Friday trading was noteworthy. Ten-year Treasury yields rose to 4.31% just ahead of the release of October Non-Farm Payrolls data. Then, yields quickly sank to 4.22% following the much weaker-than-expected 12,000 jobs added. But yields then reversed and did a bear market 16 bps grind higher throughout the day, to close the session at the highest yield since July 1st.
It’s tempting to just write off poor Treasuries performance to pre-election positioning. But there’s clearly much more to current market dynamics than election uncertainty. For one, it’s global. Looks important. Vigilantes Mobilizing.
October 30 – Bloomberg (Joe Mayes, Alex Wickham and Ellen Milligan): “Chancellor of the Exchequer Rachel Reeves unveiled £40 billion ($51.9bn) of tax rises and ramped up borrowing, a dramatic move to meet Labour’s pledge to ‘rebuild’ the UK that still risks disappointing voters. Reeves put the tax burden on course for a postwar high with hikes impacting businesses and the wealthy in particular, pointing the finger at her Conservative predecessor for leaving a fiscal black hole she said had undermined Labour’s plans.”
UK 10-year gilt yields surged a notable 21 bps this week to a one-year high of 4.45% - after trading Thursday to an intraday high of 4.53%. Gilt yields have surged 91 bps so far this year, with yields now above October 2022 crisis highs. UK two-year yields spiked 33 bps in seven sessions, to a five-month high of 4.43%.
Other debt and deficit problem children didn’t fare that much better. Italian yields jumped 17 bps to 3.68%, with Greek yields up 14 bps to 3.31%. French yields rose 12 bps to an almost four-month high 3.16%.
The emerging markets are certainly not without their own issues. Local currency yields were up almost across the board this week. Turkish 10-year yields surged 32 bps this week to 28.46%. Yields jumped 30 bps in Brazil to a 19-month high of 12.98%, 14 bps in Mexico to an almost five-month high of 10.20%, and 17 bps in Peru to a three-month high of 6.79%. Yields were 18 bps higher in Poland to a one-year high of 5.93% - with a one-month yield spike of 70 bps.
Interestingly, dollar-denominated EM bonds were not spared. Yields surged 31 bps this week in Panama (4-month high 7.03%), 31 bps in Colombia (5-mn high 7.65%), 23 bps in Mexico (1-yr high 6.29%), 15 bps in Brazil (3-mn high 6.30%), 12 bps in Chile (3-mn high 5.08%), and 10 bps in Peru (4-mn high 5.47%). From September lows, yields have spiked 107 bps in Panama, 90 bps in Colombia, 81 bps in Mexico, 67 bps in Peru, 65 bps in Chile, and 62 bps in Brazil.
Key EM currencies were under pressure this week. The Brazilian real declined 2.77%, the Colombian peso 2.44%, the Mexican peso 1.47%, and the Chilean peso 1.45%. The Brazilian real, down 17.26% y-t-d versus the dollar, closed the week right at the record low from pandemic crisis May 2020. Down 16.33% y-t-d, the Mexican peso finished the week at the lowest level since September 2022.
Might the weakness in key EM bonds and currencies be associated with ongoing yen “carry trade” deleveraging? The August yen “carry trade” blowup was quickly followed by a dovish Powell in Jackson Hole, and then in September by a 50 bps Fed cut. It’s likely that expectations of an aggressive Federal Reserve easing cycle initially mitigated yen “carry trade” unwind selling pressure. But with Treasury yields reversing sharply higher in October and the market scaling back Fed rate cut expectations, it appears deleveraging has gained momentum.
Global bond markets trade as if deleveraging has taken hold. Back in early August, pressure on both the yen “carry trade” and AI/tech Bubbles risked a more systemic de-risking/deleveraging. It’s worth noting that the Semiconductor Index (SOX) dropped 4.1% this week, trading Thursday at a six-week low. Micron Technology was down 7.6% this week, with Advanced Micro Devices sinking 9.2%. Nvidia fell 4.3%, Microsoft 4.2%, Apple 3.7%, and Qualcomm 2.9%.
November 1 – Financial Times (Richard Waters and Tim Bradshaw): “Big Tech’s capital spending is on track to surpass $200bn this year and rise even further in 2025, as anxiety grows on Wall Street about the returns on soaring investment in artificial intelligence. The four biggest US internet groups — Microsoft, Meta, Amazon and Google’s parent Alphabet — this week offered investors brief glimpses into the benefits they are seeing from their headlong rush into generative AI, arguing that it was boosting the performance of core services and helping to hold down operating costs... Capital expenditure at the four biggest hyperscalers grew more than 62% on the year before, to about $60bn during the quarter… Meta and Amazon were among those to point to further increases in spending next year.”
The manic AI/tech Bubble is today acutely vulnerable to any tightening of financial conditions. And while the Treasury market has been under pressure, so far there has been little to indicate deleveraging and associated waning liquidity in the broader U.S. debt market. Investment-grade and high yield spreads (to Treasuries) remain near multi-year lows (high yield spreads narrowed this week). Corporate debt issuance, leveraged lending, and “private Credit” all remain overheated.
Emerging Market CDS prices increased three this week to 170 bps – near highs since mid-August. At this point, it has the feel of rising global yields and nascent de-leveraging beginning to pressure the “periphery.” From the “periphery and core” analytical framework, we could expect some initial boost to the “core” (U.S. Credit market) from risk-aversion at the “periphery.” But make no mistake, the “core” is today extraordinarily vulnerable. Loose conditions and overheated Credit are stoking economic overheating risks. And there’s also the issue of elections on Tuesday. One way or the other, massive deficits as far as the eye can see. And when things start to go awry, there’s certainly plenty of speculative leverage to cause systemic grief.
November 1 – Bloomberg Intelligence (Brian Meehan): “Leveraged net shorts of Treasury futures surged to historic levels yet again to $1.15 trillion, a jump of almost 50% this year, as hedge funds pile into the basis trade. While repo funding markets have been steady, the massively leveraged trade is larger by $707 billion, or 160%, than at the March 2020 seizure – meaning the Fed would likely need to bail out traders again to unwind those positions at the same time.”
Below are excerpts from my presentation for the McAlvany Wealth Management Tactical Short Q3 recap conference call:
We live today in a world of seemingly stark inconsistencies – confounding incongruence. Record stock prices, unprecedented household wealth, and incredible technological innovation. At the same time, society is resentful, deeply divided, and insecure.
Meanwhile, the geopolitical environment is extremely alarming. In its third year, the war in Ukraine has turned increasingly dangerous. Ukraine occupies a small Russian enclave, while expanding drone attacks across Russia. The West is considering allowing Ukraine to use its weapons to strike deep into Russia, as Putin uses revisions to Russia’s nuclear doctrine as a direct threat to the U.S. Russia has been firing North Korean missiles, and now Kim Jong-Un has sent thousands of troops to fight for Putin.
The conflict in Gaza has now engulfed Lebanon – and risks consuming the entire Middle East. In alarming escalation, Israel and Iran have been in tit-for-tat missile strike retaliation.
And a couple weeks back, China’s military encircled Taiwan, stating openly that it was war gaming for a blockade scenario. Just this week, Beijing threatened to retaliate if U.S. arms shipments to Taiwan continue. It’s only a matter of time until China moves to fulfill its often-stated top priority – the reunification of Taiwan with the Chinese motherland.
It is commonly viewed as the most dangerous geopolitical backdrop since World War II. Yet stocks are at all-time highs, and market optimism remains at extremes. And incredible innovation indeed underpins the AI/technology mania and scientific advancement. What gives?
From my analytical framework, these incongruencies have a common thread: They’re all consistent with late-cycle dynamics – an incredible endgame for a historic multi-decade super cycle.
During last quarter’s call, I discussed the parallels between the current environment and the “Roaring Twenties.” Both periods were remarkable for a confluence of monumental technological advancement, financial innovation, credit and speculative excess, and catastrophic boom and bust dynamics. The wedding of late-cycle financial excess and momentous technological advancement pushed the cycle to fateful extremes – even as mounting financial, economic, and geopolitical risks had turned conspicuous.
When reading the history of the late-twenties, one ponders how it was possible for bullish stock speculators to disregard so much – egregious excess, profound social change, inequality and cultural angst here in the U.S.; post-hyperinflation economic, social and political turmoil in Germany; the rise of authoritarianism and fascism in Europe; post-revolution instability and the rise of communism in Russia; social and political tumult in Latin America and the Middle East; civil war in China – for starters.
Like today, wild speculative excess and mounting social, political, and geopolitical turmoil were not coincidental – they were instead tragically interconnected late-cycle phenomena.
I want to again highlight a theoretical framework that helps bring some clarity to today’s confounding backdrop. Bubbles are mechanisms of wealth redistribution and destruction – with detrimental consequences for social and geopolitical stability. Boom periods engender perceptions of an expanding global pie. Cooperation, integration, and alliances are viewed as mutually beneficial. But late in the cycle, perceptions shift. Many see the pie stagnant or shrinking. A zero-sum game mentality dominates. Insecurity, animosity, disintegration, fraught alliances, and conflict take hold.
It bears repeating: Things turn crazy at the end of cycles. Years and even decades of credit expansion, speculative bubbles, and government-led bailouts conspire for parabolic “blow off” surges in risky late-cycle credit inflations and market manias. Meanwhile, years of destabilizing price inflation and increasingly conspicuous wealth redistribution push societies and nations to the breaking point. These dynamics foment complex late-cycle dynamics – highlighted by manic speculative blowoffs concurrent with rapid degradation in both the social fabric and existing world order.
Late-cycle bubbles exhibit peculiar behavior. As we’ve witnessed, once bubbles have inflated to precarious extremes, confidence in the marketplace only solidifies that central banks and governments will act early and forcefully to thwart crisis dynamics. Such a posture foments instability and volatility, as market sentiment pivots from alarm over bursting bubble risk to manic affirmation that inflating markets enjoy a foolproof backstop.
This is precisely the dynamic witnessed in August. On the 5th, at intraday trading lows, the S&P500 was down 4.3%, the Nasdaq100 5.5%, and the KBW Bank Index 5.0%. The VIX equities volatility index spiked above 60 for the first time since the 2020 pandemic crisis. Japan’s Nikkei 225 stock index that day sank 12.4%, capping a three-session collapse of almost 20%. South Korea’s Kospi Index dropped 9%, as intense de-risking erupted across markets globally. Bitcoin was down almost 14% intraday.
I believe we’ll look back on that erratic market session as portending trouble ahead – a warning of mounting bubble fragility. In particular, August 5th exposed acute vulnerability for two historic bubbles – the yen “carry trade” and AI/tech bubbles.
This past March, the Bank of Japan raised its policy rate to 10 bps, ending a seven-year experiment with negative rates. Japanese rates had not been above 10 bps since 2008 – and hadn’t surpassed 50 bps all the way back to 1995. Literally for decades, artificially low rates have incentivized borrowing cheap in Japan for leveraged “carry trade” speculations in higher-yielding instruments across the globe. Between speculative leverage and Japanese institutional and retail flows, trillions have flowed freely from Japan. An abrupt reversal of this torrent would be highly destabilizing across the world of finance.
With domestic inflation and imbalances having pushed the BOJ to commence policy normalization, currency markets were understandably on edge. The dollar/yen spiked to a multi-decade high of 162 on July 10th, before reversing sharply lower. Over the next four weeks, the yen would rally 12%, with the dollar/yen trading at an intraday low below 142 on August 5th. A disorderly unwind of yen “carry trade” leverage spurred intense market instability and fears of broadening de-risking/deleveraging.
From last November lows to July highs, the Semiconductor Index surged 86%, and the Nasdaq100 rose 45%. Nothing short of a historic mania and speculative melt-up took hold, led by AI, the semiconductor companies, and the “magnificent seven” tech behemoths – and later to widen throughout tech, the financials and utilities, along with the broader market. We can assume enormous speculative leverage has accumulated – margin debt, hedge fund leverage and, importantly, embedded leverage in derivatives.
At August 5th lows, the Semiconductor Index and Nasdaq100 had sunk 28% and 15% from July highs. With the unwinding of yen “carry trade” and technology stock speculative leverage, markets were at the cusp of a systemic de-risking/deleveraging event. This explains the VIX Index’s spike to multi-year highs.
Wall Street was close to panicking on that fifth day of August. According to the narrative at the time, the economy was in trouble – and after waiting too long, the Federal Reserve must now respond forcefully. Cries immediately rang out for the Fed to aggressively slash rates, with some even pleading for an emergency inter-meeting cut.
Market relief was provided by timely comments from the Bank of Japan’s influential deputy governor Shinichi Uchida, who said: “We won’t raise interest rates when financial markets are unstable.” Japan’s Nikkei Index rallied 10% on August 6th, as global markets quickly stabilized.
A couple weeks later, from dovish Chair Powell at Jackson Hole, markets received the news they had clamored for: “The time has come for policy to adjust. The direction of travel is clear…” And in September, the Fed slashed rates 50 bps.
Policymakers responded exactly as speculative markets assumed. Especially in a backdrop of acute fragility, markets count on central banks to respond swiftly and forcefully to nascent instability. And this key dynamic underpins extreme risk-embracement and other late-cycle speculative excess, in the process extending the lives of historic bubbles.
Repeated interventions and bailouts over the course of the cycle alter market perceptions, structure, and function. Over time, markets turn increasingly dysfunctional – with mounting excess and imbalances promising only more policy stimulus. Risks can be ignored. Market dynamics become increasingly preoccupied with chasing trading opportunities from recurring short squeezes and the unwind of bearish hedges. And as this speculative market dynamic is rewarded by Federal Reserve behavior, it only grows in dominance.
After trading at 4.60% in late May, 10-year Treasury yields fell to a 15-month low of 3.62% in the session before the Fed’s September meeting. The S&P500 enjoyed a y-t-d return of 20%, with the Broker/Dealer Index returning 24%. Most market risk premiums traded to the lowest levels since the Fed commenced its rate-hiking cycle. In short, the Fed aggressively eased monetary policy, with financial conditions exceptionally loose.
Sustaining bubbles is risky business – with systemic risk rising exponentially late in the cycle. The S&P500 recovered to trade to new record highs in September, as bullish exuberance reached extremes. A record $500 billion flowed into ETFs during the quarter. There was a record $600 billion of global debt issuance in September, with U.S. investment-grade bond sales surging to a record $171 billion. Another $128 billion of leveraged loan deals were launched – the first time to surpass $100 billion. With two months to go, asset-backed securities have already posted the strongest annual sales since the mortgage finance bubble. Sales of collateralized loan obligations have also boomed. “Feeding frenzy” is an apt description of happenings in the bubbling “private-credit” universe – in what is essentially corporate America’s subprime boom.
A key risk premium, corporate investment-grade spreads-to-Treasuries, recently traded to the lowest level since 2005. That period, at the heart of the mortgage finance bubble era, was similarly notable for liquidity abundance-fueled excess.
I want to stress an important point: You just don’t see this degree of inflationary market excess without some underlying monetary dislocation. I’ll highlight that money market fund assets surged $360 billion during the quarter, or 23% annualized. Money fund assets have inflated $1.9 TN, or 42%, just since the Fed began its “tightening cycle” in March 2022 - and an incredible $2.9 TN, or 79%, since the start of the pandemic. And this historic monetary inflation runs unabated. Money fund assets have inflated $374 billion, or 26% annualized, over the past 12 weeks.
I believe a surge in money market liquidity emanates from the “repo” market’s funding of leveraged speculation. I have written about this dynamic - and discussed it recently at the McAlvany Wealth Management client conference.
This is epic monetary inflation flowing chiefly from the expansion of speculative credit in the money markets – short-term “repo” market funding of levered Treasury “basis trades” and more general fixed-income “carry trade” leverage. I liken the expansion of money market deposits to fractional reserve banking and the bank “deposit multiplier” – but without reserve requirement constraints. In the late-nineties, I referred to this dynamic as an “infinite multiplier” – I just never imagined the “repo” market and money fund deposits would inflate to surpass $6.5 TN.
I closely monitored this dynamic during the late-nineties bubble period, and then again throughout the mortgage finance bubble. But excesses during today’s most protracted global government finance bubble have reached an entirely new level – in scope and duration, along with deeply corrosive effects on market, financial and economic structures. The only period of comparable excess and maladjustment would be the fateful “Roaring Twenties” bubble experience.
It’s more important today than ever to recognize that policymaker interventions – especially here so late in the cycle – spur only more destabilizing excess – speculation and leverage, high-risk lending, and resulting deeper financial, economic, and social maladjustment. There’s just no escaping this harsh bubble reality. And it’s reached the point where consequences include historic market and AI manias, perpetual fiscal deficits in the $2 TN range, a trillion-dollar plus highly levered “basis trade,” incendiary social angst, and geopolitical turmoil. Nothing good comes from extending “terminal phase excess.”
And it’s all consistent with the endgame for a historic multi-decade super-cycle - only too fitting that the greatest bubble in human history concludes with a prolonged period of the craziest excess and wildest instability. After all, policymakers around the world are doing whatever they think it takes to hold bubble collapses at bay. Japan continues to defer policy normalization. An increasingly desperate Beijing has succumbed to “whatever it takes” reflationary measures. The Fed ignores precariously loose conditions and speculative bubbles. The ECB aggressively slashes rates. Meanwhile, all these measures promote late-cycle “terminal phase” parabolic debt growth – government and private sector, along with a fateful deluge of speculative financial credit.
“How will this all end?” I wish I knew. There are ample potential catalysts. Normally functioning markets would have brought such egregious excess to a conclusion years ago. But even irrepressible bubbles eventually succumb. Markets have been afflicted with the “frog in the pot” syndrome when it comes to geopolitical risks. Does the Middle East erupt into a more globalized conflict? Could the Ukraine war escalate into a nuclear crisis? What’s North Korea up to? Is China preparing to tighten the noose on Taiwan – and how would the U.S. respond?
The new and formidable “axis of evil” – China, Russia, North Korea, and Iran – is determined to capsize the U.S.-led global order. I fear we’ve entered a highly unstable period of unending conflict and crises.
Yet markets have remained comfortable disregarding mounting geopolitical risk. This extraordinary complacency has a clear source: Federal Reserve and global central bank market backstops. But we’re now seeing a dangerous escalation of geopolitical risk, concurrent with unappreciated issues with policymaker backstops.
Ten-year Treasury yields surged 52 bps this month. Yields on benchmark MBS securities are up 82 bps. At yesterday’s record price, gold was up $140, or 5.3%, for the month to $2,775, while silver was up 10% to $34.45. The Atlanta Fed GDPNow forecast of current growth has increased to 3.4% - and yesterday we learned that Q3 personal consumption jumped to 3.7%.
Overheating risks are increasing. And especially with China’s newfound determination to reflate, the likelihood of upside inflation surprises increases. Market complacency also applies to inflation risk.
For starters, our federal government ran a $1.8 TN deficit last year, or almost 7% of GDP. Whether it’s a Trump or Harris administration, most analysts believe the deficit only grows from here. There are reasonable scenarios where it spirals out of control. Legendary hedge fund operator Paul Tudor Jones last week stated the issue concisely: “We are going to be broke really quickly unless we get serious about dealing with our spending issues.” I was reminded of Ernest Hemingway’s two paths to bankruptcy: gradually and suddenly.
I believe inflationary psychology throughout the economy has become more deeply rooted than Wall Street and the Fed are willing to admit. At a 4.1% unemployment rate, labor markets remain tight. Labor unions are emboldened, as again confirmed by Boeing’s spurned offer of a 35% pay hike to end its strike. Companies have learned they can pass along higher costs.
Meanwhile, I believe climate change will present growing inflationary risks. We’ve already experienced rising food costs, along with incredible inflation in various types of insurance. And we saw just weeks back the scope of destruction wrought from back-to-back hurricanes Helene and Milton. There will be considerable spending on clean-up and rebuilding, economic stimulus that underpins the forces of inflation. There will also be greater spending on emergency preparation, as large swaths of the country face growing exposures to extreme weather events.
Over the past two years, U.S. and global inflationary pressures have been somewhat mitigated by disinflationary forces out of China. With the ongoing deflation of China’s historic apartment bubble, stimulus measures were buckets dumped into an ocean. But this summer, bubble deflation entered a dangerous acceleration phase. A crisis of confidence was taking hold.
Xi Jinping has hit the reflation panic button: hundreds of billions for the stock market, hundreds more for the deeply troubled local government sector, many hundreds to try to stabilize apartment markets. What’s more, Beijing has essentially promised to spend whatever it takes to reach growth targets. A Reuters article this week placed Beijing’s stimulus at $1.4 TN. This is for a system locked in massive credit expansion – upwards of $5 TN annually.
Considering the powerful forces of bubble deflation, I appreciate the view that even the grand scope of the latest stimulus barrage won’t be enough to turn the tide. But this is almost beside the point. I expect Xi Jinping to throw everything at a now open-ended reflation effort. He’s highly motivated. Collapse would be blamed on him and his communist party, while Xi’s global superpower ambitions would crumble right along with China’s global financial and economic standings.
Xi made telling comments last week when meeting with Putin. He said: “At present, the world is going through changes unseen in a hundred years, the international situation is intertwined with chaos.” A deluded Xi Jinping will view mammoth reflationary efforts as fundamental to ensuring chaos doesn’t engulf China. And mounting domestic risks, I fear, raise the odds of Beijing diverting attention with the hastening of Taiwan reunification efforts.
We see the geopolitical backdrop underpinning price pressures for many things. There are already added costs for shipping that avoids the Red Sea, while Russia has been sinking grain ships in the Black Sea – as examples. An upsurge in trade protectionism and tariffs would impact pricing, availability, and supply chains for key goods and resources. We expect the acceleration of de-globalization to come with heightened inflation risks.
While the risk of another inflationary spike is not remote, I’m focused on the potential for a more moderate uptick in inflation that would put the Federal Reserve on its heels. Importantly, mounting bond market deficit and supply concerns intensify if the Fed is forced to put its easing cycle on ice.
I believe global bond markets have finally begun to wake up to the problem. Recall that bond deleveraging and a spike in yields brought down UK Prime Minister Liz Truss and forced belt tightening in October 2022. UK yields surged another 18 bps last week and another 26 this week to trade to 4.50% today, surpassing the 2022 crisis peak. More recently, markets nervously eye French politics and looming budget battles. French yield spreads to German bunds recently touched the widest levels since the 2012 European bond crisis. Italian spreads widened to 2021 levels. And Japanese JGB yields are back to 1%, near 13-year highs.
From my analytical perspective, the highly levered Treasury market today poses a major risk to global market stability. The “basis trade” is said to easily surpass $1 TN, and I suspect this is only a segment of speculative leverage that permeates the entire U.S. credit market – Treasuries, corporate bonds, muni bonds, MBS, ABS, private credit, leveraged loans, structured finance, and derivatives.
Let’s return to the VIX Index’s August 5th spike to 60. De-risking/deleveraging today creates a momentous risk. There are scores of bubbles globally, interconnected across markets and between nations and regions. In early August, the unwind of “yen carry” leverage pressured the AI/tech Bubble. These two faltering bubbles were at the cusp of triggering a systemic de-risking/deleveraging dynamic. Importantly, a more systemic deleveraging would spawn market liquidity issues, widening risk premiums, and general pressure on Credit market leverage – the extremely levered “basis trade” in particular.
I’ll reiterate the endgame thesis. Sure, central bankers could again bail out speculative markets. But all that would accomplish is another wave of speculative excess and more problematic leverage. And keep in mind that once markets succumb to late-cycle manic excess, prolonging the bubble comes at a steep cost. Crazy turns only crazier. The tech mania has inflated to the point where trillions are to be spent on data centers, semiconductor fab plants, energy infrastructure, old decommissioned nuclear reactors, and all things AI. Meanwhile, the proliferation of uneconomic businesses runs unabated. Corporate and consumer debt growth runs unabated. Washington deficit spending – unabated. A large and expanding swath of the U.S. bubble economy – certainly including the AI mania – is addicted to loose conditions.
The Fed concluded its so-called “tightening cycle” without financial conditions actually tightening. This only raised the odds that it will be market de-risking/deleveraging that unleashes highly destabilizing tightening dynamics.
These days, I worry mightily about economic structure and the vulnerability to market dislocation, deleveraging, tighter conditions, and illiquidity. Years of loose finance, credit excess and bubble markets have nurtured an economic structure acutely vulnerable to market instability and a resulting interruption in credit expansion.
We have a pivotal election next Tuesday. In last Friday’s CBB, I highlighted insight from hedge fund manager Paul Tudor Jones. He referred to November 5th as the macro analysis “super bowl.” In analysis harmonious with my analytical framework, Tudor Jones sees the election as a potential catalyst for sudden bond market reassessment. He warns of the potential for a so-called “Minsky moment” – that “financial crises percolate for years. But they blow up in weeks.” I’m in complete agreement with his view that federal debt growth is unsustainable – and that we are at “an incredible moment in U.S. history.”
I won’t venture a guess on who our next President will be or over the composition of party control of Congress. But the bond market has shown vulnerability to what has been incredibly imprudent tax cut and spending proposals from both Trump and Harris. For me, the spectacle of this election cycle pushed “deficits don’t matter” to precarious extremes – perhaps crossing market “red lines.” Such profligacy has been a dangerous consequence of repeated Fed market bailouts and the resulting subversion of market discipline.
My basic assumption throughout this most protracted credit bubble was that market discipline would eventually win the day. It has been an incredibly long wait. And we all know the pitfalls of asserting “this time is different.”
But I believe it’s telling that 10-year Treasury yields have jumped 65 bps and MBS yields 102 bps since the Fed slashed rates 50 bps in September. Gold and silver prices have surged 6.6% and 6.4% since the Fed, increasing y-t-d gains to 33% and 37%. Something’s definitely up.
I’ve intensively analyzed this bubble period now for over three decades – and have been repeatedly astounded by the scope of central bank and government inflationary measures, market interventions, and bailouts. That debt markets would so embrace open-ended inflationism has been mind-boggling.
I’ve long believed a point would be reached where the bond market begins to respond negatively to Federal Reserve loosening measures. And such an occurrence would likely mark a critical juncture for the cycle – a point where the Fed would finally be forced to think twice before again calling upon its inflationary toolbox.
There are a few things we understand today with confidence. At this very late cycle phase, the scope of excess is off the charts. Speculative leverage is today unprecedented. This ensures that the next serious bout of de-risking/deleveraging and market illiquidity will place excruciating pressure on the Fed and central bank community to restart QE to meet their “buyer of last resort” obligation. We also know that inflation remains elevated, with myriad risks both domestic and global. It is this backdrop that shapes my view of the Fed being trapped.
This is an uncomfortable backdrop for the Treasury and bond markets. Loose conditions continue to fuel manic late-cycle asset inflation and debt issuance, underpinning already elevated inflation. And a new administration will soon move to implement a laundry list of budget-busting tax and spending campaign promises. Meanwhile, now interminable late-cycle bubble fragilities ensure the inevitability of desperate inflationary policy measures.
I don’t want to make too much of poor bond market performance following one Fed rate cut. But enormous speculative leverage has accumulated in markets on the premise of an open-ended Federal Reserve liquidity backstop. Moreover, there has been a recent parabolic spike in leverage in anticipation of an aggressive Fed easing cycle.
Risk of bond market instability and deleveraging is growing, while the manic stock market speculative bubble is an accident in the making. And we’ve already witnessed bubble fragility reveal itself globally within the massive yen “carry trade” and AI/tech mania.
Next week’s election creates a possible catalyst for market reassessment and de-risking. At the same time, with all the derivatives and hedging, there’s potential for a post-election head-fake rally. Hopefully, election outcomes don’t drag on for days and even weeks – and that results are not contested. Coupled with escalations at various geopolitical flashpoints, market risk today is at the highest level of my career – arguably the highest in generations. I’ve fallen into the habit of concluding with a simple wish: I hope I’m wrong.
We live today in a world of seemingly stark inconsistencies – confounding incongruence. Record stock prices, unprecedented household wealth, and incredible technological innovation. At the same time, society is resentful, deeply divided, and insecure.
Meanwhile, the geopolitical environment is extremely alarming. In its third year, the war in Ukraine has turned increasingly dangerous. Ukraine occupies a small Russian enclave, while expanding drone attacks across Russia. The West is considering allowing Ukraine to use its weapons to strike deep into Russia, as Putin uses revisions to Russia’s nuclear doctrine as a direct threat to the U.S. Russia has been firing North Korean missiles, and now Kim Jong-Un has sent thousands of troops to fight for Putin.
The conflict in Gaza has now engulfed Lebanon – and risks consuming the entire Middle East. In alarming escalation, Israel and Iran have been in tit-for-tat missile strike retaliation.
And a couple weeks back, China’s military encircled Taiwan, stating openly that it was war gaming for a blockade scenario. Just this week, Beijing threatened to retaliate if U.S. arms shipments to Taiwan continue. It’s only a matter of time until China moves to fulfill its often-stated top priority – the reunification of Taiwan with the Chinese motherland.
It is commonly viewed as the most dangerous geopolitical backdrop since World War II. Yet stocks are at all-time highs, and market optimism remains at extremes. And incredible innovation indeed underpins the AI/technology mania and scientific advancement. What gives?
From my analytical framework, these incongruencies have a common thread: They’re all consistent with late-cycle dynamics – an incredible endgame for a historic multi-decade super cycle.
During last quarter’s call, I discussed the parallels between the current environment and the “Roaring Twenties.” Both periods were remarkable for a confluence of monumental technological advancement, financial innovation, credit and speculative excess, and catastrophic boom and bust dynamics. The wedding of late-cycle financial excess and momentous technological advancement pushed the cycle to fateful extremes – even as mounting financial, economic, and geopolitical risks had turned conspicuous.
When reading the history of the late-twenties, one ponders how it was possible for bullish stock speculators to disregard so much – egregious excess, profound social change, inequality and cultural angst here in the U.S.; post-hyperinflation economic, social and political turmoil in Germany; the rise of authoritarianism and fascism in Europe; post-revolution instability and the rise of communism in Russia; social and political tumult in Latin America and the Middle East; civil war in China – for starters.
Like today, wild speculative excess and mounting social, political, and geopolitical turmoil were not coincidental – they were instead tragically interconnected late-cycle phenomena.
I want to again highlight a theoretical framework that helps bring some clarity to today’s confounding backdrop. Bubbles are mechanisms of wealth redistribution and destruction – with detrimental consequences for social and geopolitical stability. Boom periods engender perceptions of an expanding global pie. Cooperation, integration, and alliances are viewed as mutually beneficial. But late in the cycle, perceptions shift. Many see the pie stagnant or shrinking. A zero-sum game mentality dominates. Insecurity, animosity, disintegration, fraught alliances, and conflict take hold.
It bears repeating: Things turn crazy at the end of cycles. Years and even decades of credit expansion, speculative bubbles, and government-led bailouts conspire for parabolic “blow off” surges in risky late-cycle credit inflations and market manias. Meanwhile, years of destabilizing price inflation and increasingly conspicuous wealth redistribution push societies and nations to the breaking point. These dynamics foment complex late-cycle dynamics – highlighted by manic speculative blowoffs concurrent with rapid degradation in both the social fabric and existing world order.
Late-cycle bubbles exhibit peculiar behavior. As we’ve witnessed, once bubbles have inflated to precarious extremes, confidence in the marketplace only solidifies that central banks and governments will act early and forcefully to thwart crisis dynamics. Such a posture foments instability and volatility, as market sentiment pivots from alarm over bursting bubble risk to manic affirmation that inflating markets enjoy a foolproof backstop.
This is precisely the dynamic witnessed in August. On the 5th, at intraday trading lows, the S&P500 was down 4.3%, the Nasdaq100 5.5%, and the KBW Bank Index 5.0%. The VIX equities volatility index spiked above 60 for the first time since the 2020 pandemic crisis. Japan’s Nikkei 225 stock index that day sank 12.4%, capping a three-session collapse of almost 20%. South Korea’s Kospi Index dropped 9%, as intense de-risking erupted across markets globally. Bitcoin was down almost 14% intraday.
I believe we’ll look back on that erratic market session as portending trouble ahead – a warning of mounting bubble fragility. In particular, August 5th exposed acute vulnerability for two historic bubbles – the yen “carry trade” and AI/tech bubbles.
This past March, the Bank of Japan raised its policy rate to 10 bps, ending a seven-year experiment with negative rates. Japanese rates had not been above 10 bps since 2008 – and hadn’t surpassed 50 bps all the way back to 1995. Literally for decades, artificially low rates have incentivized borrowing cheap in Japan for leveraged “carry trade” speculations in higher-yielding instruments across the globe. Between speculative leverage and Japanese institutional and retail flows, trillions have flowed freely from Japan. An abrupt reversal of this torrent would be highly destabilizing across the world of finance.
With domestic inflation and imbalances having pushed the BOJ to commence policy normalization, currency markets were understandably on edge. The dollar/yen spiked to a multi-decade high of 162 on July 10th, before reversing sharply lower. Over the next four weeks, the yen would rally 12%, with the dollar/yen trading at an intraday low below 142 on August 5th. A disorderly unwind of yen “carry trade” leverage spurred intense market instability and fears of broadening de-risking/deleveraging.
From last November lows to July highs, the Semiconductor Index surged 86%, and the Nasdaq100 rose 45%. Nothing short of a historic mania and speculative melt-up took hold, led by AI, the semiconductor companies, and the “magnificent seven” tech behemoths – and later to widen throughout tech, the financials and utilities, along with the broader market. We can assume enormous speculative leverage has accumulated – margin debt, hedge fund leverage and, importantly, embedded leverage in derivatives.
At August 5th lows, the Semiconductor Index and Nasdaq100 had sunk 28% and 15% from July highs. With the unwinding of yen “carry trade” and technology stock speculative leverage, markets were at the cusp of a systemic de-risking/deleveraging event. This explains the VIX Index’s spike to multi-year highs.
Wall Street was close to panicking on that fifth day of August. According to the narrative at the time, the economy was in trouble – and after waiting too long, the Federal Reserve must now respond forcefully. Cries immediately rang out for the Fed to aggressively slash rates, with some even pleading for an emergency inter-meeting cut.
Market relief was provided by timely comments from the Bank of Japan’s influential deputy governor Shinichi Uchida, who said: “We won’t raise interest rates when financial markets are unstable.” Japan’s Nikkei Index rallied 10% on August 6th, as global markets quickly stabilized.
A couple weeks later, from dovish Chair Powell at Jackson Hole, markets received the news they had clamored for: “The time has come for policy to adjust. The direction of travel is clear…” And in September, the Fed slashed rates 50 bps.
Policymakers responded exactly as speculative markets assumed. Especially in a backdrop of acute fragility, markets count on central banks to respond swiftly and forcefully to nascent instability. And this key dynamic underpins extreme risk-embracement and other late-cycle speculative excess, in the process extending the lives of historic bubbles.
Repeated interventions and bailouts over the course of the cycle alter market perceptions, structure, and function. Over time, markets turn increasingly dysfunctional – with mounting excess and imbalances promising only more policy stimulus. Risks can be ignored. Market dynamics become increasingly preoccupied with chasing trading opportunities from recurring short squeezes and the unwind of bearish hedges. And as this speculative market dynamic is rewarded by Federal Reserve behavior, it only grows in dominance.
After trading at 4.60% in late May, 10-year Treasury yields fell to a 15-month low of 3.62% in the session before the Fed’s September meeting. The S&P500 enjoyed a y-t-d return of 20%, with the Broker/Dealer Index returning 24%. Most market risk premiums traded to the lowest levels since the Fed commenced its rate-hiking cycle. In short, the Fed aggressively eased monetary policy, with financial conditions exceptionally loose.
Sustaining bubbles is risky business – with systemic risk rising exponentially late in the cycle. The S&P500 recovered to trade to new record highs in September, as bullish exuberance reached extremes. A record $500 billion flowed into ETFs during the quarter. There was a record $600 billion of global debt issuance in September, with U.S. investment-grade bond sales surging to a record $171 billion. Another $128 billion of leveraged loan deals were launched – the first time to surpass $100 billion. With two months to go, asset-backed securities have already posted the strongest annual sales since the mortgage finance bubble. Sales of collateralized loan obligations have also boomed. “Feeding frenzy” is an apt description of happenings in the bubbling “private-credit” universe – in what is essentially corporate America’s subprime boom.
A key risk premium, corporate investment-grade spreads-to-Treasuries, recently traded to the lowest level since 2005. That period, at the heart of the mortgage finance bubble era, was similarly notable for liquidity abundance-fueled excess.
I want to stress an important point: You just don’t see this degree of inflationary market excess without some underlying monetary dislocation. I’ll highlight that money market fund assets surged $360 billion during the quarter, or 23% annualized. Money fund assets have inflated $1.9 TN, or 42%, just since the Fed began its “tightening cycle” in March 2022 - and an incredible $2.9 TN, or 79%, since the start of the pandemic. And this historic monetary inflation runs unabated. Money fund assets have inflated $374 billion, or 26% annualized, over the past 12 weeks.
I believe a surge in money market liquidity emanates from the “repo” market’s funding of leveraged speculation. I have written about this dynamic - and discussed it recently at the McAlvany Wealth Management client conference.
This is epic monetary inflation flowing chiefly from the expansion of speculative credit in the money markets – short-term “repo” market funding of levered Treasury “basis trades” and more general fixed-income “carry trade” leverage. I liken the expansion of money market deposits to fractional reserve banking and the bank “deposit multiplier” – but without reserve requirement constraints. In the late-nineties, I referred to this dynamic as an “infinite multiplier” – I just never imagined the “repo” market and money fund deposits would inflate to surpass $6.5 TN.
I closely monitored this dynamic during the late-nineties bubble period, and then again throughout the mortgage finance bubble. But excesses during today’s most protracted global government finance bubble have reached an entirely new level – in scope and duration, along with deeply corrosive effects on market, financial and economic structures. The only period of comparable excess and maladjustment would be the fateful “Roaring Twenties” bubble experience.
It’s more important today than ever to recognize that policymaker interventions – especially here so late in the cycle – spur only more destabilizing excess – speculation and leverage, high-risk lending, and resulting deeper financial, economic, and social maladjustment. There’s just no escaping this harsh bubble reality. And it’s reached the point where consequences include historic market and AI manias, perpetual fiscal deficits in the $2 TN range, a trillion-dollar plus highly levered “basis trade,” incendiary social angst, and geopolitical turmoil. Nothing good comes from extending “terminal phase excess.”
And it’s all consistent with the endgame for a historic multi-decade super-cycle - only too fitting that the greatest bubble in human history concludes with a prolonged period of the craziest excess and wildest instability. After all, policymakers around the world are doing whatever they think it takes to hold bubble collapses at bay. Japan continues to defer policy normalization. An increasingly desperate Beijing has succumbed to “whatever it takes” reflationary measures. The Fed ignores precariously loose conditions and speculative bubbles. The ECB aggressively slashes rates. Meanwhile, all these measures promote late-cycle “terminal phase” parabolic debt growth – government and private sector, along with a fateful deluge of speculative financial credit.
“How will this all end?” I wish I knew. There are ample potential catalysts. Normally functioning markets would have brought such egregious excess to a conclusion years ago. But even irrepressible bubbles eventually succumb. Markets have been afflicted with the “frog in the pot” syndrome when it comes to geopolitical risks. Does the Middle East erupt into a more globalized conflict? Could the Ukraine war escalate into a nuclear crisis? What’s North Korea up to? Is China preparing to tighten the noose on Taiwan – and how would the U.S. respond?
The new and formidable “axis of evil” – China, Russia, North Korea, and Iran – is determined to capsize the U.S.-led global order. I fear we’ve entered a highly unstable period of unending conflict and crises.
Yet markets have remained comfortable disregarding mounting geopolitical risk. This extraordinary complacency has a clear source: Federal Reserve and global central bank market backstops. But we’re now seeing a dangerous escalation of geopolitical risk, concurrent with unappreciated issues with policymaker backstops.
Ten-year Treasury yields surged 52 bps this month. Yields on benchmark MBS securities are up 82 bps. At yesterday’s record price, gold was up $140, or 5.3%, for the month to $2,775, while silver was up 10% to $34.45. The Atlanta Fed GDPNow forecast of current growth has increased to 3.4% - and yesterday we learned that Q3 personal consumption jumped to 3.7%.
Overheating risks are increasing. And especially with China’s newfound determination to reflate, the likelihood of upside inflation surprises increases. Market complacency also applies to inflation risk.
For starters, our federal government ran a $1.8 TN deficit last year, or almost 7% of GDP. Whether it’s a Trump or Harris administration, most analysts believe the deficit only grows from here. There are reasonable scenarios where it spirals out of control. Legendary hedge fund operator Paul Tudor Jones last week stated the issue concisely: “We are going to be broke really quickly unless we get serious about dealing with our spending issues.” I was reminded of Ernest Hemingway’s two paths to bankruptcy: gradually and suddenly.
I believe inflationary psychology throughout the economy has become more deeply rooted than Wall Street and the Fed are willing to admit. At a 4.1% unemployment rate, labor markets remain tight. Labor unions are emboldened, as again confirmed by Boeing’s spurned offer of a 35% pay hike to end its strike. Companies have learned they can pass along higher costs.
Meanwhile, I believe climate change will present growing inflationary risks. We’ve already experienced rising food costs, along with incredible inflation in various types of insurance. And we saw just weeks back the scope of destruction wrought from back-to-back hurricanes Helene and Milton. There will be considerable spending on clean-up and rebuilding, economic stimulus that underpins the forces of inflation. There will also be greater spending on emergency preparation, as large swaths of the country face growing exposures to extreme weather events.
Over the past two years, U.S. and global inflationary pressures have been somewhat mitigated by disinflationary forces out of China. With the ongoing deflation of China’s historic apartment bubble, stimulus measures were buckets dumped into an ocean. But this summer, bubble deflation entered a dangerous acceleration phase. A crisis of confidence was taking hold.
Xi Jinping has hit the reflation panic button: hundreds of billions for the stock market, hundreds more for the deeply troubled local government sector, many hundreds to try to stabilize apartment markets. What’s more, Beijing has essentially promised to spend whatever it takes to reach growth targets. A Reuters article this week placed Beijing’s stimulus at $1.4 TN. This is for a system locked in massive credit expansion – upwards of $5 TN annually.
Considering the powerful forces of bubble deflation, I appreciate the view that even the grand scope of the latest stimulus barrage won’t be enough to turn the tide. But this is almost beside the point. I expect Xi Jinping to throw everything at a now open-ended reflation effort. He’s highly motivated. Collapse would be blamed on him and his communist party, while Xi’s global superpower ambitions would crumble right along with China’s global financial and economic standings.
Xi made telling comments last week when meeting with Putin. He said: “At present, the world is going through changes unseen in a hundred years, the international situation is intertwined with chaos.” A deluded Xi Jinping will view mammoth reflationary efforts as fundamental to ensuring chaos doesn’t engulf China. And mounting domestic risks, I fear, raise the odds of Beijing diverting attention with the hastening of Taiwan reunification efforts.
We see the geopolitical backdrop underpinning price pressures for many things. There are already added costs for shipping that avoids the Red Sea, while Russia has been sinking grain ships in the Black Sea – as examples. An upsurge in trade protectionism and tariffs would impact pricing, availability, and supply chains for key goods and resources. We expect the acceleration of de-globalization to come with heightened inflation risks.
While the risk of another inflationary spike is not remote, I’m focused on the potential for a more moderate uptick in inflation that would put the Federal Reserve on its heels. Importantly, mounting bond market deficit and supply concerns intensify if the Fed is forced to put its easing cycle on ice.
I believe global bond markets have finally begun to wake up to the problem. Recall that bond deleveraging and a spike in yields brought down UK Prime Minister Liz Truss and forced belt tightening in October 2022. UK yields surged another 18 bps last week and another 26 this week to trade to 4.50% today, surpassing the 2022 crisis peak. More recently, markets nervously eye French politics and looming budget battles. French yield spreads to German bunds recently touched the widest levels since the 2012 European bond crisis. Italian spreads widened to 2021 levels. And Japanese JGB yields are back to 1%, near 13-year highs.
From my analytical perspective, the highly levered Treasury market today poses a major risk to global market stability. The “basis trade” is said to easily surpass $1 TN, and I suspect this is only a segment of speculative leverage that permeates the entire U.S. credit market – Treasuries, corporate bonds, muni bonds, MBS, ABS, private credit, leveraged loans, structured finance, and derivatives.
Let’s return to the VIX Index’s August 5th spike to 60. De-risking/deleveraging today creates a momentous risk. There are scores of bubbles globally, interconnected across markets and between nations and regions. In early August, the unwind of “yen carry” leverage pressured the AI/tech Bubble. These two faltering bubbles were at the cusp of triggering a systemic de-risking/deleveraging dynamic. Importantly, a more systemic deleveraging would spawn market liquidity issues, widening risk premiums, and general pressure on Credit market leverage – the extremely levered “basis trade” in particular.
I’ll reiterate the endgame thesis. Sure, central bankers could again bail out speculative markets. But all that would accomplish is another wave of speculative excess and more problematic leverage. And keep in mind that once markets succumb to late-cycle manic excess, prolonging the bubble comes at a steep cost. Crazy turns only crazier. The tech mania has inflated to the point where trillions are to be spent on data centers, semiconductor fab plants, energy infrastructure, old decommissioned nuclear reactors, and all things AI. Meanwhile, the proliferation of uneconomic businesses runs unabated. Corporate and consumer debt growth runs unabated. Washington deficit spending – unabated. A large and expanding swath of the U.S. bubble economy – certainly including the AI mania – is addicted to loose conditions.
The Fed concluded its so-called “tightening cycle” without financial conditions actually tightening. This only raised the odds that it will be market de-risking/deleveraging that unleashes highly destabilizing tightening dynamics.
These days, I worry mightily about economic structure and the vulnerability to market dislocation, deleveraging, tighter conditions, and illiquidity. Years of loose finance, credit excess and bubble markets have nurtured an economic structure acutely vulnerable to market instability and a resulting interruption in credit expansion.
We have a pivotal election next Tuesday. In last Friday’s CBB, I highlighted insight from hedge fund manager Paul Tudor Jones. He referred to November 5th as the macro analysis “super bowl.” In analysis harmonious with my analytical framework, Tudor Jones sees the election as a potential catalyst for sudden bond market reassessment. He warns of the potential for a so-called “Minsky moment” – that “financial crises percolate for years. But they blow up in weeks.” I’m in complete agreement with his view that federal debt growth is unsustainable – and that we are at “an incredible moment in U.S. history.”
I won’t venture a guess on who our next President will be or over the composition of party control of Congress. But the bond market has shown vulnerability to what has been incredibly imprudent tax cut and spending proposals from both Trump and Harris. For me, the spectacle of this election cycle pushed “deficits don’t matter” to precarious extremes – perhaps crossing market “red lines.” Such profligacy has been a dangerous consequence of repeated Fed market bailouts and the resulting subversion of market discipline.
My basic assumption throughout this most protracted credit bubble was that market discipline would eventually win the day. It has been an incredibly long wait. And we all know the pitfalls of asserting “this time is different.”
But I believe it’s telling that 10-year Treasury yields have jumped 65 bps and MBS yields 102 bps since the Fed slashed rates 50 bps in September. Gold and silver prices have surged 6.6% and 6.4% since the Fed, increasing y-t-d gains to 33% and 37%. Something’s definitely up.
I’ve intensively analyzed this bubble period now for over three decades – and have been repeatedly astounded by the scope of central bank and government inflationary measures, market interventions, and bailouts. That debt markets would so embrace open-ended inflationism has been mind-boggling.
I’ve long believed a point would be reached where the bond market begins to respond negatively to Federal Reserve loosening measures. And such an occurrence would likely mark a critical juncture for the cycle – a point where the Fed would finally be forced to think twice before again calling upon its inflationary toolbox.
There are a few things we understand today with confidence. At this very late cycle phase, the scope of excess is off the charts. Speculative leverage is today unprecedented. This ensures that the next serious bout of de-risking/deleveraging and market illiquidity will place excruciating pressure on the Fed and central bank community to restart QE to meet their “buyer of last resort” obligation. We also know that inflation remains elevated, with myriad risks both domestic and global. It is this backdrop that shapes my view of the Fed being trapped.
This is an uncomfortable backdrop for the Treasury and bond markets. Loose conditions continue to fuel manic late-cycle asset inflation and debt issuance, underpinning already elevated inflation. And a new administration will soon move to implement a laundry list of budget-busting tax and spending campaign promises. Meanwhile, now interminable late-cycle bubble fragilities ensure the inevitability of desperate inflationary policy measures.
I don’t want to make too much of poor bond market performance following one Fed rate cut. But enormous speculative leverage has accumulated in markets on the premise of an open-ended Federal Reserve liquidity backstop. Moreover, there has been a recent parabolic spike in leverage in anticipation of an aggressive Fed easing cycle.
Risk of bond market instability and deleveraging is growing, while the manic stock market speculative bubble is an accident in the making. And we’ve already witnessed bubble fragility reveal itself globally within the massive yen “carry trade” and AI/tech mania.
Next week’s election creates a possible catalyst for market reassessment and de-risking. At the same time, with all the derivatives and hedging, there’s potential for a post-election head-fake rally. Hopefully, election outcomes don’t drag on for days and even weeks – and that results are not contested. Coupled with escalations at various geopolitical flashpoints, market risk today is at the highest level of my career – arguably the highest in generations. I’ve fallen into the habit of concluding with a simple wish: I hope I’m wrong.
For the Week:
The S&P500 fell 1.4% (up 20.1% y-t-d), while the Dow was little changed (up 11.6%). The Utilities dropped 2.9% (up 23.4%). The Banks added 0.6% (up 26.5%), and the Broker/Dealers gained 1.0% (up 34.5%). The Transports advanced 1.5% (up 2.8%). The S&P 400 Midcaps (up 11.6%) and small cap Russell 2000 (up 9.0%) were little changed. The Nasdaq100 lost 1.6% (up 19.1%). The Semiconductors sank 4.1% (up 19.8%). The Biotechs rallied 3.5% (up 10.1%). With bullion $11 lower, the HUI gold index dropped 4.1% (up 30.4%).
Three-month Treasury bill rates ended the week at 4.395%. Two-year government yields rose 10 bps to 4.21% (down 4bps y-t-d). Five-year T-note yields jumped 16 bps to 4.22% (up 38bps). Ten-year Treasury yields advanced 14 bps to 4.38% (up 50bps). Long bond yields increased eight bps to 4.58% (up 55bps). Benchmark Fannie Mae MBS yields jumped 12 bps to 5.81% (up 54bps).
Italian 10-year yields surged 17 bps to 3.68% (down 2bps y-t-d). Greek 10-year yields jumped 14 bps to 3.31% (up 25bps). Spain's 10-year yields rose 12 bps to 3.12% (up 13bps). German bund yields gained 11 bps to 2.40% (up 38bps). French yields rose 12 bps to 3.16% (up 60bps). The French to German 10-year bond spread widened about one to 76 bps. U.K. 10-year gilt yields surged 21 bps to 4.45% (up 91bps). U.K.'s FTSE equities index declined 0.9% (up 5.7% y-t-d).
Japan's Nikkei 225 Equities Index added 0.4% (up 13.7% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.95% (up 34bps y-t-d). France's CAC40 declined 1.2% (down 1.8%). The German DAX equities index fell 1.1% (up 14.9%). Spain's IBEX 35 equities index increased 0.3% (up 17.2%). Italy's FTSE MIB index slipped 0.3% (up 14.2%). EM equities were mostly lower. Brazil's Bovespa index fell 1.4% (down 4.5%), and Mexico's Bolsa index dropped 2.2% (down 11.8%). South Korea's Kospi slumped 1.6% (down 4.3%). India's Sensex equities index added 0.4% (up 10.4%). China's Shanghai Exchange Index declined 0.8% (up 10.0%). Turkey's Borsa Istanbul National 100 index dipped 0.3% (up 18.9%).
Federal Reserve Credit declined $18.2 billion last week to $6.974 TN. Fed Credit was down $1.915 TN from the June 22, 2022, peak. Over the past 268 weeks, Fed Credit expanded $3.248 TN, or 87%. Fed Credit inflated $4.164 TN, or 148%, over the past 625 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $7.6 billion last week to $3.329 TN. "Custody holdings" were down $92 billion y-o-y, or 2.7%.
Total money market fund assets slipped $2.2 billion to $6.506 TN. Money funds were up $371 billion over 13 weeks (24% annualized), $620 billion y-t-d (12.4% ann.), and $811 billion, or 14.2%, y-o-y.
Total Commercial Paper jumped $24.9 billion to $1.182 TN. CP was down $36 billion, or 3.0%, over the past year.
Freddie Mac 30-year fixed mortgage jumped 18 bps this week to a 13-week high 6.72% (down 100bps y-o-y). Fifteen-year rates surged 28 bps to 5.99% (down 108bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 11 bps to a three-month high 7.33% (down 59bps).
Currency Watch:
For the week, the U.S. Dollar Index was little changed at 104.317 (up 2.9% y-t-d). For the week on the upside, the South Korean won increased 0.8%, the euro 0.4%, and the South African rand 0.1%. On the downside, the Brazilian real declined 2.8%, the Mexican peso 1.5%, the Swedish krona 1.1%, the Norwegian krone 0.8%, the Australian dollar 0.7%, the Japanese yen 0.5%, the Canadian dollar 0.4%, the Swiss franc 0.4%, the Singapore dollar 0.4%, the British pound 0.3%, and the New Zealand dollar 0.2%. The Chinese (onshore) renminbi declined 0.11% versus the dollar (down 0.41% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index fell 2.2% (down 0.6% y-t-d). Spot Gold slipped 0.4% to $2,737 (up 32.6%). Silver dropped 3.6% to $32.49 (up 36.5%). WTI crude reversed $2.29, or 3.2%, lower to $69.49 (down 3%). Gasoline dropped 5.4% (down 7%), while Natural Gas rose 4.0% to $2.66 (up 6%). Copper was little changed (up 12%). Wheat slipped 0.2% (down 10%), and Corn declined 0.2% (down 12%). Bitcoin jumped $2,100, or 3.1%, to $69,260 (up 63%).
Election Watch:
October 31 – Associated Press (Linley Sanders): “Most Americans are feeling a lot of emotions heading into Election Day, but excitement is not one of them. A new poll from The AP-NORC Center for Public Affairs Research finds that about 7 in 10 Americans report feeling anxious or frustrated about the 2024 presidential campaign, and a similar share say they’re interested. Only about one-third say they feel excited.”
October 30 – Axios (Andrew Solender): “Lawmakers in both parties are bracing themselves for a tumultuous period after the Nov. 5 election, with many openly expressing fears of political violence… Democrats, in particular, see it as virtually inevitable that Trump will challenge the election results if he loses, raising the specter of nationwide civil unrest or even a repeat of the Jan. 6 attack… Republicans, on the other hand, claim the real threat will be from the political left being unable to accept another Trump term… Federal and local law enforcement are already ramping up security across D.C. ahead of the election… The Secret Service confirmed to Axios that security enhancements have been made to the Capitol in the run-up to the certification of presidential electors on Jan. 6 — including fencing erected around the Capitol complex.”
October 29 – Financial Times (Stephen Foley and Radhika Rukmangadhan): “In the race for the White House, the largest companies in the US are facing two starkly different financial futures, separated by one vast sum: a quarter of a trillion dollars a year. The potential price tag is thanks to the differing tax policies of the two candidates… Kamala Harris is promising to partly reverse Donald Trump’s big reduction in the corporate rate, while the former president says he will lower it further… Big business, meanwhile, is gearing up to protect its gains. The quarter-trillion figure is based on estimates from Goldman Sachs, which says Trump’s proposal to cut the corporate rate from 21% to 15% would add 4% to the earnings of the S&P 500. Harris’s plan to raise it to 28% would reduce earnings by 5%, the Wall Street bank estimated, and her other corporate tax proposals would shave a further 3%.”
November 1 – Bloomberg (Patricia Lopez): “Big money has never been as big nor as bold as it has been in the 2024 presidential election, and the failure to rein it in could further solidify the already overwhelming influence the super-wealthy wield over our political system. This election cycle is expected to be the most expensive in history, with nearly $16 billion spent on the presidential and congressional races. Outside spending alone is projected to top $5 billion — far more than the $1.6 billion outside groups spent in 2020. The problem of megadonors playing an outsized role in elections was compounded earlier this year when the Federal Election Commission lifted the longtime ban against candidates coordinating with outside groups such as super PACs, which can raise and spend unlimited money.”
October 29 – New York Times (Sheera Frenkel, Tiffany Hsu and Steven Lee Myers): “When Russia interfered in the 2016 U.S. presidential election, spreading divisive and inflammatory posts online to stoke outrage, its posts were brash and riddled with spelling errors and strange syntax… ‘Hillary is a Satan,’ one Russian-made Facebook post read. Now, eight years later, foreign interference in American elections has become far more sophisticated, and far more difficult to track. Disinformation from abroad — particularly from Russia, China and Iran — has matured into a consistent and pernicious threat, as the countries test, iterate and deploy increasingly nuanced tactics, according to U.S. intelligence and defense officials, tech companies and academic researchers.”
Middle East War Watch:
October 26 – Wall Street Journal (Sune Engel Rasmussen, Jared Malsin and Summer Said): “Israel’s attack on Iran early Saturday—the most serious military strike on Iranian soil in decades—was calibrated to avoid prompting an escalatory response, but it also moved the two foes deeper into a direct conflict that is creating a new and dangerous era for the Middle East. Israel launched its strike in retaliation for a barrage of more than 180 missiles that Iran fired at Israel on Oct. 1. Saturday’s complex attack played out in several waves over several hours, involving dozens of warplanes that struck missile manufacturing facilities and surface-to-air missile defense sites in three different provinces, killing four soldiers. It steered clear of striking the nuclear and oil facilities… Among the military assets Israel targeted were Iranian aerial-defense systems, including Russian-made S-300 surface-to-air batteries, according to an Israeli official, who said Israel destroyed several of the country’s S-300 batteries.”
October 31 – Axios (Barak Ravid): “Israeli intelligence suggests Iran is preparing to attack Israel from Iraqi territory in the coming days, possibly before the U.S. presidential election, two Israeli sources tell Axios… Carrying the attack out through pro-Iranian militias in Iraq and not directly from Iranian territory could be an attempt by Iran to avoid another Israeli attack against strategic targets in Iran… The sources said… the attack is expected to be carried out from Iraq using a large number of drones and ballistic missiles… A high-ranking Iranian source told CNN that Iran is planning a ‘definitive and painful’ response that will likely come before the election… Mohammad Mohammadi Golpayegani, chief of staff to Iran's supreme leader, told TV network al-Mayadeen… Iranian retaliation was ‘certain.’ He said the Iranian response will be ‘strong’ and will ‘make our enemy regret’ its attack.”
November 1 – Financial Times (Najmeh Bozorgmehr): “Global oil prices rose after top commanders of Iran’s elite Revolutionary Guards vowed that Tehran would deliver a harsh response to last week’s Israeli strikes on the Islamic republic, sparking fears of further escalation in the region. Major General Hossein Salami, the head of the guards corps, warned… that Iran’s retaliation would be ‘unimaginable’ as Iranian officials stepped up their rhetoric against Israel. ‘Israelis think they can launch a couple of missiles and change history,’ he said. ‘You have not forgotten… how Iranian missiles opened up the sky… and made you sleepless.’”
October 29 – Financial Times (Bita Ghaffari and Najmeh Bozorgmehr): “Iran is set to drastically expand its defence budget for the coming fiscal year, following a recent exchange of missile fire with Israel that has heightened the risk of broader conflict across the Middle East. Government spokesperson Fatemeh Mohajerani said… the administration had recommended a 200% increase in next year’s defence allocation to the parliament…”
Ukraine War Watch:
October 31 – Reuters (Michelle Nichols): “The United States has received information that indicates that ‘right now’ there are 8,000 North Korean troops in Russia's Kursk region, deputy U.S. Ambassador to the United Nations Robert Wood told the Security Council… ‘I have a very respectful question for my Russian colleague: Does Russia still maintain that there are no DPRK troops in Russia?’ Wood said, referring to North Korea's formal name: the Democratic People's Republic of Korea.”
October 26 – Wall Street Journal (Yaroslav Trofimov): “Several times over the past three months, swarms of as many as 150 Ukrainian drones flew hundreds of miles into Russia, slamming into missile storage facilities, strategic fuel reservoirs, military airfields and defense plants. Once considered exceptional, these deep strikes now barely register in the news. Yet, Ukrainian officials and some of their Western backers increasingly see the pain that long-range attacks inflict as a game-changer that could force President Vladimir Putin into negotiating an acceptable peace. ‘Our capacity to return the war back to its home, to Russia, is what fundamentally alters the situation,’ Ukrainian President Volodymyr Zelensky said… The attack… destroyed some 58 warehouses and a railway terminal at an artillery and rocket arsenal northwest of Moscow.”
October 29 – Reuters (Pavel Polityuk and Tom Balmforth): “President Volodymyr Zelenskiy said… he had agreed with South Korea's president to step up contacts between their nations at all levels to develop countermeasures and a strategy to respond to North Korea's involvement in the war in Ukraine. Zelenskiy, in a readout of a phone call with President Yoon Suk Yeol published on X, said the two leaders also agreed to strengthen exchanges of intelligence and expertise.”
Taiwan Watch:
October 27 – Bloomberg (Twinnie Siu and Phila Siu): “China said it filed a diplomatic complaint with the US and reserved the right to retaliate after the latest American weapons sales to Taiwan, escalating tensions in their dispute over the archipelago. ‘China will resolutely respond and take all necessary measures to firmly safeguard national sovereignty, security and territorial integrity,’ the Foreign Ministry in Beijing said…, following US approval of about $2 billion of military sales to Taiwan. ‘China urges the US to immediately stop arming Taiwan and immediately stop dangerous actions that undermine peace and stability across the Taiwan Strait’…”
October 28 – Bloomberg (Anthony Capaccio): “The Taiwan Ministry of Defense has signed formal agreements with the US government allowing it to buy as many as 1,000 attack drones from AeroVironment Inc. and Anduril Industries Inc. to aid in blunting a potential Chinese assault on the island democracy… Taiwan signed a ‘letter of offer and acceptance’ in late September, the step before signed contracts that specify quantities, dollar values and delivery dates. Those contracts could be signed soon…”
Market Instability Watch:
October 30 – Financial Times (Ian Smith and Rafe Uddin): “UK borrowing costs climbed on Wednesday, reversing an initially positive reaction to the Labour government’s inaugural Budget, as investors were ‘caught unaware’ by the level of additional borrowing needed to fund Rachel Reeves’ plans… Analysts said the market was responding to an increase of borrowing of £28bn a year over the parliament, after what the Office for Budget Responsibility called ‘one of the largest fiscal loosenings of any fiscal event in recent decades’. ‘It’s the amount of extra borrowing which is above and beyond what had been expected [that] has caught the market a bit unaware,’ said Moyeen Islam, a fixed-income strategist at Barclays. ‘Going forward from here, it is still pretty challenging.’”
October 29 – Bloomberg (Edward Bolingbroke): “A bearish tone is taking hold in Treasury options as traders bet that a crucial stretch ahead — with the US presidential election just days away — will deepen losses in bonds and spark bouts of increased volatility. Yields have already surged this month, in part on speculation that the winner of the Nov. 5 vote will boost fiscal stimulus… But options traders see the risk of an even steeper selloff. They’re targeting a 4.5% yield on the 10-year note, which would be the highest since May.”
October 30 – Barron's (Sheila Bair): “I have seen more than my fair share of financial crises during my time in the U.S. government. I was the assistant secretary of the U.S. Treasury for financial institutions during the 9/11 terrorist attacks and chair of the Federal Deposit Insurance Corp. during the 2007-2008 financial crisis. The U.S. government resorted to deficit-financed spending and tax relief to these crises, and to the pandemic. Those decisions were right. Unfortunately, once the crises passed, we just kept spending as if nothing had changed. Now, the resulting overhang of federal debt could itself be the cause of a future crisis. Our gross national debt exceeds $35 trillion. This puts the federal debt held by the public at a staggering 99% of U.S. gross domestic product, nearly as high as its peak at the end of World War II. After the war, our ‘greatest generation’ of political leadership steadily restored our nation's finances, bringing the debt down to about 31% of GDP by 1981. Unfortunately, more recent political leadership has concluded that deficits do not matter.”
Global Credit Bubble Watch:
October 29 – Bloomberg (Immanual John Milton and Charles E Williams): “Sales of debt backed by everything from auto loans to airplane leases to Subway franchise fees have hit their highest level since the financial crisis… Asset-backed securities sales have topped $316 billion, surpassing 2021’s $312.6 billion… According to Bank of America… this year’s sales are the highest in the decade-and-a-half following the Great Financial Crisis… Investors have flocked to exotic asset-backeds in particular — bonds supported by music royalties, revenue from data centers and cell towers, among other cash flows, instead of more conventional collateral like credit card debt. Sales of exotic ABS have jumped to about $89 billion, up from $54 billion around this time last year…”
October 29 – Bloomberg (Neil Callanan, Naureen S Malik, Will Mathis, and Silas Brown): “Some of the world’s biggest managers of private capital are making moves to finance and invest in nuclear power plants, latching onto a revival in the sector driven in part by tech giants’ electricity-intensive AI ambitions. Carlyle Group Inc. has been approached about backing credit investments linked to nuclear… and Brookfield Asset Management is looking at boosting its exposure to the industry. Apollo Global Management Inc. is in talks to provide financing for a plant under construction at Hinkley Point in the UK… The tech sector’s huge energy needs have led to a number of recent deals.”
October 31 – Financial Times (Ian Smith, George Steer, Sam Fleming, Michael O’Dwyer and Ortenca Aliaj): “A sell-off in UK government bonds intensified on Thursday, as investor worries over additional debt in chancellor Rachel Reeves’ Budget pushed UK borrowing costs to their highest level of the year. The yield on the 10-year gilt was up 0.09 percentage points to 4.44%, having earlier climbed above 4.50%. The pound fell 0.8% against the dollar to $1.286, its lowest in more than two months. With government bond prices falling, Reeves said that the Labour government’s ‘number one commitment’ was to economic and fiscal stability, insisting… that she had put in place robust fiscal rules and that there would be a ‘significant fiscal consolidation’.”
October 29 – Bloomberg (Nicolas Parasie and Laura Gardner Cuesta): “A chorus of Wall Street chiefs said the worlds of private credit and traditional bank debt are continuing to collide — with Apollo Global Management Inc.’s Marc Rowan predicting that in just 18 months some borrowers won’t be able to tell the difference between the two offerings. The $1.7 trillion private credit market swelled in size by providing capital to private, non-investment-grade companies or other businesses that couldn’t get traditional bank financing. Now, though, asset managers like Apollo or rival Blackstone Inc. are trying to lend more to established businesses — putting them in a position to further unseat Wall Street incumbents.”
November 1 – Bloomberg (Scott Carpenter): “The biggest buyers of leveraged loans have gained the freedom to purchase more of the debt in recent months after refinancing their liabilities. Fund managers that buy loans and bundle them into bonds known as collateralized loan obligations could have some $100 billion more to freely invest over time compared with a year ago, largely thanks to bankers springing into action in recent months to modify the vehicles. When CLO managers raise money by issuing bonds, they typically have as long as five years to buy loans with the proceeds with relatively few investment restrictions…”
AI Bubble Watch:
November 1 – Reuters (Anna Tong, Aditya Soni and Deborah Mary Sophia): “Big technology companies including Microsoft, Meta and Amazon are stepping up spending to build out AI data centers in a rush to meet vast demand, but Wall Street is hungry for a quicker payday on the billions invested. Microsoft and Meta both said… their capital expenses were growing due to their AI investments. Alphabet, too, reported… that these expenditures would remain elevated, while Amazon said they would increase the rest of the year and into 2025. The extensive capital spending could threaten fat margins at these companies and pressure on profitability is likely to spook investors.”
October 31 – Bloomberg (Kurt Wagner): “Meta Platforms Inc. CEO Mark Zuckerberg will ramp up heavy investments in AI and other futuristic technologies, continuing a years-long tug-of-war between the company’s long-term bets and the core advertising business that provides the vast majority of Meta’s revenue. Zuckerberg warned investors Wednesday that Meta will continue to spend significantly on infrastructure and other projects like the metaverse and AI-powered glasses, efforts he believes are core to the company’s future.”
October 30 – Wall Street Journal (Katherine Blunt): “KKR and Energy Capital Partners have agreed to invest a combined $50 billion in data-center and power-generation projects to support the development of artificial intelligence. The investment is a bet on AI’s huge energy needs and the mounting stress it is putting on the U.S. power grid… KKR, one of the world’s largest investment companies, and Energy Capital Partners, a private-equity firm, have each been spending heavily on the infrastructure underpinning the AI boom. The companies said they are now working together with large tech companies to accelerate their access to electricity… ‘The capital needs are huge, and one of the big bottlenecks—maybe the bottleneck—is electricity availability,’ ECP founder… Doug Kimmelman said.”
October 28 – Bloomberg (Naureen S. Malik): “CenterPoint Energy Inc. has seen a 700% increase in requests from data center developers to connect to its Houston-area utility within months. The Greater Houston’s utility’s queue from data centers now tops 8 gigawatts, up from 1 gigawatts before summer, CenterPoint Chief Executive Officer Jason Wells said… The company confirmed… this planned development is located entirely around Houston…, and facilities supporting artificial intelligence are likely the leading cause of the increase. ‘Over the summer, we have seen a fundamental shift in data center development,’ Wells said... ‘While we recognize that not all of this will be developed, it is yet another tailwind in what we continue to believe is one of the most tangible long-term growth stories in the industry.’”
October 27 – Bloomberg (Akiko Fujita): “Small modular reactors (SMRs) have long held the promise of cheaper, more efficient nuclear energy. Their smaller, standardized designs were expected to usher in a new era for an industry historically plagued by cost overruns and safety concerns. But as major tech firms, including Google and Amazon, turn to advanced technologies in hopes of powering their AI ambitions with a low carbon footprint, skeptics are raising questions about their viability, largely because no commercial SMR has been built in the US yet. Despite the talk of a simplified process, there are only three SMRs operational worldwide — two in Russia and one in China. ‘Nobody knows how long they’re going to take to build,’ said David Schlissel, an analyst at the Institute for Energy Economics and Financial Analysis… ‘Nobody knows how expensive they’re going to be to build. We don't know how effective they will be in addressing climate change because it may take them 10 to 15 years to build them.’”
Bubble and Mania Watch:
October 29 – Bloomberg (Viktoria Dendrinou): “US Treasury Secretary Janet Yellen said that fraud in the banking system is becoming a huge problem and that her department is now using artificial intelligence to detect and deal with the issue. ‘I absolutely agree with the premise — which is that fraud is becoming a huge problem,’ Yellen said… She added that fraud is now seen nationwide, including through a big increase in fraud around government checks.”
October 29 – Bloomberg (Ryan Gould and David Carnevali): “Private equity firms are back to spending big in their hunt for public US companies. They have struck almost $85 billion in deals this year involving listed US targets… That’s up by roughly half on the same point in 2023 and the second-highest year-to-date tally since 2010... The dealmaking is being driven by trillions of dollars of unspent capital sitting in private equity funds, as well as by Wall Street’s renewed appetite for financing leveraged buyouts. These factors, together with a booming private credit market, are providing buyout firms with ample funds to pursue deals.”
October 29 – Reuters (Niket Nishant and Manya Saini): “U.S. regional banks continue to grapple with pressures in their office loan books as remote work stays prevalent, but rate cuts may provide some relief by easing the strain on other commercial real estate (CRE) segments, analysts said. Nearly a dozen mid-sized and regional U.S. banks reported higher non-performing loans (NPLs)… in their CRE portfolios in the third quarter compared with a year earlier… A looming ‘maturity wall’ could complicate matters further… Roughly $950 billion of CRE mortgages are expected to mature in 2024, of which 10% are tied to office properties, according to… S&P Global Market Intelligence.”
October 28 – Bloomberg (Carmen Arroyo, Natalie Wong, Aaron Gordon, and Christopher Cannon): “1407 Broadway was, as far as the financiers of Wall Street could tell, as rock-solid an asset as could possibly exist. Located in the heart of Manhattan’s storied Garment District, its entrance cut from white marble flecked with a soft bronze terrazzo motif, the 43-floor tower was a money-minting machine with a never-ending roster of well-heeled corporate tenants. So when the owners floated a $350 million bond backed by the building’s rental income in 2019, the bulk of the debt was stamped with a AAA credit rating… On June 17 — four years and 212 days after the bond was issued — investors in the AAA rated chunk of debt were informed they wouldn’t be getting the full $1 million interest payment they were owed that month. They’re now foreclosing… to salvage whatever they can of their investment. Over in Chicago, at a building called River North Point, it’s a similar story. So too at 600 California St. in San Francisco and at 555 West 5th St. in Los Angeles…”
October 31 – Bloomberg (Keith Naughton): “Ford Motor Co. plans to shut down the Michigan factory that produces its F-150 Lightning plug-in pickup truck, its signature electric vehicle, through the end of the year as demand for EVs continues to wane. The move is the latest blow to a model that had been a centerpiece of Ford’s EV strategy and that Chief Executive Officer Jim Farley said would be ‘a test for adoption of electric vehicles.’”
De-globalization and Iron Curtain Watch:
October 29 – Reuters (Philip Blenkinsop): “The European Union has decided to increase tariffs on Chinese-built electric vehicles to as much as 45.3% at the end of its highest profile trade investigation that has divided Europe and prompted retaliation from Beijing. Just over a year after launching its anti-subsidy probe, the European Commission will set out extra tariffs ranging from 7.8% for Tesla to 35.3% for China's SAIC, on top of the EU's standard 10% car import duty… The Commission… has said tariffs are required to counter what it says are unfair subsidies including preferential financing and grants as well as land, batteries and raw materials at below market prices. It says China's spare production capacity of 3 million EVs per year is twice the size of the EU market. Given 100% tariffs in the United States and Canada, the most obvious outlet for those EVs is Europe.”
October 30 – Reuters (Zhang Yan and Kevin Krolicki): “China has told its automakers to halt big investment in European countries that support extra tariffs on Chinese-built electric vehicles... Ten EU members including France, Poland and Italy supported tariffs in a vote this month, in which five members including Germany opposed them and 12 abstained. As Beijing continues negotiations over an alternative to tariffs…”
October 26 – New York Times (Keith Bradsher): “The vise-tight grip that China wields over the mining and refining of rare minerals, crucial ingredients of today’s most advanced technologies, is about to become even stronger. In a series of steps made in recent weeks, the Chinese government has made it considerably harder for foreign companies, particularly semiconductor manufacturers, to purchase the many rare earth metals and other minerals mined and refined mainly in China. Already, China produces almost all the world’s supply of these materials… As of Oct. 1, exporters must provide the authorities with detailed, step-by-step tracings of how shipments of rare earth metals are used in Western supply chains. That has given Beijing greater authority over which overseas companies receive scarce supplies.”
U.S./Russia/China/Europe Watch:
October 28 – Reuters (Phil Stewart and Andrew Gray): “The U.S. will not impose new limits on Ukraine's use of American weapons if North Korea joins Russia's war, the Pentagon said…, as NATO said North Korean military units had been deployed to the Kursk region in Russia. The North Korea deployment is fanning Western concerns that the 2-1/2-year conflict in Ukraine could widen, even as attention shifts to the Middle East. It could signal how Russia hopes to offset mounting battlefield losses and continue making slow, steady gains in eastern Ukraine.”
October 31 – Associated Press (Didi Tang and Matthew Lee): “The U.S. and South Korea have called on China to use its influence over Russia and North Korea to prevent escalation after Pyongyang sent thousands of troops to Russia to aid Moscow’s war against Ukraine. Beijing has so far stayed quiet. In a rare meeting earlier this week, three top U.S. diplomats met with China’s ambassador to the United States to emphasize U.S. concerns and urge China to use its sway with North Korea to try to curtail the cooperation… Secretary of State Antony Blinken said Thursday that the sides had ‘a robust conversation just this week’ and that China knows U.S. expectations are that ‘they’ll use the influence that they have to work to curb these activities.’”
November 1 – Reuters (Hyunsu Yim, Josh Smith and Hyun Young Yi): “North Korea flexed its military muscle with the test of a huge new solid-fuel intercontinental ballistic missile dubbed Hwasong-19… The launch… flew higher than any previous North Korean missile, according to the North as well as militaries in South Korea and Japan that tracked its flight deep into space before it splashed down in the ocean between Japan and Russia… ‘The new-type ICBM proved before the world that the hegemonic position we have secured in the development and manufacture of nuclear delivery means of the same kind is absolutely irreversible,’ North Korean leader Kim Jong Un said while overseeing the launch, KCNA reported.”
October 29 – Wall Street Journal (Nancy A. Youssef and Gordon Lubold): “The U.S. is running low on some types of air-defense missiles, raising questions about the Pentagon’s readiness to respond to the continuing wars in the Middle East and Europe and a potential conflict in the Pacific. Interceptors are fast becoming the most sought-after ordnance during the widening crisis in the Middle East…”
Inflation Watch:
October 31 – CNBC (Jeff Cox): “Inflation increased slightly in September and moved closer to the Federal Reserve’s target… The personal consumption expenditures price index showed a seasonally adjusted 0.2% increase for the month, with the 12-month inflation rate at 2.1%... The Fed uses the PCE reading as its primary inflation gauge, though policymakers also follow a variety of other indicators…. Though the headline number showed the central bank nearing its goal, the inflation rate was at 2.7% excluding food and energy, after the so-called core measure increased 0.3% on a monthly basis.”
October 29 – Yahoo Finance (David Hollerith): “Some of the top figures on Wall Street sound more concerned about the persistence of inflation than the occupant of the Oval Office in 2025. ‘I do believe we have greater embedded inflation in the world than we've ever seen,’ BlackRock CEO Larry Fink said… adding that ‘no one is asking the question, 'At what cost?’’… No matter who wins the election, most finance bosses are concerned that inflation will prove to be stickier than expected. Thus they aren't expecting interest rates to come down as quickly as traders currently expect. ‘We're not going to see interest rates as low as people are forecasting,’ BlackRock’s Fink said.”
October 30 – Reuters (Lisa Baertlein, Doyinsola Oladipo and Jessica DiNapoli): “U.S. shippers are steering clear of East and Gulf Coast ports amid worries the 45,000 dockworkers at those trade hubs will go on strike again if their union leader does not land a new contract with employers by a Jan. 15 deadline. The International Longshoremen's Association (ILA) labor union and the United States Maritime Alliance (USMX) employer group had ended a three-day strike in October with a tentative agreement on wages, but left the thorny issue of port automation still to be resolved.”
October 30 – Wall Street Journal (Denny Jacob and Paul Page): “Trucking companies that have struggled through a weak freight market say they are expecting an upturn in rates later this year. ‘We have a lot of pricing initiatives that we’re executing on, and we would expect that momentum to continue here into the fourth quarter and into 2025 as well,’ Ali Faghri, chief strategy officer at XPO, said… after the trucker reported improved earnings in its latest quarter that got a boost from stronger freight rates.”
U.S. Economic Bubble Watch:
October 30 – CNBC (Jeff Cox): “The U.S. economy posted another solid though slightly disappointing period of growth in the third quarter, propelled higher by strong consumer spending… Gross domestic product… increased at a 2.8% annualized rate… Personal consumption expenditures… increased 3.7% for the quarter, the strongest performance since Q1 of 2023, contributing nearly 2.5 percentage points to the total. Another major factor… for growth was federal government spending, which exploded higher by 9.7%, pushed by a 14.9% surge in defense outlays… However, an 11.2% jump in imports, which subtract from GDP, held back the growth number and offset an 8.9% gain in exports.”
October 29 – Reuters (Lucia Mutikani): “U.S. consumer confidence increased to a nine-month high in October amid improved perceptions of the labor market. The Conference Board said… its consumer confidence index rose to 108.7 this month from a upwardly revised 99.2 in September. Economists… had forecast the index climbing to 99.5 from the previously reported 98.7. ‘Consumer confidence recorded the strongest monthly gain since March 2021, but still did not break free of the narrow range that has prevailed over the past two years,’ said Dana Peterson, the chief economist at the Conference Board. The share of consumers who viewed jobs as being ‘plentiful’ rose to 35.1% from 31.3% in September. Some 16.8% of consumers said jobs were ‘hard to get,’ down from 18.6% last month.”
October 30 – CNBC (Jeff Cox): “Private job creation burst to its highest level in more than a year during October, despite a devastating storm season in the Southeast and major labor disruptions, ADP reported… The payrolls processing firm said companies hired 233,000 new workers in the month, better than the upwardly revised 159,000 in September and far ahead of the… estimate for 113,000. ADP said it was the best month for job creation since July 2023. ‘Even amid hurricane recovery, job growth was strong in October,’ ADP’s chief economist, Nela Richardson, said. ‘As we round out the year, hiring in the U.S. is proving to be robust and broadly resilient’… Leading sectors included education and health services (53,000), trade, transportation and utilities (51,000), construction and leisure and hospitality, which added 37,000 apiece, and professional and business services, which contributed 31,000. Manufacturing was the only sector to report losses, down 19,000 on the month…”
November 1 – CNBC (Jeff Cox): “Job creation in October slowed to its weakest pace since late 2020 as the impacts of storms in the Southeast and a significant labor impasse dented the employment picture. Nonfarm payrolls increased by 12,000 for the month, down sharply from September and below the… estimate for 100,000… The unemployment rate, however, held at 4.1%... A broader measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons also was unchanged at 7.7%... The BLS noted that the Boeing strike likely subtracted 44,000 jobs in the manufacturing sector, which lost 46,000 positions overall.”
October 29 – Reuters (Lucia Mutikani): “U.S. job openings fell to the lowest level in more than 3-1/2 years in September and data for the prior month was revised down… Job openings… dropped by 418,000 to 7.443 million by the last day of September, the lowest level since January 2021, the Labor Department's Bureau of Labor Statistics said in its… JOLTS report… Data for August was revised down to show 7.861 million unfilled positions instead of the previously reported 8.040 million.”
October 31 – Reuters (Dan Burns): “U.S. layoff announcements tumbled in October to a three-month low in another sign the job market remains in good shape ahead of next week's presidential election, a monthly tally of workforce reduction announcements showed… Firms announced 55,597 layoffs last month, down 23.7% from the 72,821 announced in September, outplacement firm Challenger, Gray and Christmas said. Layoffs would have been even lower last month were it not for more than 18,000 aerospace industry job cuts, some 17,000 of which came from Boeing as it copes with an ongoing strike.”
October 30 – Bloomberg (Vince Golle): “US mortgage rates rose to the highest level since July… The contract rate on a 30-year fixed mortgage rose 21 bps to 6.73% in the week ended Oct. 25… In the last four weeks, the rate has risen nearly 60 bps, the most since March 2023.”
October 30 – CNBC (Diana Olick): “Mortgage rates rose last week for the fourth time in five weeks, causing another pullback in refinancing… Applications for a mortgage to purchase a home increased 5% for the week and were 10% higher than the same week one year ago. Real estate brokerages have reported a surge in interest from homebuyers recently, as the supply of homes for sale has increased.”
October 29 – Reuters (Lucia Mutikani): “U.S. single-family home prices increased in August amid still tight supply, which together with elevated mortgage rates continue to keep prospective buyers on the sidelines. House prices rose 0.3% on a month-on-month basis after gaining 0.2% in July, the Federal Housing Finance Agency said... They increased 4.2% in the 12 months through August after an upwardly revised 4.7% advance in July. The rise in annual house prices was previously reported to have been 4.5%.”
October 30 - Yahoo Finance (Claire Boston): “A measure of housing contract activity jumped 7.4% in September as buyers took advantage of lower mortgage rates and higher inventory. The Pending Home Sales Index, which tracks contract signings on existing homes, rose to 75.8 from a month earlier and registered the highest reading since March…”
October 26 – Wall Street Journal (Nicole Friedman and Gina Heeb): “The U.S. housing market is stuck. The real-estate industry hoped 2024 would be a recovery year in which mortgage rates fell and home sales climbed. Mortgage rates dipped over the summer and hit a two-year low in September as they moved toward 6%. But buyers continued to hold back. They have been spooked by expensive home prices and low inventory… Now, sales of existing homes are on track for their worst year since 1995 for the second year in a row… Even if this year’s sales slightly exceed last year’s level, they are still on track for the worst two-year period since the mid-90s, when the country’s population was considerably smaller.”
October 30 – Bloomberg (Charlie Wells, Claire Ballentine and Carmen Arroyo): “Camille Weston’s breast augmentation carried a $7,000 price tag. Her insurance, of course, wouldn’t cover it. But a lender happily would. So the 22-year-old Salt Lake City resident opened a credit line — interest free for six months — and went under the knife. The procedure could turbocharge her TikTok following and might help the social media agency she runs with her sister, too... Weston is part of a growing cohort eager to spend on ultra-pricey cosmetic work and willing to borrow to fund it. Procedures like tummy tucks and lip fillers are are on the rise, helped along by scores of social media influencers flaunting their results. And the bills that go along with them are increasingly being financed by specialty lenders… ‘You wouldn’t think that they would need to have this type of financing,’ said Shawna Chrisman, founder of Destination Aesthetics Medical Spa... ‘These are responsible people with their money, but they’re using this as an option to ideally get packages and higher-service treatments that have a higher ticket price.’ A setup like that is a sort of siren call for Wall Street.”
Fixed Income Watch:
October 31 – Bloomberg (Gowri Gurumurthy): “US junk bonds are headed for their first monthly loss since April… Yields climbed 29 bps to 7.28%, also the first monthly jump since April. While the losses extended to BBs and single Bs, CCCs, the riskiest segment of the junk-bond market, bucked the trend and is on track to record a sixth straight month of positive returns, the longest streak since June 2021.”
China Watch:
October 28 – Bloomberg (Myungshin Cho): “The Chinese economy’s debt ratio reached a record high... The macro leverage ratio, which measures the amount of debt held by households, non-financial enterprises and government compared to total GDP, edged up to 296.4% in the third quarter, driven by increase in government’s debt as a percentage of gross domestic product.”
October 29 – Reuters: “China is considering approving next week the issuance of over 10 trillion yuan ($1.4 trillion) in extra debt in the next few years to revive its fragile economy, a fiscal package which is expected to be further bolstered if Donald Trump wins the U.S. election, said two sources... China's top legislative body, the Standing Committee of the National People's Congress (NPC), is looking to approve the fresh fiscal package, including 6 trillion yuan which would partly be raised via special sovereign bonds… The 6-trillion-yuan worth of debt would be raised over three years including 2024, said the sources, adding the proceeds would primarily be used to help local governments address off-the-books debt risks. The planned total amount, to be raised… equates to over 8% of the output of the world's second-largest economy…”
October 31 – Reuters: “China's central bank has injected 500 billion yuan ($70.24bn) into its banking system during October through a new reverse repurchase tool announced earlier this week… The People's Bank of China (PBOC) said the repo operations aimed to ‘keep banking system liquidity reasonably ample’.”
October 26 – Bloomberg: “China’s recent rollout of stimulus is centered around lifting domestic demand and hitting the nation’s annual growth goal, said Vice Finance Minister Liao Min… ‘The goals are to enhance the strength of macro policies to expand domestic demand and reach this year’s GDP growth target,’ Liao told Bloomberg... ‘And in the meantime to coordinate with monetary policy to push for the restructuring of the economy, particularly to boost domestic demand including consumption.’ ‘The size of this round of policies will be of quite large scale…’”
October 28 – Bloomberg: “Some of China’s commercial banks are issuing loans for listed companies to buy back their shares or increase their equity stakes at lower rates than other lenders to attract clients, amid a government push to boost investor confidence in the country’s stock market, according to a Securities Daily report. The interest rates of such loans were offered at as low as 1.75%, same as the cost at which the banks could borrow through PBOC re-lending with a maturity of one year…”
October 27 – Bloomberg: “Interest rates in some corners of China’s financial system didn’t follow a record policy rate cut lower, highlighting the challenges authorities are facing. The costs for banks to borrow from each other for more than three months remained largely steady compared with a month ago, and so did the costs for non-bank institutions to borrow short-term funds. A booming stock market is certainly one important reason. Households have taken cash out of their savings accounts, and redeemed wealth management products — which are mostly invested in bonds — essentially making it more difficult and relatively costly for banks and brokerages to raise funds elsewhere.”
October 31 – Bloomberg: “China’s first major economic indicators after authorities unveiled their recent stimulus push suggest the economy has stabilized somewhat, with manufacturing and housing sectors showing tentative signs of recovery… The Caixin manufacturing purchasing managers index unexpectedly rose to 50.3 last month from 49.3 in September. The reading from Caixin and S&P Global on Friday followed official surveys showing factory activity ended five months of contraction in October.”
October 28 – Bloomberg: “Sales of existing homes have risen in China’s biggest cities including Beijing, Shenzhen and Shanghai this month as supportive policies boosted sentiment in the country’s property market… The number of signed property deals in Beijing hit 12,979 in Oct. through 26th, 21% higher than same period last month, the report cited data from Cetaline Property Research…”
November 1 – Bloomberg: “China’s residential property sales rose in October, the first year-on-year increase of 2024, as the government’s latest stimulus blitz brought back buyers. The value of new-home sales from the 100 biggest real estate companies rose 7.1% from a year earlier to 435.5 billion yuan ($61.2bn), reversing from a 37.7% slump in September… Sales surged 73% from a month earlier. The improvement came after China unleashed its strongest package of measures, including cutting borrowing costs on existing mortgages, relaxing buying curbs in big cities and easing downpayment requirements.”
October 31 – Bloomberg: “China Vanke Co. suffered another loss in the third quarter, underscoring the property developer’s challenges even after the government rolled out stimulus measures to support the sector. The Shenzhen-based company reported a net loss of 8.1 billion yuan ($1.1bn), bringing its combined losses for the first nine months of the year to 17.9 billion yuan…”
October 27 – Bloomberg: “Chinese commodities producers centered on the old economy are still bearing the brunt of the nation’s economic slowdown, with steelmakers and crude oil processors in particular continuing to rack up losses. Cumulative losses in the world’s biggest steel industry swelled to 34 billion yuan ($5bn) over the first nine months of the year… The oil refining sector saw losses deepen to 32 billion yuan over the period. Profits at industrial firms more broadly declined at a faster pace than a month earlier.”
October 30 – Bloomberg: “China’s top solar manufacturers posted big losses in the third quarter as severe overcapacity and price wars continue to hurt the companies producing equipment critical to global energy transition. Leading panel-maker Longi Green Energy Technology Co. chalked up its fourth straight quarterly net loss of 1.26 billion yuan ($177 million)… Rivals Tongwei Co. and Trina Solar Co. also swung to losses, while JA Solar Technology Co. saw net income plunge and Jinko Solar Co. barely turned a profit.”
October 30 – Bloomberg: “Chinese firms sold the least amount of bonds domestically in the past two months since 2021, as they navigated rising borrowing costs and uncertainties tied to the government’s stimulus plans. Issuers priced 2.51 trillion yuan ($352bn) of bonds in September and October in the onshore market, down 8.4% from the same period last year…”
October 28 – Financial Times (Joe Leahy): “The number of China’s dollar billionaires has fallen by more than a third in the past three years, according to a ‘rich list’ compiled by research group Hurun, as government crackdowns, weakness in parts of the economy and depressed equity markets take their toll. Since hitting a peak of 1,185 in 2021, Hurun said the number of dollar billionaires had been reduced to 753… The list has also undergone rapid churn, Hurun said, with older entrepreneurs such as property developers making way for newer members such as Zhang Yiming, head of ByteDance.”
October 28 – Bloomberg (Rebecca Choong Wilkins): “To figure out how far President Xi Jinping will go to revive his struggling economy, a growing number of money managers are taking cues from a once-jailed Chinese dissident now living in Canada. From a basement in Calgary, often accompanied by his pet cat, Lu Yuyu spends 10 hours a day scouring the internet to compile stats on social instability before they are scrubbed by China’s censors. The 47-year-old exile won’t reveal his exact method because it risks jeopardizing the overall goal of the project... ‘These records provide an important basis for people to understand the truth of this period of history,’ said Lu, who started the effort in January 2023 but didn't make it public until he arrived in Canada a year ago. ‘I didn’t want to go to jail again,’ he explained.”
Central Banker Watch:
October 30 – Bloomberg (Mark Schroers and Alexander Weber): “The European Central Bank shouldn’t hurry to lower borrowing costs and go below the so-called neutral rate to stimulate the economy, according to Executive Board member Isabel Schnabel. While disinflation remains well on track, ‘the fight against inflation has not yet been won,’ she said... ‘A gradual approach to removing policy restriction remains appropriate.’ Her comments add to the debate among officials on the future rate path, after the ECB in mid-October lowered its borrowing costs for a third time this year but stayed tight-lipped on what happens next.”
October 30 – Bloomberg (Mark Schroers and Jana Randow): “German inflation quickened more sharply than expected and exceeded the European Central Bank’s 2% target... Consumer-price growth in Europe’s largest economy picked up to 2.4% in October from 1.8% the previous month – well above the 2.1% median estimate... Base effects linked to energy helped drive the uptick, with services, goods and food also contributing…”
Global Bubble Watch:
October 29 – Bloomberg (Swati Pandey): “Australia’s core inflation remained elevated last quarter, reinforcing the Reserve Bank’s view that price pressures will take time to dissipate and that monetary policy needs to stay restrictive for the time being. The trimmed mean measure of consumer prices… rose 0.8% in the three months through September… On an annual basis, the trimmed mean climbed 3.5%, also in line with forecasts. The RBA is focused on core CPI as government subsidies are suppressing headline prices.”
Europe Watch:
October 30 – Financial Times (Olaf Storbeck): “The Eurozone economy expanded by 0.4% in the third quarter, providing a boost for a region where growth has faltered this year… Growth fell back to 0.2% in the second quarter, down from 0.3% at the start of the year. The European Central Bank, which started to cut interest rates in June, has become increasingly concerned about the sluggishness of economic output, notably in Germany, the region’s manufacturing powerhouse.”
October 31 – Bloomberg (Alexander Weber): “Euro-area inflation accelerated more than expected — matching the European Central Bank’s target and boosting arguments for gradual rate cuts. Consumer prices rose 2% from a year ago in October, up from 1.7% the previous month and exceeding analysts’ estimates for a 1.9% increase… A smaller decline in energy costs was a major driver of the move. Closely watched core inflation, which excludes volatile items, unexpectedly held steady at 2.7%, while increases in food prices were faster.”
October 29 – Reuters (Maria Martinez and Matthias Williams): “Thousands of German workers launched nationwide strikes to press for higher wages on Tuesday, compounding problems for companies worried about staying globally competitive as high costs, weak exports and foreign rivals chip away at their strengths. The strikes by unionised workers in the nearly four-million strong electrical engineering and metal industries hit companies such as Porsche AG, BMW and Mercedes. Also this week, car giant Volkswagen could announce plans to shut three plants on home soil for the first time in its 87-year history, as well as mass layoffs and 10% wage cuts for workers who keep their jobs.”
Japan Watch:
October 27 – Financial Times (Leo Lewis): “Japan has been plunged into political uncertainty after voters delivered a harsh rebuke to the ruling coalition led by the Liberal Democratic party, stripping it of its parliamentary majority for the first time in 15 years. The result leaves the LDP struggling to govern and put Prime Minister Shigeru Ishiba under pressure to resign just weeks after he took office… The loss of the coalition’s previously comfortable majority was a much more damaging outcome than most analysts had forecast and reflects surging discontent in Japan after years of stagnant wage growth and recent sharp increases in the cost of living. ‘Looking at results, it is true voters have handed us a harsh verdict and we have to humbly accept this result,’ Ishiba… told broadcaster NHK.”
October 28 – Bloomberg (John Geddie, Tim Kelly and Sakura Murakami): “The make-up of Japan's future government was in flux on Monday after voters punished Prime Minister Shigeru Ishiba's scandal-tainted coalition in a weekend snap election, leaving no party with a clear mandate to lead the world's fourth-largest economy… ‘We cannot allow not even a moment of stagnation as we face very difficult situations both in our security and economic environments,’ Ishiba said at a news conference on Monday, pledging to continue as premier.”
October 31 – Financial Times (Leo Lewis and Harry Dempsey): “The Bank of Japan held short-term interest rates…, but signalled that further rises were still on the horizon as prices continued to climb. The unanimous decision from the Japanese central bank’s monetary policy board to maintain its target rate around 0.25% was widely expected… BoJ governor Kazuo Ueda confirmed that the bank would not be deterred by recent political turmoil in Japan, and would press ahead with raising rates if wages and prices continued to move in line with projections. ‘If the outlook for the economy and prices is realised, then I believe we will need to continue raising interest rates and adjust the level of monetary easing accordingly,’ he said.”
October 31 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan kept its benchmark interest rate unchanged while sticking to its view that it’s on track to achieve its inflation target, an outlook that points to the possibility of another rate hike in the coming months… The central bank said it needed to pay attention to the course of overseas economies and the US economy in particular. The US presidential vote looms large next week, leaving investors on guard for potential volatility in markets.”
November 1 – Bloomberg (Yoshiaki Nohara and Akemi Terukina): “The Bank of Japan shouldn’t raise interest rates again before March next year, according to Yuichiro Tamaki, a key potential ally for Japan’s weakened government. The central bank needs to closely examine the results of next year’s wage deal results before moving on policy again, Tamaki told Bloomberg… ‘Until we achieve nominal wage growth 2% above inflation, we should continue with monetary easing and proactive fiscal spending,’ Tamaki said. ‘We are still in a very important phase, trying to get out of the 30 years of deflation, so we want to make that our top priority first. We will avoid any increase in the burden on people.’”
Emerging Markets Watch:
October 31 – Bloomberg (Subhadip Sircar and Swati Pandey): “A $6.4 trillion foreign-exchange reserve pile in Asia is giving investors confidence that central banks have the ammunition to fight the dollar’s strength stemming from the US presidential election. Asian currencies have come under pressure in October, as rising odds of a Donald Trump presidency and uncertainties over the pace of the Federal Reserve’s easing bolstered the greenback. A Bloomberg index of the region’s currencies just had its worst month since February 2023, with the Indian rupee near its weakest ever and South Korea’s won close to a three-month low.”
Leveraged Speculation Watch:
November 1 – Reuters (Carolina Mandl and Davide Barbuscia): “Hedge funds and other investors are searching for trades that profit from a win by Republican presidential candidate Donald Trump, but also offer limited downside in the event of a victory by Vice President Kamala Harris. As the nearly deadlocked race nears, some are looking for so-called ‘asymmetric trades’ involving bitcoin or the yuan, assets which could yield big profits if Trump wins but would not cause big losses if the wagers are wrong. ‘Trading the election is difficult given how tight it is,’ said Edoardo Rulli, head of UBS Hedge Fund Solutions.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 28 – Bloomberg (Anthony Capaccio): “JPMorgan… says the US is facing significant strains on its water supply that have the potential to harm the world’s largest economy and eat into corporate valuations. The water resources of the US, already overstretched, are being further stressed by the boom in artificial intelligence, according to a report… by JPMorgan and sustainability consultancy ERM… The research shows how the growth of AI, which requires vast amounts of water to cool power-hungry data centers and for semiconductor manufacturing, is bumping up against the reality of climate change. The upshot is that a surge in demand is colliding with less reliable precipitation patterns, leading to dangerous water shortages… Large data centers can use as much as 5 million gallons of water a day…”
October 30 – Bloomberg (Emily Beament): “Climate change made the 10 deadliest extreme weather events over the past two decades worse, contributing to the deaths of more than 570,000 people, scientists have said. Climate scientists said the finding ‘underscores how dangerous extreme weather events have already become’ with just 1.3C of global warming above pre-industrial levels. It also highlights the urgency of cutting the greenhouse gas emissions driving rising temperatures and more extreme weather, they said, as the world is currently on track for 3C of warming by the end of the century - a level recently described by UN chief Antonio Guterres as ‘catastrophic’.”
October 29 – Associated Press (Seth Borenstein): “A bone-dry October is pushing nearly half of the United States into a flash drought, leading to fires in the Midwest and hindering shipping on the Mississippi River. More than 100 different long-term weather stations in 26 states, including Alaska, are having their driest October on record... Cities that have had no measurable rain for October include New York, Houston, Dallas, Philadelphia, San Francisco and Sioux City, Iowa… ‘This is on pace for a record dry October,’ said Allison Santorelli, acting warning coordinator for the National Oceanic and Atmospheric Administration’s Weather Prediction Center…”
October 30 – Reuters (David Ljunggren): “An aggressive Chinese hacking campaign is the most active state cyber threat to Canada, the country's signals intelligence agency said on Wednesday, in the latest warning about clandestine activity by Beijing. In a new threat assessment, the Communications Security Establishment Canada also said Russia's cyber program was trying to confront and destabilize Canada and its allies and cited Iran as a threat.”
Geopolitical Watch:
October 29 – Associated Press (Kim Tong-Hyung): “North Korea said… its top diplomat is visiting Russia, in another sign of their deepening relations... North Korea’s official Korean Central News Agency said a delegation led by Foreign Minister Choe Son Hui departed for Russia on Monday… In a closed-door hearing at South Korea’s parliament, the South’s spy agency said Choe may be involved in high-level discussions on sending additional troops to Russia and negotiating what the North would get in return…”
The S&P500 fell 1.4% (up 20.1% y-t-d), while the Dow was little changed (up 11.6%). The Utilities dropped 2.9% (up 23.4%). The Banks added 0.6% (up 26.5%), and the Broker/Dealers gained 1.0% (up 34.5%). The Transports advanced 1.5% (up 2.8%). The S&P 400 Midcaps (up 11.6%) and small cap Russell 2000 (up 9.0%) were little changed. The Nasdaq100 lost 1.6% (up 19.1%). The Semiconductors sank 4.1% (up 19.8%). The Biotechs rallied 3.5% (up 10.1%). With bullion $11 lower, the HUI gold index dropped 4.1% (up 30.4%).
Three-month Treasury bill rates ended the week at 4.395%. Two-year government yields rose 10 bps to 4.21% (down 4bps y-t-d). Five-year T-note yields jumped 16 bps to 4.22% (up 38bps). Ten-year Treasury yields advanced 14 bps to 4.38% (up 50bps). Long bond yields increased eight bps to 4.58% (up 55bps). Benchmark Fannie Mae MBS yields jumped 12 bps to 5.81% (up 54bps).
Italian 10-year yields surged 17 bps to 3.68% (down 2bps y-t-d). Greek 10-year yields jumped 14 bps to 3.31% (up 25bps). Spain's 10-year yields rose 12 bps to 3.12% (up 13bps). German bund yields gained 11 bps to 2.40% (up 38bps). French yields rose 12 bps to 3.16% (up 60bps). The French to German 10-year bond spread widened about one to 76 bps. U.K. 10-year gilt yields surged 21 bps to 4.45% (up 91bps). U.K.'s FTSE equities index declined 0.9% (up 5.7% y-t-d).
Japan's Nikkei 225 Equities Index added 0.4% (up 13.7% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.95% (up 34bps y-t-d). France's CAC40 declined 1.2% (down 1.8%). The German DAX equities index fell 1.1% (up 14.9%). Spain's IBEX 35 equities index increased 0.3% (up 17.2%). Italy's FTSE MIB index slipped 0.3% (up 14.2%). EM equities were mostly lower. Brazil's Bovespa index fell 1.4% (down 4.5%), and Mexico's Bolsa index dropped 2.2% (down 11.8%). South Korea's Kospi slumped 1.6% (down 4.3%). India's Sensex equities index added 0.4% (up 10.4%). China's Shanghai Exchange Index declined 0.8% (up 10.0%). Turkey's Borsa Istanbul National 100 index dipped 0.3% (up 18.9%).
Federal Reserve Credit declined $18.2 billion last week to $6.974 TN. Fed Credit was down $1.915 TN from the June 22, 2022, peak. Over the past 268 weeks, Fed Credit expanded $3.248 TN, or 87%. Fed Credit inflated $4.164 TN, or 148%, over the past 625 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $7.6 billion last week to $3.329 TN. "Custody holdings" were down $92 billion y-o-y, or 2.7%.
Total money market fund assets slipped $2.2 billion to $6.506 TN. Money funds were up $371 billion over 13 weeks (24% annualized), $620 billion y-t-d (12.4% ann.), and $811 billion, or 14.2%, y-o-y.
Total Commercial Paper jumped $24.9 billion to $1.182 TN. CP was down $36 billion, or 3.0%, over the past year.
Freddie Mac 30-year fixed mortgage jumped 18 bps this week to a 13-week high 6.72% (down 100bps y-o-y). Fifteen-year rates surged 28 bps to 5.99% (down 108bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 11 bps to a three-month high 7.33% (down 59bps).
Currency Watch:
For the week, the U.S. Dollar Index was little changed at 104.317 (up 2.9% y-t-d). For the week on the upside, the South Korean won increased 0.8%, the euro 0.4%, and the South African rand 0.1%. On the downside, the Brazilian real declined 2.8%, the Mexican peso 1.5%, the Swedish krona 1.1%, the Norwegian krone 0.8%, the Australian dollar 0.7%, the Japanese yen 0.5%, the Canadian dollar 0.4%, the Swiss franc 0.4%, the Singapore dollar 0.4%, the British pound 0.3%, and the New Zealand dollar 0.2%. The Chinese (onshore) renminbi declined 0.11% versus the dollar (down 0.41% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index fell 2.2% (down 0.6% y-t-d). Spot Gold slipped 0.4% to $2,737 (up 32.6%). Silver dropped 3.6% to $32.49 (up 36.5%). WTI crude reversed $2.29, or 3.2%, lower to $69.49 (down 3%). Gasoline dropped 5.4% (down 7%), while Natural Gas rose 4.0% to $2.66 (up 6%). Copper was little changed (up 12%). Wheat slipped 0.2% (down 10%), and Corn declined 0.2% (down 12%). Bitcoin jumped $2,100, or 3.1%, to $69,260 (up 63%).
Election Watch:
October 31 – Associated Press (Linley Sanders): “Most Americans are feeling a lot of emotions heading into Election Day, but excitement is not one of them. A new poll from The AP-NORC Center for Public Affairs Research finds that about 7 in 10 Americans report feeling anxious or frustrated about the 2024 presidential campaign, and a similar share say they’re interested. Only about one-third say they feel excited.”
October 30 – Axios (Andrew Solender): “Lawmakers in both parties are bracing themselves for a tumultuous period after the Nov. 5 election, with many openly expressing fears of political violence… Democrats, in particular, see it as virtually inevitable that Trump will challenge the election results if he loses, raising the specter of nationwide civil unrest or even a repeat of the Jan. 6 attack… Republicans, on the other hand, claim the real threat will be from the political left being unable to accept another Trump term… Federal and local law enforcement are already ramping up security across D.C. ahead of the election… The Secret Service confirmed to Axios that security enhancements have been made to the Capitol in the run-up to the certification of presidential electors on Jan. 6 — including fencing erected around the Capitol complex.”
October 29 – Financial Times (Stephen Foley and Radhika Rukmangadhan): “In the race for the White House, the largest companies in the US are facing two starkly different financial futures, separated by one vast sum: a quarter of a trillion dollars a year. The potential price tag is thanks to the differing tax policies of the two candidates… Kamala Harris is promising to partly reverse Donald Trump’s big reduction in the corporate rate, while the former president says he will lower it further… Big business, meanwhile, is gearing up to protect its gains. The quarter-trillion figure is based on estimates from Goldman Sachs, which says Trump’s proposal to cut the corporate rate from 21% to 15% would add 4% to the earnings of the S&P 500. Harris’s plan to raise it to 28% would reduce earnings by 5%, the Wall Street bank estimated, and her other corporate tax proposals would shave a further 3%.”
November 1 – Bloomberg (Patricia Lopez): “Big money has never been as big nor as bold as it has been in the 2024 presidential election, and the failure to rein it in could further solidify the already overwhelming influence the super-wealthy wield over our political system. This election cycle is expected to be the most expensive in history, with nearly $16 billion spent on the presidential and congressional races. Outside spending alone is projected to top $5 billion — far more than the $1.6 billion outside groups spent in 2020. The problem of megadonors playing an outsized role in elections was compounded earlier this year when the Federal Election Commission lifted the longtime ban against candidates coordinating with outside groups such as super PACs, which can raise and spend unlimited money.”
October 29 – New York Times (Sheera Frenkel, Tiffany Hsu and Steven Lee Myers): “When Russia interfered in the 2016 U.S. presidential election, spreading divisive and inflammatory posts online to stoke outrage, its posts were brash and riddled with spelling errors and strange syntax… ‘Hillary is a Satan,’ one Russian-made Facebook post read. Now, eight years later, foreign interference in American elections has become far more sophisticated, and far more difficult to track. Disinformation from abroad — particularly from Russia, China and Iran — has matured into a consistent and pernicious threat, as the countries test, iterate and deploy increasingly nuanced tactics, according to U.S. intelligence and defense officials, tech companies and academic researchers.”
Middle East War Watch:
October 26 – Wall Street Journal (Sune Engel Rasmussen, Jared Malsin and Summer Said): “Israel’s attack on Iran early Saturday—the most serious military strike on Iranian soil in decades—was calibrated to avoid prompting an escalatory response, but it also moved the two foes deeper into a direct conflict that is creating a new and dangerous era for the Middle East. Israel launched its strike in retaliation for a barrage of more than 180 missiles that Iran fired at Israel on Oct. 1. Saturday’s complex attack played out in several waves over several hours, involving dozens of warplanes that struck missile manufacturing facilities and surface-to-air missile defense sites in three different provinces, killing four soldiers. It steered clear of striking the nuclear and oil facilities… Among the military assets Israel targeted were Iranian aerial-defense systems, including Russian-made S-300 surface-to-air batteries, according to an Israeli official, who said Israel destroyed several of the country’s S-300 batteries.”
October 31 – Axios (Barak Ravid): “Israeli intelligence suggests Iran is preparing to attack Israel from Iraqi territory in the coming days, possibly before the U.S. presidential election, two Israeli sources tell Axios… Carrying the attack out through pro-Iranian militias in Iraq and not directly from Iranian territory could be an attempt by Iran to avoid another Israeli attack against strategic targets in Iran… The sources said… the attack is expected to be carried out from Iraq using a large number of drones and ballistic missiles… A high-ranking Iranian source told CNN that Iran is planning a ‘definitive and painful’ response that will likely come before the election… Mohammad Mohammadi Golpayegani, chief of staff to Iran's supreme leader, told TV network al-Mayadeen… Iranian retaliation was ‘certain.’ He said the Iranian response will be ‘strong’ and will ‘make our enemy regret’ its attack.”
November 1 – Financial Times (Najmeh Bozorgmehr): “Global oil prices rose after top commanders of Iran’s elite Revolutionary Guards vowed that Tehran would deliver a harsh response to last week’s Israeli strikes on the Islamic republic, sparking fears of further escalation in the region. Major General Hossein Salami, the head of the guards corps, warned… that Iran’s retaliation would be ‘unimaginable’ as Iranian officials stepped up their rhetoric against Israel. ‘Israelis think they can launch a couple of missiles and change history,’ he said. ‘You have not forgotten… how Iranian missiles opened up the sky… and made you sleepless.’”
October 29 – Financial Times (Bita Ghaffari and Najmeh Bozorgmehr): “Iran is set to drastically expand its defence budget for the coming fiscal year, following a recent exchange of missile fire with Israel that has heightened the risk of broader conflict across the Middle East. Government spokesperson Fatemeh Mohajerani said… the administration had recommended a 200% increase in next year’s defence allocation to the parliament…”
Ukraine War Watch:
October 31 – Reuters (Michelle Nichols): “The United States has received information that indicates that ‘right now’ there are 8,000 North Korean troops in Russia's Kursk region, deputy U.S. Ambassador to the United Nations Robert Wood told the Security Council… ‘I have a very respectful question for my Russian colleague: Does Russia still maintain that there are no DPRK troops in Russia?’ Wood said, referring to North Korea's formal name: the Democratic People's Republic of Korea.”
October 26 – Wall Street Journal (Yaroslav Trofimov): “Several times over the past three months, swarms of as many as 150 Ukrainian drones flew hundreds of miles into Russia, slamming into missile storage facilities, strategic fuel reservoirs, military airfields and defense plants. Once considered exceptional, these deep strikes now barely register in the news. Yet, Ukrainian officials and some of their Western backers increasingly see the pain that long-range attacks inflict as a game-changer that could force President Vladimir Putin into negotiating an acceptable peace. ‘Our capacity to return the war back to its home, to Russia, is what fundamentally alters the situation,’ Ukrainian President Volodymyr Zelensky said… The attack… destroyed some 58 warehouses and a railway terminal at an artillery and rocket arsenal northwest of Moscow.”
October 29 – Reuters (Pavel Polityuk and Tom Balmforth): “President Volodymyr Zelenskiy said… he had agreed with South Korea's president to step up contacts between their nations at all levels to develop countermeasures and a strategy to respond to North Korea's involvement in the war in Ukraine. Zelenskiy, in a readout of a phone call with President Yoon Suk Yeol published on X, said the two leaders also agreed to strengthen exchanges of intelligence and expertise.”
Taiwan Watch:
October 27 – Bloomberg (Twinnie Siu and Phila Siu): “China said it filed a diplomatic complaint with the US and reserved the right to retaliate after the latest American weapons sales to Taiwan, escalating tensions in their dispute over the archipelago. ‘China will resolutely respond and take all necessary measures to firmly safeguard national sovereignty, security and territorial integrity,’ the Foreign Ministry in Beijing said…, following US approval of about $2 billion of military sales to Taiwan. ‘China urges the US to immediately stop arming Taiwan and immediately stop dangerous actions that undermine peace and stability across the Taiwan Strait’…”
October 28 – Bloomberg (Anthony Capaccio): “The Taiwan Ministry of Defense has signed formal agreements with the US government allowing it to buy as many as 1,000 attack drones from AeroVironment Inc. and Anduril Industries Inc. to aid in blunting a potential Chinese assault on the island democracy… Taiwan signed a ‘letter of offer and acceptance’ in late September, the step before signed contracts that specify quantities, dollar values and delivery dates. Those contracts could be signed soon…”
Market Instability Watch:
October 30 – Financial Times (Ian Smith and Rafe Uddin): “UK borrowing costs climbed on Wednesday, reversing an initially positive reaction to the Labour government’s inaugural Budget, as investors were ‘caught unaware’ by the level of additional borrowing needed to fund Rachel Reeves’ plans… Analysts said the market was responding to an increase of borrowing of £28bn a year over the parliament, after what the Office for Budget Responsibility called ‘one of the largest fiscal loosenings of any fiscal event in recent decades’. ‘It’s the amount of extra borrowing which is above and beyond what had been expected [that] has caught the market a bit unaware,’ said Moyeen Islam, a fixed-income strategist at Barclays. ‘Going forward from here, it is still pretty challenging.’”
October 29 – Bloomberg (Edward Bolingbroke): “A bearish tone is taking hold in Treasury options as traders bet that a crucial stretch ahead — with the US presidential election just days away — will deepen losses in bonds and spark bouts of increased volatility. Yields have already surged this month, in part on speculation that the winner of the Nov. 5 vote will boost fiscal stimulus… But options traders see the risk of an even steeper selloff. They’re targeting a 4.5% yield on the 10-year note, which would be the highest since May.”
October 30 – Barron's (Sheila Bair): “I have seen more than my fair share of financial crises during my time in the U.S. government. I was the assistant secretary of the U.S. Treasury for financial institutions during the 9/11 terrorist attacks and chair of the Federal Deposit Insurance Corp. during the 2007-2008 financial crisis. The U.S. government resorted to deficit-financed spending and tax relief to these crises, and to the pandemic. Those decisions were right. Unfortunately, once the crises passed, we just kept spending as if nothing had changed. Now, the resulting overhang of federal debt could itself be the cause of a future crisis. Our gross national debt exceeds $35 trillion. This puts the federal debt held by the public at a staggering 99% of U.S. gross domestic product, nearly as high as its peak at the end of World War II. After the war, our ‘greatest generation’ of political leadership steadily restored our nation's finances, bringing the debt down to about 31% of GDP by 1981. Unfortunately, more recent political leadership has concluded that deficits do not matter.”
Global Credit Bubble Watch:
October 29 – Bloomberg (Immanual John Milton and Charles E Williams): “Sales of debt backed by everything from auto loans to airplane leases to Subway franchise fees have hit their highest level since the financial crisis… Asset-backed securities sales have topped $316 billion, surpassing 2021’s $312.6 billion… According to Bank of America… this year’s sales are the highest in the decade-and-a-half following the Great Financial Crisis… Investors have flocked to exotic asset-backeds in particular — bonds supported by music royalties, revenue from data centers and cell towers, among other cash flows, instead of more conventional collateral like credit card debt. Sales of exotic ABS have jumped to about $89 billion, up from $54 billion around this time last year…”
October 29 – Bloomberg (Neil Callanan, Naureen S Malik, Will Mathis, and Silas Brown): “Some of the world’s biggest managers of private capital are making moves to finance and invest in nuclear power plants, latching onto a revival in the sector driven in part by tech giants’ electricity-intensive AI ambitions. Carlyle Group Inc. has been approached about backing credit investments linked to nuclear… and Brookfield Asset Management is looking at boosting its exposure to the industry. Apollo Global Management Inc. is in talks to provide financing for a plant under construction at Hinkley Point in the UK… The tech sector’s huge energy needs have led to a number of recent deals.”
October 31 – Financial Times (Ian Smith, George Steer, Sam Fleming, Michael O’Dwyer and Ortenca Aliaj): “A sell-off in UK government bonds intensified on Thursday, as investor worries over additional debt in chancellor Rachel Reeves’ Budget pushed UK borrowing costs to their highest level of the year. The yield on the 10-year gilt was up 0.09 percentage points to 4.44%, having earlier climbed above 4.50%. The pound fell 0.8% against the dollar to $1.286, its lowest in more than two months. With government bond prices falling, Reeves said that the Labour government’s ‘number one commitment’ was to economic and fiscal stability, insisting… that she had put in place robust fiscal rules and that there would be a ‘significant fiscal consolidation’.”
October 29 – Bloomberg (Nicolas Parasie and Laura Gardner Cuesta): “A chorus of Wall Street chiefs said the worlds of private credit and traditional bank debt are continuing to collide — with Apollo Global Management Inc.’s Marc Rowan predicting that in just 18 months some borrowers won’t be able to tell the difference between the two offerings. The $1.7 trillion private credit market swelled in size by providing capital to private, non-investment-grade companies or other businesses that couldn’t get traditional bank financing. Now, though, asset managers like Apollo or rival Blackstone Inc. are trying to lend more to established businesses — putting them in a position to further unseat Wall Street incumbents.”
November 1 – Bloomberg (Scott Carpenter): “The biggest buyers of leveraged loans have gained the freedom to purchase more of the debt in recent months after refinancing their liabilities. Fund managers that buy loans and bundle them into bonds known as collateralized loan obligations could have some $100 billion more to freely invest over time compared with a year ago, largely thanks to bankers springing into action in recent months to modify the vehicles. When CLO managers raise money by issuing bonds, they typically have as long as five years to buy loans with the proceeds with relatively few investment restrictions…”
AI Bubble Watch:
November 1 – Reuters (Anna Tong, Aditya Soni and Deborah Mary Sophia): “Big technology companies including Microsoft, Meta and Amazon are stepping up spending to build out AI data centers in a rush to meet vast demand, but Wall Street is hungry for a quicker payday on the billions invested. Microsoft and Meta both said… their capital expenses were growing due to their AI investments. Alphabet, too, reported… that these expenditures would remain elevated, while Amazon said they would increase the rest of the year and into 2025. The extensive capital spending could threaten fat margins at these companies and pressure on profitability is likely to spook investors.”
October 31 – Bloomberg (Kurt Wagner): “Meta Platforms Inc. CEO Mark Zuckerberg will ramp up heavy investments in AI and other futuristic technologies, continuing a years-long tug-of-war between the company’s long-term bets and the core advertising business that provides the vast majority of Meta’s revenue. Zuckerberg warned investors Wednesday that Meta will continue to spend significantly on infrastructure and other projects like the metaverse and AI-powered glasses, efforts he believes are core to the company’s future.”
October 30 – Wall Street Journal (Katherine Blunt): “KKR and Energy Capital Partners have agreed to invest a combined $50 billion in data-center and power-generation projects to support the development of artificial intelligence. The investment is a bet on AI’s huge energy needs and the mounting stress it is putting on the U.S. power grid… KKR, one of the world’s largest investment companies, and Energy Capital Partners, a private-equity firm, have each been spending heavily on the infrastructure underpinning the AI boom. The companies said they are now working together with large tech companies to accelerate their access to electricity… ‘The capital needs are huge, and one of the big bottlenecks—maybe the bottleneck—is electricity availability,’ ECP founder… Doug Kimmelman said.”
October 28 – Bloomberg (Naureen S. Malik): “CenterPoint Energy Inc. has seen a 700% increase in requests from data center developers to connect to its Houston-area utility within months. The Greater Houston’s utility’s queue from data centers now tops 8 gigawatts, up from 1 gigawatts before summer, CenterPoint Chief Executive Officer Jason Wells said… The company confirmed… this planned development is located entirely around Houston…, and facilities supporting artificial intelligence are likely the leading cause of the increase. ‘Over the summer, we have seen a fundamental shift in data center development,’ Wells said... ‘While we recognize that not all of this will be developed, it is yet another tailwind in what we continue to believe is one of the most tangible long-term growth stories in the industry.’”
October 27 – Bloomberg (Akiko Fujita): “Small modular reactors (SMRs) have long held the promise of cheaper, more efficient nuclear energy. Their smaller, standardized designs were expected to usher in a new era for an industry historically plagued by cost overruns and safety concerns. But as major tech firms, including Google and Amazon, turn to advanced technologies in hopes of powering their AI ambitions with a low carbon footprint, skeptics are raising questions about their viability, largely because no commercial SMR has been built in the US yet. Despite the talk of a simplified process, there are only three SMRs operational worldwide — two in Russia and one in China. ‘Nobody knows how long they’re going to take to build,’ said David Schlissel, an analyst at the Institute for Energy Economics and Financial Analysis… ‘Nobody knows how expensive they’re going to be to build. We don't know how effective they will be in addressing climate change because it may take them 10 to 15 years to build them.’”
Bubble and Mania Watch:
October 29 – Bloomberg (Viktoria Dendrinou): “US Treasury Secretary Janet Yellen said that fraud in the banking system is becoming a huge problem and that her department is now using artificial intelligence to detect and deal with the issue. ‘I absolutely agree with the premise — which is that fraud is becoming a huge problem,’ Yellen said… She added that fraud is now seen nationwide, including through a big increase in fraud around government checks.”
October 29 – Bloomberg (Ryan Gould and David Carnevali): “Private equity firms are back to spending big in their hunt for public US companies. They have struck almost $85 billion in deals this year involving listed US targets… That’s up by roughly half on the same point in 2023 and the second-highest year-to-date tally since 2010... The dealmaking is being driven by trillions of dollars of unspent capital sitting in private equity funds, as well as by Wall Street’s renewed appetite for financing leveraged buyouts. These factors, together with a booming private credit market, are providing buyout firms with ample funds to pursue deals.”
October 29 – Reuters (Niket Nishant and Manya Saini): “U.S. regional banks continue to grapple with pressures in their office loan books as remote work stays prevalent, but rate cuts may provide some relief by easing the strain on other commercial real estate (CRE) segments, analysts said. Nearly a dozen mid-sized and regional U.S. banks reported higher non-performing loans (NPLs)… in their CRE portfolios in the third quarter compared with a year earlier… A looming ‘maturity wall’ could complicate matters further… Roughly $950 billion of CRE mortgages are expected to mature in 2024, of which 10% are tied to office properties, according to… S&P Global Market Intelligence.”
October 28 – Bloomberg (Carmen Arroyo, Natalie Wong, Aaron Gordon, and Christopher Cannon): “1407 Broadway was, as far as the financiers of Wall Street could tell, as rock-solid an asset as could possibly exist. Located in the heart of Manhattan’s storied Garment District, its entrance cut from white marble flecked with a soft bronze terrazzo motif, the 43-floor tower was a money-minting machine with a never-ending roster of well-heeled corporate tenants. So when the owners floated a $350 million bond backed by the building’s rental income in 2019, the bulk of the debt was stamped with a AAA credit rating… On June 17 — four years and 212 days after the bond was issued — investors in the AAA rated chunk of debt were informed they wouldn’t be getting the full $1 million interest payment they were owed that month. They’re now foreclosing… to salvage whatever they can of their investment. Over in Chicago, at a building called River North Point, it’s a similar story. So too at 600 California St. in San Francisco and at 555 West 5th St. in Los Angeles…”
October 31 – Bloomberg (Keith Naughton): “Ford Motor Co. plans to shut down the Michigan factory that produces its F-150 Lightning plug-in pickup truck, its signature electric vehicle, through the end of the year as demand for EVs continues to wane. The move is the latest blow to a model that had been a centerpiece of Ford’s EV strategy and that Chief Executive Officer Jim Farley said would be ‘a test for adoption of electric vehicles.’”
De-globalization and Iron Curtain Watch:
October 29 – Reuters (Philip Blenkinsop): “The European Union has decided to increase tariffs on Chinese-built electric vehicles to as much as 45.3% at the end of its highest profile trade investigation that has divided Europe and prompted retaliation from Beijing. Just over a year after launching its anti-subsidy probe, the European Commission will set out extra tariffs ranging from 7.8% for Tesla to 35.3% for China's SAIC, on top of the EU's standard 10% car import duty… The Commission… has said tariffs are required to counter what it says are unfair subsidies including preferential financing and grants as well as land, batteries and raw materials at below market prices. It says China's spare production capacity of 3 million EVs per year is twice the size of the EU market. Given 100% tariffs in the United States and Canada, the most obvious outlet for those EVs is Europe.”
October 30 – Reuters (Zhang Yan and Kevin Krolicki): “China has told its automakers to halt big investment in European countries that support extra tariffs on Chinese-built electric vehicles... Ten EU members including France, Poland and Italy supported tariffs in a vote this month, in which five members including Germany opposed them and 12 abstained. As Beijing continues negotiations over an alternative to tariffs…”
October 26 – New York Times (Keith Bradsher): “The vise-tight grip that China wields over the mining and refining of rare minerals, crucial ingredients of today’s most advanced technologies, is about to become even stronger. In a series of steps made in recent weeks, the Chinese government has made it considerably harder for foreign companies, particularly semiconductor manufacturers, to purchase the many rare earth metals and other minerals mined and refined mainly in China. Already, China produces almost all the world’s supply of these materials… As of Oct. 1, exporters must provide the authorities with detailed, step-by-step tracings of how shipments of rare earth metals are used in Western supply chains. That has given Beijing greater authority over which overseas companies receive scarce supplies.”
U.S./Russia/China/Europe Watch:
October 28 – Reuters (Phil Stewart and Andrew Gray): “The U.S. will not impose new limits on Ukraine's use of American weapons if North Korea joins Russia's war, the Pentagon said…, as NATO said North Korean military units had been deployed to the Kursk region in Russia. The North Korea deployment is fanning Western concerns that the 2-1/2-year conflict in Ukraine could widen, even as attention shifts to the Middle East. It could signal how Russia hopes to offset mounting battlefield losses and continue making slow, steady gains in eastern Ukraine.”
October 31 – Associated Press (Didi Tang and Matthew Lee): “The U.S. and South Korea have called on China to use its influence over Russia and North Korea to prevent escalation after Pyongyang sent thousands of troops to Russia to aid Moscow’s war against Ukraine. Beijing has so far stayed quiet. In a rare meeting earlier this week, three top U.S. diplomats met with China’s ambassador to the United States to emphasize U.S. concerns and urge China to use its sway with North Korea to try to curtail the cooperation… Secretary of State Antony Blinken said Thursday that the sides had ‘a robust conversation just this week’ and that China knows U.S. expectations are that ‘they’ll use the influence that they have to work to curb these activities.’”
November 1 – Reuters (Hyunsu Yim, Josh Smith and Hyun Young Yi): “North Korea flexed its military muscle with the test of a huge new solid-fuel intercontinental ballistic missile dubbed Hwasong-19… The launch… flew higher than any previous North Korean missile, according to the North as well as militaries in South Korea and Japan that tracked its flight deep into space before it splashed down in the ocean between Japan and Russia… ‘The new-type ICBM proved before the world that the hegemonic position we have secured in the development and manufacture of nuclear delivery means of the same kind is absolutely irreversible,’ North Korean leader Kim Jong Un said while overseeing the launch, KCNA reported.”
October 29 – Wall Street Journal (Nancy A. Youssef and Gordon Lubold): “The U.S. is running low on some types of air-defense missiles, raising questions about the Pentagon’s readiness to respond to the continuing wars in the Middle East and Europe and a potential conflict in the Pacific. Interceptors are fast becoming the most sought-after ordnance during the widening crisis in the Middle East…”
Inflation Watch:
October 31 – CNBC (Jeff Cox): “Inflation increased slightly in September and moved closer to the Federal Reserve’s target… The personal consumption expenditures price index showed a seasonally adjusted 0.2% increase for the month, with the 12-month inflation rate at 2.1%... The Fed uses the PCE reading as its primary inflation gauge, though policymakers also follow a variety of other indicators…. Though the headline number showed the central bank nearing its goal, the inflation rate was at 2.7% excluding food and energy, after the so-called core measure increased 0.3% on a monthly basis.”
October 29 – Yahoo Finance (David Hollerith): “Some of the top figures on Wall Street sound more concerned about the persistence of inflation than the occupant of the Oval Office in 2025. ‘I do believe we have greater embedded inflation in the world than we've ever seen,’ BlackRock CEO Larry Fink said… adding that ‘no one is asking the question, 'At what cost?’’… No matter who wins the election, most finance bosses are concerned that inflation will prove to be stickier than expected. Thus they aren't expecting interest rates to come down as quickly as traders currently expect. ‘We're not going to see interest rates as low as people are forecasting,’ BlackRock’s Fink said.”
October 30 – Reuters (Lisa Baertlein, Doyinsola Oladipo and Jessica DiNapoli): “U.S. shippers are steering clear of East and Gulf Coast ports amid worries the 45,000 dockworkers at those trade hubs will go on strike again if their union leader does not land a new contract with employers by a Jan. 15 deadline. The International Longshoremen's Association (ILA) labor union and the United States Maritime Alliance (USMX) employer group had ended a three-day strike in October with a tentative agreement on wages, but left the thorny issue of port automation still to be resolved.”
October 30 – Wall Street Journal (Denny Jacob and Paul Page): “Trucking companies that have struggled through a weak freight market say they are expecting an upturn in rates later this year. ‘We have a lot of pricing initiatives that we’re executing on, and we would expect that momentum to continue here into the fourth quarter and into 2025 as well,’ Ali Faghri, chief strategy officer at XPO, said… after the trucker reported improved earnings in its latest quarter that got a boost from stronger freight rates.”
U.S. Economic Bubble Watch:
October 30 – CNBC (Jeff Cox): “The U.S. economy posted another solid though slightly disappointing period of growth in the third quarter, propelled higher by strong consumer spending… Gross domestic product… increased at a 2.8% annualized rate… Personal consumption expenditures… increased 3.7% for the quarter, the strongest performance since Q1 of 2023, contributing nearly 2.5 percentage points to the total. Another major factor… for growth was federal government spending, which exploded higher by 9.7%, pushed by a 14.9% surge in defense outlays… However, an 11.2% jump in imports, which subtract from GDP, held back the growth number and offset an 8.9% gain in exports.”
October 29 – Reuters (Lucia Mutikani): “U.S. consumer confidence increased to a nine-month high in October amid improved perceptions of the labor market. The Conference Board said… its consumer confidence index rose to 108.7 this month from a upwardly revised 99.2 in September. Economists… had forecast the index climbing to 99.5 from the previously reported 98.7. ‘Consumer confidence recorded the strongest monthly gain since March 2021, but still did not break free of the narrow range that has prevailed over the past two years,’ said Dana Peterson, the chief economist at the Conference Board. The share of consumers who viewed jobs as being ‘plentiful’ rose to 35.1% from 31.3% in September. Some 16.8% of consumers said jobs were ‘hard to get,’ down from 18.6% last month.”
October 30 – CNBC (Jeff Cox): “Private job creation burst to its highest level in more than a year during October, despite a devastating storm season in the Southeast and major labor disruptions, ADP reported… The payrolls processing firm said companies hired 233,000 new workers in the month, better than the upwardly revised 159,000 in September and far ahead of the… estimate for 113,000. ADP said it was the best month for job creation since July 2023. ‘Even amid hurricane recovery, job growth was strong in October,’ ADP’s chief economist, Nela Richardson, said. ‘As we round out the year, hiring in the U.S. is proving to be robust and broadly resilient’… Leading sectors included education and health services (53,000), trade, transportation and utilities (51,000), construction and leisure and hospitality, which added 37,000 apiece, and professional and business services, which contributed 31,000. Manufacturing was the only sector to report losses, down 19,000 on the month…”
November 1 – CNBC (Jeff Cox): “Job creation in October slowed to its weakest pace since late 2020 as the impacts of storms in the Southeast and a significant labor impasse dented the employment picture. Nonfarm payrolls increased by 12,000 for the month, down sharply from September and below the… estimate for 100,000… The unemployment rate, however, held at 4.1%... A broader measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons also was unchanged at 7.7%... The BLS noted that the Boeing strike likely subtracted 44,000 jobs in the manufacturing sector, which lost 46,000 positions overall.”
October 29 – Reuters (Lucia Mutikani): “U.S. job openings fell to the lowest level in more than 3-1/2 years in September and data for the prior month was revised down… Job openings… dropped by 418,000 to 7.443 million by the last day of September, the lowest level since January 2021, the Labor Department's Bureau of Labor Statistics said in its… JOLTS report… Data for August was revised down to show 7.861 million unfilled positions instead of the previously reported 8.040 million.”
October 31 – Reuters (Dan Burns): “U.S. layoff announcements tumbled in October to a three-month low in another sign the job market remains in good shape ahead of next week's presidential election, a monthly tally of workforce reduction announcements showed… Firms announced 55,597 layoffs last month, down 23.7% from the 72,821 announced in September, outplacement firm Challenger, Gray and Christmas said. Layoffs would have been even lower last month were it not for more than 18,000 aerospace industry job cuts, some 17,000 of which came from Boeing as it copes with an ongoing strike.”
October 30 – Bloomberg (Vince Golle): “US mortgage rates rose to the highest level since July… The contract rate on a 30-year fixed mortgage rose 21 bps to 6.73% in the week ended Oct. 25… In the last four weeks, the rate has risen nearly 60 bps, the most since March 2023.”
October 30 – CNBC (Diana Olick): “Mortgage rates rose last week for the fourth time in five weeks, causing another pullback in refinancing… Applications for a mortgage to purchase a home increased 5% for the week and were 10% higher than the same week one year ago. Real estate brokerages have reported a surge in interest from homebuyers recently, as the supply of homes for sale has increased.”
October 29 – Reuters (Lucia Mutikani): “U.S. single-family home prices increased in August amid still tight supply, which together with elevated mortgage rates continue to keep prospective buyers on the sidelines. House prices rose 0.3% on a month-on-month basis after gaining 0.2% in July, the Federal Housing Finance Agency said... They increased 4.2% in the 12 months through August after an upwardly revised 4.7% advance in July. The rise in annual house prices was previously reported to have been 4.5%.”
October 30 - Yahoo Finance (Claire Boston): “A measure of housing contract activity jumped 7.4% in September as buyers took advantage of lower mortgage rates and higher inventory. The Pending Home Sales Index, which tracks contract signings on existing homes, rose to 75.8 from a month earlier and registered the highest reading since March…”
October 26 – Wall Street Journal (Nicole Friedman and Gina Heeb): “The U.S. housing market is stuck. The real-estate industry hoped 2024 would be a recovery year in which mortgage rates fell and home sales climbed. Mortgage rates dipped over the summer and hit a two-year low in September as they moved toward 6%. But buyers continued to hold back. They have been spooked by expensive home prices and low inventory… Now, sales of existing homes are on track for their worst year since 1995 for the second year in a row… Even if this year’s sales slightly exceed last year’s level, they are still on track for the worst two-year period since the mid-90s, when the country’s population was considerably smaller.”
October 30 – Bloomberg (Charlie Wells, Claire Ballentine and Carmen Arroyo): “Camille Weston’s breast augmentation carried a $7,000 price tag. Her insurance, of course, wouldn’t cover it. But a lender happily would. So the 22-year-old Salt Lake City resident opened a credit line — interest free for six months — and went under the knife. The procedure could turbocharge her TikTok following and might help the social media agency she runs with her sister, too... Weston is part of a growing cohort eager to spend on ultra-pricey cosmetic work and willing to borrow to fund it. Procedures like tummy tucks and lip fillers are are on the rise, helped along by scores of social media influencers flaunting their results. And the bills that go along with them are increasingly being financed by specialty lenders… ‘You wouldn’t think that they would need to have this type of financing,’ said Shawna Chrisman, founder of Destination Aesthetics Medical Spa... ‘These are responsible people with their money, but they’re using this as an option to ideally get packages and higher-service treatments that have a higher ticket price.’ A setup like that is a sort of siren call for Wall Street.”
Fixed Income Watch:
October 31 – Bloomberg (Gowri Gurumurthy): “US junk bonds are headed for their first monthly loss since April… Yields climbed 29 bps to 7.28%, also the first monthly jump since April. While the losses extended to BBs and single Bs, CCCs, the riskiest segment of the junk-bond market, bucked the trend and is on track to record a sixth straight month of positive returns, the longest streak since June 2021.”
China Watch:
October 28 – Bloomberg (Myungshin Cho): “The Chinese economy’s debt ratio reached a record high... The macro leverage ratio, which measures the amount of debt held by households, non-financial enterprises and government compared to total GDP, edged up to 296.4% in the third quarter, driven by increase in government’s debt as a percentage of gross domestic product.”
October 29 – Reuters: “China is considering approving next week the issuance of over 10 trillion yuan ($1.4 trillion) in extra debt in the next few years to revive its fragile economy, a fiscal package which is expected to be further bolstered if Donald Trump wins the U.S. election, said two sources... China's top legislative body, the Standing Committee of the National People's Congress (NPC), is looking to approve the fresh fiscal package, including 6 trillion yuan which would partly be raised via special sovereign bonds… The 6-trillion-yuan worth of debt would be raised over three years including 2024, said the sources, adding the proceeds would primarily be used to help local governments address off-the-books debt risks. The planned total amount, to be raised… equates to over 8% of the output of the world's second-largest economy…”
October 31 – Reuters: “China's central bank has injected 500 billion yuan ($70.24bn) into its banking system during October through a new reverse repurchase tool announced earlier this week… The People's Bank of China (PBOC) said the repo operations aimed to ‘keep banking system liquidity reasonably ample’.”
October 26 – Bloomberg: “China’s recent rollout of stimulus is centered around lifting domestic demand and hitting the nation’s annual growth goal, said Vice Finance Minister Liao Min… ‘The goals are to enhance the strength of macro policies to expand domestic demand and reach this year’s GDP growth target,’ Liao told Bloomberg... ‘And in the meantime to coordinate with monetary policy to push for the restructuring of the economy, particularly to boost domestic demand including consumption.’ ‘The size of this round of policies will be of quite large scale…’”
October 28 – Bloomberg: “Some of China’s commercial banks are issuing loans for listed companies to buy back their shares or increase their equity stakes at lower rates than other lenders to attract clients, amid a government push to boost investor confidence in the country’s stock market, according to a Securities Daily report. The interest rates of such loans were offered at as low as 1.75%, same as the cost at which the banks could borrow through PBOC re-lending with a maturity of one year…”
October 27 – Bloomberg: “Interest rates in some corners of China’s financial system didn’t follow a record policy rate cut lower, highlighting the challenges authorities are facing. The costs for banks to borrow from each other for more than three months remained largely steady compared with a month ago, and so did the costs for non-bank institutions to borrow short-term funds. A booming stock market is certainly one important reason. Households have taken cash out of their savings accounts, and redeemed wealth management products — which are mostly invested in bonds — essentially making it more difficult and relatively costly for banks and brokerages to raise funds elsewhere.”
October 31 – Bloomberg: “China’s first major economic indicators after authorities unveiled their recent stimulus push suggest the economy has stabilized somewhat, with manufacturing and housing sectors showing tentative signs of recovery… The Caixin manufacturing purchasing managers index unexpectedly rose to 50.3 last month from 49.3 in September. The reading from Caixin and S&P Global on Friday followed official surveys showing factory activity ended five months of contraction in October.”
October 28 – Bloomberg: “Sales of existing homes have risen in China’s biggest cities including Beijing, Shenzhen and Shanghai this month as supportive policies boosted sentiment in the country’s property market… The number of signed property deals in Beijing hit 12,979 in Oct. through 26th, 21% higher than same period last month, the report cited data from Cetaline Property Research…”
November 1 – Bloomberg: “China’s residential property sales rose in October, the first year-on-year increase of 2024, as the government’s latest stimulus blitz brought back buyers. The value of new-home sales from the 100 biggest real estate companies rose 7.1% from a year earlier to 435.5 billion yuan ($61.2bn), reversing from a 37.7% slump in September… Sales surged 73% from a month earlier. The improvement came after China unleashed its strongest package of measures, including cutting borrowing costs on existing mortgages, relaxing buying curbs in big cities and easing downpayment requirements.”
October 31 – Bloomberg: “China Vanke Co. suffered another loss in the third quarter, underscoring the property developer’s challenges even after the government rolled out stimulus measures to support the sector. The Shenzhen-based company reported a net loss of 8.1 billion yuan ($1.1bn), bringing its combined losses for the first nine months of the year to 17.9 billion yuan…”
October 27 – Bloomberg: “Chinese commodities producers centered on the old economy are still bearing the brunt of the nation’s economic slowdown, with steelmakers and crude oil processors in particular continuing to rack up losses. Cumulative losses in the world’s biggest steel industry swelled to 34 billion yuan ($5bn) over the first nine months of the year… The oil refining sector saw losses deepen to 32 billion yuan over the period. Profits at industrial firms more broadly declined at a faster pace than a month earlier.”
October 30 – Bloomberg: “China’s top solar manufacturers posted big losses in the third quarter as severe overcapacity and price wars continue to hurt the companies producing equipment critical to global energy transition. Leading panel-maker Longi Green Energy Technology Co. chalked up its fourth straight quarterly net loss of 1.26 billion yuan ($177 million)… Rivals Tongwei Co. and Trina Solar Co. also swung to losses, while JA Solar Technology Co. saw net income plunge and Jinko Solar Co. barely turned a profit.”
October 30 – Bloomberg: “Chinese firms sold the least amount of bonds domestically in the past two months since 2021, as they navigated rising borrowing costs and uncertainties tied to the government’s stimulus plans. Issuers priced 2.51 trillion yuan ($352bn) of bonds in September and October in the onshore market, down 8.4% from the same period last year…”
October 28 – Financial Times (Joe Leahy): “The number of China’s dollar billionaires has fallen by more than a third in the past three years, according to a ‘rich list’ compiled by research group Hurun, as government crackdowns, weakness in parts of the economy and depressed equity markets take their toll. Since hitting a peak of 1,185 in 2021, Hurun said the number of dollar billionaires had been reduced to 753… The list has also undergone rapid churn, Hurun said, with older entrepreneurs such as property developers making way for newer members such as Zhang Yiming, head of ByteDance.”
October 28 – Bloomberg (Rebecca Choong Wilkins): “To figure out how far President Xi Jinping will go to revive his struggling economy, a growing number of money managers are taking cues from a once-jailed Chinese dissident now living in Canada. From a basement in Calgary, often accompanied by his pet cat, Lu Yuyu spends 10 hours a day scouring the internet to compile stats on social instability before they are scrubbed by China’s censors. The 47-year-old exile won’t reveal his exact method because it risks jeopardizing the overall goal of the project... ‘These records provide an important basis for people to understand the truth of this period of history,’ said Lu, who started the effort in January 2023 but didn't make it public until he arrived in Canada a year ago. ‘I didn’t want to go to jail again,’ he explained.”
Central Banker Watch:
October 30 – Bloomberg (Mark Schroers and Alexander Weber): “The European Central Bank shouldn’t hurry to lower borrowing costs and go below the so-called neutral rate to stimulate the economy, according to Executive Board member Isabel Schnabel. While disinflation remains well on track, ‘the fight against inflation has not yet been won,’ she said... ‘A gradual approach to removing policy restriction remains appropriate.’ Her comments add to the debate among officials on the future rate path, after the ECB in mid-October lowered its borrowing costs for a third time this year but stayed tight-lipped on what happens next.”
October 30 – Bloomberg (Mark Schroers and Jana Randow): “German inflation quickened more sharply than expected and exceeded the European Central Bank’s 2% target... Consumer-price growth in Europe’s largest economy picked up to 2.4% in October from 1.8% the previous month – well above the 2.1% median estimate... Base effects linked to energy helped drive the uptick, with services, goods and food also contributing…”
Global Bubble Watch:
October 29 – Bloomberg (Swati Pandey): “Australia’s core inflation remained elevated last quarter, reinforcing the Reserve Bank’s view that price pressures will take time to dissipate and that monetary policy needs to stay restrictive for the time being. The trimmed mean measure of consumer prices… rose 0.8% in the three months through September… On an annual basis, the trimmed mean climbed 3.5%, also in line with forecasts. The RBA is focused on core CPI as government subsidies are suppressing headline prices.”
Europe Watch:
October 30 – Financial Times (Olaf Storbeck): “The Eurozone economy expanded by 0.4% in the third quarter, providing a boost for a region where growth has faltered this year… Growth fell back to 0.2% in the second quarter, down from 0.3% at the start of the year. The European Central Bank, which started to cut interest rates in June, has become increasingly concerned about the sluggishness of economic output, notably in Germany, the region’s manufacturing powerhouse.”
October 31 – Bloomberg (Alexander Weber): “Euro-area inflation accelerated more than expected — matching the European Central Bank’s target and boosting arguments for gradual rate cuts. Consumer prices rose 2% from a year ago in October, up from 1.7% the previous month and exceeding analysts’ estimates for a 1.9% increase… A smaller decline in energy costs was a major driver of the move. Closely watched core inflation, which excludes volatile items, unexpectedly held steady at 2.7%, while increases in food prices were faster.”
October 29 – Reuters (Maria Martinez and Matthias Williams): “Thousands of German workers launched nationwide strikes to press for higher wages on Tuesday, compounding problems for companies worried about staying globally competitive as high costs, weak exports and foreign rivals chip away at their strengths. The strikes by unionised workers in the nearly four-million strong electrical engineering and metal industries hit companies such as Porsche AG, BMW and Mercedes. Also this week, car giant Volkswagen could announce plans to shut three plants on home soil for the first time in its 87-year history, as well as mass layoffs and 10% wage cuts for workers who keep their jobs.”
Japan Watch:
October 27 – Financial Times (Leo Lewis): “Japan has been plunged into political uncertainty after voters delivered a harsh rebuke to the ruling coalition led by the Liberal Democratic party, stripping it of its parliamentary majority for the first time in 15 years. The result leaves the LDP struggling to govern and put Prime Minister Shigeru Ishiba under pressure to resign just weeks after he took office… The loss of the coalition’s previously comfortable majority was a much more damaging outcome than most analysts had forecast and reflects surging discontent in Japan after years of stagnant wage growth and recent sharp increases in the cost of living. ‘Looking at results, it is true voters have handed us a harsh verdict and we have to humbly accept this result,’ Ishiba… told broadcaster NHK.”
October 28 – Bloomberg (John Geddie, Tim Kelly and Sakura Murakami): “The make-up of Japan's future government was in flux on Monday after voters punished Prime Minister Shigeru Ishiba's scandal-tainted coalition in a weekend snap election, leaving no party with a clear mandate to lead the world's fourth-largest economy… ‘We cannot allow not even a moment of stagnation as we face very difficult situations both in our security and economic environments,’ Ishiba said at a news conference on Monday, pledging to continue as premier.”
October 31 – Financial Times (Leo Lewis and Harry Dempsey): “The Bank of Japan held short-term interest rates…, but signalled that further rises were still on the horizon as prices continued to climb. The unanimous decision from the Japanese central bank’s monetary policy board to maintain its target rate around 0.25% was widely expected… BoJ governor Kazuo Ueda confirmed that the bank would not be deterred by recent political turmoil in Japan, and would press ahead with raising rates if wages and prices continued to move in line with projections. ‘If the outlook for the economy and prices is realised, then I believe we will need to continue raising interest rates and adjust the level of monetary easing accordingly,’ he said.”
October 31 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan kept its benchmark interest rate unchanged while sticking to its view that it’s on track to achieve its inflation target, an outlook that points to the possibility of another rate hike in the coming months… The central bank said it needed to pay attention to the course of overseas economies and the US economy in particular. The US presidential vote looms large next week, leaving investors on guard for potential volatility in markets.”
November 1 – Bloomberg (Yoshiaki Nohara and Akemi Terukina): “The Bank of Japan shouldn’t raise interest rates again before March next year, according to Yuichiro Tamaki, a key potential ally for Japan’s weakened government. The central bank needs to closely examine the results of next year’s wage deal results before moving on policy again, Tamaki told Bloomberg… ‘Until we achieve nominal wage growth 2% above inflation, we should continue with monetary easing and proactive fiscal spending,’ Tamaki said. ‘We are still in a very important phase, trying to get out of the 30 years of deflation, so we want to make that our top priority first. We will avoid any increase in the burden on people.’”
Emerging Markets Watch:
October 31 – Bloomberg (Subhadip Sircar and Swati Pandey): “A $6.4 trillion foreign-exchange reserve pile in Asia is giving investors confidence that central banks have the ammunition to fight the dollar’s strength stemming from the US presidential election. Asian currencies have come under pressure in October, as rising odds of a Donald Trump presidency and uncertainties over the pace of the Federal Reserve’s easing bolstered the greenback. A Bloomberg index of the region’s currencies just had its worst month since February 2023, with the Indian rupee near its weakest ever and South Korea’s won close to a three-month low.”
Leveraged Speculation Watch:
November 1 – Reuters (Carolina Mandl and Davide Barbuscia): “Hedge funds and other investors are searching for trades that profit from a win by Republican presidential candidate Donald Trump, but also offer limited downside in the event of a victory by Vice President Kamala Harris. As the nearly deadlocked race nears, some are looking for so-called ‘asymmetric trades’ involving bitcoin or the yuan, assets which could yield big profits if Trump wins but would not cause big losses if the wagers are wrong. ‘Trading the election is difficult given how tight it is,’ said Edoardo Rulli, head of UBS Hedge Fund Solutions.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 28 – Bloomberg (Anthony Capaccio): “JPMorgan… says the US is facing significant strains on its water supply that have the potential to harm the world’s largest economy and eat into corporate valuations. The water resources of the US, already overstretched, are being further stressed by the boom in artificial intelligence, according to a report… by JPMorgan and sustainability consultancy ERM… The research shows how the growth of AI, which requires vast amounts of water to cool power-hungry data centers and for semiconductor manufacturing, is bumping up against the reality of climate change. The upshot is that a surge in demand is colliding with less reliable precipitation patterns, leading to dangerous water shortages… Large data centers can use as much as 5 million gallons of water a day…”
October 30 – Bloomberg (Emily Beament): “Climate change made the 10 deadliest extreme weather events over the past two decades worse, contributing to the deaths of more than 570,000 people, scientists have said. Climate scientists said the finding ‘underscores how dangerous extreme weather events have already become’ with just 1.3C of global warming above pre-industrial levels. It also highlights the urgency of cutting the greenhouse gas emissions driving rising temperatures and more extreme weather, they said, as the world is currently on track for 3C of warming by the end of the century - a level recently described by UN chief Antonio Guterres as ‘catastrophic’.”
October 29 – Associated Press (Seth Borenstein): “A bone-dry October is pushing nearly half of the United States into a flash drought, leading to fires in the Midwest and hindering shipping on the Mississippi River. More than 100 different long-term weather stations in 26 states, including Alaska, are having their driest October on record... Cities that have had no measurable rain for October include New York, Houston, Dallas, Philadelphia, San Francisco and Sioux City, Iowa… ‘This is on pace for a record dry October,’ said Allison Santorelli, acting warning coordinator for the National Oceanic and Atmospheric Administration’s Weather Prediction Center…”
October 30 – Reuters (David Ljunggren): “An aggressive Chinese hacking campaign is the most active state cyber threat to Canada, the country's signals intelligence agency said on Wednesday, in the latest warning about clandestine activity by Beijing. In a new threat assessment, the Communications Security Establishment Canada also said Russia's cyber program was trying to confront and destabilize Canada and its allies and cited Iran as a threat.”
Geopolitical Watch:
October 29 – Associated Press (Kim Tong-Hyung): “North Korea said… its top diplomat is visiting Russia, in another sign of their deepening relations... North Korea’s official Korean Central News Agency said a delegation led by Foreign Minister Choe Son Hui departed for Russia on Monday… In a closed-door hearing at South Korea’s parliament, the South’s spy agency said Choe may be involved in high-level discussions on sending additional troops to Russia and negotiating what the North would get in return…”
