Friday, May 17, 2024

Weekly Commentary: Zhang Zhan

An audience question during the annual meeting of the Foreign Bankers’ Association of Amsterdam, May 14, 2024: 

“Do you entertain the possibility that returning to the 2% target will not be possible with the current level of the Fed funds rate?”

Chair Powell: “I do think it’s really a question of keeping the policy rate at the current level for a longer time than had been thought. By many, many measures, the policy rate is restrictive. The question is, ‘Is it sufficiently restrictive?’ And I think that’s going to be a question that time will have to tell. Entertain the possibility – that could be a very small probability – but I have said that I don’t think it is likely, based on the data we have, that the next move that we make would be a rate hike. I think it’s more likely we’ll be in a place where we hold the policy rate where it is.”

Disciplined central bankers would undoubtedly more than “entertain the possibility” that additional rate hikes will be necessary to return the system to price stability. To be sure, this is not the backdrop to signal that additional policy tightening is off the table.

Importantly, it is a consequential analytical and communications blunder to assert today that there is only a “very small probability” of inflation surprising to the upside. For starters, the sordid history of inflationism informs us that once inflation has taken hold, it becomes quite difficult to return to price stability. “Immaculate disinflation” is a contemporary contrivance.

U.S. CPI experience is a case in point. After consumer inflation jumped to 6.1% in December 1969, it had dropped back to 2.7% by June 1972. But CPI was back up to 12.3% in December 1974, before settling back down to 5.5% by September 1976. But an inflationary surge saw CPI spike to 14.8% by March 1980. Then, after dropping to 1.1% in December 1986, CPI was back up to 6.2% by September 1990.

From a historical perspective, there is a significant probability of an inflationary resurgence. And what is a reasonable probability of a major geopolitical development triggering an inflationary shock? Some might argue 10 to 20%. Closely monitoring troubling global developments – including this week – I would place the odds at greater than 50% (and growing). And I would put odds of climate instability having a meaningful inflationary impact at least as high.

With a 3.9% unemployment rate and still 8.5 million job openings, what is the probability of ongoing elevated wage gains perpetuating second-round inflationary effects (especially in rents and housing)? The likelihood of the unfolding historic A.I. spending boom (including energy infrastructure) adding to pricing pressures?

May 17 – Bloomberg (Carter Johnson and Nazmul Ahasan): “The Federal Reserve’s delay of interest-rate cuts in a bid to temper inflation runs the risk of falling behind the curve, according to Mohamed El-Erian. ‘The Fed pivoted on the basis of data. It was the opposite of the pivot that they did in December — now they have to do a U-turn,’ El-Erian… told Bloomberg… ‘Is the inflation target the right target? We all talk about wanting to go back to 2%... Two percent is totally arbitrary. If we are pursuing the wrong inflation target, the risk of a mistake — that mistake would mean sacrificing growth unnecessarily — the risk of a mistake is high.’ ‘It’s a world that’s subjected to higher inflation. And we’ve come from a world that was subject to lower inflation.’”

I take exception with the assertion that the 2% target is “arbitrary.” Two percent has traditionally been viewed as approximating price stability, providing a little wiggle room seen as an essential buffer against deflation risk. Close enough for government work, apparently. The problem over recent decades has been that CPI in the vicinity of 2% has not corresponded to general price stability, certainly not with respect to securities and asset prices.

The fundamental predicament today is Monetary Disorder, including speculation running completely out of control. Focus on CPI misses the critical issue of today’s extraordinary price level instabilities. This is a super cycle repeatedly extended by historic monetary inflation. Loose conditions at this “Terminal Phase” are extremely destabilizing. From the epic A.I. (and related) arms race to precarious speculative Bubbles, loose conditions only exacerbate systemic fragilities. Stated differently, there are powerful and now well-entrenched inflationary biases throughout the economy and markets that are feeding on loose conditions.

One of my son’s high school pals had an especially rewarding trading week. He had purchased GameStop call options ahead of Monday’s price spike. We’re at the stage of the speculative cycle where traders – from high schoolers entering trades between classes (and during examinations, I kid you not) to hedge fund operators trading around the clock – have learned the tricks of the trade. Risk-taking has been rewarded again and again. Traders are emboldened and playing with the house’s money. Disregard economic data, Powell, and geopolitics. It was the splashy return of “Roaring Kitty.”

May 14 – Bloomberg (Bre Bradham and Subrat Patnaik): “Meme-stock traders again piled into shares of GameStop Corp. and AMC Entertainment Holdings Inc. in a revival of the retail-trading frenzy that rocked markets during the pandemic. The video-game retailer’s stock jumped 60% after rising as much as 113% earlier on Tuesday, while the beleaguered movie theater chain’s shares were up 32%. The swings triggered multiple halts in the trading of each stock throughout the day. GameStop has picked up more than $11 billion in market value this month as its stock has soared, while AMC has gained some $1.2 billion. The latest rally erupted on Monday following the return to social media of Keith Gill, who drove the meme-stock mania of 2021 under the moniker ‘Roaring Kitty.’”

Risk premiums traded this week near lows back to 2021. Financial conditions are the loosest since 2021. Stocks have been in a major rally, the strongest since 2021. The VIX Index ended the week below 12. From the April 19th intraday low to Tuesday’s intraday high, the Goldman Sachs short index surged 31.5%. And it’s no coincidence that “Roaring Kitty” uses the loosey-goosey backdrop for a rather spectacular return to the spotlight. A powerful short squeeze saw the Goldman Sachs short index post a two-day (Monday and Tuesday) gain of 11.8%.

Recalling 2021 crazy - compliments of massive Fed-induced (zero rates and Trillions of QE) loose conditions:

January 29, 2021 – Wall Street Journal (Julia-Ambra Verlaine and Gunjan Banerji): “The investor who helped direct the world’s attention to GameStop, leading a horde of online followers in a bizarre market rally that made and lost fortunes from one day to the next, says he’s just a normal guy… To many of them, Mr. Gill—who until recently worked in marketing for Massachusetts Mutual Life Insurance Co.—is the force behind the quadruple-digit gains in shares of the videogame retailer GameStop, up more than 1600% this year... On Wednesday, the stock jumped 135% to $347.51, a record… Mr. Gill posted a screenshot of his brokerage account…, showing a roughly $20 million daily gain on GameStop shares and options. ‘Your steady hand convinced many of us to not only buy, but hold. Your example has literally changed the lives of thousands of ordinary normal people. Seriously thank you. You deserve every penny,’ replied one Reddit user…”

“Roaring Kitty” has more followers than Powell. The Fed Chair Tuesday admitted the labor market remains “very, very strong.” And at least he has retreated somewhat from “sufficiently restrictive.” Curiously, Chair Powell, in a moment of unscripted candor, even uttered “policy is probably restrictive.”

Markets see excessively loose conditions and increasingly powerful inflationary dynamics. The Bloomberg Commodities Index surged 2.9% this week, boosting y-t-d gains to 7.2%. From Bloomberg: “The Bloomberg Commodities Index is on pace for a third straight monthly gain, a streak last seen in 2022 when core inflation was running above 8%. The commodity index is up almost 4% in May, on pace for the best month since July.”

Gold surpassed $2,400 for the first time in Friday trading, ending the week at $2,414 with a 17.1% y-t-d gain. Silver surged 11.7% this week to $31.493 – up 29.8% y-t-d to the high back to February 2013. Platinum gained 8.8%. Copper jumped 8.3%, pushing 2024 gains to 30%. Nickel gained 11.2% this week, Lead 2.7%, Tin 6.7%, Palladium 3.3%, and Aluminum 3.3%. Crude futures rose 2.3%, gasoline 3.0%, and natural gas 16.6%. Lumber gained 7.5%, Cattle 2.8%, Coffee 1.8%, Soybeans 1.9%, and Rubber 3.7%.

What is the probability that surging commodities prices foreshadow the next round of inflationary pressures? It’s certainly not very low. With the Fed refusing to tighten conditions, how will this sit with the bond market?

May 17 – Reuters (Liangping Gao and Clare Jim): “China announced ‘historic’ steps on Friday to stabilise its crisis-hit property sector, with the central bank facilitating 1 trillion yuan ($138bn) in extra funding and easing mortgage rules, and local governments set to buy ‘some’ apartments. Investors hoped the measures marked the beginning of more decisive government intervention to compensate for waning demand for new and old apartments, to slow down falling prices and to reduce a growing stock of unsold homes… The homes would be used to provide affordable housing, Vice Premier He Lifeng said, without giving a timeline or a target for the purchases. He also said local governments, already some $9 trillion in debt, can repurchase land sold to developers, and promised that authorities will ‘fight hard’ to complete stalled projects… China's central bank said it would set up a relending facility for affordable housing that it says would result in 500 billion yuan worth of bank financing. It would also further lower mortgage interest rates and downpayment requirements. Additionally, it would make another 500 billion yuan available in its pledged supplementary lending facility to support policies including the redevelopment of some urban areas with older dwellings.”

Beijing has embarked on what I expect will degenerate into historic reflationary policymaking. The Rubicon was crossed this week. Xi Jinping’s global ambitions preclude desperately needed financial and economic adjustment. Hopes that more conventional measures would avert apartment Bubble deflation have been dashed. Ominously, last year’s record $5.0 TN of Credit (“aggregate financing”) growth and record $5.24 TN Bank Assets ballooning barely held crisis dynamics at bay.

Massive Credit growth, myriad stimulus measures, and bank reserve requirement cuts – and apartment Bubble deflation only accelerated. Moreover, the massive investment (to counter housing weakness) in export industries (i.e., EV, solar, renewables, tech…) has provoked a powerful global trade backlash.

China has been a huge gold purchaser. Is Beijing now stockpiling various commodities? Ahead of economic recovery, currency devaluation or geopolitical upheaval? Powell clearly does not factor China developments into his “very low probability” thesis. More than ever before, inflation dynamics are out of the Fed’s control.

May 16 – Financial Times (Joe Leahy, Max Seddon and Demetri Sevastopulo): “Vladimir Putin and Xi Jinping… vowed to work together against what they said was ‘destructive and hostile’ US pressure and to deepen the ties that have sustained Russia’s invasion of Ukraine… Putin’s state visit… was a clear rebuke to the US after secretary of state Antony Blinken last month urged China to drop its support for Russia’s war in Ukraine. Washington has also been considering imposing sanctions on Chinese financial institutions if Beijing does not stop its support. A senior US official said the message from Putin and Xi sent ‘a signal throughout the People’s Republic of China that it is OK to be full-steam ahead on all trade with Russia and that is a concern’. ‘We find it unacceptable that Chinese companies are helping Putin wage this war against Ukraine and if China purports to support peace in Europe, it cannot continue to fuel the biggest threat to European security,’ the US official said. ‘This is not just a US position. You also heard it from our G7 partners, Nato and the EU.’”

Thrilling comebacks of “Roaring Kitty” and meme-stock madness notwithstanding, it was an ominous week. Those Xi/Putin bromance hugs confirm the world has changed for the worse. And Beijing’s adoption of aggressive reflationary measures moves China one step closer to crisis of confidence dynamics. And it’s not just the U.S. that must today seriously question the durability of business as usual with Xi’s China. How can Europe not be aghast and alarmed by the whole thug bromance spectacle? The Western world?

It's increasingly challenging to see how the China/Russia/North Korea/Iran anti-West alliance is consistent with a stable renminbi. And I fear the typical constraints imposed by a currency crisis would push China closer to what I’ve called “Plan B.”

May 17 – Bloomberg (Simina Mistreanu and Christopher Bodeen): “Russia and China are helping each other expand their territorial reach, and democracies must push back against authoritarian states that threaten their rights and sovereignty, Taiwan’s outgoing foreign minister, Joseph Wu, said… Wu called on democracies to align in countering Russia and China’s military assertiveness in Europe, the South China Sea and beyond. China threatens to invade Taiwan, a self-ruled democracy that it claims as its own territory. ‘Putin’s visit to Beijing is an example of the two big authoritarian countries supporting each other, working together with each other, supporting each other’s expansionism,’ he said.”

May 16 – BBC (Kelly Ng and Joel Guinto): “Concerns are growing for the safety of a Chinese blogger, who has not surfaced days after she was meant to be freed from jail. Zhang Zhan was sentenced to four years for livestreaming the Covid-19 lockdowns in Wuhan… She was due to be released on Monday, but her whereabouts remain unclear, sparking concerns from rights groups. The 40-year-old is among a number of people who got into trouble for reporting on Covid-19. ‘The international community must not forget Zhang Zhan and should demand that the Chinese government ensure that she is truly free,’ Human Rights Watch said...”

May 13 – CNN (Nectar Gan): “A Chinese citizen journalist who has been behind bars for four years over her reporting on the initial Covid-19 outbreak in Wuhan is due to be released Monday… Zhang Zhan, a former lawyer, was one of the few independent Chinese journalists reporting in Wuhan after the metropolis of 11 million people went into a complete lockdown, offering a rare, unfiltered glimpse into the reality on the ground as Chinese authorities imposed tight censorship on media coverage. She was detained in May 2020 and sentenced months later… for ‘picking quarrels and provoking trouble’ – a charge commonly used by the Chinese government to target dissidents and human rights activists.”

For the Week:

The S&P500 gained 1.5% (up 11.2% y-t-d), and the Dow rose 1.2% (up 6.1%). The Utilities added 1.2% (up 14.5%). The Banks advanced 1.2% (up 11.8%), and the Broker/Dealers surged 3.1% (up 14.5%). The Transports slipped 0.6% (down 2.5%). The S&P 400 Midcaps increased 0.7% (up 8.4%), and the small cap Russell 2000 rose 1.7% (up 3.4%). The Nasdaq100 gained 2.1% (up 10.2%). The Semiconductors surged 3.6% (up 19.3%). The Biotechs rose 2.4% (down 3.2%). With bullion surging $55, the HUI gold index jumped 4.9% (up 17.9%).

Three-month Treasury bill rates ended the week at 5.235%. Two-year government yields declined four bps this week to 4.83% (up 57bps y-t-d). Five-year T-note yields fell seven bps to 4.45% (up 60bps). Ten-year Treasury yields dropped eight bps to 4.42% (up 54bps). Long bond yields fell eight bps to 4.56% (up 53bps). Benchmark Fannie Mae MBS yields dropped 10 bps to 5.82% (up 55bps).

Italian yields declined four bps to 3.81% (up 11bps y-t-d). Greek 10-year yields dipped three bps to 3.51% (up 46bps). Spain's 10-year yields fell four bps to 3.27% (up 28bps). German bund yields were unchanged at 2.52% (up 49bps). French yields slipped a basis point to 2.99% (up 43bps). The French to German 10-year bond spread narrowed one to 47 bps. U.K. 10-year gilt yields declined four bps to 4.13% (up 59bps). U.K.'s FTSE equities index slipped 0.2% (up 8.9% y-t-d).

Japan's Nikkei Equities Index rallied 1.5% (up 15.9% y-t-d). Japanese 10-year "JGB" yields jumped four bps to 0.95% (up 34bps y-t-d). France's CAC40 slipped 0.6% (up 8.3%). The German DAX equities index declined 0.4% (up 11.7%). Spain's IBEX 35 equities index rose 2.0% (up 12.1%). Italy's FTSE MIB index jumped 2.1% (up 16.6%). EM equities were mixed. Brazil's Bovespa index increased 0.4% (down 4.5%), while Mexico's Bolsa index slipped 0.2% (up 0.3%). South Korea's Kospi index was little changed (up 2.6%). India's Sensex equities index rallied 1.7% (up 2.3%). China's Shanghai Exchange Index about unchanged (up 6.0%). Turkey's Borsa Istanbul National 100 index surged 4.2% (up 42.5%). Russia's MICEX equities index gained 1.5% (up 13.0%).

Federal Reserve Credit declined $7.9bn last week to $7.310 TN. Fed Credit was down $1.579 TN from the June 22, 2022, peak. Over the past 244 weeks, Fed Credit expanded $3.584 TN, or 96%. Fed Credit inflated $4.499 TN, or 160%, over the past 601 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $18.8bn last week to a 13-month low $3.337 TN. "Custody holdings" were down $52.4 billion y-o-y, or 3.7%.

Total money market fund assets gained $16.4bn to $6.049 TN. Money funds were up $721 billion, or 13.5%, y-o-y.

Total Commercial Paper declined $33.7bn to $1.295 TN. CP was up $156bn, or 13.7%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell seven bps to 7.02% (up 58bps y-o-y). Fifteen-year rates dropped 10 bps to 6.28% (up 58bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down nine bps to 7.33% (up 71bps).

Currency Watch:

For the week, the U.S. Dollar Index declined 0.8% to 104.445 (up 3.1% y-t-d). For the week on the upside, the New Zealand dollar increased 1.9%, the South African rand 1.5%, the Norwegian krone 1.5%, the British pound 1.4%, the Australian dollar 1.4%, the Swedish krona 1.1%, the Brazilian real 1.1%, the Mexican peso 1.0%, the South Korean won 1.0%, the euro 0.9%, the Singapore dollar 0.7%, the Canadian dollar 0.4%, and the Japanese yen 0.1%. On the downside, the Swiss franc declined 0.3%. The Chinese (onshore) renminbi increased 0.04% versus the dollar (down 1.72% y-t-d).

Commodities Watch:

May 17 – Bloomberg (Mark Burton, Yvonne Yue Li and Guillermo Molero): “Copper vaulted toward a record in London and nickel spiked nearly 8%, capping a week of big moves in industrial and precious metals markets as bullish investors pile in and bearish bets unravel. Global benchmark copper contracts on the London Metal Exchange rallied as much as 2.8% on Friday to within striking distance of an all-time high set in March 2022. Copper prices had already hit records in New York and Shanghai this week, as the global market reels from a short squeeze centered on the Comex exchange.”

May 16 – Bloomberg: “A massive dislocation between the prices for copper traded in New York and other commodity exchanges has rocked the global market for the metal and prompted a frantic dash for supplies to ship to the US. The source of the disruption is a short squeeze that has driven up prices on the Comex exchange in recent days. The premium fetched by New York copper futures above the London Metal Exchange price has rocketed to an unprecedented level of over $1,200 per ton, compared with a typical differential of just a few dollars.”

May 13 – Wall Street Journal (Joseph Hoppe): “The forecast deficit for the platinum market has widened for 2024, as weak supply is outweighed by sustained demand from the and industrial sectors. The precious metal is now forecast for a market deficit of 476,000 ounces in 2024—from prior expectations given in March of 418,000 ounces—amid strained supply from the mining sector and resilient demand, according to… the World Platinum Investment Council. ‘The upfront takeaway is that this is the second year of a material market deficit in a row,’ Edward Sterck, director of research at WPIC, said…”

May 15 – Bloomberg (Elizabeth Low): “Global gasoline demand will remain robust this summer despite recent signs of weakness in the market, according to Rystad Energy A/S, which expects consumption to top levels seen before the pandemic… Global gasoline demand is on track to reach 26.8 million barrels a day in August, above seasonal levels in the past two years and 2019, according to Rystad estimates.”

The Bloomberg Commodities Index jumped 2.9% (up 7.2% y-t-d). Spot Gold rose 2.3% to $2,415 (up 17.1%). Silver surged 11.7% to $31.493 (up 32.3%). WTI crude gained $1.80, or 2.3%, to $80.06 (up 12%). Gasoline rose 3.0% (up 22%), and Natural Gas surged 16.6% to $2.625 (up 5%). Copper jumped 8.3% (up 30%). Wheat added 0.9% (up 4%), while Corn slipped 0.7% (down 4%). Bitcoin gained $5,840, or 9.6%, to $66,780 (up 57%).

Middle East War Watch:

May 17 – Reuters (Nidal Al-Mughrabi): “Israeli forces battled Hamas fighters in the narrow alleyways of Jabalia in northern Gaza on Friday in some of the fiercest engagements since they returned to the area a week ago, while in the south militants attacked tanks massing around Rafah. Residents said Israeli armour had thrust as far as the market at the heart of Jabalia, the largest of Gaza's eight historic refugee camps, and that bulldozers were demolishing homes and shops in the path of the advance.”

Ukraine War Watch:

May 15 – Reuters (Yuliia Dysa, Tom Balmforth and Sergiy Karazy): “President Volodymyr Zelenskiy postponed all his foreign trips as the battlefield situation continued to deteriorate on Wednesday and Kyiv said fighting raged in the northeastern border town of Vovchansk in Kharkiv region. The capture of the town, 3 miles from the border, would be Russia's most significant gain since it launched an incursion into the region on Friday, opening a new front in its invasion and forcing Kyiv to rush in reinforcements.”

May 13 – Wall Street Journal (Alistair MacDonald, Jemal R. Brinson, Emma Brown): “Ukraine is shooting down a far smaller proportion of Russian missile attacks than it was earlier in the war. The worsening performance of Ukraine’s air defenses comes as Russia increases drone and missile attacks, and fires more harder-to-hit weapons, such as ballistic missiles. Kyiv is also running low on ammunition for the Western-supplied Patriot systems… In the past six months, Ukraine intercepted around 46% of Russian missiles, compared with 73% in the preceding six-month period…”

May 14 – Reuters (Ron Popeski): “Russian President Vladimir Putin… said he backed China’s plan for a peaceful settlement of the Ukraine crisis, saying Beijing had a full understanding of what lay behind the crisis. Putin… said Russia remained open to dialogue and talks to solve the more than two-year-old conflict. China's plan and further ‘principles’ made public by President Xi Jinping last month took account of factors behind the conflict, Putin said. ‘We are positive in our assessment of China’s approach to solving the Ukrainian crisis,’ Putin said... ‘In Beijing, they truly understand its root causes and its global geopolitical meaning.’”

Taiwan Watch:

May 15 – Reuters (Ben Blanchard and Yimou Lee): “Lai Ching-te takes office as Taiwan's president on Monday, facing a China that calls him a ‘dangerous separatist’ and has ramped up military drills, as well as a fractured parliament at home where no party has a majority. Lai, vice president for the past four years, succeeds President Tsai Ing-wen at a time Beijing has been increasing military and political pressure to assert sovereignty - a claim he and Tsai reject - over democratically governed Taiwan… China says any move by Taiwan to declare formal independence would be grounds to attack the island.”

May 16 – Financial Times (Kathrin Hille and Max Seddon): “For two years, Chinese backing for Russia’s war in Ukraine has been western governments’ biggest concern about the two countries’ burgeoning relationship. But two weeks ago, US officials raised alarm over their co-operation in another key security theatre: the seas around Taiwan. ‘We see them, China and Russia, for the first time exercising together in relation to Taiwan,’ Avril Haines, director of national intelligence, told US lawmakers. ‘[We are] recognising that this is a place where China definitely wants Russia to be working with them, and we see no reason why they wouldn’t.’ The US has had to adapt to closer co-operation between the Chinese and Russian militaries, Jeffrey Kruse, director of the Defense Intelligence Agency, told the same Senate hearing.”

May 14 – Reuters: “The U.S. and Taiwan navies conducted joint drills in the Pacific in April that, officially, did not take place, four people briefed on the matter said, as the two militaries boost cooperation amid rising Chinese military threats. Washington and Taipei have been expanding their military cooperation in recent years amid almost daily Chinese incursions into Taiwan's air defence identification zone and drills by Chinese forces near the island.”

May 15 – Bloomberg: “China will sanction five commentators and their relatives for ‘slander,’ Taiwan Affairs Office spokesman Chen Binhua said... China will introduce new laws to punish ‘separatists,’ Chen adds. Says incoming president and current Vice President Lai Ching- te has to make a choice between peace and confrontation.”

Market Instability Watch:

May 12 – Bloomberg (Yumi Teso and Masahiro Hidaka): “The Bank of Japan offered to purchase a smaller amount of government bonds in a regular operation on Monday than it did on April 24 as it seeks to reduce its presence in the country’s debt market. The move is likely to put upward pressure on Japanese bond yields… The yields for the benchmark 10-year maturity rose immediately after the announcement… ‘The BOJ seems to be under pressure from the government’ to take action in response to the yen’s slide and easy financial conditions, said Shoki Omori, chief desk strategist at Mizuho Securities... ‘Still, the impact would be limited as investors were somewhat prepared for this since the release of last summary of opinions from the BOJ’s April policy meeting.’”

May 14 – Bloomberg (Ye Xie and Liz Capo McCormick): “For the first time on record, private investors overseas are poised to overtake foreign central banks as the second-largest holder of US government debt. That watershed moment stands to materialize on Wednesday, when the Treasury Department releases its data for March… It’s a shift that would leave global investors second only to the Federal Reserve — and potentially usher in an era of greater volatility for the bond market.”

May 14 – Bloomberg (Alex Tanzi and Jonnelle Marte): “US household debt has reached a record and more borrowers are struggling to keep up. Overall US household debt rose to $17.7 trillion, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit... That’s an increase of $184 billion, or 1.1%, from the fourth quarter. The data highlight the mounting financial pressures on American families in an age of elevated inflation. The persistent rise in the prices of essentials such as food and rent have strained household budgets, pushing people to borrow against their credit cards to pay for necessities. Consumers have added $3.4 trillion in debt since the pandemic, and that increased debt bears much higher interest rates.”

Global Credit Bubble Watch:

May 13 – Bloomberg (Sagarika Jaisinghani): “Risks are mounting for some US firms that haven’t ever turned a profit as they’re compelled to raise capital at elevated interest rates to ‘remain solvent,’ according to Goldman Sachs… strategists. The team led by David Kostin said the pressure was high for so-called unprofitable growth stocks — a majority of them tech-related — as they ‘will be forced to either find an acquiror, issue dilutive equity, or issue debt at elevated current rates’ to continue operations. Unprofitable growth stocks are only expected to generate cash flow in the ‘distant future,’ which means that higher interest rates impose a bigger discount on the present value of their projected profits, Kostin wrote in a note dated May 10. As a result, they ‘face larger headwinds from an increase in the discount rate than the typical stock,’ he said.”

Bubble and Mania Watch:

May 15 – Reuters (Saqib Iqbal Ahmed and David Randall): “Meme stocks are soaring again, delighting fans, frustrating detractors and showing Wall Street that the social media force behind the wild GameStop rally in 2021 is still going strong. The American video game retailer is again the star, shooting up 340% over the last 10 trading days after a string of posts on the X platform from an account linked to Keith Gill, the central figure behind the previous frenzy. Shares of other companies, including theater chain AMC, headphones maker Koss and food storage container company Tupperware have followed suit. Like GameStop, many of the stocks are heavily shorted and their fundamentals have declined over the last few years. ‘It's hard not to use words like ‘insane’ when you look at this as a trader,’ said Jay Woods, chief global strategist at Freedom Capital Markets. ‘The first time this happened, it was more of a movement, but right now this looks like a craze where people are saying, ‘Here’s an opportunity' and 'Let's see if we can make a quick buck off of it.’’”

May 12 – Bloomberg (Mackenzie Hawkins, Ian King, Jillian Deutsch, Yoshiaki Nohara, and Yuan Gao): “Superpowers led by the US and European Union have funneled nearly $81 billion toward cranking out the next generation of semiconductors, escalating a global showdown with China for chip supremacy. It’s the first wave of close to $380 billion earmarked by governments worldwide for companies… to boost production of more powerful microprocessors. The surge has pushed the Washington-led rivalry with Beijing over cutting-edge technology to a critical turning point that will shape the future of the global economy. ‘There is no doubt we’ve passed the Rubicon in terms of the tech competition with China, particularly on semiconductors,’ said Jimmy Goodrich, senior China and strategic technology adviser to the RAND Corp. ‘Both sides have basically made this one of their top strategic national objectives.’”

May 15 – Bloomberg (Paula Seligson and Katherine Doherty): “Citadel Securities generated $2.3 billion of net trading revenue in the first three months of 2024, setting the market-making firm up for a potentially record year as it expands in new assets classes and geographies. The trading haul is among a litany of financial markers recently disclosed to debt investors. The first quarter result, which was up 68% from the prior year, sets the firm on a trajectory to reach unprecedented revenue in 2024… The firm posted about $6.3 billion in net trading revenue last year…”

May 16 – Bloomberg (Diana Li and Jack Witzig): “The world’s super-rich club now has 15 members with fortunes over $100 billion, the most on record, as they ride the waves of artificial intelligence, luxury goods and geopolitical shifts. The combined net worth for these people is up 13% this year to $2.2 trillion, according to the Bloomberg Billionaires Index… Between them, they hold nearly a quarter of the wealth of the world’s 500 richest people.”

May 13 – Bloomberg (Edward Harrison): “The biggest US tech stocks are not only a bet on innovation but also a possible hedge against inflation, according to some respondents in the latest Bloomberg Markets Live Pulse survey. Gold, the haven of choice for decades, is still seen as the best safeguard against the risk of rising prices, according to 46% of survey participants. But nearly a third said the tech behemoths are their first pick for the role.”

May 14 – Bloomberg (Will Parker): “Initial public offerings in the US are poised to take a breather, with volume expected to snap a solid run of five consecutive weeks with more than $1 billion raised. Last week’s first-time share sales… capped the longest streak of $1 billion-plus weeks in nearly three years… The deal flow adds to signs that the US IPO market has turned a corner after two years of anemic volume.”

May 15 – Financial Times (Antoine Gara in New York and Dan McCrum): “A $10bn US property fund is running low on liquidity as investors demand their money back, threatening a reckoning for a sector rocked by rising debt costs and fears over real estate valuations. Starwood Real Estate Investment Trust (Sreit), one of the largest unlisted property funds, has drawn more than $1.3bn of its $1.55bn unsecured credit facility since the beginning of 2023 following heavy redemption requests.”

AI Bubble Watch:

May 13 – Wall Street Journal (David Uberti): “Bill Thomson needs power fast. The problem is that many of the other businesspeople racing into Georgia do too. Thomson heads marketing and product management at DC Blox, which in recent years built a string of data centers in midsize cities across the fast-growing Southeast. The company more recently set its sights on Atlanta… joining a slew of tech and industrial firms piling into the state. Vying for a piece of one of America’s hottest markets, those businesses tend to have two things in common. One is that they represent a U.S. economy increasingly driven by advanced manufacturing, cloud computing and artificial intelligence. The other is that they promise to hoover up huge amounts of electricity… Similar quandaries are rippling through other hubs of the new American economy, with utilities in Tennessee and the Carolinas forecasting their own unexpected surges in load growth.”

May 16 – Bloomberg (Tope Alake): “The US is expected to boost total generating capacity by 80% through 2035, driven largely by almost 1 terawatt of new solar and wind, according to BloombergNEF. Developers will add 737 gigawatts of solar panels by the middle of the next decade, more than four times the total installed capacity at the end of 2023, BNEF said… Almost 200 gigawatts of wind power will be installed, more than doubling the nation’s turbine capacity. Utilities are racing to strip carbon from the grid while adding new capacity to meet booming demand for electricity from factories, artificial intelligence and the drive to electrify much of the economy. The additional power plants will need to be supplemented with more transmission lines to deliver the power.”

May 15 – Bloomberg (Akshat Rathi and Dina Bass): “When Microsoft Corp. pledged four years ago to remove more carbon than it emits by the end of the decade, it was one of the most ambitious and comprehensive plans to tackle climate change. Now the software giant's relentless push to be the global leader in artificial intelligence is putting that goal in peril. The… company’s total planet-warming impact is about 30% higher today than it was in 2020… Microsoft’s predicament is one of the first concrete examples of how the pursuit of AI is colliding with efforts to cut emissions.”

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

May 15 – Bloomberg: “Chinese President Xi Jinping and Russian leader Vladimir Putin pledged to intensify cooperation against US ‘containment’ of their countries, as they warned of growing nuclear tensions between rival powers. Putin and Xi accused the US of planning to station missile systems around the world that ‘pose a direct threat to the security of Russia and China,’ in a joint declaration… They agreed to tighten coordination, including between their militaries, against what they called Washington’s ‘destructive and hostile course.’ The two leaders also warned of ‘increased strategic risks’ from spiraling tensions between nuclear powers. They accused the US of seeking to violate the strategic nuclear balance to gain a ‘decisive military advantage.’”

May 16 – Reuters (Bernard Orr, Guy Faulconbridge and Andrew Osborn): “China’s Xi Jinping and Russia’s Vladimir Putin… pledged a ‘new era’ of partnership between the two most powerful rivals of the United States, which they cast as an aggressive Cold War hegemon sowing chaos across the world… Xi, 70, and Putin, 71, signed a joint statement on Thursday about the ‘new era’ that proclaimed opposition to the U.S. on a host of security issues and a shared view on everything from Taiwan and Ukraine to North Korea and cooperation on new peaceful nuclear technologies and finance… ‘China is willing to… jointly achieve the development and rejuvenation of our respective countries, and work together to uphold fairness and justice in the world.’ Xi has told Putin the two have the chance to drive changes the world has not seen in a century, which many analysts see as an attempt to challenge a U.S.-led global order.”

May 17 – Bloomberg (Greg Sullivan and Anthony Halpin): “Vladimir Putin is wrapping up a trip to China, where his warm ties with President Xi Jinping have led to booming trade and increasing defense coordination. More than two years since his February 2022 invasion of Ukraine began, it’s a far cry from efforts by the US and its Group of Seven allies to isolate the Russian leader. They imposed sweeping sanctions, froze Russia’s foreign assets and kicked major Russian lenders off the SWIFT financial messaging system. A year later the International Criminal Court issued an arrest warrant for Putin… China’s embrace is mirrored by a network of other states that have kept Russia from pariah status. Many join with Moscow to bolster joint interests at summits like the Group of 20 and to rival Western powers in clubs like the BRICS. Some are driven by pragmatic self-interest, focusing on energy, trade or economic considerations. For others, military cooperation or weapons lie at the heart of the entente. More often than not, they share a common outlook with Russia — a desire to supplant the post-Cold War, US-led world order.”

May 15 – Financial Times (Joe Leahy and Max Seddon): “Russian President Vladimir Putin has delivered a blistering attack on the west ahead of a visit to China this week, blaming ‘western elites’ for the war in Ukraine and outlining Beijing and Moscow’s alignment on a parallel world order. In an interview published by Chinese state news agency Xinhua…, Putin said the two autocracies had ‘similar or coinciding positions’ on geopolitical issues. Both Russia and China advocated for ‘international law’, Putin said, but rejected ‘western attempts to impose an order based on… some mythical rules of no one knows whose making’… ‘Today’s global shocks have been provoked precisely by [the west’s] policies,’ Putin said of the invasion of Ukraine, which he referred to as a ‘dramatic manifestation [of] the crisis on the planet today’.”

May 15 – Reuters (Guy Faulconbridge and Mark Trevelyan): “Russian President Vladimir Putin has ordered his military to practise the deployment of tactical nuclear weapons after what Moscow said were threats from France, Britain and the United States… Russia’s defence ministry said… missile forces in the Southern Military District will take part, together with aviation and the navy. The southern district, headquartered in Rostov-on-Don, lies alongside Ukraine and includes, opens new tab parts of Ukraine which Russia controls. Belarus will also be involved.”

De-globalization and Iron Curtain Watch:

May 15 – Bloomberg: “Chinese Foreign Minister Wang Yi piled onto his nation’s criticism of the latest US tariffs, calling them ‘a classic example of bullying.’ The measures show that ‘some people in the US have lost their sanity in order to safeguard their unilateral hegemony,’ Wang told reporters… Wang called on other nations to condemn the tariffs, saying that ‘at this crucial moment of the economic recovery, the global community should tell the US to stop creating new troubles.’”

May 16 – Bloomberg (Masaki Kondo and Iris Ouyang): “China sold a record amount of Treasury and US agency bonds in the first quarter, highlighting the Asian nation’s move to diversify away from American assets as trade tensions persist. Beijing offloaded a total of $53.3 billion of Treasuries and agency bonds combined in the first quarter… Belgium, often seen as a custodian of China’s holdings, disposed of $22 billion of Treasuries during the period. China’s investments in the US are garnering renewed investor attention amid signs that tensions between the world’s largest economies may worsen.”

May 15 – Reuters (Yuliia Dysa, Tom Balmforth and Sergiy Karazy): “U.S. officials flagged concerns over China's ‘misuse’ of artificial intelligence in their first formal bilateral talks on the issue, the White House said…, as the superpowers seek to avoid confrontation over the fast-developing technology… ‘The United States also raised concerns over the misuse of AI, including by (the People's Republic of China),’ White House National Security Council spokesperson Adrienne Watson added. Worries are mounting among U.S. officials about China's access to AI technology, amid fears that it could be used by Beijing to upend elections in other countries, create bioweapons and launch cyberattacks.”

Inflation Watch:

May 15 – CNBC (Jeff Cox): “Inflation eased slightly in April, providing at least a bit of relief for consumers while still holding above levels that would suggest a cut in interest rates is imminent. The consumer price index… increased 0.3% from March… That was slightly below the Dow Jones estimate for 0.4%. The consumer price index… increased 0.3% from March… That was slightly below the… estimate for 0.4%. On a 12-month basis, however, the CPI increased 3.4%, in line with expectations. Excluding food and energy, the key core inflation reading came in at 0.3% monthly and 3.6% on an annual basis, both as forecast.”

May 13 – Bloomberg (Alex Tanzi): “US consumer expectations for inflation and home prices rose in April while perceptions of the labor market weakened, underscoring an uneasy backdrop for household finances and the cost of living. Consumers expect prices will climb at an annual rate of 3.3% over the next year after hovering around 3% for the past four months, a Federal Reserve Bank of New York survey showed. That marked the highest reading since November. Anticipated home price growth rose at a similar pace — the fastest advance since July 2022.”

May 14 – CNBC (Jeff Cox): “Wholesale prices jumped more than expected in April, putting up another potential roadblock to interest rate cuts anytime soon. The producer price index… increased 0.5% for the month, higher than the 0.3%... estimate… Stripping out volatile food and energy prices, the core PPI also rose 0.5% compared with the 0.2%... estimate. Excluding trade services from that core group showed a 0.4% increase on the month and 3.1% on a 12-month basis, the highest level since April 2023.”

May 13 – Wall Street Journal (Ruth Simon): “Aluminum and cardboard keep getting more expensive. So do health insurance and wages. Small-business owners say these are just a few of the reasons they plan to raise prices again this year. ‘We have death by a thousand paper cuts,’ said Reid Baker, president of SuperGraphics, a commercial printer in Seattle. The 50-person firm routinely updates its software so that increases in the cost of materials can be incorporated into new estimates as quickly as possible. Management also has begun uncomfortable conversations with customers about boosting overhead and labor charges... ‘I almost feel like it’s a momentum thing in the marketplace,’ said Baker… ‘Someone else is doing it. I need to do it to keep up.’ The cost pressures squeezing small businesses—and their need to pass along those higher charges—help explain why inflation has been so stubborn.”

May 16 – Wall Street Journal (Melanie Evans): “One reason U.S. inflation is still high: Increases in prices for procedures to prop open clogged arteries, provide intensive care for newborns and biopsy breasts. Hospitals didn’t raise prices as early in the pandemic as supermarkets, retailers and restaurants. But they have been making up ground since then. Their increases have contributed to stubbornly high inflation readings… Hospital prices specifically jumped 7.7% last month from a year ago, the highest increase in any month since October 2010…”

May 16 – Bloomberg (Katherine Doherty): “Jamie Dimon said he’s still more worried about inflation than markets appear to be. The JPMorgan... chief executive officer said significant price pressures are still influencing the US economy and may mean interest rates will be higher for longer than many investors are expecting. Dimon cited costs linked to the green economy, re-militarization, infrastructure spending, trade disputes and large fiscal deficits. ‘There are a lot of inflationary forces in front of us,’ Dimon said… ‘The underlying inflation may not go away the way people expect it to.’”

Federal Reserve Watch:

May 14 – New York Times (Jeanna Smialek): “Jerome H. Powell, the Federal Reserve chair, reiterated… that policymakers were poised to hold interest rates steady at a high level as they waited for evidence that inflation is slowing further… Mr. Powell said officials had been surprised by recent inflation readings… ‘We did not expect this to be a smooth road, but these were higher than I think anybody expected… What that has told us is that we will need to be patient and let restrictive policy do its work’… The Fed chair made clear that further interest rates increases are not expected, though not impossible. He said that there was a ‘very small probability’ that the Fed would need to entertain lifting again…”

May 16 – Bloomberg (Laura Curtis and Alister Bull): “Federal Reserve Bank of New York President John Williams said the latest US inflation data confirm price pressures are gradually easing but he still needs more evidence to adjust interest rates. ‘I don’t see any indicators now telling me, oh, that there’s a reason to change the stance of monetary policy now, and I don’t expect that,’ Williams said… ‘I don’t expect to get that greater confidence that we need to see on the inflation progress towards a 2% goal in the very near term… ‘Monetary policy is restrictive. It is helping the economy get into better balance... Monetary policy is in a good place.’”

Biden Administration Watch:

May 14 – Reuters (Trevor Hunnicutt and Steve Holland): “U.S. President Joe Biden… unveiled steep tariff increases on an array of Chinese imports including electric vehicle (EV) batteries, computer chips and medical products, risking an election-year standoff with Beijing as he woos American voters who give his economic policies low marks. ‘American workers can out-work and out-compete anyone as long as the competition is fair, but for too long it hasn't been fair,’ Biden said… ‘We’re not going to let China flood our market.’”

May 14 – Wall Street Journal (Andrew Duehren and Andrew Restuccia): “One day after news broke that President Biden was planning to raise tariffs on Chinese electric vehicles to roughly 100%, Donald Trump moved to one-up his rival for the White House. ‘I will put a 200% tax on every car that comes in from those plants,’ the former president said at a rally…, referring to Chinese vehicles manufactured in Mexico. Biden, he suggested, was ripping off his tariff-focused trade agenda… The retort put on display a dynamic now at the heart of U.S. trade policy: The leaders of both political parties are racing each other to impose tough barriers on trade with China… Beyond raising tariffs on electric vehicles, the White House said Tuesday that Biden was increasing a key tariff rate on steel and aluminum products to 25% from 7.5%, while the tariff on solar cells would rise to 50% from 25%, and a new duty on shipping cranes would be 25%.”

May 14 – Bloomberg: “China blasted the Biden administration’s move to increase US tariffs on a wide range of Chinese imports, vowing to take its own action, without giving specifics. ‘China will take resolute measures to safeguard its own rights and interests,’ the Ministry of Commerce said... ‘The US should immediately correct its wrong actions and cancel the additional tariff measures against China.’”

U.S. Economic Bubble Watch:

May 16 – Associated Press (Matt Ott): “Fewer Americans applied for unemployment benefits last week as layoffs remain at historically low levels even as other signs that the labor market is cooling have surfaced. Jobless claims for the week ending May 11 fell by 10,000 to 222,000, down from 232,000 the week before… Last week’s applications were the most since the final week of August 2023, though it’s still a relatively low number of layoffs.”

May 14 – Reuters (Lucia Mutikani): “U.S. small-business confidence increased in April and the share of owners planning to raise prices was the smallest in a year, but persistent labor shortages continued to exert cost pressures for owners… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index rebounded 1.2 points to 89.7 last month. The index had slumped in March to the lowest level since December 2012… Twenty-two percent of owners reported that inflation was their single most important problem in operating their business, down 3 points from March. The share of businesses planning price hikes dropped 7 points to 26%, the smallest since April 2023.”

May 15 – The Hill (Aris Folley): “Credit card delinquencies are on the rise, as research from the New York Federal Reserve shows nearly a fifth of borrowers are ‘maxed-out’… Household debt rose by 1.1%, or $184 billion, in the first quarter of the year, bringing the total to $17.69 trillion… Almost half of borrowers ‘used less than 20% of their available credit in the first quarter,’ a breakdown of the report explained, compared to 18% of borrowers who used ‘at least 90% of their available credit.’ The latter group was dubbed ‘maxed-out borrowers.’ Prior to the coronavirus pandemic, the report found that less than a fourth of balances associated with those borrowers had gone delinquent per year. By comparison, last year saw roughly a third of the balances go delinquent.”

May 13 – New York Times (Ben Casselman and Jeanna Smialek): “High interest rates haven’t crashed the financial system, set off a wave of bankruptcies or caused the recession that many economists feared. But for millions of low- and moderate-income families, high rates are taking a toll. More Americans are falling behind on payments on credit card and auto loans, even as many are taking on more debt than ever before. Monthly interest expenses have soared since the Federal Reserve began raising interest rates two years ago. For families already strained by high prices, dwindling savings and slowing wage growth, increased borrowing costs are pushing them closer to the financial edge. ‘It’s crazy,’ said Ora Dorsey, a 43-year-old Army veteran in Clarksville, Tenn. ‘It does make it hard to get out of debt. It seems like you’re only paying the interest.’”

May 15 – CNBC (Diana Olick): “Mortgage rates last week dropped to the lowest level since April, but buyers are still struggling to afford today’s housing market…. Applications for a mortgage to purchase a home fell 2% for the week and were 14% lower than the year-earlier period. The drop was driven by a 9% decline in FHA applications. Those loans are favored by first-time or lower income buyers…”

May 11 – CNBC (Mike Winters): “Home prices are on the rise again after declining for the second half of 2023, with 93% of all major metro areas posting gains so far in 2024, a National Association of Realtors report reveals. Roughly one-third of the 223 major metro markets NAR examined had a double-digit price increase in the first three months of 2024. The surge in prices is largely due to pent-up demand for homes, says Lawrence Yun, NAR’s chief economist. ‘In the current market, rising prices are the direct result of insufficient housing supply not meeting the full demand,’ Yun says. Prices for existing single-family homes in the U.S. are up 5% year over year as of April, after decreasing by 2.86% year over year as of April 2023.”

May 15 – Reuters (Dan Burns): “U.S. homebuilder sentiment soured in May for the first time in six months as high interest rates on home loans kept potential customers on the sidelines and more builders had to offer incentives to lure buyers… The National Association of Home Builders/Wells Fargo Housing Market Index fell unexpectedly to 45 in May, the lowest since January, from 51 a month earlier… A quarter of builders reported cutting prices to help sales in May, snapping four months of declines, and the use of some form of buyer incentives rose to 59% from 57% in April. The average price cut was 6%.”

May 14 – Wall Street Journal (Will Parker): “Developers are building new houses for rent at an unprecedented rate, aiming to capitalize on the steep home prices and higher mortgage rates that are forcing many Americans to keep renting. In 2023, 93,000 new single-family homes for rent were completed, according to… John Burns Research and Consulting. That was 39% more rental homes than in 2022, and the most in any year ever. The breakneck pace is poised to continue this year before easing by 2025.”

May 11 – Wall Street Journal (Paul Kiernan): “For two decades, Jeremy Kimbrell and his co-workers at the Mercedes-Benz plant in Alabama could expect to hear the same thing when they raised concerns about pay, time off or working conditions: With no college degree, you should just be happy to have a job. Those days might be over. Roughly 5,000 hourly employees of the Tuscaloosa-area facility are set to vote starting Monday on whether to join the United Auto Workers. Just last month, 73% of employees who cast ballots at Volkswagen’s slightly smaller plant in Chattanooga, Tenn., opted to unionize, a first for a foreign-owned auto factory in the South.”

May 15 – Wall Street Journal (Anne Tergesen): “Retirees took more money out of their savings to keep up with rising prices, raising the risk of depleting their nest eggs. The rise in spending since 2021 shows how pernicious inflation can be for those in or near retirement…, according to a study Boston College… ‘High inflation later in life is often harmful to retirement security,’ said Laura Quinby, a senior research economist at Boston College’s Center for Retirement Research and co-author of the study.”

Fixed Income Watch:

May 13 – Bloomberg (Immanual John Milton and Charles Williams): “At least 10 issuers are marketing deals in the US auto asset-backed securities market… Vehicle makers like Honda Motor Co., Stellantis NV, Hyundai Motor Co. and Harley-Davidson Inc., as well as financial firms like Bank of America Corp. and Santander Bank, have brought around $9 billion of auto-backed ABS deals to kick off a busy start to the week… Sales of auto ABS debt have been high enough this year to spur at least one strategist to consider revising her firm’s forecast… On Friday, BofA Securities’ head of ABS Strategy, Theresa O’Neill, wrote that ‘it’s becoming increasingly likely’ the firm will need to revise up its full-year ABS sales forecast of $270 billion…”

May 13 – Bloomberg (Martin Z. Braun and Shruti Date Singh): “John Miller’s new high-yield municipal-bond fund has amassed $1 billion of assets in just under five months, drawing buyers eager to invest in the riskiest segment of state and local-government debt.”

China Watch:

May 13 – Financial Times (Cheng Leng): “Chinese authorities have kicked off plans to sell Rmb1tn ($140bn) of long-dated bonds, as Beijing raises spending to stimulate the economy… China’s government announced plans for the bond sale during the annual session of the country’s legislature in March, saying it would support investment in critical areas and reinforce economic momentum in the second quarter amid a lengthy property crisis. ‘The bond sale is a critical part of the concerted efforts to support significant, urgent and challenging projects that are essential for the modernisation of the economy,’ Liu Sushe, deputy head of the National Development and Reform Commission, said…”

May 13 – Reuters: “China’s finance ministry plans to start raising 1 trillion yuan ($138bn) in long-awaited, long-term special treasury bonds this week to raise funds it will use to stimulate key sectors of its flagging economy. The finance ministry confirmed what four sources had told Reuters earlier on Monday that the 1 trillion yuan ($138.23bn) of special government bonds would have tenors of 20 to 50 years and issuance will begin on May 17… China's Premier Li Qiang on Monday urged officials to make good use of the ultra-long special treasury bonds to support the implementation of major national strategies as well as building security capabilities in key areas, state media reported.”

May 12 – Bloomberg: “China’s shock credit contraction is adding pressure on the government to spend more money — and on the central bank to help. Last month’s decline in aggregate financing… was the first in almost two decades. With private borrowers and local authorities largely tapped out, the central government signaled Monday it’s ready to step in with a spending boost… The problem confronting the PBOC is one other central banks have faced in recent decades, sometimes called ‘pushing on a string.’ Essentially, it’s hard to spur more borrowing via lower rates when households or businesses have been hit by an asset-price slump and simply don’t want to take on debt.”

May 11 – Bloomberg: “China’s credit in April shrank for the first time as government bond sales slowed, while loan expansion was worse than expected in a sign of weak demand. Aggregate financing, a broad measure of credit, decreased by almost 200 billion yuan ($27.7bn) in April from the previous month… That’s the first time the measure has declined since comparable data began in 2017… Looking back further, using a smaller data set that excludes things like government funding, it was the first decrease since October 2005…”

May 12 – Reuters (Joe Cash): “China's consumer prices rose for a third straight month in April, while producer prices extended declines… The closely watched numbers follow better-than-expected imports data for April, suggesting a flurry of policy support measures over the past several months may be helping consumer confidence. Consumer prices edged up 0.3% in April from a year earlier… ‘Strip out food and energy prices, and the consumer inflation data suggests a comeback in demand, especially in services,’ said Xu Tianchen, senior economist at the Economist Intelligence Unit.”

May 13 – New York Times (Keith Bradsher): “China is taking the rare step of sharply increasing fares for riders on four major bullet train lines, in its broadest move to address rising costs and heavy debts since construction of the system began nearly two decades ago. The higher prices for train tickets are part of a push to raise prices for public services. Earlier this year, water and natural gas bills started going up in some cities. Public services in China are heavily subsidized by local governments. But huge municipal debts mean that these governments have less money on hand to keep prices down.”

May 15 – Reuters (Liangping Gao and Clare Jim): “A campaign by Chinese authorities to encourage people to replace their old apartments with new ones is attracting interest, but faces one major hurdle: the participants in the scheme are struggling to sell their current homes. Flagged at a key political meeting last month, the campaign is meant to help cities across China offload their growing stock of new apartments and provide crucial cash flow to ailing developers. As of May 6, more than 50 cities have launched their own versions of the ‘swap old for new’ scheme… But analysts, real estate agents and developers say buying interest in second-hand homes is very limited, casting doubt over the success of the campaign and suggesting the property sector downturn in China has further to run.”

May 13 – Wall Street Journal (Jiahui Huang): “Two more Chinese cities have unveiled plans to buy up unsold, unfinished or old housing, coming as Beijing shifts its focus to absorbing excess apartment supply as a way to resolve the country’s ongoing property crisis. Nanjing… said it would help renovate or buy housing inventories and turn them into public housing. Foshan… said it would encourage local state-owned enterprises to buy up and complete unfinished housing projects, and to participate in a trade-in program by buying old apartments and turning them into public housing.”

May 14 – Reuters (Clare Jim and Xie Yu): “When China's local governments began compiling a ‘whitelist’ of housing projects for loans earlier this year, troubled developers hoped it would open a spigot of credit for a sector that remains a major stumbling block to a broad economic revival. Four months later, new funding is only coming by the drip, reflecting the deep-seated caution about the outlook for China’s residential property market, according to Reuters interviews with bankers and developers.”

May 13 – Bloomberg: “Two of China’s biggest state banks will sell a combined 60 billion yuan ($8.3bn) of total loss-absorbing capacity bonds starting this week, the first such debt sales by Chinese lenders in a drive to replenish capital and support growth of the world’s No. 2 economy. Industrial & Commercial Bank of China Ltd. is planning to sell 30 billion yuan TLAC bonds in two tranches during May 15-17… Bank of China Ltd. disclosed its issuance plan of the same amount, to be sold on May 16-20…”

May 16 – Reuters (Clare Jim): “Shares of Chinese property developers rallied on Thursday after a report that China was considering a plan for local governments across the country to buy millions of unsold homes from distressed companies to ease a protracted property crisis. Hong Kong's Hang Seng Mainland Properties Index closed up 4.9% to the highest since Nov 24. The sub-index has gained around 30% since mid-April, when the market started speculation that more supportive measures would be rolled out to stabilize the ailing sector after months of disappointing home sales.”

May 12 – Bloomberg: “A series of research reports from Chinese brokerages on the country’s recent bad credit data disappeared from social media over the weekend, highlighting the increasing difficulty of getting reliable information about the world’s second-largest economy… China has increasingly hidden negative data over the past few years, making it harder for investors to accurately judge what is happening in the economy. The nation’s exchanges are set to switch off a live feed of foreign money flows into stocks as early as Monday…”

May 17 – Bloomberg (Kamran Haider): “Pakistan’s government may seek a five-year extension in repaying $15.4 billion in debt to Chinese-controlled independent power producers in the South Asian country as part of Prime Minister Shehbaz Sharif’s push to reduce energy costs, according to a report.”

Central Bank Watch:

May 16 – Bloomberg (Alexander Weber and Mark Schroers): “Geopolitical tensions and a raft of elections around the world are heightening the risk that investors will be jolted by negative surprises and endanger financial stability, the European Central Bank warned. ‘The scope for adverse economic and financial surprises is elevated, and the risk outlook for euro-area financial stability remains fragile accordingly,’ ECB Vice President Luis de Guindos said... ‘Sentiment can change rapidly, not least given the geopolitical environment and pricing-for-perfection which creates the potential for large market reactions to disappointing news.’”

Global Watch:

May 15 – Reuters (Matt Tracy): “Global corporate debt defaults more than doubled in April from March to their highest monthly tally since October 2020, according to a report from S&P Global Ratings. April saw 18 defaults globally, led by the 10 U.S. defaults worth $7.1 billion, according to the S&P report… ‘Looming maturities, strained operations, and elevated refinancing costs were among the main reasons for the increase in bankruptcies,’ the report said. In the U.S., 56% of April's total publicly rated defaults came from bankruptcies, while the remainder came from distressed exchanges.”

Europe Watch:

May 15 – Bloomberg (Craig Stirling and Alessandra Migliaccio): “Italy now faces a widening deficit and a jump in debt next year, according to European Union forecasts that conflict markedly with the rosier outlook of Premier Giorgia Meloni’s government. A shortfall of 4.7% for 2025 projected by the European Commission… would be one percentage point larger than that seen by the Treasury… Brussels officials predict that debt will surge by three percentage points in that time to reach a four-year high, also notably worse than the outcome foreseen in Rome.”

May 13 – Bloomberg (Alexander Weber and Mark Schroers): “Robust early-year wage growth for euro-area workers will do little to calm the nerves of European Central Bank officials pondering how much they can lower interest rates. Data from the bloc’s largest economies suggest increases in negotiated pay failed to slow significantly in the first quarter. The danger is that companies pass rising costs on to consumers, keeping inflation above 2% for longer. A key culprit is Germany, where past deals… have driven salaries sharply higher. Policymakers are unlikely to be sufficiently consoled by evidence of moderation elsewhere in the region.”

Japan Watch:

May 13 – Bloomberg (Erica Yokoyama): “Japanese Minister of Finance Shunichi Suzuki stressed the importance of coordination and collaboration between the government and the Bank of Japan to ensure they don’t hinder each other in pursuing their policy objectives. ‘It’s important to maintain close policy coordination so as not to hinder the implementation of other policies and reduce the overall effectiveness of policy making,’ Suzuki said… Suzuki’s remarks came amid mounting speculation in the market that the weak yen may prompt the BOJ to bring forward its next interest rate hike after authorities conducted the bank’s first increase in 17 years in March.”

May 12 – Reuters (Makiko Yamazaki and Yoshifumi Takemoto): “Japan is seeing conditions fall in place for the central bank to normalise monetary policy, ruling party heavyweight Katsunobu Kato told Reuters, underscoring growing political support for further interest rate hikes. But Kato said the Bank of Japan (BOJ) must keep a close eye on economic conditions and coordinate carefully with the government in working out when to raise rates. ‘Japan is shifting to an era where prices and wages rise, from one where both barely moved,’ said Kato, a former chief cabinet secretary and a ruling party veteran seen by some analysts as a candidate to become future prime minister.”

May 15 – Reuters (Satoshi Sugiyama and Tetsushi Kajimoto): “Japan's economy fell faster than expected in the first quarter as the weak yen continued to batter consumers, throwing a fresh challenge to the central bank's push to get interest rates further away from near zero. Preliminary gross domestic product (GDP) data… showed Japan's economy shrank 2.0% annualised in January-March from the prior quarter, faster than the 1.5% drop seen in a Reuters poll of economists.”

Emerging Market Watch:

May 14 – Reuters (Jorge Otaola and Walter Bianchi): “Argentina's central bank cut the benchmark interest rate on Tuesday after inflation slowed for the fourth straight month and the annual rate crested just shy of 300% amid a tough austerity drive by libertarian President Javier Milei. The central bank said… it had cut the overnight rate to 40% from 50% previously, the fifth major cut since brash economist Milei took office in December when the central bank changed the benchmark instrument.”

May 16 – Bloomberg (Luana Maria Benedito, Marcela Ayres and Isabel Versiani): “Brazil's Finance Ministry… hiked its projection for economic growth this year but also raised inflation estimates for 2024 and 2025, underlining price impacts from recent floods in Rio Grande do Sul state. A finance ministry official also said the government is now expecting fewer interest rate cuts and a higher terminal interest rate at the end of the ongoing easing cycle. Gross domestic product in Latin America's largest economy is now expected to grow by 2.5% in 2024, up from the 2.2% forecast in March…”

Leveraged Speculation Watch:

May 15 – Reuters (Carolina Mandl and David Randall): “Hedge fund Renaissance Technologies added a new long position in GameStop and significantly increased its position in AMC Entertainment during the first quarter, putting it in position to benefit from the meme stock mania sweeping through the U.S. equity market this week. Renaissance added 1,004,958 shares of videogame retailer GameStop during the quarter…”

May 15 – Financial Times (Kate Duguid): “Ray Dalio, the billionaire founder of hedge fund giant Bridgewater Associates, has warned that the US government’s rising debt levels could hit Treasury bonds, arguing that investors should move some of their money to foreign markets… Dalio described his wide-ranging concerns about the US, including its debt load, the risk of what he calls a ‘civil war’ and the potential for the country to become involved in another international conflict, which he warned could deter foreign investors from buying US bonds. ‘I am… concerned about Treasury bonds because of the high debt levels, which high interest rates are adding to,’ he said.”

Social, Political, Environmental, Cybersecurity Instability Watch:

May 17 – Bloomberg (Brian K. Sullivan and Dan Murtaugh): “The worst windstorm in Houston in 40 years killed at least four people, left more than 800,000 customers without power and grounded hundreds of flights across Texas. Wind gusts reached at least 78 miles per hour through the Houston metro area Thursday. The fourth-most populous US city hasn’t seen damage like this since Hurricane Alicia in 1983, said Hayley Adams, a National Weather Service meteorologist. It was the worst straight-line wind event to hit Houston since May 1983 as well, she said.”

May 15 – Bloomberg (Naureen S. Malik): “Texas is facing a potential electricity emergency this weekend, the fourth time in the past month the state’s grid operator has issued such a warning… Ercot currently expects to have as much as 62.7 gigawatts of power available when supplies are expected to be tightest Friday evening, about 6.3 gigawatts more than projected demand.”

May 14 – Axios (Rebecca Falconer): “Officials in western Canada warned of ‘volatile wildfire activity,’ as dozens of blazes burn in dry conditions across the country, forcing thousands to evacuate and triggering air quality alerts in several U.S. states this week. By the numbers: Most of the 134 blazes burning in the first major wildfires since Canada's record season that finally abated in October were in British Columbia (47) and Alberta (45) as of Tuesday evening, per the Canadian Interagency Forest Fire Centre.”

May 14 – Reuters (Gloria Dickie): “The intense northern hemisphere summer heat that drove wildfires across the Mediterranean, buckled roads in Texas and strained power grids in China last year made it not just the warmest summer on record - but the warmest in some 2,000 years, new research suggests. The stark finding, comes from one of two new studies released on Tuesday, as both global temperatures and climate-warming emissions continue to climb.”

May 14 – Reuters (Lisandra Paraguassu): “Devastating and ongoing flooding in southern Brazil is forcing some of the half million displaced residents to consider uprooting their lives from inundated towns to rebuild on higher ground… With hundreds of thousands of families fleeing the floods, the disaster - which has killed at least 147 people, with 127 still missing - could touch off one of Brazil's biggest cases of climate migration in recent history.”

Geopolitical Watch:

May 11 – Reuters (Karen Lema): “The Philippines said… it has deployed ships to a disputed area in the South China Sea, where it accused China of building ‘an artificial island’ in an escalating maritime row. The coast guard sent a ship ‘to monitor the supposed illegal activities of China, creating 'an artificial island',’ the office of President Ferdinand Marcos Jr said…, adding two other vessels were in rotational deployment in the area.”

May 11 – Bloomberg (Piotr Bujnicki): “Poland plans to bolster security along its eastern borders amid threats from Belarus and Russia, Prime Minister Donald Tusk said… ‘We have begun intensive work on a modern fortification along the entire Polish border from the east,’ he told soldiers and border guard personnel… The visit comes after a Polish judge recently defected to Belarus and asked the country’s leader Alexander Lukashenko for political asylum. Tusk has called for a parliamentary probe into potential Russian and Belarusian interference in Polish politics.”