with EU Commission chief Ursula von der Leyen citing overcapacity as a reason for opening an anti-subsidy probe into Chinese EVs.”

March 31 – Wall Street Journal (Yang Jie and Santiago Pérez): “Some of the biggest U.S. companies in artificial intelligence have asked their Taiwanese manufacturing partners to step up production of AI-related hardware in Mexico, seeking to diminish reliance on China. Taiwan-based Foxconn… and other Taiwanese companies are heeding the call and investing more in Mexico… They are taking advantage of the U.S.-Mexico-Canada Agreement… It has attracted billions of dollars from manufacturers aiming to move operations from China to Mexico, a process known as nearshoring. The North American nations ‘hope to replace products imported from Asia as much as possible,’ said James Huang, chairman of the Taiwan External Trade Development Council. ‘Based on this consensus, Mexico is poised to become the most important manufacturing base for the USMCA.’”

Inflation Watch:

April 2 – Bloomberg (Joe Carroll): “The biggest US ports are stretching capacity limits and need to expand to handle anticipated growth in inbound shipping, according to shipping industry veteran John McCown. Even before the Baltimore bridge disaster that shut one of the East Coast’s most important delivery points, space was so constrained at the nation’s 10 largest ports that containers unloaded from ocean-going vessels were being stacked six high in some places, said McCown, founder of Blue Alpha Capital and former CEO of Trailer Bridge Inc. The stacks can’t go any higher without threatening to crack pavements below, he noted. ‘Capacity limits are closer than most people think,’ McCown said… ‘Our container system is approaching its physical limits.’”

April 2 – Associated Press (Nick Perry): “As more than 2 million graduating high school students from across the United States finalize their decisions on what college to attend this fall, many are facing jaw-dropping costs — in some cases, as much as $95,000. A number of private colleges — some considered elite and others middle-of-the-pack — have exceeded the $90,000 threshold for the first time this year as they set their annual costs for tuition, board, meals and other expenses. That means a wealthy family with three children could expect to shell out more than $1 million by the time their youngest child completes a four-year degree.”

April 2 – Bloomberg (Gerson Freitas Jr. and Michael Hirtzer): “Cal-Maine Foods Inc., the biggest egg producer in the US, has culled roughly 3.6% of its flock after birds at a Texas facility tested positive for avian flu, adding to concerns over a widening outbreak. Nearly 1.6 million laying hens and 337,000 pullets were destroyed and production at the Parmer County plant has temporarily ceased…”

April 3 – Reuters (Marion Giraldo): “The severe drought which has forced the Panama Canal, one of the world's busiest trade passages, to limit daily crossings could impact global supply chains during a period of high demand, S&P Global said… The canal has imposed several restrictions since 2023, though last month the Panama Canal Authority bumped up daily crossings to 27, from 24, as water levels rose at the man-made Gatun Lake which feeds into the canal. ‘Capacity pressures at the Panama Canal are starting to have an effect on supply chains,’ S&P Global said… ‘Container ships have yet to feel the impact in light of their priority status, although the situation is changing.’”

Federal Reserve Watch:

April 3 – Reuters (Howard Schneider and Lindsay Dunsmuir): “Federal Reserve Chair Jerome Powell reiterated… that the U.S. central bank has time to deliberate over its first interest rate cut given the strength of the economy and recent high inflation readings. ‘Recent readings on both job gains and inflation have come in higher than expected,’ Powell said… ‘Recent data do not, however, materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down toward 2% on a sometimes bumpy path.’”

April 3 – Associated Press (Christopher Rugaber): “Federal Reserve officials will likely reduce their benchmark interest rate later this year, Chair Jerome Powell said…, despite recent reports showing that the U.S. economy is still strong and that U.S. inflation picked up in January and February. ‘The recent data do not ... materially change the overall picture,’ Powell said…, ‘which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down toward 2% on a sometimes bumpy path.’ Most Fed officials ‘see it as likely to be appropriate’ to start cutting their key rate ‘at some point this year,’ he added… Powell also sought to dispel any notion that the Fed’s interest-rate decisions might be affected by this year’s presidential election campaign.”

April 4 – Reuters (Howard Schneider): “Richmond Federal Reserve President Thomas Barkin said he is focused intently on the persistent breadth of inflation across goods and services, and feels slower price increases need to be more widespread before he is comfortable cutting interest rates… Before the pandemic, he said, about a quarter of goods and services tended to see price increases above 3%. ‘Now, we have 55% of the basket over three, and 55% of the basket over three it is just hard to reconcile in your mind with the kind of progress you'd want to make’ in returning overall inflation to the central bank’s 2% target, Barkin said.”

April 4 – Reuters (Lindsay Dunsmuir): “Minneapolis Federal Reserve Bank President Neel Kashkari said… that at the U.S. central bank's meeting last month he penciled in two interest rate cuts this year but if inflation continues to stall, none may be required by year end. ‘If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all,’ Kashkari said during an interview with Pensions & Investments. ‘There’s a lot of momentum in the economy right now.’”

April 5 – Wall Street Journal (Nick Timiraos): “Dallas Fed President Lorie Logan warned Friday that it was ‘much too soon to think about cutting interest rates’ given the serious prospect that inflation might get stuck at a level that is too far above the central bank’s 2% goal. Logan said she was ‘increasingly concerned’ about the risk that inflation would stop its recent decline. She pointed to various measures of underlying inflation that strip out the most volatile items and show inflation running closer to 3% than to 2%. ‘My bottom line is that while the benign path back to price stability remains possible, I see meaningful risks to continued progress’…”

April 2 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Cleveland President Loretta Mester said she wants to see more evidence that inflation is headed lower before cutting interest rates, but noted recent figures have generally aligned with her expectation for slower progress on price growth… She said she still believes price growth will continue to cool toward the Fed’s 2% goal, just at a slower pace than last year. ‘But I need to see more data to raise my confidence… Some further monthly readings will give us a better sense of whether the disinflation process is stalling out or whether the start-of-the-year readings reflect a temporary detour on the downward path back to price stability.’”

April 3 – CNBC (Jeff Cox): “Atlanta Federal Reserve President Raphael Bostic expressed concern… about the pace of inflation and indicated he doesn’t think interest rate cuts should come until much later in the year… The central bank official said strong productivity, a rebound in the supply chain and a resilient labor market are indicating that inflation is going to decline ‘much slower than what many have expected.’ ‘If the economy evolves as I expect, and that’s going to be seeing continued robustness in GDP, unemployment and a slow decline of inflation through the course of the year, I think it would be appropriate for us to do start moving down at the end of this year, the fourth quarter… We’ll just have to see where the data come in.’”

April 2 – Bloomberg (Catarina Saraiva and Matthew Boesler): “San Francisco Fed President Mary Daly said the three rate cuts penciled in by Fed officials last month are a reasonable expectation, though there’s no urgency to make adjustments at the moment. ‘I think that is a very reasonable baseline,’ Daly said… For now, ‘Growth is going strong, so there’s really no urgency to adjust the rate,’ she said.”

April 4 – Reuters (Lindsay Dunsmuir): “The largest impediment to the U.S. central bank's efforts to return inflation to its 2% target rate is the persistence of outsized price increases in the housing services sector, Chicago Federal Reserve President Austan Goolsbee said… ‘The biggest danger to the inflation picture in my view... (is) the continued high inflation in housing services,’ Goolsbee said…”

April 3 – Reuters (Howard Schneider): “Federal Reserve Governor Adriana Kugler… said she believes inflation will continue to fall this year as households and businesses trim spending and the supply of goods and services continues to improve. ‘I expect the disinflationary trend to continue’ and help pave the way for rate cuts over the course of the year, Kugler said…”

Biden Administration Watch:

April 2 – Wall Street Journal (Michael R. Gordon and Andrew Duehren): “In his first call with Chinese President Xi Jinping since their November summit, President Biden raised mounting concerns over Beijing’s substantial support for Russia’s defense industry… China has refrained from sending lethal weapons for Russia’s war in Ukraine following repeated U.S. warnings that such a move would present a major challenge for relations between Washington and Beijing. But China has found other ways to strengthen Russia’s defense capability and indirectly help Moscow’s military campaign in Ukraine... ‘As time has gone on, we’ve really seen the PRC start to help to rebuild Russia’s defense industrial base,’ a senior Biden administration official said… China… has been helping to ‘provide the components that get slowly towards increasing Russia’s capabilities in Ukraine. And that has, of course, longer term impacts on European security.’”

April 2 – CNN (MJ Lee and Donald Judd): “President Joe Biden spoke on the phone with Chinese President Xi Jinping on Tuesday, marking the first conversation between the leaders since their historic in-person summit in November and the latest in ongoing efforts by US and Chinese officials to defuse tensions between the two superpowers. The call comes amid heavy global turbulence – the ongoing wars in Gaza and Ukraine, as well as North Korea’s nuclear capabilities, were topics of discussion. Other issues that have strained the Washington-Beijing relationship also came up, including Taiwan, China’s recent provocations in the South China Sea and Beijing’s human rights abuses.”

April 4 – Reuters (Jeff Mason and Steve Holland): “President Joe Biden threatened… to condition support for Israel's offensive in Gaza on it taking concrete steps to protect aid workers and civilians, seeking for the first time to leverage U.S. aid to influence Israeli military behavior. Biden's warning, relayed in a call with Prime Minister Benjamin Netanyahu on Thursday, followed a deadly Israeli attack on World Central Kitchen aid workers that spurred new calls from Biden's fellow Democrats to place conditions on U.S. aid to Israel. Israel said the attack was a mistake.”

April 5 – Bloomberg: “Treasury Secretary Janet Yellen chided China for ‘unfair’ treatment of American and other foreign companies and said its factories risk producing more than the world can easily absorb, as she began a four-day visit to the country. China has pursued ‘unfair economic practices, including imposing barriers to access for foreign firms and taking coercive actions against American companies,’ Yellen said Friday in the southern city of Guangzhou. ‘I intend to raise these issues in meetings this week.’”

April 3 – Bloomberg (Ari Natter and Lucia Kassai): “The Biden administration won’t move forward with its latest plans to buy oil for the Strategic Petroleum Reserve amid rising prices. The Energy Department said it was ‘keeping the taxpayer’s interest at the forefront’ in its decision not to purchase as many as 3 million barrels of oil for a Strategic Petroleum Reserve site in Louisiana. The plan for the barrels to be delivered in August and September had been announced in mid-March.”

U.S. Economic Bubble Watch:

April 4 – Bloomberg (Mark Niquette): “The US trade deficit widened in February for a third month as the value of imports exceeded exports. The deficit in goods and services trade expanded 1.9% from the prior month to $68.9 billion, the largest shortfall in nearly a year… The value of imports rose to almost $332 billion, on gains in mobile phones, foods and motor vehicles. Exports increased to $263 billion, reflecting shipments of civilian aircraft and crude oil.”

April 5 – CNBC (Jeff Cox): “Job creation in March easily topped expectations in a sign of continued acceleration for what has been a bustling and resilient labor market. Nonfarm payrolls increased 303,000 for the month, well above the Dow Jones estimate for a rise of 200,000 and higher than the downwardly revised 270,000 gain in February… The unemployment rate edged lower to 3.8%, as expected, even though the labor force participation rate moved higher to 62.7%... In the key average hourly earnings measure, wages rose 0.3% for the month and 4.1% from a year ago, both in line with Wall Street estimates. Growth came from many of the usual sectors that have powered gains in recent months. Health care led with 72,000, followed by government (71,000), leisure and hospitality (49,000), and construction (39,000). Retail trade contributed 18,000 while the “other services” category added 16,000.”

April 3 – CNBC (Jeff Cox): “Private sector job growth expanded in March at its fastest pace since July 2023, indicating continuing buoyance in the U.S. labor market, payrolls processing firm ADP reported… Companies added 184,000 workers on the month, an increase from the upwardly revised February gain of 155,000… In addition to the strong employment pickup, ADP reported that wages for workers who stayed in their jobs increased 5.1% from a year ago, the same rate as February after showing a steady easing going well back into 2023. Those switching jobs saw gains of 10%, also higher than in previous months. ‘March was surprising not just for the pay gains, but the sectors that recorded them,’ said ADP’s chief economist, Nela Richardson. ‘Inflation has been cooling, but our data shows pay is heating up in both goods and services.’”

April 2 – Bloomberg (Augusta Saraiva): “US job openings were little changed in February from the prior month, suggesting labor demand is stabilizing at an elevated level. The number of available positions edged up to 8.76 million, mainly reflecting a pickup in finance and state and local government, from a downwardly revised 8.75 million in January.”

April 4 – Reuters (Amina Niasse): “U.S. layoff announcements rose 7% in March to the highest since January 2023, led by technology and government-sector job eliminations, though cuts announced year to date are down 5% from a year ago amid a still-strong job market… Job cut announcements increased to 90,309 in March from 84,638 in February, outplacement firm Challenger, Gray & Christmas said. On a yearly basis, the level increased slightly by 0.7% from the 89,703 cuts announced in March 2023.”

April 4 – Dow Jones (Jeffry Bartash): “Unemployment filing are very low historically… The number of Americans who applied for unemployment benefits last week rose to a nine-week high of 221,000. but they remained quite low and didn’t show any deterioration in the labor market. Last week there were 212,000 unemployment filings… Jobless claims have hovered between 194,000 to 225,000 this year, a remarkably low level that attests to the strength of the labor market and broader economy.”

April 4 – Wall Street Journal (James Freeman): “The owners of small U.S. companies keep getting less optimistic about future hiring plans, but they’re handing out more raises to the workers of today. That’s according to the latest monthly employment survey from the National Federation of Independent Business… NFIB Chief Economist William Dunkelberg reports that ‘a few more owners did complain about labor quality as their top issue’ as demand for labor remains historically strong… But whether owners are in an ebullient mood or not, they are finding that they still have to pay up for talent and are expecting to pay more in the near future. The NFIB report continues: Labor cost reported as the single most important problem for business owners decreased 1 point to 10%, only 3 points below the highest reading of 13% reached in December 2021. Seasonally adjusted, a net 38% reported raising compensation, up 3 points from February’s lowest reading since May 2021. A net 21% plan to raise compensation in the next three months, up 2 points from February.”

April 3 – Bloomberg (Mark Niquette): “Growth in the US services sector eased in March for a second month while a gauge of input costs slumped to a four-year low. The Institute for Supply Management’s composite gauge of services fell 1.2 points to 51.4, largely reflecting a drop in the supplier deliveries index to a record low… The index of prices paid for materials and services decreased more than 5 points to 53.4, the lowest since March 2020… That stands in stark contrast to ISM data earlier week showing a manufacturing input-cost gauge climbed to the highest level since July 2022, suggesting the pace of goods disinflation is leveling off.”

April 1 – Bloomberg (Mark Niquette): “US factory activity unexpectedly expanded in March for the first time since September 2022 on a sharp rebound in production and stronger demand, while input costs climbed. The Institute for Supply Management’s manufacturing gauge rose 2.5 points to 50.3 last month… While barely above the level of 50…, it halted 16 straight months of shrinking activity… Production snapped back sharply from a month earlier with a gain of 6.2 points that was the largest since mid-2020. At 54.6, output growth was the strongest since June 2022… At the same time, the cost of materials and other inputs is rising, suggesting stubborn inflationary pressures. The group’s gauge of prices paid rose by 3.3 points to 55.8, the highest since July 2022.”

April 4 – Bloomberg (Prashant Gopal): “Mortgage rates in the US rose, ramping up the pressure on homebuyers. The average for a 30-year, fixed loan was 6.82%, up from 6.79% last week, Freddie Mac said… House hunters are confronting a market that became less affordable in recent years as borrowing costs rose and prices stayed high. More than a third of home purchases were made in cash in February, according to Redfin…”

April 2 – Associated Press (Tom Krisher): “New vehicle sales in the U.S. rose nearly 5% from January through March, as buyers stayed in the market despite high interest rates. But electric vehicle sales growth slowed during the first three months of the year… Automakers… sold nearly 3.8 million vehicles in the first quarter versus a year ago, for an annual rate of 15.4 million in sales. With inventory on dealer lots growing toward pre-pandemic levels, auto companies were forced to reduce prices. J.D. Power said the average sales price in March was $44,186, down 3.6% from a year ago and the largest recorded decline for the month of March.”

April 3 – Bloomberg (Steven Church): “Going bankrupt happens slowly, then all at once, to paraphrase an old saying. For businesses of all sizes, all at once is happening now. This week is tied for the busiest three-day period for major corporate bankruptcies on record… If the pace continues through Saturday, the week will top the end of April, 2009 when 16 big companies went bankrupt just as the US was climbing out of the Great Recession. Total bankruptcies — including consumer, small business and big corporates — have been climbing steadily for 20 months, said Michael Hunter, vice president at Epiq…”

Fixed Income Watch:

March 31 – Financial Times (Harriet Clarfelt): “Companies are rushing to meet their financing needs before the US election this year, in a bid to get ahead of potential market volatility in the final stages of the presidential race. Corporate borrowers have issued $606bn worth of dollar bonds so far this year…, up by two-fifths compared with the same period in 2023 and the highest total since at least 1990. Bankers and investors said companies were being motivated to borrow by the lowest spreads in years — referring to the difference between US corporate debt yields and those of equivalent government bonds.”

China Watch:

April 2 – Wall Street Journal: “A months-old speech by China’s top leader has stoked speculation around aggressive liquidity boosts from Beijing. While economists have generally shrugged off such a possibility, some say that more trading of treasury bonds could bring the country’s central bank more in line with practices adopted by peers in developed markets. In remarks made in October but only published recently, Chinese President Xi Jinping called for the People’s Bank of China to supplement its monetary policy toolbox and gradually step up trading of treasury bonds in its open-market operations, a policy tool the bank has rarely used in the past two decades.”

April 3 – Reuters (Liangping Gao, Ellen Zhang and Ryan Woo): “China’s central bank will accurately and effectively implement prudent monetary policy, pay more attention to counter-cyclical adjustments and make efforts to expand domestic demand and boost confidence, it said… The People's Bank of China will support banks to replenish capital and guide financial institutions to increase medium- and long-term loans to the manufacturing industry, it said… The PBOC will improve a ‘mild rise’ in prices and maintain the prices at a reasonable level, according to the statement, as the economy faces deflationary pressure. The bank also said it will guide major banks to play the role of the main force to provide financial services to the real economy.”

April 2 – Reuters (Ellen Zhang and Ryan Woo): “China's services activity growth accelerated in March as new business rose at the quickest pace in three months, a private-sector survey showed…, a sign sentiment was staging a tentative recovery in the world's second-largest economy… The Caixin/S&P Global services purchasing managers' index (PMI) edged up to 52.7 from 52.5 in February, above the 50-mark that separates expansion from contraction for the 15th consecutive month.”

March 30 – Associated Press: “Manufacturing in China expanded in March after contracting for five consecutive months, according to an official survey of factory managers… The official purchasing managers index, or PMI, rose from 49.1 in February to 50.8 in March… The monthly manufacturing PMI has mostly been under 50 over the past 12 months: Other than this month, factory activities only recorded an expansion in September.”

March 31 – Bloomberg: “China’s home sales slump dragged on in March, signaling a much-hoped turnaround for the sector isn’t in sight yet. The value of new-home sales from the 100 biggest real estate companies slid about 46% from a year earlier to 358 billion yuan ($49.6bn), following a 60% decline in February, according to preliminary data from China Real Estate Information Corp.”

April 1 – Bloomberg: “China Vanke Co. dropped to a record low after getting its first sell rating from Wall Street brokerages, as it grapples with deepening liquidity pressure and slumping profits. The company’s Hong Kong-listed shares fell as much as 12%... The Chinese builder ‘will undergo a challenging time of deleveraging and relying on banks and state-owned enterprises’ support,’ JPMorgan Chase & Co. analysts including Karl Chan wrote… Vanke’s decision not to pay a dividend with last week’s results are among other reasons for investors to be worried, they added.”

April 1 – Reuters (Clare Jim): “The Hong Kong-listed shares of state-backed property developer China Vanke slid… after it reported a 50.6% drop in 2023 core profit and no dividend payout late last week… China Vanke told an earnings conference… it aimed to boost its cash flow by slashing debt by 100 billion yuan ($13.83bn) over the next two years, and lifting income from businesses other than property development as it sees continued margin pressure in 2024 and 2025 during a market correction.”

April 2 – Bloomberg (Ye Xie): “China’s home sales have fallen 50% from a 2021 peak and are in line to match the decline that occurred during the US sub-prime crisis more than a decade ago. And while the reduction in property construction has been much milder, an analysis by Capital Economics says such divergence is unsustainable. The firm expects construction activities to drop by half in coming years… Home sales and housing starts in the world’s second-largest economy have plummeted… Paradoxically, construction activities have held up fairly well. Output of construction materials - such as iron ore and steel - has stayed above pre-pandemic levels for much of the past few years. The chart below could tempt an investor to wonder whether the crisis in real estate, which accounts for two-thirds of China’s overall construction activities, is less than feared.”

April 2 – Bloomberg: “Country Garden Holdings Co.’s home sales tumbled last month from a year earlier, extending woes for the Chinese developer that’s already facing a wind-up petition and missed a deadline for releasing annual results. Contracted sales for March plunged 83% to 4.3 billion yuan ($590 million), following an 85% annual slide in February…”

March 31 – Reuters (Liangping Gao and Ryan Woo): “New home prices in China rose at the fastest pace in more than two and a half years in March versus a month earlier, a private survey showed…, driven by a slew of supportive steps to prop up the crisis-hit property sector. The average new home price across 100 cities rose 0.27% on month in March, the biggest rise since July 2021…”

April 2 – Bloomberg: “The Industrial & Commercial Bank of China Ltd. will offer 300-billion yuan ($41bn) in financing to boost the nation’s tourism sector amid sluggish consumer spending in the world’s second-largest economy. The country’s biggest bank signed a cooperation pact with China’s culture and tourism ministry on Tuesday to ‘stimulate’ tourism investment and spending…”

April 1 – Reuters (Ziyi Tang, Judy Hua and Liz Lee): “Bank of China (BoC) said its net interest margin (NIM) - a key gauge of profitability - will still face significant pressure this year. Vice President Zhang Yi made the remarks… Five of China's largest lenders have posted shrinking NIMs, while warning of ongoing property sector risks. Reductions to the benchmark lending rate earlier this year and existing mortgage rates last year have impacted returns from the asset side, said Zhang.”

April 4 – Bloomberg (Venus Feng): “The rise of China’s housing market over the past few decades was responsible for one of the greatest waves of wealth accumulation in history, minting dozens of billionaires and landing at least 10 of them in the ranks of the planet’s 500 richest people. The collapse in Chinese real estate in recent years has been equally efficient—at wealth destruction, erasing more than $100 billion from the fortunes of those tycoons.”

Central Banker Watch:

April 4 – Bloomberg (Alexandra Harris): “Foreign central bank usage of a key Federal Reserve facility rose for a third week, an indication policymakers around the world keep building cash positions amid warnings they will take steps to bolster their currencies. These monetary officials stashed $365 billion at the Fed’s reverse repurchase agreement facility, according to data for the period through April 3, up from $354 billion a week earlier. That’s the most since the week through Jan. 3. Meanwhile, the central banks added $11.6 billion in Treasury securities during the same period, leaving total holdings at $2.95 trillion…”

April 4 – Wall Street Journal (Joseph C. Sternberg): “In case you missed it, Sweden’s central bank… asked Swedish taxpayers for a cash infusion of around $4.1 billion. It’s the latest data point to emerge from the enormous economic experiment the world began in 2008. The Riksbank is asking Parliament for the equity injection to make good the losses the central bank has experienced as a result of quantitative-easing policies. Swedish monetary authorities bought government bonds and other assets worth nearly $94 billion in two phases between 2015 and 2021.”

Global Bubble Watch:

April 1 – Bloomberg (Swati Pandey and Ben Westcott): “Australia’s housing market extended gains to a 14th consecutive month in March amid declining affordability and borrowing costs at a 12-year high which cooled momentum in two of the nation’s biggest cities. Bellwether Sydney advanced 0.3% while prices in Melbourne stabilized, resulting in an overall increase of 0.6% for Australia’s major cities — unchanged from February, property consultancy CoreLogic Inc. said…”

Europe Watch:

April 3 – Reuters (Balazs Koranyi): “Euro zone inflation fell unexpectedly last month, solidifying the case for the European Central Bank to start lowering borrowing costs from record highs. Consumer price growth in the 20 nations sharing the euro currency slowed to 2.4% in March from 2.6% a month earlier… Underlying inflation, closely watched by the ECB to gauge the durability of price pressures, meanwhile fell to 2.9% from 3.1%, coming below expectations for 3.0%...”

April 4 – Bloomberg (Nicholas Comfort): “German banks saw a jump in customers struggling to pay back commercial property loans in the fourth quarter, as the sector faces higher interest rates and shifts in consumer behavior exacerbated by the pandemic. Banks in the country saw their non-performing commercial real estate loans swell to €13.6 billion ($14.8bn) at the end of December from €9.7 billion three months earlier…”

Japan Watch:

April 1 – Bloomberg (Lisa Du): “Japanese investors have been increasingly piling into alternative assets in recent years, and the trend is likely to continue as they search for yield, according to a report from… Preqin Ltd. The number of investors in Japan that are actively allocating money into assets like private debt, real estate and hedge funds has grown by 50% since 2019… Pension funds, insurers and others are seeking out higher returns as Japan’s economy turns inflationary, providing opportunities for foreign funds that can offer higher-yielding products. High-net-worth individuals and retail investors in the country are also emerging as a new area to tap…”

April 2 – Reuters (Satoshi Sugiyama): “Japanese service sector activity expanded at its quickest pace in seven months in March…, a business survey showed… The service sector has been the driving force behind the country's recent economic growth, helping offset the drag in manufacturing hampered by weak global demand. The final au Jibun Bank Service purchasing managers' index (PMI) rose to 54.1 in March from 52.9 in February, marking the 19th consecutive month of increase, according to index publisher S&P Global Market Intelligence.”

April 4 – Bloomberg (Erica Yokoyama and Yoshiaki Nohara): “Japan’s households continued to cut back on spending as sticky inflation discouraged discretionary outlays. Outlays decreased 0.5% in February from a year ago, sliding for a 12th consecutive month, the ministry of internal affairs reported…”

EM Watch:

April 1 – Bloomberg (Anup Roy and Ruchi Bhatia): “Prime Minister Narendra Modi said economic growth should be the Reserve Bank of India’s top priority over the next decade as he praised its management of the economy and the transformation of the banking system over the years… ‘In the next decade, RBI should give growth the highest priority, while focusing on trust and stability,’ he said.”

April 1 – Reuters (Can Sezer and Burcu Karakas): “Turks dealt President Tayyip Erdogan and his party their biggest electoral blow on Sunday in a nationwide local vote that reasserted the opposition as a political force and reinforced Istanbul Mayor Ekrem Imamoglu as the president's chief rival. With most of the votes counted, Imamoglu led by 10 percentage points in the mayoral race in Istanbul, Turkey's largest city, while his Republican People's Party (CHP) retained Ankara and gained 15 other mayoral seats in cities nationwide.”

Leveraged Speculation Watch:

April 2 – Reuters (Carolina Mandl): “Hedge funds capped the first quarter with gains across different strategies, as a rally in stocks, some commodities and the dollar helped the industry weather a less shiny period for bonds... Fundamental equities long/short hedge funds were up 6.28% in the first quarter, while systematic long/short funds posted gains of 11%, according to a Goldman Sachs' prime brokerage report… Hedge funds focused on technology rose 11.3%... Portfolio managers have also juiced up returns with an extra dose of leverage in portfolios, investors said. Among strategies that worked: Fresh record commodities prices for copper, gold and cocoa also helped strategies such as CTAs (commodity trading advisers) and macro hedge funds, investors said.”

April 1 – Bloomberg (Hema Parmar): “Citadel founder Ken Griffin told investors he expects modest economic growth in upcoming quarters and cited US national debt as a ‘growing concern that cannot be overlooked.’ Griffin made the remarks in a letter to the hedge fund’s investors… Griffin said net interest spending is estimated to reach 3.1% of gross domestic product for 2023, citing Congressional Budget Office estimates. That’s a percentage point more than the average from 1974 to 2023... ‘It is irresponsible for the US government to incur a deficit of 6.4% when unemployment is hovering around 3.75%,’ Griffin said... ‘We must stop borrowing at the expense of future generations.’”

April 1 – Bloomberg (Nishant Kumar and Laura Benitez): “GoldenTree Asset Management raised $1.3 billion to invest in first-loss equity tranches of collateralized loan obligations, tapping into growing demand for higher-risk products. The… credit specialist founded by Steve Tananbaum exceeded its target of $1 billion for the fund, which will invest in the riskiest slice of GoldenTree’s CLOs and target mid- to high-teen net returns…”

April 4 – Financial Times (Cheng Leng): “Computer-driven traders in China’s $250bn quant sector are overhauling their strategies in response to a regulatory crackdown that threatens to curb industry growth and returns after a decade of gains. Funds including Lingjun Investment and High-Flyer Capital Management, which each managed $8.3bn at their peak, are changing their complex trading algorithms to comply with restrictions on speculative bets as Beijing tightens its grip on Chinese markets... Their move comes after authorities blamed quants’ rapid-fire trading patterns for exacerbating the stock market’s slump in January, when the benchmark CSI 300 index dropped 6% to a five-year low.”

Social, Political, Environmental, Cybersecurity Instability Watch:

March 30 – Bloomberg (Alastair Marsh): “Highly pathogenic avian influenza has been discovered in dairy herds in Michigan and Idaho, indicating the virus is spreading into new US states. The National Veterinary Services Laboratories has confirmed the presence of bird flu in a Michigan herd that recently received cows from Texas, the U.S. Department of Agriculture said…”

April 2 – Bloomberg (Gerson Freitas Jr., Michael Hirtzer and Ilena Peng): “A virus that has killed millions of birds is spreading among US dairy cows, raising concerns that the outbreak may hurt demand for dairy and beef. While the US Department of Agriculture has said there’s little safety risk, the outbreak is unsettling the industry, with cattle and milk prices taking a hit. There’s concern some shoppers will balk at drinking milk or eating beef. ‘Risks to consumer demand for dairy are prevalent in conversations,’ StoneX Group Inc. analyst Dave Kurzawski said... He added that while there are ‘big risks on the table,’ the impact of the illness on buyer behavior is unclear.”

March 29 – Wall Street Journal (Matthew Dalton and Jack Gillum): “From Vladimir Putin in Russia to the theocrats in Iran, authoritarian leaders are increasingly shutting down independent media and locking up reporters, with hundreds of journalists now in jail around the globe. The surge in government crackdowns on the press, which accelerated after Russia invaded Ukraine two years ago, has left more than 520 journalists imprisoned worldwide, including a few dozen under house arrest, according to… Reporters Without Borders. The figure is among the highest the group has ever recorded.”

Geopolitical Watch:

March 31 – The Hill (Brad Dress): “The return of great power competition across the globe is forcing countries to adapt, spurring major changes to alignment and spending from Europe to the Indo-Pacific to the Middle East. The change is everywhere on the map — but most evident in countries like Sweden and Japan as the nations make dramatic changes to meet rising threats from Russia and China. ‘I’ve described the security environment as the most dangerous I’ve seen in 40 years in uniform,’ said U.S. Adm. John Aquilino, head of Indo-Pacific Command, before the House Armed Services Committee... The rise of new tensions has driven up defense spending worldwide. In an annual report this year, the International Institute for Strategic Studies found defense spending was up 9% worldwide last year, reaching $2.2 trillion.”

March 31 – Reuters (Karen Lema and David Kirton): “Philippine President Ferdinand Marcos Jr has ordered his government to strengthen its coordination on maritime security to confront ‘a range of serious challenges’ to territorial integrity and peace, as a dispute with China escalates. The order… does not mention China but follows a series of bilateral maritime confrontations and mutual accusations over a disputed area of the South China Sea.”